RISK
FACTORS
An
investment in our securities involves a high degree of risk. You should carefully read and consider all of the risks described
below, together with all of the other information contained or referred to in this prospectus, before making an investment decision
with respect to our securities. If any of the following events occur, our financial condition, business and results of operations
(including cash flows) may be materially adversely affected. In that event, the market price of our shares could decline, and
you could lose all or part of your investment.
Risks
Related to Our Business and Structure
The
coronavirus pandemic may cause a material adverse effect on our business.
In
December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The virus has since spread to over
150 countries and every state in the United States. On March 11, 2020, the World Health Organization declared the outbreak a pandemic,
and on March 13, 2020, the United States declared a national emergency. Most states and cities have reacted by instituting quarantines,
restrictions on travel, “stay at home” rules and restrictions on the types of businesses that may continue to operate,
as well as guidance in response to the pandemic and the need to contain it.
Effective
March 18, 2020, the County of Sonoma, California issued a shelter in place order. Pursuant to this order, non-essential businesses
were ordered to close. Asien’s was qualified as an essential business and remained open under a modified service plan whereby
customers were allowed access to the demonstration floor by appointment only with access limited to one customer party (following
published guidelines a customer party was defined as no more than 3 adults and no children). Effective June 6, 2020, Sonoma County
modified the retail guidelines for essential businesses and Asien’s store allowed access for retail customer parties without
appointment but with limitations on the number of individuals allowed in the store. More recently, on July 13, 2020, the state
of California issued new restrictions on business activities in certain counties, including Sonoma County, due to the increase
in cases. These new restrictions primarily relate to indoor activities of certain businesses and do not affect retail stores,
such as Asien’s; however, if the spread of the virus is not contained, we expect that additional restrictions may be imposed.
Furthermore, Asien’s is dependent upon suppliers to provide it with all of the products that its sells. The pandemic has
impacted and may continue to impact suppliers and manufacturers of certain of its products. As a result, Asien’s has faced
and may continue to face delays or difficulty sourcing certain products, which could negatively affect its business and financial
results. Even if Asien’s is able to find alternate sources for such products, they may cost more, which could adversely
impact Asien’s profitability and financial condition.
Idaho,
where Kyle’s is located, issued a “stay at home” order beginning on March 27, 2020. The order was initially
in place until April 15, then undergone several extensions, and was lifted on April 30, 2020. Currently the state of Idaho is
under a Department of Health and Welfare Stay Healthy Order. Kyle’s was in an industry designated as Essential Critical
Infrastructure Workforce and remained operational during the “stay at home” order; as such, Kyle’s remained,
and continues to do so, observant to social-distancing and mask-wearing guidance and all other State, County and City mandates.
Therefore, there was minimal disruption to Kyle’s business operations during the Idaho’s “stay at home”
period. However, during the “stay at home” period, certain key customers of Kyle’s elected to either temporarily
stop building homes or delayed their building process, which adversely affected Kyle’s sales. As a result, Kyle’s
generated comparatively lower-than-expected sales. Further, during the “stay at home” period, several of Kyle’s
employees had taken time off because of medical experiences, and certain of them did not return to employment. Kyle’s has
been hiring and training new employees to replace lost productivity because of the aforementioned loss of employees. Kyle’s
did not experience any meaningful business interruption related to any of its key suppliers. Kyle’s endeavors to best observe
guidance from the State of Idaho and to provide a safe working environment to its employees. If the pandemic is not sufficiently
contained, it may continue to negatively affect Kyle’s ability to generate sales opportunities and to hire productive employees.
Therefore, Kyle’s business operations may experience further delays and experience lost sales opportunities, which could
further adversely impact Kyle’s profitability and financial condition.
In
Iowa, where Neese is located, non-essential businesses in certain counties, include where Neese’s principal office is located,
began re-opening on May 1, 2020, but the pandemic has had a negative effect on business activity throughout Iowa. Neese is also
dependent upon suppliers to provide it with all of the equipment and parts that it sells, and several have notified it of disruptions
to their production and/or supply chain related to the pandemic. Any business disruption or failure of these suppliers to meet
delivery requirements and commitments may cause delays in future shipments and potential lost or delayed revenue.
If
the current pace of the pandemic cannot be slowed and the spread of the virus is not contained, our business operations could
be further delayed or interrupted. We expect that government and health authorities may announce new or extend existing restrictions,
which could require us to make further adjustments to our operations in order to comply with any such restrictions. We may also
experience limitations in employee resources. In addition, our operations could be disrupted if any of our employees were suspected
of having the virus, which could require quarantine of some or all such employees or closure of our facilities for disinfection.
We may also delay or reduce certain capital spending and related projects until the travel and logistical impacts of the pandemic
are lifted, which will delay the completion of such projects. The duration of any business disruption cannot be reasonably estimated
at this time but may materially affect our ability to operate our business and result in additional costs.
Further,
our customers’ financial condition may be adversely impacted as a result of the impacts of the coronavirus and efforts taken
to prevent its spread, which could result in reduced demand for our products.
The
extent to which the pandemic may impact our results will depend on future developments, which are highly uncertain and cannot
be predicted as of the date of this prospectus, including new information that may emerge concerning the severity of the pandemic
and steps taken to contain the pandemic or treat its impact, among others. Nevertheless, the pandemic and the current financial,
economic and capital markets environment, and future developments in the global supply chain and other areas present material
uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
We
may not be able to effectively integrate the businesses that we acquire.
Our
ability to realize the anticipated benefits of acquisitions will depend on our ability to integrate those businesses with our
own. The combination of multiple independent businesses is a complex, costly and time-consuming process and there can be no assurance
that we will be able to successfully integrate businesses into our business, or if such integration is successfully accomplished,
that such integration will not be costlier or take longer than presently contemplated. Integration of future acquisitions may
include various risks and uncertainties, including the factors discussed in the paragraph below. If we cannot successfully integrate
and manage the businesses within a reasonable time, we may not be able to realize the potential and anticipated benefits of the
such acquisitions, which could have a material adverse effect on our share price, business, cash flows, results of operations
and financial position.
We
will consider other acquisitions that we believe will complement, strengthen and enhance our growth. We evaluate opportunities
on a preliminary basis from time to time, but these transactions may not advance beyond the preliminary stages or be completed.
Such acquisitions are subject to various risks and uncertainties, including:
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the
inability to integrate effectively the operations, products, technologies and personnel
of the acquired companies (some of which are in diverse geographic regions) and achieve
expected synergies;
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the
potential disruption of existing business and diversion of management’s attention
from day-to-day operations;
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the
inability to maintain uniform standards, controls, procedures and policies;
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the
need or obligation to divest portions of the acquired companies;
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the
potential failure to identify material problems and liabilities during due diligence
review of acquisition targets;
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the
potential failure to obtain sufficient indemnification rights to fully offset possible
liabilities associated with acquired businesses; and
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the
challenges associated with operating in new geographic regions.
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We
are a new company with limited history and we may not be able to manage our businesses on a profitable basis.
We
were formed on January 22, 2013 and operated a management consulting business from inception through October 3, 2017. In March
2017, we acquired Neese, which is a business that provides a wide range of products and services for the agriculture, construction,
lawn and garden industries. In April 2019, we acquired the assets of Goedeker Television, a one-stop e-commerce destination for
home furnishings, which we subsequently spun-off pursuant our distribution of all of our shares of Goedeker that we held to our
shareholders. In May 2020, we acquired Asien’s, which provides a wide variety of appliance services, including sales, delivery/installation,
in-home service and repair, extended warranties, and financing in the North Bay area of Sonoma County, California. In September
2020, we acquired Kyle’s, a leading custom cabinetry maker servicing contractors and homeowners since 1976 in Boise, Idaho
and the surrounding area. We plan to acquire additional operating businesses in the future.
Our
manager will manage the day-to-day operations and affairs of our company and oversee the management and operations of our businesses,
subject to the oversight of our board of directors. If we do not develop effective systems and procedures, including accounting
and financial reporting systems, to manage our operations as a consolidated public company, we may not be able to manage the combined
enterprise on a profitable basis, which could adversely affect our ability to pay distributions to our shareholders.
Our
future success is dependent on the employees of our manager, our manager’s operating partners and the management team of
our business, the loss of any of whom could materially adversely affect our financial condition, business and results of operations.
Our
future success depends, to a significant extent, on the continued services of the employees of our manager. The loss of their
services may materially adversely affect our ability to manage the operations of our businesses. The employees of our manager
may leave our manager and go to companies that compete with us in the future. In addition, we depend on the assistance provided
by our manager’s operating partners in evaluating, performing diligence on and managing our businesses. The loss of any
employees of our manager or any of our manager’s operating partners may materially adversely affect our ability to implement
or maintain our management strategy or our acquisition strategy.
The
future success of our existing and future businesses also depends on the respective management teams of those businesses because
we intend to operate our businesses on a stand-alone basis, primarily relying on their existing management teams for day-to-day
operations. Consequently, their operational success, as well as the success of any organic growth strategy, will be dependent
on the continuing efforts of the management teams of our businesses. We will seek to provide these individuals with equity incentives
in our company and to have employment agreements with certain persons we have identified as key to their businesses. However,
these measures may not prevent these individuals from leaving their employment. The loss of services of one or more of these individuals
may materially adversely affect our financial condition, business and results of operations.
We
may experience difficulty as we evaluate, acquire and integrate businesses that we may acquire, which could result in drains on
our resources, including the attention of our management, and disruptions of our on-going business.
We
acquire small businesses in various industries. Generally, because such businesses are privately held, we may experience difficulty
in evaluating potential target businesses as much of the information concerning these businesses is not publicly available. Therefore,
our estimates and assumptions used to evaluate the operations, management and market risks with respect to potential target businesses
may be subject to various risks and uncertainties. Further, the time and costs associated with identifying and evaluating potential
target businesses and their industries may cause a substantial drain on our resources and may divert our management team’s
attention away from the operations of our businesses for significant periods of time.
In
addition, we may have difficulty effectively integrating and managing acquisitions. The management or improvement of businesses
we acquire may be hindered by a number of factors, including limitations in the standards, controls, procedures and policies implemented
in connection with such acquisitions. Further, the management of an acquired business may involve a substantial reorganization
of the business’ operations resulting in the loss of employees and customers or the disruption of our ongoing businesses.
We may experience greater than expected costs or difficulties relating to an acquisition, in which case, we might not achieve
the anticipated returns from any particular acquisition.
We
face competition for businesses that fit our acquisition strategy and, therefore, we may have to acquire targets at sub-optimal
prices or, alternatively, forego certain acquisition opportunities.
We
have been formed to acquire and manage small businesses. In pursuing such acquisitions, we expect to face strong competition from
a wide range of other potential purchasers. Although the pool of potential purchasers for such businesses is typically smaller
than for larger businesses, those potential purchasers can be aggressive in their approach to acquiring such businesses. Furthermore,
we expect that we may need to use third-party financing in order to fund some or all of these potential acquisitions, thereby
increasing our acquisition costs. To the extent that other potential purchasers do not need to obtain third-party financing or
are able to obtain such financing on more favorable terms, they may be in a position to be more aggressive with their acquisition
proposals. As a result, in order to be competitive, our acquisition proposals may need to be aggressively priced, including at
price levels that exceed what we originally determined to be fair or appropriate. Alternatively, we may determine that we cannot
pursue on a cost-effective basis what would otherwise be an attractive acquisition opportunity.
We
may not be able to successfully fund acquisitions due to the unavailability of debt or equity financing on acceptable terms, which
could impede the implementation of our acquisition strategy.
In
order to make acquisitions, we intend to raise capital primarily through debt financing, primarily at our operating company level,
additional equity offerings, the sale of equity or assets of our businesses, offering equity in our company or our businesses
to the sellers of target businesses or by undertaking a combination of any of the above. Because the timing and size of acquisitions
cannot be readily predicted, we may need to be able to obtain funding on short notice to benefit fully from attractive acquisition
opportunities. Such funding may not be available on acceptable terms. In addition, the level of our indebtedness may impact our
ability to borrow at our company level. The sale of additional shares of any class of equity will also be subject to market conditions
and investor demand for such shares at prices that may not be in the best interest of our shareholders. These risks may materially
adversely affect our ability to pursue our acquisition strategy.
We
may change our management and acquisition strategies without the consent of our shareholders, which may result in a determination
by us to pursue riskier business activities.
We
may change our strategy at any time without the consent of our shareholders, which may result in our acquiring businesses or assets
that are different from, and possibly riskier than, the strategy described in this prospectus. A change in our strategy may increase
our exposure to interest rate and currency fluctuations, subject us to regulation under the Investment Company Act of 1940, as
amended, which we refer to as the Investment Company Act, or subject us to other risks and uncertainties that affect our operations
and profitability.
If
we are unable to generate sufficient cash flow from the anticipated dividends and interest payments that we expect to receive
from our businesses, we may not be able to make distributions to our shareholders.
Our
primary business is the holding and managing of controlling interests our operating businesses. Therefore, we will be dependent
upon the ability of our businesses to generate cash flows and, in turn, distribute cash to us in the form of interest and principal
payments on indebtedness and distributions on equity to enable us, first, to satisfy our financial obligations and, second, to
make distributions to our common shareholders. The ability of our businesses to make payments to us may also be subject to limitations
under laws of the jurisdictions in which they are incorporated or organized. If, as a consequence of these various restrictions
or otherwise, we are unable to generate sufficient cash flow from our businesses, we may not be able to declare, or may have to
delay or cancel payment of, distributions to our common shareholders.
In
addition, the put price and profit allocation will be payment obligations of our company and, as a result, will be senior in right
to the payment of any distributions to our shareholders. Further, we are required to make a profit allocation to our manager upon
satisfaction of applicable conditions to payment. See “Our Manager—Our Manager as an Equity Holder” for more
information about our manager’s put right and profit allocation.
Our
loans with third parties contain certain terms that could materially adversely affect our financial condition.
We
and our subsidiaries are parties to certain loans with third parties, which are secured by the assets of our subsidiaries. The
loans agreements contain customary representations, warranties and affirmative and negative financial and other covenants. If
an event of default were to occur under any of these loans, the lender thereto may pursue all remedies available to it, including
declaring the obligations under its respective loan immediately due and payable, which could materially adversely affect our financial
condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources” for further discussion regarding our borrowing activities.
In
the future, we may seek to enter into other credit facilities to help fund our acquisition capital and working capital needs.
These credit facilities may expose us to additional risks associated with leverage and may inhibit our operating flexibility and
reduce cash flow available for payment of distributions to our shareholders.
We
may seek to enter into other credit facilities with third-party lenders to help fund our acquisitions. Such credit facilities
will likely require us to pay a commitment fee on the undrawn amount and will likely contain a number of affirmative and restrictive
covenants.
If
we violate any such covenants, our lenders could accelerate the maturity of any debt outstanding and we may be prohibited from
making any distributions to our shareholders. Such debt may be secured by our assets, including the stock we may own in businesses
that we acquire and the rights we have under intercompany loan agreements that we may enter into with our businesses. Our ability
to meet our debt service obligations may be affected by events beyond our control and will depend primarily upon cash produced
by businesses that we currently manage and may acquire in the future and distributed or paid to our company. Any failure to comply
with the terms of our indebtedness may have a material adverse effect on our financial condition.
In
addition, we expect that such credit facilities will bear interest at floating rates which will generally change as interest rates
change. We will bear the risk that the rates that we are charged by our lenders will increase faster than we can grow the cash
flow from our businesses or businesses that we may acquire in the future, which could reduce profitability, materially adversely
affect our ability to service our debt, cause us to breach covenants contained in our third-party credit facilities and reduce
cash flow available for distribution.
We
may engage in a business transaction with one or more target businesses that have relationships with our executive officers, our
directors, our manager, our manager’s employees or our manager’s operating partners, or any of their respective affiliates,
which may create or present conflicts of interest.
We
may decide to engage in a business transaction with one or more target businesses with which our executive officers, our directors,
our manager, our manager’s employees, our manager’s operating partners, or any of their respective affiliates, have
a relationship, which may create or present conflicts of interest. Regardless of whether we obtain a fairness opinion from an
independent investment banking firm with respect to such a transaction, conflicts of interest may still exist with respect to
a particular acquisition and, as a result, the terms of the acquisition of a target business may not be as advantageous to our
shareholders as it would have been absent any conflicts of interest.
The
operational objectives and business plans of our businesses may conflict with our operational and business objectives or with
the plans and objective of another business we own and operate.
Our
businesses operate in different industries and face different risks and opportunities depending on market and economic conditions
in their respective industries and regions. A business’ operational objectives and business plans may not be similar to
our objectives and plans or the objectives and plans of another business that we own and operate. This could create competing
demands for resources, such as management attention and funding needed for operations or acquisitions, in the future.
If,
in the future, we cease to control and operate our businesses or other businesses that we acquire in the future or engage in certain
other activities, we may be deemed to be an investment company under the Investment Company Act.
We
have the ability to make investments in businesses that we will not operate or control. If we make significant investments in
businesses that we do not operate or control, or that we cease to operate or control, or if we commence certain investment-related
activities, we may be deemed to be an investment company under the Investment Company Act. Our decision to sell a business will
be based upon financial, operating and other considerations rather than a plan to complete a sale of a business within any specific
time frame. If we were deemed to be an investment company, we would either have to register as an investment company under the
Investment Company Act, obtain exemptive relief from the SEC or modify our investments or organizational structure or our contract
rights to fall outside the definition of an investment company. Registering as an investment company could, among other things,
materially adversely affect our financial condition, business and results of operations, materially limit our ability to borrow
funds or engage in other transactions involving leverage and require us to add directors who are independent of us or our manager
and otherwise will subject us to additional regulation that will be costly and time-consuming.
We
have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective
system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current
and potential shareholders could lose confidence in our financial statements, which would harm the trading price of our common
shares.
Companies
that file reports with the Securities and Exchange Commission, or the SEC, including us, are subject to the requirements of Section
404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal
control over financial reporting and annual reports on Form 10-K filed under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, to contain a report from management assessing the effectiveness of a company’s internal control over
financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010, public companies that are large accelerated filers or accelerated filers must include in their annual reports on Form 10-K
an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control
over financial reporting. Non-accelerated filers and smaller reporting companies, like us, are not required to include an attestation
report of their auditors in annual reports.
A
report of our management is included under Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for
the year ended December 31, 2019. We are a smaller reporting company and, consequently, are not required to include an attestation
report of our auditor in our annual report. However, if and when we become subject to the auditor attestation requirements under
SOX 404, we can provide no assurance that we will receive a positive attestation from our independent auditors.
During
its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2019, management identified
material weaknesses. These material weaknesses were associated with our lack of (i) appropriate policies and procedures to evaluate
the proper accounting and disclosures of key documents and agreements, (ii) adequate segregation of duties with our limited accounting
personnel and reliance upon outsourced accounting services and (iii) sufficient and skilled accounting personnel with an appropriate
level of technical accounting knowledge and experience in the application of GAAP commensurate with our financial reporting requirements.
We are undertaking remedial measures, which measures will take time to implement and test, to address these material weaknesses.
There can be no assurance that such measures will be sufficient to remedy the material weaknesses identified or that additional
material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience
material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances
could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements,
or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each
of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline
in our share price.
Risks
Related to Our Relationship with Our Manager
Termination
of the management services agreement will not affect our manager’s rights to receive profit allocations and removal of our
manager may cause us to incur significant fees.
Our
manager owns all of our allocation shares, which generally will entitle our manager to receive a profit allocation as a form of
preferred distribution. In general, this profit allocation is designed to pay our manager 20% of the excess of the gains upon
dispositions of our subsidiaries, plus an amount equal to the net income of such subsidiaries since their acquisition by our company,
over an annualized hurdle rate. If our manager resigns or is removed, for any reason, it will remain the owner of our allocation
shares. It will therefore remain entitled to all profit allocations while it holds our allocation shares regardless of whether
it is terminated as our manager. If we terminate our manager, it may therefore be difficult or impossible for us to find a replacement
to serve the function of our manager, because we would not be able to force our manager to transfer its allocation shares to a
replacement manager so that the replacement manager could be entitled to a profit allocation. Therefore, as a practical matter,
it may be difficult for us to replace our manager without its cooperation. If it becomes necessary to replace our manager and
we are unable to replace our manager without its cooperation, we may be unable to continue to manage our operations effectively
and our business may fail.
If
we terminate the management services agreement with our manager, any fees, costs and expenses already earned or otherwise payable
to our manager upon termination would become immediately due. Moreover, if our manager were to be removed and our management services
agreement terminated by a vote of our board of directors and a majority of our common shares other than common shares beneficially
owned by our manager, we would also owe a termination fee to our manager on top of the other fees, costs and expenses. In addition,
the management services agreement is silent as to whether termination of our manager “for cause” would result in a
termination fee; there is therefore a risk that the agreement may be interpreted to entitle our manager to a termination fee even
if terminated “for cause”. The termination fee would equal twice the sum of the amount of the quarterly management
fees calculated with respect to the four fiscal quarters immediately preceding the termination date of the management services
agreement. As a result, we could incur significant management fees as a result of the termination of our manager, which may increase
the risk that our business may be unable to meet its financial obligations or otherwise fail.
Mr.
Ellery W. Roberts, our Chairman and Chief Executive Officer, controls our manager. If some event were to occur to cause Mr. Roberts
(or his designated successor, heirs, beneficiaries or permitted assigns) not to control our manager without the prior written
consent of our board of directors, our manager would be considered terminated under our agreement.
Our
manager and the members of our management team may engage in activities that compete with us or our businesses.
Although
our Chief Executive Officer intends to devote substantially all of his time to the affairs of our company and our manager must
present all opportunities that meet our company’s acquisition and disposition criteria to our board of directors, neither
our manager nor our Chief Executive Officer is expressly prohibited from investing in or managing other entities. In this regard,
the management services agreement and the obligation to provide management services will not create a mutually exclusive relationship
between our manager and its affiliates, on the one hand, and our company, on the other. See “Our Manager” for more
information about our relationship with our manager and our management team.
Our
manager need not present an acquisition opportunity to us if our manager determines on its own that such acquisition opportunity
does not meet our company’s acquisition criteria.
Our
manager will review any acquisition opportunity to determine if it satisfies our company’s acquisition criteria, as established
by our board of directors from time to time. If our manager determines, in its sole discretion, that an opportunity fits our criteria,
our manager will refer the opportunity to our board of directors for its authorization and approval prior to signing a letter
of intent, indication of interest or similar document or agreement. Opportunities that our manager determines do not fit our criteria
do not need to be presented to our board of directors for consideration. In addition, upon a determination by our board of directors
not to promptly pursue an opportunity presented to it by our manager, in whole or in part, our manager will be unrestricted in
its ability to pursue such opportunity, or any part that we do not promptly pursue, on its own or refer such opportunity to other
entities, including its affiliates. If such an opportunity is ultimately profitable, we will have not participated in such opportunity.
See “Our Manager—Acquisition and Disposition Opportunities” for more information about our company’s current
acquisition criteria.
Our
Chief Executive Officer, Mr. Ellery W. Roberts, controls our manager and, as a result we may have difficulty severing ties with
Mr. Roberts.
Under
the terms of the management services agreement, our board of directors may, after due consultation with our manager, at any time
request that our manager replace any individual seconded to our company, and our manager will, as promptly as practicable, replace
any such individual. However, because Mr. Roberts controls our manager, we may have difficulty completely severing ties with Mr.
Roberts absent terminating the management services agreement and our relationship with our manager. Further, termination of the
management services agreement could give rise to a significant financial obligation of our company, which may have a material
adverse effect on our business and financial condition. See “Our Manager” for more information about our relationship
with our manager.
If
the management services agreement is terminated, our manager, as holder of the allocation shares, has the right to cause our company
to purchase its allocation shares, which may have a material adverse effect on our financial condition.
If:
(i) the management services agreement is terminated at any time other than as a result of our manager’s resignation, subject
to (ii); or (ii) our manager resigns, our manager will have the right, but not the obligation, for one year from the date of termination
or resignation, as the case may be, to cause our company to purchase the allocation shares for the put price. The put price shall
be equal to, as of any exercise date: (i) if we terminate the management services agreement, the sum of two separate, independently
made calculations of the aggregate amount of the “base put price amount” as of such exercise date; or (ii) if our
manager resigns, the average of two separate, independently made calculations of the aggregate amount of the “base put price
amount” as of such exercise date. If our manager elects to cause our company to purchase its allocation shares, we are obligated
to do so and, until we have done so, our ability to conduct our business, including our ability to incur debt, to sell or otherwise
dispose of our property or assets, to engage in certain mergers or consolidations, to acquire or purchase the property, assets
or stock of, or beneficial interests in, another business, or to declare and pay distributions, would be restricted. These financial
and operational obligations of our company may have a material adverse effect on our financial condition, business and results
of operations. See “Our Manager—Our Manager as an Equity Holder—Supplemental Put Provision” for more information
about our manager’s put right and our obligations relating thereto, as well as the definition and calculation of the base
put price amount.
If
the management services agreement is terminated, we will need to change our name and cease our use of the term “1847”,
which in turn could have a material adverse impact upon our business and results of operations as we would be required to expend
funds to create and market a new name.
Our
manager controls our rights to the term “1847” as it is used in the name of our company. Our company and any businesses
that we acquire must cease using the term “1847,” including any trademark based on the name of our company that may
be licensed to them by our manager under the license provisions of our management services agreement, entirely in their businesses
and operations within 180 days of our termination of the management services agreement. The sublicense provisions of the management
services agreement would require our company and its businesses to change their names to remove any reference to the term “1847”
or any reference to trademarks licensed to them by our manager. This also would require us to create and market a new name and
expend funds to protect that name, which may have a material adverse effect on our business and results of operations.
We
have agreed to indemnify our manager under the management services agreement that may result in an indemnity payment that could
have a material adverse impact upon our business and results of operations.
The
management services agreement provides that we will indemnify, reimburse, defend and hold harmless our manager, together with
its employees, officers, members, managers, directors and agents, from and against all losses (including lost profits), costs,
damages, injuries, taxes, penalties, interests, expenses, obligations, claims and liabilities of any kind arising out of the breach
of any term or condition in the management services agreement or the performance of any services under such agreement except by
reason of acts or omissions constituting fraud, willful misconduct or gross negligence. If our manager is forced to defend itself
in any claims or actions arising out of the management services agreement for which we are obligated to provide indemnification,
our payment of such indemnity could have a material adverse impact upon our business and results of operations.
Our
manager can resign on 120 days’ notice and we may not be able to find a suitable replacement within that time, resulting
in a disruption in our operations that could materially adversely affect our financial condition, business and results of operations,
as well as the market price of our shares.
Our
manager has the right, under the management services agreement, to resign at any time on 120 days written notice, whether we have
found a replacement or not. If our manager resigns, we may not be able to contract with a new manager or hire internal management
with similar expertise and ability to provide the same or equivalent services on acceptable terms within 120 days, or at all,
in which case our operations are likely to experience a disruption, our financial condition, business and results of operations,
as well as our ability to pay distributions are likely to be materially adversely affected and the market price of our shares
may decline. In addition, the coordination of our internal management, acquisition activities and supervision of our business
is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having
the experience and expertise possessed by our manager and its affiliates. Even if we are able to retain comparable management,
whether internal or external, the integration of such management and their lack of familiarity with our businesses may result
in additional costs and time delays that could materially adversely affect our financial condition, business and results of operations
as well as the market price of our shares.
The
amount recorded for the allocation shares may be subject to substantial period-to-period changes, thereby significantly adversely
impacting our results of operations.
Our
company will record the allocation shares at the redemption value at each balance sheet date by recording any change in fair value
through its income statement as a dividend between net income and net income available to common shareholders. The redemption
value of the allocation shares is largely related to the value of the profit allocation that our manager, as holder of the allocation
shares, will receive. The redemption value of the allocation shares may fluctuate on a period-to-period basis based on the distributions
we pay to our common shareholders, the earnings of our businesses and the price of our common shares, which fluctuation may be
significant, and could cause a material adverse effect on our company’s results of operations. See “Our Manager—Our
Manager as an Equity Holder” for more information about the terms and calculation of the profit allocation and any payments
under the supplemental put provisions of our operating agreement.
We
cannot determine the amount of management fee that will be paid to our manager over time with certainty, which management fee
may be a significant cash obligation of our company and may reduce the cash available for operations and distributions to our
shareholders.
Our
manager’s management fee will be calculated by reference to our company’s adjusted net assets, which will be impacted
by the following factors:
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the
acquisition or disposition of businesses by our company;
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organic
growth, add-on acquisitions and dispositions by our businesses; and
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the
performance of our businesses.
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We
cannot predict these factors, which may cause significant fluctuations in our adjusted net assets and, in turn, impact the management
fee we pay to our manager. Accordingly, we cannot determine the amount of management fee that will be paid to our manager over
time with any certainty, which management fee may represent a significant cash obligation of our company and may reduce the cash
available for our operations and distributions to our shareholders.
We
must pay our manager the management fee regardless of our performance. Therefore, our manager may be induced to increase the amount
of our assets rather than the performance of our businesses.
Our
manager is entitled to receive a management fee that is based on our adjusted net assets, as defined in the management services
agreement, regardless of the performance of our businesses. In this respect, the calculation of the management fee is unrelated
to our company’s net income. As a result, the management fee may encourage our manager to increase the amount of our assets
by, for example, recommending to our board of directors the acquisition of additional assets, rather than increase the performance
of our businesses. In addition, payment of the management fee may reduce or eliminate the cash we have available for distributions
to our shareholders.
The
management fee is based solely upon our adjusted net assets; therefore, if in a given year our performance declines, but our adjusted
net assets remain the same or increase, the management fee we pay to our manager for such year will increase as a percentage of
our net income and may reduce the cash available for distributions to our shareholders.
The
management fee we pay to our manager will be calculated solely by reference to our company’s adjusted net assets. If in
a given year the performance of our company declines, but our adjusted net assets remain the same or increase, the management
fee we pay to our manager for such year will increase as a percentage of our net income and may reduce the cash available for
distributions to our shareholders. See “Our Manager—Our Manager as a Service Provider—Management Fee”
for more information about the terms and calculation of the management fee.
The
amount of profit allocation to be paid to our manager could be substantial. However, we cannot determine the amount of profit
allocation that will be paid over time or the put price with any certainty.
We
cannot determine the amount of profit allocation that will be paid over time or the put price with any certainty. Such determination
would be dependent on, among other things, the number, type and size of the acquisitions and dispositions that we make in the
future, the distributions we pay to our shareholders, the earnings of our businesses and the market value of common shares from
time to time, factors that cannot be predicted with any certainty at this time. Such factors will have a significant impact on
the amount of any profit allocation to be paid to our manager, especially if our share price significantly increases. See “Our
Manager—Our Manager as an Equity Holder—Manager’s Profit Allocation” for more information about the calculation
and payment of profit allocation. Any amounts paid in respect of the profit allocation are unrelated to the management fee earned
for performance of services under the management services agreement.
The
management fee and profit allocation to be paid to our manager may significantly reduce the amount of cash available for distributions
to shareholders and for operations.
Under
the management services agreement, our company will be obligated to pay a management fee to and, subject to certain conditions,
reimburse the costs and out-of-pocket expenses of our manager incurred on behalf of our company in connection with the provision
of services to our company. Similarly, our businesses will be obligated to pay fees to and reimburse the costs and expenses of
our manager pursuant to any offsetting management services agreements entered into between our manager and our businesses, or
any transaction services agreements to which such businesses are a party. In addition, our manager, as holder of the allocation
shares, will be entitled to receive a profit allocation upon satisfaction of applicable conditions to payment and may be entitled
to receive the put price upon the occurrence of certain events. While we cannot quantify with any certainty the actual amount
of any such payments in the future, we do expect that such amounts could be substantial. See “Our Manager” for more
information about these payment obligations of our company. The management fee, put price and profit allocation will be payment
obligations of our company and, as a result, will be senior in right to the payment of any distributions to our shareholders.
Likewise, the profit allocation may also significantly reduce the cash available for operations.
Our
manager’s influence on conducting our business and operations, including acquisitions, gives it the ability to increase
its fees and compensation to our Chief Executive Officer, which may reduce the amount of cash available for distributions to our
shareholders.
Under
the terms of the management services agreement, our manager is paid a management fee calculated as a percentage of our company’s
adjusted net assets for certain items and is unrelated to net income or any other performance base or measure. See “Our
Manager—Our Manager as a Service Provider—Management Fee” for more information about the calculation of the
management fee. Our manager, which Ellery W. Roberts, our Chief Executive Officer, controls, may advise us to consummate transactions,
incur third-party debt or conduct our operations in a manner that may increase the amount of fees paid to our manager which, in
turn, may result in higher compensation to Mr. Roberts because his compensation is paid by our manager from the management fee
it receives from our company.
Fees
paid by our company and our businesses pursuant to transaction services agreements do not offset fees payable under the management
services agreement and will be in addition to the management fee payable by our company under the management services agreement.
The
management services agreement provides that businesses that we may acquire in the future may enter into transaction services agreements
with our manager pursuant to which our businesses will pay fees to our manager. See “Our Manager—Our Manager as a
Service Provider” for more information about these agreements. Unlike fees paid under the offsetting management services
agreements, fees that are paid pursuant to such transaction services agreements will not reduce the management fee payable by
our company. Therefore, such fees will be in addition to the management fee payable by our company or offsetting management fees
paid by businesses that we may acquire in the future.
The
fees to be paid to our manager pursuant to these transaction service agreements will be paid prior to any principal, interest
or dividend payments to be paid to our company by our businesses, which will reduce the amount of cash available for distributions
to our shareholders.
Our
manager’s profit allocation may induce it to make decisions and recommend actions to our board of directors that are not
optimal for our business and operations.
Our
manager, as holder of all of the allocation shares in our company, will receive a profit allocation based on the extent to which
gains from any sales of our subsidiaries plus their net income since the time they were acquired exceed a certain annualized hurdle
rate. As a result, our manager may be encouraged to make decisions or to make recommendations to our board of directors regarding
our business and operations, the business and operations of our businesses, acquisitions or dispositions by us or our businesses
and distributions to our shareholders, any of which factors could affect the calculation and payment of profit allocation, but
which may otherwise be detrimental to our long-term financial condition and performance.
The
obligations to pay the management fee and profit allocation, including the put price, may cause our company to liquidate assets
or incur debt.
If
we do not have sufficient liquid assets to pay the management fee and profit allocation, including the put price, when such payments
are due and payable, we may be required to liquidate assets or incur debt in order to make such payments. This circumstance could
materially adversely affect our liquidity and ability to make distributions to our shareholders. See “Our Manager”
for more information about these payment obligations of our company.
Risks
Related to Taxation
Our
shareholders will be subject to taxation on their share of our company’s taxable income, whether or not they receive cash
distributions from our company.
Our
company is a limited liability company and will be classified as a partnership for U.S. federal income tax purposes. Consequently,
our shareholders will be subject to U.S. federal income taxation and, possibly, state, local and foreign income taxation on their
share of our company’s taxable income, whether or not they receive cash distributions from our company. There is, accordingly,
a risk that our shareholders may not receive cash distributions equal to their portion of our company’s taxable income or
even in an amount sufficient to satisfy the tax liability that results from that income. This risk is attributable to a number
of variables, such as results of operations, unknown liabilities, government regulations, financial covenants relating to the
debt of our company, funds needed for future acquisitions and/or to satisfy short- and long-term working capital needs of our
businesses, and the discretion and authority of our company’s board of directors to make distributions or modify our distribution
policy.
As
a partnership, our company itself will not be subject to U.S. federal income tax (except as may be imposed under certain recently
enacted partnership audit rules), although it will file an annual partnership information return with the IRS. The information
return will report the results of our company’s activities and will contain a Schedule K-1 for each company shareholder
reflecting allocations of profits or losses (and items thereof) to members of our company, that is, to the shareholders. Each
partner of a partnership is required to report on his or her income tax return his or her share of items of income, gain, loss,
deduction, credit, and other items of the partnership (in each case, as reflected on such Schedule K-1) without regard to whether
cash distributions are received. Each holder will be required to report on his or her tax return his or her allocable share of
company income, gain, loss, deduction, credit and other items for our company’s taxable year that ends with or within the
holder’s taxable year. Thus, holders of common shares will be required to report taxable income (and thus be subject to
significant income tax liability) without a corresponding current receipt of cash if our company were to recognize taxable income
and not make cash distributions to the shareholders.
Generally,
the determination of a holder’s distributive share of any item of income, gain, loss, deduction, or credit of a partnership
is governed by the operating agreement. The income tax laws governing the allocation of company income, gains, losses, deductions
or credits set forth in a particular Schedule K-1 are complex and there can be no assurance that the IRS would not successfully
challenge any allocation set forth in any such Schedule K-1. Whether an allocation set forth in any particular K-1 issued to a
shareholder will be accepted by the IRS depends on a facts and circumstances analysis of the underlying economic arrangement of
our company’s shareholders. If the IRS were to prevail in challenging the allocations provided by the operating agreement,
the amount of income or loss allocated to holders for U.S. federal income tax purposes could be increased or reduced or the character
of the income or loss could be modified. See “Material U.S. Federal Income Tax Considerations” for more information.
All
of our company’s income could be subject to an entity-level tax in the United States, which could result in a material reduction
in cash flow available for distribution to shareholders and thus could result in a substantial reduction in the value our shares.
Based
on the number of shareholders we have and because our shares are listed for trading on the over-the-counter market, we believe
that our company will be regarded as a publicly-traded partnership. Under the federal tax laws, a publicly-traded partnership
generally will be treated as a corporation for U.S. federal income tax purposes. A publicly-traded partnership will be treated
as a partnership, however, and not as a corporation, for U.S. federal tax purposes, so long as 90% or more of its gross income
for each taxable year in which it is publicly traded constitutes “qualifying income” within the meaning of section
7704(d) of the Internal Revenue Code of 1986, as amended, or the Code, and our company is not required to register under the Investment
Company Act. Qualifying income generally includes dividends, interest (other than interest derived in the conduct of a lending
or insurance business or interest the determination of which depends in whole or in part on the income or profits of any person),
certain real property rents, certain gain from the sale or other disposition of real property, gains from the sale of stock or
debt instruments which are held as capital assets, and certain other forms of “passive-type” income. Our company expects
to realize sufficient qualifying income to satisfy the qualifying income exception. Our company also expects that we will not
be required to register under the Investment Company Act.
In
certain cases, income that would otherwise qualify for the qualifying income exception may not so qualify if it is considered
to be derived from an active conduct of a business. For example, the IRS may assert that interest received by our company from
its subsidiaries is not qualifying income because it is derived in the conduct of a lending business. If our company fails to
satisfy the qualifying income exception or is required to register under the Investment Company Act, our company will be classified
as a corporation for U.S. federal (and certain state and local) income tax purposes, and shareholders of our company would be
treated as shareholders in a domestic corporation. Our company would be required to pay federal income tax at regular corporate
rates on its income. In addition, our company would likely be liable for state and local income and/or franchise taxes on its
income. Distributions to the shareholders would constitute ordinary dividend income (taxable at then existing ordinary income
rates) or, in certain cases, qualified dividend income (which is generally subject to tax at reduced tax rates) to such holders
to the extent of our company’s earnings and profits, and the payment of these dividends would not be deductible to our company.
Taxation of our company as a corporation could result in a material reduction in distributions to our shareholders and after-tax
return and, thus, would likely result in a substantial reduction in the value of, or materially adversely affect the market price
of, our shares.
The
present U.S. federal income tax treatment of an investment in our shares may be modified by administrative, legislative, or judicial
interpretation at any time, and any such action may affect investments previously made. For example, changes to the U.S. federal
tax laws and interpretations thereof could make it more difficult or impossible to meet the qualifying income exception for our
company to be classified as a partnership, and not as a corporation, for U.S. federal income tax purposes, necessitate that our
company restructure its investments, or otherwise adversely affect an investment in our shares.
In
addition, our company may become subject to an entity level tax in one or more states. Several states are evaluating ways to subject
partnerships to entity level taxation through the imposition of state income, franchise, or other forms of taxation. If any state
were to impose a tax upon our company as an entity, our distributions to you would be reduced.
Complying
with certain tax-related requirements may cause our company to forego otherwise attractive business or investment opportunities
or enter into acquisitions, borrowings, financings, or arrangements our company may not have otherwise entered into.
In
order for our company to be treated as a partnership for U.S. federal income tax purposes and not as a publicly traded partnership
taxable as a corporation, our company must meet the qualifying income exception discussed above on a continuing basis and our
company must not be required to register as an investment company under the Investment Company Act. In order to effect such treatment,
our company may be required to invest through foreign or domestic corporations, forego attractive business or investment opportunities
or enter into borrowings or financings our company (o any of our subsidiaries, as the case may be) may not have otherwise entered
into. This may adversely affect our ability to operate solely to maximize our cash flow. In addition, our company may not be able
to participate in certain corporate reorganization transactions that would be tax free to our shareholders if our company were
a corporation.
Non-corporate
investors who are U.S. taxpayers will not be able to deduct certain fees, costs or other expenses for U.S. federal income tax
purposes.
Our
company will pay a management fee (and possibly certain transaction fees) to our manager. Our company will also pay certain costs
and expenses incurred in connection with activities of our manager. Our company intends to deduct such fees and expenses to the
extent that they are reasonable in amount and are not capital in nature or otherwise nondeductible. It is expected that such fees
and other expenses will generally constitute miscellaneous itemized deductions for non-corporate U.S. taxpayers who hold our shares.
Under current law that is in effect for taxable years beginning after December 31, 2017 and before January 1, 2026, non-corporate
U.S. taxpayers may not deduct any such miscellaneous itemized deductions for U.S. federal income tax purposes. A non-corporate
U.S. taxpayer’s inability to deduct such items could result in such holder reporting as his or her share of company taxable
income an amount that exceeds any cash actually distributed to such U.S. taxpayer for the year. Corporate U.S. holders of our
shares generally will be able to deduct these fees, costs and expenses in accordance with applicable U.S. federal income tax law.
A
portion of the income arising from an investment in our shares may be treated as unrelated business taxable income and taxable
to certain tax-exempt holders despite such holders’ tax-exempt status.
Our
company expects to incur debt that would be treated as “acquisition indebtedness” under section 514 of the Code with
respect to certain of its investments. To the extent our company recognizes income from any investment with respect to which there
is “acquisition indebtedness” during a taxable year, or to the extent our company recognizes gain from the disposition
of any investment with respect to which there is “acquisition indebtedness,” a portion of the income received will
be treated as unrelated business taxable income and taxable to tax-exempt investors. In addition, if the IRS successfully asserts
that we are engaged in a trade or business for U.S. federal income tax purposes (for example, if it determines we are engaged
in a lending business), then tax-exempt and in certain cases non-U.S. holders would be subject to U.S. income tax on any income
generated by such business. The foregoing only applies if the amount of such business income does not cause our company to fail
to meet the qualifying income test (which would happen if such income exceeded 10% of our gross income, and in which case such
failure would cause us to be taxable as a corporation).
A
portion of the income arising from an investment in our shares may be treated as income that is effectively connected with our
conduct of a U.S. trade or business, which income would be taxable to holders who are not U.S. taxpayers.
If
the IRS successfully asserts that we are engaged in a trade or business in the United States for U.S. federal income tax purposes
(for example, if it determines we are engaged in a lending business), then in certain cases non-U.S. holders would be subject
to U.S. income tax on any income that is effectively connected with such business. It could also cause the non-U.S. holder to
be subject to U.S. federal income tax on a sale of his or her interest in our company under recently enacted tax law. The foregoing
only applies if the amount of such business income does not cause our company to fail to meet the qualifying income test (which
would happen if such income exceeded 10% of our gross income, and in which case such failure would cause us to be taxable as a
corporation).
Risks
related to recently enacted legislation.
The
rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and
by the IRS and the U.S. Treasury Department. No assurance can be given as to whether, when or in what form the U.S. federal income
tax laws applicable to us and our shareholders may be enacted. Changes to the U.S. federal income tax laws and interpretations
of U.S. federal income tax laws could adversely affect an investment in our shares.
We
cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be issued,
nor is the long-term impact of recently enacted tax legislation clear. Prospective investors are urged to consult their tax advisors
regarding the effect of potential changes to the U.S. federal income tax laws on an investment in our shares.
Risks
Related to Retail and Appliances Business
If
we fail to acquire new customers or retain existing customers, or fail to do so in a cost-effective manner, we may not be able
to achieve profitability.
Our
success depends on our ability to acquire and retain customers in a cost-effective manner. We have made significant investments
related to customer acquisition and expect to continue to spend significant amounts to acquire additional customers. We cannot
assure you that the net profit from new customers we acquire will ultimately exceed the cost of acquiring those customers. If
we fail to deliver a quality shopping experience, or if consumers do not perceive the products we offer to be of high value and
quality, we may not be able to acquire new customers. If we are unable to acquire new customers who purchase products in numbers
sufficient to grow our business, we may not be able to generate the scale necessary to drive beneficial network effects with our
suppliers or efficiencies in our logistics network, our net revenue may decrease, and our business, financial condition and operating
results may be materially adversely affected.
We
believe that many of our new customers originate from word-of-mouth and other non-paid referrals from existing customers. Therefore,
we must ensure that our existing customers remain loyal to us in order to continue receiving those referrals. If our efforts to
satisfy our existing customers are not successful, we may not be able to acquire new customers in sufficient numbers to continue
to grow our business, or we may be required to incur significantly higher marketing expenses in order to acquire new customers.
Our
success depends in part on our ability to increase our net revenue per active customer. If our efforts to increase customer loyalty
and repeat purchasing as well as maintain high levels of customer engagement are not successful, our growth prospects and revenue
will be materially adversely affected.
Our
ability to grow our business depends on our ability to retain our existing customer base and generate increased revenue and repeat
purchases from this customer base, and maintain high levels of customer engagement. To do this, we must continue to provide our
customers and potential customers with a unified, convenient, efficient and differentiated shopping experience by:
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providing
imagery, tools and technology that attract customers who historically would have bought
elsewhere;
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maintaining
a high-quality and diverse portfolio of products;
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delivering
products on time and without damage; and
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maintaining
and further developing our in-store and online platforms.
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If
we fail to increase net revenue per active customer, generate repeat purchases or maintain high levels of customer engagement,
our growth prospects, operating results and financial condition could be materially adversely affected.
Our
business depends on our ability to build and maintain strong brands. We may not be able to maintain and enhance our brands if
we receive unfavorable customer complaints, negative publicity or otherwise fail to live up to consumers’ expectations,
which could materially adversely affect our business, results of operations and growth prospects.
Maintaining
and enhancing our brands is critical to expanding our base of customers and suppliers. Our ability to maintain and enhance our
brand depends largely on our ability to maintain customer confidence in our product and service offerings, including by delivering
products on time and without damage. If customers do not have a satisfactory shopping experience, they may seek out alternative
offerings from our competitors and may not return to our stores and sites as often in the future, or at all. In addition, unfavorable
publicity regarding, for example, our practices relating to privacy and data protection, product quality, delivery problems, competitive
pressures, litigation or regulatory activity, could seriously harm our reputation. Such negative publicity also could have an
adverse effect on the size, engagement, and loyalty of our customer base and result in decreased revenue, which could adversely
affect our business and financial results.
In
addition, maintaining and enhancing these brands may require us to make substantial investments, and these investments may not
be successful. If we fail to promote and maintain our brands, or if we incur excessive expenses in this effort, our business,
operating results and financial condition may be materially adversely affected. We anticipate that, as our market becomes increasingly
competitive, maintaining and enhancing our brands may become increasingly difficult and expensive. Maintaining and enhancing our
brands will depend largely on our ability to provide high quality products to our customers and a reliable, trustworthy and profitable
sales channel to our suppliers, which we may not be able to do successfully.
Customer
complaints or negative publicity about our sites, products, delivery times, customer data handling and security practices or customer
support, especially on blogs, social media websites and our sites, could rapidly and severely diminish consumer use of our sites
and consumer and supplier confidence in us and result in harm to our brands.
Our
efforts to expand our business into new brands, products, services, technologies, and geographic regions will subject us to additional
business, legal, financial, and competitive risks and may not be successful.
Our
business success depends to some extent on our ability to expand our customer offerings by launching new brands and services and
by expanding our existing offerings into new geographies. Launching new brands and services or expanding geographically requires
significant upfront investments, including investments in marketing, information technology, and additional personnel. We may
not be able to generate satisfactory revenue from these efforts to offset these costs. Any lack of market acceptance of our efforts
to launch new brands and services or to expand our existing offerings could have a material adverse effect on our business, prospects,
financial condition and results of operations. Further, as we continue to expand our fulfillment capability or add new businesses
with different requirements, our logistics networks become increasingly complex and operating them becomes more challenging. There
can be no assurance that we will be able to operate our networks effectively.
We
have also entered and may continue to enter into new markets in which we have limited or no experience, which may not be successful
or appealing to our customers. These activities may present new and difficult technological and logistical challenges, and resulting
service disruptions, failures or other quality issues may cause customer dissatisfaction and harm our reputation and brand. Further,
our current and potential competitors in new market segments may have greater brand recognition, financial resources, longer operating
histories and larger customer bases than we do in these areas. As a result, we may not be successful enough in these newer areas
to recoup our investments in them. If this occurs, our business, financial condition and operating results may be materially adversely
affected.
If
we fail to manage our growth effectively, our business, financial condition and operating results could be harmed.
To
manage our growth effectively, we must continue to implement our operational plans and strategies, improve and expand our infrastructure
of people and information systems and expand, train and manage our employee base. We have rapidly increased employee headcount
since our inception to support the growth in our business. To support continued growth, we must effectively integrate, develop
and motivate a large number of new employees. We face significant competition for personnel. Failure to manage our hiring needs
effectively or successfully integrate our new hires may have a material adverse effect on our business, financial condition and
operating results.
Additionally,
the growth of our business places significant demands on our operations, as well as our management and other employees. For example,
we typically launch hundreds of promotional events across thousands of products each month on our sites via emails and personalized
displays. These events require us to produce updates of our sites and emails to our customers on a daily basis with different
products, photos and text. Any surge in online traffic and orders associated with such promotional activities places increased
strain on our operations, including our logistics network, and may cause or exacerbate slowdowns or interruptions. The growth
of our business may require significant additional resources to meet these daily requirements, which may not scale in a cost-effective
manner or may negatively affect the quality of our sites and customer experience. We are also required to manage relationships
with a growing number of suppliers, customers and other third parties. Our information technology systems and our internal controls
and procedures may not be adequate to support future growth of our supplier and employee base. If we are unable to manage the
growth of our organization effectively, our business, financial condition and operating results may be materially adversely affected.
Our
ability to obtain continued financing is critical to the growth of our business. We will need additional financing to fund operations,
which additional financing may not be available on reasonable terms or at all.
Our
future growth, including the potential for future market expansion will require additional capital. We will consider raising additional
funds through various financing sources, including the procurement of additional commercial debt financing. However, there can
be no assurance that such funds will be available on commercially reasonable terms, if at all. If such financing is not available
on satisfactory terms, we may be unable to execute our growth strategy, and operating results may be adversely affected. Any additional
debt financing will increase expenses and must be repaid regardless of operating results and may involve restrictions limiting
our operating flexibility.
Our
ability to obtain financing may be impaired by such factors as the capital markets, both generally and specifically in our industry,
which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing
activities, together with our revenues from operations, are not sufficient to satisfy our capital needs, we may be required to
decrease the pace of, or eliminate, our future product offerings and market expansion opportunities and potentially curtail operations.
Our
business is highly competitive. Competition presents an ongoing threat to the success of our business.
Our
business is rapidly evolving and intensely competitive, and we have many competitors in different industries. Our competition
includes big box retailers, such as Home Depot, Lowe’s and Best Buy, specialty retailers, such as TeeVax, Ferguson and Premier
Bath and Kitchen, and online marketplaces, such as Amazon.
We
expect competition to continue to increase. We believe that our ability to compete successfully depends upon many factors both
within and beyond our control, including:
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the
size and composition of our customer base;
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the
number of suppliers and products we feature;
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our
selling and marketing efforts;
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the
quality, price and reliability of products we offer;
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the
quality and convenience of the shopping experience that we provide;
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our
ability to distribute our products and manage our operations; and
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our
reputation and brand strength.
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Many
of our current competitors have, and potential competitors may have, longer operating histories, greater brand recognition, larger
fulfillment infrastructures, greater technical capabilities, faster and less costly shipping, significantly greater financial,
marketing and other resources and larger customer bases than we do. These factors may allow our competitors to derive greater
net revenue and profits from their existing customer base, acquire customers at lower costs or respond more quickly than we can
to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development
efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to build
larger customer bases or generate net revenue from their customer bases more effectively than we do.
Our
success depends, in substantial part, on our continued ability to market our products through search engines and social media
platforms.
The
marketing of our products depends on our ability to cultivate and maintain cost-effective and otherwise satisfactory relationships
with search engines and social media platforms, including those operated by Google, Facebook, Bing and Yahoo! These platforms
could decide to change their terms and conditions of use at any time (and without notice) and/or significantly increase their
fees. No assurances can be provided that we will be able to maintain cost-effective and otherwise satisfactory relationships with
these platforms and our inability to do so in the case of one or more of these platforms could have a material adverse effect
on our business, financial condition and results of operations.
We
obtain a significant number of visits via search engines such as Google, Bing and Yahoo! Search engines frequently change the
algorithms that determine the ranking and display of results of a user’s search and may make other changes to the way results
are displayed, which can negatively affect the placement of links and, therefore, reduce the number of visits to our website.
The growing use of online ad-blocking software may also impact the success of our marketing efforts because we may reach a smaller
audience and fail to bring more customers to our website, which could have a material adverse effect on our business, financial
condition and results of operations.
System
interruptions that impair customer access to our sites or other performance failures or incidents involving our logistics network,
our technology infrastructure or our critical technology partners could damage our business, reputation and brand and substantially
harm our business and results of operations.
The
satisfactory performance, reliability and availability of our sites, transaction processing systems, logistics network, and technology
infrastructure are critical to our reputation and our ability to acquire and retain customers, as well as maintain adequate customer
service levels.
For
example, if one of our data centers fails or suffers an interruption or degradation of services, we could lose customer data and
miss order fulfillment deadlines, which could harm our business. Our systems and operations, including our ability to fulfill
customer orders through our logistics network, are also vulnerable to damage or interruption from inclement weather, fire, flood,
power loss, telecommunications failure, terrorist attacks, labor disputes, cyber-attacks, data loss, acts of war, break-ins, earthquake
and similar events. In the event of a data center failure, the failover to a back-up could take substantial time, during which
time our sites could be completely shut down. Further, our back-up services may not effectively process spikes in demand, may
process transactions more slowly and may not support all of our site’s functionality.
We
use complex proprietary software in our technology infrastructure, which we seek to continually update and improve. We may not
always be successful in executing these upgrades and improvements, and the operation of our systems may be subject to failure.
In particular, we have in the past and may in the future experience slowdowns or interruptions on some or all of our sites when
we are updating them, and new technologies or infrastructures may not be fully integrated with existing systems on a timely basis,
or at all. Additionally, if we expand our use of third-party services, including cloud-based services, our technology infrastructure
may be subject to increased risk of slowdown or interruption as a result of integration with such services and/or failures by
such third parties, which are out of our control. Our net revenue depends on the number of visitors who shop on our sites and
the volume of orders we can handle. Unavailability of our sites or reduced order fulfillment performance would reduce the volume
of goods sold and could also materially adversely affect consumer perception of our brand.
We
may experience periodic system interruptions from time to time. In addition, continued growth in our transaction volume, as well
as surges in online traffic and orders associated with promotional activities or seasonal trends in our business, place additional
demands on our technology platform and could cause or exacerbate slowdowns or interruptions. If there is a substantial increase
in the volume of traffic on our sites or the number of orders placed by customers, we may be required to further expand and upgrade
our technology, logistics network, transaction processing systems and network infrastructure. There can be no assurance that we
will be able to accurately project the rate or timing of increases, if any, in the use of our sites or expand and upgrade our
systems and infrastructure to accommodate such increases on a timely basis. In order to remain competitive, we must continue to
enhance and improve the responsiveness, functionality and features of our sites, which is particularly challenging given the rapid
rate at which new technologies, customer preferences and expectations and industry standards and practices are evolving in the
e-commerce industry. Accordingly, we redesign and enhance various functions on our sites on a regular basis, and we may experience
instability and performance issues as a result of these changes.
Any
slowdown, interruption or performance failure of our sites and the underlying technology and logistics infrastructure could harm
our business, reputation and our ability to acquire, retain and serve our customers, which could materially adversely affect our
results of operations.
Our
failure or the failure of third-party service providers to protect our sites, networks and systems against security breaches,
or otherwise to protect our confidential information, could damage our reputation and brand and substantially harm our business
and operating results.
We
collect, maintain, transmit and store data about our customers, employees, contractors, suppliers, vendors and others, including
credit card information and personally identifiable information, as well as other confidential and proprietary information. We
also employ third-party service providers that store, process and transmit certain proprietary, personal and confidential information
on our behalf. We rely on encryption and authentication technology licensed from third parties in an effort to securely transmit,
encrypt, anonymize or pseudonymize certain confidential and sensitive information, including credit card numbers. Advances in
computer capabilities, new technological discoveries or other developments may result in the whole or partial failure of this
technology to protect transaction and personal data or other confidential and sensitive information from being breached or compromised.
Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to hack our systems,
denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or
other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by our sites, networks
and systems or that we or our third-party service providers otherwise maintain, including payment card systems and human resources
management platforms. We and our service providers may not anticipate or prevent all types of attacks until after they have already
been launched, and techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known
until launched against us or our third-party service providers. In addition, security breaches can also occur as a result of non-technical
issues, including intentional or inadvertent breaches by our employees or by persons with whom we have commercial relationships.
Breaches
of our security measures or those of our third-party service providers or cyber security incidents could result in unauthorized
access to our sites, networks and systems; unauthorized access to and misappropriation of personal information, including consumers’
and employees’ personally identifiable information, or other confidential or proprietary information of ourselves or third
parties; limited or terminated access to certain payment methods or fines or higher transaction fees to use such methods; viruses,
worms, spyware or other malware being served from our sites, networks or systems; deletion or modification of content or the display
of unauthorized content on our sites; interruption, disruption or malfunction of operations; costs relating to breach remediation,
deployment or training of additional personnel and protection technologies, responses to governmental investigations and media
inquiries and coverage; engagement of third party experts and consultants; litigation, regulatory action and other potential liabilities.
If any of these breaches of security occur, our reputation and brand could be damaged, our business may suffer, we could be required
to expend significant capital and other resources to alleviate problems caused by such breaches and we could be exposed to a risk
of loss, litigation or regulatory action and possible liability. In addition, any party who is able to illicitly obtain a customer’s
password could access that customer’s transaction data or personal information. Any compromise or breach of our security
measures, or those of our third-party service providers, could violate applicable privacy, data security and other laws, and cause
significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, which could have
a material adverse effect on our business, financial condition and operating results. We may need to devote significant resources
to protect against security breaches or to address problems caused by breaches, diverting resources from the growth and expansion
of our business.
We
may be subject to product liability and other similar claims if people or property are harmed by the products we sell.
Some
of the products we sell may expose us to product liability and other claims and litigation (including class actions) or regulatory
action relating to safety, personal injury, death or environmental or property damage. Some of our agreements with members of
our supply chain may not indemnify us from product liability for a particular product, and some members of our supply chain may
not have sufficient resources or insurance to satisfy their indemnity and defense obligations. Although we maintain liability
insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue
to be available to us on economically reasonable terms, or at all.
Risks
associated with the suppliers from whom our products are sourced could materially adversely affect our financial performance as
well as our reputation and brand.
We
depend on our ability to provide our customers with a wide range of products from qualified suppliers in a timely and efficient
manner. Political and economic instability, the financial stability of suppliers, suppliers’ ability to meet our standards,
labor problems experienced by suppliers, the availability or cost of raw materials, merchandise quality issues, currency exchange
rates, trade tariff developments, transport availability and cost, transport security, inflation, and other factors relating to
our suppliers are beyond our control.
Our
agreements with most of our suppliers do not provide for the long-term availability of merchandise or the continuation of particular
pricing practices, nor do they usually restrict such suppliers from selling products to other buyers. There can be no assurance
that our current suppliers will continue to seek to sell us products on current terms or that we will be able to establish new
or otherwise extend current supply relationships to ensure product acquisitions in a timely and efficient manner and on acceptable
commercial terms. Our ability to develop and maintain relationships with reputable suppliers and offer high quality merchandise
to our customers is critical to our success. If we are unable to develop and maintain relationships with suppliers that would
allow us to offer a sufficient amount and variety of quality merchandise on acceptable commercial terms, our ability to satisfy
our customers’ needs, and therefore our long-term growth prospects, would be materially adversely affected.
Further,
we rely on our suppliers’ representations of product quality, safety and compliance with applicable laws and standards.
If our suppliers or other vendors violate applicable laws, regulations or our supplier code of conduct, or implement practices
regarded as unethical, unsafe, or hazardous to the environment, it could damage our reputation and negatively affect our operating
results. Further, concerns regarding the safety and quality of products provided by our suppliers could cause our customers to
avoid purchasing those products from us, or avoid purchasing products from us altogether, even if the basis for the concern is
outside of our control. As such, any issue, or perceived issue, regarding the quality and safety of any items we sell, regardless
of the cause, could adversely affect our brand, reputation, operations and financial results.
We
also are unable to predict whether any of the countries in which our suppliers’ products are currently manufactured or may
be manufactured in the future will be subject to new, different, or additional trade restrictions imposed by the U.S. or foreign
governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from
suppliers with international manufacturing operations, including the imposition of additional import restrictions, restrictions
on the transfer of funds or increased tariffs or quotas, could increase the cost or reduce the supply of merchandise available
to our customers and materially adversely affect our financial performance as well as our reputation and brand. Furthermore, some
or all of our suppliers’ foreign operations may be adversely affected by political and financial instability, resulting
in the disruption of trade from exporting countries, restrictions on the transfer of funds or other trade disruptions.
In
addition, our business with foreign suppliers may be affected by changes in the value of the U.S. dollar relative to other foreign
currencies. For example, any movement by any other foreign currency against the U.S. dollar may result in higher costs to us for
those goods. Declines in foreign currencies and currency exchange rates might negatively affect the profitability and business
prospects of one or more of our foreign suppliers. This, in turn, might cause such foreign suppliers to demand higher prices for
merchandise in their effort to offset any lost profits associated with any currency devaluation, delay merchandise shipments,
or discontinue selling to us altogether, any of which could ultimately reduce our sales or increase our costs.
Our
suppliers have imposed conditions in our business arrangements with them. If we are unable to continue satisfying these conditions,
or such suppliers impose additional restrictions with which we cannot comply, it could have a material adverse effect on our business,
financial condition and operating results.
Our
suppliers have strict conditions for doing business with them. Several are sizeable such as General Electric, Whirlpool and Riggs
Distributing. If we cannot satisfy these conditions or if they impose additional or more restrictive conditions that we cannot
satisfy, our business would be materially adversely affected. It would be materially detrimental to our business if these suppliers
decided to no longer do business with us, increased the pricing at which they allow us to purchase their goods or impose other
restrictions or conditions that make it more difficult for us to work with them. Any of these events could have a material adverse
effect on our business, financial condition and operating results.
We
may be unable to source new suppliers or strengthen our relationships with current suppliers.
We
have relationships with approximately 17 suppliers. Our agreements with suppliers are generally terminable at will by either party
upon short notice. If we do not maintain our existing relationships or build new relationships with suppliers on acceptable commercial
terms, we may not be able to maintain a broad selection of merchandise, and our business and prospects would suffer severely.
In
order to attract quality suppliers, we must:
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demonstrate
our ability to help our suppliers increase their sales;
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offer
suppliers a high quality, cost-effective fulfillment process; and
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continue
to provide suppliers with a dynamic and real-time view of our demand and inventory needs.
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If
we are unable to provide our suppliers with a compelling return on investment and an ability to increase their sales, we may be
unable to maintain and/or expand our supplier network, which would negatively impact our business.
We
depend on our suppliers to perform certain services regarding the products that we offer.
As
part of offering our suppliers’ products for sale on our sites, suppliers are often responsible for conducting a number
of traditional retail operations with respect to their respective products, including maintaining inventory and preparing merchandise
for shipment to our customers. In these instances, we may be unable to ensure that suppliers will perform these services to our
or our customers’ satisfaction in a manner that provides our customer with a unified brand experience or on commercially
reasonable terms. If our customers become dissatisfied with the services provided by our suppliers, our business, reputation and
brands could suffer.
We
depend on our relationships with third parties, and changes in our relationships with these parties could adversely impact our
revenue and profits.
We
rely on third parties to operate certain elements of our business. For example, we use carriers such as FedEx, UPS, DHL and the
U.S. Postal Service to deliver products. As a result, we may be subject to shipping delays or disruptions caused by inclement
weather, natural disasters, system interruptions and technology failures, labor activism, health epidemics or bioterrorism. We
are also subject to risks of breakage or other damage during delivery by any of these third parties. We also use and rely on other
services from third parties, such as retail partner services, telecommunications services, customs, consolidation and shipping
services, as well as warranty, installation and design services.
We
may be unable to maintain these relationships, and these services may also be subject to outages and interruptions that are not
within our control. For example, failures by our telecommunications providers have in the past and may in the future interrupt
our ability to provide phone support to our customers. Third parties may in the future determine they no longer wish to do business
with us or may decide to take other actions or make changes to their practices that could harm our business. We may also determine
that we no longer want to do business with them. If products are not delivered in a timely fashion or are damaged during the delivery
process, or if we are not able to provide adequate customer support or other services or offerings, our customers could become
dissatisfied and cease buying products through our sites, which would adversely affect our operating results.
The
seasonal trends in our business create variability in our financial and operating results and place increased strain on our operations.
We
experience surges in orders associated with promotional activities and seasonal trends. This activity may place additional demands
on our technology systems and logistics network and could cause or exacerbate slowdowns or interruptions. Any such system, site
or service interruptions could prevent us from efficiently receiving or fulfilling orders, which may reduce the volume or quality
of goods or services we sell and may cause customer dissatisfaction and harm our reputation and brand.
Our
business may be adversely affected if we are unable to provide our customers a cost-effective shopping platform that is able to
respond and adapt to rapid changes in technology.
The
number of people who access the Internet through devices other than personal computers, including mobile phones, smartphones,
handheld computers such as notebooks and tablets, video game consoles, and television set-top devices, has increased dramatically
in the past few years. We continually upgrade existing technologies and business applications to keep pace with these rapidly
changing and continuously evolving technologies, and we may be required to implement new technologies or business applications
in the future. The implementation of these upgrades and changes requires significant investments and as new devices and platforms
are released, it is difficult to predict the problems we may encounter in developing applications for these alternative devices
and platforms. Additionally, we may need to devote significant resources to the support and maintenance of such applications once
created. Our results of operations may be affected by the timing, effectiveness and costs associated with the successful implementation
of any upgrades or changes to our systems and infrastructure to accommodate such alternative devices and platforms. Further, in
the event that it is more difficult or less compelling for our customers to buy products from us on their mobile or other devices,
or if our customers choose not to buy products from us on such devices or to use mobile or other products that do not offer access
to our sites, our customer growth could be harmed and our business, financial condition and operating results may be materially
adversely affected.
Significant
merchandise returns could harm our business.
We
allow our customers to return products, subject to our return policy. If merchandise returns are significant, our business, prospects,
financial condition and results of operations could be harmed. Further, we modify our policies relating to returns from time to
time, which may result in customer dissatisfaction or an increase in the number of product returns. Many of our products are large
and require special handling and delivery. From time to time our products are damaged in transit, which can increase return rates
and harm our brand.
Uncertainties
in economic conditions and their impact on consumer spending patterns, particularly in the home goods segment, could adversely
impact our operating results.
Consumers
may view a substantial portion of the products we offer as discretionary items rather than necessities. As a result, our results
of operations are sensitive to changes in macro-economic conditions that impact consumer spending, including discretionary spending.
Some of the factors adversely affecting consumer spending include levels of unemployment; consumer debt levels; changes in net
worth based on market changes and uncertainty; home foreclosures and changes in home values or the overall housing, residential
construction or home improvement markets; fluctuating interest rates; credit availability, including mortgages, home equity loans
and consumer credit; government actions; fluctuating fuel and other energy costs; fluctuating commodity prices and general uncertainty
regarding the overall future economic environment. Adverse economic changes in any of the regions in which we sell our products
could reduce consumer confidence and could negatively affect net revenue and have a material adverse effect on our operating results.
Our
business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or an
inability to timely deliver such communications could materially adversely affect our net revenue and business.
Our
business is highly dependent upon email and other messaging services for promoting our sites and products. If we are unable to
successfully deliver emails or other messages to our subscribers, or if subscribers decline to open our emails or other messages,
our net revenue and profitability would be materially adversely affected. Changes in how webmail applications organize and prioritize
email may also reduce the number of subscribers opening our emails. For example, in 2013 Google Inc.’s Gmail service began
offering a feature that organizes incoming emails into categories (for example, primary, social and promotions). Such categorization
or similar inbox organizational features may result in our emails being delivered in a less prominent location in a subscriber’s
inbox or viewed as “spam” by our subscribers and may reduce the likelihood of that subscriber opening our emails.
Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also adversely
impact our business. From time to time, Internet service providers or other third parties may block bulk email transmissions or
otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to third
parties. Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements
upon us in connection with sending such communications would also materially adversely impact our business. Our use of email and
other messaging services to send communications about our products or other matters may also result in legal claims against us,
which may cause us increased expenses, and if successful might result in fines and orders with costly reporting and compliance
obligations or might limit or prohibit our ability to send emails or other messages. We also rely on social networking messaging
services to send communications and to encourage customers to send communications. Changes to the terms of these social networking
services to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to
send communications through their services, disruptions or downtime experienced by these social networking services or decline
in the use of or engagement with social networking services by customers and potential customers could materially adversely affect
our business, financial condition and operating results.
We
are subject to risks related to online payment methods.
We
accept payments using a variety of methods, including credit card, debit card, PayPal, credit accounts and gift cards. As we offer
new payment options to consumers, we may be subject to additional regulations, compliance requirements and fraud. For certain
payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our
operating costs and lower profitability. We are also subject to payment card association operating rules and certification requirements,
including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers, which could change
or be reinterpreted to make it difficult or impossible for us to comply. As our business changes, we may also be subject to different
rules under existing standards, which may require new assessments that involve costs above what we currently pay for compliance.
If we fail to comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our
transactions limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to
our payment systems, we may, among other things, be subject to fines or higher transaction fees and may lose, or face restrictions
placed upon, our ability to accept credit card and debit card payments from consumers or to facilitate other types of online payments.
If any of these events were to occur, our business, financial condition and operating results could be materially adversely affected.
We
occasionally receive orders placed with fraudulent credit card data. We may suffer losses as a result of orders placed with fraudulent
credit card data even if the associated financial institution approved payment of the orders. Under current credit card practices,
we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card fraud, our liability
for these transactions could harm our business, financial condition and results of operations.
Government
regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations
could substantially harm our business and results of operations.
We
are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce.
Existing and future regulations and laws could impede the growth of the Internet, e- commerce or mobile commerce. These regulations
and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications,
consumer protection, Internet neutrality and gift cards. It is not clear how existing laws governing issues such as property ownership,
sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the
advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. It is possible
that general business regulations and laws, or those specifically governing the Internet or e-commerce, may be interpreted and
applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.
We cannot be sure that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure,
or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in
business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our
reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs
of doing business, decrease the use of our sites by consumers and suppliers and may result in the imposition of monetary liability.
We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance
with any such laws or regulations. Adverse legal or regulatory developments could substantially harm our business. Further, if
we enter into new market segments or geographical areas and expand the products and services we offer, we may be subject to additional
laws and regulatory requirements or prohibited from conducting our business, or certain aspects of it, in certain jurisdictions.
We will incur additional costs complying with these additional obligations and any failure or perceived failure to comply would
adversely affect our business and reputation.
Failure
to comply with applicable laws and regulations relating to privacy, data protection and consumer protection, or the expansion
of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could adversely
affect our business and our financial condition.
A
variety of laws and regulations govern the collection, use, retention, sharing, export and security of personal information. Laws
and regulations relating to privacy, data protection and consumer protection are evolving and subject to potentially differing
interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another
or may conflict with other rules or our practices. As a result, our practices may not comply, or may not comply in the future
with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our posted
privacy policies or with any applicable privacy or consumer protection- related laws, regulations, industry self-regulatory principles,
industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating
to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, proceedings
or actions against us by governmental entities or others or other liabilities or require us to change our operations and/or cease
using certain data sets. Any such claim, proceeding or action could hurt our reputation, brand and business, force us to incur
significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in
a loss of customers and suppliers and may result in the imposition of monetary penalties. We may also be contractually required
to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other
legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that
we store or handle as part of operating our business.
Federal,
state and international governmental authorities continue to evaluate the privacy implications inherent in the use of proprietary
or third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. U.S.
and foreign governments have enacted, have considered or are considering legislation or regulations that could significantly restrict
the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and
consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such
tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means
to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could
if widely adopted significantly reduce the effectiveness of such practices and technologies. The regulation of the use of cookies
and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ
such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms
and consequently, materially adversely affect our business, financial condition and operating results.
In
addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand current
laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and consumer
protection. Any such changes may force us to incur substantial costs or require us to change our business practices. This could
compromise our ability to pursue our growth strategy effectively and may adversely affect our ability to acquire customers or
otherwise harm our business, financial condition and operating results.
Changes
in tax treatment of companies engaged in e-commerce may adversely affect the commercial use of our sites and our financial results.
Due
to the global nature of the Internet, it is possible that various states or foreign countries might attempt to impose additional
or new regulation on our business or levy additional or new sales, income or other taxes relating to our activities. Tax authorities
at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in
e-commerce. New or revised international, federal, state or local tax regulations or court decisions may subject us or our customers
to additional sales, income and other taxes. For example, on June 21, 2018, the U.S. Supreme Court rendered a 5-4 majority decision
in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) where the Court held, among other things, that a state may require
an out-of-state seller with no physical presence in the state to collect and remit sales taxes on goods the seller ships to consumers
in the state, overturning existing court precedent. Other new or revised taxes and, in particular, sales taxes, value added tax
and similar taxes could increase the cost of doing business online and decrease the attractiveness of selling products over the
Internet. New taxes and rulings could also create significant increases in internal costs necessary to capture data and collect
and remit taxes. In addition, we may charge sales taxes in jurisdictions where our competitors do not, resulting in our product
prices potentially being higher than those of our competitors. As a result, we may lose sales to our competitors in these jurisdictions.
Any of these events could have a material adverse effect on our business, financial condition and operating results.
We
rely on the performance of members of management and highly skilled personnel, and if we are unable to attract, develop, motivate
and retain well-qualified employees, our business could be harmed.
We
believe our success has depended, and continues to depend, on the members of our senior management teams. The loss of any of our
senior management or other key employees could materially harm our business. Our future success also depends on our continuing
ability to attract, develop, motivate and retain highly qualified and skilled employees, particularly mid-level managers and merchandising
and technology personnel. The market for such positions is competitive. Qualified individuals are in high demand, and we may incur
significant costs to attract them. Our inability to recruit and develop mid-level managers could materially adversely affect our
ability to execute our business plan, and we may not be able to find adequate replacements. All of our officers and other U.S.
employees are at-will employees, meaning that they may terminate their employment relationship with us at any time, and their
knowledge of our business and industry would be extremely difficult to replace. If we do not succeed in attracting well-qualified
employees or retaining and motivating existing employees, our business, financial condition and operating results may be materially
adversely affected.
We
may not be able to adequately protect our intellectual property rights.
We
regard our customer lists, domain names, trade dress, trade secrets, proprietary technology and similar intellectual property
as critical to our success, and we rely on trade secret protection, agreements and other methods with our employees and others
to protect our proprietary rights. We might not be able to obtain broad protection for all of our intellectual property. The protection
of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources.
We may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property
rights or proprietary rights or to establish the validity of such rights. Any litigation, whether or not it is resolved in our
favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may materially
adversely affect our business, financial condition and operating results. Moreover, the steps we take to protect our intellectual
property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights,
and we may not be able to broadly enforce all of our intellectual property rights. Any of our intellectual property rights may
be challenged by others or invalidated through administrative process or litigation. Additionally, the process of obtaining intellectual
property protections is expensive and time-consuming, and we may not be able to pursue all necessary or desirable actions at a
reasonable cost or in a timely manner. Even if issued, there can be no assurance that these protections will adequately safeguard
our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and
other intellectual property rights are uncertain. We also cannot be certain that others will not independently develop or otherwise
acquire equivalent or superior technology or intellectual property rights. We may also be exposed to claims from third parties
claiming infringement of their intellectual property rights, or demanding the release or license of open source software or derivative
works that we developed using such software (which could include our proprietary code) or otherwise seeking to enforce the terms
of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license,
publicly release the affected portions of our source code, be limited in or cease using the implicated software unless and until
we can re-engineer such software to avoid infringement or change the use of the implicated open source software.
We
may be accused of infringing intellectual property rights of third parties.
The
e-commerce industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in
protracted and expensive litigation for many companies. We may be subject to claims and litigation by third parties that we infringe
their intellectual property rights. The costs of supporting such litigation and disputes are considerable, and there can be no
assurances that favorable outcomes will be obtained. As our business expands and the number of competitors in our market increases
and overlaps occur, we expect that infringement claims may increase in number and significance. Any claims or proceedings against
us, whether meritorious or not, could be time-consuming, result in considerable litigation costs, require significant amounts
of management time or result in the diversion of significant operational resources, any of which could materially adversely affect
our business, financial condition and operating results.
We
have received in the past, and we may receive in the future, communications alleging that certain items posted on or sold through
our sites violate third-party copyrights, designs, marks and trade names or other intellectual property rights or other proprietary
rights. Brand and content owners and other proprietary rights owners have actively asserted their purported rights against online
companies. In addition to litigation from rights owners, we may be subject to regulatory, civil or criminal proceedings and penalties
if governmental authorities believe we have aided and abetted in the sale of counterfeit or infringing products.
Such
claims, whether or not meritorious, may result in the expenditure of significant financial, managerial and operational resources,
injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege that we have
violated their rights, but such licenses may not be available on terms acceptable to us, or at all. These risks have been amplified
by the increase in third parties whose sole or primary business is to assert such claims.
We
are engaged in legal proceedings that could cause us to incur unforeseen expenses and could occupy a significant amount of our
management’s time and attention.
From
time to time, we are subject to litigation or claims that could negatively affect our business operations and financial position.
Litigation disputes could cause us to incur unforeseen expenses, result in site unavailability, service disruptions, and otherwise
occupy a significant amount of our management’s time and attention, any of which could negatively affect our business operations
and financial position. We also from time to time receive inquiries and subpoenas and other types of information requests from
government authorities and we may become subject to related claims and other actions related to our business activities. While
the ultimate outcome of investigations, inquiries, information requests and related legal proceedings is difficult to predict,
such matters can be expensive, time-consuming and distracting, and adverse resolutions or settlements of those matters may result
in, among other things, modification of our business practices, reputational harm or costs and significant payments, any of which
could negatively affect our business operations and financial position.
Risks
Related to Custom Cabinetry Business
The
loss of any of our key customers could have a materially adverse effect on our results of operations.
Historically,
a few long term recurring contractor customers have accounted for a majority of our revenues. There can be no assurance that we
will maintain or improve the relationships with those customers. Our major customers often change each period based on when a
given order is placed. If we cannot maintain long-term relationships with major customers or replace major customers from period
to period with equivalent customers, the loss of such sales could have an adverse effect on our business, financial condition
and results of operations.
Our
business primarily relies on U.S. home improvement, repair and remodel and new home construction activity levels, all of which
are impacted by risks associated with fluctuations in the housing market. Downward changes in the general economy, the housing
market or other business conditions could adversely affect our results of operations, cash flows and financial condition.
Our
business primarily relies on home improvement, repair and remodel and new home construction activity levels in the United States.
The housing market is sensitive to changes in economic conditions and other factors, such as the level of employment, access to
labor, consumer confidence, consumer income, availability of financing and interest rate levels. Adverse changes in any of these
conditions generally, or in any of the markets where we operate, including due to the global pandemic, could decrease demand and
could adversely impact our businesses by: causing consumers to delay or decrease homeownership; making consumers more price conscious
resulting in a shift in demand to smaller, less expensive homes; making consumers more reluctant to make investments in their
existing homes, including large kitchen and bath repair and remodel projects; or making it more difficult to secure loans for
major renovations.
For
the past few years, the conditions within the home improvement industry have been extremely challenging. Low levels of consumer
confidence, high levels of unemployment and downward pressure on home prices have made consumers reluctant to make additional
investments in existing homes, such as kitchen and bath remodeling projects. In addition, the increasing number of households
with negative equity in their homes and more conservative lending practices, including for home equity loans which are often used
to finance repairs and remodeling, are limiting the ability of consumers to finance home improvements. The challenges facing the
home improvement industry may lead to a further decrease in demand for our products.
A
significant part of our business is also affected by levels of new home construction, as our products are often purchased in connection
with the construction of a new home. Like the home improvement industry, over the past few years, the home building industry has
undergone a significant downturn, marked by declines in the demand for new homes, an oversupply of new and existing homes on the
market and a reduction in the availability of financing for homebuyers. The oversupply of existing homes has been exacerbated
by a growing number of home mortgage foreclosures, which is further contributing to downward pressure on home prices. Fewer new
home buyers may lead to a decrease in demand for our products.
We
believe that housing market conditions will continue to be challenging. We cannot predict the duration or ultimate severity of
these challenging conditions. Continued depressed activity levels in consumer spending for home improvement and new home construction
will continue to adversely affect our results of operations and our financial position. Furthermore, renewed economic turmoil
may cause unanticipated shifts in consumer preferences and purchasing practices and in the business models and strategies of our
customers. Such shifts may alter the nature and prices of products demanded by the end consumer and our customers and could adversely
affect our operating performance.
Increases
in interest rates and the reduced availability of financing for home improvements may cause our sales and profitability to decrease.
In
general, demand for home improvement products may be adversely affected by increases in interest rates and the reduced availability
of financing. Also, trends in the financial industry which influence the requirements used by lenders to evaluate potential buyers
can result in reduced availability of financing. If interest rates or lending requirements increase and consequently, the ability
of prospective buyers to finance purchases of home improvement products is adversely affected, our business, financial condition
and results of operations may also be adversely impacted and the impact may be material.
Our
custom cabinetry business is subject to seasonal and other periodic fluctuations, and affected by factors beyond our control,
which may cause our sales and operating results to fluctuate significantly.
Our
custom cabinetry business is subject to seasonal fluctuations. We believe that we can more effectively control and balance our
direct labor resources and costs during seasonal variations in our custom cabinetry business, depending on the dynamics of the
market served. However, extreme winter weather conditions can have an adverse effect on appointments and installations which typically
occur during our fourth and first quarters and can also negatively affect our net sales and operating results. In addition, sales
and revenues may decline in the fourth quarter due to the holiday season.
Difficulties
in recruiting adequate personnel may have a material adverse effect on our ability to meet our growth expectations.
In
order to fulfill our growth expectations, we must recruit, hire, train and retain qualified sales and installation personnel.
In particular, during the pandemic, we may experience greater difficulty in fulfilling our personnel needs since our employees
are not able to work remotely for installations. When new construction and remodeling are on the rise, recruiting of independent
contractors to perform our installations becomes more difficult. There can be no assurance that we will have sufficient contractors
or employees to fulfill our installation requirements. Our inability to fulfill our personnel needs could have a material adverse
effect on our ability to meet our growth expectations.
Increases
in the cost of labor, union organizing activity and work stoppages at our facility or the facilities of our suppliers could materially
affect our financial performance.
Our
business is labor intensive, and, as a result, our financial performance is affected by the availability of qualified personnel
and the cost of labor. Currently, none of our employees are represented by labor unions. Strikes or other types of conflicts with
personnel could arise or we may become a target for union organizing activity. Some of our direct and indirect suppliers have
unionized work forces. Strikes, work stoppages or slowdowns experienced by these suppliers could result in slowdowns or closures
of facilities where components of our products are manufactured. Any interruption in the production of our products could reduce
sales of our products and increase our costs.
In
the event of a catastrophic loss of our key manufacturing facility, our business would be adversely affected.
While
we maintain insurance covering our facility, including business interruption insurance, a catastrophic loss of the use of all
or a portion of our manufacturing facility due to accident, labor issues, weather conditions, natural disaster or otherwise, whether
short or long-term, could have a material adverse effect on us.
We
could face potential product liability claims relating to our products which could result in significant costs and liabilities,
which would reduce our profitability.
We
face an inherent business risk of exposure to product liability claims in the event that the installation and use of any of our
products results in personal injury or property damage. We are also exposed to potential liability and product performance warranty
risks that are inherent in the design, manufacture and sale of our products. In the event that any of our products prove to be
defective, we may be required to recall or redesign such products, which would result in significant unexpected costs. Any insurance
we maintain may not be available on terms acceptable to us or such coverage may not be adequate for liabilities actually incurred.
Further, any claim could result in adverse publicity against us, which could adversely affect our sales or increase our costs.
If
we are unable to compete successfully with our competitors, our financial condition and results of operations may be harmed.
We
operate in a highly fragmented and very competitive industry. Our competitors include national and local cabinetry manufacturers.
These can be large, consolidated operations which house their manufacturing facilities in large and efficient plants, as well
as relatively small, local cabinetmakers. Although we believe that we have superior name and reputation of direct marketing of
custom designed cabinetry, we compete with numerous competitors in our primary markets, Boise and the surrounding area (Twin Falls,
McCall, and Sun Valley), in which we operate, with reputation, price, workmanship and services being the principal competitive
factors. Some of our competitors have achieved substantially more market penetration in certain of the markets in which we operate.
Some of our competitors have greater resources available and are less highly leveraged, which may provide them with greater financial
flexibility. We also compete against retail chains, including Sears, Costco, Builders Square, Sam’s Warehouse Club and other
stores, which offer similar products and services through licensees. We compete, to a lesser extent, with small home improvement
contractors and with large “home center” retailers such as Home Depot and Lowes. As a result of the implementation
of our business strategy to conduct more remodel, condo/multi-family, and commercial projects in the new construction markets,
we anticipate that we will compete to a greater degree with large “home center” retailers. To remain competitive,
we will need to invest continuously in manufacturing, customer service and support, marketing and our dealer network. We may have
to adjust the prices of some of our products to stay competitive, which would reduce our revenues or harm our financial condition
and result of operations. We may not have sufficient resources to continue to make such investments or maintain our competitive
position within each of the markets we serve.
We
have historically depended on a limited number of third parties to supply key raw materials or finished goods to us. Failure to
obtain a sufficient supply of these raw materials or finished goods in a timely fashion and at reasonable costs could significantly
delay our production, which would cause us to breach our sales contracts with our customers.
We
have historically purchased certain key raw materials and finished goods such as lumber, doors and hardware, from a limited number
of suppliers. We purchased raw materials and finished goods on the basis of purchase orders. In the absence of firm and long-term
contracts, we may not be able to obtain a sufficient supply of these raw materials and finished goods from our existing suppliers
or alternates in a timely fashion or at a reasonable cost. If we fail to secure a sufficient supply of key raw materials and finished
goods in a timely fashion, it would result in a significant delay in our production, which may cause us to breach our sales contracts
with our customers. Furthermore, failure to obtain sufficient supply of these raw materials and finished goods at a reasonable
cost could also harm our revenue and gross profit margins.
Increased
prices for raw materials or finished goods used in our products could increase our cost of sales and decrease demand for our products,
which could adversely affect our revenue or profitability.
Our
profitability is affected by the prices of the raw materials and finished goods used in the manufacturing of our products. These
prices may fluctuate based on a number of factors beyond our control, including, among others, changes in supply and demand, general
economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates and, in some cases, government
regulation. Increased prices could adversely affect our profitability or revenues. We do not have long-term supply contracts for
the raw materials and finished goods used in the manufacturing of our products; however, we enter into pricing agreements with
certain customers which fix their pricing for specified periods ranging from one to twelve months. Significant increases in the
prices of raw materials or finished goods could adversely affect our profit margins, especially if we are not able to recover
these costs by increasing the prices we charge our customers for our products.
Interruptions
in deliveries of raw materials or finished goods could adversely affect our revenue or profitability.
Our
dependency upon regular deliveries from particular suppliers means that interruptions or stoppages in such deliveries could adversely
affect our operations until arrangements with alternate suppliers could be made. If any of our suppliers were unable to deliver
materials to us for an extended period of time, as the result of financial difficulties, catastrophic events affecting their facilities
or other factors beyond our control, or if we were unable to negotiate acceptable terms for the supply of materials with these
or alternative suppliers, our business could suffer. We may not be able to find acceptable alternatives, and any such alternatives
could result in increased costs for us. Even if acceptable alternatives are found, the process of locating and securing such alternatives
might be disruptive to our business. Extended unavailability of a necessary raw material or finished good could cause us to cease
manufacturing of one or more products for a period of time.
Environmental
requirements applicable to our facilities may impose significant environmental compliance costs and liabilities, which would adversely
affect our results of operations.
Our
facilities are subject to numerous federal, state and local laws and regulations relating to pollution and the protection of the
environment, including those governing emissions to air, discharges to water, storage, treatment and disposal of waste, remediation
of contaminated sites and protection of worker health and safety. We believe we are in substantial compliance with all applicable
requirements. However, our efforts to comply with environmental requirements do not remove the risk that we may be held liable,
or incur fines or penalties, and that the amount of liability, fines or penalties may be material, for, among other things, releases
of hazardous substances occurring on or emanating from current or formerly owned or operated properties or any associated offsite
disposal location, or for contamination discovered at any of our properties from activities conducted by previous occupants.
Changes
in environmental laws and regulations or the discovery of previously unknown contamination or other liabilities relating to our
properties and operations could result in significant environmental liabilities. In addition, we might incur significant capital
and other costs to comply with increasingly stringent air emission control laws and enforcement policies which would decrease
our cash flow.
We
may fail to fully realize the anticipated benefits of our growth strategy within the multi-family and commercial properties channels.
Part
of our growth strategy depends on expanding our business in the multi-family and commercial properties channels. We may fail to
compete successfully against other companies that are already established providers within those channels. Demand for our products
within the multi-family and commercial properties channels may not grow, or might even decline. In addition, trends within the
industry change often, we may not accurately gauge consumer preferences and successfully develop, manufacture and market our products.
Our failure to anticipate, identify or react to changes in these trends could lead to, among other things, rejection of a new
product line, reduced demand and price reductions for our products, and could adversely affect our sales. Further, the implementation
of our growth strategy may place additional demands on our administrative, operational and financial resources and may divert
management’s attention away from our existing business and increase the demands on our financial systems and controls. If
our management is unable to effectively manage growth, our business, financial condition or results of operations could be adversely
affected. If our growth strategy is not successful then our revenue and earnings may not grow as anticipated or may decline, we
may not be profitable, or our reputation and brand may be damaged. In addition, we may change our financial strategy or other
components of our overall business strategy if we believe our current strategy is not effective, if our business or markets change,
or for other reasons, which may cause fluctuations in our financial results.
Risks
Related to Land Management Services Business
Adverse
weather conditions, including as a result of future climate change, may adversely affect the availability, quality and price of
agricultural commodities and agricultural commodity products, which may impact our business, as well as its operations and operating
results.
Adverse
weather conditions have historically caused volatility in the agricultural commodity industry by causing crop failures or significantly
reduced harvests, which may affect the supply and pricing of agricultural commodities, and result in reduce demand for our products
and services and negatively affect the creditworthiness of agricultural producers who do business with us.
Severe
adverse weather conditions, such as hurricanes or severe storms, may also result in extensive property damage, extended business
interruption, personal injuries and other loss and damage to agricultural producers who do business with us. Our operations also
rely on dependable and efficient transportation services. A disruption in transportation services, as a result of weather conditions
or otherwise, may also significantly adversely impact our operations.
Additionally,
the potential physical impacts of climate change are uncertain and may vary by region. These potential effects could include changes
in rainfall patterns, water shortages, changing sea levels, changing storm patterns and intensities, and changing temperature
levels that could adversely impact our costs and business operations, the location and costs of global agricultural commodity
production and the supply and demand for agricultural commodities. These effects could be material to our results of operations,
liquidity or capital resources.
Government
policies and regulations, particularly those affecting the agricultural sector and related industries, could adversely affect
our operations and profitability.
Agricultural
commodity production and trade flows are significantly affected by government policies and regulations. Governmental policies
affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, import and export restrictions on agricultural
commodities and commodity products and energy policies (including biofuels mandates), can influence industry profitability, the
planting of certain crops versus other uses of agricultural resources, the location and size of crop production, whether unprocessed
or processed commodity products are traded and the volume and types of imports and exports. In addition, international trade disputes
can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions.
Increases
in prices for, among other things, food, fuel and crop inputs, such as fertilizers, have become the subject of significant discussion
by governmental bodies and the public throughout the world in recent years. In some countries, this has led to the imposition
of policies such as price controls, tariffs and export restrictions on agricultural commodities. Future governmental policies,
regulations or actions affecting our industries may adversely affect the supply of, demand for and prices of its products and
services, restrict our ability to do business and cause our financial results to suffer.
We
depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply
products to us.
We
do not manufacture any products that we sell, and instead purchases products from manufacturers. Since we purchase products from
many manufacturers under at-will contracts and contracts which can be terminated without cause upon 90 days’ notice or less,
or which expire without express rights of renewal, manufacturers could discontinue sales to us immediately or upon short notice.
In lieu of termination, a manufacturer may also change the terms upon which it sells, for example, by raising prices or broadening
distribution to third parties. For these and other reasons, we may not be able to acquire desired merchandise in sufficient quantities
or on acceptable terms in the future.
Any
significant interruption in the supply of products by manufacturers could disrupt our ability to deliver merchandise to our customers
in a timely manner, which could have a material adverse effect on our business, financial condition and results of operations.
Manufacturers
are subject to certain risks that could adversely impact their ability to provide us with their products on a timely basis, including
industrial accidents, environmental events, strikes and other labor disputes, union organizing activity, disruptions in logistics
or information systems, loss or impairment of key manufacturing sites, product quality control, safety, and licensing requirements
and other regulatory issues, as well as natural disasters and other external factors over which neither they nor we have control.
In addition, our operating results depend to some extent on the orderly operation of our receiving and distribution processes,
which depend on manufacturers’ adherence to shipping schedules and our effective management of our distribution facilities
and capacity.
If
a material interruption of supply occurs, or a significant manufacturer ceases to supply us or materially decreases its supply
to us, we may not be able to acquire products with similar quality as the products we currently sell or to acquire such products
in sufficient quantities to meet our customers’ demands or on favorable terms to our business, any of which could adversely
impact our business, financial condition and results of operations.
Competition
in our market and the agricultural equipment industry could adversely affect its business.
We
sell products and services into a regional market. The principal competitive factors in our regional market includes product performance,
innovation and quality, distribution, customer service and price. The competitive environment in our business and the agricultural
equipment industry includes global competitors and many regional and local competitors. These competitors have varying numbers
of product lines competing with our products and services and each has varying degrees of regional focus. An important part of
the competition within the agricultural equipment industry during the past decade has come from a variety of short-line and specialty
manufacturers, as well as indigenous regional competitors, with differing manufacturing and marketing methods. Due to industry
conditions, including the merger of certain large integrated competitors, we believe the agricultural equipment business continues
to undergo change and is becoming more competitive. Our inability to successfully compete with respect to product performance,
innovation and quality, distribution, customer service and price could adversely affect its results of operations and financial
condition.
Risks
Related to Ownership of Our Common Shares
Our
common shares are quoted on the OTCQB Market, which may have an unfavorable impact on our share price and liquidity.
Our
common shares are quoted on the OTCQB Market operated by OTC Markets Group Inc. The OTCQB Market is a significantly more limited
market than the New York Stock Exchange or The Nasdaq Stock Market. The quotation of our shares on the OTCQB Market may result
in a less liquid market available for existing and potential shareholders to trade our common shares, could depress the trading
price of our common shares and could have a long-term adverse impact on our ability to raise capital in the future.
We
cannot predict the extent to which an active public trading market for our common shares will develop or be sustained. If an active
public trading market does not develop or cannot be sustained, you may be unable to liquidate your investment in our common shares.
At
present, there is minimal public trading in our common shares. We cannot predict the extent to which an active public market for
our common shares will develop or be sustained due to a number of factors, including the fact that we are a small company that
is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate
or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our common shares until such time
as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in
our common shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading
activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance
that an active public trading market for our common shares will develop or be sustained. If such a market cannot be sustained,
you may be unable to liquidate your investment in our common shares.
If
an active public market develops, the market price, trading volume and marketability of our common shares may, from time to time,
be significantly affected by numerous factors beyond our control, which may materially adversely affect the market price of your
common shares, the marketability of your common shares and our ability to raise capital through future equity financings.
The
market price and trading volume of our common shares may fluctuate significantly. Many factors that are beyond our control may
materially adversely affect the market price of your common shares, the marketability of your common shares and our ability to
raise capital through equity financings. These factors include the following:
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price
and volume fluctuations in the stock markets generally which create highly variable and
unpredictable pricing of equity securities;
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significant
volatility in the market price and trading volume of securities of companies in the sectors
in which our businesses operate, which may not be related to the operating performance
of these companies and which may not reflect the performance of our businesses;
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differences
between our actual financial and operating results and those expected by investors;
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fluctuations
in quarterly operating results;
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loss
of a major funding source;
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operating
performance of companies comparable to us;
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changes
in regulations or tax law;
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share
transactions by our principal shareholders;
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recruitment
or departure of key personnel; and
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general
economic trends and other external factors including inflation, interest rates, and costs
and availability of raw materials, fuel and transportation.
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We
may use these proceeds in ways with which you may not agree.
We
will not receive any proceeds from the sale of the common shares by the selling shareholders. However, we may receive up to $6,580,695
in proceeds payable by selling shareholders upon exercise of a warrants. While we currently intend to use these proceeds for working
capital and general corporate purposes, we have considerable discretion in the application of the proceeds. You will not have
the opportunity, as part of your investment decision, to assess whether the proceeds are being used in a manner agreeable to you.
You must rely on our judgment regarding the application of these proceeds. The proceeds may be used for corporate purposes that
do not immediately improve our profitability or increase the price of our shares.
The
number of shares being registered for sale is significant in relation to our trading volume.
All
of the shares registered for sale on behalf of the selling shareholders are “restricted securities” as that term is
defined in Rule 144 under the Securities Act. We have filed this registration statement to register these restricted shares for
sale into the public market by the selling shareholders. These restricted securities, if sold in the market all at once or at
about the same time, could depress the market price during the period the registration statement remains effective and also could
affect our ability to raise equity capital. Any outstanding shares not sold by the selling shareholders pursuant to this prospectus
will remain as “restricted shares” in the hands of the holders, except for those sales that satisfy the requirements
under Rule 144 or another exemption to the registration requirements under the Securities Act.
Future
sales of common shares may affect the market price of our common shares.
We
cannot predict what effect, if any, future sales of our common shares, or the availability of common shares for future sale, will
have on the market price of our common shares. Sales of substantial amounts of our common shares in the public market, or the
perception that such sales could occur, could materially adversely affect the market price of our common shares and may make it
more difficult for you to sell your common shares at a time and price which you deem appropriate.
Rule
144 sales in the future may have a depressive effect on our share price.
All
of the outstanding common shares held by the present officers, directors, and affiliate shareholders are “restricted securities”
within the meaning of Rule 144 under the Securities Act. As restricted shares, these shares may be resold only pursuant to an
effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under
the Act and as required under applicable state securities laws. Rule 144 provides in essence that a person who is an affiliate
or officer or director who has held restricted securities for six months may, under certain conditions, sell every three months,
in brokerage transactions, a number of shares that does not exceed the greater of 1.0% of a company’s outstanding common
shares. There is no limitation on the amount of restricted securities that may be sold by a non-affiliate after the owner has
held the restricted securities for a period of six months if our company is a current, reporting company under the Exchange Act.
A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registration
of common shares of present shareholders, may have a depressive effect upon the price of the common shares in any market that
may develop.
Our
series A senior convertible preferred shares are senior to our common shares as to distributions and in liquidation, which could
limit our ability to make distributions to our common shareholders.
Holders
of our series A senior convertible preferred shares are entitled to quarterly dividends, payable in cash or in common shares,
at a rate per annum of 14.0% of the stated value of $2.00 per share (subject to adjustment). In addition, upon any liquidation
of our company or its subsidiaries, each holder of outstanding series A senior convertible preferred shares will be entitled to
receive an amount of cash equal to 115% of the stated value of $2.00 per share, plus an amount of cash equal to all accumulated
accrued and unpaid dividends thereon (whether or not declared), before any payment shall be made to or set apart for the holders
of our common shares. This could limit our ability to make regular distributions to our common shareholders or distributions upon
liquidation.
We
may issue additional debt and equity securities, which are senior to our common shares as to distributions and in liquidation,
which could materially adversely affect the market price of our common shares.
In
the future, we may attempt to increase our capital resources by entering into additional debt or debt-like financing that is secured
by all or up to all of our assets, or issuing debt or equity securities, which could include issuances of commercial paper, medium-term
notes, senior notes, subordinated notes or shares. In the event of our liquidation, our lenders and holders of our debt securities
would receive a distribution of our available assets before distributions to our shareholders.
Any
additional preferred securities, if issued by our company, may have a preference with respect to distributions and upon liquidation,
which could further limit our ability to make distributions to our common shareholders. Because our decision to incur debt and
issue securities in our future offerings will depend on market conditions and other factors beyond our control, we cannot predict
or estimate the amount, timing or nature of our future offerings and debt financing.
Further,
market conditions could require us to accept less favorable terms for the issuance of our securities in the future. Thus, you
will bear the risk of our future offerings reducing the value of your common shares and diluting your interest in us. In addition,
we can change our leverage strategy from time to time without approval of holders of our common shares, which could materially
adversely affect the market share price of our common shares.
Our
potential future earnings and cash distributions to our shareholders may affect the market price of our common shares.
Generally,
the market price of our common shares may be based, in part, on the market’s perception of our growth potential and our
current and potential future cash distributions, whether from operations, sales, acquisitions or refinancings, and on the value
of our businesses. For that reason, our common shares may trade at prices that are higher or lower than our net asset value per
share. Should we retain operating cash flow for investment purposes or working capital reserves instead of distributing the cash
flows to our shareholders, the retained funds, while increasing the value of our underlying assets, may materially adversely affect
the market price of our common shares. Our failure to meet market expectations with respect to earnings and cash distributions
and our failure to make such distributions, for any reason whatsoever, could materially adversely affect the market price of our
common shares.
Were
our common shares to be considered penny stock, and therefore become subject to the penny stock rules, U.S. broker-dealers may
be discouraged from effecting transactions in our common shares.
Our
common shares may be subject to the penny stock rules under the Exchange Act. These rules regulate broker-dealer practices for
transactions in “penny stocks.” Penny stocks are generally equity securities with a price of less than $5.00 per share.
The penny stock rules require broker-dealers that derive more than 5% of their customer transaction revenues from transactions
in penny stocks to deliver a standardized risk disclosure document that provides information about penny stocks, and the nature
and level of risks in the penny stock market, to any non-institutional customer to whom the broker-dealer recommends a penny stock
transaction. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation
of the broker-dealer and its salesperson and monthly account statements showing the market value of each penny stock held in the
customer’s account. The bid and offer quotations and the broker-dealer and salesperson compensation information must be
given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing before
or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction, the broker
and/or dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive
the purchaser’s written agreement to the transaction. The transaction costs associated with penny stocks are high, reducing
the number of broker-dealers who may be willing to engage in the trading of our shares. These additional penny stock disclosure
requirements are burdensome and may reduce all the trading activity in the market for our common shares. As long as our common
shares are subject to the penny stock rules, holders of our common shares may find it more difficult to sell their common shares.
Holders
of our common shares may not be entitled to a jury trial with respect to claims arising under our operating agreement, which could
result in less favorable outcomes to the plaintiffs in any such action.
Our
operating agreement governing our common shares provides that, to the fullest extent permitted by law, holders of our common shares
waive the right to a jury trial of any claim they may have against us arising out of or relating to our operating agreement, including
any claim under the U.S. federal securities laws.
If
we opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the
facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability
of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been
finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision
is generally enforceable, including under the laws of the State of Delaware, which govern our operating agreement, by a federal
or state court in the State of Delaware, which has non-exclusive jurisdiction over matters arising under the operating agreement.
In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether
a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect
to our operating agreement. It is advisable that you consult legal counsel regarding the jury waiver provision before entering
into the operating agreement.
If
you or any other holders or beneficial owners of our common shares bring a claim against us in connection with matters arising
under our operating agreement, including claims under federal securities laws, you or such other holder or beneficial owner may
not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against
us. If a lawsuit is brought against us under our operating agreement, it may be heard only by a judge or justice of the applicable
trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial
by jury would have, including results that could be less favorable to the plaintiffs in any such action.
Nevertheless,
if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the operating
agreement with a jury trial. No condition, stipulation or provision of the operating agreement serves as a waiver by any holder
or beneficial owner of our common shares or by us of compliance with the U.S. federal securities laws and the rules and regulations
promulgated thereunder.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following management’s discussion and analysis of financial condition and results of operations provides information that
management believes is relevant to an assessment and understanding of our plans and financial condition. The following
selected financial information is derived from our historical financial statements and the separate financial statements of Goedeker
Television and Asien’s and should be read in conjunction with such financial statements and notes thereto set forth elsewhere
herein and the “Special Note Regarding Forward-Looking Statements” explanation included herein.
Overview
We
are an acquisition holding company focused on acquiring and managing a group of small businesses, which we characterize as those
that have an enterprise value of less than $50 million, in a variety of different industries headquartered in North America. To
date, we have completed four acquisitions.
In
March 2017, our subsidiary 1847 Neese acquired Neese. Headquartered in Grand Junction, Iowa and founded in 1991, Neese is an established
business specializing in providing a wide range of land application services and selling equipment and parts, primarily to the
agricultural industry, but also to the construction and lawn and garden industries.
In
April 2019, our subsidiary Goedeker acquired substantially all of the assets of Goedeker Television. As a result of this transaction,
Goedeker acquired the former business of Goedeker Television, which was established in 1951, and continues to operate this business.
Headquartered in St. Louis, Missouri, Goedeker is a one-stop e-commerce destination for home furnishings, including appliances,
furniture, home goods and related products. On October 23, 2020, we distributed all of the shares of Goedeker that we held to
our shareholders. As a result of this distribution, Goedeker is no longer a subsidiary of our company.
In
May 2020, our subsidiary 1847 Asien acquired Asien’s. Asien’s has been in business since 1948 serving the North Bay
area of Sonoma County, California. It provides a wide variety of appliance services, including sales, delivery/installation, in-home
service and repair, extended warranties, and financing. Its main focus is delivering personal sales and exceptional service to
its customers at competitive prices.
In
September 2020, our subsidiary 1847 Cabinet acquired Kyle’s. Kyle’s is a leading custom cabinetry maker servicing
contractors and homeowners since 1976 in Boise, Idaho and the surrounding area. Kyle’s focuses on designing, building, and
installing custom cabinetry primarily for custom and semi-custom builders.
Through
our structure, we offer investors an opportunity to participate in the ownership and growth of a portfolio of businesses that
traditionally have been owned and managed by private equity firms, private individuals or families, financial institutions or
large conglomerates. We believe that our management and acquisition strategies will allow us to achieve our goals to begin making
and growing regular distributions to our common shareholders and increasing common shareholder value over time.
We
seek to acquire controlling interests in small businesses that we believe operate in industries with long-term macroeconomic growth
opportunities, and that have positive and stable earnings and cash flows, face minimal threats of technological or competitive
obsolescence and have strong management teams largely in place. We believe that private company operators and corporate parents
looking to sell their businesses will consider us to be an attractive purchaser of their businesses. We make these businesses
our majority-owned subsidiaries and actively manage and grow such businesses. We expect to improve our businesses over the long
term through organic growth opportunities, add-on acquisitions and operational improvements.
Recent
Developments
Impact
of Coronavirus Pandemic
In
December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The virus has since spread to over
150 countries and every state in the United States. On March 11, 2020, the World Health Organization declared the outbreak a pandemic,
and on March 13, 2020, the United States declared a national emergency. Most states and cities have reacted by instituting quarantines,
restrictions on travel, “stay at home” rules and restrictions on the types of businesses that may continue to operate,
as well as guidance in response to the pandemic and the need to contain it.
Effective
March 18, 2020, the County of Sonoma, California issued a shelter in place order. Pursuant to this order, non-essential businesses
were ordered to close. Asien’s was qualified as an essential business and remained open under a modified service plan whereby
customers were allowed access to the demonstration floor by appointment only with access limited to one customer party (following
published guidelines a customer party was defined as no more than 3 adults and no children). Effective June 6, 2020, Sonoma County
modified the retail guidelines for essential businesses and Asien’s store allowed access for retail customer parties without
appointment but with limitations on the number of individuals allowed in the store. More recently, on July 13, 2020, the state
of California issued new restrictions on business activities in certain counties, including Sonoma County, due to the increase
in cases. These new restrictions primarily relate to indoor activities of certain businesses and do not affect retail stores,
such as Asien’s; however, if the spread of the virus is not contained, we expect that additional restrictions may be imposed.
Furthermore, Asien’s is dependent upon suppliers to provide it with all of the products that its sells. The pandemic has
impacted and may continue to impact suppliers and manufacturers of certain of its products. As a result, Asien’s has faced
and may continue to face delays or difficulty sourcing certain products, which could negatively affect its business and financial
results. Even if Asien’s is able to find alternate sources for such products, they may cost more, which could adversely
impact Asien’s profitability and financial condition.
Idaho,
where Kyle’s is located, issued a “stay at home” order beginning on March 27, 2020. The order was initially
in place until April 15, then undergone several extensions, and was lifted on April 30, 2020. Currently the state of Idaho is
under a Department of Health and Welfare Stay Healthy Order. Kyle’s was in an industry designated as Essential Critical
Infrastructure Workforce and remained operational during the “stay at home” order; as such, Kyle’s remained,
and continues to do so, observant to social-distancing and mask-wearing guidance and all other State, County and City mandates.
Therefore, there was minimal disruption to Kyle’s business operations during the Idaho’s “stay at home”
period. However, during the “stay at home” period, certain key customers of Kyle’s elected to either temporarily
stop building homes or delayed their building process, which adversely affected Kyle’s sales. As a result, Kyle’s
generated comparatively lower-than-expected sales. Further, during the “stay at home” period, several of Kyle’s
employees had taken time off because of medical experiences, and certain of them did not return to employment. Kyle’s has
been hiring and training new employees to replace lost productivity because of the aforementioned loss of employees. Kyle’s
did not experience any meaningful business interruption related to any of its key suppliers. Kyle’s endeavors to best observe
guidance from the State of Idaho and to provide a safe working environment to its employees. If the pandemic is not sufficiently
contained, it may continue to negatively affect Kyle’s ability to generate sales opportunities and to hire productive employees.
Therefore, Kyle’s business operations may experience further delays and experience lost sales opportunities, which could
further adversely impact Kyle’s profitability and financial condition.
In
Iowa, where Neese is located, non-essential businesses in certain counties, include where Neese’s principal office is located,
began re-opening on May 1, 2020, but the pandemic has had a negative effect on business activity throughout Iowa. Neese is also
dependent upon suppliers to provide it with all of the equipment and parts that it sells, and several have notified it of disruptions
to their production and/or supply chain related to the pandemic. Any business disruption or failure of these suppliers to meet
delivery requirements and commitments may cause delays in future shipments and potential lost or delayed revenue.
We
have taken steps to take care of our employees, including providing the ability for employees to work remotely and implementing
strategies to support appropriate social distancing techniques for those employees who are not able to work remotely. We have
also taken precautions with regard to employee, facility and office hygiene as well as implementing significant travel restrictions.
We are also assessing our business continuity plans for all business units in the context of the pandemic. This is a rapidly evolving
situation, and we will continue to monitor and mitigate developments affecting our workforce, our suppliers, our customers, and
the public at large to the extent we are able to do so. We have and will continue to carefully review all rules, regulations,
and orders and responding accordingly.
If
the current pace of the pandemic cannot be slowed and the spread of the virus is not contained, our business operations could
be further delayed or interrupted. We expect that government and health authorities may announce new or extend existing restrictions,
which could require us to make further adjustments to our operations in order to comply with any such restrictions. We may also
experience limitations in employee resources. In addition, our operations could be disrupted if any of our employees were suspected
of having the virus, which could require quarantine of some or all such employees or closure of our facilities for disinfection.
The duration of any business disruption cannot be reasonably estimated at this time but may materially affect our ability to operate
our business and result in additional costs.
The
extent to which the pandemic may impact our results will depend on future developments, which are highly uncertain and cannot
be predicted as of the date of this report, including new information that may emerge concerning the severity of the pandemic
and steps taken to contain the pandemic or treat its impact, among others. Nevertheless, the pandemic and the current financial,
economic and capital markets environment, and future developments in the global supply chain and other areas present material
uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
Loan
Agreement with Arvest Bank – Asien’s
On
July 10, 2020, Asien’s entered into a promissory note and security agreement with Arvest Bank for a revolving loan of up
to $400,000. The loan matures on July 10, 2021 and bears interest at 5.25% per annum, subject to change in accordance with the
Variable Rate (as defined in the promissory note and security agreement), the calculation for which is the U.S. Prime Rate plus
2%. Pursuant to the terms of the promissory note and security agreement, Asien’s is required to make monthly payments beginning
on August 10, 2020 and until the maturity date, at which time all unpaid principal and interest will be due. The promissory note
and security agreement contains customary representations, warranties, affirmative and negative covenants and events of default
for a loan of this type. The loan is secured by Asien’s inventory and equipment, accounts and other rights of payments,
and general intangibles, as such terms are defined in the Uniform Commercial Code. Asien’s may prepay the loan in full or
in part at any time without penalty.
6%
Amortizing Promissory Note
On
July 29, 2020, 1847 Asien entered into a securities purchase agreement with the seller of Asien’s, Joerg Christian Wilhelmsen
and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992 (which we refer to as the Asien’s
Seller), pursuant to which the Asien’s Seller sold to 415,000 of our common shares to 1847 Asien 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 the 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 the note ($518,750) with all accrued, but unpaid interest thereon, is due on the second anniversary of the
note. The note is unsecured and contains customary events of default.
Amendment
of Home State Bank Loan
On
July 30, 2020, Neese entered into a change in terms agreement with Home State Bank to amend the terms of the term loan described
below. Pursuant to the change in terms agreement: (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 described below; (vii) Neese agreed to pay a loan fee of $17,500.00; and (viii) Home
State Bank agreed to make a loan advance to checking for $17,500.00.
Closing
of Goedeker’s Initial Public Offering
On
July 30, 2020, Goedeker entered into the underwriting agreement with ThinkEquity, a division of Fordham Financial Management,
Inc., or the Representative, relating to an initial public offering of Goedeker’s common stock (which we refer to as 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 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.
A
portion of the proceeds of the IPO were used to repay certain debt, as more particularly described below.
Loan
Agreement with Arvest Bank – Goedeker
On
August 25, 2020, Goedeker entered into a promissory note and security agreement with Arvest Bank for a loan in the principal amount
of $3,500,000. The loan matures on August 25, 2025 and bears interest at 3.250% per annum; provided that, upon an event of default,
the interest rate shall increase by 6% until paid in full. Pursuant to the terms of the promissory note and security agreement,
Goedeker is required to make monthly payments of $63,352.85 beginning on September 25, 2020 and until the maturity date, at which
time all unpaid principal and interest will be due. The promissory note and security agreement contains customary representations,
warranties, affirmative and negative covenants and events of default for a loan of this type. The loan is secured by all financial
assets credited to Goedeker’s securities account held by Arvest Investments, Inc. Goedeker may prepay the loan in full or
in part at any time without penalty. The proceeds of the loan were used to repay the 9% subordinated promissory note described
below.
Amendment
and Exercise of Leonite Warrants
On
September 2, 2020, we entered into amendment to the warrant issued to Leonite Capital LLC, or Leonite, on April 5, 2019 for the
purchase of 200,000 common shares. Pursuant to the amendment, the parties amended the warrant to allow for the conversion of the
warrant into 180,000 common shares in exchange for Leonite’s surrender of the remaining 20,000 common shares underlying
this warrant, as well as all 200,000 common shares underlying the second warrant issued to Leonite on May 11, 2020. On September
2, 2020, Leonite exercised the first warrant in accordance with the foregoing amendment and we issued 180,000 common shares to
Leonite. As a result of this exercise, both warrants were cancelled.
Inventory
Financing Agreement
On
September 25, 2020, Asien’s entered into an inventory financing agreement with Wells Fargo Commercial Distribution Finance,
LLC, or Wells Fargo, pursuant to which Wells Fargo may extend credit to Asien’s from time to time to enable it to purchase
inventory from Wells Fargo-approved vendors. The term of the agreement is one year, and from year to year thereafter, unless sooner
terminated by either party upon 30 days written notice to the other party. As of the date of this prospectus, Asien’s has
not borrowed any funds under this agreement.
The
inventory financing agreement contains customary representations, warranties, affirmative and negative covenants and events of
default for a loan of this type. The agreement is secured by all assets of Asien’s and is guaranteed by 1847 Asien and our
company.
Kyle’s
Acquisition
On
August 27, 2020, we and 1847 Cabinet entered into a stock purchase agreement with Kyle’s and Stephen Mallatt, Jr. and Rita
Mallatt (which we refer to as the seller), pursuant to which 1847 Cabinet agreed to acquire all of issued and outstanding common
stock of Kyle’s.
On
September 30, 2020, the parties entered into an addendum to the stock purchase agreement to amend certain terms of the stock purchase
agreement. Following entry into the addendum, closing of the acquisition of Kyle’s was completed on the same day.
Pursuant
to the terms of the stock purchase agreement, as amended by the addendum, 1847 Cabinet agreed to acquire all of the issued and
outstanding common stock of Kyle’s for an aggregate purchase price of $6,650,000, subject to adjustment as described below.
The purchase price consists of (i) $4,200,000 in cash, (ii) an 8% contingent subordinated note in the aggregate principal amount
of $1,050,000, and (iii) 700,000 common shares of our company, having a mutually agreed upon value of $1,400,000. The shares were
issued on October 16, 2020, immediately following the record date for the distribution of our shares of Goedeker.
The
cash portion of the purchase price was subject to a target working capital adjustment. If the net working capital reflected on
the unaudited balance sheet of Kyle’s delivered to 1847 Cabinet on the closing date (which we refer to as the preliminary
working capital) exceeded a target working capital of $154,000, then the purchase price would be increased at the closing by the
amount of such difference. Accordingly, as a result of the target working capital adjustment, the cash portion of the purchase
price at the closing was $4,356,162.
The
purchase price is also subject to a post-closing working capital adjustment provision. On or before the 75th day following the
closing, 1847 Cabinet shall deliver to the seller an audited balance sheet of Kyle’s as of the closing date. If the net
working capital reflected on such balance sheet (which we refer to as the closing working capital) exceeds the preliminary working
capital, then 1847 Cabinet shall, within seven (7) days, pay to the seller an amount in cash that is equal to such excess. If
the preliminary working capital exceeds the closing working capital, then the seller shall, within seven (7) days, pay to 1847
Cabinet an amount in cash that is 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 Cabinet a number of common shares that is equal to such excess divided by $2.00.
Vesting
Promissory Note
As
noted above, a portion of the purchase price under the stock purchase agreement was paid by the issuance of a vesting promissory
note by 1847 Cabinet to the seller in the principal amount of $1,050,000, which increased to a principal amount of up to $1,260,000
pursuant to the vested percentage calculation described below. Payment of the principal and accrued interest on the note is subject
to vesting as described below. The note bears interest on the vested portion of principal amount at the rate of eight percent
(8%) per annum. To the extent vested, the vested portion of the principal and all accrued but unpaid interest on such vested portion
of the principal shall be paid in one lump sum on the last day of the thirty-sixth (36th) month following the date of the note.
The
vested principal of the note due at the maturity date shall be calculated each year based on the average annual consolidated EBITDA
(as defined in the note) of 1847 Cabinet for each of the years ended December 31, 2020, 2021 and 2022. The EBITDA for each year
shall be divided by $1.4 million multiplied by 100 to obtain the vested percentage. The vested principal for each year shall be
equal to the vested percentage for that year multiplied by $350,000. To the extent that the vested percentage for the subject
year is less than 80%, no portion of the note for that year shall vest. To the extent that the vested percentage for the subject
year is equal to or greater than 120%, the vested principal shall be equal to $420,000 for that year and no more.
1847
Cabinet will have the right to redeem all but no less than all of the note at any time prior to the maturity date. If 1847 Cabinet
elects to redeem the note, the redemption price will be payable in cash and is equal to the then outstanding vested portion of
the principal plus any remaining unvested principal amount plus accrued but unpaid interest thereon (calculated over 36 months).
For purposes of this redemption calculation, the “unvested principal amount” shall be $350,000 per year.
The
note contains customary events of default. The right of the seller to receive payments under the note is subordinated to all indebtedness
of 1847 Cabinet, whether outstanding as of the closing date or thereafter created, to banks, insurance companies and other financial
institutions or funds, and federal or state taxation authorities.
Intercompany
Secured Promissory Note
In
connection with the acquisition of Kyle’s, we provided 1847 Cabinet with the funds necessary to pay the cash portion of
the purchase price and cover acquisition expenses. In connection therewith, on September 30, 2020, 1847 Cabinet issued a secured
promissory note to our company in the principal amount of $4,525,000.
The
note bears interest at the rate of 16% per annum. The interest is cumulative and any unpaid accrued interest will compound on
each anniversary date of the note. Interest is due and payable in arrears on January 15, April 15, July 15 and October 15 commencing
January 15, 2021. In the event payment of principal or interest due under the note is not made when due, giving effect to any
grace period which may be applicable, or in the event of any other default (as defined in the note), the outstanding principal
balance shall from the date of default immediately bear interest at the rate of 5% above the then applicable interest rate for
so long as such default continues.
We
may demand payment in full of the note at any time, even if 1847 Cabinet has complied with all of the terms of the note; and the
note shall be due in full, without demand, upon a third party sale of all or substantially all the assets and business of 1847
Cabinet or a third party sale or other disposition of any capital stock of 1847 Cabinet. 1847 Cabinet may prepay the note at any
time without penalty.
The
note contains customary events of default, is guaranteed by Kyle’s and is secured by all of the assets of 1847 Cabinet and
Kyle’s.
Unit
Offering
In
connection with the acquisition of Kyle’s and to, in part, fund the secured promissory note, on September 30, 2020, we entered
into several securities purchase agreements with certain purchasers, pursuant to which we sold units to the purchasers, at a price
of $1.90 per unit, each unit consists of one (1) series A senior convertible preferred share and a three-year warrant to purchase
one (1) common share at an exercise price of $2.50 per common share (subject to adjustment), which may be exercised on a cashless
basis under certain circumstances. On September 30, 2020, we completed an initial closing pursuant to which we sold an aggregate
of 2,189,835 units for an aggregate purchase price of $4,160,684. On October 26, 2020, we completed a final closing pursuant to
which we sold an aggregate of 442,443 units for an aggregate purchase price of $840,640. See “Description of Securities”
for more information about the terms of the series A senior convertible preferred shares and warrants.
Pursuant
to the securities purchase agreements, we are required file a registration statement covering the resale of all shares issuable
upon conversion of the series A senior convertible preferred shares and exercise of the warrants with thirty (days) after the
closing and use our commercially reasonable efforts to have the registration statement declared effective by the SEC as soon as
practicable, but in no event later than (i) ninety (90) days after the closing in the event that the SEC does not review the registration
statement, or (ii) one hundred fifty (150) days after the closing in the event that the SEC reviews the registration statement
(but in any event, no later than two (2) business days from the SEC indicating that it has no further comments on the registration
statement).
Leonite
and one other lead purchaser received participation rights that permit them, for a period of 12 months after the closing, to participate
in an offering of securities by us or any of our subsidiaries in an amount up to the aggregate amount that such purchasers invested
with customary exclusions. In addition, the securities purchase agreements provided several other covenants in favor of the purchasers
and/or Leonite, including information rights, observer rights, certain restrictive covenants, most favored nations provisions
and other covenants customary for similar transactions. The securities purchase agreements also contain customary representations,
warranties, closing conditions and indemnities.
Issuance
of 1847 Cabinet Shares to Leonite
In
connection with the unit offering described above, we also agreed to issue 81 shares of common stock of 1847 Cabinet to Leonite,
which constitutes 7.5% of the issued and outstanding capital stock of 1847 Cabinet on a post-issuance and fully-diluted basis,
in consideration for Leonite’s investment and for its agreement to act as lead purchaser for the unit offering. Leonite
also received certain anti-dilution protection relating to its ownership in 1847 Cabinet.
Management
Fees
On
April 15, 2013, we entered into a management services agreement with our manager, pursuant to which we are required to pay our
manager a quarterly management fee equal to 0.5% of our adjusted net assets for services performed (which we refer to as 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 our 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) our manager as of the end of such fiscal quarter, and (iii) increased by the amount of any outstanding accrued and unpaid
parent management fees. We expensed $0 in parent management fees for the six months ended June 30, 2020 and 2019 and years ended
December 31, 2019 and 2018.
1847
Neese entered into an offsetting management services agreement with our manager on March 3, 2017, Goedeker entered into an offsetting
management services agreement with our manager on April 5, 2019, 1847 Asien entered into an offsetting management services agreement
with our manager on May 28, 2020 and 1847 Cabinet entered into an offsetting management services agreement with our manager on
August 21, 2020. Pursuant to the offsetting management services agreements, 1847 Neese appointed our manager to provide certain
services to it for a quarterly management fee equal to $62,500, Goedeker appointed our manager to provide certain services to
it for a quarterly management fee equal to $62,500, 1847 Asien appointed our 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)
and 1847 Cabinet appointed our 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, 1847 Asien or 1847 Cabinet, together with all other management fees paid or to
be paid by all other subsidiaries of our company to our manager, in each case, with respect to any fiscal year exceeds, or is
expected to exceed, 9.5% of our gross income with respect to such fiscal year, then the management fee to be paid by 1847 Neese,
Goedeker, 1847 Asien or 1847 Cabinet 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 our manager by all of our subsidiaries, until the aggregate amount
of the management fee paid or to be paid by 1847 Neese, Goedeker, 1847 Asien or 1847 Cabinet, together with all other management
fees paid or to be paid by all other subsidiaries to our manager, in each case, with respect to such fiscal year, does not exceed
9.5% of our 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, 1847 Asien or 1847 Cabinet, together with all other management fees paid or to be paid by all other
subsidiaries to our 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, 1847 Asien or 1847 Cabinet
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, 1847 Asien or 1847 Cabinet, together with all other management fees paid or to be paid by all other
subsidiaries of to our 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, 1847 Asien or 1847 Cabinet shall also reimburse our 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
our manager or its affiliates on behalf of 1847 Neese, Goedeker, 1847 Asien or 1847 Cabinet 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, and $250,000 for the years ended December
31, 2019 and 2018. Under terms of the term loan from Home State Bank described below, no fees may be paid to our manager without
permission of the bank, which our manager does not expect to be granted within the forthcoming year. Accordingly, $575,808 due
from 1847 Neese to our 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, and $183,790 for
the year ended December 31, 2019. Payment of the management fee was subordinated to the payment of interest on the 9% subordinated
promissory note described below, such that no payment of the management fee could be made if Goedeker was in default under the
note with regard to interest payments and, for the avoidance of doubt, such payment of the management fee was 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
our manager to receive payments under the offsetting management services agreement with Goedeker were also subordinate to the
rights of Burnley Capital LLC, or Burnley, and Small Business Community Capital II, L.P., or SBCC, under separate subordination
agreements that our manager entered into with them on April 5, 2019. Accordingly, $188,653 due from Goedeker to our 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.
On
a consolidated basis, we expensed total management fees of $278,022 and $183,790 for the six months ended June 30, 2020 and 2019,
respectively, and $216,675 due to our is classified as an accrued liability and $575,808 as non-current accrued liability as of
June 30, 2020.
Segments
As
of June 30, 2020, we had two reportable segments: the retail and appliances segment and the land management services segment.
Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions,
are presented as corporate services.
The
retail and appliances segment is comprised of the business operated by Asien’s and, prior to our distribution of all of
our shares of Goedeker on October 23, 2020, the business operated by Goedeker. Goedeker, based in St. Louis, Missouri, operates
a retail store and is an e-commerce destination for home furnishings, including appliances, furniture, home goods and related
products. Asien’s, based in Santa Rosa, California, provides a wide variety of appliance services including sales, delivery,
installation, service and repair, extended warranties, and financing.
The
land management services segment, operated by Neese, 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.
Consolidated
Results of Operations of 1847 Holdings
Comparison
of Six Months Ended June 30, 2020 and 2019
The
following table sets forth key components of our results of operations during the six months ended June 30, 2020 and 2019, both
in dollars and as a percentage of our revenue.
|
|
June
30,
2020
|
|
|
June
30,
2019
|
|
|
|
Amount
|
|
|
%
of
Revenues
|
|
|
Amount
|
|
|
%
of
Revenues
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
1,213,026
|
|
|
|
4.3
|
%
|
|
$
|
1,551,724
|
|
|
|
11.9
|
%
|
Sales
of parts and equipment
|
|
|
605,047
|
|
|
|
2.2
|
%
|
|
|
852,810
|
|
|
|
6.5
|
%
|
Furniture
and appliances
|
|
|
26,148,192
|
|
|
|
93.5
|
%
|
|
|
10,616,050
|
|
|
|
81.5
|
%
|
Total
revenues
|
|
|
27,966,265
|
|
|
|
100.0
|
%
|
|
|
13,020,584
|
|
|
|
100.0
|
%
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
22,249,110
|
|
|
|
79.6
|
%
|
|
|
9,545,726
|
|
|
|
73.3
|
%
|
Personnel
costs
|
|
|
3,290,884
|
|
|
|
11.8
|
%
|
|
|
1,896,233
|
|
|
|
14.6
|
%
|
Depreciation
and amortization
|
|
|
811,145
|
|
|
|
2.9
|
%
|
|
|
688,086
|
|
|
|
5.3
|
%
|
Fuel
|
|
|
186,199
|
|
|
|
0.7
|
%
|
|
|
360,265
|
|
|
|
2.8
|
%
|
General
and administrative
|
|
|
4,963,682
|
|
|
|
17.7
|
%
|
|
|
2,086,670
|
|
|
|
16.0
|
%
|
Total
operating expenses
|
|
|
31,501,020
|
|
|
|
112.7
|
%
|
|
|
14,576,980
|
|
|
|
112.0
|
%
|
Net
loss from operations
|
|
|
(3,534,755
|
)
|
|
|
(12.6
|
)%
|
|
|
(1,556,396
|
)
|
|
|
(12.0
|
)%
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
costs
|
|
|
(313,960
|
)
|
|
|
(1.1
|
)%
|
|
|
(175,506
|
)
|
|
|
(1.3
|
)%
|
Loss
on extinguishment of debt
|
|
|
(948,856
|
)
|
|
|
(3.4
|
)%
|
|
|
-
|
|
|
|
0.0
|
%
|
Interest
expense
|
|
|
(683,939
|
)
|
|
|
(2.4
|
)%
|
|
|
(450,860
|
)
|
|
|
(3.5
|
)%
|
Loss
on acquisition receivable
|
|
|
(809,000
|
)
|
|
|
(2.9
|
)%
|
|
|
-
|
|
|
|
0.0
|
%
|
Change
in warrant liability
|
|
|
(2,127,656
|
)
|
|
|
(7.6
|
)%
|
|
|
2,600
|
|
|
|
0.0
|
%
|
Other
income (expense)
|
|
|
6,325
|
|
|
|
0.0
|
%
|
|
|
5,089
|
|
|
|
0.0
|
%
|
Gain
(loss) on sale of property and equipment
|
|
|
37,767
|
|
|
|
0.1
|
%
|
|
|
24,224
|
|
|
|
0.2
|
%
|
Total
other income (expense)
|
|
|
(4,839,319
|
)
|
|
|
(17.3
|
)%
|
|
|
(594,453
|
)
|
|
|
(4.6
|
)%
|
Net
loss before income taxes
|
|
|
(8,374,074
|
)
|
|
|
(29.9
|
)%
|
|
|
(2,150,849
|
)
|
|
|
(16.5
|
)%
|
Income
tax benefit
|
|
|
1,451,753
|
|
|
|
5.2
|
%
|
|
|
259,850
|
|
|
|
2.0
|
%
|
Net
loss before non-controlling interests
|
|
|
(6,922,321
|
)
|
|
|
(24.8
|
)%
|
|
|
(1,890,999
|
)
|
|
|
(14.5
|
)%
|
Less
net loss attributable to non-controlling interests
|
|
|
(2,007,322
|
)
|
|
|
(7.2
|
)%
|
|
|
(697,469
|
)
|
|
|
(5.2
|
)%
|
Net
loss attributable to company shareholders
|
|
$
|
(4,914,999
|
)
|
|
|
(17.6
|
)%
|
|
$
|
(1,193,530
|
)
|
|
|
(9.2
|
)%
|
Total
revenues. Our total revenues were $27,966,265 for the six months ended June 30, 2020, including $1,185,980 from Asien’s
for the period from May 29, 2020 to June 30, 2020, as compared to $13,020,584 for the six months ended June 30, 2019.
The
retail and appliances segment generates revenue through the sales of home furnishings, including appliances, furniture, home goods
and related products. Revenues from the retail and appliances segment was $26,148,192, including $1,185,980 from Asien’s
for the period from May 29, 2020 to June 30, 2020, for the six months ended June 30, 2020, as compared $10,616,050 for the period
from April 6, 2019 to June 30, 2019.
The
following table summarizes our revenues by sales type:
|
|
Six
Months Ended
June
30,
2020
|
|
|
Period
from
April 6,
2019
to
June 30,
2019
|
|
Appliance
sales
|
|
$
|
21,316,809
|
|
|
$
|
8,759,916
|
|
Furniture
sales
|
|
|
4,326,378
|
|
|
|
1,702,284
|
|
Other
sales
|
|
|
505,005
|
|
|
|
153,850
|
|
Total
revenues
|
|
$
|
26,148,192
|
|
|
$
|
10,616,050
|
|
The
land management services segment generates revenue through the provision of waste disposal and a variety of land application services,
wholesaling of agricultural equipment and parts, local trucking services, various shop services, and sales of other products and
services. Revenues from the land management segment decreased by $586,461, or 24.4%, to $1,818,073 for the six months ended June
30, 2020 from $2,404,534 for six three months ended June 30, 2019. Such decrease resulted from a $338,698 decrease in services
revenue and by a $247,763 decrease in sales of parts and equipment. The decrease in services revenue was primarily due to a $364,344
decline in trucking revenue primarily attributable to COVID related reduced demand for trucking services compared to 2019. The
following table summarizes our revenues by type for the six months ended June 30, 2020 and 2019:
|
|
Six
Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Services
|
|
|
|
|
|
|
Trucking
|
|
$
|
519,497
|
|
|
$
|
883,841
|
|
Waste
hauling
|
|
|
439,049
|
|
|
|
376,357
|
|
Repairs
|
|
|
106,293
|
|
|
|
137,607
|
|
Other
|
|
|
148,187
|
|
|
|
153,919
|
|
Total
services
|
|
|
1,213,026
|
|
|
|
1,551,724
|
|
Sales
of parts and equipment
|
|
|
605,047
|
|
|
|
852,810
|
|
Total
revenues
|
|
$
|
1,818,073
|
|
|
$
|
2,404,534
|
|
Cost
of sales. Our total cost of sales was $22,249,110 for the six months ended June 30, 2020, including $923,892 from Asien’s
for the period from May 29, 2020 to June 30, 2020, as compared to $9,545,726 for the six months ended June 30, 2019.
Cost
of sales for the retail and appliances segment consists of the cost of purchased merchandise plus the cost of delivering merchandise
and, where applicable, installation, net of promotional rebates and other incentives received from vendors. Cost of sales for
the retail and appliances segment was $21,720,220, including $923,892 from Asien’s for the period from May 29, 2020 to June
30, 2020, for the six months ended June 30, 2020, as compared to $8,772,572 for the period from April 6, 2019 to June 30, 2019.
As a percentage of retail and appliances revenues, cost of sales was 83% for the six months ended June 30, 2020.
Cost
of sales for the land management services segment consists of the direct costs of our equipment and parts. Cost of sales for the
land management segment decreased by $244,265, or 31.6%, to $528,889 for the six months ended June 30, 2020 from $773,154 for
the six months ended June 30, 2019. As a percentage of land management services revenue, cost of sales was 87.4% and 90.7% for
the six months ended June 30, 2020 and 2019, respectively. Such decrease was due to the sale of a $205,628 tractor at cost to
another dealer in the six months ended June 30, 2019.
Personnel
costs. Personnel costs include employee salaries and bonuses plus related payroll taxes. It also includes health insurance
premiums, 401(k) contributions, and training costs. Our total personnel costs were $3,290,884 for the six months ended June 30,
2020, including $81,284 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $1,896,233 for the
six months ended June 30, 2019.
Personnel
costs for the retail and appliances segment was $2,432,879 for the six months ended June 30, 2020, including $81,284 from Asien’s
for the period from May 29, 2020 to June 30, 2020, as compared to $893,008 for the period from April 6, 2019 to June 30, 2019.
Personnel
costs for the land management services segment decreased by $145,221, or 14.5%, to $858,005 for the six months ended June 30,
2020 from $1,003,226 for the six months ended June 30, 2019. Such decrease was due to reduction of staff attributable to COVID
related reduced demand for trucking services.
Fuel
costs. Fuel costs, which are attributable to our land management services segment, include fuel for our on-road trucking
and off-road manure spreading services. Our fuel costs decreased by $174,066, or 48.3%, to $186,199 for the six months ended June
30, 2020 from $360,265 for the six months ended June 30, 2019. The decrease in fuel costs is the result of a decline in market
prices for fuel purchases and the decline in trucking services provided.
General
and administrative expenses. Our general and administrative expenses consist primarily of professional advisor fees, stock-based
compensation, bad debts reserve, rent expense, advertising, bank fees, and other expenses incurred in connection with general
operations. Our total general and administrative were $4,963,682 for the six months ended June 30, 2020, including $350,459 from
Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $2,086,670 for the six months ended June 30, 2019.
General
and administrative expenses for the retail and appliances segment was $3,811,052 for the six months ended June 30, 2020, including
$350,459 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $1,289,833 for the period from April
6, 2019 to June 30, 2019. As a percentage of retail and appliances revenue, general and administrative expenses for the retail
and appliances segment amounted to 14.6% for the six months ended June 30, 2020.
General
and administrative expenses for the land management services segment decreased by $85,983, or 12.0%, to $630,978 for the six months
ended June 30, 2020 from $716,961 for the six months ended June 30, 2019. The decrease primarily resulted from a decrease in maintenance
and repairs of $55,199 and insurance of $34,233. As a percentage of land management services revenue, general and administrative
expenses for the land management services segment amounted to 34.7% and 32.1% for the six months ended June 30, 2020 and 2019,
respectively.
General
and administrative expenses for our holding company increased by $441,779, or 553.1%, to $521,653 for the six months ended June
30, 2020, from $79,877 for the six months ended June 30, 2019. The increase was due to an increase in professional fees compared
to the prior year and issuance of stock-based compensation in the current year of $436,386.
Total
other income (expense). We had $4,839,319 in total other expense, net, for the six months ended June 30, 2020, as compared
to other expense, net, of $594,453 for the six months ended June 30, 2019. Other expense in the six months ended June 30, 2020
consisted primarily of interest expense of $683,939, amortization of financing costs of $313,960, loss on debt modification and
extinguishment of $948,856, loss on acquisition working capital receivable of $809,000, and a change in the warrant liability
of Goedeker’s warrants of $2,127,656, offset by gain on sale of property and equipment of $37,767 and other income of $6,325,
while total other expense, net, for the six months ended June 30, 2019 consisted of financing costs of $175,506 and interest expense,
net, of $450,860, offset by gain on sale of property and equipment of $24,224 and a change in warrant liability and other income
of $7,689.
Net
loss attributable to company shareholders. As a result of the cumulative effect of the factors described above, our net
loss attributable to our shareholders increased by $3,721,469, or 311.8%, to $4,914,999 for the six months ended June 30, 2020
from $1,193,530 for the six months ended June 30, 2019.
Comparison
of Years Ended December 31, 2019 and 2018
The
following table sets forth key components of our results of operations during the years ended December 31, 2019 and 2018, both
in dollars and as a percentage of our revenue.
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
|
Amount
|
|
|
%
of
Revenues
|
|
|
Amount
|
|
|
%
of
Revenues
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
4,201,414
|
|
|
|
10.2
|
%
|
|
$
|
4,631,507
|
|
|
|
63.2
|
%
|
Sales
of parts and equipment
|
|
|
2,178,611
|
|
|
|
5.3
|
%
|
|
|
2,702,340
|
|
|
|
36.8
|
%
|
Furniture
and appliances
|
|
|
34,668,113
|
|
|
|
84.5
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total
revenue
|
|
|
41,048,138
|
|
|
|
100.0
|
%
|
|
|
7,333,847
|
|
|
|
100.0
|
%
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
30,426,194
|
|
|
|
74.1
|
%
|
|
|
2,370,757
|
|
|
|
32.3
|
%
|
Personnel
costs
|
|
|
5,137,946
|
|
|
|
12.5
|
%
|
|
|
2,269,059
|
|
|
|
30.9
|
%
|
Depreciation
and amortization
|
|
|
1,623,908
|
|
|
|
4.0
|
%
|
|
|
1,441,898
|
|
|
|
19.7
|
%
|
Fuel
|
|
|
718,495
|
|
|
|
1.8
|
%
|
|
|
874,187
|
|
|
|
11.9
|
%
|
General
and administrative
|
|
|
6,177,588
|
|
|
|
15.0
|
%
|
|
|
1,896,541
|
|
|
|
25.9
|
%
|
Total
operating expenses
|
|
|
44,084,131
|
|
|
|
107.4
|
%
|
|
|
8,852,442
|
|
|
|
120.7
|
%
|
Net
loss from operations
|
|
|
(3,035,993
|
)
|
|
|
(7.4
|
)%
|
|
|
(1,518,595
|
)
|
|
|
(20.7
|
)%
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
costs and loss on early extinguishment of debt
|
|
|
(552,561
|
)
|
|
|
(1.3
|
%
|
|
|
(536,491
|
)
|
|
|
(7.3
|
)%
|
Gain
on write-down of contingency
|
|
|
32,246
|
|
|
|
-
|
|
|
|
395,634
|
|
|
|
5.4
|
%
|
Interest
expense
|
|
|
(1,206,991
|
)
|
|
|
(2.9
|
)%
|
|
|
(562,629
|
)
|
|
|
(7.7
|
)%
|
Change
in warrant liability
|
|
|
106,900
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
|
Other
income (expense)
|
|
|
15,010
|
|
|
|
-
|
|
|
|
(129,400
|
)
|
|
|
(1.76
|
)%
|
Gain
(loss) on sale of property and equipment
|
|
|
57,603
|
|
|
|
0.1
|
%
|
|
|
28,408
|
|
|
|
0.4
|
)%
|
Total
other income (expense)
|
|
|
(1,547,793
|
)
|
|
|
(3.8
|
)%
|
|
|
(804,478
|
)
|
|
|
(11.0
|
)%
|
Net
loss before income taxes
|
|
|
(4,583,786
|
)
|
|
|
(11.2
|
)%
|
|
|
(2,323,073
|
)
|
|
|
(31.7
|
)%
|
Income
tax expense (benefit)
|
|
|
(1,202,363
|
)
|
|
|
(2.9
|
)%
|
|
|
(781,200
|
)
|
|
|
(10.7
|
)%
|
Net
loss before non-controlling interests
|
|
|
(3,381,423
|
)
|
|
|
(8.2
|
)%
|
|
|
(1,541,873
|
)
|
|
|
(21.0
|
)%
|
Less
net loss attributable to non-controlling interests
|
|
|
(1,134,464
|
)
|
|
|
(2.7
|
)%
|
|
|
(546,513
|
)
|
|
|
(7.5
|
)%
|
Net
loss attributable to company shareholders
|
|
$
|
(2,246,959
|
)
|
|
|
(5.5
|
)%
|
|
$
|
(995,360
|
)
|
|
|
(13.5
|
)%
|
Total
revenue. Our total revenue was $41,048,138 for the year ended December 31, 2019, including $34,668,113 from our new retail
and appliances segment from the date of acquisition on April 5, 2019 to December 31, 2019, as compared to $7,333,847 for the year
ended December 31, 2018.
Revenue
from the land management segment decreased by $953,822, or 13.0%, to $6,380,025 for the year ended December 31, 2019 from $7,333,847
for the year ended December 31, 2018. Such decrease resulted from a $523,729 decrease in sales of parts and equipment and by a
$430,093 decrease in services revenue. The decline in service revenue was attributable to a decline in trucking revenue, which
was partially offset by an increase in bin cleaning revenue. Trucking revenue declined from a reduction in business from a few
large customers.
Cost
of sales. Our total cost of sales was $30,426,194 for the year ended December 31, 2019, including $28,596,127 from our
new retail and appliances segment from the date of acquisition on April 5, 2019 to December 31, 2019, as compared to $2,370,757
for the year ended December 31, 2018.
Cost
of sales for the land management services segment decreased by $540,690, or 22.8%, to $1,830,067 for the year ended December 31,
2019 from $2,370,757 for the year ended December 31, 2018. The decrease in cost of sales results from the decreased sales noted
above, offset by an increase in gross margin. The increase in gross profit is the result of a slight increase in gross profit
on equipment sales and a significant increase in gross profit on parts sales, although on a smaller amount of sales. Gross profit
varies among the different products that we sell resulting in differences in gross profit percentages from period to period.
Personnel
costs. Our total personnel costs were $5,137,946 for the year ended December 31, 2019, including $2,909,752 from our new
retail and appliances segment from the date of acquisition on April 5, 2019 to December 31, 2019, as compared to $2,269,059 for
the year ended December 31, 2018.
Personnel
costs for the land management services segment decreased by $40,865, or 1.8%, to $2,228,194 for the year ended December 31, 2019
from $2,269,059 for the year ended December 31, 2018.
Fuel
costs. Our fuel costs decreased by $155,692 or 17.8 %, to $718,495 for the year ended December 31, 2019 from $874,187
for the year ended December 31, 2018. The decrease in fuel is the result of a slight decline in market prices for fuel and the
timing of fuel purchases, as well as the decline in trucking revenue and a slight decline in hauling revenue.
General
and administrative expenses. Our total general and administrative expenses increased by $4,281,047, or 225.7%, to $6,177,588
for the year ended December 31, 2019, including $4,618,112 from our new retail and appliances segment from the date of acquisition
on April 5, 2019 to December 31, 2019, from $1,896,541 for the year ended December 31, 2018. As a percentage of revenue, general
and administrative expenses were 15.0% and 25.9% for the years ended December 31, 2019 and 2018, respectively.
General
and administrative expenses for the land management services segment decreased by $168,983, or 10.7%, to $1,407,708 for the year
ended December 31, 2019 from $1,576,691 for the year ended December 31, 2018. The primary changes were a decrease in professional
fees of $156,057, an increase in repair and maintenance of $151,194 and a decrease in other general and administrative expenses
of $161,916. The other general and administrative expenses were primarily impacted by adjustments to inventory obsolescence decrease
of $48,000, a reduction of bad debt of $15,000, a decrease of shop supplies $41,000 and a decrease of general insurance of $15,000.
As a percentage of revenue for the land management services segment, general and administrative expenses amounted to 22.1% and
21.5% for the years ended December 31, 2019 and 2018, respectively.
General
and administrative expenses for our holding company decreased by $158,409, or 49.5%, to $161,441 for the year ended December 31,
2019, from $319,850 for the year ended December 31, 2018. The decrease was due to a decrease in professional fees compared to
the prior year.
Total
other income (expense). We had $1,547,793 in total other expense, net, for the year ended December 31, 2019, as compared
to total other expense, net, of $804,478 for the year ended December 31, 2018. Total other expense, net, in the year ended December
31, 2019 consisted of financing costs of $552,561 and interest expense of $1,206,991, offset by a change in warrant liability
of $106,900, write-off of contingent consideration of $32,246, other income of $15,010 and a gain on sale of fixed assets of $57,603,
while other expense in the year ended December 31, 2018 consisted of financing costs of $536,491, primarily related to debt restructuring,
interest expense of $562,629, and loss on asset write-down of $129,400, offset by $395,634 upon the write-off of the contingent
consideration in the vesting note payable to $0 and gain on sale of fixed assets of $28,408.
Net
loss attributable to company shareholders. As a result of the cumulative effect of the factors described above, our net
loss attributable to our shareholders increased by $1,251,599, or 125.7%, to $2,246,959 for the year ended December 31, 2019 from
$995,360 for the year ended December 31, 2018.
Liquidity
and Capital Resources
As
of June 30, 2020, we had cash and cash equivalents of $4,515,991. To date, we have financed our operations primarily through cash
proceeds from financing activities, borrowings and equity contributions by our shareholders.
Although
we do not believe that we will require additional cash to continue our operations over the next twelve months (i.e., we do not
believe that there is a going concern issue), we do believe additional funds are required to execute our business plan and our
strategy of acquiring additional businesses. The funds required to execute our business plan will depend on the size, capital
structure and purchase price consideration that the seller of a target business deems acceptable in a given transaction. The amount
of funds needed to execute our business plan also depends on what portion of the purchase price of a target business the seller
of that business is willing to take in the form of seller notes or our equity or in one of our subsidiaries. Given these factors,
we believe that the amount of outside additional capital necessary to execute our business plan on the low end (assuming target
company sellers accept a significant portion of the purchase price in the form of seller notes or our equity or in one of our
subsidiaries) ranges between $100,000 to $250,000. If, and to the extent, that sellers are unwilling to accept a significant portion
of the purchase price in seller notes and equity, then the cash required to execute our business plan could be as much as $5,000,000.
We will seek growth as funds become available from cash flow, borrowings, additional capital raised privately or publicly, or
seller retained financing.
Our
primary use of funds will be for future acquisitions, public company expenses including regular distributions to our shareholders,
investments in future acquisitions, payments to our manager pursuant to the management services agreement, potential payment of
profit allocation to our manager and potential put price to our manager in respect of the allocation shares it owns. The management
fee, expenses, potential profit allocation and potential put price are paid before distributions to shareholders and may be significant
and exceed the funds held by our company, which may require our company to dispose of assets or incur debt to fund such expenditures.
See “Our Manager” for more information concerning the management fee, the profit allocation and put price.
At
June 30, 2020, Goedeker did not meet certain loan covenants under the loan and security agreements with Burnley and SBCC. The
agreements require 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.
Accordingly,
at June 30, 2020, Goedeker was in default on these loan and security agreements (though it remained current in its payments) and
we have classified such debt as a current liability. Upon closing of the IPO on August 4, 2020, Goedeker repaid the loans from
Burnley and SBCC in full.
There
are no cross-default provisions that would require any other long-term liabilities to be classified as current. Although we have
defaulted under the 9% subordinated promissory note described below as the result of our failure to make payments thereunder from
and after August 27, 2019, the date that Burnley notified us that we are in technical default under its loan and security agreement,
Burnley’s notice also stated that pursuant to the subordination agreement, dated April 5, 2019, between Burnley and Goedeker
Television, no payment can be made under the note so long as our default relating to Burnley’s loan continues. Therefore,
notwithstanding the default, Goedeker Television has no right to accelerate the note because, in addition to the subordination
agreement which otherwise would have permitted acceleration, the note itself also has specific subordination provisions that prohibit
such acceleration. Since Goedeker Television does not currently have the right to accelerate the note, we have classified all
amounts other than the currently due portion of the note as long-term liabilities.
The
amount of management fee paid to our manager by our company is reduced by the aggregate amount of any offsetting management fees,
if any, received by our manager from any of our businesses. As a result, the management fee paid to our manager may fluctuate
from quarter to quarter. The amount of management fee paid to our manager may represent a significant cash obligation. In this
respect, the payment of the management fee will reduce the amount of cash available for distribution to shareholders. See “Our
Manager—Our Manager as a Service Provider—Management Fee” for more information on the calculation of the management
fee.
Our
manager, as holder of 100% of our allocation shares, is entitled to receive a twenty percent (20%) profit allocation as a form
of preferred equity distribution, subject to an annual hurdle rate of eight percent (8%), as follows. Upon the sale of a company
subsidiary, the manager will be paid a profit allocation if the sum of (i) the excess of the gain on the sale of such subsidiary
over a high water mark plus (ii) the subsidiary’s net income since its acquisition by the company exceeds the 8% hurdle
rate. The 8% hurdle rate is the product of (i) a 2% rate per quarter, multiplied by (ii) the number of quarters such subsidiary
was held by the company, multiplied by (iii) the subsidiary’s average share (determined based on gross assets, generally)
of our company’s consolidated net equity (determined according to GAAP. with certain adjustments). In certain circumstances,
after a subsidiary has been held for at least 5 years, the manager may also trigger a profit allocation with respect to such subsidiary
(determined based solely on the subsidiary’s net income since its acquisition). The amount of profit allocation may represent
a significant cash payment and is senior in right to payments of the distributions to our shareholders. Therefore, the amount
of profit allocation paid, when paid, will reduce the amount of cash available to our company for its operating and investing
activities, including future acquisitions. See “Our Manager—Our Manager as an Equity Holder—Manager’s
Profit Allocation” for more information on the calculation of the profit allocation.
Our
operating agreement also contains a supplemental put provision, which gives our manager the right, subject to certain conditions,
to cause our company to purchase the allocation shares then owned by our manager upon termination of the management services agreement.
The amount of put price under the supplemental put provision is determined by assuming all of our subsidiaries are sold at that
time for their fair market value and then calculating the amount of profit allocation would be payable in such a case. If the
management services agreement is terminated for any reason other than the manager’s resignation, the payment to our manager
could be as much as twice the amount of such hypothetical profit allocation. As is the case with profit allocation, the calculation
of the put price is complex and based on many factors that cannot be predicted with any certainty at this time. See “Our
Manager—Our Manager as an Equity Holder—Supplemental Put Provision” for more information on the calculation
of the put price. The put price obligation, if the manager exercises its put right, will represent a significant cash payment
and is senior in right to payments of distributions to our shareholders. Therefore, the amount of put price will reduce the amount
of cash available to our company for its operating and investing activities, including future acquisitions.
Summary
of Cash Flow
The
following table provides detailed information about our net cash flow for all financial statement periods presented in this prospectus:
Cash
Flow
|
|
Six
Months Ended
June 30,
|
|
|
Year
Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
2018
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
3,800,759
|
|
|
$
|
(452,738
|
)
|
|
$
|
(1,923,293
|
)
|
|
$
|
(127,005
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
1,253,781
|
|
|
|
1,310,088
|
|
|
|
(47,321
|
)
|
|
|
309,968
|
|
Net
cash provided by (used in) financing activities
|
|
|
(777,309
|
)
|
|
|
(873,394
|
)
|
|
|
1,875,494
|
|
|
|
(350,505
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
4,277,231
|
|
|
|
(16,044
|
)
|
|
|
(95,120
|
)
|
|
|
(167,542
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
238,760
|
|
|
|
333,880
|
|
|
|
333,880
|
|
|
|
501,422
|
|
Cash
and cash equivalent at end of period
|
|
$
|
4,515,991
|
|
|
|
317,836
|
|
|
$
|
238,760
|
|
|
$
|
333,880
|
|
Net
cash provided by operating activities was $3,800,759 for the six months ended June 30, 2020, as compared to net cash used in operating
activities of $452,738 for the six months ended June 30, 2019. For the six months ended June 30, 2020, the net loss of $6,922,321,
an increase in deferred taxes and uncertain tax position of $1,201,753, an increase in inventory of $514,236, an increase in vendor
deposits of $50,542, offset by depreciation and amortization of $811,145, stock compensation of $436,386, amortization of financing
related costs and extinguishment of debt of $393,507, an increase in accounts payable and accrued expenses of $3,019,374, an increase
in customer deposits of $5,861,609 and a change in warrant liability of $2,127,656, were the primary drivers of the net cash used
in operating activities. were the primary drivers of the net cash used in operating activities. For the six months ended June
30, 2019, the net loss of $1,890,999, a decrease in accounts receivable of $1,246,154, and a decrease in uncertain tax position
of $259,831, offset by an increase in customer deposits of $1,107,639, depreciation and amortization of $688,086, an increase
in accounts payable and accrued expenses of $607,378 and an decrease in inventory of $315,390, were the primary drivers of the
net cash used in operating activities.
Net
cash used in operating activities was $1,923,293 for the year ended December 31, 2019, as compared to $127,005 for the year ended
December 31, 2018. For the year ended December 31, 2019, the net loss of $3,381,423, an increase in accounts receivable of $1,447,705,
a decrease in accounts payable, accrued expenses, and accrued interest of $1,012,226, and an increase in uncertain tax position
and deferred taxes of $1,008,104, offset by a decrease in inventory of $723,509, depreciation and amortization of $1,623,908,
and an increase in customer deposits of $1,855,989, were the primary drivers of the net cash used in operating activities. For
the year ended December 31, 2018, the net loss of $1,541,873, a decrease in deferred tax liability and prepaid tax of $742,000,
a loan contingency write-down of $395,634, a gain on sale of fixed assets of $28,408, and an increase in accounts receivable of
$239,205, offset by depreciation and amortization of $1,441,898, loss of extinguishment of debt of $536,534, a loss on write-off
of assets of $129,400, amortization of financing costs of $29,239, an increase in accounts payable and accrued expenses of $433,736,
and a decrease of inventory of $240,353, were the primary drivers of the used in by operating activities.
Net
cash provided by investing activities was $1,253,781, for the six months ended June 30, 2020, as compared to net cash provided
by investing activities of $1,310,088 for the six months ended June 30, 2019. For the six months ended June 30, 2020, net cash
provided by investing activities consisted of net cash acquired in the acquisition of Asien of $1,268,285 and proceeds from sale
of fixed assets of $31,500, offset of the purchase of equipment of $46,004, while net cash provided by investing activities for
the six months ended June 30, 2019 consisted of net cash acquired in the acquisition of Goedeker of $1,285,214 and proceeds from
sale of fixed assets of $39,750, offset by purchase of equipment in the amount of $14,876.
Net
cash used in investing activities was $47,321 for the year ended December 31, 2019, consisting of proceeds from sale of property
and equipment of $143,711, offset by the purchase of equipment in the amount of $191,032. Net cash provided by investing activities
was $309,968 for the year ended December 31, 2018, consisting of $320,775 of proceeds from sale of fixed assets, offset by purchase
of equipment in the amount of $10,807.
Net
cash used in financing activities was $777,309 for the six months ended June 30, 2020, as compared to $873,394 for the six months
ended June 30, 2019. For the six months ended June 30, 2020, net cash used in financing activities consisted of repayment of notes
payable of $1,197,796, net repayments of the lines of credit of $443,270 and repayment of the financing lease of $162,443 net
of proceeds from term loans of $1,026,200, while net cash used in financing activities for the six months ended June 30, 2019
consisted of repayments of notes payable of $483,266, repayments of capital lease obligations of $302,099 and repayments of short-term
borrowing $88,029.
Net
cash provided by financing activities was $1,875,494 for the year ended December 31, 2019, as compared to net cash used in financing
activities of $350,505 for the year ended December 31, 2018. For the year ended December 31, 2019, net cash provided by financing
activities consisted of proceeds of convertible promissory note of $650,000, proceeds from notes payable of $1,527,000, proceeds
from related party note payable of $2,400, and proceeds, net of repayments, from lines of credit of $1,339,430, offset by payments
on notes payable of $661,259, floor plan repayments of $98,519, repayments on capital lease obligations of $524,058 and financing
costs of $359,500. For the year ended December 31, 2018, net cash used in financing activities consisted of proceeds from short-term
borrowings and notes payable in the amount of $479,434 and proceeds from related party notes payable in the amount of $117,000,
offset by principal payments on the capital lease of $596,405, repayment to line of credit in the amount of $275,000, and repayments
of notes payable of $75,534.
Grid
Promissory Note
On
January 3, 2018, we issued a grid promissory note to our manager in the initial principal amount of $50,000. The note provides
that we may from time to time request additional advances from our manager up to an aggregate additional amount of $100,000, which
will be added to the note if our 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 we complete a financing involving at least $500,000, we 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, our manager has advanced $119,400 of the note
and we have accrued interest of $21,944.
Revolving
Loan – Northpoint
On
June 24, 2019, Goedeker entered into a loan and security agreement with Northpoint Commercial Finance LLC, or 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 us of inventory at an interest rate of LIBOR plus 7.99%. Goedeker terminated the loan and security agreement
on May 18, 2020 and there is no outstanding balance as of June 30, 2020.
Revolving
Loan – Burnley
On
April 5, 2019, Goedeker, as borrower, and its parent company at such time, 1847 Goedeker Holdco Inc., or 1847 Holdco, entered
into a loan and security agreement with Burnley for revolving loans in an aggregate principal amount that will not exceed the
lesser of (i) the borrowing base (as defined in the loan and security agreement) 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. In connection with the closing of the acquisition of Goedeker Television 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. As of June 30, 2020, there was $232,000 available for borrowing and the balance of the line of credit was
$456,104, comprised of principal of $524,938 and net of unamortized debt issuance costs of $68,834.
As
noted above, as of June 30, 2020, Goedeker was in technical, not payment default, on this loan and security agreement and classified
such debt as a current liability.
On
August 4, 2020, Goedeker used a portion of the proceeds from the IPO to repay the loan in full and the loan and security agreement
was terminated. 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.
Term
Loan – SBCC
On
April 5, 2019, Goedeker, as borrower, and 1847 Holdco entered into a loan and security agreement with 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 its most senior capital stock equal to 5.0% of its outstanding equity securities
on a fully-diluted basis for an aggregate price equal to $100. We 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 $158,320.
As
noted above, as of June 30, 2020, Goedeker was in technical, not payment default, on this loan and security agreement and classified
such debt as a current liability.
On
August 4, 2020, Goedeker used a portion of the proceeds from the IPO to repay the loan in full and the loan and security agreement
was terminated. 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. In addition, SBCC converted the warrant into 250,000 shares of Goedeker’s common stock.
Term
Loan – 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 events of default, representations and warranties and covenants. 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. We continue 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.
If
Neese 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.
As
described under “—Recent Developments” above, the terms of this loan were amended on July 30, 2020.
Secured
Convertible Promissory Note
On
April 5, 2019, our company, 1847 Holdco and Goedeker (which we collectively refer to as 1847) entered into a securities purchase
agreement with Leonite, pursuant to which 1847 issued to Leonite a secured convertible promissory note in the aggregate principal
amount of $714,286. As additional consideration for the purchase of the note, (i) we issued 50,000 common shares to Leonite, (ii)
we 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) Goedeker issued to Leonite shares of common stock equal to
a 7.5% non-dilutable interest in 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, we issued 50,000 common shares valued
at $137,500 and a debt-discount related to the warrants valued at $292,673. We 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.
In
connection with the amendment, (i) we 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 prepayment of principal and accrued interest resulting in a debt extinguishment and we recorded an aggregate extinguishment
loss of $773,856.
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 our company into which such common shares may be changed or reclassified.
On
May 4, 2020, Leonite converted $100,000 of the outstanding balance of the note into 100,000 common shares.
On
July 24, 2020, Leonite converted $50,000 of the outstanding balance of the note into 50,000 common shares.
On
August 4, 2020, Goedeker used a portion of the proceeds from the IPO to repay the note in full. The total payoff amount was $780,653,
consisting of principal of $771,431 and interest of $9,222.
9%
Subordinated Promissory Note
A
portion of the purchase price for the acquisition of the assets of Goedeker Television was paid by Goedeker’s issuance to
Steve Goedeker, as representative of Goedeker Television (which we refer to as the Goedeker Seller), 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, 2024. 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.
On
June 2, 2020, the parties entered into an amendment and restatement of the note that became effective as of the closing of the
IPO on August 4, 2020, pursuant to which (i) the principal amount of the existing note was increased by $250,000, (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 was increased from 9% to 12%. Goedeker also agreed
to grant to the sellers, Goedeker Television, Steve Goedeker and Mike Goedeker, a security interest in all of its assets to secure
its obligations under the amended and restated note and entered into a security agreement with them that became effective upon
the closing of the IPO.
As
stated above, although Goedeker defaulted under this note, Goedeker Television had no right to accelerate the note because the
note has specific subordination provisions that prohibit such acceleration.
In
accordance with the terms of the amended and restated note that became effective upon closing of the IPO on August 4, 2020, Goedeker
used a portion of the proceeds from the IPO to pay $1,083,842 of the balance of the note representing a $696,204 reduction in
the principal balance and interest accrued through August 4, 2020 of $387,638.
On
August 26, 2020, Goedeker used the proceeds of the loan from Arvest Bank described above under “—Recent Developments”
to repay this the note in full.
10%
Promissory Note
A
portion of the purchase price for the acquisition of Neese was paid by the issuance of a promissory note in the principal amount
of $1,025,000 by 1847 Neese and Neese to the sellers of Neese, Alan Neese and Katherine Neese (which we refer to as the Neese
Sellers). 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 is unsecured and contains customary events of default.
The
note has not been repaid; thus, Neese 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 Neese Sellers 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, Home State Bank limits the payment of interest on this note to $40,000 annually. We continue 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 Asien’s 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 is unsecured and contains customary events of default. The rights of the Asien’s 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 Asien’s 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
Asien’s Seller. The note was repaid in June 2020.
PPP
Loans
On
April 9, 2020, April 10, 2020 and April 28, 2020 (prior to the acquisition), Goedeker, Neese and Asien’s received $642,600,
$383,600, and $357,500, respectively, in Paycheck Protection Program, or PPP, loans from the United States Small Business Administration,
or the SBA, under provisions of the Coronavirus Aid, Relief and Economic Security Act, or the 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’s
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. We have 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.
4.5%
Unsecured Promissory Note
On
October 30, 2017, Asien’s entered into a stock repurchase agreement with Paul A. Gwilliam and Terri L. Gwilliam, co-trustees
of the Gwilliam Family Trust, pursuant to which Asien’s issued an unsecured promissory note in the aggregate principal amount
of $540,000 to such trust for a term of 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
Asien’s
has entered into three retail installment sale contracts related to its delivery trucks pursuant to which Asien’s agreed
to finance the vehicles at rates ranging 3.98% to 6.99% with an aggregate remaining principal amount of $79,498 as of June 30,
2020.
Floor
Plan Loans Payable
At
December 31, 2019, $10,581 of machinery and equipment inventory was pledged to secure a floor plan loan from a commercial lender.
The balance of the floor plan payable was repaid in the six months ended June 30, 2020.
Master
Lease Agreement
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, or Utica, pursuant to a master lease agreement, dated March 3, 2017, between Utica, as lessor,
and 1847 Neese and Neese, as co-lessees, 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 co-lessees. A
portion of the proceeds from the term loan from Home State Bank described above 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.
The
remaining balance of the lease amounts to $478,045 as of June 30, 2020, comprised of principal of $668,248 and net of unamortized
debt discount of $19,025, accrued payments on lien release of $249,784 and lease deposits of $38,807, offset by end of lease buyout
payments of $117,413.
Agreement
of Sale of Future Receipts
On
May 28, 2020, 1847 Asien and Asien’s entered into an agreement of sale of future receipts with TVT Direct Funding LLC, or
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 agreement with TVT contains customary events of default. The remaining balance at June 30, 2020 is $410,374, comprised of
principal of $591,803 and net of unamortized debt discount of $181,429.
Total
Debt
The
following table shows aggregate figures for the total debt described above that is coming due in the short and long term as of
June 30, 2020. See the above disclosures for more details regarding these loans.
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total
Debt
|
|
Grid
Promissory Note
|
|
$
|
119,400
|
|
|
$
|
-
|
|
|
$
|
119,400
|
|
Revolving
Loan – Burnley
|
|
|
456,105
|
|
|
|
-
|
|
|
|
456,105
|
|
Term
Loan – SBCC
|
|
|
3,127,604
|
(1)
|
|
|
-
|
|
|
|
3,127,604
|
|
Term
Loan – Home State Bank
|
|
|
2,953,867
|
|
|
|
-
|
|
|
|
2,953,867
|
|
Secured
Convertible Promissory Note – Leonite
|
|
|
821,431
|
|
|
|
-
|
|
|
|
821,431
|
|
9%
Subordinated Promissory Note – Goedeker Seller
|
|
|
311,931
|
|
|
|
3,153,543
|
(2)
|
|
|
3,465,474
|
|
10%
Promissory Note – Neese Sellers
|
|
|
-
|
|
|
|
1,025,000
|
|
|
|
1,025,000
|
|
8%
Subordinated Amortizing Promissory Note – Asien’s Seller
|
|
|
201,447
|
|
|
|
-
|
|
|
|
201,447
|
|
PPP
Loans
|
|
|
612,417
|
|
|
|
771,283
|
|
|
|
1,383,700
|
|
4.5%
Unsecured Promissory Note
|
|
|
47,907
|
|
|
|
17,467
|
|
|
|
65,374
|
|
Vehicle
Loans
|
|
|
25,314
|
|
|
|
54,184
|
|
|
|
79,498
|
|
Master
Lease Agreement – Utica
|
|
|
388,023
|
|
|
|
90,021
|
|
|
|
478,044
|
|
Agreement
of Sale of Future Receipts – TVT
|
|
|
410,374
|
|
|
|
-
|
|
|
|
410,374
|
|
Total
|
|
$
|
9,475,820
|
|
|
$
|
5,111,498
|
|
|
$
|
14,587,318
|
|
|
(1)
|
Includes
warrant liability of $2,250,000
|
|
(2)
|
Includes
contingent note payable of $49,248
|
Results
of Operations of Goedeker Television
This
section provides financial information for Goedeker Television for the years ended December 31, 2018 and 2017. As discussed elsewhere
in this prospectus, on October 23, 2020, we distributed all of the shares of Goedeker that we held to our shareholders. As a result
of this distribution, Goedeker is no longer a subsidiary of our company.
The
following table sets forth key components of the results of operations of Goedeker Television during the years ended December
31, 2018 and 2017, both in dollars and as a percentage of net sales.
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
|
|
Amount
|
|
|
%
of
Net
Sales
|
|
|
Amount
|
|
|
%
of
Net
Sales
|
|
Net
sales
|
|
$
|
56,307,960
|
|
|
|
100.00
|
%
|
|
$
|
58,555,495
|
|
|
|
100.00
|
%
|
Cost
of goods sold
|
|
|
45,409,884
|
|
|
|
80.65
|
%
|
|
|
49,104,277
|
|
|
|
83.86
|
%
|
Gross
profit
|
|
|
10,898,076
|
|
|
|
19.35
|
%
|
|
|
9,451,218
|
|
|
|
16.14
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
3,627,883
|
|
|
|
6.44
|
%
|
|
|
3,705,336
|
|
|
|
6.33
|
%
|
Advertising
|
|
|
2,640,958
|
|
|
|
4.69
|
%
|
|
|
2,197,518
|
|
|
|
3.75
|
%
|
Bank
and credit card fees
|
|
|
1,369,557
|
|
|
|
2.43
|
%
|
|
|
1,490,641
|
|
|
|
2.55
|
%
|
Other
operating expenses
|
|
|
1,370,286
|
|
|
|
2.43
|
%
|
|
|
1,220,279
|
|
|
|
2.08
|
%
|
Total
operating expenses
|
|
|
9,008,684
|
|
|
|
16.00
|
%
|
|
|
8,613,774
|
|
|
|
14.71
|
%
|
Income
from operations
|
|
|
1,889,392
|
|
|
|
3.36
|
%
|
|
|
837,444
|
|
|
|
1.43
|
%
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
116,135
|
|
|
|
0.21
|
%
|
|
|
77,938
|
|
|
|
0.13
|
%
|
Interest
expense
|
|
|
(149
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
other income (expense)
|
|
|
115,986
|
|
|
|
0.21
|
%
|
|
|
77,938
|
|
|
|
0.13
|
%
|
Net
income
|
|
$
|
2,005,378
|
|
|
|
3.56
|
%
|
|
$
|
915,382
|
|
|
|
1.56
|
%
|
Net
sales. Goedeker Television generates revenue through the sales of home furnishings, including appliances, furniture, bath
and kitchen fixtures, décor, lighting and home goods. Total net sales decreased by $2,247,535, or 3.84%, to $56,307,960
for the year ended December 31, 2018 from $58,555,495 for the year ended December 31, 2017. Such decrease was primarily due to
a decrease of consumer sales in the appliance industry in general, a shift of product mix to different appliance vendors, and
to recent company strategy of reducing furniture sales of lower margin items.
Net
sales by sales type for the years ended December 31, 2018 and 2017 is as follows:
|
|
For
the Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Appliance
sales
|
|
$
|
42,871,864
|
|
|
$
|
43,134,923
|
|
Furniture
sales
|
|
|
10,813,453
|
|
|
|
12,605,779
|
|
Other
sales
|
|
|
2,622,643
|
|
|
|
2,814,793
|
|
Total
net sales
|
|
$
|
56,307,960
|
|
|
$
|
58,555,495
|
|
Cost
of goods sold. Cost of goods sold includes the cost of purchased merchandise plus the cost of delivering merchandise and
where applicable installation, net of promotional rebates and other incentives received from vendors. Cost of goods sold decreased
by $3,694,393, or 7.52%, to $45,409,884 for the year ended December 31, 2018 from $49,104,277 for the year ended December 31,
2017. Such decrease was primarily due to a decrease of consumer sales in the appliance industry in general, a shift of product
mix to different appliance vendors, and to recent company strategy of reducing furniture sales of lower margin items.
Gross
profit. Gross profit increased by $1,446,858, or 15.31%, to $10,898,076 for the year ended December 31, 2018 from $9,451,218
for the year ended December 31, 2017. The gross margin (percent of net sales) increased to 19.35% for the year ended December
31, 2018 from 16.14% for the year ended December 31, 2017. Such increase was primarily due to our recent strategy of reducing
furniture sales of lower margin items.
Operating
expenses. Operating expenses including personnel expenses (including employee salaries and bonuses, payroll taxes, health
insurance premiums, 401(k) contributions, and training costs), advertising expenses, bank and credit card fees and other general
operating costs. Operating expenses increased by $394,910, or 4.58%, to $9,008,684 for the year ended December 31, 2018 from $8,613,774
for the year ended December 31, 2017. Such increase was due to a 20.18% increase in advertising expenses and a 12.29% increase
in other operating expense, including computer support and repairs and maintenance, offset by a 2.10% decrease in personnel expenses
and an 8.12% decrease in bank and credit card fees. As a percentage of net sales, operating expenses were 16.00% and 14.71% for
the years ended December 31, 2018 and 2017, respectively.
Other
income. Other income, which includes interest income and other miscellaneous income, increased by $38,197, or 49.01%,
to $116,135 for the year ended December 31, 2018 from $77,938 for the year ended December 31, 2017.
Net
income. As a result of the cumulative effect of the factors described above, net income increased by $1,089,996, or 119.08%,
to $2,005,378 for the year ended December 31, 2018 from $915,382 for the year ended December 31, 2018.
Liquidity
and Capital Resources
As
of December 31, 2018, Goedeker Television had cash and cash equivalents of $1,525,693. Goedeker Television has financed its operations
primarily through cash flow from operations.
The
following table provides detailed information about net cash flow for all financial statement periods presented in this prospectus:
|
|
Years
Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash provided by (used
in) operating activities
|
|
$
|
442,074
|
|
|
$
|
275,267
|
|
Net cash provided by investing activities
|
|
|
-
|
|
|
|
-
|
|
Net cash used in financing activities
|
|
|
(713,800
|
)
|
|
|
(980,996
|
)
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(271,726
|
)
|
|
|
(705,734
|
)
|
Cash and cash equivalents at beginning
of period
|
|
|
1,797,419
|
|
|
|
2,503,153
|
|
Cash and cash equivalent at end of period
|
|
$
|
1,525,693
|
|
|
$
|
1,797,419
|
|
Net
provided by operating activities was $442,074 for the year ended December 31, 2018, as compared to $275,267 for the year ended
December 31, 2017. For the year ended December 31, 2018, net cash provided by operating activities primarily consisted of the
net income of $2,005,378, increases in inventory in the amount of $597,981 and receivables in the amount of $271,776, and decreases
in customer deposits in the amount of $1,711,409, accounts payable in the amount of $519,108, deposits with vendors in the amount
of $116,281, accrued expenses and other liabilities in the amount of $99,801 and payroll related liabilities in the amount of
$35,817. For the year ended December 31, 2017, net cash provided by operating activities primarily consisted of the net income
of $915,382, increases in accounts payable in the amount of $44,185, other assets in the amount of $43,524 and accrued expenses
and other liabilities in the amount of $39,380, and decreases in inventory in the amount of $1,247,732, receivables in the amount
of $957,292 and deposits with vendors in the amount of $262,832.
Goedeker
Television had no investing activities for the years ended December 31, 2018 and 2017.
Net
cash provided by financing activities for the years ended December 31, 2018 and 2017 was $713,800 and $980,996, respectively,
which consisted of distributions to stockholders.
Results
of Operations of Asien’s
The
following table sets forth key components of the results of operations of Asien’s during the years ended December 31, 2019
and 2018, both in dollars and as a percentage of revenue.
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
|
Amount
|
|
|
%
of
Revenue
|
|
|
Amount
|
|
|
%
of
Revenue
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales, net
|
|
$
|
12,300,648
|
|
|
|
92.06
|
%
|
|
$
|
7,827,123
|
|
|
|
87.80
|
%
|
Service
revenue
|
|
|
1,061,222
|
|
|
|
7.94
|
%
|
|
|
1,087,174
|
|
|
|
12.20
|
%
|
Total
revenue
|
|
|
13,361,870
|
|
|
|
100.00
|
%
|
|
|
8,914,297
|
|
|
|
100.00
|
%
|
Costs of
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
9,757,269
|
|
|
|
73.02
|
%
|
|
|
6,128,814
|
|
|
|
68.75
|
%
|
Cost
of service revenue
|
|
|
498,385
|
|
|
|
3.73
|
%
|
|
|
526,000
|
|
|
|
5.90
|
%
|
Total
costs of revenue
|
|
|
10,255,654
|
|
|
|
76.75
|
%
|
|
|
6,654,814
|
|
|
|
74.65
|
%
|
Gross
profit
|
|
|
3,106,216
|
|
|
|
23.25
|
%
|
|
|
2,259,483
|
|
|
|
25.35
|
%
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
500,581
|
|
|
|
3.75
|
%
|
|
|
459,782
|
|
|
|
5.16
|
%
|
Advertising
|
|
|
66,570
|
|
|
|
0.50
|
%
|
|
|
88,581
|
|
|
|
0.99
|
%
|
Bank
and credit card fees
|
|
|
264,759
|
|
|
|
1.98
|
%
|
|
|
205,651
|
|
|
|
2.31
|
%
|
Depreciation
|
|
|
35,337
|
|
|
|
0.26
|
%
|
|
|
45,414
|
|
|
|
0.51
|
%
|
General
and administrative
|
|
|
825,620
|
|
|
|
6.18
|
%
|
|
|
767,472
|
|
|
|
8.61
|
%
|
Total
operating expenses
|
|
|
1,692,867
|
|
|
|
12.67
|
%
|
|
|
1,566,900
|
|
|
|
17.58
|
%
|
Income
from operations
|
|
|
1,413,349
|
|
|
|
10.58
|
%
|
|
|
692,583
|
|
|
|
7.77
|
%
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
30,371
|
|
|
|
0.23
|
%
|
|
|
68,064
|
|
|
|
0.76
|
%
|
Other
expense
|
|
|
(38,875
|
)
|
|
|
(0.29
|
)%
|
|
|
(5,516
|
)
|
|
|
(0.06
|
)%
|
Total
other income (expense)
|
|
|
(8,504
|
)
|
|
|
(0.06
|
)%
|
|
|
62,548
|
|
|
|
0.70
|
%
|
Net
income
|
|
$
|
1,404,845
|
|
|
|
10.51
|
%
|
|
$
|
755,131
|
|
|
|
8.47
|
%
|
Revenue.
Asien’s generates revenue through the sales of appliances and from appliances services, including in-home service and repair.
Total revenue increased by $4,447,573, or 49.89%, to $13,361,870 for the year ended December 31, 2019 from $8,914,297 for the
year ended December 31, 2018. Such increase was due to a significant increase in product sales, offset by a slight 2.39% decrease
in service revenue.
Revenue
from product sales increased by $4,473,525, or 57.15%, to $12,300,648 for the year ended December 31, 2019 from $7,827,12 for
the year ended December 31, 2018. We believe that such increase was due to replacement appliances for homes rebuilt due to fire
damage in 2017 and 2018.
Service
revenue decreased by $25,952, or 2.39%, to $1,061,222 for the year ended December 31, 2019 from $1,087,174 for the year ended
December 31, 2018.
Cost
of revenue. Cost of revenue includes the cost of purchased merchandise plus freight, labor and overhead associated with
delivery and installation services and any applicable delivery charges from the vendor. Total cost of revenue increased by $3,600,840,
or 54.11%, to $10,255,654 for the year ended December 31, 2019 from $6,654,814 for the year ended December 31, 2018. Such increase
was generally in line with the increase in revenue, although it was also affected by the change in product mix, with product sales
accounting for a larger portion of revenue in 2019.
Gross
profit. Gross profit increased by $846,733, or $37.47%, to $3,106,216 for the year ended December 31, 2019 from $2,259,483
for the year ended December 31, 2019. Gross margin (percent of revenue) decreased slightly to 23.25% for the year ended December
31, 2019 from 25.35% for the year ended December 31, 2018. Such decrease was primarily due to the change in product mix noted
above.
Operating
expenses. Operating expenses including personnel expenses (including employee salaries and bonuses, payroll taxes, health
insurance premiums, 401(k) contributions, and recruitment and training costs), advertising expenses, bank and credit card fees,
depreciation and other general operating costs. Total operating expenses increased by $125,967, or 8.04%, to $1,692,867 for the
year ended December 31, 2019 from $1,566,900 for the year ended December 31, 2018. Such increase was due to an 8.87% increase
personnel costs due to an increase in personnel, a 28.75% increase in bank and credit card fees resulting from the increase in
revenue, and a 7.58% increase in other general and administrative expenses resulting from the general expansion of Asien’s
business, offset by a 24.85% decrease in advertising expenses due to greater vendor co-op contributions offsetting these expenses
carried by Asien’s alone in 2018, and a 22.19% decrease in depreciation. As a percentage of revenue, total operating expenses
were 12.67% and 17.58% for the years ended December 31, 2019 and 2018, respectively.
Other
income (expense). Asien’s had total other expense, net, of $8,504 for the year ended December 31, 2019, as compared
to total other income, net, of $62,548 for the year ended December 31, 2018.
Net
income. As a result of the cumulative effect of the factors described above, net income increased by $649,714, or 86.04%,
to $1,404,845 for the year ended December 31, 2018 from $755,131 for the year ended December 31, 2018.
Liquidity
and Capital Resources
As
of December 31, 2019, Asien’s had cash and cash equivalents of $1,875,336. Asien’s has financed its operations primarily
through cash flow from operations and bank borrowings.
The
following table provides detailed information about net cash flow for all financial statement periods presented in this prospectus:
|
|
Years
Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net
cash provided by operating activities
|
|
$
|
1,532,321
|
|
|
$
|
1,606,581
|
|
Net
cash used in investing activities
|
|
|
(9,929
|
)
|
|
|
(7,280
|
)
|
Net
cash used in financing activities
|
|
|
(1,156,670
|
)
|
|
|
(736,029
|
)
|
Net
increase in cash and cash equivalents
|
|
|
365,722
|
|
|
|
863,272
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,509,614
|
|
|
|
646,342
|
|
Cash
and cash equivalent at end of period
|
|
$
|
1,875,336
|
|
|
$
|
1,509,614
|
|
Net
provided by operating activities was $1,532,321 for the year ended December 31, 2019, as compared to $1,606,581 for the year ended
December 31, 2018. For the year ended December 31, 2019, the net income of $1,404,845, an increase in contract liabilities of
$358,640, an increase in accounts payable and accrued expenses of $141,623, depreciation of $35,337, and an increase in prepaid
expenses and other current assets of $210, offset by a decrease in inventory of $285,096 and decrease in accounts receivable of
$123,238, were the primary drivers of the net cash provided by operating activities. For the year ended December 31, 2018, the
net income of $755,131, an increase in contract liabilities of $894,753, an increase in prepaid expenses and other current assets
of $294,217, an increase in accounts receivable of $47,255 and depreciation of $45,414, offset by a decrease in inventory of $360,973
and a decrease in accounts payable and accrued expenses of $69,216, were the primary drivers of the net cash provided by operating
activities.
Net
cash used in investing activities was $9,929 for the year ended December 31, 2019, as compared to $7,280 for the year ended December
31, 2018, which consisted entirely of the purchases of property and equipment.
Net
cash used in financing activities was $1,156,670 for the year ended December 31, 2019, as compared to $736,029 for the year ended
December 31, 2018. Net cash used in operating activities for the year ended December 31, 2019 consisted of distributions of $1,042,200,
repayments on notes payable of $111,450 and repayments on line of credit of $3,020, while net cash used in financing activities
for the year ended December 31, 2018 consisted of repayments on notes payable of $387,604, distributions of $331,350 and repayments
on line of credit of $17,075.
Contractual
Obligations
We
have engaged our manager to manage the day-to-day operations and affairs of our company. Our relationship with our manager will
be governed principally by the following agreements:
|
●
|
the
management services agreement relating to the management services our manager will perform
for us and the businesses we own and the management fee to be paid to our manager in
respect thereof; and
|
|
●
|
our
company’s operating agreement setting forth our manager’s rights with respect
to the allocation shares it owns, including the right to receive profit allocations from
our company, and the supplemental put provision relating to our manager’s right
to cause our company to purchase the allocation shares it owns.
|
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources.
Critical
Accounting Policies
The
following discussion relates to critical accounting policies for our consolidated company. The preparation of financial statements
in conformity with GAAP requires our management to make assumptions, estimates and judgments that affect the amounts reported,
including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting
policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding
of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal
of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment,
often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent
periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because
of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.
We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation
of our financial statements:
Revenue
Recognition and Cost of Revenue
On
January 1, 2018, we adopted Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic
606), which supersedes the revenue recognition requirements in Accounting Standard Codification, or 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. Our adoption of this ASU resulted in no change to
our 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
(which we refer to as 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 (which we refer to as a Drop Shipment) and the third way
is where Goedeker itself delivers the products to the customer and often also installs the product (which we refer to as 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. Asien’s
has a diverse customer base with no one client accounting for more than 5% of total revenue.
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.
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 we purchase 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 our assessment of the credit history with our manufacturers, we have concluded that there should
be no allowance for uncollectible accounts. We historically collect substantially all of our 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 our accounts receivable. We charge 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. We record 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 We periodically evaluate
the value of items in inventory and provide write-downs to inventory based on our estimate of market conditions. We estimated
an obsolescence allowance of $463,687 and $451,546 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
We
review our 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.
Derivative
Instrument Liability
We
account 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.
Recent
Accounting Pronouncements
In
January 2017, the Financial Accounting Standards Board 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. We 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 Financial Accounting Standards Board 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. We have elected this extension and the effective
date for our company to adopt this standard will be for fiscal years beginning after December 15, 2022. We have not completed
our assessment of the standard but do not expect the adoption to have a material impact on our consolidated financial position,
results of operations, or cash flows.
OUR
CORPORATE STRUCTURE AND HISTORY
Our
company is a Delaware limited liability company that was formed on January 22, 2013. Your rights as a holder of common shares,
and the fiduciary duties of our board of directors and executive officers, and any limitations relating thereto, are set forth
in the operating agreement governing our company and may differ from those applying to a Delaware corporation. However, subject
to certain exceptions, the documents governing our company specify that the duties of our directors and officers will be generally
consistent with the duties of directors and officers of a Delaware corporation.
Our
company is classified as a partnership for U.S. federal income tax purposes. Under the partnership income tax provisions, our
company will not incur any U.S. federal income tax liability; rather, each of our shareholders will be required to take into account
his or her allocable share of company income, gain, loss, and deduction. As a holder of our shares, you may not receive cash distributions
sufficient in amount to cover taxes in respect of your allocable share of our company’s net taxable income. Our company
will file a partnership return with the IRS and will issue tax information, including a Schedule K-1, to you that describes your
allocable share of our company’s income, gain, loss, deduction, and other items. The U.S. federal income tax rules that
apply to partnerships are complex and complying with the reporting requirements may require significant time and expense. See
“Material U.S. Federal Income Tax Considerations” for more information.
Our
company currently has three classes of limited liability company interests - the common shares, the series A senior convertible
preferred shares and the allocation shares. All of our allocation shares have been and will continue to be held by our manager.
See “Description of Securities” for more information about our shares.
On
March 3, 2017, our newly formed wholly-owned subsidiary 1847 Neese acquired all of the issued and outstanding capital stock of
Neese for an aggregate purchase price of $6,655,000, consisting of: (i) $2,225,000 in cash, subject to certain adjustments; (ii)
450 shares of the common stock of 1847 Neese, valued by the parties at $1,530,000, constituting 45% of its capital stock; (iii)
the issuance of a vesting promissory note in the principal amount of $1,875,000 (which was determined to have a fair value of
$395,634) due June 30, 2020; and (iv) the issuance of a short-term promissory note in the principal amount of $1,025,000 due March
3, 2018. As a result of this transaction, we own 55% of 1847 Neese, with the remaining 45% held by third parties. 1847 Neese was
formed in the State of Delaware on October 11, 2016 and Neese was formed in the State of Iowa in January 1993.
On
April 5, 2019, our newly formed indirect wholly-owned subsidiary Goedeker acquired substantially all of the assets of Goedeker
Television for an aggregate purchase price of $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 additional
consideration, our newly formed wholly-owned subsidiary 1847 Holdco issued to each of the stockholders of Goedeker Television
a number of shares of its common stock equal to a 11.25% non-dilutable interest in all of the issued and outstanding stock of
1847 Holdco as of the closing date. Following this transaction, we owned 70% of 1847 Holdco, with the remaining 30% held by third
parties. 1847 Holdco was formed in the State of Delaware on March 20, 2019 and Goedeker was formed in the State of Delaware on
January 10, 2019.
On
August 4, 2020, 1847 Holdco distributed all of its shares of Goedeker to its stockholders in accordance with their pro rata ownership
in 1847 Holdco, after which time 1847 Holdco was dissolved. Following this transaction, and the closing of Goedeker’s IPO
on August 4, 2020, we owned approximately 54.41% of Goedeker.
On
October 23, 2020, we distributed all of the shares of Goedeker that we held to our shareholders. As a result of this distribution,
Goedeker is no longer a subsidiary of our company.
On
May 28, 2020, our newly formed wholly-owned subsidiary 1847 Asien acquired all of the issued and outstanding capital stock of
Asien’s for an aggregate purchase price of $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 our company, having a mutually agreed upon value of $830,000,
which may be repurchased by 1847 Asien for a period of one year following the closing at a purchase price of $2.50 per share.
These shares were repurchased on July 29, 2020. As a result of this transaction, we own 95% of 1847 Asien, with the remaining
5% held by a third party. 1847 Asien was formed in the State of Delaware on March 24, 2020 and Asien’s was formed in the
State of California on February 6, 2004.
On
September 30, 2020, our newly formed wholly-owned subsidiary 1847 Cabinet acquired all of the issued and outstanding capital stock
of Kyle’s for an aggregate purchase price of $6,650,000 (subject to adjustment) consisting of: (i) $4,200,000 in cash, (ii)
an 8% contingent subordinated note in the aggregate principal amount of $1,050,000, and (iii) 700,000 common shares of our company,
having a mutually agreed upon value of $1,400,000. As a result of this transaction, we own 92.5% of 1847 Cabinet, with the remaining
7.5% held by a third party. 1847 Cabinet was formed in the State of Delaware on August 21, 2020 and Kyle’s was formed in
the State of Idaho on May 7, 1991.
The
following chart depicts our current organizational structure:
See
“Our Manager” for more details regarding the ownership of our manager.
OUR
MANAGER
Overview
of Our Manager
Our
manager, 1847 Partners LLC, is a Delaware limited liability company. It has two classes of limited liability interests known as
Class A interests and Class B interests. The Class A interests, which give the holder the right to the profit allocation received
by our manager as a result of holding our allocation shares, are owned in their entirety by 1847 Partners Class A Member LLC;
and the Class B interests, which give the holder the right to all other profits or losses of our manager, including the management
fee payable to our manager by us, are owned in their entirety by 1847 Partners Class B Member LLC. 1847 Partners Class A Member
LLC is owned 52% by Ellery W. Roberts, our Chief Executive Officer, 38% by 1847 Founders Capital LLC, which is owned by Edward
J. Tobin, and approximately 9% by Louis A. Bevilacqua, the managing member of Bevilacqua PLLC, outside counsel to our company,
with the balance being owned by a former contractor to such law firm. 1847 Partners Class B Member LLC is owned 54% by Ellery
W. Roberts, 36% by 1847 Founders Capital LLC and 10% by Louis A. Bevilacqua. Mr. Roberts is also the sole manager of both entities.
In the future, Mr. Roberts may cause 1847 Partners Class A Member LLC or 1847 Partners Class B Member LLC to issue units to employees
of our manager to incentivize those employees by providing them with the ability to participate in our manager’s incentive
allocation and management fee.
Key
Personnel of Our Manager
The
key personnel of our manager are Ellery W. Roberts, our Chief Executive Officer, and Edward J. Tobin. Please see “Management”
for a description of the business experience of these individuals. Each of these individuals will be compensated entirely by our
manager from the management fees it receives. As employees of our manager, these individuals devote a substantial majority of
their time to the affairs of our company.
Collectively,
the management team of our manager has more than 60 years of combined experience in acquiring and managing small businesses and
has overseen the acquisitions and financing of over 50 businesses.
Acquisition
and Disposition Opportunities
Our
manager has exclusive responsibility for reviewing and making recommendations to our board of directors with respect to acquisition
and disposition opportunities. If our manager does not originate an opportunity, our board of directors will seek a recommendation
from our manager prior to making a decision concerning such opportunity. In the case of any acquisition or disposition opportunity
that involves an affiliate of our manager or us, our nominating and corporate governance committee, or, if we do not have such
a committee, the independent members of our board of directors, will be required to authorize and approve such transaction.
Our
manager will review each acquisition or disposition opportunity presented to our manager to determine if such opportunity satisfies
the acquisition and disposition criteria established by our board of directors. The acquisition and disposition criteria provide
that our manager will review each acquisition opportunity presented to it to determine if such opportunity satisfies our company’s
acquisition and disposition criteria, and if it is determined, in our manager’s sole discretion, that an opportunity satisfies
the criteria, our manager will refer the opportunity to our board of directors for its authorization and approval prior to the
consummation of any such opportunity.
Our
investment criteria include the following:
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Revenue
of at least $5.0 million
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Current
year EBITDA/Pre-tax Income of at least $1.5 million with a history of positive cash flow
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Clearly
identifiable “blueprint” for growth with the potential for break-out returns
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Well-positioned
companies within our core industry categories (consumer-driven, business-to-business,
light manufacturing and specialty finance) with strong returns on capital
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Opportunities
wherein building management team, infrastructure and access to capital are the primary
drivers of creating value
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Headquartered
in North America
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We
believe we will be able to acquire small businesses for multiples ranging from three to six times EBITDA. With respect to investment
opportunities that do not fall within the criteria set forth above, our manager must first present such opportunities to our board
of directors. Our board of directors and our manager will review these criteria from time to time and our board of directors may
make changes and modifications to such criteria as our company makes additional acquisitions and dispositions.
If
an acquisition opportunity is referred to our board of directors by our manager and our board of directors determines not to timely
pursue such opportunity in whole or in part, any part of such opportunity that our company does not promptly pursue may be pursued
by our manager or may be referred by our manager to any person, including affiliates of our manager. In this case, our manager
is likely to devote a portion of its time to the oversight of this opportunity, including the management of a business that we
do not own.
If
there is a disposition, our manager must use its commercially reasonable efforts to manage a process through which the value of
such disposition can be maximized, taking into consideration non-financial factors such as those relating to competition, strategic
partnerships, potential favorable or adverse effects on us, our businesses, or our investments or any similar factors that may
reasonably perceived as having a short- or long-term impact on our business, results of operations and financial condition.
Management
Services Agreement
The
management services agreement sets forth the services performed by our manager. Our manager performs such services subject to
the oversight and supervision of our board of directors.
In
general, our manager performs those services for our company that would be typically performed by the executive officers of a
company. Specifically, our manager performs the following services, which we refer to as the management services, pursuant to
the management services agreement:
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manage
the day-to-day business and operations of our company, including our liquidity and capital
resources and compliance with applicable law;
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identify,
evaluate, manage, perform due diligence on, negotiate and oversee acquisitions of target
businesses and any other investments;
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evaluate
and oversee the financial and operational performance of our businesses, including monitoring
the business and operations of such businesses, and the financial performance of any
other investments that we make;
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provide,
on our behalf, managerial assistance to our businesses;
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evaluate,
manage, negotiate and oversee dispositions of all or any part of any of our property,
assets or investments, including disposition of all or any part of our businesses;
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provide
or second, as necessary, employees of our manager to serve as executive officers or other
employees of our company or as members of our board of directors; and
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perform
any other services that would be customarily performed by executive officers and employees
of a publicly listed or quoted company.
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Our
company and our manager have the right at any time during the term of the management services agreement to change the services
provided by our manager. In performing management services, our manager has all necessary power and authority to perform, or cause
to be performed, such services on behalf of our company, and, in this respect, our manager is the only provider of management
services to our company. Nonetheless, our manager is required to obtain authorization and approval of our board of directors in
all circumstances where executive officers of a corporation typically would be required to obtain authorization and approval of
a corporation’s board of directors, including, for example, with respect to the consummation of an acquisition of a target
business, the issuance of securities or the entry into credit arrangements.
While
our Chief Executive Officer, Mr. Ellery W. Roberts, intends to devote substantially all of his time to the affairs of our company,
neither Mr. Roberts, nor our manager, is expressly prohibited from investing in or managing other entities. In this regard, the
management services agreement does not require our manager and its affiliates to provide management services to our company exclusively.
Secondment
of Our Executive Officers
In
accordance with the terms of the management services agreement, our manager may second to our company our executive officers,
which means that these individuals will be assigned by our manager to work for us during the term of the management services agreement.
Our board of directors has appointed Mr. Roberts as an executive officer of our company. Although Mr. Roberts is an employee of
our manager, he will report directly, and be subject, to our board of directors. In this respect, our board of directors may,
after due consultation with our manager, at any time request that our manager replace any individual seconded to our company and
our manager will, as promptly as practicable, replace any such individual; however, our Chief Executive Officer, Mr. Roberts,
controls our manager, which may make it difficult for our board of directors to completely sever ties with Mr. Roberts. Our manager
and our board of directors may agree from time to time that our manager will second to our company one or more additional individuals
to serve on behalf of our company, upon such terms as our manager and our board of directors may mutually agree.
Indemnification
by our Company
Our
company has agreed to indemnify and hold harmless our manager and its employees and representatives, including any individuals
seconded to our company, from and against all losses, claims and liabilities incurred by our manager in connection with, relating
to or arising out of the performance of any management services. However, our company will not be obligated to indemnify or hold
harmless our manager for any losses, claims and liabilities incurred by our manager in connection with, relating to or arising
out of (i) a breach by our manager or its employees or its representatives of the management services agreement, (ii) the gross
negligence, willful misconduct, bad faith or reckless disregard of our manager or its employees or representatives in the performance
of any of its obligations under the management services agreement, or (iii) fraudulent or dishonest acts of our manager or its
employees or representatives with respect to our company or any of its businesses.
Termination
of Management Services Agreement
Our
board of directors may terminate the management services agreement and our manager’s appointment if, at any time:
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a
majority of our board of directors vote to terminate the management services agreement,
and the holders of at least a majority of the outstanding shares (other than shares beneficially
owned by our manager) then entitled to vote also vote to terminate the management services
agreement;
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neither
Mr. Roberts nor his designated successor controls our manager, which change of control
occurs without the prior written consent of our board of directors;
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there
is a finding by a court of competent jurisdiction in a final, non-appealable order that
(i) our manager materially breached the terms of the management services agreement and
such breach continued unremedied for 60 days after our manager receives written notice
from our company setting forth the terms of such breach, or (ii) our manager (x) acted
with gross negligence, willful misconduct, bad faith or reckless disregard in performing
its duties and obligations under the management services agreement, or (y) engaged in
fraudulent or dishonest acts in connection with the business or operations of our company;
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our
manager has been convicted of a felony under federal or state law, our board of directors
finds that our manager is demonstrably and materially incapable of performing its duties
and obligations under the management services agreement, and the holders of at least
66 2/3% of the then outstanding shares, other than shares beneficially owned by our manager,
vote to terminate the management services agreement; or
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there
is a finding by a court of competent jurisdiction that our manager has (i) engaged in
fraudulent or dishonest acts in connection with the business or operations of our company
or (ii) acted with gross negligence, willful misconduct, bad faith or reckless disregard
in performing its duties and obligations under the management services agreement, and
the holders of at least 66 2/3% of the then outstanding shares (other than shares beneficially
owned by our manager) vote to terminate the management services agreement.
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In
addition, our manager may resign and terminate the management services agreement at any time upon 120 days prior written notice
to our company, and this right is not contingent upon the finding of a replacement manager. However, if our manager resigns, until
the date on which the resignation becomes effective, it will, upon request of our board of directors, use reasonable efforts to
assist our board of directors to find a replacement manager at no cost and expense to our company.
Upon
the termination of the management services agreement, seconded officers, employees, representatives and delegates of our manager
and its affiliates who are performing the services that are the subject of the management services agreement will resign their
respective position with our company and cease to work at the date of such termination or at any other time as determined by our
manager. Any director appointed by our manager may continue serving on our board of directors, subject to the terms of the operating
agreement.
If
we terminate the management services agreement, our company and its businesses have agreed to cease using the term “1847”,
including any trademarks based on the name of our company that may be licensed to them by our manager, under the licensing provisions
of the management services agreement, entirely in their businesses and operations within 180 days of such termination. Such licensing
provisions of the management services agreement would require our company and its businesses to change their names to remove any
reference to the term “1847” or any reference to trademarks licensed to them by our manager. In this respect, our
right to use the term “1847” and related intellectual property is subject to licensing provisions between our manager,
on the one hand, and our company and our businesses, on the other hand.
Except
with respect to the termination fee payable to our manager due to a termination of the management services agreement based solely
on a vote of our board of directors and our shareholders, no other termination fee is payable upon termination of the management
services agreement for any other reason. See “—Our Manager as a Service Provider—Termination Fee” for
more information about the termination fee payable upon termination of the management services agreement.
While
termination of the management services agreement will not affect any terms and conditions, including those relating to any payment
obligations, that exist under any offsetting management services agreements or transaction services agreements, such agreements
will be terminable by our businesses upon 60 days prior written notice and there will be no termination or other similar fees
due upon such termination. Notwithstanding termination of the management services agreement, our manager will maintain its rights
with respect to the allocation shares it then owns, including its rights under the supplemental put provision of our operating
agreement. See “—Our Manager as an Equity Holder—Supplemental Put Provision” for more information on our
manager’s put right with respect to the allocation shares.
Our
Relationship with Our Manager, Manager Fees and Manager Profit Allocation
Our
relationship with our manager is based on our manager having two distinct roles: first, as a service provider to us and, second,
as an equity holder of the allocation shares.
As
a service provider, our manager performs a variety of services for us, which entitles it to receive a management fee. As holder
of our company’s allocation shares, our manager has the right to a preferred distribution in the form of a profit allocation
upon the occurrence of certain events. Our manager paid $1,000 for the allocation shares. In addition, our manager will have the
right to cause our company to purchase the allocation shares then owned by our manager upon termination of the management services
agreement.
These
relationships with our manager are governed principally by the following agreements:
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the
management services agreements relating to the services our manager performs for us and
our businesses; and
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our
company’s operating agreement relating to our manager’s rights with respect
to the allocation shares it owns and which contains the supplemental put provision relating
to our manager’s right to cause our company to purchase the allocation shares it
owns.
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We
also expect that our manager will enter into offsetting management services agreements and transaction services agreements with
our businesses directly. These agreements, and some of the material terms relating thereto, are discussed in more detail below.
The management fee, profit allocation and put price under the supplemental put provision will be payment obligations of our company
and, as a result, will be paid, along with other company obligations, prior to the payment of distributions to common shareholders.
The
following table provides a simplified description of the fees and profit allocation rights held by our manager. Further detail
is provided in the following subsections.
Description
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Fee
Calculation
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Payment
Term
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Management Fees
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Determined by management services agreement
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0.5% of adjusted net assets (2.0% annually)
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Quarterly
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Determined by offsetting
management services agreement
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Payment of fees
by our subsidiary businesses that result in a dollar for dollar reduction of manager fees paid by us to our manager such that
our manager cannot receive duplicate fees from both us and our subsidiary
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Quarterly
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Termination fee
– determined by management services agreement
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Accumulated management
fee paid in the preceding 4 fiscal quarters multiplied by 2. Paid only upon termination by our board and a majority in interest
of our shareholders
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Determined by management services agreement
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Reimbursement of
manager’s costs and expenses in providing services to us, but not including: (1) costs of overhead; (2) due diligence
and other costs for potential acquisitions our board of directors does not approve pursuing or that are required by acquisition
target to be reimbursed under a transaction services agreement; and (3) certain seconded officers and employees
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Ongoing
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Transaction Services
Fees
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Acquisition services
of target businesses or disposition of subsidiaries – fees determined by transaction services agreements
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2.0% of aggregate
purchase price up to $50 million; plus 1.5% of aggregate purchase price in excess of $50 million and up to and equal to $100
million; plus 1.0% of aggregate purchase price in excess of $100 million
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Per transaction
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Manager profit allocation
determined by our operating agreement
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20%
of certain profits and gains on a sale of subsidiary after clearance of the 8% annual hurdle rate 8% hurdle rate determined
for any subsidiary by multiplying the subsidiary’s average quarterly share of our assets by an 8% annualized rate
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Sale
of a material amount of capital stock or assets of one of our businesses or subsidiaries.
Holding
event: at the option of our manager, for the 30 day period following the 5th anniversary of an acquired business (but
only based on historical profits of the business)
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Our
Manager as a Service Provider
Management
Fee
Our
company will pay our manager a quarterly management fee equal to 0.5% (2.0% annualized) of its adjusted net assets, as discussed
in more detail below (which we refer to as the parent management fee).
Subject
to any adjustments discussed below, for performing management services under the management services agreement during any fiscal
quarter, our company will pay our manager a management fee with respect to such fiscal quarter. The management fee to be paid
with respect to any fiscal quarter will be calculated as of the last day of such fiscal quarter, which we refer to as the calculation
date. The management fee will be calculated by an administrator, which will be our manager so long as the management services
agreement is in effect. The amount of any management fee payable by our company as of any calculation date with respect to any
fiscal quarter will be (i) reduced by the aggregate amount of any offsetting management fees, if any, received by our manager
from any of our businesses with respect to such fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid (or
under-paid) management fees received by (or owed to) our manager as of such calculation date, and (iii) increased by the amount
of any outstanding accrued and unpaid management fees.
As
an obligation of our company, the management fee will be paid prior to the payment of distributions to our common shareholders.
If we do not have sufficient liquid assets to pay the management fee when due, we may be required to liquidate assets or incur
debt in order to pay the management fee.
Offsetting
Management Services Agreements
Pursuant
to the management services agreement, we have agreed that our manager may, at any time, enter into offsetting management services
agreements with our businesses pursuant to which our manager may perform services that may or may not be similar to management
services. Any fees to be paid by one of our businesses pursuant to such agreements are referred to as offsetting management fees
and will offset, on a dollar-for-dollar basis, the management fee otherwise due and payable by our company under the management
services agreement with respect to a fiscal quarter. The management services agreement provides that the aggregate amount of offsetting
management fees to be paid to our manager with respect to any fiscal quarter shall not exceed the management fee to be paid to
our manager with respect to such fiscal quarter.
Our
manager entered into offsetting management services agreements with 1847 Neese, Goedeker, 1847 Asien and 1847 Cabinet and may
enter into offsetting management services agreements with our future subsidiaries, which agreements would be in the form prescribed
by our management services agreement.
The
services that our manager will provide to future subsidiaries under the offsetting management services agreements will include:
conducting general and administrative supervision and oversight of the subsidiary’s day-to-day business and operations,
including, but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development
of administrative policies and procedures, establishment and management of banking services, managing and arranging for the maintaining
of liability insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any
additional licenses and permits that become necessary, participation in risk management policies and procedures; and overseeing
and consulting with respect to our business and operational strategies, the implementation of such strategies and the evaluation
of such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions
or dispositions and product or service lines. If our manager and the subsidiary do not enter into an offsetting management services
agreement, our manager will provide these services for our subsidiaries under our management services agreement.
The
offsetting management fee paid to our manager for providing management services to a future subsidiary will vary.
1847
Neese entered into an offsetting management services agreement with our manager on March 3, 2017, Goedeker entered into an offsetting
management services agreement with our manager on April 5, 2019, 1847 Asien entered into an offsetting management services agreement
with our manager on May 28, 2020 and 1847 Cabinet entered into an offsetting management services agreement with our manager on
August 21, 2020. Pursuant to the offsetting management services agreements, 1847 Neese appointed our manager to provide certain
services to it for a quarterly management fee equal to $62,500, Goedeker appointed our manager to provide certain services to
it for a quarterly management fee equal to $62,500, 1847 Asien appointed our 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)
and 1847 Cabinet appointed our 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, 1847 Asien or 1847 Cabinet, together with all other management fees paid or to
be paid by all other subsidiaries of our company to our manager, in each case, with respect to any fiscal year exceeds, or is
expected to exceed, 9.5% of our gross income with respect to such fiscal year, then the management fee to be paid by 1847 Neese,
Goedeker, 1847 Asien or 1847 Cabinet 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 our manager by all of our subsidiaries, until the aggregate amount
of the management fee paid or to be paid by 1847 Neese, Goedeker, 1847 Asien or 1847 Cabinet, together with all other management
fees paid or to be paid by all other subsidiaries to our manager, in each case, with respect to such fiscal year, does not exceed
9.5% of our 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, 1847 Asien or 1847 Cabinet, together with all other management fees paid or to be paid by all other
subsidiaries to our 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, 1847 Asien or 1847 Cabinet
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, 1847 Asien or 1847 Cabinet, together with all other management fees paid or to be paid by all other
subsidiaries of to our manager, in each case, with respect to such fiscal quarter, does not exceed the parent management fee calculated
and payable with respect to such fiscal quarter.
Notwithstanding
the foregoing, under terms of a term loan from Home State Bank, no fees may be paid to our manager under the 1847 Neese offsetting
management services agreement without permission of the bank, which our does not expect to be granted within the forthcoming year.
Each
of 1847 Neese, Goedeker, 1847 Asien or 1847 Cabinet shall also reimburse our 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
our manager or its affiliates on behalf of 1847 Neese, Goedeker, 1847 Asien or 1847 Cabinet in connection with performing services
under the offsetting management services agreements.
The
services provided by our manager include: conducting general and administrative supervision and oversight of day-to-day business
and operations, including, but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits,
development of administrative policies and procedures, establishment and management of banking services, managing and arranging
for the maintaining of liability insurance, arranging for equipment rental, maintenance of all necessary permits and licenses,
acquisition of any additional licenses and permits that become necessary, participation in risk management policies and procedures;
and overseeing and consulting with respect to business and operational strategies, the implementation of such strategies and the
evaluation of such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs,
acquisitions or dispositions and product or service lines.
Example
of Calculation of Management Fee with Adjustment for Offsetting Management Fees
In
order to better understand how the management fee is calculated, we are providing the following example:
Quarterly
management fee:
|
|
(in
thousands)
|
|
1
|
|
Consolidated
total assets
|
|
$
|
100,000
|
|
2
|
|
Consolidated
accumulation amortization of intangibles
|
|
|
5,000
|
|
3
|
|
Total
cash and cash equivalents
|
|
|
5,000
|
|
4
|
|
Adjusted
total liabilities
|
|
|
(10,000
|
)
|
5
|
|
Adjusted
net assets (Line 1 + Line 2 – Line 3 – Line 4)
|
|
|
90,000
|
|
6
|
|
Multiplied
by quarterly rate
|
|
|
0.5
|
%
|
7
|
|
Quarterly
management fee
|
|
$
|
450
|
|
|
|
|
|
|
|
|
Offsetting
management fees:
|
|
|
|
|
8
|
|
Acquired
company A offsetting management fees
|
|
$
|
(100
|
)
|
9
|
|
Acquired
company B offsetting management fees
|
|
|
(100
|
)
|
10
|
|
Acquired
company C offsetting management fees
|
|
|
(100
|
)
|
11
|
|
Acquired
company D offsetting management fees
|
|
|
(100
|
)
|
12
|
|
Total
offsetting management fees (Line 8 + Line 9 – Line 10 – Line 11)
|
|
|
(400
|
)
|
13
|
|
Quarterly
management fee payable by Company (Line 7 + Line 12)
|
|
$
|
50
|
|
The
foregoing example provides hypothetical information only and does not intend to reflect actual or expected management fee amounts.
For
purposes of the calculation of the management fee:
|
●
|
“Adjusted
net assets” will be equal to, with respect to our company as of any calculation
date, the sum of (i) consolidated total assets (as determined in accordance with GAAP)
of our company as of such calculation date, plus (ii) the absolute amount of consolidated
accumulated amortization of intangibles (as determined in accordance with GAAP) for our
company as of such calculation date, minus (iii) total cash and cash equivalents, minus
(iv) the absolute amount of adjusted total liabilities of our company as of such calculation
date.
|
|
●
|
“Adjusted
total liabilities” will be equal to, with respect to our company as of any calculation
date, our company’s consolidated total liabilities (as determined in accordance
with GAAP) as of such calculation date after excluding the effect of any outstanding
third party indebtedness of our company.
|
|
●
|
“Quarterly
management fee” will be equal to, as of any calculation date, the product of (i)
0.5%, multiplied by (ii) our company’s adjusted net assets as of such calculation
date; provided, however, that with respect to any fiscal quarter in which the management
services agreement is terminated, our company will pay our manager a management fee with
respect to such fiscal quarter equal to the product of (i)(x) 0.5%, multiplied by (y)
our company’s adjusted net assets as of such calculation date, multiplied by (ii)
a fraction, the numerator of which is the number of days from and including the first
day of such fiscal quarter to but excluding the date upon which the management services
agreement is terminated and the denominator of which is the number of days in such fiscal
quarter.
|
|
●
|
“Total
offsetting management fees” will be equal to, as of any calculation date, fees
paid to our manager by the businesses that we acquire in the future under separate offsetting
management services agreements.
|
Transaction
Services Agreements
Pursuant
to the management services agreement, we have agreed that our manager may, at any time, enter into transaction services agreements
with any of our businesses relating to the performance by our manager of certain transaction-related services in connection with
the acquisitions of target businesses by our company or its businesses or dispositions of our company’s or its businesses’
property or assets. These services may include those customarily performed by a third-party investment banking firm or similar
financial advisor, which may or may not be similar to management services, in connection with the acquisition of target businesses
by us or our subsidiaries or disposition of subsidiaries or any of our property or assets or those of our subsidiaries. In connection
with providing transaction services, our manager will generally receive a fee equal to the sum of (i) 2.0% of the aggregate purchase
price of the target business up to and equal to $50 million, plus (ii) 1.5% of the aggregate purchase price of the target business
in excess of $50 million and up to and equal to $100 million, plus (iii) 1.0% of the aggregate purchase price over $100 million,
subject to annual review by our board of directors. The purchase price of a target business shall be defined as the aggregate
amount of consideration, including cash and the value of any shares issued by us on the date of acquisition, paid for the equity
interests of such target business plus the aggregate principal amount of any debt assumed by us of the target business on the
date of acquisition or any similar formulation. The other terms and conditions relating to the performance of transaction services
will be established in accordance with market practice.
Our
manager may enter into transaction services agreements with our subsidiaries and future subsidiaries, which agreements would be
in the form prescribed by our management services agreement.
The
services that our manager will provide to our subsidiaries and future subsidiaries under the transaction services agreements will
include the following services that would be provided in connection with a specific transaction identified at the time that the
transaction services agreement is entered into: reviewing, evaluating and otherwise familiarizing itself and its affiliates with
the business, operations, properties, financial condition and prospects of the future subsidiary and its target acquisition and
preparing documentation describing the future subsidiary’s operations, management, historical financial results, projected
financial results and any other relevant matters and presenting such documentation and making recommendations with respect thereto
to certain of our manager’s affiliates.
Any
fees received by our manager pursuant to such a transaction services agreement will be in addition to the management fee payable
by our company pursuant to the management services agreement and will not offset the payment of such management fee. A transaction
services agreement with any of our businesses may provide for the reimbursement of costs and expenses incurred by our manager
in connection with the acquisition of such businesses.
Transaction
services agreements will be reviewed, authorized and approved by our company’s board of directors on an annual basis.
Reimbursement
of Expenses
Our
company will be responsible for paying costs and expenses relating to its business and operations. Our company agreed to reimburse
our manager during the term of the management services agreement for all costs and expenses of our company that are incurred by
our manager or its affiliates on behalf of our company, including any out-of-pocket costs and expenses incurred in connection
with the performance of services under the management services agreement, and all costs and expenses the reimbursement of which
are specifically approved by our company’s board of directors.
Our
company will not be obligated or responsible for reimbursing or otherwise paying for any costs or expenses relating to our manager’s
overhead or any other costs and expenses relating to our manager’s conduct of its business and operations. Also, our company
will not be obligated or responsible for reimbursing our manager for costs and expenses incurred by our manager in the identification,
evaluation, management, performance of due diligence on, negotiation and oversight of potential acquisitions of new businesses
for which our company (or our manager on behalf of our company) fails to submit an indication of interest or letter of intent
to pursue such acquisition, including costs and expenses relating to travel, marketing and attendance of industry events and retention
of outside service providers relating thereto. In addition, our company will not be obligated or responsible for reimbursing our
manager for costs and expenses incurred by our manager in connection with the identification, evaluation, management, performance
of due diligence on, negotiating and oversight of an acquisition by our company if such acquisition is actually consummated and
the business so acquired entered into a transaction services agreement with our manager providing for the reimbursement of such
costs and expenses by such business. In this respect, the costs and expenses associated with the pursuit of add-on acquisitions
for our company may be reimbursed by any businesses so acquired pursuant to a transaction services agreement.
All
reimbursements will be reviewed and, in certain circumstances, approved by our company’s board of directors on an annual
basis in connection with the preparation of year-end financial statements.
Termination
Fee
We
will pay our manager a termination fee upon termination of the management services agreement if such termination is based solely
on a vote of our company’s board of directors and our shareholders; no other termination fee will be payable to our manager
in connection with the termination of the management services agreement for any other reason. The termination fee that is payable
to our manager will be equal to the product of (i) two (2) multiplied by (ii) the sum of the amount of the quarterly management
fees calculated with respect to the four fiscal quarters immediately preceding the termination date of the management services
agreement. The termination fee will be payable in eight equal quarterly installments, with the first such installment being paid
on or within five (5) business days of the last day of the fiscal quarter in which the management services agreement was terminated
and each subsequent installment being paid on or within five (5) business days of the last day of each subsequent fiscal quarter,
until such time as the termination fee is paid in full to our manager.
Our
Manager as an Equity Holder
Manager’s
Profit Allocation
Our
manager owns 100% of the allocation shares of our company, which generally will entitle our manager to receive a 20% profit allocation
as a form of preferred distribution. Upon the sale of a company subsidiary, our manager will be paid a profit allocation if the
sum of (i) the excess of the gain on the sale of such subsidiary over a high water mark plus (ii) the subsidiary’s net income
since its acquisition by our company exceeds the 8% hurdle rate. The 8% hurdle rate is the product of (i) a 2% rate per quarter,
multiplied by (ii) the number of quarters such subsidiary was held by our company, multiplied by (iii) the subsidiary’s
average share (determined based on gross assets, generally) of our consolidated net equity (determined according to GAAP with
certain adjustments). In certain circumstances, after a subsidiary has been held for at least 5 years, our manager may also trigger
a profit allocation with respect to such subsidiary (determined based solely on the subsidiary’s net income since its acquisition).
The calculation of the profit allocation and the rights of our manager, as the holder of the allocation shares, are governed by
the operating agreement.
Our
board will have the opportunity to review and approve the calculation of manager’s profit allocation when it becomes due
and payable. Our manager will not receive a profit allocation on an annual basis. Instead, our manager will be paid a profit allocation
only upon the occurrence of one of the following events, which we refer to collectively as the trigger events:
|
●
|
the
sale of a material amount, as determined by our manager and reasonably consented to by
a majority of our company’s board of directors, of the capital stock or assets
of one of our businesses or a subsidiary of one of our businesses, which event we refer
to as a sale event; or
|
|
●
|
at
the option of our manager, for the 30-day period following the fifth anniversary of the
date upon which we acquired a controlling interest in a business, which event we refer
to as a holding event. If our manager elects to forego declaring a holding event with
respect to such business during such period, then our manager may only declare a holding
event with respect to such business during the 30-day period following each anniversary
of such fifth anniversary date with respect to such business. Once declared, our manager
may only declare another holding event with respect to a business following the fifth
anniversary of the calculation date with respect to a previously declared holding event.
|
We
believe this payment timing, rather than a method that provides for annual allocation payments, more accurately reflects the long-term
performance of each of our businesses and is consistent with our intent to hold, manage and grow our businesses over the long
term. We refer generally to the obligation to make this payment to our manager as the “profit allocation” and, specifically,
to the amount of any particular profit allocation as the “manager’s profit allocation.”
Definitions
used in, and an example of the calculation of profit allocation, are set forth in more detail below.
The
amount of our manager’s profit allocation will be based on the extent to which the “total profit allocation amount”
(as defined below) with respect to any business, as of the last day of any fiscal quarter in which a trigger event occurs, which
date we refer to as the “calculation date”, exceeds the relevant hurdle amounts (as described below) with respect
to such business, as of such calculation date. Our manager’s profit allocation will be calculated by an administrator, which
will be our manager so long as the management services agreement is in effect, and such calculation will be subject to a review
and approval process by our company’s board of directors. For this purpose, “total profit allocation amount”
will be equal to, with respect to any business as of any calculation date, the sum of:
|
●
|
the
contribution-based profit (as described below) of such business as of such calculation
date, which will be calculated upon the occurrence of any trigger event with respect
to such business; plus
|
|
●
|
the
excess of the cumulative gains and losses of our company (as described below) over the
high water mark (as described below) as of such calculation date, which will only be
calculated upon the occurrence of a sale event with respect to such business, and not
on a holding event (we generally expect this component to be the most significant component
in calculating total profit allocation amount).
|
Specifically,
manager’s profit allocation will be calculated and paid as follows:
|
●
|
manager’s
profit allocation will not be paid with respect to a trigger event relating to any business
if the total profit allocation amount, as of any calculation date, with respect to such
business does not exceed such business’ level 1 hurdle amount (based on an 8% annualized
hurdle rate, as described below), as of such calculation date; and
|
|
●
|
manager’s
profit allocation will be paid with respect to a trigger event relating to any business
if the total profit allocation amount, as of any calculation date, with respect to such
business exceeds such business’ level 1 hurdle amount, as of such calculation date.
Our manager’s profit allocation to be paid with respect to such calculation date
will be equal to the sum of the following:
|
|
○
|
100%
of such business’ total profit allocation amount, as of such calculation date,
with respect to that portion of the total profit allocation amount that exceeds such
business’ level 1 hurdle amount (but is less than or equal to such business’
level 2 hurdle amount (which is based on a 10% annualized hurdle rate, as described below),
in each case, as of such calculation date. We refer to this portion of the total profit
allocation amount as the “catch-up.” The “catch-up” is intended
to provide our manager with an overall profit allocation of 20% of the business’
total profit allocation amount until such business’ level 2 hurdle amount has been
reached; plus
|
|
○
|
20%
of the total profit allocation amount, as of such calculation date, that exceeds such
business’ level 2 hurdle amount as of such calculation date; minus
|
|
○
|
the
high water mark allocation, if any, as of such calculation date. The effect of deducting
the high water mark allocation is to take into account profit allocations our manager
has already received in respect of past gains attributable to previous sale events.
|
The
administrator will calculate our manager’s profit allocation on or promptly following the relevant calculation date, subject
to a “true-up” calculation upon availability of audited or unaudited consolidated financial statements, as the case
may be, of our company to the extent not available on such calculation date. Any adjustment necessitated by the true-up calculation
will be made in connection with the next calculation of manager’s profit allocation. Because of the length of time that
may pass between trigger events, there may be a significant delay in our company’s ability to realize the benefit, if any,
of a true-up of our manager’s profit allocation.
Once
calculated, the administrator will submit the calculation of our manager’s profit allocation, as adjusted pursuant to any
true-up, to our company’s board of directors for its review and approval. The board of directors will have ten business
days to review and approve the calculation, which approval shall be automatic absent disapproval by the board of directors. Our
manager’s profit allocation will be paid ten business days after such approval.
If
the board of directors disapproves of the administrator’s calculation of manager’s profit allocation, the calculation
and payment of manager’s profit allocation will be subject to a dispute resolution process, which may result in manager’s
profit allocation being determined, at our company’s cost and expense, by two independent accounting firms. Any determination
by such independent accounting firms will be conclusive and binding on our company and our manager.
We
will also pay a tax distribution to our manager if our manager is allocated taxable income by our company but does not realize
distributions from our company at least equal to the taxes payable by our manager resulting from allocations of taxable income.
Any such tax distributions will be paid in a similar manner as profit allocations are paid.
For
any fiscal quarter in which a trigger event occurs with respect to more than one business, the calculation of our manager’s
profit allocation, including the components thereof, will be made with respect to each business in the order in which controlling
interests in such businesses were acquired or obtained by our company and the resulting amounts shall be aggregated to determine
the total amount of manager’s profit allocation. If controlling interests in two or more businesses were acquired at the
same time and such businesses give rise to a calculation of manager’s profit allocation during the same fiscal quarter,
then manager’s profit allocation will be further calculated separately for each such business in the order in which such
businesses were sold.
As
obligations of our company, profit allocations and tax distributions will be paid prior to the payment of distributions to our
shareholders. If we do not have sufficient liquid assets to pay the profit allocations or tax distributions when due, we may be
required to liquidate assets or incur debt in order to pay such profit allocation. Our manager will have the right to elect to
defer the payment of our manager’s profit allocation due on any payment date. Once deferred, our manager may demand payment
thereof upon 20 business days’ prior written notice.
Termination
of the management services agreement, by any means, will not affect our manager’s rights with respect to the allocation
shares that it owns, including its right to receive profit allocations, unless our manager exercises its put right to sell such
allocation shares to our company.
Example
of Calculation of Manager’s Profit Allocation
Our
manager will receive a profit allocation at the end of the fiscal quarter in which a trigger event occurs, as follows (all dollar
amounts are in millions):
Assumptions
Year
1:
Acquisition
of Company A
Acquisition
of Company B
Year
4
Company
A (or assets thereof) sold for $25 capital gain (as defined below) over its net book value of assets at time of sale, which is
a qualifying trigger event
Company
A’s average allocated share of our consolidated net equity over its ownership is $50
Company
A’s holding period in quarters is 12
Company
A’s contribution-based profit since acquisition is $5
Year
6:
Company
B’s contribution-based profit since acquisition is $7
Company
B’s average allocated share of our consolidated net equity over its ownership is $25
Company
B’s holding period in quarters is 20
Company
B’s cumulative gains and losses are $20
Manager
elects to have holding period measured for purposes of profit allocation for Company B
Profit
Allocation Calculation:
|
|
Year
4
A,
due to
sale
|
|
Year
6
B,
due to
5
year hold
|
|
1
|
Contribution-based
profit since acquisition for respective subsidiary
|
|
$
|
5
|
|
$
|
7
|
|
2
|
Gain/ Loss on sale
of company
|
|
|
25
|
|
|
0
|
|
3
|
Cumulative gains
and losses
|
|
|
25
|
|
|
20
|
|
4
|
High water mark
prior to transaction
|
|
|
0
|
|
|
20
|
|
5
|
Total Profit Allocation
Amount (Line 1 + Line 3)
|
|
|
30
|
|
|
27
|
|
6
|
Business’
holding period in quarters since ownership or last measurement due to holding event
|
|
|
12
|
|
|
20
|
|
7
|
Business’
average allocated share of consolidated net equity
|
|
|
50
|
|
|
25
|
|
8
|
Business’
level 1 hurdle amount (2.00% * Line 6 * Line 7)
|
|
|
12
|
|
|
10
|
|
9
|
Business’
excess over level 1 hurdle amount (Line 5 – Line 8)
|
|
|
18
|
|
|
17
|
|
10
|
Business’
level 2 hurdle amount (125% * Line 8)
|
|
|
15
|
|
|
12.5
|
|
11
|
Allocated to manager
as “catch-up” (Line 10 – Line 8)
|
|
|
3
|
|
|
2.5
|
|
12
|
Excess over level
2 hurdle amount (Line 9 – Line 11)
|
|
|
15
|
|
|
14.5
|
|
13
|
Allocated to manager
from excess over level 2 hurdle amount (20% * Line 12)
|
|
|
3
|
|
|
2.9
|
|
14
|
Cumulative allocation
to manager (Line 11 + Line 13)
|
|
|
6
|
|
|
5.4
|
|
15
|
High water mark
allocation (20% * Line 4)
|
|
|
0
|
|
|
4
|
|
16
|
Manager’s
Profit Allocation for Current Period (Line 14 – Line 15,> 0)
|
|
$
|
6
|
|
$
|
1.4
|
|
For
purposes of calculating profit allocation:
|
●
|
An
entity’s “adjusted net assets” will be equal to, as of any date,
the sum of (i) such entity’s consolidated total assets (as determined in accordance
with GAAP) as of such date, plus (ii) the absolute amount of such entity’s consolidated
accumulated amortization of intangibles (as determined in accordance with GAAP) as of
such date, minus (iii) the absolute amount of such entity’s adjusted total liabilities
as of such date.
|
|
●
|
An
entity’s “adjusted total liabilities” will be equal to, as of
any date, such entity’s consolidated total liabilities (as determined in accordance
with GAAP) as of such date after excluding the effect of any outstanding third party
indebtedness of such entity.
|
|
●
|
A
business’ “allocated share of our company’s overhead”
will be equal to, with respect to any measurement period as of any calculation date,
the aggregate amount of such business’ quarterly share of our company’s overhead
for each fiscal quarter ending during such measurement period.
|
|
●
|
A
business’ “average allocated share of our consolidated equity”
will be equal to, with respect to any measurement period as of any calculation date,
the average (i.e., arithmetic mean) of a business’ quarterly allocated share of
our consolidated equity for each fiscal quarter ending during such measurement period.
|
|
●
|
“Capital
gains” (i) means, with respect to any entity, capital gains (as determined
in accordance with GAAP) that are calculated with respect to the sale of capital stock
or assets of such entity and which sale gave rise to a sale event and the calculation
of profit allocation and (ii) will be equal to the amount, adjusted for minority interests,
by which (x) the net sales price of such capital stock or assets, as the case may be,
exceeded (y) the net book value (as determined in accordance with GAAP) of such capital
stock or assets, as the case may be, at the time of such sale, as reflected on our company’s
consolidated balance sheet prepared in accordance with GAAP; provided, that such amount
shall not be less than zero.
|
|
●
|
“Capital
losses” (i) means, with respect to any entity, capital losses (as determined
in accordance with GAAP) that are calculated with respect to the sale of capital stock
or assets of such entity and which sale gave rise to a sale event and the calculation
of profit allocation and (ii) will be equal to the amount, adjusted for minority interests,
by which (x) the net book value (as determined in accordance with GAAP) of such capital
stock or assets, as the case may be, at the time of such sale, as reflected on our consolidated
balance sheet prepared in accordance with GAAP, exceeded (y) the net sales price
of such capital stock or assets, as the case may be; provided, that such absolute
amount thereof shall not be less than zero.
|
|
●
|
Our
“consolidated net equity” will be equal to, as of any date, the sum
of (i) our consolidated total assets (as determined in accordance with GAAP) as of
such date, plus (ii) the aggregate amount of asset impairments (as determined
in accordance with GAAP) that were taken relating to any businesses owned by us as of
such date, plus (iii) our consolidated accumulated amortization of intangibles
(as determined in accordance with GAAP), as of such date minus (iv) our consolidated
total liabilities (as determined in accordance with GAAP) as of such date.
|
|
●
|
A
business’ “contribution-based profits” will be equal to, for
any measurement period as of any calculation date, the sum of (i) the aggregate amount
of such business’ net income (loss) (as determined in accordance with GAAP and
as adjusted for minority interests) with respect to such measurement period (without
giving effect to (x) any capital gains or capital losses realized by such business that
arise with respect to the sale of capital stock or assets held by such business and which
sale gave rise to a sale event and the calculation of profit allocation or (y) any expense
attributable to the accrual or payment of any amount of profit allocation or any amount
arising under the supplemental put agreement, in each case, to the extent included in
the calculation of such business’ net income (loss)), plus (ii) the absolute
aggregate amount of such business’ loan expense with respect to such measurement
period, minus (iii) the absolute aggregate amount of such business’ allocated
share of our company’s overhead with respect to such measurement period.
|
|
●
|
Our
“cumulative capital gains” will be equal to, as of any calculation
date, the aggregate amount of capital gains realized by our company as of such calculation
date, after giving effect to any capital gains realized by our company on such calculation
date, since its inception.
|
|
●
|
Our
“cumulative capital losses” will be equal to, as of any calculation
date, the aggregate amount of capital losses realized by our company as of such calculation
date, after giving effect to any capital losses realized by our company on such calculation
date, since its inception.
|
|
●
|
Our
“cumulative gains and losses” will be equal to, as of any calculation
date, the sum of (i) the amount of cumulative capital gains as of such calculation
date, minus (ii) the absolute amount of cumulative capital losses as of such calculation
date.
|
|
●
|
The
“high water mark” will be equal to, as of any calculation date, the
highest positive amount of capital gains and losses as of such calculation date that
were calculated in connection with a qualifying trigger event that occurred prior to
such calculation date.
|
|
●
|
The
“high water mark allocation” will be equal to, as of any calculation
date, the product of (i) the amount of the high water mark as of such calculation date,
multiplied by (ii) 20%.
|
|
●
|
A
business’ “level 1 hurdle amount” will be equal to, as of any
calculation date, the product of (i) (x) the quarterly hurdle rate of 2.00% (8% annualized),
multiplied by (y) the number of fiscal quarters ending during such business’
measurement period as of such calculation date, multiplied by (ii) a business’
average allocated share of our consolidated equity for each fiscal quarter ending during
such measurement period.
|
|
●
|
A
business’ “level 2 hurdle amount” will be equal to, as of any
calculation date, the product of (i) (x) the quarterly hurdle rate of 2.5% (10% annualized,
which is 125% of the 8% annualized hurdle rate), multiplied by (y) the number
of fiscal quarters ending during such business’ measurement period as of such calculation
date, multiplied by (ii) a business’ average allocated share of our consolidated
equity for each fiscal quarter ending during such measurement period.
|
|
●
|
A
business’ “loan expense” will be equal to, with respect to any
measurement period as of any calculation date, the aggregate amount of all interest or
other expenses paid by such business with respect to indebtedness of such business to
either our company or other company businesses with respect to such measurement period.
|
|
●
|
The
“measurement period” will mean, with respect to any business as of
any calculation date, the period from and including the later of (i) the date upon which
we acquired a controlling interest in such business and (ii) the immediately preceding
calculation date as of which contribution-based profits were calculated with respect
to such business and with respect to which profit allocation were paid (or, at the election
of the allocation member, deferred) by our company up to and including such calculation
date.
|
|
●
|
Our
company’s “overhead” will be equal to, with respect to any fiscal
quarter, the sum of (i) that portion of our operating expenses (as determined
in accordance with GAAP) (without giving effect to any expense attributable to the accrual
or payment of any amount of profit allocation or any amount arising under the supplemental
put agreement to the extent included in the calculation of our operating expenses), including
any management fees actually paid by our company to our manager, with respect to such
fiscal quarter that are not attributable to any of the businesses owned by our company
(i.e., operating expenses that do not correspond to operating expenses of such businesses
with respect to such fiscal quarter), plus (ii) our accrued interest expense (as
determined in accordance with GAAP) on any outstanding third party indebtedness of our
company with respect to such fiscal quarter, minus (iii) revenue, interest income
and other income reflected in our unconsolidated financial statements as prepared in
accordance with GAAP.
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A
“qualifying trigger event” will mean, with respect to any business,
a trigger event that gave rise to a calculation of total profit allocation with respect
to such business as of any calculation date and (ii) where the amount of total profit
allocation so calculated as of such calculation date exceeded such business’ level
2 hurdle amount as of such calculation date.
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A
business’ “quarterly allocated share of our consolidated equity”
will be equal to, with respect to any fiscal quarter, the product of (i) our consolidated
net equity as of the last day of such fiscal quarter, multiplied by (ii) a fraction,
the numerator of which is such business’ adjusted net assets as of the last day
of such fiscal quarter and the denominator of which is the sum of (x) our adjusted
net assets as of the last day of such fiscal quarter, minus (y) the aggregate
amount of any cash and cash equivalents as such amount is reflected on our consolidated
balance sheet as prepared in accordance with GAAP that is not taken into account in the
calculation of any business’ adjusted net assets as of the last day of such fiscal
quarter.
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A
business’ “quarterly share of our company’s overhead”
will be equal to, with respect to any fiscal quarter, the product of (i) the absolute
amount of our company’s overhead with respect to such fiscal quarter, multiplied
by (ii) a fraction, the numerator of which is such business’ adjusted net assets
as of the last day of such fiscal quarter and the denominator of which is our adjusted
net assets as of the last day of such fiscal quarter.
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An
entity’s “third party indebtedness” means any indebtedness of
such entity owed to any third party lenders that are not affiliated with such entity.
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Supplemental
Put Provision
In
addition to the provisions discussed above, in consideration of our manager’s acquisition of the allocation shares, our
operating agreement contains a supplemental put provision pursuant to which our manager will have the right to cause our company
to purchase the allocation shares then owned by our manager upon termination of the management services agreement.
If
the management services agreement is terminated at any time or our manager resigns, then our manager will have the right, but
not the obligation, for one year from the date of such termination or resignation, as the case may be, to elect to cause our company
to purchase all of the allocation shares then owned by our manager for the put price as of the put exercise date.
For
purposes of this provision, the “put price” is equal to, as of any exercise date, (i) if we terminate the management
services agreement, the sum of two separate, independently made calculations of the aggregate amount of manager’s profit
allocation as of such exercise date or (ii) if our manager resigns, the average of two separate, independently made calculations
of the aggregate amount of manager’s profit allocation as of such exercise date, in each case, calculated assuming that
(x) all of the businesses are sold in an orderly fashion for fair market value as of such exercise date in the order in which
the controlling interest in each business was acquired or otherwise obtained by our company, (y) the last day of the fiscal quarter
ending immediately prior to such exercise date is the relevant calculation date for purposes of calculating manager’s profit
allocation as of such exercise date. Each of the two separate, independently made calculations of our manager’s profit allocation
for purposes of calculating the put price will be performed by a different investment bank that is engaged by our company at its
cost and expense. The put price will be adjusted to account for a final “true-up” of our manager’s profit allocation.
Our
manager and our company can mutually agree to permit our company to issue a note in lieu of payment of the put price when due;
provided, that if our manager resigns and terminates the management services agreement, then our company will have the right,
in its sole discretion, to issue a note in lieu of payment of the put price when due. In either case the note would have an aggregate
principal amount equal to the put price, would bear interest at a rate of LIBOR plus 4.0% per annum, would mature on the first
anniversary of the date upon which the put price was initially due, and would be secured by the then-highest priority lien available
to be placed on our equity interests in each of our businesses.
Our
company’s obligations under the put provision of our operating agreement are absolute and unconditional. In addition, our
company will be subject to certain obligations and restrictions upon exercise of our manager’s put right until such time
as our company’s obligations under the put provision of our operating agreement, including any related note, have been satisfied
in full, including:
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subject
to our company’s right to issue a note in the circumstances described above, our
company must use commercially reasonable efforts to raise sufficient debt or equity financing
to permit our company to pay the put price or note when due and obtain approvals, waivers
and consents or otherwise remove any restrictions imposed under contractual obligations
or applicable law or regulations that have the effect of limiting or prohibiting our
company from satisfying its obligations under the supplemental put agreement or note;
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our
manager will have the right to have a representative observe meetings of our company’s
board of directors and have the right to receive copies of all documents and other information
furnished to the board of directors;
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our
company and its businesses will be restricted in their ability to sell or otherwise dispose
of their property or assets or any businesses they own and in their ability to incur
indebtedness (other than in the ordinary course of business) without granting a lien
on the proceeds therefrom to our manager, which lien will secure our company’s
obligations under the put provision of our operating agreement or note; and
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our
company will be restricted in its ability to (i) engage in certain mergers or consolidations,
(ii) sell, transfer or otherwise dispose of all or a substantial part of its business,
property or assets or all or a substantial portion of the stock or beneficial ownership
of its businesses or a portion thereof, (iii) liquidate, wind-up or dissolve, (iv) acquire
or purchase the property, assets, stock or beneficial ownership or another person, or
(v) declare and pay distributions to our common shareholders.
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Our
company also has agreed to indemnify our manager for any losses or liabilities it incurs or suffers in connection with, arising
out of or relating to its exercise of its put right or any enforcement of terms and conditions of the supplemental put provision
of our operating agreement.
As
an obligation of our company, the put price will be paid prior to the payment of distributions to our shareholders. If we do not
have sufficient liquid assets to pay the put price when due, we may be required to liquidate assets or incur debt in order to
pay the put price.
Termination
of the management services agreement, by any means, will not affect our manager’s rights with respect to the allocation
shares that it owns. In this regard, our manager will retain its put right and its allocation shares after ceasing to serve as
our manager. As a result, if we terminate our manager, regardless of the reason for such termination, it would retain the right
to exercise the put right and demand payment of the put price.
OUR
BUSINESS
Overview
We
are an acquisition holding company focused on acquiring and managing a group of small businesses, which we characterize as those
that have an enterprise value of less than $50 million, in a variety of different industries headquartered in North America. To
date, we have completed four acquisitions.
In
March 2017, our subsidiary 1847 Neese acquired Neese. Headquartered in Grand Junction, Iowa and founded in 1991, Neese is an established
business specializing in providing a wide range of land application services and selling equipment and parts, primarily to the
agricultural industry, but also to the construction and lawn and garden industries.
In
April 2019, our subsidiary Goedeker acquired substantially all of the assets of Goedeker Television. As a result of this transaction,
Goedeker acquired the former business of Goedeker Television, which was established in 1951, and continues to operate this business.
Headquartered in St. Louis, Missouri, Goedeker is a one-stop e-commerce destination for home furnishings, including appliances,
furniture, home goods and related products. On October 23, 2020, we distributed all of the shares of Goedeker that we held to
our shareholders. As a result of this distribution, Goedeker is no longer a subsidiary of our company.
In
May 2020, our subsidiary 1847 Asien acquired Asien’s. Asien’s has been in business since 1948 serving the North Bay
area of Sonoma County, California. It provides a wide variety of appliance services, including sales, delivery/installation, in-home
service and repair, extended warranties, and financing. Its main focus is delivering personal sales and exceptional service to
its customers at competitive prices.
In
September 2020, our subsidiary 1847 Cabinet acquired Kyle’s. Kyle’s is a leading custom cabinetry maker servicing
contractors and homeowners since 1976 in Boise, Idaho and the surrounding area. Kyle’s focuses on designing, building, and
installing custom cabinetry primarily for custom and semi-custom builders.
Through
our structure, we offer investors an opportunity to participate in the ownership and growth of a portfolio of businesses that
traditionally have been owned and managed by private equity firms, private individuals or families, financial institutions or
large conglomerates. We believe that our management and acquisition strategies will allow us to achieve our goals to begin making
and growing regular distributions to our common shareholders and increasing common shareholder value over time.
We
seek to acquire controlling interests in small businesses that we believe operate in industries with long-term macroeconomic growth
opportunities, and that have positive and stable earnings and cash flows, face minimal threats of technological or competitive
obsolescence and have strong management teams largely in place. We believe that private company operators and corporate parents
looking to sell their businesses will consider us to be an attractive purchaser of their businesses. We make these businesses
our majority-owned subsidiaries and actively manage and grow such businesses. We expect to improve our businesses over the long
term through organic growth opportunities, add-on acquisitions and operational improvements.
Market
Opportunity
We
acquire and manage small businesses, which we characterize as those that have an enterprise value of less than $50 million. We
believe that the merger and acquisition market for small businesses is highly fragmented and provides significant opportunities
to purchase businesses at attractive prices. For example, according to GF Data, platform acquisitions with enterprise values greater
than $50.0 million commanded valuation premiums 30% higher than platform acquisitions with enterprise values less than $50.0 million
(8.2x trailing twelve month adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) versus 6.3x trailing
twelve month adjusted EBITDA, respectively).
We
believe that the following factors contribute to lower acquisition multiples for small businesses:
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there
are typically fewer potential acquirers for these businesses;
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third-party
financing generally is less available for these acquisitions;
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sellers
of these businesses may consider non-economic factors, such as continuing board membership
or the effect of the sale on their employees; and
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these
businesses are generally less frequently sold pursuant to an auction process.
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We
believe that our management team’s strong relationships with business brokers, investment and commercial bankers, accountants,
attorneys and other potential sources of acquisition opportunities offers us substantial opportunities to purchase small businesses.
See “Our Manager—Key Personnel of our Manager” for more information about our management team.
We
also believe that significant opportunities exist to improve the performance of the businesses upon their acquisition. In the
past, our manager has acquired businesses that are often formerly owned by seasoned entrepreneurs or large corporate parents.
In these cases, our manager has frequently found that there have been opportunities to further build upon the management teams
of acquired businesses. In addition, our manager has frequently found that financial reporting and management information systems
of acquired businesses may be improved, both of which can lead to substantial improvements in earnings and cash flow. Finally,
because these businesses tend to be too small to have their own corporate development efforts, we believe opportunities exist
to assist these businesses in meaningful ways as they pursue organic or external growth strategies that were often not pursued
by their previous owners.
Our
Strategy
Our
long-term goals are to begin making and growing regular distributions to our common shareholders and to increase common shareholder
value over the long-term. We plan to continue focusing on acquiring businesses. Therefore, we intend to continue to identify,
perform due diligence on, negotiate and consummate platform acquisitions of small businesses in attractive industry sectors.
Unlike
buyers of small businesses that rely on significant leverage to consummate acquisitions (as demonstrated by the data below), we
plan to limit the use of third party (i.e., external) acquisition leverage so that our debt will not exceed the market value of
the assets we acquire and so that our debt to EBITDA ratio will not exceed 1.25x to 1 for our operating subsidiaries. We believe
that limiting leverage in this manner will avoid the imposition on stringent lender controls on our operations that would otherwise
potentially hamper the growth of our operating subsidiaries and otherwise harm our business even during times when we have positive
operating cash flows. Additionally, in our experience, leverage rarely leads to “break-out” returns and often creates
negative return outcomes that are not correlated with the profitability of the business.
Source:
GF Data M&A Report (May 2019)
Source:
GF Data Leverage Report (May 2019)
Management
Strategy
Our
management strategy involves the identification, performance of due diligence, negotiation and consummation of acquisitions. After
acquiring businesses, we attempt to grow the businesses both organically and through add-on or bolt-on acquisitions. Add-on or
bolt-on acquisitions are acquisitions by a company of other companies in the same industry. Following the acquisition of companies,
we seek to grow the earnings and cash flow of acquired companies and, in turn, begin making and growing regular distributions
to our common shareholders and to increase common shareholder value over time. We believe we can increase the cash flows of our
businesses by applying our intellectual capital to improve and grow our businesses.
We
seek to acquire and manage small businesses. We believe that the merger and acquisition market for small businesses is highly
fragmented and provides opportunities to purchase businesses at attractive prices. We believe we will be able to acquire small
businesses for multiples ranging from three to six times EBITDA. We also believe, and our manager has historically found, that
significant opportunities exist to improve the performance of these businesses upon their acquisition.
In
general, our manager oversees and supports the management team of our businesses by, among other things:
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recruiting
and retaining managers to operate our businesses by using structured incentive compensation
programs, including minority equity ownership, tailored to each business;
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regularly
monitoring financial and operational performance, instilling consistent financial discipline,
and supporting management in the development and implementation of information systems;
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assisting
the management teams of our businesses in their analysis and pursuit of prudent organic
growth strategies;
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identifying
and working with business management teams to execute on attractive external growth and
acquisition opportunities;
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identifying
and executing operational improvements and integration opportunities that will lead to
lower operating costs and operational optimization;
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providing
the management teams of our businesses the opportunity to leverage our experience and
expertise to develop and implement business and operational strategies; and
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forming
strong subsidiary level boards of directors to supplement management teams in their development
and implementation of strategic goals and objectives.
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We
also believe that our long-term perspective provides us with certain additional advantages, including the ability to:
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recruit
and develop management teams for our businesses that are familiar with the industries
in which our businesses operate;
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focus
on developing and implementing business and operational strategies to build and sustain
shareholder value over the long term;
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create
sector-specific businesses enabling us to take advantage of vertical and horizontal acquisition
opportunities within a given sector;
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achieve
exposure in certain industries in order to create opportunities for future acquisitions;
and
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develop
and maintain long-term collaborative relationships with customers and suppliers.
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We
intend to continually increase our intellectual capital as we operate our businesses and acquire new businesses and as our manager
identifies and recruits qualified operating partners and managers for our businesses.
Acquisition
Strategy
Our
acquisition strategies involve the acquisition of small businesses in various industries that we expect will produce positive
and stable earnings and cash flow, as well as achieve attractive returns on our invested capital. In this respect, we expect to
make acquisitions in industries wherein we believe an acquisition presents an attractive opportunity from the perspective of both
(i) return on assets or equity and (ii) an easily identifiable path for growing the acquired businesses. We believe that attractive
opportunities will increasingly present themselves as private sector owners seek to monetize their interests in longstanding and
privately held businesses and large corporate parents seek to dispose of their “non-core” operations.
We
believe that the greatest opportunities for generating consistently positive annual returns and, ultimately, residual returns
on capital invested in acquisitions will result from targeting capital light businesses operating in niche geographical markets
with a clearly identifiable competitive advantage within the following industries: business services, consumer services, consumer
products, consumable industrial products, industrial services, niche light manufacturing, distribution, alternative/specialty
finance and in select cases, specialty retail. While we believe that the professional experience of our management team within
the industries identified above will offer the greatest number of acquisition opportunities, we will not eschew opportunities
if a business enjoys an inarguable moat around its products and services in an industry which our management team may have less
familiarity.
From
a financial perspective, we expect to make acquisitions of small businesses that are stable, have minimal bad debt, and strong
accounts receivable. In addition, we expect to acquire companies that have been able to generate positive pro forma cash available
for distribution for a minimum of three years prior to acquisition. Our previous acquisitions met these acquisition criteria.
We
benefit from our manager’s ability to identify diverse acquisition opportunities in a variety of industries. In addition,
we rely upon our management teams’ experience and expertise in researching and valuing prospective target businesses, as
well as negotiating the ultimate acquisition of such target businesses. In particular, because there may be a lack of information
available about these target businesses, which may make it more difficult to understand or appropriately value such target businesses,
our manager will:
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engage
in a substantial level of internal and third-party due diligence;
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critically
evaluate the management team;
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identify
and assess any financial and operational strengths and weaknesses of any target business;
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analyze
comparable businesses to assess financial and operational performances relative to industry
competitors;
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actively
research and evaluate information on the relevant industry; and
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thoroughly
negotiate appropriate terms and conditions of any acquisition.
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The
process of acquiring new businesses is time-consuming and complex. Our manager has historically taken from 2 to 24 months to perform
due diligence on, negotiate and close acquisitions. Although we expect our manager to be at various stages of evaluating several
transactions at any given time, there may be significant periods of time during which it does not recommend any new acquisitions
to us.
Upon
an acquisition of a new business, we rely on our manager’s experience and expertise to work efficiently and effectively
with the management of the new business to jointly develop and execute a business plan.
While
primarily seek to acquire controlling interests in a business, we may also acquire non-control or minority equity positions in
businesses where we believe it is consistent with our long-term strategy.
As
discussed in more detail below, we intend to raise capital for additional acquisitions primarily through debt financing, primarily
at our operating company level, additional equity offerings by our company, the sale of all or a part of our businesses or by
undertaking a combination of any of the above.
Our
primary corporate purpose is to own, operate and grow our operating businesses. However, in addition to acquiring businesses,
we expect to sell businesses that we own from time to time. Our decision to sell a business will be based upon financial, operating
and other considerations rather than a plan to complete a sale of a business within any specific time frame. We may also decide
to own and operate some or all of our businesses in perpetuity if our board believes that it makes sense to do so. Upon the sale
of a business, we may use the resulting proceeds to retire debt or retain proceeds for future acquisitions or general corporate
purposes. Generally, we do not expect to make special distributions at the time of a sale of one of our businesses; instead, we
expect that we will seek to gradually increase regular common shareholder distributions over time.
There
are several risks associated with our acquisition strategy, including the following risks, which are described more fully in “Risk
Factors—Risks Related to Our Business and Structure”:
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we
may not be able to successfully fund future acquisitions of new businesses due to the
unavailability of debt or equity financing on acceptable terms, which could impede the
implementation of our acquisition strategy;
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we
may experience difficulty as we evaluate, acquire and integrate businesses that we may
acquire, which could result in drains on our resources, including the attention of our
management, and disruptions of our on-going business;
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we
face competition for businesses that fit our acquisition strategy and, therefore, we
may have to acquire targets at sub-optimal prices or, alternatively, forego certain acquisition
opportunities; and
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we
may change our management and acquisition strategies without the consent of our shareholders,
which may result in a determination by us to pursue riskier business activities.
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Strategic
Advantages
Based
on the experience of our manager and its ability to identify and negotiate acquisitions, we believe that we are strongly positioned
to acquire additional businesses. Our manager has strong relationships with business brokers, investment and commercial bankers,
accountants, attorneys and other potential sources of acquisition opportunities. In negotiating these acquisitions, we believe
our manager will be able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs,
transitions of family-owned businesses, management buy-outs and reorganizations.
We
believe that the flexibility, creativity, experience and expertise of our manager in structuring transactions provides us with
strategic advantages by allowing us to consider non-traditional and complex transactions tailored to fit a specific acquisition
target.
Our
manager also has a large network of deal intermediaries who expose us to potential acquisitions. Through this network, we have
a substantial pipeline of potential acquisition targets. Our manager also has a well-established network of contacts, including
professional managers, attorneys, accountants and other third-party consultants and advisors, who may be available to assist us
in the performance of due diligence and the negotiation of acquisitions, as well as the management and operation of our businesses
once acquired.
Valuation
and Due Diligence
When
evaluating businesses or assets for acquisition, we perform a rigorous due diligence and financial evaluation process. In doing
so, we seek to evaluate the operations of the target business as well as the outlook for the industry in which the target business
operates. While valuation of a business is, by definition, a subjective process, we define valuations under a variety of analyses,
including:
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discounted
cash flow analyses;
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evaluation
of trading values of comparable companies;
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expected
value matrices;
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assessment
of competitor, supplier and customer environments; and
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examination
of recent/precedent transactions.
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One
outcome of this process is an effort to project the expected cash flows from the target business as accurately as possible. A
further outcome is an understanding of the types and levels of risk associated with those projections. While future performance
and projections are always uncertain, we believe that our detailed due diligence review process allows us to more accurately estimate
future cash flows and more effectively evaluate the prospects for operating the business in the future. To assist us in identifying
material risks and validating key assumptions in our financial and operational analysis, in addition to our own analysis, we engage
third-party experts to review key risk areas, including legal, tax, regulatory, accounting, insurance and environmental. We may
also engage technical, operational or industry consultants, as necessary.
A
further critical component of the evaluation of potential target businesses is the assessment of the capability of the existing
management team, including recent performance, expertise, experience, culture and incentives to perform. Where necessary, and
consistent with our management strategy, we actively seek to augment, supplement or replace existing members of management who
we believe are not likely to execute the business plan for the target business. Similarly, we analyze and evaluate the financial
and operational information systems of target businesses and, where necessary, we actively seek to enhance and improve those existing
systems that are deemed to be inadequate or insufficient to support our business plan for the target business.
Financing
We
finance acquisitions primarily through additional equity and debt financings. We believe that having the ability to finance most,
if not all, acquisitions with the general capital resources raised by our company, rather than financing relating to the acquisition
of individual businesses, provides us with an advantage in acquiring attractive businesses by minimizing delay and closing conditions
that are often related to acquisition-specific financings. In this respect, we believe that, at some point in the future, we may
need to pursue additional debt or equity financings, or offer equity in our company or target businesses to the sellers of such
target businesses, in order to fund acquisitions.
Our
Competitive Advantages
We
believe that our manager’s collective investment experience and approach to executing our investment strategy provide our
company with several competitive advantages. These competitive advantages, certain of which are discussed below, have enabled
our management to generate very attractive risk- adjusted returns for investors in their predecessor firms.
Robust
Network. Through their activities with their predecessor firms and their comprehensive marketing capabilities, we believe
that the management team of our manager has established a “top of mind” position among investment bankers and business
brokers targeting small businesses. By employing an institutionalized, multi-platform marketing strategy, we believe our manager
has established a robust national network of personal relationships with intermediaries, seasoned operating executives, entrepreneurs
and managers, thereby firmly establishing our company’s presence and credibility in the small business market. In contrast
to many other buyers of and investors in small businesses, we believe that we can buy businesses at value-oriented multiples and
through our asset management activities with a group of professional, experienced and talented operating partners, create appreciable
value. We believe our experience, track record and consistent execution of our marketing and investment activities will allow
us to maintain a leadership position as the preferred partner for today’s small business market.
Disciplined
Deal Sourcing. We employ an institutionalized, multi-platform approach to sourcing new acquisition opportunities. Our
deal sourcing efforts include leveraging relationships with more than 3,000 qualified deal sources through regular calling, mail
and e-mail campaigns, assignment of regional marketing responsibilities, in-person visits and high-profile sponsorship of important
conferences and industry events. We supplement these activities by retaining selected intermediary firms to conduct targeted searches
for opportunities in specific categories on an opportunistic basis. As a result of the significant time and effort spent on these
activities, we believe we established close relationships and unique “top of mind” awareness with many of the most
productive intermediary sources for small business acquisition opportunities in the United States. While reinforcing our market
leadership, this capability enables us to generate a large number of attractive acquisition opportunities.
Differentiated
Acquisition Capabilities in the Small Business Market. We deploy a differentiated approach to acquiring businesses in
the small business market. Our management concentrates their efforts on mature companies with sustainable value propositions,
which can be supported by our resources and institutional expertise. Our evaluation of acquisition opportunities typically involves
significant input from a seasoned operating partner with relevant experience, which we believe enhances both our diligence and
ongoing monitoring capabilities. In addition, we approach every acquisition opportunity with creative structures, which we believe
enables us to engineer mutually attractive scenarios for sellers, whereas competing buyers may be limited by their rigid structural
requirements. We believe our commitment to conservative capital structures and valuation will enhance each acquired operating
subsidiary’s ability to deliver consistent levels of cash available for distribution, while additionally supporting reinvestment
for growth.
Value
Proposition for Business Owners. We employ a creative, flexible approach by tailoring each acquisition structure to meet
the specific liquidity needs and certain qualitative objectives of the target’s owners and management team. In addition
to serving as an exit pathway for sellers, we seek to align our interests with the sellers by enabling them to retain and/or earn
(through incentive compensation) a substantial economic interest in their businesses following the acquisition and by typically
allowing the incumbent management team to retain operating control of the acquired operating subsidiary on a day-to-day basis.
We believe that our company is an appealing buyer for small business owners and managers due to our track record of capitalizing
portfolio companies conservatively, enhancing our ability to execute on its strategic initiatives and adding equity value. As
a result, we believe business owners and managers will find our company to be a dynamic, value-added buyer that brings considerable
resources to achieve their strategic, capital and operating needs, resulting in substantial value creation for the operating subsidiary.
Operating
Partner. Our manager has consistently worked with a strong network of seasoned operating partners - former entrepreneurs
and executives with extensive experience building, managing and optimizing successful small businesses across a range of industries.
We believe that our operating partner model will enable our company to make a significant improvement in the operating subsidiary,
as compared to other buyers, such as traditional private equity firms, which rely principally upon investment professionals to
make acquisition/investment and monitoring decisions regarding not only the business, financial and legal due diligence aspects
of a business but also the more operational aspects including industry dynamics, management strength and strategic growth initiatives.
We typically engage an operating partner soon after identifying a target business for acquisition, enhancing our acquisition judgment
and building the acquisition team’s relationship with the subsidiary’s management team. Operating partners usually
serve as a member of the board of directors of an operating subsidiary and spend two to four days per month working with the subsidiary’s
management team. We leverage the operating partner’s extensive experience to build the management team, improve operations
and assist with strategic growth initiatives, resulting in value creation.
Small
Business Market Experience. We believe the history and experience of our manager’s partnering with companies in
the small business market allows us to identify highly attractive acquisition opportunities and add significant value to our operating
subsidiaries. Our manager’s investment experience in the small business market prior to forming our company has further
contributed to our institutional expertise in the acquisition, strategic and operational decisions critical to the long-term success
of small businesses. Since 2000, the management team of our manager has collectively been presented with several thousand investment
opportunities and actively worked with more than 30 small businesses on all facets of their strategy, development and operations,
which we have successfully translated into unique, institutionalized capabilities directed towards creating value in small businesses.
Intellectual
Property
Our
manager owns certain intellectual property relating to the term “1847.” Our manager has granted our company a license
to use the term “1847” in its business.
Employees
As
of June 30, 2020, the only full-time employee of our company is Ellery W. Roberts, our Chairman, Chief Executive Officer, President
and Chief Financial Officer.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common shares offered
by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information
set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by
the rules and regulations of the SEC. For further information with respect to us and our common shares, we refer you to the registration
statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning
the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an
exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in
this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. You
may obtain copies of this information by mail from the public reference room of the SEC at 100 F Street, N.E., Room 1580, Washington,
D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC
at 1(800) SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about
issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
We
file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other
information are available for inspection and copying at the SEC’s public reference facilities and the website of the SEC
referred to above. Additionally, we will make these filings available, free of charge, on our website at www.1847holdings.com
as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. The information
on our website, other than these filings, is not, and should not be, considered part of this prospectus and is not incorporated
by reference into this document.
FINANCIAL STATEMENTS
|
Page
|
Unaudited
Consolidated Financial Statements of 1847 Holdings LLC for the Three and Six Months Ended June 30, 2020 and 2019
|
F-2
|
Consolidated
Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019
|
F-3
|
Consolidated
Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)
|
F-4
|
Consolidated
Statements of Shareholders’ Deficit for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)
|
F-5
|
Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (unaudited)
|
F-6
|
Notes
to Unaudited Consolidated Financial Statements
|
F-7
|
|
|
Audited
Consolidated Financial Statements of 1847 Holdings LLC for the Fiscal Years Ended December 31, 2019 and 2018
|
F-43
|
Report
of Independent Registered Public Accounting Firm
|
F-44
|
Consolidated
Balance Sheets as of December 31, 2019 and 2018
|
F-45
|
Consolidated
Statements of Operations for the Years Ended December 31, 2019 and 2018
|
F-46
|
Consolidated
Statements of Shareholders’ Deficit for the Years Ended December 31, 2019 and 2018
|
F-47
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2019 and 2018
|
F-48
|
Notes
to Consolidated Financial Statements
|
F-49
|
|
|
Audited
Financial Statements of Goedeker Television Co. for the Years Ended December 31, 2018 and 2017
|
F-79
|
Report
of Independent Registered Public Accounting Firm
|
F-80
|
Balance
Sheets as of December 31, 2018 and 2017
|
F-81
|
Statements
of Income for the Years Ended December 31, 2018 and 2017
|
F-82
|
Statement
of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
|
F-83
|
Statements
of Cash Flows for the Years Ended December 31, 2018 and 2017
|
F-84
|
Notes
to Financial Statements
|
F-85
|
|
|
Unaudited Financial Statements of Asien’s
Appliance, Inc. for the Three Months Ended March 31, 2020 and 2019
|
F-90
|
Balance Sheets as of March 31, 2020 (unaudited)
and December 31, 2019
|
F-91
|
Statements of Income for the Three Months
Ended March 31, 2020 and 2019 (unaudited)
|
F-92
|
Statement of Stockholders’ Equity for
the Three Months Ended March 31, 2020 and 2019 (unaudited)
|
F-93
|
Statements of Cash Flows for the Three Months
Ended March 31, 2020 and 2019 (unaudited)
|
F-94
|
Notes to Unaudited
Financial Statements
|
F-95
|
|
|
Audited
Financial Statements of Asien’s Appliance, Inc. for the Years Ended December 31, 2019 and 2018
|
F-101
|
Report
of Independent Registered Public Accounting Firm
|
F-102
|
Balance
Sheets as of December 31, 2019 and 2018
|
F-103
|
Statements
of Income for the Years Ended December 31, 2019 and 2018
|
F-104
|
Statement
of Stockholders’ Equity for the Years Ended December 31, 2019 and 2018
|
F-105
|
Statements
of Cash Flows for the Years Ended December 31, 2019 and 2018
|
F-106
|
Notes
to Financial Statements
|
F-107
|
|
|
1847
Holdings LLC Unaudited Pro Forma Combined Financial Information
|
F-116
|
Pro
Forma Combined Statement of Operations for the Six Months Ended June 30, 2020
|
F-117
|
Pro
Forma Combined Statement of Operations for the Year Ended December 31, 2019
|
F-118
|
Notes
to Unaudited Pro Forma Combined Financial Information
|
F-119
|
1847 HOLDINGS LLC
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
1847 HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
|
|
June
30,
2020
|
|
|
December 31,
2019
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
4,340,001
|
|
|
$
|
238,760
|
|
Restricted cash
|
|
|
175,990
|
|
|
|
-
|
|
Accounts receivable, net
|
|
|
3,848,990
|
|
|
|
2,453,455
|
|
Vendor deposits
|
|
|
345,502
|
|
|
|
294,960
|
|
Inventories, net
|
|
|
3,587,157
|
|
|
|
1,615,432
|
|
Prepaid expenses and other current assets
|
|
|
1,154,862
|
|
|
|
1,123,486
|
|
TOTAL CURRENT ASSETS
|
|
|
13,452,502
|
|
|
|
5,726,093
|
|
Property and equipment, net
|
|
|
2,930,772
|
|
|
|
3,367,427
|
|
Operating lease right of use assets
|
|
|
2,326,865
|
|
|
|
2,565,835
|
|
Goodwill
|
|
|
7,083,144
|
|
|
|
4,998,182
|
|
Intangible assets, net
|
|
|
1,728,411
|
|
|
|
1,893,577
|
|
Deferred tax asset
|
|
|
1,802,256
|
|
|
|
635,503
|
|
Other assets
|
|
|
45,375
|
|
|
|
45,375
|
|
TOTAL ASSETS
|
|
$
|
29,369,325
|
|
|
$
|
19,231,992
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
7,311,489
|
|
|
$
|
4,017,630
|
|
Floor plan payable
|
|
|
-
|
|
|
|
10,581
|
|
Current portion of operating lease liability
|
|
|
441,336
|
|
|
|
485,773
|
|
Advances, related party
|
|
|
184,678
|
|
|
|
181,333
|
|
Lines of credit
|
|
|
456,105
|
|
|
|
1,250,930
|
|
Note payable – related party
|
|
|
119,400
|
|
|
|
119,400
|
|
Notes payable – current portion
|
|
|
5,030,487
|
|
|
|
5,367,539
|
|
Warrant liability
|
|
|
2,250,000
|
|
|
|
122,344
|
|
Convertible promissory note – current portion
|
|
|
821,431
|
|
|
|
584,943
|
|
Factoring Agreement
|
|
|
410,374
|
|
|
|
-
|
|
Contract liabilities
|
|
|
12,431,608
|
|
|
|
4,164,296
|
|
Current portion of financing lease liability
|
|
|
388,023
|
|
|
|
358,584
|
|
TOTAL CURRENT LIABILITIES
|
|
|
29,844,931
|
|
|
|
16,663,353
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability – long term, net of current portion
|
|
|
1,885,529
|
|
|
|
2,080,062
|
|
Notes payable – long term, net of current portion
|
|
|
4,972,230
|
|
|
|
3,256,469
|
|
Contingent note payable
|
|
|
49,248
|
|
|
|
49,248
|
|
Accrued expenses – long term, related party
|
|
|
1,132,884
|
|
|
|
905,780
|
|
Financing lease liability, net of current portion
|
|
|
90,021
|
|
|
|
275,874
|
|
TOTAL LIABILITIES
|
|
$
|
37,974,843
|
|
|
$
|
23,230,786
|
|
1847 HOLDINGS SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Allocation shares, 1,000 shares issued and outstanding
|
|
|
1,000
|
|
|
|
1,000
|
|
Common Shares, 500,000,000 shares authorized, 3,780,625 and 3,165,625
shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
|
|
|
3,780
|
|
|
|
3,165
|
|
Additional paid-in capital
|
|
|
2,638,496
|
|
|
|
442,014
|
|
Accumulated deficit
|
|
|
(9,317,042
|
)
|
|
|
(4,402,043
|
)
|
TOTAL 1847 HOLDINGS SHAREHOLDERS’ DEFICIT
|
|
|
(6,673,766
|
)
|
|
|
(3,955,864
|
)
|
NONCONTROLLING INTERESTS
|
|
|
(1,931,752
|
)
|
|
|
(42,930
|
)
|
TOTAL SHAREHOLDERS’ DEFICIT
|
|
|
(8,605,518
|
)
|
|
|
(3,998,794
|
)
|
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
$
|
29,369,325
|
|
|
$
|
19,231,992
|
|
The accompanying notes are an integral
part of these consolidated financial statements
1847
HOLDINGS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
766,927
|
|
|
$
|
976,327
|
|
|
$
|
1,213,026
|
|
|
$
|
1,551,724
|
|
Sales of parts and equipment
|
|
|
316,976
|
|
|
|
615,836
|
|
|
|
605,047
|
|
|
|
852,810
|
|
Furniture and appliances revenue
|
|
|
16,471,014
|
|
|
|
10,616,050
|
|
|
|
26,148,192
|
|
|
|
10,616,050
|
|
TOTAL REVENUE
|
|
|
17,554,917
|
|
|
|
12,208,213
|
|
|
|
27,966,265
|
|
|
|
13,020,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
13,882,672
|
|
|
|
9,331,976
|
|
|
|
22,249,110
|
|
|
|
9,545,726
|
|
Personnel costs
|
|
|
1,526,434
|
|
|
|
1,439,036
|
|
|
|
3,290,884
|
|
|
|
1,896,233
|
|
Depreciation and amortization
|
|
|
407,909
|
|
|
|
349,264
|
|
|
|
811,145
|
|
|
|
688,086
|
|
Fuel
|
|
|
82,435
|
|
|
|
171,888
|
|
|
|
186,199
|
|
|
|
360,265
|
|
General and administrative
|
|
|
3,115,893
|
|
|
|
1,710,935
|
|
|
|
4,963,682
|
|
|
|
2,086,670
|
|
TOTAL OPERATING EXPENSES
|
|
|
19,015,343
|
|
|
|
13,003,099
|
|
|
|
31,501,020
|
|
|
|
14,576,980
|
|
NET LOSS FROM OPERATIONS
|
|
|
(1,460,426
|
)
|
|
|
(794,886
|
)
|
|
|
(3,534,755
|
)
|
|
|
(1,556,396
|
)
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs
|
|
|
(111,178
|
)
|
|
|
(167,406
|
)
|
|
|
(313,960
|
)
|
|
|
(175,506
|
)
|
Loss on extinguishment of debt
|
|
|
(948,856
|
)
|
|
|
-
|
|
|
|
(948,856
|
)
|
|
|
-
|
|
Interest expense
|
|
|
(350,385
|
)
|
|
|
(306,568
|
)
|
|
|
(683,939
|
)
|
|
|
(450,860
|
)
|
Loss on acquisition receivable
|
|
|
(809,000
|
)
|
|
|
-
|
|
|
|
(809,000
|
)
|
|
|
-
|
|
Change in warrant liability
|
|
|
(2,127,656
|
)
|
|
|
2,600
|
|
|
|
(2,127,656
|
)
|
|
|
2,600
|
|
Other income (expense)
|
|
|
3,942
|
|
|
|
5,089
|
|
|
|
6,325
|
|
|
|
5,089
|
|
Gain (loss) on sale of property and equipment
|
|
|
37,767
|
|
|
|
-
|
|
|
|
37,767
|
|
|
|
24,224
|
|
TOTAL OTHER INCOME (EXPENSE)
|
|
|
(4,305,366
|
)
|
|
|
(466,285
|
)
|
|
|
(4,839,319
|
)
|
|
|
(594,453
|
)
|
NET LOSS BEFORE INCOME TAXES
|
|
|
(5,765,792
|
)
|
|
|
(1,261,171
|
)
|
|
|
(8,374,074
|
)
|
|
|
(2,150,849
|
)
|
INCOME TAX BENEFIT
|
|
|
(953,953
|
)
|
|
|
(5,431
|
)
|
|
|
(1,451,753
|
)
|
|
|
(259,850
|
)
|
NET LOSS BEFORE NON-CONTROLLING INTERESTS
|
|
|
(4,811,839
|
)
|
|
|
(1,255,740
|
)
|
|
|
(6,922,321
|
)
|
|
|
(1,890,999
|
)
|
LESS NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
|
|
|
(1,269,137
|
)
|
|
|
(430,789
|
)
|
|
|
(2,007,322
|
)
|
|
|
(697,469
|
)
|
NET LOSS ATTRIBUTABLE TO 1847 HOLDINGS
SHAREHOLDERS
|
|
$
|
(3,542,702
|
)
|
|
$
|
(824,951
|
)
|
|
$
|
(4,914,999
|
)
|
|
$
|
(1,193,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share: Basic and diluted
|
|
$
|
(1.04
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(1.49
|
)
|
|
$
|
(0.38
|
)
|
Weighted-average number of common shares outstanding:
Basic and diluted
|
|
|
3,418,378
|
|
|
|
3,162,322
|
|
|
|
3,290,747
|
|
|
|
3,138,981
|
|
The accompanying notes are an integral
part of these consolidated financial statements
1847
HOLDINGS LLC
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS’ DEFICIT
(UNAUDITED)
For the Three and Six Months Ended June 30, 2020
|
|
Allocation
|
|
|
Common Shares
|
|
|
Additional Paid-In
|
|
|
Accumulated
|
|
|
Non-
Controlling
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Deficit
|
|
BALANCE – January 1, 2020
|
|
$
|
1,000
|
|
|
|
3,165,625
|
|
|
$
|
3,165
|
|
|
$
|
442,014
|
|
|
$
|
(4,402,043
|
)
|
|
$
|
(42,930
|
)
|
|
$
|
(3,998,794
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,372,297
|
)
|
|
|
(738,185
|
)
|
|
|
(2,110,482
|
)
|
BALANCE – March 31, 2020
|
|
$
|
1,000
|
|
|
|
3,165,625
|
|
|
$
|
3,165
|
|
|
$
|
442,014
|
|
|
$
|
(5,774,340
|
)
|
|
$
|
(781,115
|
)
|
|
$
|
(6,109,276
|
)
|
Common shares issued in connection with acquisition
|
|
|
-
|
|
|
|
415,000
|
|
|
|
415
|
|
|
|
1,037,085
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,037,500
|
|
Common shares issued for service
|
|
|
-
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
244,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
245,000
|
|
Common shares issued upon partial conversion of convertible
note payable
|
|
|
-
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
274,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
275,000
|
|
Warrants issued in connection with convertible
note payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
448,211
|
|
|
|
-
|
|
|
|
118,500
|
|
|
|
566,711
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,386
|
|
|
|
|
|
|
|
|
|
|
|
191,386
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,542,702
|
)
|
|
|
(1,269,137
|
)
|
|
|
(4,811,839
|
)
|
BALANCE – June 30, 2020
|
|
$
|
1,000
|
|
|
|
3,780,625
|
|
|
$
|
3,780
|
|
|
$
|
2,638,496
|
|
|
$
|
(9,317,042
|
)
|
|
$
|
(1,931,752
|
)
|
|
$
|
(8,605,518
|
)
|
For the Three and Six Months Ended June 30, 2019
|
|
Allocation
|
|
|
Common Shares
|
|
|
Additional Paid-In
|
|
|
Accumulated
|
|
|
Non-
Controlling
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Deficit
|
|
BALANCE – January 1, 2019
|
|
$
|
1,000
|
|
|
|
3,115,625
|
|
|
$
|
3,115
|
|
|
$
|
11,891
|
|
|
$
|
(2,155,084
|
)
|
|
$
|
112,011
|
|
|
$
|
(2,027,067
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(368,579
|
)
|
|
|
(266,680
|
)
|
|
|
(635,259
|
)
|
BALANCE – March 31, 2019
|
|
$
|
1,000
|
|
|
|
3,115,625
|
|
|
$
|
3,115
|
|
|
$
|
11,891
|
|
|
$
|
(2,523,663
|
)
|
|
$
|
(154,669
|
)
|
|
$
|
(2,662,326
|
)
|
Common shares and warrants issued in connection with
convertible note payable
|
|
|
-
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
430,123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
430,173
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(824,951
|
)
|
|
|
(430,789
|
)
|
|
|
(1,255,740
|
)
|
BALANCE – June 30, 2019
|
|
$
|
1,000
|
|
|
|
3,165,625
|
|
|
$
|
3,165
|
|
|
$
|
442,014
|
|
|
$
|
(3,348,614
|
)
|
|
$
|
(585,458
|
)
|
|
$
|
(3,487,893
|
)
|
The accompanying notes are an integral
part of these consolidated financial statements
1847
HOLDINGS LLC
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(UNAUDITED)
|
|
Six Months Ended
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,922,321
|
)
|
|
$
|
(1,890,999
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Gain on sale of property and equipment
|
|
|
(37,767
|
)
|
|
|
(24,224
|
)
|
Depreciation and amortization
|
|
|
811,145
|
|
|
|
688,086
|
|
Stock compensation
|
|
|
436,386
|
|
|
|
-
|
|
Loss on extinguishment of debt
|
|
|
948,856
|
|
|
|
-
|
|
Amortization of financing costs
|
|
|
208,837
|
|
|
|
106,736
|
|
Amortization of warrant feature of note payable
|
|
|
108,325
|
|
|
|
68,770
|
|
Amortization of original interest discount
|
|
|
46,212
|
|
|
|
16,205
|
|
Amortization of operating lease right-of-use assets
|
|
|
238,970
|
|
|
|
19,107
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,281,527
|
)
|
|
|
(1,246,154
|
)
|
Inventory
|
|
|
(514,236
|
)
|
|
|
315,390
|
|
Prepaid expenses and other assets
|
|
|
10,050
|
|
|
|
57,716
|
|
Deposits
|
|
|
(50,542
|
)
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
3,019,380
|
|
|
|
607,378
|
|
Operating lease liability
|
|
|
(238,970
|
)
|
|
|
(19,107
|
)
|
Customer deposits
|
|
|
5,861,609
|
|
|
|
1,107,639
|
|
Deferred taxes and uncertain tax position
|
|
|
(1,201,753
|
)
|
|
|
(259,831
|
)
|
Warrant liability
|
|
|
2,127,656
|
|
|
|
(2,600
|
)
|
Due to related parties
|
|
|
3,345
|
|
|
|
3,150
|
|
Accrued expense long-term
|
|
|
227,104
|
|
|
|
-
|
|
Net cash provided by (used in) operating activities
|
|
|
3,800,759
|
|
|
|
(452,738
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash acquired in acquisition
|
|
|
1,268,285
|
|
|
|
1,285,214
|
|
Proceeds from the sale of property and equipment
|
|
|
31,500
|
|
|
|
39,750
|
|
Purchase of property and equipment
|
|
|
(46,004
|
)
|
|
|
(14,876
|
)
|
Net cash provided by investing activities
|
|
|
1,253,781
|
|
|
|
1,310,088
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds (repayments) of short-term borrowings
|
|
|
1,026,200
|
|
|
|
(88,029
|
)
|
Repayments of notes payable
|
|
|
(1,197,796
|
)
|
|
|
(483,266
|
)
|
Net borrowings from lines of credit
|
|
|
(443,270
|
)
|
|
|
-
|
|
Repayment of financing lease
|
|
|
(162,443
|
)
|
|
|
(302,099
|
)
|
Net cash used in financing activities
|
|
|
(777,309
|
)
|
|
|
(873,394
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
|
4,277,231
|
|
|
|
(16,044
|
)
|
|
|
|
|
|
|
|
|
|
CASH
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
238,760
|
|
|
|
333,880
|
|
End of period
|
|
$
|
4,515,991
|
|
|
$
|
317,836
|
|
The accompanying notes are an integral
part of these consolidated financial statements
1847
HOLDINGS LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
NOTE 1—ORGANIZATION AND NATURE OF BUSINESS
1847 Holdings LLC (the “Company”)
was formed under the laws of the State of Delaware on January 22, 2013. The Company is in the business of acquiring small
businesses in a variety of different industries.
On March 3, 2017, the Company’s
wholly owned subsidiary 1847 Neese Inc., a Delaware corporation (“1847 Neese”), entered into a stock purchase agreement
with Neese, Inc., an Iowa corporation (“Neese”), and Alan Neese and Katherine Neese, pursuant to which 1847 Neese
acquired all of the issued and outstanding capital stock of Neese. As a result of this transaction, 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 owned 70% of 1847 Goedeker, with the remaining 30% held by third parties,
and 1847 Goedeker owned 100% of Goedeker. On August 4, 2020, 1847 Goedeker distributed all of its shares of Goedeker to its stockholders
in accordance with their pro rata ownership in 1847 Goedeker, after which time 1847 Goedeker was dissolved. Following this transaction,
and the closing of Goedeker’s initial public offering on August 4, 2020, the Company owned approximately 54.41% of Goedeker.
On October 23, 2020, the Company distributed
all of the shares of Goedeker that it held to its shareholders. As a result of this distribution, Goedeker is no longer a subsidiary
of the Company.
On March 27, 2020, the Company and its
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
Receivables
Receivables consist of credit card transactions
in the process of settlement. Vendor rebates receivable represent amounts due from manufactures from whom the Company purchases
products. Rebates receivable are stated at the amount that management expects to collect from manufacturers, net of accounts payable
amounts due the vendor. Rebates are calculated on product and model sales programs from specific vendors. The rebates are paid
at intermittent periods either in cash or through issuance of vendor credit memos, which can be applied against vendor accounts
payable. Based on the Company’s assessment of the credit history with its manufacturers, it has concluded that there should
be no allowance for uncollectible accounts. The Company historically collects substantially all of its outstanding rebates receivables.
Uncollectible balances are expensed in the period it is determined to be uncollectible.
Allowance for Credit Losses
Provisions for credit losses are charged
to income as losses are estimated to have occurred and in amounts sufficient to maintain an allowance for credit losses at an
adequate level to provide for future losses on the Company’s accounts receivable. The Company charges credit losses against
the allowance and credits subsequent recoveries, if any, to the allowance. Historical loss experience and contractual delinquency
of accounts receivables, and management’s judgment are factors used in assessing the overall adequacy of the allowance and
the resulting provision for credit losses. While management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes in economic conditions or portfolio performance.
This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information
becomes available.
The allowance for credit losses consists
of general and specific components. The general component of the allowance estimates credit losses for groups of accounts receivable
on a collective basis and relates to probable incurred losses of unimpaired accounts receivables. The Company records a general
allowance for credit losses that includes forecasted future credit losses.
Inventory
Inventory consists of finished products
acquired for resale and is valued at the lower-of-cost-or-market with cost determined on a specific item basis for the Neese and
of finished products acquired for resale and is valued at the low-of-cost-or-market with cost determined on 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
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
Goodwill and Intangible Assets
In applying the acquisition method of
accounting, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date
of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are initially valued at fair value using
generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite
lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible
assets with indefinite lives are tested for impairment within one year of acquisitions or annually as of December 1, and whenever
indicators of impairment exist. The fair value of intangible assets are compared with their carrying values, and an impairment
loss would be recognized for the amount by which a carrying amount exceeds its fair value.
Acquired identifiable intangible assets are amortized over
the following periods:
Acquired intangible Asset
|
|
Amortization Basis
|
|
Expected
Life
(years)
|
Customer-Related
|
|
Straight-line basis
|
|
5-15
|
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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
|
)
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
|
|
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 totaled $345,502 and $294,960, respectively.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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
|
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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
|
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
|
●
|
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
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
The loan and security agreement with SBCC
contains the same events of default as the loan and security agreement with Burnley, provided that the reference to the term loan
in the cross-default provision refers instead to the revolving loan.
The loan and security agreement contains
customary representations, warranties and affirmative and negative financial and other covenants for a loan of this type. The
term note is secured by a second priority security interest (subordinate to the revolving loan) in all of the assets of Goedeker
and 1847 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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
Under the note, Leonite has the right
at any time at its option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest
of the note into fully paid and non-assessable common shares or any shares of capital stock or other securities of the Company
into which such common shares may be changed or reclassified. The number of common shares to be issued upon each conversion of
the note shall be determined by dividing the conversion amount by the applicable conversion price then in effect. The conversion
amount is the sum of: (i) the principal amount of the note to be converted plus (ii) at Leonite’s option, accrued and unpaid
interest, plus (iii) at Leonite’s option, Default Interest, if any, plus (iv) Leonite’s expenses relating to a conversion,
plus (v) at Leonite’s option, any amounts owed to Leonite. The conversion price shall be $1.00 per share (subject to adjustment
as further described in the note for common share distributions and splits, certain fundamental transactions, and anti-dilution
adjustments), provided that at any time after any event of default under the note, the conversion price shall immediately be equal
to the lesser of (i) such conversion price less 40%; and (ii) the lowest weighted average price of the common shares during the
21 consecutive trading day period immediately preceding the trading day that 1847 receives a notice of conversion or (iii) the
discount to market based on subsequent financings with other investors.
Notwithstanding the foregoing, in no event
shall Leonite be entitled to convert any portion of the note in excess of that portion of the note upon conversion of which the
sum of (1) the number of common shares beneficially owned by Leonite and its affiliates (other than common shares which may be
deemed beneficially owned through the ownership of the unconverted portion of the note or the unexercised or unconverted portion
of any other security of the Company subject to a limitation on conversion or exercise analogous to the limitations contained
in the note, and, if applicable, net of any shares that may be deemed to be owned by any person not affiliated with Leonite who
has purchased a portion of the note from Leonite) and (2) the number of common shares issuable upon the conversion of the portion
of the note with respect to which the determination of this proviso is being made, would result in beneficial ownership by Leonite
and its affiliates of more than 4.99% of the outstanding common shares of the Company. Such limitations on conversion may be waived
(up to a maximum of 9.99%) by Leonite upon, at its election, not less than 61 days’ prior notice to the Company, and the
provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by Leonite,
as may be specified in such notice of waiver).
Concurrently with 1847 and Leonite entering
into the securities purchase agreement and as security for 1847’s obligations thereunder, on April 5, 2019, the Company,
1847 Goedeker and Goedeker entered into a security and pledge agreement with Leonite, pursuant to which, in order to secure 1847’s
timely payment of the note and related obligations and the timely performance of each and all of its covenants and obligations
under the securities purchase agreement and related documents, 1847 unconditionally and irrevocably granted, pledged and hypothecated
to Leonite a continuing security interest in and to, a lien upon, assignment of, and right of set-off against, all presently existing
and hereafter acquired or arising assets. Such security interest is a first priority security interest with respect to the securities
that the Company owns in 1847 Goedeker and in 1847 Neese, and a third priority security interest with respect to all other assets.
The rights of Leonite to receive payments
under the note are subordinate to the rights of Northpoint, Burnley and SBCC under separate subordination agreements that Leonite
entered into with them.
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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
|
%
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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
|
%
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
Advances
From time to time, the Company has received
advances from its chief executive officer to meet short-term working capital needs. As of 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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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
|
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
Warrants
|
|
Number
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Intrinsic
|
|
|
|
of Common
|
|
|
average
|
|
|
average
|
|
|
value
|
|
|
|
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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
|
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2020
AND 2019
(UNAUDITED)
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.
1847
HOLDINGS LLC
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019
AND 2018
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of 1847 Holdings LLC:
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of 1847 Holdings LLC (“the Company”) as of December 31, 2019 and 2018, the related consolidated statements
of operations, shareholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2019
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and
2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019,
in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we
are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Sadler, Gibb & Associates, LLC
We have served as the Company’s auditor since 2017.
Salt Lake City, UT
March 30, 2020
1847
HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
238,760
|
|
|
$
|
333,880
|
|
Accounts receivable, net
|
|
|
2,453,455
|
|
|
|
549,568
|
|
Vendor deposits
|
|
|
294,960
|
|
|
|
-
|
|
Inventories, net
|
|
|
1,615,432
|
|
|
|
487,690
|
|
Prepaid expenses and other current assets
|
|
|
1,123,486
|
|
|
|
145,978
|
|
TOTAL CURRENT ASSETS
|
|
|
5,726,093
|
|
|
|
1,517,116
|
|
Property and equipment, net
|
|
|
3,367,427
|
|
|
|
4,491,089
|
|
Operating lease right of use assets
|
|
|
2,565,835
|
|
|
|
-
|
|
Goodwill
|
|
|
4,998,182
|
|
|
|
22,166
|
|
Intangible assets, net
|
|
|
1,893,577
|
|
|
|
21,533
|
|
Deferred tax asset
|
|
|
635,503
|
|
|
|
-
|
|
Other assets
|
|
|
45,375
|
|
|
|
375
|
|
TOTAL ASSETS
|
|
$
|
19,231,992
|
|
|
$
|
6,052,279
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
4,017,630
|
|
|
$
|
1,210,984
|
|
Floor plan payable
|
|
|
10,581
|
|
|
|
109,100
|
|
Current portion of operating lease liability
|
|
|
485,773
|
|
|
|
-
|
|
Advances, related party
|
|
|
181,333
|
|
|
|
174,333
|
|
Lines of credit
|
|
|
1,250,930
|
|
|
|
-
|
|
Note payable – related party
|
|
|
119,400
|
|
|
|
117,000
|
|
Notes payable – current portion
|
|
|
5,367,539
|
|
|
|
293,641
|
|
Uncertain tax liability
|
|
|
-
|
|
|
|
8,000
|
|
Warrant liability
|
|
|
122,344
|
|
|
|
-
|
|
Convertible promissory note – current portion
|
|
|
584,943
|
|
|
|
-
|
|
Customer deposits
|
|
|
4,164,296
|
|
|
|
-
|
|
Current portion of financing lease liability
|
|
|
358,584
|
|
|
|
299,157
|
|
TOTAL CURRENT LIABILITIES
|
|
|
16,663,353
|
|
|
|
2,212,215
|
|
Non-current notes-payable
|
|
|
-
|
|
|
|
3,262,434
|
|
Operating lease liability – long term, net of current portion
|
|
|
2,080,062
|
|
|
|
-
|
|
Notes payable – long term, net of current portion
|
|
|
3,256,469
|
|
|
|
1,025,000
|
|
Contingent note payable
|
|
|
49,248
|
|
|
|
-
|
|
Non-current deferred tax liability
|
|
|
-
|
|
|
|
364,601
|
|
Accrued expenses – long term, related party
|
|
|
905,780
|
|
|
|
451,857
|
|
Financing lease liability, net of current portion
|
|
|
275,874
|
|
|
|
763,239
|
|
TOTAL LIABILITIES
|
|
$
|
23,230,786
|
|
|
$
|
8,079,346
|
|
SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Allocation shares, 1,000 shares issued and outstanding
|
|
|
1,000
|
|
|
|
1,000
|
|
Common Shares, 500,000,000 shares authorized,
3,165,625 and 3,115,625 shares issued and outstanding as of December 31, 2019 and 2018, respectively
|
|
|
3,165
|
|
|
|
3,115
|
|
Additional paid-in capital
|
|
|
442,014
|
|
|
|
11,891
|
|
Accumulated deficit
|
|
|
(4,402,043
|
)
|
|
|
(2,155,084
|
)
|
TOTAL SHAREHOLDERS’ DEFICIT
|
|
|
(3,955,864
|
)
|
|
|
(2,139,078
|
)
|
NONCONTROLLING INTERESTS
|
|
|
(42,930
|
)
|
|
|
112,011
|
|
TOTAL SHAREHOLDERS’ DEFICIT
|
|
|
(3,998,794
|
)
|
|
|
(2,027,067
|
)
|
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
$
|
19,231,992
|
|
|
$
|
6,052,279
|
|
The accompanying
notes are an integral part of these consolidated financial statements
1847 HOLDINGS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
REVENUES
|
|
|
|
|
|
|
Services
|
|
$
|
4,201,414
|
|
|
$
|
4,631,507
|
|
Sales of parts and equipment
|
|
|
2,178,611
|
|
|
|
2,702,340
|
|
Furniture and appliances
|
|
|
34,668,113
|
|
|
|
-
|
|
TOTAL REVENUE
|
|
|
41,048,138
|
|
|
|
7,333,847
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
30,426,194
|
|
|
|
2,370,757
|
|
Personnel costs
|
|
|
5,137,946
|
|
|
|
2,269,059
|
|
Depreciation and amortization
|
|
|
1,623,908
|
|
|
|
1,441,898
|
|
Fuel
|
|
|
718,495
|
|
|
|
874,187
|
|
General and administrative
|
|
|
6,177,588
|
|
|
|
1,896,541
|
|
TOTAL OPERATING EXPENSES
|
|
|
44,084,131
|
|
|
|
8,852,442
|
|
LOSS FROM OPERATIONS
|
|
|
(3,035,993
|
)
|
|
|
(1,518,595
|
)
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Financing costs and loss on early extinguishment of debt
|
|
|
(552,561
|
)
|
|
|
(536,491
|
)
|
Gain on write-down of contingency
|
|
|
32,246
|
|
|
|
395,634
|
|
Interest expense
|
|
|
(1,206,991
|
)
|
|
|
(562,629
|
)
|
Change in warrant liability
|
|
|
106,900
|
|
|
|
-
|
|
Other income (expense)
|
|
|
15,010
|
|
|
|
(129,400
|
)
|
Gain (loss) on sale of property and equipment
|
|
|
57,603
|
|
|
|
28,408
|
|
TOTAL OTHER INCOME (EXPENSE)
|
|
|
(1,547,793
|
)
|
|
|
(804,478
|
)
|
NET LOSS BEFORE INCOME TAXES
|
|
|
(4,583,786
|
)
|
|
|
(2,323,073
|
)
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
(1,202,363
|
)
|
|
|
(781,200
|
)
|
NET LOSS BEFORE NON-CONTROLLING INTERESTS
|
|
|
(3,381,423
|
)
|
|
|
(1,541,873
|
)
|
NON-CONTROLLING INTEREST
|
|
|
(1,134,464
|
)
|
|
|
(546,513
|
)
|
NET LOSS ATTRIBUTABLE TO 1847 HOLDINGS SHAREHOLDERS
|
|
$
|
(2,246,959
|
)
|
|
$
|
(995,360
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share: Basic and diluted
|
|
$
|
(1.07
|
)
|
|
$
|
(0.50
|
)
|
Weighted-average number of common shares outstanding: Basic and diluted
|
|
|
3,152,349
|
|
|
|
3,115,625
|
|
The accompanying
notes are an integral part of these consolidated financial statements
1847 HOLDINGS LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS’
DEFICIT
|
|
Common Shares
|
|
|
Allocation
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Non-
Controlling
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Deficit
|
|
BALANCE – January 1, 2018
|
|
|
3,115,625
|
|
|
$
|
3,115
|
|
|
$
|
1,000
|
|
|
$
|
11,891
|
|
|
$
|
(1,159,724
|
)
|
|
$
|
658,524
|
|
|
$
|
(485,194
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(995,360
|
)
|
|
|
(546,513
|
)
|
|
|
(1,541,873
|
)
|
BALANCE – December
31, 2018
|
|
|
3,115,625
|
|
|
$
|
3,115
|
|
|
$
|
1,000
|
|
|
$
|
11,891
|
|
|
$
|
(2,155,084
|
)
|
|
$
|
112,011
|
|
|
$
|
(2,027,067
|
)
|
Non-controlling interest granted in the acquisition
of Goedeker
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
979,523
|
|
|
|
979,523
|
|
Common shares and warrants issued in connection
with convertible note payable
|
|
|
50,000
|
|
|
|
50
|
|
|
|
-
|
|
|
|
430,123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
430,173
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,246,959
|
)
|
|
|
(1,134,464
|
)
|
|
|
(3,381,423
|
)
|
BALANCE – December 31,
2019
|
|
|
3,165,625
|
|
|
$
|
3,165
|
|
|
$
|
1,000
|
|
|
$
|
442,014
|
|
|
$
|
(4,402,043
|
)
|
|
$
|
(42,930
|
)
|
|
$
|
(3,998,794
|
)
|
The accompanying
notes are an integral part of these consolidated financial statements
1847
HOLDINGS LLC
CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
|
Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,381,423
|
)
|
|
$
|
(1,541,873
|
)
|
Adjustments to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Gain on sale of property and equipment
|
|
|
(57,603
|
)
|
|
|
(28,408
|
)
|
Depreciation and amortization
|
|
|
1,623,908
|
|
|
|
1,441,898
|
|
Amortization of financing costs
|
|
|
-
|
|
|
|
29,239
|
|
Gain on write-down of contingency
|
|
|
(32,246
|
)
|
|
|
(395,634
|
)
|
Write-down of assets
|
|
|
-
|
|
|
|
129,400
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
536,534
|
|
Amortization of debt discounts
|
|
|
605,272
|
|
|
|
42,506
|
|
Amortization of operating lease right-of-use assets
|
|
|
358,322
|
|
|
|
-
|
|
Change in warrant liability
|
|
|
(106,900
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,447,705
|
)
|
|
|
(239,205
|
)
|
Vendor deposits
|
|
|
(294,960
|
)
|
|
|
-
|
|
Inventory
|
|
|
723,509
|
|
|
|
240,353
|
|
Prepaid expenses and other assets
|
|
|
148,272
|
|
|
|
(28,184
|
)
|
Accounts payable and accrued expenses
|
|
|
(1,012,225
|
)
|
|
|
433,739
|
|
Operating lease liability
|
|
|
(358,322
|
)
|
|
|
-
|
|
Customer deposits
|
|
|
1,855,989
|
|
|
|
-
|
|
Deferred taxes and uncertain tax position
|
|
|
(1,008,104
|
)
|
|
|
(742,000
|
)
|
Due to related parties
|
|
|
7,000
|
|
|
|
(5,370
|
)
|
Accrued expense long-term
|
|
|
453,923
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,923,293
|
)
|
|
|
(127,005
|
)
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from the sale of property and equipment
|
|
|
143,711
|
|
|
|
320,775
|
|
Purchase of equipment
|
|
|
(191,032
|
)
|
|
|
(10,807
|
)
|
Net cash provided by investing activities
|
|
|
(47,321
|
)
|
|
|
309,968
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
-
|
|
|
|
463,137
|
|
Proceeds from convertible note payable
|
|
|
650,000
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
1,527,000
|
|
|
|
16,297
|
|
Repayments of notes payable
|
|
|
(661,259
|
)
|
|
|
(75,534
|
)
|
Repayment of floor plan
|
|
|
(98,519
|
)
|
|
|
|
|
Proceeds from note payable – related party
|
|
|
2,400
|
|
|
|
117,000
|
|
Proceeds (repayment) from lines of credit, net
|
|
|
1,339,430
|
|
|
|
(275,000
|
)
|
Repayment of capital lease
|
|
|
(524,058
|
)
|
|
|
-
|
|
Financing costs and early extinguishment of
debt
|
|
|
(359,500
|
)
|
|
|
(596,405
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,875,494
|
|
|
|
(350,505
|
)
|
NET CHANGE IN CASH
|
|
|
(95,120
|
)
|
|
|
(167,542
|
)
|
CASH
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
333,880
|
|
|
|
501,422
|
|
End of period
|
|
$
|
238,760
|
|
|
$
|
333,880
|
|
The accompanying
notes are an integral part of these consolidated financial statements
1847
HOLDINGS LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
NOTE 1—ORGANIZATION AND NATURE OF BUSINESS
1847 Holdings LLC (the “Company”)
was formed under the laws of the State of Delaware on January 22, 2013. The Company is in the business of acquiring small
businesses in a variety of different industries.
On March 3, 2017, the Company’s
wholly-owned subsidiary 1847 Neese Inc., a Delaware corporation (“1847 Neese”), entered into a stock purchase agreement
with Neese, Inc., an Iowa corporation (“Neese”), and Alan Neese and Katherine Neese, pursuant to which 1847 Neese
acquired all of the issued and outstanding capital stock of Neese. As a result of this transaction, the Company owns 55% of 1847
Neese, with the remaining 45% held by the sellers.
On January 10, 2019, the Company established
1847 Goedeker Inc. (“Goedeker”) as a wholly-owned subsidiary in the State of Delaware in connection with the proposed
acquisition of assets from Goedeker Television Co., Inc., a Missouri corporation (“Goedeker Television”), described
below. On March 20, 2019, the Company established 1847 Goedeker Holdco Inc. (“1847 Goedeker”) as a wholly-owned subsidiary
in the State of Delaware and subsequently transferred all of its shares in Goedeker to 1847 Goedeker, such that Goedeker became
a wholly-owned subsidiary of 1847 Goedeker.
On January 18, 2019, Goedeker entered
into an asset purchase agreement with Goedeker Television and Steve Goedeker and Mike Goedeker, pursuant to which, on April 5,
2019, Goedeker acquired substantially all of the assets of Goedeker Television used in its retail appliance and furniture business
(see Note 9). As a result of this transaction, the Company owns 70% of 1847 Goedeker, with the remaining 30% held by third-parties.
(See Note 17).
The consolidated financial statements
include the accounts of the Company and its consolidated subsidiaries, 1847 Neese, Neese, 1847 Goedeker and Goedeker. All significant
intercompany balances and transactions have been eliminated in consolidation.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company
have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
and are presented in US dollars.
Accounting Basis
The Company uses the accrual basis of
accounting and GAAP. The Company has adopted a calendar year end.
Stock Splits
On January 22, 2018, the Company completed
a 1-for-5 reverse split of its outstanding common shares. As a result of this stock split, the Company’s issued and outstanding
common shares decreased from 3,115,500 to 623,125 shares.
On May 10, 2018, the Company completed
a 5-for-1 forward stock split of its outstanding common shares. As a result of this stock split, the Company’s issued and
outstanding common shares increased from 623,125 to 3,115,625 shares.
Accordingly, all share and per share information
has been restated to retroactively show the effect of these stock splits.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Segment Reporting
The Financial Accounting Standards Board
(“FASB”) Accounting Standard Codification (“ASC”) Topic 280, Segment Reporting, requires that an
enterprise report selected information about reportable segments in its financial reports issued to its stockholders. Beginning
with the second quarter of 2019, the Company changed its operating and reportable segments from one segment to two segments: the
Land Management Segment, which is operated by Neese, and the Retail and Appliances Segment, which is operated by Goedeker.
The Land Management Segment will be responsible
for the activities that provide professional services on waste disposal and land application services based in Grand Junction,
Iowa.
The Retail and Appliances Segment will
be responsible for the activities in e-commerce destination for home furnishings, including appliances, furniture, bath and kitchen
fixtures, décor, lighting and home goods based in St. Louis, Missouri.
The Company provides general corporate
services to its segments; however, these services are not considered when making operating decisions and assessing segment performance.
These services are reported under “Holding Company” below and these include costs associated with executive management,
financing activities and public company compliance.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with the original maturities of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain Statements of Operations reclassifications
have been made in the presentation of the Company’s prior financial statements and accompanying notes to conform to the
presentation as of and for the year ended December 31, 2019. The Company reclassified certain operating expense accounts in the
Consolidated Statement of Operations. The reclassification had no impact on financial position, net income, or shareholder’s
equity.
Revenue Recognition and Cost of
Revenue
On January 1, 2018, the Company adopted
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes
the revenue recognition requirements in ASC Topic 605, Revenue Recognition. This ASU is based on the principle that
revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant
judgments. The Company’s adoption of this ASU resulted in no change to the Company’s results of operations or
balance sheet.
Land Management Segment
Neese’s payment terms are due on
demand from acceptance of delivery. Neese does not incur incremental costs obtaining purchase orders from customers, however,
if Neese did, because all of Neese’s contracts are less than a year in duration, any contract costs incurred would be expensed
rather than capitalized.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
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 year ended December 31, 2019, revenues, gross margin, and net loss would not have changed.
Substantially all of Neese’s sales
are to businesses, including farmers or municipalities and very little to individuals.
Disaggregated Revenue ‒ Neese disaggregates
revenue from contracts with customers by contract type, as it believes it best depicts how the nature, amount, timing and uncertainty
of revenue and cash flows are affected by economic factors.
Neese’s revenue by contract type
is as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
|
|
|
|
|
Trucking
|
|
$
|
1,579,660
|
|
|
$
|
2,060,992
|
|
Waste hauling and pumping
|
|
|
1,901,314
|
|
|
|
1,844,053
|
|
Repairs
|
|
|
377,004
|
|
|
|
413,210
|
|
Other
|
|
|
343,436
|
|
|
|
313,252
|
|
Total services
|
|
|
4,201,414
|
|
|
|
4,631,057
|
|
Sales of parts and equipment
|
|
|
2,178,611
|
|
|
|
2,702,340
|
|
Total revenue
|
|
$
|
6,380,025
|
|
|
$
|
7,333,847
|
|
Performance Obligations ‒ Performance
obligations for the different types of services are discussed below:
|
●
|
Trucking
‒ Revenues for time and material contracts are recognized when the merchandise
or commodity is delivered to the destination specified in the agreement with the customer.
|
|
●
|
Waste
Hauling and pumping ‒ Revenues for waste hauling and pumping is recognized
when the hauling, pumping, and spreading are complete.
|
|
●
|
Repairs
‒ Revenues for repairs are recognized upon completion of equipment serviced.
|
|
●
|
Sales
of parts and equipment ‒ Revenues for the sale of parts and equipment are recognized
upon the transfer and acceptance by the customer.
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Accounts Receivable, Net ‒ Accounts
receivable, net, are amounts due from customers where there is an unconditional right to consideration. Unbilled receivables of
$121,989 and $139,766 are included in this balance at December 31, 2019 and 2018, respectively. The payment of consideration related
to these unbilled receivables is subject only to the passage of time.
Neese reviews accounts receivable on a
periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of
the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates
are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific
information. After Neese has exhausted all collection efforts, the outstanding receivable balance relating to services provided
is written off against the allowance. Additions to the provision for bad debt are charged to expense.
Neese determined that an allowance for
loss of $29,001 was required at December 31, 2019 and 2018.
Retail and Appliances Segment
Goedeker collects the full sales price
from the customer at the time the order is placed. Goedeker does not incur incremental costs obtaining purchase orders from customers,
however, if Goedeker did, because all Goedeker’s contracts are less than a year in duration, any contract costs incurred
would be expensed rather than capitalized.
The revenue that Goedeker recognizes arises
from orders it receives from customers. Goedeker’s performance obligations under the customer orders correspond to each
sale of merchandise that it makes to customers under the purchase orders; as a result, each purchase order generally contains
only one performance obligation based on the merchandise sale to be completed. Control of the delivery transfers to customers
when the customer can direct the use of, and obtain substantially all the benefits from, Goedeker’s products, which generally
occurs when the customer assumes the risk of loss. The transfer of control generally occurs at the point of shipment. Once this
occurs, Goedeker has satisfied its performance obligation and Goedeker recognizes revenue. Revenue from the sale of long-term
service warranties are recognized net of costs to sell the contracts to the third-party warranty service company.
Transaction Price ‒ Goedeker agrees
with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price.
In Goedeker’s contracts with customers, it allocates the entire transaction price to the sales price, which is the basis
for the determination of the relative standalone selling price allocated to each performance obligation. Any sales tax, value
added tax, and other tax Goedeker collects concurrently with revenue-producing activities are excluded from revenue.
If Goedeker continued to apply legacy
revenue recognition guidance for the three and year ended December 31, 2019, revenues, gross margin, and net loss would not have
changed.
Cost of revenue includes the cost of purchased
merchandise plus the cost of delivering merchandise and where applicable installation, net of promotional rebates and other incentives
received from vendors.
Substantially all Goedeker’s sales
are to individual retail consumers.
Disaggregated Revenue ‒
Goedeker disaggregates revenue from contracts with customers by contract type, as it believes it best depicts how the nature,
amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Goedeker’s revenue by sales type
is as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Appliance sales
|
|
$
|
29,254,413
|
|
|
$
|
-
|
|
Furniture sales
|
|
|
4,814,931
|
|
|
|
-
|
|
Other sales
|
|
|
598,769
|
|
|
|
-
|
|
Total revenue
|
|
$
|
34,668,113
|
|
|
$
|
-
|
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Performance Obligations – Goedeker’s
performance obligations include delivery of products and, in some instances, performance of services such as installation. Revenue
for the sale of merchandise is recognized upon shipment to the customer; or in some instances, upon delivery and installation
of the product which typically occur simultaneously.
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. 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 $425,000 and $0 at December 31, 2019 and
2018, 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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
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 December 31, 2019, the Company classified a warrant
issued in conjunction with a term loan as a derivative instrument. (see Note 11).
Income Taxes
Income taxes are computed using the asset
and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on
the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted
tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence,
are not expected to be realized.
Stock-Based Compensation
Stock-based compensation is accounted
for at fair value in accordance with ASC Topic 718. To date, the Company has not adopted a stock option plan and has not granted
any stock options.
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 year ended December
31, 2019, the following 895,565 potentially dilutive securities were excluded from diluted loss per share: 200,000 for outstanding
warrants and 695,565 related to the convertible note payable and accrued interest. There are no such common share equivalents
outstanding as of December 31, 2018.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Going Concern Assessment
Management assesses going concern uncertainty
in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital,
including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial
statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in
GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider
various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of
projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise additional
capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, management makes certain assumptions
around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable
those implementations can be achieved and management has the proper authority to execute them within the look-forward period.
The Company has generated losses since
its inception and has relied on cash on hand, external bank lines of credit, issuance of third party and related party debt and
the sale of a note to support cashflow from operations. As of and for the year ended December 31, 2019, the Company had a net loss
attributable to 1847 Holdings’ shareholders of $2,246,959, and net cash used in operations of $1,923,293.
For the year ended December 31, 2019,
the Company incurred operating losses of $3,381,000 (before deducting losses attributable to non-controlling interests) and incurred
negative cash flows from operations of $1,923,293 and negative working capital of $10,937,260. Losses from operations include
approximately $673,000 of expenses incurred in connection with the acquisition of the assets of Goedeker Television on April 5,
2019. Also, management believes the Company is owed $809,000 related to a working capital adjustment, which is disputed by Goedeker
Television. This matter is being pursued through a legal process (See Note 9). In addition to the estimates of funds available
from operations, the Company has unpledged assets that it believes could provide for $474,000 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
Annual Report on Form 10-K, indicate improved operations and the Company’s ability to continue operations as a going concern.
The impact of COVID-19 on the Company’s
business has been considered in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing
on a return to more normal operations. Further, the recently enacted stimulus bill provides for economic assistance loans through
the United States Small Business Administration. The Company is actively pursuing the possibility of obtaining such loans.
The accompanying consolidated financial
statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and
satisfy its liabilities in the normal course of business.
Management believes that based on
relevant conditions and events that are known and reasonably knowable that its forecasts. 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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
In June 2016, the FASB issued ASU 2016-13
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the
measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing
incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses.
ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019.
The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial
statements.
Recently Adopted
In February 2016, the FASB issued ASU
2016-02, Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases
and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease
liabilities by lessees for those leases classified as operating leases under previous GAAP. Topic 842 retains a distinction between
finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases
are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the
previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods
within those fiscal years; and earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases
shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. Practical
expedients are available for election as a package and if applied consistently to all leases. As part of its adoption, the Company
elected the following practical expedients: the Company has not reassessed whether any expired or existing contracts are or contain
leases, the Company has not reassessed lease classification for any expired or existing leases; the Company has not reassessed
initial direct costs for any existing leases; and the Company has not separated lease and non-lease components. The adoption of
the standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
The comparative periods have not been restated for the adoption of ASU 2016-02.
NOTE 3 – BUSINESS SEGMENTS
Summarized financial information concerning
the Company’s reportable segments is presented below:
|
|
For the Year Ended
December 31,
2019
|
|
|
For the Year Ended
December 31,
2018
|
|
|
|
Land
Management
Services
|
|
|
Retail &
Appliances
|
|
|
Corporate
Services
|
|
|
Total
|
|
|
Land
Management
Services
|
|
|
Retail &
Appliances
|
|
|
Corporate
Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
4,201,414
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,201,414
|
|
|
$
|
4,631,507
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,631,507
|
|
Sales of parts and equipment
|
|
|
2,178,611
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,178,611
|
|
|
|
2,702,340
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,702,340
|
|
Furniture and appliances revenue
|
|
|
-
|
|
|
|
34,668,113
|
|
|
|
-
|
|
|
|
34,668,113
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Revenue
|
|
|
6,380,025
|
|
|
|
34,668,113
|
|
|
|
-
|
|
|
|
41,048,138
|
|
|
|
7,333,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,333,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
1,830,067
|
|
|
|
28,596,127
|
|
|
|
-
|
|
|
|
30,426,194
|
|
|
|
2,370,757
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,370,757
|
|
Total operating expenses
|
|
|
5,707,272
|
|
|
|
7,789,224
|
|
|
|
161,441
|
|
|
|
13,657,937
|
|
|
|
6,161,835
|
|
|
|
-
|
|
|
|
319,850
|
|
|
|
6,481,685
|
|
Loss from operations
|
|
$
|
(1,157,314
|
)
|
|
$
|
(1,717,238
|
)
|
|
$
|
(161,441
|
)
|
|
$
|
(3,035,993
|
)
|
|
$
|
(1,198,745
|
)
|
|
$
|
-
|
|
|
$
|
(319,850
|
)
|
|
$
|
(1,518,595
|
)
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
NOTE 4—RECEIVABLES
At December 31, 2019 and 2018, receivables
consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Credit card payments in process of settlement
|
|
$
|
406,838
|
|
|
$
|
-
|
|
Vendor rebates receivable
|
|
|
1,380,369
|
|
|
|
-
|
|
Trade receivables from customers
|
|
|
695,249
|
|
|
|
578,569
|
|
Total receivables
|
|
|
2,482,456
|
|
|
|
578,569
|
|
Allowance for doubtful accounts
|
|
|
(29,001
|
)
|
|
|
(29,001
|
)
|
Accounts receivable, net
|
|
$
|
2,453,455
|
|
|
$
|
549,568
|
|
NOTE 5—INVENTORIES
At December 31, 2019 and 2018, the inventory
balances are composed of:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Machinery and Equipment
|
|
$
|
119,444
|
|
|
$
|
427,551
|
|
Parts
|
|
|
142,443
|
|
|
|
159,685
|
|
Appliances
|
|
|
1,562,359
|
|
|
|
-
|
|
Furniture
|
|
|
189,376
|
|
|
|
-
|
|
Other
|
|
|
53,356
|
|
|
|
-
|
|
Subtotal
|
|
|
2,066,978
|
|
|
|
587,236
|
|
Allowance for inventory obsolescence
|
|
|
(451,546
|
)
|
|
|
(99,546
|
)
|
Inventories, net
|
|
$
|
1,615,432
|
|
|
$
|
487,690
|
|
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 December 31,
2019 and 2018, deposits with vendors totaled $294,960 and $-0-, respectively.
NOTE 7—PROPERTY AND EQUIPMENT
Property and equipment consist of the
following at December 31, 2019 and 2018:
Classification
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Buildings and improvements
|
|
$
|
5,338
|
|
|
$
|
5,338
|
|
Equipment and machinery
|
|
|
3,120,498
|
|
|
|
2,943,490
|
|
Tractors
|
|
|
2,694,888
|
|
|
|
2,834,888
|
|
Trucks and other vehicles
|
|
|
1,138,304
|
|
|
|
1,147,304
|
|
Leasehold improvements
|
|
|
117,626
|
|
|
|
-
|
|
Total
|
|
|
7,076,654
|
|
|
|
6,931,020
|
|
Less: Accumulated depreciation
|
|
|
(3,709,227
|
)
|
|
|
(2,439,931
|
)
|
Property and equipment, net
|
|
$
|
3,367,427
|
|
|
$
|
4,491,089
|
|
Depreciation expense for the years ended
December 31, 2019 and 2018 was $1,378,952 and $1,435,098, respectively.
All property and equipment are pledged
to secure loans from Burnley, SBCC and Home State Bank as described and defined in the notes below.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
NOTE 8—INTANGIBLE ASSETS
The following
provides a breakdown of identifiable intangible assets as of December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Customer Relationships
|
|
|
|
|
|
|
Identifiable intangible assets, gross
|
|
$
|
783,000
|
|
|
$
|
34,000
|
|
Accumulated amortization
|
|
|
(56,023
|
)
|
|
|
(12,467
|
)
|
Customer relationship identifiable intangible
assets, net
|
|
|
726,977
|
|
|
|
21,533
|
|
Marketing Related
|
|
|
|
|
|
|
|
|
Identifiable intangible assets, gross
|
|
|
1,368,000
|
|
|
|
-
|
|
Accumulated amortization
|
|
|
(201,400
|
)
|
|
|
-
|
|
Marketing related identifiable intangible assets,
net
|
|
|
1,166,600
|
|
|
|
-
|
|
Total Identifiable intangible assets, net
|
|
$
|
1,893,577
|
|
|
$
|
21,533
|
|
In connection
with the acquisitions of Goedeker and Neese, the Company identified intangible assets of $2,151,000 and $34,000, respectively,
representing trade names and customer relationships. These assets are being amortized on a straight-line basis over their weighted
average estimated useful life of 4.6 years and amortization expense amounted to $244,956 and $6,800 for the years ended December
31, 2019 and 2018, respectively.
As of December
31, 2019, the estimated annual amortization expense for each of the next five fiscal years is as follows:
2020
|
|
$
|
330,332
|
|
2021
|
|
|
330,332
|
|
2022
|
|
|
324,665
|
|
2023
|
|
|
323,532
|
|
2024
|
|
|
584,716
|
|
Total
|
|
$
|
1,893,577
|
|
NOTE 9—ACQUISITION
On January 18, 2019, Goedeker entered
into an asset purchase agreement with Goedeker Television and Steve Goedeker and Mike Goedeker (the “Stockholders”),
pursuant to which Goedeker agreed to acquire substantially all of the assets of Goedeker Television used in its retail appliance
and furniture business (the “Goedeker Business”).
On April 5, 2019, Goedeker, 1847 Goedeker,
and the Stockholders entered into an amendment to the asset purchase agreement and closing of the acquisition of substantially
all of the assets of Goedeker Television used in the Goedeker Business was completed (the “Acquisition”). The acquisition
provided an addition to the Company’s objective of a diversified portfolio of acquisitions.
The aggregate purchase price was $6,200,000
consisting of: (i) $1,500,000 in cash, subject to adjustment; (ii) the issuance of a promissory note in the principal amount of
$4,100,000; and (iii) up to $600,000 in earn out payments (as described below). As additional consideration, 1847 Goedeker agreed
to issue to each of the Stockholders a number of shares of its common stock equal to a 11.25% non-dilutable interest (22.5% total)
in all of the issued and outstanding stock of 1847 Goedeker as of the closing date.
The asset purchase agreement provided
for an adjustment to the purchase price based on the difference between actual working capital at closing and the seller’s
preliminary estimate of closing date working capital. In accordance with the asset purchase agreement, an independent CPA
firm was retained by Goedeker and the seller to resolve differences in the working capital amounts. The report issued by
that CPA firm determined that the sellers owed Goedeker $809,000, which to date the seller has not paid. The $809,000 is
included in other assets in the accompanying balance sheet as of December 31, 2019.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Goedeker Television is also entitled to
receive the following earn out payments to the extent the Goedeker Business achieves the applicable EBITDA (as defined in the
asset purchase agreement) targets:
|
1.
|
An earn
out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing twelve
(12) month period from the closing date is $2,500,000 or greater;
|
|
2.
|
An earn
out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing twelve
(12) month period from the first anniversary of closing date is $2,500,000 or greater;
and
|
|
3.
|
An earn
out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing twelve
(12) month period from the second anniversary of the closing date is $2,500,000 or greater.
|
To the extent the EBITDA of the Goedeker
Business for any applicable period is less than $2,500,000 but greater than $1,500,000, Goedeker must pay a partial earn out payment
to Goedeker Television in an amount equal to the product determined by multiplying (i) the EBITDA Achievement Percentage by (ii)
the applicable earn out payment for such period, where the “Achievement Percentage” is the percentage determined by
dividing (A) the amount of (i) the EBITDA of the Goedeker Business for the applicable period less (ii) $1,500,000, by (B) $1,000,000.
For avoidance of doubt, no partial earn out payments shall be earned or paid to the extent the EBITDA of the Goedeker Business
for any applicable period is equal or less than $1,500,000.
To the extent Goedeker Television is entitled
to all or a portion of an earn out payment, the applicable earn out payment(s) (or portion thereof) shall be paid on the date
that is three (3) years from the closing date, and shall accrue interest from the date on which it is determined Goedeker Television
is entitled to such earn out payment (or portion thereof) at a rate equal to five percent (5%) per annum, computed on the basis
of a 360 day year for the actual number of days elapsed.
The rights of Goedeker Television to receive
any earn out payment are subordinate to the rights of Burnley and SBCC under separate subordination agreements that Goedeker Television
entered into with them on April 5, 2019 in connection with the Acquisition (see Notes 10 and 11). The 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 ending December 31, 2019
as the target was not met and the balance of the liability at December 31, 2019 is $49,248.
The provisional fair value of the purchase
consideration issued to Goedeker Television was allocated to the net tangible assets acquired. The Company accounted for the Acquisition
as the purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were
recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value
of the net liabilities assumed was approximately $492,601. The excess of the aggregate fair value of the net tangible assets has
been allocated to goodwill.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
The Company is currently in the process
of completing the preliminary purchase price allocation as an acquisition of certain assets. The final purchase price allocation
for Goedeker will be included in the Company’s financial statements in future periods. The table below shows preliminary
analysis for the Goedeker asset purchase:
Provisional
Purchase Consideration at preliminary 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 preliminary fair value
|
|
|
|
|
Cash
|
|
$
|
-
|
|
Accounts receivable
|
|
|
456,182
|
|
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
|
)
|
Other liabilities
|
|
|
-
|
|
Net tangible assets acquired (liabilities assumed)
|
|
$
|
(492,601
|
)
|
|
|
|
|
|
Total net assets acquired (liabilities assumed)
|
|
$
|
(492,601
|
)
|
Consideration paid
|
|
|
4,483,415
|
|
Preliminary Goodwill
|
|
$
|
4,976,016
|
|
The following presents the pro-forma combined
results of operations of the Company as if the Acquisition was completed on January 1, 2018 (before non-controlling interest).
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues, net
|
|
$
|
53,995,037
|
|
|
$
|
63,641,807
|
|
Net income (loss) allocable to common shareholders
|
|
$
|
(3,189,209
|
)
|
|
$
|
1,010,018
|
|
Net loss per share
|
|
$
|
(1.01
|
)
|
|
$
|
0.32
|
|
Weighted average number of shares outstanding
|
|
|
3,165,625
|
|
|
|
3,165,625
|
|
The unaudited pro forma results of operations
are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual
results that would have been attained had the Acquisition been completed as of January 1, 2018 or to project potential operating
results as of any future date or for any future periods. The revenue and net loss before non-controlling interest of Goedeker
since April 5, 2019 acquisition date through December 31, 2019 included in the consolidated income statement amounted to approximately
$34,668,113 and $2,878,700, respectively.
The estimated useful life remaining on
the property and equipment acquired is 4 to 5 years.
NOTE 10—LINES OF CREDIT
Burnley Capital LLC
On April 5, 2019, Goedeker, as borrower,
and 1847 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 $571,997 as of December 31, 2019, comprised of principal
of $660,497 and net of unamortized debt discount of $88,500.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
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.
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
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 (as defined below) under a subordination agreement that Burnley
entered into with Northpoint.
At December 31, 2019, Goedeker did not
meet certain loan covenants under the loan and security agreement. The agreement requires compliance with the following ratios
as a percentage of earnings before interest, taxes, depreciation, and amortization for the twelve-month period ended December
31, 2019. The table below shows the required ratio and actual ratio for such period.
Covenant
|
|
Actual
Ratio
|
|
Required
Ratio
|
Total debt ratio
|
|
(4.2)x
|
|
4.50x
|
Senior debt ratio
|
|
(1.5)x
|
|
1.75x
|
Interest coverage ratio
|
|
(1.1)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 December 31, 2019, the actual ratio was 0.12x compared to a requirement of 0.60x.
The loan and security agreement with SBCC
described below contains the same covenants and a cross default provision, whereby a default under the Burnley loan and security
agreement triggers a default under the SBCC loan and security agreement. Accordingly, the Company is in technical, not payment
default, on these loan and security agreements and has classified such debt as a current liability. The Company has developed
plans that will return it to full compliance including a recently received proposal from a new asset-based lender.
There are no cross default provisions
that would require any other long-term liabilities to be classified as current. Although the 9% subordinated promissory note described
below contains a cross default provision that is triggered by the acceleration of the senior debt, such cross default provision
would only be triggered for a technical default like the one that occurred if the senior lender accelerated the senior debt, which
has not happened.
1847
HOLDINGS LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Northpoint Commercial Finance LLC
On June 24, 2019, Goedeker, as borrower,
entered into a loan and security agreement with Northpoint Commercial Finance LLC (“Northpoint”), which was amended
on August 2, 2019, for revolving loans up to an aggregate maximum loan amount of $1,000,000 for the acquisition, financing or
refinancing by Goedeker of inventory at an interest rate of LIBOR plus 7.99%. The balance of the line of credit amounts to $678,993
as of December 31, 2019.
Pursuant to the loan and security agreement,
Goedeker shall pay the following fees to Northpoint: (i) an audit fee for each audit conducted as determined by Northpoint, equal
to the out-of-pocket expense incurred by Northpoint plus any minimum audit fee established by Northpoint; (ii) a fee for any returned
payments equal to the lesser of the maximum amount permitted by law or $50; (iii) a late fee for each payment not received by
the 25th day of a calendar month, and each month thereafter until such payment is paid, equal to the greater of 5%
of the amount past due or $25; (iv) a billing fee equal to $250 for any month for which Goedeker requests a paper billing statement;
(v) a live check fee equal to $50 for each check that Goedeker sends to Northpoint for payment of obligations under the loan and
security agreement; (vi) processing fees to be determined by Northpoint; and (vii) any additional fees that Northpoint may implement
from time to time.
The loan and security agreement contains
customary events of default, including in the event of (i) non-payment, (ii) a breach by Goedeker of any of its representations,
warranties or covenants under the loan and security agreement or any other agreement entered into with Northpoint, or (iii) the
bankruptcy or insolvency of Goedeker. The loan and security agreement contains customary representations, warranties and
affirmative and negative financial and other covenants for a loan of this type.
The Northpoint loans are secured by a
security interest in all of the inventory of Goedeker that is manufactured or sold by vendors identified in the loan and security
agreement. In connection with the loan and security agreement, on June 24, 2019, 1847 Goedeker entered into a guaranty in favor
of Northpoint, to guaranty the obligations of Goedeker under the loan and security agreement.
NOTE 11—NOTES PAYABLE
Small Business Community Capital
II, L.P.
On April 5, 2019, Goedeker, as borrower,
and 1847 Goedeker entered into a loan and security agreement with Small Business Community Capital II, L.P. (“SBCC”)
for a term loan in the principal amount of $1,500,000, pursuant to which Goedeker issued to SBCC a term note in the principal
amount of up to $1,500,000 and a ten-year warrant to purchase shares of the most senior capital stock of Goedeker equal to 5.0%
of the outstanding equity securities of Goedeker on a fully-diluted basis for an aggregate price equal to $100. The Company classified
the warrant as a derivative liability on the balance sheet of $122,344 and subject to remeasurement on every reporting period.
The balance of the note amounts to $999,201 as of December 31, 2019, comprised of principal of $1,312,500, capitalized PIK interest
of $21,204, and net of unamortized debt discount of $144,625 and unamortized warrant feature of $189,879.
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
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 matures July 20, 2020, the loan is classified as a current liability
in the December 31, 2019 balance sheet. Pursuant to the terms of the note, Neese will make semi-annual payments of $302,270 beginning
on January 20, 2019 and continuing every six months thereafter until July 20, 2020, the maturity date; provided however, that
Neese will pay the note in full immediately upon demand by Home State Bank. The balance of the note amounts to $3,299,364 as of
December 31, 2019, comprised of principal of $3,309,537 and net of unamortized debt discount of $10,173.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
The loan agreement contains customary
representations and warranties. Pursuant to the terms of the loan agreement and the note, an “event of default” includes:
(i) if Neese fails to make any payment when due under the note; (ii) if Neese fails to comply with or to perform any other term,
obligation, covenant or condition contained in the note or in any of the related documents or to comply with or to perform any
term, obligation, covenant or condition contained in any other agreement between Home State Bank and Neese; (iii) if Neese defaults
under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Home State Bank’s property or Neese’s ability to repay
the note or perform Neese’s obligations under the note or any of the related documents; (iv) if any warranty, representation
or statement made or furnished to Home State Bank by Neese or on Neese’s behalf under the note or the related documents
is false or misleading in any material respect; (v) upon the dissolution or termination of Neese’s existence as a going
business, the insolvency of Neese, the appointment of a receiver for any part of Neese’s property, any assignment for the
benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws
by or against Neese, (vi) upon commencement of foreclosure or forfeiture proceedings by any creditor of Neese or by any governmental
agency against any collateral securing the loan; and (vii) if a material adverse change occurs in Neese’s financial condition,
or Home State Bank believes the prospect of payment or performance of the note is impaired. If any event of default occurs, all
commitments and obligations of Home State Bank immediately will terminate and, at Home State Bank’s option, all indebtedness
immediately will become due and payable, all without notice of any kind to Neese. Additionally, upon an event of default, the
interest rate on the note will be increased by 3 percentage points. However, in no event will the interest rate exceed the maximum
interest rate limitations under applicable law.
The loan is secured by inventory, accounts
receivable, and certain fixed assets of Neese. The loan agreement limited the payment of interest on certain promissory notes
(See Note 13) to $40,000 annually or fees to the Company’s manager. The Company continues to accrue interest and management
fee at the contractual amounts. Such accruals (in excess of $40,000 in interest on the promissory notes) are shown as long-term
accrued expenses in the accompanying balance sheet as of December 31, 2019.
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 year ended
December 31, 2019, $30,500 was remitted to Home State Bank pursuant to this requirement. During the year ended December 31, 2019,
Home State Bank advanced $27,000 against the term loan to pay the annual liability insurance premium.
The Company adopted ASU 2015-03 by deducting
$220,379 of net debt issuance costs from the term loan. Amortization of debt issuance costs totaled $32,206 for the year ended
December 31, 2019, leaving an ending balance of $10,073 at year end.
9% Subordinated Promissory Note
As noted above, a portion of the purchase
price for the Acquisition was paid by the issuance by Goedeker to Steve Goedeker, as representative of Goedeker Television, of
a 9% subordinated promissory note in the principal amount of $4,100,000. The note will accrue interest at 9% per annum, amortized
on a five-year straight-line basis and payable quarterly in accordance with the amortization schedule attached thereto, and mature
on April 5, 2023. The remaining balance of the note at December 31, 2019 is $3,300,444, comprised of principal of $3,930,292 and
net of unamortized debt discount of $629,848.
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.
1847
HOLDINGS LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
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.
8% Vesting Promissory Note
A portion of the purchase price for the
acquisition of Neese was paid by the issuance of an 8% vesting promissory note in the principal amount of $1,875,000 (which was
determined to have no fair value as of December 31, 2019 and 2018) by 1847 Neese and Neese to the sellers of Neese. Payment of
the principal and accrued interest on the note was subject to vesting in the event that Neese met Adjusted EBITDA (as defined
in the note) targets of $1,300,000 for the fiscal years ended December 31, 2017, 2018 and 2019 and a contingent consideration
subject to fair market valuation adjustment at each reporting period. The note bore interest on the vested portion of the principal
amount at the rate of eight percent (8%) per annum and was to be due and payable in full on June 30, 2020.
Neese did not meet the Adjusted EBITDA
target of $1,300,000 for the fiscal year ended December 31, 2017. At June 30, 2018, management made the determination that the
vesting note payable had no value because it estimated that the Adjusted EBITDA target of $1,300,000 for both 2018 and 2019 would
be not attained, thus eliminating the requirement for a payment under terms of the note payable. As expected, Neese did not meet
the Adjusted EBITDA target for the fiscal years ended December 31, 2019. As a result, this note did not vest and no amounts are
payable.
10% Promissory Note
A portion of the purchase price for the
acquisition of Neese was paid by the issuance of a promissory note in the principal amount of $1,025,000 by 1847 Neese and Neese
to the sellers of Neese. The promissory note bears interest on the outstanding principal amount at the rate of ten percent (10%)
per annum and was due and payable in full on March 3, 2018; provided, however, that the unpaid principal, and all accrued, but
unpaid, interest thereon shall be prepaid if at any time, and from time to time, the cash on hand of 1847 Neese and Neese exceeds
$250,000 and, then, the prepayment shall be equal to the amount of cash in excess of $200,000 until the unpaid principal and accrued,
but unpaid, interest thereon is fully prepaid. The promissory note contains the same events of default as the vesting promissory
note. The promissory note has not been repaid, thus the Company is in default under this note. Under terms of the term loan with
Home State Bank described in Note 11, this note may not be paid until the term loan is paid in full. The payees on the note agreed
to the modification of its terms by signing the loan agreement for the Home State Bank term loan. Accordingly, the loan is shown
as a long-term liability as of December 31, 2019. Additionally, the term loan lender limits the payment of interest on this note
to $40,000 annually. The Company continues to accrue interest at the contract rate; however, given the limitations of the term
loan, all accrued interest in excess of $40,000 is included in long-term accrued expenses.
NOTE 12—FLOOR PLAN LOANS PAYABLE
At December 31, 2019 and 2018, $10,581
and $109,100 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 December 31, 2019 and 2018 amounted to $10,581 and $109,100,
respectively.
NOTE 13—CONVERTIBLE PROMISSORY NOTE
On April 5, 2019, the Company, 1847 Goedeker
and Goedeker (collectively, “1847”) entered into a securities purchase agreement with Leonite Capital LLC, a Delaware
limited liability company (“Leonite”), pursuant to which 1847 issued to Leonite a secured convertible promissory note
in the aggregate principal amount of $714,286. As additional consideration for the purchase of the note, (i) the Company issued
to Leonite 50,000 common shares, (ii) the Company issued to Leonite a five-year warrant to purchase 200,000 common shares at an
exercise price of $1.25 per share (subject to adjustment), which may be exercised on a cashless basis, and (iii) 1847 Goedeker
issued to Leonite shares of common stock equal to a 7.5% non-dilutable interest in 1847 Goedeker.
The note carries an original issue discount
of $64,286 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred
in connection with the purchase of the note. Therefore, the purchase price of the note was $650,000. Furthermore, the Company
issued 50,000 shares of common stock valued at $137,500 and a debt-discount related to the warrants valued at $292,673. The company
amortized $319,031 of financing costs related to the shares and warrants in the year ended December 31, 2019. The remaining net
balance of the note at December 31, 2019 is $584,943, comprised of principal of $714,286 and net of unamortized original issuance
discount interest of $14,451, financing costs of $38,125 and unamortized debt discount warrant feature of $76,767.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
The note bears interest at the rate of
the greater of (i) 12% per annum and (ii) the prime rate as set forth in the Wall Street Journal on April 5, 2019 plus 6.5% guaranteed
over the holding period on the unconverted principal amount, on the terms set forth in the note (the “Stated Rate”).
Any amount of principal or interest on the note which is not paid by the maturity date shall bear interest at the rate at the
lesser of 24% per annum or the maximum legal amount permitted by law (the “Default Interest”).
Beginning on May 5, 2019 and on the
same day of each and every calendar month thereafter throughout the term of the note, 1847 shall make monthly payments
of interest only due under the note to Leonite at the Stated Rate as set forth above. 1847 shall pay to Leonite on an
accelerated basis any outstanding principal amount of the note, along with accrued, but unpaid interest, from: (i) net proceeds
of any future financings by the Company, but not its subsidiaries, whether debt or equity, or any other financing proceeds, except
any transaction having a specific use of proceeds requirement that such proceeds are to be used exclusively to purchase the assets
or equity of an unaffiliated business and the proceeds are used accordingly; (ii) net proceeds from any sale of assets of 1847
or any of its subsidiaries other than sales of assets in the ordinary course of business or receipt by 1847 or any of its subsidiaries
of any tax credits, subject to rights of Goedeker, or other financing sources of 1847 (including its subsidiaries) existing prior
to the date of the note; and (iii) net proceeds from the sale of any assets outside of the ordinary course of business or securities
in any subsidiary.
The note will mature 12 months from the
issue date, or April 5, 2020, at which time the principal amount and all accrued and unpaid interest, if any, and other fees relating
to the note, will be due and payable. Unless an event of default as set forth in the note has occurred, 1847 has the right to
prepay principal amount of, and any accrued and unpaid interest on, the note at any time prior to the maturity date at 115% of
the principal amount (the “Premium”), provided, however, that if the prepayment is the result of any of the occurrence
of any of the transactions described in subparagraphs (i), (ii) or (iii) above then such prepayment shall be the unpaid principal
amount, plus accrued and unpaid interest and other amounts due but without the Premium.
The note contains customary events of
default, including in the event of (i) non-payment, (ii) a breach by 1847 of its covenants under the securities purchase agreement
or any other agreement entered into in connection with the securities purchase agreement, or a breach of any of representations
or warranties under the note, or (iii) the bankruptcy of 1847. The note also contains a cross default provision, whereby a default
by 1847 of any covenant or other term or condition contained in any of the other financial instrument issued by of 1847 to Leonite
or any other third party after the passage all applicable notice and cure or grace periods that results in a material adverse
effect shall, at Leonite’s option, be considered a default under the note, in which event Leonite shall be entitled to apply
all rights and remedies under the terms of the note.
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.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
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 LEASES
The cash portion of the purchase price
for the acquisition of Neese was financed under a capital lease transaction for Neese’s equipment with Utica Leaseco, LLC
(“Utica”), pursuant to a master lease agreement, dated March 3, 2017, between Utica, as lessor, and 1847 Neese and
Neese, as co-lessees (collectively, the “Lessee”). Under the master lease agreement, Utica loaned an aggregate of
$3,240,000 for certain of Neese’s equipment listed therein, which it leases to the Lessee. The initial term of the master
lease agreement was for 51 months. Under the master lease agreement, the Lessee agreed to pay a monthly rent of $53,000 for the
first three (3) months, with such amount increasing to $85,322 for the remaining forty-eight (48) months.
On June 14, 2017, the parties entered
into a first amendment to lease documents, pursuant to which the parties agreed to, among other things, extend the term of the
master lease agreement from 51 months to 57 months and amend the payments due thereunder. Under the amendment, the Lessee agreed
to pay a monthly rent of $53,000 for the first ten (10) months, with such amount increasing to $85,322 for the remaining forty-seven
(47) months. In connection with the extension of the term of the master lease agreement, the parties also amended the schedule
of stipulated loss values and early termination payment schedule attached thereto. In connection with the amendment, the Lessee
agreed to pay Utica an amendment fee of $2,500.
On October 31, 2017, the parties entered
into a second equipment schedule to the master lease agreement, pursuant to which Utica loaned an aggregate of $980,000 for certain
of Neese’s equipment listed therein. The term of the second equipment schedule is 51 months and agreed monthly payments
are $25,807.
If any rent is not received by Utica within
five (5) calendar days of the due date, the Lessee shall pay a late charge equal to ten (10%) percent of the amount. In addition,
in the event that any payment is not processed or is returned on the basis of insufficient funds, upon demand, the Lessee shall
pay Utica a charge equal to five percent (5%) of the amount of such payment. The Lessee is also required to pay an annual administration
fee of $5,000. Upon the expiration of the term of the master lease agreement, the Lessee is required to pay, together with all
other amounts then due and payable under the master lease agreement, in cash, an end of term buyout price equal to the lesser
of: (a) $162,000 (five percent (5%) of the total invoice cost (as defined in the master lease agreement)); or (b) the fair market
value of the equipment, as determined by Utica. Upon the expiration of the master lease agreement, the Lessee is required to pay,
together with all other amounts then due and payable under the master lease agreement, in cash, an end of term buyout price equal
to the lesser of: (a) $49,000 (five percent (5%) of the total invoice cost); or (b) the fair market value of the equipment, as
determined by Utica.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Provided that no default under the master
lease agreement has occurred and is continuing beyond any applicable grace or cure period, the Lessee has an early buy-out option
with respect to all but not less than all of the equipment, upon the payment of any outstanding rental payments or other fees
then due, plus an additional amount set forth in the master lease agreement, which represents the anticipated fair market value
of the equipment as of the anticipated end date of the master lease agreement. In addition, the Lessee shall pay to Utica an administrative
charge to be determined by Utica to cover its time and expenses incurred in connection with the exercise of the option to purchase,
including, but not limited to, reasonable attorney fees and costs. Furthermore, upon the exercise by the Lessee of this option
to purchase the equipment, the Lessee shall pay all sales and transfer taxes and all fees payable to any governmental authority
as a result of the transfer of title of the equipment to Lessee. The early buy-out option was not available on the second equipment
schedule to the master lease agreement until after December 31, 2018.
In connection with the master lease agreement,
the Lessee granted a security interest on all of its right, title and interest in and to: (i) the equipment, together with all
related software (embedded therein or otherwise) and general intangibles, all additions, attachments, accessories and accessions
thereto whether or not furnished by the supplier; (ii) all accounts, chattel paper, deposit accounts, documents, other equipment,
general intangibles, instruments, inventory, investment property, letter of credit rights and any supporting obligations related
to any of the foregoing; (iii) all books and records pertaining to the foregoing; (iv) all property of such Lessee held by Utica,
including all property of every description, in the custody of or in transit to Utica for any purpose, including safekeeping,
collection or pledge, for the account of such Lessee or as to which such Lessee may have any right or power, including but not
limited to cash; and (v) to the extent not otherwise included, all insurance, substitutions, replacements, exchanges, accessions,
proceeds and products of the foregoing.
On February 1, 2018, Utica agreed to continue
the $53,000 payments for three additional months and extend the maturity of the loan by three months. Additionally, Utica agreed
to defer the February 3, 2018 payment to February 20, 2018. The Company paid one-half the normal late fee, $2,650 for the late
payment. On March 2, 2018, Utica agreed to defer the March 3 payment to March 30, 2018. The Company paid a late payment fee of
$5,300 for the payment deferral.
On April 18, 2018, Utica, the Lessee,
and Ellery W. Roberts, as guarantor under the master lease agreement, entered into a forbearance agreement relating to the non-payment
of certain rent payments due under the master lease agreement for the months of March 2018 and April 2018. Pursuant to the forbearance
agreement, Utica agreed to forbear from demanding payment in full and exercising its remedies under the master lease agreement
until June 3, 2018. Pursuant to the forbearance agreement, the Lessee agreed to, among other things, (i) make the payments set
forth in the forbearance agreement on or before the dates specified therein, totaling $173,376, (ii) be current on all rent due
under Schedule 1 of the master lease agreement by June 3, 2018 and be current on all rent due under Schedule 2 of the master lease
agreement by May 30, 2018, (ii) reinstate or renew and continue in effect all insurance as required under the master lease agreement
at Lessee’s sole cost and expense, (iv) pay a forbearance fee to Utica totaling $4,500, which shall not be due until termination
of the master lease agreement and (v) execute a surrender agreement with respect to the Lessee’s equipment, which will be
held in escrow by Utica and not deemed effective unless and until the earlier to occur of: (a) the June 3, 2018, provided liabilities
under master lease agreement remain due but unpaid; (b) such time as Utica accelerates due and unpaid liabilities pursuant to
the term of the forbearance agreement and the master lease agreement; or (c) a default occurs under the forbearance agreement
or the master lease agreement.
A portion of the proceeds from the term
loan from Home State Bank (Note 11) were applied to reduce the balance of this lease to $475,000. The lease is payable in 46 payments
of $12,882 beginning July 3, 2018 and an end-of-term buyout of $38,000. As a result, the parties to the forbearance agreement
agreed that the forbearance agreement is terminated and is no longer in effect. In completing the early payout, the Company incurred
a loss of $405,674 plus an additional loss of $95,130 from the write-off of unamortized debt issuance costs. The loss on early
extinguishment of debt arose from the buyout provisions in the lease and because the Company had delayed making the regular payment
of $85,322 until May 3, 2018, rather than July 3, 2017 as contemplated in the original master lease agreement. Management chose
to close the term loan because of the much lower interest rate and the loan allows the Company to make payments that match its
operating cycle rather than monthly payments.
If the Company sells equipment or inventory,
it must remit to Utica the amount loaned against the equipment. Such payments are accumulated and applied to the balance at the
end of the lease term. During the year ended December 31, 2019, $500,179 of payments and $174,784 of lien release payments were
remitted to Utica.
The assets and liabilities under the master
lease agreement are recorded at the fair value of the assets at the time of acquisition.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
The Company adopted ASU 2015-03 by deducting
$25,055 of net debt issuance costs from the long-term portion of the financing lease. Amortization of debt issuance costs totaled
$12,060 for the year ended December 31, 2019.
At December 31, 2019, annual minimum future
lease payments under this Master Lease Agreement are as follows:
|
|
Amount
|
|
2020
|
|
$
|
490,077
|
|
2021
|
|
|
464,269
|
|
2022
|
|
|
77,335
|
|
Total minimum lease payments
|
|
|
1,031,681
|
|
Less amount representing interest
|
|
|
200,990
|
|
Present value of minimum lease payments
|
|
|
830,691
|
|
Less current portion of minimum lease
|
|
|
(358,584
|
)
|
Less debt issuance costs, net
|
|
|
(25,055
|
)
|
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
|
|
$
|
275,874
|
|
The interest rate on the capitalized lease
is approximately 15.5%.
NOTE 15—OPERATING LEASE
On March 3, 2017, Neese entered into an
agreement of lease with K&A Holdings, LLC, a limited liability company that is wholly-owned by officers of Neese. The agreement
of lease is for a term of ten (10) years and provides for a base rent of $8,333 per month. In the event of late payment, interest
shall accrue on the unpaid amount at the rate of eighteen percent (18%) per annum. The agreement of lease contains customary events
of default, including if Neese shall fail to pay rent within five (5) days after the due date, or if Neese shall fail to perform
any other terms, covenants or conditions under the agreement of lease, and other customary representations, warranties and covenants.
Under terms of the term loan agreement with Home State Bank (Note 11), the Company may not pay salary or rent to such officers
of Neese in excess of $100,000 per year beginning on the date of the term loan agreement, June 13, 2018. The Company is accruing
monthly rent, but because of the limitation in the term loan, $200,000 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 $100,000 for the year ended December 31, 2019.
Supplemental balance sheet information
related to leases was as follows:
|
|
December 31,
2019
|
|
Operating lease right-of-use lease asset
|
|
$
|
624,157
|
|
Accumulated amortization
|
|
|
(59,077
|
)
|
Net balance
|
|
$
|
565,080
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
63,253
|
|
Lease liability, long term
|
|
|
501,827
|
|
Total operating lease liabilities
|
|
$
|
565,080
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
|
86
months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
6.85
|
%
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Maturities of the lease liability are
as follows:
|
|
For the Years Ended
|
|
2020
|
|
$
|
100,000
|
|
2021
|
|
|
100,000
|
|
2022
|
|
|
100,000
|
|
2023
|
|
|
100,000
|
|
2024
|
|
|
100,000
|
|
Thereafter
|
|
|
216,667
|
|
Total lease payments
|
|
|
716,667
|
|
Less imputed interest
|
|
|
151,587
|
|
Maturities of lease liabilities
|
|
$
|
565,080
|
|
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. 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:
|
|
December 31,
2019
|
|
Operating lease right-of-use lease asset
|
|
$
|
2,300,000
|
|
Accumulated amortization
|
|
|
(299,335
|
)
|
Net balance
|
|
$
|
2,000,665
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
422,520
|
|
Lease liability, long term
|
|
|
1,578,235
|
|
Total operating lease liabilities
|
|
$
|
2,000,755
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
|
51 Months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
6.5
|
%
|
Maturities of the lease liability are
as follows:
|
|
For the Years Ended
|
|
2020
|
|
$
|
540,000
|
|
2021
|
|
|
540,000
|
|
2022
|
|
|
540,000
|
|
2023
|
|
|
540,000
|
|
2024
|
|
|
135,000
|
|
Total lease payments
|
|
|
2,295,000
|
|
Less imputed interest
|
|
|
(294,245
|
)
|
Maturities of lease liabilities
|
|
$
|
2,000,755
|
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
NOTE 16—RELATED PARTIES
Management Services Agreement
On April 15, 2013, the Company and 1847
Partners LLC (the “Manager”), entered into a management services agreement, pursuant to which the Company is required
to pay the Manager a quarterly management fee equal to 0.5% (2.0% annualized) of its adjusted net assets for services performed.
Offsetting Management Services Agreement
- 1847 Neese
On March 3, 2017, 1847 Neese entered into
an offsetting management services agreement with the Manager.
Pursuant to the offsetting management
services agreement, 1847 Neese appointed the Manager to provide certain services to it for a quarterly management fee equal to
$62,500 per quarter; provided, however, that: (i) pro rated payments shall be made in the first quarter and the last quarter of
the term; (ii) if the aggregate amount of management fees paid or to be paid by 1847 Neese, together with all other management
fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal year
exceeds, or is expected to exceed, 9.5% of the Company’s gross income with respect to such fiscal year, then the management
fee to be paid by 1847 Neese for any remaining fiscal quarters in such fiscal year shall be reduced, on a pro rata basis determined
by reference to the management fees to be paid to the Manager by all of the subsidiaries of the Company, until the aggregate amount
of the management fee paid or to be paid by 1847 Neese, together with all other management fees paid or to be paid by all other
subsidiaries of the Company to the Manager, in each case, with respect to such fiscal year, does not exceed 9.5% of the Company’s
gross income with respect to such fiscal year; and (iii) if the aggregate amount of the management fee paid or to be paid by 1847
Neese, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in
each case, with respect to any fiscal quarter exceeds, or is expected to exceed, the aggregate amount of the management fee (before
any adjustment thereto) calculated and payable under the management services agreement (the “Parent Management Fee”)
with respect to such fiscal quarter, then the management fee to be paid by 1847 Neese for such fiscal quarter shall be reduced,
on a pro rata basis, until the aggregate amount of the management fee paid or to be paid by 1847 Neese, together with all other
management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to such
fiscal quarter, does not exceed the Parent Management Fee calculated and payable with respect to such fiscal quarter.
1847 Neese shall also reimburse the Manager
for all costs and expenses of 1847 Neese which are specifically approved by the board of directors of 1847 Neese, including all
out-of-pocket costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of 1847 Neese in connection
with performing services under the offsetting management services agreement.
The services provided by the Manager include:
conducting general and administrative supervision and oversight of 1847 Neese’s day-to-day business and operations, including,
but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative
policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability
insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses
and permits that become necessary, participation in risk management policies and procedures; and overseeing and consulting with
respect to 1847 Neese’s business and operational strategies, the implementation of such strategies and the evaluation of
such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions
or dispositions and product or service lines.
The Company expensed $250,000 and $250,000
in management fees for the years ended December 31, 2019 and 2018, respectively. Under terms of the term loan from Home State
Bank, no fees may be paid to the Manager without permission of the bank, which the Manager does not expect to be granted within
the forthcoming year. Accordingly, $450,808 due the Manager is classified as an accrued liability as of December 31, 2019.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Offsetting Management Services Agreement
- Goedeker
On April 5, 2019, Goedeker entered into
an offsetting management services agreement with the Manager.
Pursuant to the offsetting management
services agreement, Goedeker appointed the Manager to provide certain services to it for a quarterly management fee equal to the
greater of $62,500 or 2% of adjusted net assets (as defined in the management services agreement); provided, however, that (i)
pro rated payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate amount of management
fees paid or to be paid by Goedeker, together with all other management fees paid or to be paid by all other subsidiaries of the
Company to the Manager, in each case, with respect to any fiscal year exceeds, or is expected to exceed, 9.5% of the Company’s
gross income with respect to such fiscal year, then the management fee to be paid by Goedeker for any remaining fiscal quarters
in such fiscal year shall be reduced, on a pro rata basis determined by reference to the management fees to be paid to the Manager
by all of the subsidiaries of the Company, until the aggregate amount of the management fee paid or to be paid by Goedeker, together
with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with
respect to such fiscal year, does not exceed 9.5% of the Company’s gross income with respect to such fiscal year, and (iii)
if the aggregate amount the management fee paid or to be paid by Goedeker, together with all other management fees paid or to
be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal quarter exceeds, or
is expected to exceed, the aggregate amount of the Parent Management Fee with respect to such fiscal quarter, then the management
fee to be paid by Goedeker for such fiscal quarter shall be reduced, on a pro rata basis, until the aggregate amount of the management
fee paid or to be paid by Goedeker, together with all other management fees paid or to be paid by all other subsidiaries of the
Company to the Manager, in each case, with respect to such fiscal quarter, does not exceed the Parent Management Fee calculated
and payable with respect to such fiscal quarter.
Goedeker shall also reimburse the Manager
for all costs and expenses of Goedeker which are specifically approved by the board of directors of Goedeker, including all out-of-pocket
costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of Goedeker in connection with performing
services under the offsetting management services agreement.
The services provided by the Manager include:
conducting general and administrative supervision and oversight of Goedeker’s day-to-day business and operations, including,
but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative
policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability
insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses
and permits that become necessary, participation in risk management policies and procedures; and overseeing and consulting with
respect to Goedeker’s business and operational strategies, the implementation of such strategies and the evaluation of such
strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions
or dispositions and product or service lines.
The Company expensed $183,790 in management
fees for the year ended December 31, 2019. Payment of the management fee is subordinated to the payment of interest on the 9%
subordinated promissory note (see Note 13), such that no payment of the management fee may be made if Goedeker is in default under
the note with regard to interest payments and, for the avoidance of doubt, such payment of the management fee will be contingent
on Goedeker being in good standing on all associated loan covenants. In addition, during the period that that any amounts are
owed under the 9% subordinated promissory note or the earn out payments, the annual management fee shall be capped at $250,000.
The rights of the Manager to receive payments under the offsetting management services agreement 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, $63,653 due the Manager is classified as an accrued liability as of December 31, 2019.
Advances
From time to time, the Company has received
advances from its chief executive officer to meet short-term working capital needs. As of December 31, 2019 and 2018, a total
of $181,333 and $174,333 advances from related parties are outstanding, respectively. These advances are unsecured, bear no interest,
and do not have formal repayment terms or arrangements.
As of December 31, 2019 and 2018, the
Manager has funded the Company $62,499 and $55,500 in related party advances, respectively. These advances are unsecured, bear
no interest, and do not have formal repayment terms or arrangements.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
Grid Promissory Note
On January 3, 2018, the Company issued
a grid promissory note to the Manager in the initial principal amount of $50,000. The note provides that the Company may from
time to time request additional advances from the Manager up to an aggregate additional amount of $100,000, which will be added
to the note if the Manager, in its sole discretion, so provides. Interest shall accrue on the unpaid portion of the principal
amount and the unpaid portion of all advances outstanding at a fixed rate of 8% per annum, and along with the outstanding portion
of the principal amount and the outstanding portion of all advances, shall be payable in one lump sum due on the maturity date,
which is the first anniversary of the date of the note. The maturity date of the grid promissory note was extended until January
3, 2021. If all or a portion of the principal amount or any advance under the note, or any interest payable thereon is not paid
when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate of
12% per annum. In the event the Company completes a financing involving at least $500,000, the Company must, contemporaneously
with the closing of such financing transaction, repay the entire outstanding principal and accrued and unpaid interest on the
note. The note is unsecured and contains customary events of default. As of December 31, 2019 and 2018, the Manager has advanced
$119,400 and $117,000 of the promissory note and the Company has accrued interest of $17,115 and $7,549, respectively.
Building Lease
On March 3, 2017, Neese entered into an
agreement of lease with K&A Holdings, LLC, a limited liability company that is wholly-owned by officers of Neese. See Note
15 for details regarding this lease.
NOTE 17—SHAREHOLDERS’ DEFICIT
Allocation Shares
As of and December 31, 2019 and 2018,
the Company had authorized and outstanding 1,000 allocation shares. These allocation shares do not entitle the holder thereof
to vote on any matter relating to the Company other than in connection with amendments to the Company’s operating agreement
and in connection with certain other corporate transactions as specified in the operating agreement.
The Manager owns 100% of the allocation
shares of the Company, which are a separate class of limited liability company interests that, together with the common shares,
will comprise all of the classes of equity interests of the Company. The Manager received the allocation shares with its initial
capitalization of the Company. The allocation shares generally will entitle the Manager to receive a twenty percent (20%) profit
allocation as a form of incentive designed to align the interests of the Manager with those of the Company’s shareholders.
Profit allocation has two components: an equity-based component and a distribution-based component. The equity-based component
will be paid when the market for the Company’s shares appreciates, subject to certain conditions and adjustments. The distribution-based
component will be paid when the distributions the Company pays to shareholders exceed an annual hurdle rate of eight percent (8.0%),
subject to certain conditions and adjustments. While the equity-based component and distribution-based component are interrelated
in certain respects, each component may independently result in a payment of profit allocation if the relevant conditions to payment
are satisfied.
The 1,000 allocation shares are issued
and outstanding and held by the Manager, which is controlled by Mr. Roberts, the Company’s chief executive officer and controlling
shareholder.
Common Shares
The Company is authorized to issue 500,000,000
common shares as of December 31, 2019 and 2018. As of December 31, 2019 and 2018, the Company had 3,165,625 and 3,115,625 common
shares issued and outstanding, respectively. The common shares entitle the holder thereof to one vote per share on all matters
coming before the shareholders of the Company for a vote.
On January 22, 2018, the Company completed
a 1-for-5 reverse split of its outstanding common shares. As a result of this stock split, the issued and outstanding common shares
decreased from 3,115,500 to 623,125 shares.
On May 10, 2018, the Company completed
a 5-for-1 forward stock split of its outstanding common shares by way of a share dividend. As a result of this stock split, the
issued and outstanding common shares increased from 623,125 to 3,115,625 shares.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
All share and per share information has
been restated to retroactively show the effect of these stock splits.
On April 5, 2019, the Company, issued
50,000 common shares to Leonite pursuant to the securities purchase agreement (see Note 13).
Except in connection with the share dividend
on May 10, 2018 and issuance on April 5, 2019, the Company did not issue any equity securities in the years ended December 31,
2019 and 2018.
Warrants
On April 5, 2019, the Company issued a
warrant to purchase 200,000 common shares to Leonite pursuant to the securities purchase agreement (see Note 13). The warrant
has a term of five years, an exercise price of $1.25 per share (subject to adjustment), and may be exercised on a cashless basis.
Accordingly, a portion of the proceeds
was allocated to the warrant based on its relative fair value using the Black Scholes option-pricing model. The assumptions used
in the Black-Scholes model are as follows: (i) dividend yield of 0%; (ii) expected volatility of 140.3%, (iii) weighted
average risk-free interest rate of 2.31%, (iv) expected life of five years, and (v) estimated fair value of the common
shares of $2.75 per share in the amount of $292,673. The Company amortized $ 215,906 of debt discount in the year ended December
31, 2019 and the unamortized balance at year end is $76,767.
The warrant also contains an ownership
limitation. The Company shall not effect any exercise of the warrant, and Leonite shall not have the right to exercise any portion
of the warrant, to the extent that after giving effect to issuance of common shares upon exercise the warrant, Leonite, together
with its affiliates, and any other persons acting as a group together with Leonite or any of its affiliates, would beneficially
own in excess of 4.99% of the number of common shares outstanding immediately after giving effect to the issuance of common shares
issuable upon exercise of the warrant. Upon no fewer than 61 days’ prior notice to the Company, Leonite may increase
or decrease such beneficial ownership limitation provisions and any such increase or decrease will not be effective until the
61st day after such notice is delivered to the Company.
Noncontrolling Interests
The Company owns 55.0% of 1847 Neese and
70% of 1847 Goedeker. For financial interests in which the Company owns a controlling financial interest, the Company applies
the provisions of ASC 810, which are applicable to reporting the equity and net income or loss attributable to noncontrolling
interests. The results of 1847 Neese and 1847 Goedeker are included in the consolidated statement of income. The net loss attributable
to the 45% non-controlling interest of 1847 Neese amounted to $456,419 and $546,513 for the years ended December 31, 2019 and
2018, respectively. The net loss attributable to the 30% non-controlling interest of 1847 Goedeker amounted to $863,610 for the
period from April 5, 2019 (acquisition) to December 31, 2019.
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—INCOME TAXES
As of December 31, 2019 and 2018, the
Company had net operating loss carry forwards of approximately $2,297,000 and $1,135,000, respectively, that may be available
to reduce future years’ taxable income in varying amounts through 2037. Future tax benefits which may arise as a result
of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur
and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
The provision for Federal income tax consists
of the following:
The cumulative tax effect at the expected
rate of 26.3% and 34.7% of significant items comprising the Company’s net deferred tax amount is as follows:
Due to the change in ownership provisions
of the Tax Reform Act of 1986, net operating loss carry forwards incurred prior to 2018 for Federal income tax reporting purposes
are subject to annual limitations. Should a change in ownership occur net operating loss carry forwards may be limited as to use
in future years.
The components for the provision of income
taxes include:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Current Federal and State
|
|
$
|
16,500
|
|
|
$
|
(85,000
|
)
|
Deferred Federal and State
|
|
|
(1,218,900
|
)
|
|
|
(697,000
|
)
|
Total (benefit) provision for income taxes
|
|
$
|
(1,202,400
|
)
|
|
$
|
(782,000
|
)
|
A reconciliation of the statutory US Federal
income tax rate to the Company’s effective income tax rate is as follows:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Federal tax
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State tax
|
|
|
5.5
|
%
|
|
|
8.1
|
%
|
Gain on bargain purchase
|
|
|
0.0
|
%
|
|
|
5.8
|
%
|
Permanent items
|
|
|
(0.2
|
)%
|
|
|
(2.2
|
)%
|
Rate change from TCJA
|
|
|
0.0
|
%
|
|
|
4.3
|
%
|
Other
|
|
|
0.0
|
%
|
|
|
(2.3
|
)%
|
Effective income tax rate
|
|
|
26.3
|
%
|
|
|
34.7
|
%
|
On December 22, 2017 the Tax Cuts and
Jobs Act (“TCJA”) was signed into law. Pursuant to Staff Accounting Bulletin No 118, a reasonable estimate of the
specific income tax effects for the TCJA can be determined and the Company is reporting these provisional amounts. Accordingly,
the Company may revise these estimates in the upcoming year.
The TCJA reduces the corporate income
tax rate from 34% to 21% effective January 1, 2018. All deferred income tax assets and liabilities, including NOL’s have
been measured using the new rate under the TCJA and are reflected in the valuation of these assets as of December 31, 2019 and
2018.
Deferred income taxes reflect the net
tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes.
The major components of deferred tax assets and liabilities are as follows:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Deferred tax assets
|
|
|
|
|
|
|
Receivables
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
Related party accruals
|
|
|
156,000
|
|
|
|
58,000
|
|
Inventory obsolescence
|
|
|
115,000
|
|
|
|
29,000
|
|
Sales return reserve
|
|
|
51,000
|
|
|
|
-
|
|
Business interest limitation
|
|
|
343,000
|
|
|
|
-
|
|
Other
|
|
|
8,000
|
|
|
|
7,000
|
|
Loss carryforward
|
|
|
624,000
|
|
|
|
473,000
|
|
Total deferred tax assets
|
|
$
|
1,305,000
|
|
|
$
|
575,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
(652,000
|
)
|
|
$
|
(940,000
|
)
|
Intangibles
|
|
|
(18,000
|
)
|
|
|
-
|
|
Total deferred tax liabilities
|
|
$
|
(670,000
|
)
|
|
$
|
(940,000
|
)
|
|
|
|
|
|
|
|
-
|
|
Total net deferred income tax assets (liabilities)
|
|
$
|
635,000
|
|
|
$
|
(365,000
|
)
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
The Company has recorded activity related
to the gross unrecognized tax benefits (excluding interest and penalties) as follows:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Gross unrecognized tax benefit at the beginning of the year
|
|
$
|
-
|
|
|
$
|
126,000
|
|
Increase in tax positions to the current year
|
|
|
-
|
|
|
|
-
|
|
Adjustment to acquisition purchase price
|
|
|
-
|
|
|
|
(120,000
|
)
|
Decreases due to lapses in applicable statutes of limitations
|
|
|
-
|
|
|
|
(6,000
|
)
|
Total (benefit) provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company recognizes interest and penalties
accrued related to unrecognized tax benefits in income tax expense. At December 31, 2019 and 2018, accrued interest and penalties
were $0 and $0, respectively. The tax years ended December 31, 2015 through December 31, 2019 are considered to be open under
statute and therefore may be subject to examination by the Internal Revenue Service and various state jurisdictions.
Neese’s 2016 federal and state income
tax returns were filed showing a refund due of $129,000. The sellers received and retained the refunds related to a year prior
to the acquisition on Neese by 1847 Neese. In preparation of the 2017 return, the Company learned that the 2016 return was in
error and no refund should have been paid to the sellers. Thus, the funds received by the sellers should have been remitted to
the Company. The Company in discussion with the sellers agreed to treat the amount of the tax refund as additional consideration
for the purchase of Neese. Accordingly, the Company charged $129,000 to extinguishment of debt for the year ended December 31,
2018.
The Company is a partnership for federal
income taxes; however, its subsidiaries are C corporations. The Company owns less than 80% of the subsidiaries and thus it cannot
file consolidated federal income tax returns. Following is a summary of prepaid and deferred tax assets and liabilities for December
31, 2019 and 2018.
|
|
As of
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prepaid income taxes (accrued tax liability)
|
|
$
|
(24,000
|
)
|
|
$
|
173,000
|
|
Deferred tax asset (liability)
|
|
$
|
635,000
|
|
|
$
|
(365,000
|
)
|
|
|
Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Income tax benefit
|
|
$
|
1,202,000
|
|
|
$
|
781,000
|
|
1847 HOLDINGS
LLC
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2019
AND 2018
NOTE 20—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow
information for the years ended December 31, 2019 and 2018 were as follows:
|
|
For the Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Interest paid
|
|
$
|
706,784
|
|
|
$
|
811,854
|
|
Income tax paid
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Business Combinations:
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
3,412,296
|
|
|
$
|
-
|
|
Property and equipment
|
|
|
216,286
|
|
|
|
-
|
|
Intangibles
|
|
|
2,117,000
|
|
|
|
-
|
|
Goodwill
|
|
|
4,976,016
|
|
|
|
-
|
|
Assumed liabilities
|
|
|
(6,238,183
|
)
|
|
|
-
|
|
9% Subordinated Promissory Note, net of debt discount of $1,277,602
|
|
|
(3,422,398
|
)
|
|
|
-
|
|
Contingent note payable
|
|
|
(81,494
|
|
|
|
|
|
Non-controlling interest
|
|
|
(979,523
|
)
|
|
|
-
|
|
Cash acquired in acquisition of Goedeker
|
|
$
|
-
|
|
|
$
|
-
|
|
Financing:
|
|
|
|
|
|
|
|
|
Term Loan
|
|
$
|
1,500,000
|
|
|
$
|
-
|
|
Debt discount financing costs
|
|
|
(178,000
|
)
|
|
|
-
|
|
Warrant feature upon issuance of term loan
|
|
|
(229,244
|
)
|
|
|
-
|
|
Term loan, net
|
|
$
|
1,092,756
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Line of Credit
|
|
$
|
754,682
|
|
|
$
|
-
|
|
Debt discount on line of credit
|
|
|
(128,682
|
)
|
|
|
-
|
|
Issuance of common shares on promissory note
|
|
|
(137,500
|
)
|
|
|
-
|
|
Line of Credit, net
|
|
$
|
488,500
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible Promissory Note
|
|
$
|
714,286
|
|
|
$
|
-
|
|
Convertible Promissory Note original issue and debt discount
|
|
|
(79,286
|
)
|
|
|
-
|
|
Warrants issued in conjunction with convertible
promissory note
|
|
|
(292,673
|
)
|
|
|
-
|
|
Convertible Promissory Note, net
|
|
$
|
(342,327
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
|
229,244
|
|
|
|
-
|
|
Additional Paid-in Capital – common shares
and warrants issued
|
|
$
|
430,173
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating lease, ROU assets and liabilities
|
|
$
|
2,924,157
|
|
|
$
|
-
|
|
NOTE 21—SUBSEQUENT EVENTS
In accordance with SFAS 165 (ASC 855-10),
the Company has analyzed its operations subsequent to December 31, 2019 to the date these financial statements were issued and
has determined that it does not have any material subsequent events to disclose in these financial statements.
GOEDEKER TELEVISION
CO.
AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Goedeker Television Company:
Opinion on the Financial Statements
We have audited the accompanying balance
sheets of Goedeker Television Company (“the Company”) as of December 31, 2018 and 2017, the related statements of
income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018 and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and
the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we
are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Sadler, Gibb & Associates, LLC
We have served as the Company’s auditor since 2019.
Salt Lake City, UT
June 19, 2019
GOEDEKER
TELEVISION CO.
BALANCE SHEETS
DECEMBER 31, 2018
AND 2017
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,525,693
|
|
|
$
|
1,797,419
|
|
Receivables, net
|
|
|
2,635,932
|
|
|
|
2,907,708
|
|
Deposits with vendors
|
|
|
2,212,181
|
|
|
|
2,095,900
|
|
Merchandise inventory
|
|
|
3,111,594
|
|
|
|
3,709,575
|
|
Due from officers
|
|
|
50,634
|
|
|
|
50,634
|
|
Other assets
|
|
|
6,784
|
|
|
|
16,500
|
|
Total current assets
|
|
|
9,542,818
|
|
|
|
10,577,736
|
|
Property and equipment,
net
|
|
|
216,286
|
|
|
|
255,925
|
|
Total assets
|
|
$
|
9,759,104
|
|
|
$
|
10,833,661
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable, net
|
|
$
|
2,360,562
|
|
|
$
|
2,879,670
|
|
Customer deposits
|
|
|
3,500,268
|
|
|
|
5,211,677
|
|
Payroll related liabilities
|
|
|
153,767
|
|
|
|
189,584
|
|
Accrued expenses and other liabilities
|
|
|
345,830
|
|
|
|
445,631
|
|
Total current liabilities
|
|
|
6,360,427
|
|
|
|
8,726,562
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Common stock, no par value, 30,000 shares authorized, 7,000 shares issued
and outstanding
|
|
|
7,000
|
|
|
|
7,000
|
|
Additional paid-in capital
|
|
|
707,049
|
|
|
|
707,049
|
|
Retained earnings
|
|
|
2,684,628
|
|
|
|
1,393,050
|
|
Total stockholders’ equity
|
|
|
3,398,677
|
|
|
|
2,107,099
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
9,759,104
|
|
|
$
|
10,833,661
|
|
The accompanying notes are an integral
part of these financial statements
GOEDEKER TELEVISION
CO.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
$
|
56,307,960
|
|
|
$
|
58,555,495
|
|
Cost of goods sold
|
|
|
45,409,884
|
|
|
|
49,104,277
|
|
Gross profit
|
|
|
10,898,076
|
|
|
|
9,451,218
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
3,627,883
|
|
|
|
3,705,336
|
|
Advertising
|
|
|
2,640,958
|
|
|
|
2,197,518
|
|
Bank and credit card fees
|
|
|
1,369,557
|
|
|
|
1,490,641
|
|
Other operating expenses
|
|
|
1,370,286
|
|
|
|
1,220,279
|
|
Total operating expenses
|
|
|
9,008,684
|
|
|
|
8,613,774
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,889,392
|
|
|
|
837,444
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
116,135
|
|
|
|
77,938
|
|
Interest expense
|
|
|
(149
|
)
|
|
|
-
|
|
Total other income (expense)
|
|
|
115,986
|
|
|
|
77,938
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,005,378
|
|
|
$
|
915,382
|
|
|
|
|
|
|
|
|
|
|
Earnings per share – basic and diluted
|
|
$
|
286.48
|
|
|
$
|
130.77
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding – basic and diluted
|
|
|
7,000
|
|
|
|
7,000
|
|
The accompanying notes are an integral
part of these financial statements
GOEDEKER TELEVISION
CO.
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Retained
|
|
|
Total Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
Balance January 1, 2017
|
|
7,000
|
|
|
$
|
7,000
|
|
|
$
|
707,049
|
|
|
$
|
1,458,664
|
|
|
$
|
2,172,713
|
|
Net income for the year ended December
31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
915,382
|
|
|
|
915,382
|
|
Distributions to stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(980,996
|
)
|
|
|
(980,996
|
)
|
Balance December 31, 2017
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
707,049
|
|
|
|
1,393,050
|
|
|
|
2,107,099
|
|
Net income for the year ended December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,005,378
|
|
|
|
2,005,378
|
|
Distributions to stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(713,800
|
)
|
|
|
(713,800
|
)
|
Balance December 31, 2018
|
|
|
7,000
|
|
|
$
|
7,000
|
|
|
$
|
707,049
|
|
|
$
|
2,684,628
|
|
|
$
|
3,398,677
|
|
The accompanying notes are an integral
part of these financial statements
GOEDEKER TELEVISION
CO.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
2,005,378
|
|
|
$
|
915,382
|
|
Adjustments to reconcile net income to net cash
provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
39,639
|
|
|
|
42,858
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
271,776
|
|
|
|
(957,292
|
)
|
Deposits with vendors
|
|
|
(116,281
|
)
|
|
|
(262,832
|
)
|
Inventory
|
|
|
597,981
|
|
|
|
(1,247,732
|
)
|
Other assets
|
|
|
9,716
|
|
|
|
43,524
|
|
Accounts payable
|
|
|
(519,108
|
)
|
|
|
44,185
|
|
Customer deposits
|
|
|
(1,711,409
|
)
|
|
|
1,665,405
|
|
Payroll related liabilities
|
|
|
(35,817
|
)
|
|
|
(7,611
|
)
|
Accrued expenses and other
liabilities
|
|
|
(99,801
|
)
|
|
|
39,380
|
|
Net cash provided by
operating activities
|
|
|
442,074
|
|
|
|
275,267
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Distributions to stockholders
|
|
|
(713,800
|
)
|
|
|
(980,996
|
)
|
Cash used in financing
activities
|
|
|
(713,800
|
)
|
|
|
(980,996
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(271,726
|
)
|
|
|
(705,734
|
)
|
Cash beginning of period
|
|
|
1,797,419
|
|
|
|
2,503,153
|
|
Cash end of period
|
|
$
|
1,525,693
|
|
|
$
|
1,797,419
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period
for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these financial statements
GOEDEKER TELEVISION
CO.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 1 — ORGANIZATION AND NATURE OF BUSINESS
Goedeker Television Co. (the “Company”)
was formed under the laws of the State of Missouri in 1951 and is an independent retailer of major appliances, as well as furniture,
housewares, plumbing products, and lighting. Its single showroom location is in St. Louis, Missouri. Since 2008, it has also sold
its products through its website.
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company
have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
and are presented in US dollars.
Accounting Basis
The Company uses the accrual basis of
accounting and GAAP. The Company has adopted a calendar year end.
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.
Revenue Recognition and Cost of
Revenue
On January 1, 2018, the Company adopted
Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),”
which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, “Revenue
Recognition.” This ASU is based on the principle that revenue is recognized to depict the transfer of goods to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods. 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 collects the full sales price from the customer at the time the
order is placed. The Company does not incur incremental costs obtaining purchase orders from customers, however, if the Company
did, because all the Company’s contracts are less than a year in duration, any contract costs incurred would be expensed
rather than capitalized. The Company’s adoption of this ASU resulted in no change to the Company’s results of operations
or balance sheet.
The revenue that the Company recognizes
arises from orders the Company receives from customers. The Company’s performance obligations under the customer orders
correspond to each sale of merchandise that the Company 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, the Company’s
products, which generally occurs when the customer assumes the risk of loss. The transfer of control generally occurs at the point
of shipment. Once this occurs, the Company has satisfied its performance obligation and the Company recognizes revenue. Revenue
from the sale of long-term service warranties are recognized net of costs to sell the contracts to the third-party warranty service
company.
Transaction Price: The Company
agrees with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales
price. In the Company’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 the Company collects concurrently with revenue-producing activities are excluded from revenue.
GOEDEKER TELEVISION CO.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
If the Company continued to apply legacy
revenue recognition guidance for the year ended December 31, 2018, revenues, gross margin, and net loss would not have changed.
Cost of revenue includes the cost of purchased
merchandise plus the cost of delivering merchandise and where applicable installation, net of promotional rebates and other incentives
received from vendors.
Substantially all the Company’s
sales are to individual retail consumers.
Disaggregated Revenue ‒ The
Company 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.
The Company’s revenue by sales type
is as follows:
|
|
For the Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Appliance sales
|
|
$
|
42,871,864
|
|
|
$
|
43,134,923
|
|
Furniture sales
|
|
|
10,813,453
|
|
|
|
12,605,779
|
|
Other sales
|
|
|
2,622,643
|
|
|
|
2,814,793
|
|
Total revenue
|
|
$
|
56,307,960
|
|
|
$
|
58,555,495
|
|
Performance Obligations –
Our performance obligations include delivery of products and, in some instances, performance of services such as installation.
Revenue for the sale of merchandise is recognized upon shipment to the customer; or in some instances, upon delivery and installation
of the product which typically occur simultaneously.
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 its outstanding rebates receivables.
Uncollectible balances are expensed in the period it is determined to be uncollectible.
Inventory
Inventory consists of finished product
acquired for resale and is valued at the lower-of-cost-or-market with cost determined on an average item basis. The Company periodically
evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. Reserves
for slow-moving and potentially obsolete inventories was $-0- and $-0- as of December 31, 2018 and 2017, respectively.
Property and Equipment
Property and equipment is stated at cost.
Depreciation of furniture, vehicles and office equipment is calculated using the straight-line method over the estimated useful
lives as follows:
Asset
|
|
Years
|
Equipment
|
|
10
|
Office equipment
|
|
7
|
Vehicles
|
|
7
|
Fair Value of Financial Instruments
The Company’s financial instruments
consist of cash and cash equivalents. 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.
GOEDEKER TELEVISION CO.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
Income Taxes
The Company is a Subchapter S Corporation and income taxes
are the responsibility of the Company’s stockholders.
Basic and Diluted Income Per Share
Basic income 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. There are no such common share equivalents outstanding as of December
31, 2018 and 2017.
Recent Accounting Pronouncements
Recently Adopted
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers,” as a new Topic, ASC Topic 606, which supersedes existing accounting standards
for revenue recognition and creates a single framework. Additional updates to Topic 606 issued by the FASB in 2015 and 2016 include
the following:
|
●
|
ASU No. 2015-14, “Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which
defers the effective date of the new guidance such that the new provisions will now be
required for fiscal years, and interim periods within those years, beginning after December
15, 2017.
|
|
●
|
ASU No. 2016-08, “Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations,”
which clarifies the implementation guidance on principal versus agent considerations
(reporting revenue gross versus net).
|
|
●
|
ASU No. 2016-10, “Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,”
which clarifies the implementation guidance on identifying performance obligations and
classifying licensing arrangements.
|
|
●
|
ASU No. 2016-12, “Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,”
which clarifies the implementation guidance in a number of other areas.
|
The underlying principle is to use a five-step
analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects
the consideration that is expected to be received for those goods or services. The standard permits the use of either a retrospective
or modified retrospective application. ASU 2014-09 and ASU 2016-12 are effective for annual reporting periods beginning after
December 15, 2017. The Company adopted ASC 606 using the modified retrospective method for annual and interim reporting periods
beginning January 1, 2018. The Company has aggregated and reviewed its contracts that are within the scope of ASC 606. Based on
its evaluation, the Company does not anticipate the adoption of ASC 606 will have a material impact on its balance sheet or related
consolidated statements of earnings, equity or cash flows. Accordingly, the Company will continue to recognize revenue at the
time services are delivered and parts and equipment are sold.
NOTE 3 — RECEIVABLES
At December 31, 2018 and 2017, receivables
consisted of the following:
|
|
2018
|
|
|
2017
|
|
Credit card payments in process of settlement
|
|
$
|
629,498
|
|
|
$
|
946,179
|
|
Vendor rebates receivable
|
|
|
2,004,206
|
|
|
|
1,961,529
|
|
Other
|
|
|
2,228
|
|
|
|
-
|
|
Total receivables
|
|
$
|
2,635,932
|
|
|
$
|
2,907,708
|
|
GOEDEKER TELEVISION CO.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 4 — MERCHANDISE INVENTORY
At December 31, 2018 and 2017, the inventory
balances are composed of:
|
|
2018
|
|
|
2017
|
|
Appliances
|
|
$
|
2,656,386
|
|
|
$
|
3,264,637
|
|
Furniture
|
|
|
327,458
|
|
|
|
331,033
|
|
Other
|
|
|
127,750
|
|
|
|
113,905
|
|
Total merchandise inventory
|
|
$
|
3,111,594
|
|
|
$
|
3,709,575
|
|
NOTE 5 — 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.
NOTE 6 — PROPERTY AND EQUIPMENT
As of December 31, 2018 and 2017, property
and equipment consisted of the following:
|
|
2018
|
|
|
2017
|
|
Equipment
|
|
$
|
81,242
|
|
|
$
|
81,242
|
|
Warehouse equipment
|
|
|
111,787
|
|
|
|
111,787
|
|
Furniture and fixtures
|
|
|
78,585
|
|
|
|
78,585
|
|
Transportation equipment
|
|
|
170,824
|
|
|
|
170,824
|
|
Leasehold improvements
|
|
|
249,993
|
|
|
|
249,993
|
|
Total
|
|
|
692,431
|
|
|
|
692,431
|
|
Accumulated depreciation
|
|
|
(476,145
|
)
|
|
|
(436,506
|
)
|
Property and equipment, net
|
|
$
|
216,286
|
|
|
$
|
255,925
|
|
Depreciation charged to operations for
the years ended December 31, 2018 and 2017 amounted to $39,639 and $42,858, respectively.
NOTE 7 — CONCENTRATION OF CREDIT
RISK
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of concentrated cash balances and rebate receivables.
The Company maintains its cash balances in one financial institution located in St. Louis, Missouri. The balances are insured
by the Federal Deposit Insurance Corporation up to $250,000. At December 31, 2018 and 2017, the Company’s uninsured cash
balances total $1,275,693 and $1,542,419, respectively.
The Company has several contracts with
vendors, of which net purchases from five major vendors represented 77.5% and 76.1% of total purchases for the years ended December
31, 2018 and 2017, respectively.
NOTE 8 — ADVERTISING
The Company’s advertising costs
are primarily advertisements placed in local publications, television ads, and online advertising. Advertising costs are expensed
as incurred and, for the years ended December 31, 2018 and 2017, amounted to $2,640,958 and $2,197,518, respectively.
GOEDEKER TELEVISION CO.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 9 — RELATED PARTY TRANSACTIONS
The Company leases buildings on a month-to-month
lease from certain stockholders. Rental expense paid to related parties for office and warehouse space charged to operations for
the years ended December 31, 2018 and 2017 was $480,000 in each year.
The Company has advanced amounts to certain
stockholders on a revolving loan basis. The amount is due upon request. The balance receivable from stockholders as of December
31, 2018 and 2017 was $50,634, and $50,634, respectively.
NOTE 10 — SUBSEQUENT EVENTS
Subsequent events were reviewed through
June 19, 2019.
On April 5, 2019, the Company and its
stockholders entered into an Asset Purchase Agreement (the “APA”) with 1847 Goedeker Inc., a wholly-owned subsidiary
of 1847 Goedeker Holdco, Inc., which is a majority owned subsidiary of 1847 Holdings LLC. Under terms of the APA, 1847 Goedeker
Inc. acquired substantially all of the Company’s assets and assumed substantially all its liabilities. The purchase price
was $6.1 million paid as $1.5 million in cash, issuance of a $4.1 million subordinated note payable, and an earn out provision
of $600,000 based on attainment of certain EBITDA targets. Additionally, 1847 Goedeker Inc. issued 22.5% of its common stock to
the Company’s stockholders. Pending a formal valuation of the assets acquired and consideration paid, the Company allocated
$5,815,000 of the excess purchase price to Goodwill.
ASIEN’S
APPLIANCE, INC.
UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2020 AND 2019
ASIEN’S APPLIANCE, INC.
BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,029,474
|
|
|
$
|
1,875,336
|
|
Accounts receivable, net
|
|
|
50,383
|
|
|
|
179,813
|
|
Inventories, net
|
|
|
1,904,630
|
|
|
|
1,924,104
|
|
Prepaid expenses and other current assets
|
|
|
33,316
|
|
|
|
35,588
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
4,017,803
|
|
|
|
4,014,841
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
165,389
|
|
|
|
164,740
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,183,192
|
|
|
$
|
4,179,581
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
972,816
|
|
|
$
|
788,961
|
|
Contract liabilities
|
|
|
2,156,249
|
|
|
|
2,201,394
|
|
Current portion of notes payable
|
|
|
80,445
|
|
|
|
80,643
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,209,510
|
|
|
|
3,070,998
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable, net of current portion
|
|
|
90,883
|
|
|
|
120,265
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
3,300,393
|
|
|
|
3,191,263
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
55,933
|
|
|
|
55,933
|
|
Treasury stock
|
|
|
(208,103
|
)
|
|
|
(208,103
|
)
|
Retained earnings
|
|
|
1,034,969
|
|
|
|
1,140,488
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
882,799
|
|
|
|
988,318
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
4,183,192
|
|
|
$
|
4,179,581
|
|
The accompanying notes are an integral
part of these financial statements.
ASIEN’S APPLIANCE, INC.
STATEMENTS OF INCOME
(UNAUDITED)
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
3,121,369
|
|
|
$
|
2,539,769
|
|
Service revenue
|
|
|
203,421
|
|
|
|
241,125
|
|
Total revenue
|
|
|
3,324,790
|
|
|
|
2,780,894
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
2,316,148
|
|
|
|
2,009,901
|
|
Cost of service revenue
|
|
|
109,088
|
|
|
|
113,258
|
|
Total costs of revenue
|
|
|
2,425,236
|
|
|
|
2,123,159
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
899,554
|
|
|
|
657,735
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
124,744
|
|
|
|
120,589
|
|
Advertising
|
|
|
46,925
|
|
|
|
20,625
|
|
Bank and credit card fees
|
|
|
64,769
|
|
|
|
57,198
|
|
Depreciation
|
|
|
12,861
|
|
|
|
9,843
|
|
General and administrative
|
|
|
212,191
|
|
|
|
217,546
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
461,490
|
|
|
|
425,801
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
438,064
|
|
|
|
231,934
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
2,013
|
|
|
|
47,023
|
|
Other expense
|
|
|
(4,021
|
)
|
|
|
(1,578
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(2,008
|
)
|
|
|
45,445
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
436,056
|
|
|
$
|
277,379
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE - BASIC AND DILUTED
|
|
$
|
12.49
|
|
|
$
|
7.95
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED
|
|
|
34,902
|
|
|
|
34,902
|
|
The accompanying notes are an integral
part of these financial statements.
ASIEN’S APPLIANCE, INC.
STATEMENTS OF STOCKHOLDERS’
EQUITY
For the Three Months Ended March
31, 2020 and 2019
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury
|
|
|
Retained
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE – December 31, 2019
|
|
|
34,902
|
|
|
$
|
55,933
|
|
|
$
|
(208,103
|
)
|
|
$
|
1,140,488
|
|
|
$
|
988,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
436,056
|
|
|
|
436,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(541,575
|
)
|
|
|
(541,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE – March 31, 2020
|
|
|
34,902
|
|
|
$
|
55,933
|
|
|
$
|
(208,103
|
)
|
|
$
|
1,034,969
|
|
|
$
|
882,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury
|
|
|
Retained
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE – December 31, 2018
|
|
|
34,902
|
|
|
$
|
55,933
|
|
|
$
|
(208,103
|
)
|
|
$
|
777,842
|
|
|
$
|
625,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
277,379
|
|
|
|
277,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(51,138
|
)
|
|
|
(51,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE – March 31, 2019
|
|
|
34,902
|
|
|
$
|
55,933
|
|
|
$
|
(208,103
|
)
|
|
$
|
1,004,083
|
|
|
$
|
851,913
|
|
The accompanying notes are an integral
part of these financial statements.
ASIEN’S APPLIANCE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$
|
436,056
|
|
|
$
|
277,379
|
|
Adjustments to reconcile net profit to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
12,861
|
|
|
|
9,843
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
129,430
|
|
|
|
(150,007
|
)
|
Inventory
|
|
|
19,474
|
|
|
|
(278,010
|
)
|
Prepaid expenses and other current assets
|
|
|
2,272
|
|
|
|
1,301
|
|
Accounts payable and accrued expenses
|
|
|
192,935
|
|
|
|
48,778
|
|
Contract liabilities
|
|
|
(45,145
|
)
|
|
|
188,576
|
|
Net cash provided by operating activities
|
|
|
747,883
|
|
|
|
97,860
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(22,590
|
)
|
|
|
(20,174
|
)
|
Net cash used in investing activities
|
|
|
(22,590
|
)
|
|
|
(20,174
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayments of line of credit
|
|
|
-
|
|
|
|
(266
|
)
|
Repayments of notes payable
|
|
|
(29,580
|
)
|
|
|
(43,968
|
)
|
Distributions paid
|
|
|
(541,575
|
)
|
|
|
(51,138
|
)
|
Net cash used in financing activities
|
|
|
(571,155
|
)
|
|
|
(95,372
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
|
154,138
|
|
|
|
(17,686
|
)
|
CASH, BEGINNING OF PERIOD
|
|
|
1,875,336
|
|
|
|
1,509,614
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD
|
|
$
|
2,029,474
|
|
|
$
|
1,491,928
|
|
The accompanying notes are an integral
part of these financial statements.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2020 AND 2019
(UNAUDITED)
NOTE 1 – ORGANIZATION AND
NATURE OF BUSINESS
Asien’s Appliance, Inc. (“the
Company”) was formed under the laws of the State of California and incorporated on February 14, 2004.
Located in Santa Rosa, California,
the Company provides a wide variety of appliance services including sales, delivery, installation, service and repair, extended
warranties, and financing to the North Bay area. The Company is one of the area’s oldest appliance stores and is well known
and highly respected throughout the North Bay area. The Company has strong, established relationships with customers and contractors
in the community. Company provides products and services to a diverse group of customers including homeowners, builders, and designers.
As a member of BrandSource, a buying group that offers vendor programs, factory direct deals, marketing support, opportunity buys,
close-outs, consumer rebates, finance offers, etc., the Company offers a full line of top brands from U.S. and international manufacturers.
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.
Accounting Basis
The Company uses the accrual basis
of accounting and GAAP. The Company has adopted a calendar year end.
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.
Revenue Recognition and Cost
of Revenue
On January 1, 2018, the Company adopted
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue
Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash
flows arising from customer purchase orders, including significant judgments. The Company’s adoption of this ASU resulted
in no change to the Company’s results of operations or balance sheet.
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.
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.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2020 AND 2019
(UNAUDITED)
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.
Performance Obligations – Asien’s
performance obligations include delivery of products and, in some instances, performance of services such as installation. Revenue
for the sale of merchandise is recognized upon shipment to the customer; or in some instances, upon delivery and installation
of the product which typically occur simultaneously.
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.
Asien’s revenue by sales type
is as follows:
|
|
For the Three Months
Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Appliance sales
|
|
$
|
3,121,032
|
|
|
$
|
2,539,769
|
|
Service Revenue (including parts revenue)
|
|
|
203,421
|
|
|
|
241,125
|
|
Total Revenue
|
|
$
|
3,324,790
|
|
|
$
|
2,780,894
|
|
Receivables
Receivables consists of customer’s
balance payments for which Asien’s extends credit to certain homebuilders and designers based on prior business relationship
and 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
(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 its trade receivables from customers, credit card receivable an any outstanding rebates receivables. Uncollectible balances
are expensed in the period it is determined to be uncollectible.
Inventory
Inventory mainly consists of appliances
that are acquired for resale and is valued at actual cost determined on a specific item basis including cost of inbound freight.
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.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2020 AND 2019
(UNAUDITED)
NOTE 3 – RECEIVABLES
At March 31, 2020 and December 31, 2019, receivables consisted
of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Credit card payments in process of settlement
|
|
$
|
34,557
|
|
|
$
|
76,255
|
|
Vendor rebates receivable
|
|
|
-
|
|
|
|
26,274
|
|
Trade receivables from customers
|
|
|
15,826
|
|
|
|
77,284
|
|
Total receivables
|
|
$
|
50,383
|
|
|
$
|
179,813
|
|
NOTE 4 – INVENTORIES
At March 31, 2020 and December 31,
2019, the inventory balances are composed of:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Appliances
|
|
$
|
1,798,512
|
|
|
$
|
1,821,4064
|
|
Parts
|
|
|
118,258
|
|
|
|
115,180
|
|
Inventory reserve
|
|
|
(12,140
|
)
|
|
|
(12,140
|
)
|
Total receivables
|
|
$
|
1,904,630
|
|
|
$
|
1,924,104
|
|
Following is a summary of transactions
in the allowance for inventory obsolescence:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Balance at beginning of period
|
|
$
|
12,140
|
|
|
$
|
10,319
|
|
Provisions for obsolescence
|
|
|
-
|
|
|
|
1,821
|
|
Write-down in inventory value
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
12,140
|
|
|
$
|
12,140
|
|
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consist of the
following at March 31, 2020 and December 31, 2019:
Classification
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Leasehold improvements
|
|
$
|
46,807
|
|
|
$
|
46,807
|
|
Equipment
|
|
|
7,095
|
|
|
|
7,095
|
|
Office equipment
|
|
|
133,438
|
|
|
|
110,848
|
|
Vehicles
|
|
|
442,782
|
|
|
|
442,782
|
|
Less: Accumulated depreciation
|
|
|
(464,733
|
)
|
|
|
(442,792
|
)
|
Property and equipment, net
|
|
$
|
165,389
|
|
|
$
|
164,740
|
|
Depreciation expense for the three
months ended March 31, 2020 and 2019 was $12,861 and $9,843, respectively.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2020 AND 2019
(UNAUDITED)
NOTE 6 – PROMISSORY NOTES
4.5% Unsecured Promissory Note
On October 30, 2017, the Company entered
into a stock repurchase agreement with Paul A. Gwilliam and Terri L. Gwilliam, co-trustees of the Gwilliam Family Trust (“Note
Holders”) pursuant to which the Company 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 $77,037
and $88,576 as of March 31, 2020 and December 31, 2019, respectively.
Loans on Vehicles
4.99% Secured Loan (2015 GMC)
On January 1, 2015, the Company entered
into a Retail Installment Sale contract for purchase of a delivery truck pursuant to which the Company agreed to finance an aggregate
principal amount of $29,390 for a term of 60 months with $3,949 being the total finance charges for the term of the loan.
The loan bears interest at the rate
of the 4.99% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar
days after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $-0- and
$590 as of March 31, 2020 and December 31, 2019, respectively.
4.49% Secured Loan (2016 Chevy)
On January 13, 2017, the Company entered
into a Retail Installment Sale contract for the purchase of a delivery truck pursuant to which the Company agreed to finance an
aggregate principal amount of $50,192 for a term of 60 months with $6,042 being the total finance charges for the term of the
loan.
The loan bears interest at the rate
of the 4.49% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar
days after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $18,988
and $21,498 as of March 31, 2020 and December 31, 2019, respectively.
2.99% Secured Loan (2016 Dodge
Ram 2500)
On January 11, 2016, the Company entered
into a Retail Installment Sale contract for the purchase of a delivery truck pursuant to which the Company agreed to finance an
aggregate principal amount of $20,691 for a term of 60 months with $3,755 being the total finance charges for the term of the
loan.
The loan bears interest at the rate
of the 2.99% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar
days after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $8,468 and
$11,304 as of March 31, 2020 and December 31, 2019, respectively.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2020 AND 2019
(UNAUDITED)
6.99% Secured Loan (2019 Chevy)
On December 31, 2019, the Company entered
into a Retail Installment Sale contract for the purchase of a delivery truck pursuant to which the Company agreed to finance an
aggregate principal amount of $57,077 for a term of 60 months with $10,916 being the total finance charges for the term of the
loan.
The loan bears interest at the rate
of the 6.99% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar
days after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $54,302
and $57,007 as of March 31, 2020 and December 31, 2019, respectively.
3.98% Secured Loan (2020 Nissan)
On December 31, 2019, the Company entered
into a Retail Installment Sale contract for the purchase of a delivery truck pursuant to which the Company agreed to finance an
aggregate principal amount of $21,933 for a term of 60 months with $2,331 being the total finance charges for the term of the
loan.
The loan bears interest at the rate
of the 3.98% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar
days after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $12,533
and $21,933 as of March 31, 2020 and December 31, 2019, respectively.
NOTE 7 – STOCKHOLDERS’
EQUITY
The Company had 34,902 shares of common
stock issued and outstanding as of December 31, 2019 and 2018. During the three months ended March 31, 2020 and 2019, net cash
of $541,575 and $51,138, respectively, was distributed to stockholders.
NOTE 8 – SUBSEQUENT EVENTS
On May 28, 2020, 1847 Asien Inc. (“1847
Asien”), a subsidiary of 1847 Holdings LLC (“1847 Holdings”), entered into a stock purchase agreement with Asien’s
Appliance, Inc. (“Asien’s Appliance”) and Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of
the Wilhelmsen Family Trust, U/D/T, (the “Seller”), pursuant to which 1847 Asien agreed to acquire all of the issued
and outstanding capital stock of Asien’s.
Pursuant to the terms of the purchase
agreement, 1847 Asien agreed to acquire all of the issued and outstanding capital stock of Asien’s Appliance for an aggregate
purchase price of $2,125,500, subject to adjustment. The purchase price consisted of (i) $233,000 in cash, (ii) an Amortizing
Note in the aggregate principal amount of $200,000, (iii) a Demand in the aggregate principal amount of $655,000, and (iv) 415,000
common shares of 1847 Holdings, having a fair market value of $1,037,500.
The purchase price is subject to a
post-closing working capital adjustment provision. On or before the 75th day following the Closing Date, 1847 Asien is to
deliver to the Seller an audited balance sheet as of the closing date. If the net working capital reflected on the balance sheet
(the “Final Working Capital”) exceeds the net working capital reflected on the unaudited balance sheet of Asien’s
Appliance delivered to 1847 Asien on the Closing Date (the “Preliminary Working Capital”), 1847 Asien’s shall,
within seven days, pay to the Seller an amount of cash that is equal to such excess. If the Preliminary Working Capital exceeds
the Final Working Capital, the Seller shall, within seven days, 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 the Buyer a number
of Buyer Shares that is equal to such excess divided by $2.00.
Pursuant to the Amendment, upon five
calendar days written notice to the Seller and the transfer agent, from time to time during the one year period following the
closing of the Acquisition, the Company shall have the right to repurchase any or all of the Buyer Shares then held by the Seller
from the Seller for a purchase price of $2.50 per share.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2020 AND 2019
(UNAUDITED)
On April 28, 2020, Asien’s received
$357,500 in Payroll Protection Program (“PPP”) loan 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 term 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 loan may be prepaid at any time prior to its maturity date,
April 1, 2020, with no prepayment penalties. The PPP loan 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. Asien’s intend to use the proceeds from the PPP loan for qualifying
expenses and to apply for forgiveness of the PPP loan in accordance with the terms of the CARES Act.
On July 29, 2020, 1847 Asien Inc. (“the
Buyer”) executed a securities purchase agreement with the Wilhelmsen Family Trust, (the “Seller,” and collectively
with Company, the “Parties”). Pursuant to the agreement, The Seller sold to the Buyer, 415,000 common shares of 1847
Holdings LLC at a purchase price of $2.50 per share and the Buyer hereby acquires and purchases from the Seller the shares. As
consideration, the Buyer issued to the 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) (the “Amortized Principal”) 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) (the “Unamortized Principal”) with all accrued, but unpaid interest thereon is due on July 28, 2022 (the
“Maturity Date”) along with any other unpaid principal or accrued interest.
ASIEN’S APPLIANCE,
INC.
AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019
AND 2018
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Asien’s
Appliance, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance
sheets of Asien’s Appliance, Inc. (“the Company”), as of December 31, 2019 and 2018, and the related statements
of income, stockholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2019 and
the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and
2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019,
in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Sadler, Gibb & Associates, LLC
We have served as the Company’s auditor since 2020.
Salt Lake City, UT
August 11, 2020
ASIEN’S APPLIANCE,
INC.
BALANCE SHEETS
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,875,336
|
|
|
$
|
1,509,614
|
|
Accounts receivable, net
|
|
|
179,813
|
|
|
|
56,575
|
|
Inventories, net
|
|
|
1,924,104
|
|
|
|
1,639,008
|
|
Prepaid expenses and other
current assets
|
|
|
35,588
|
|
|
|
35,798
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
4,014,841
|
|
|
|
3,240,995
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
164,740
|
|
|
|
111,137
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,179,581
|
|
|
$
|
3,352,132
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
788,962
|
|
|
$
|
647,338
|
|
Contract liabilities
|
|
|
2,201,394
|
|
|
|
1,842,754
|
|
Line of credit
|
|
|
-
|
|
|
|
3,020
|
|
Current portion of notes
payable
|
|
|
80,643
|
|
|
|
70,321
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,070,999
|
|
|
|
2,563,433
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable,
net of current portion
|
|
|
120,265
|
|
|
|
163,027
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
3,191,264
|
|
|
|
2,726,460
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
55,933
|
|
|
|
55,933
|
|
Treasury stock
|
|
|
(208,103
|
)
|
|
|
(208,103
|
)
|
Retained earnings
|
|
|
1,140,487
|
|
|
|
777,842
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’
Equity
|
|
|
988,317
|
|
|
|
625,672
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
$
|
4,179,581
|
|
|
$
|
3,352,132
|
|
The accompanying notes are an integral
part of these financial statements.
ASIEN’S APPLIANCE,
INC.
STATEMENTS OF INCOME
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Product sales, net
|
|
$
|
12,300,648
|
|
|
$
|
7,827,123
|
|
Service revenue
|
|
|
1,061,222
|
|
|
|
1,087,174
|
|
Total revenue
|
|
|
13,361,870
|
|
|
|
8,914,297
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
9,757,269
|
|
|
|
6,128,814
|
|
Cost of service revenue
|
|
|
498,385
|
|
|
|
526,000
|
|
Total costs of revenue
|
|
|
10,255,654
|
|
|
|
6,654,814
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,106,216
|
|
|
|
2,259,483
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
500,581
|
|
|
|
459,782
|
|
Advertising
|
|
|
66,570
|
|
|
|
88,581
|
|
Bank and credit card fees
|
|
|
264,759
|
|
|
|
205,651
|
|
Depreciation
|
|
|
35,337
|
|
|
|
45,414
|
|
General and administrative
|
|
|
825,620
|
|
|
|
767,472
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,692,867
|
|
|
|
1,566,900
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
1,413,349
|
|
|
|
692,583
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
30,371
|
|
|
|
68,064
|
|
Other expense
|
|
|
(38,875
|
)
|
|
|
(5,516
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(8,504
|
)
|
|
|
62,548
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,404,845
|
|
|
$
|
755,131
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE - BASIC
AND DILUTED
|
|
$
|
40.25
|
|
|
$
|
21.64
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC
AND DILUTED
|
|
|
34,902
|
|
|
|
34,902
|
|
The accompanying notes are an integral
part of these financial statements.
ASIEN’S APPLIANCE,
INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury
|
|
|
Retained
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Earnings
|
|
|
Equity
|
|
BALANCE – January 1, 2018
|
|
|
34,902
|
|
|
$
|
55,933
|
|
|
$
|
(208,103
|
)
|
|
$
|
354,061
|
|
|
$
|
201,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
755,131
|
|
|
|
755,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(331,350
|
)
|
|
|
(331,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE – December 31, 2018
|
|
|
34,902
|
|
|
|
55,933
|
|
|
|
(208,103
|
)
|
|
|
777,842
|
|
|
|
625,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,404,845
|
|
|
|
1,404,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,042,200
|
)
|
|
|
(1,042,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE – December 31, 2019
|
|
|
34,902
|
|
|
$
|
55,933
|
|
|
$
|
(208,103
|
)
|
|
$
|
1,140,487
|
|
|
$
|
988,317
|
|
The accompanying notes are an integral
part of these financial statements.
ASIEN’S APPLIANCE,
INC.
STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$
|
1,404,845
|
|
|
$
|
755,131
|
|
Adjustments to reconcile net profit to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
35,337
|
|
|
|
45,414
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(123,238
|
)
|
|
|
47,255
|
|
Inventory
|
|
|
(285,096
|
)
|
|
|
(360,973
|
)
|
Prepaid expenses and other current assets
|
|
|
210
|
|
|
|
294,217
|
|
Accounts payable and accrued expenses
|
|
|
141,623
|
|
|
|
(69,216
|
)
|
Contract liabilities
|
|
|
358,640
|
|
|
|
894,753
|
|
Net cash provided by operating activities
|
|
|
1,532,321
|
|
|
|
1,606,581
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
(9,929
|
)
|
|
|
(7,280
|
)
|
Net cash used in investing activities
|
|
|
(9,929
|
)
|
|
|
(7,280
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayments of line of credit
|
|
|
(3,020
|
)
|
|
|
(17,075
|
)
|
Repayments of notes payable
|
|
|
(111,450
|
)
|
|
|
(387,604
|
)
|
Distributions paid
|
|
|
(1,042,200
|
)
|
|
|
(331,350
|
)
|
Net cash used in financing activities
|
|
|
(1,156,670
|
)
|
|
|
(736,029
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
|
365,722
|
|
|
|
863,272
|
|
CASH, BEGINNING OF PERIOD
|
|
|
1,509,614
|
|
|
|
646,342
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD
|
|
$
|
1,875,336
|
|
|
$
|
1,509,614
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Financed purchases of property
and equipment
|
|
$
|
79,010
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these financial statements.
ASIEN’S APPLIANCE,
INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 1 – ORGANIZATION AND NATURE
OF BUSINESS
Asien’s Appliance, Inc. (the “Company”)
was formed under the laws of the State of California and incorporated on February 14, 2004.
Located in Santa Rosa, California, the
Company provides a wide variety of appliance services including sales, delivery, installation, service and repair, extended warranties,
and financing to the North Bay area. The Company is one of the area’s oldest appliance stores and is well known and highly
respected throughout the North Bay area. The Company has strong, established relationships with customers and contractors in the
community. Company provides products and services to a diverse group of customers including homeowners, builders, and designers.
As a member of BrandSource, a buying group that offers vendor programs, factory direct deals, marketing support, opportunity buys,
close-outs, consumer rebates, finance offers, etc., the Company offers a full line of top brands from U.S. and international manufacturers.
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.
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.
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 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.
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.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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.
Asien’s revenue by sales type is
as follows:
|
|
Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Appliance sales
|
|
$
|
12,300,648
|
|
|
$
|
7,827,123
|
|
Service revenue (including parts revenue)
|
|
|
1,061,222
|
|
|
|
1,087,174
|
|
Total Revenue
|
|
$
|
13,361,870
|
|
|
$
|
8,914,297
|
|
Receivables
Receivables consists of customer’s
balance payments for which Asien’s extends credit to certain homebuilders and designers based on prior business relationship
and 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
(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 its trade receivables from customers, credit card receivable an any outstanding rebates receivables. Uncollectible balances
are expensed in the period it is determined to be uncollectible.
Inventory
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 $12,140 and $10,319 at December 31, 2019
and 2018, respectively.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Property and Equipment
Property and equipment is stated at the
historical cost. Maintenance and repairs of property and equipment are charged to operations as incurred. Leasehold improvements
are amortized over the lesser of the base term of the lease or estimated life of the leasehold improvements. Depreciation
is computed using the straight-line method over estimated useful lives as follows:
|
|
Useful Life
(Years)
|
Leasehold improvements
|
|
15
|
Furniture and fixtures
|
|
10
|
Equipment
|
|
7
|
Office equipment
|
|
5 - 10
|
Vehicles
|
|
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 fair value of a financial instrument
is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked
to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize
the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy
is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined
in the following three categories:
Level 1: Quoted
market prices in active markets for identical assets or liabilities.
Level 2: Observable
market-based inputs or inputs that are corroborated by market data.
Level 3: Unobservable
inputs that are not corroborated by market data.
Income Taxes
The Company has elected to be taxed as
an “S Corporation” under the provisions of the Internal Revenue Code and comparable state income tax law. As an S
Corporation, the Company is generally not subject to corporate income taxes and the Company’s net income or loss is reported
on the individual tax return of the stockholder of the Company. Therefore, no provision or liability for income taxes is reflected
in the financial statements. Management has evaluated its tax positions and has concluded that the Company had taken no uncertain
tax positions that could require adjustment or disclosure in the financial statements to comply with provisions set forth in ASC
740, Income Taxes.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Recent Accounting Pronouncements
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 as of January 1, 2018 resulted in no change to the Company’s results
of operations or balance sheet.
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic
842) (“ASC 842”), which requires lessees to recognize right-of-use (“ROU”) assets and related
lease liabilities on the balance sheet for all leases greater than one year in duration. We adopted ASC 842 on January 1, 2019
using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. The modified retrospective approach did not require any transition accounting
for leases that expired before the earliest comparative period presented. The adoption of this standard resulted in the recording
of ROU assets and lease liabilities for all of our lease agreements with original terms of greater than one year. The adoption
of ASC 842 did not have a significant impact on our consolidated statements of income or cash flows.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for
nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation,
to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of
the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted
to employees. This standard became effective for us on January 1, 2019. The adoption of this standard did not have a material
impact on our consolidated financial statements.
In February 2018, the FASB issued ASU
2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (AOCI) to retained
earnings for stranded tax effects resulting from U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act,
which was enacted in December 2017 (the “2017 Tax Act”). ASU 2018-02 became effective for us on January 1, 2019 and
resulted in a decrease of approximately $748,000 to retained earnings due to the reclassification from AOCI of
the effect of the corporate income tax rate change on our cash flow hedges. The adoption of this standard did not have a material
impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives
and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting
for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments
and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance
related to the assessment of hedge effectiveness. ASU 2017-12 became effective for us on January 1, 2019. The adoption of this
standard did not have a material impact on our consolidated financial statements.
Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15, Intangibles
– Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation
costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs
incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).
ASU 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods.
Early adoption is permitted. We adopted ASU 2018-15 on January 1, 2020 on a prospective basis, and do not expect the adoption
will result in a material impact for future periods.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
In August 2018, the FASB issued ASU 2018-13, Fair
Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value
Measurement, which removes, modifies and adds various disclosure requirements related to fair value disclosures.
Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized
gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among
other changes. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early
adoption is permitted. We will modify our disclosures beginning in the first quarter of 2020 to conform to this guidance. We do
not expect the adoption of this standard and the associated changes to our disclosures to have a material impact to our consolidated
financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces
the current incurred loss impairment methodology for financial assets with a methodology that reflects expected credit losses.
The new credit losses model must be applied to loans, accounts receivable, and other financial assets. ASU 2016-13 is effective
for annual periods beginning after December 15, 2019, including interim periods within those annual periods. We plan to adopt
the new standard in the first quarter of 2020 using a modified retrospective approach with a cumulative-effect adjustment to retained
earnings as of the beginning of the year of adoption. We do not believe this guidance will have a material impact on our statements
of operations or cash flows.
The Company currently believes that all
other issued and not yet effective accounting standards are not relevant to its financial statements.
NOTE 3 – RECEIVABLES
At December 31, 2019 and 2018, receivables
consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Credit card payments in process of settlement
|
|
$
|
76,255
|
|
|
$
|
46,171
|
|
Vendor rebates receivable
|
|
|
26,274
|
|
|
|
4,885
|
|
Trade receivables from customers
|
|
|
77,284
|
|
|
|
5,519
|
|
Total receivables
|
|
$
|
179,813
|
|
|
$
|
59,575
|
|
NOTE 4 – INVENTORIES
At December 31, 2019 and 2018, the inventory
balances are composed of:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Appliances
|
|
$
|
1,821,064
|
|
|
$
|
1,547,837
|
|
Parts
|
|
|
115,180
|
|
|
|
101,490
|
|
Subtotal
|
|
|
1,936,244
|
|
|
|
1,649,327
|
|
Allowance for inventory obsolescence
|
|
|
(12,140
|
)
|
|
|
(10,319
|
)
|
Inventories, net
|
|
$
|
1,924,104
|
|
|
$
|
1,639,008
|
|
Following is a summary of transactions
in the allowance for inventory obsolescence:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Balance at beginning of period
|
|
$
|
10,319
|
|
|
$
|
8,008
|
|
Provisions for obsolescence
|
|
|
1,821
|
|
|
|
2,311
|
|
Write-down in inventory value
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
12,140
|
|
|
$
|
10,319
|
|
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consist of the
following at December 31, 2019 and, 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Leasehold improvements
|
|
$
|
46,807
|
|
|
$
|
46,807
|
|
Equipment
|
|
|
7,095
|
|
|
|
7,095
|
|
Office equipment
|
|
|
110,848
|
|
|
|
110,848
|
|
Vehicles
|
|
|
442,782
|
|
|
|
353,843
|
|
Less: Accumulated depreciation
|
|
|
(442,792
|
)
|
|
|
(407,456
|
)
|
Property and equipment, net
|
|
$
|
164,740
|
|
|
$
|
111,137
|
|
Depreciation expense for the years ended
December 31, 2019 and 2018 was $35,337 and $45,414, respectively.
NOTE 6 – CONTRACT LIABILITIES
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. When the customer makes the decision to purchase, they place a deposit with the store primarily on a credit card for the
purchase price and the customer receives an invoice describing the model number and other pertinent information about their purchase.
The customer’s deposit is posted to the Contract Liability account.
Following products are considered Special
Order items:
|
●
|
Telescoping Down Drafts
|
|
●
|
Any Appliance with custom
colors
|
|
●
|
All Vent a Hood products
|
|
●
|
and anything else, out
of ordinary
|
Certain Appliances may be added to the
list of special-order items as determined by the company. All special-order items are considered non-cancellable and non-refundable.
Asien’s recognizes 100% of the deposit
as a short-term liability at the time of receipt of the deposit. Once the product is delivered to the customer (satisfaction of
the performance obligation) typically within a few weeks to a few months, revenue is recognized.
Asien’s performance obligations
under the customer order 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. The transfer
of control generally occurs at the point of shipment. Once this occurs, Asien’s has satisfied its performance obligation
and Asien’s recognizes revenue.
The balance for contract liabilities is
$2,201,394 and $1,842,754 as of December 31, 2019 and 2018, respectively.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 7 – LINE OF CREDIT
On November 15, 2005, Asien’s, as
borrower entered into a loan and security agreement with Exchange Bank for revolving loans in an aggregate principal amount that
will not exceed $100,000. The revolving note bears interest at 7.00% per annum.
The balance on the loan is $-0- and $3,020
as of December 31, 2019 and 2018, respectively.
NOTE 8 – PROMISSORY NOTES
4.5% Unsecured Promissory Note
On October 30, 2017, the Company entered
into a stock repurchase agreement with Paul A. Gwilliam and Terri L. Gwilliam, co-trustees of the Gwilliam Family Trust (“Note
Holder”) pursuant to which Asien’s Appliance, Inc. issued to the Note Holder 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 $88,576 and
$174,025 as of December 31, 2019 and 2018, respectively.
Loans on Vehicles
4.99% Secured Loan (2015 GMC)
On January 1, 2015, the Company entered
into a Retail Installment Sale contract with Silveira Buick-GMC for purchase of a delivery truck pursuant to which Asien’s
Appliance, Inc. agreed to finance an aggregate principal amount of $29,390 for a term of 60 months with $3,949 being the total
finance charges for the term of the loan.
The loan bears interest at the rate of
the 4.99% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar days
after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $590 and $7,056
as of December 31, 2019 and 2018, respectively.
4.49% Secured Loan (2016 Chevy)
On January 13, 2017, the Company entered
into a Retail Installment Sale contract for the purchase of a delivery truck pursuant to which Asien’s Appliance, Inc. agreed
to finance an aggregate principal amount of $50,192 for a term of 60 months with $6,042 being the total finance charges for the
term of the loan.
The loan bears interest at the rate of
the 4.49% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar days
after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $21,498 and
$31,536 as of December 31, 2019 and 2018, respectively.
2.99% Secured Loan (2016 Dodge Ram
2500)
On January 11, 2017, the Company entered
into a Retail Installment Sale contract for purchase of a delivery truck pursuant to which Asien’s Appliance, Inc. agreed
to finance an aggregate principal amount of $47,578, for a term of 60 months with $3,755 being the total finance charges for the
term of the loan.
The loan bears interest at the rate of
the 2.99% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar days
after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $11,304 and
$20,731 as of December 31, 2019 and 2018, respectively.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
6.99% Secured Loan (2019 Chevy)
On December 31, 2019, the Company entered
into a Retail Installment Sale contract for purchase of a delivery truck pursuant to which Asien’s Appliance, Inc. agreed
to finance an aggregate principal amount of $57,077 for a term of 60 months with $10,916 being the total finance charges for the
term of the loan.
The loan bears interest at the rate of
the 6.99% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar days
after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $57,007 and
$-0- as of December 31, 2019 and 2018, respectively.
3.98% Secured Loan (2020 Nissan)
On December 31, 2019, the Company entered
into a Retail Installment Sale contract for purchase of a delivery truck pursuant to which Asien’s Appliance, Inc. agreed
to finance an aggregate principal amount of $21,933 for a term of 60 months with $2,331 being the total finance charges for the
term of the loan.
The loan bears interest at the rate of
the 3.98% per annum. If the lender does not receive the full amount of any monthly payment by the end of ten (10) calendar days
after the date it is due, the company will be required to pay a late charge of 5% of the part of the payment that is late.
The balance on the note is $21,933 and
$0 as of December 31, 2019 and 2018, respectively.
Following is a summary of payments due
on loans for the succeeding five years:
|
|
Amount
|
|
2020
|
|
$
|
80,643
|
|
2021
|
|
|
67,786
|
|
2022
|
|
|
16,592
|
|
2023
|
|
|
16,652
|
|
2024 and later
|
|
|
19,236
|
|
Total payments
|
|
|
200,908
|
|
Less current portion of principal payments
|
|
|
(80,643
|
)
|
Long-term portion of principal payments
|
|
$
|
120,655
|
|
NOTE 9 – STOCKHOLDERS’
EQUITY
The Company had 34,902 shares of common
stock issued and outstanding as of December 31, 2019 and 2018. During the years ended December 31, 2019 and 2018, net cash of
$1,042,200 and $331,350, respectively, was distributed to stockholders.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Corporate Office, Sales Floor, and
Warehouse Space
Asien’s conducts retail business
from 1801 Piner Road, Santa Rosa, CA 95403. At approximately 11,000 sq. ft this building sits on the corner of Piner Rd. and Coffee
Rd. Asien’s occupies 100% of the building. The building is allocated between the sales floor at approximately 6,000 sq ft,
main warehouse at approximately 3,000 sq ft, corporate offices at approximately 1,200 sq. ft and the remainder in restroom, breakroom,
hallways and other common area. Asien’s pays the landlord $9,700 in monthly rent on the first day of each calendar month.
The agreement is month-to-month with both parties agreeing to provide at least 90 days’ notice to cancel or renegotiate.
ASIEN’S APPLIANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Asien’s also occupies 3,000 sq.
ft of space located at 1821 Piner Rd. Approximately 2,400 sq. ft. is used in two equal sized warehouses and the remaining 600
sq. ft is used as an office space. Asien’s leases this space from Redwood Gospel Mission (Landlord) at $2,000 per month
due on the 1st day of each calendar month. The agreement is also month-to-month with both parties agreeing to provide
at least 90 days’ notice to cancel or renegotiate.
NOTE 11 – SUBSEQUENT EVENTS
On May 28, 2020, 1847 Asien Inc. (“1847
Asien”), a subsidiary of 1847 Holdings LLC (“1847 Holdings”), entered into a stock purchase agreement with Asien’s
Appliance, Inc. (“Asien’s Appliance”) and Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of
the Wilhelmsen Family Trust, U/D/T, (the “Seller”), pursuant to which 1847 Asien agreed to acquire all of the issued
and outstanding capital stock of Asien’s.
Pursuant to the terms of the purchase
agreement, 1847 Asien agreed to acquire all of the issued and outstanding capital stock of Asien’s Appliance for an aggregate
purchase price of $2,125,500, subject to adjustment. The purchase price consisted of (i) $233,000 in cash, (ii) an Amortizing
Note in the aggregate principal amount of $200,000, (iii) a Demand in the aggregate principal amount of $655,000, and (iv) 415,000
common shares of 1847 Holdings, having a fair market value of $1,037,500.
The purchase price is subject to a post-closing
working capital adjustment provision. On or before the 75th day following the Closing Date, 1847 Asien is to deliver to the
Seller an audited balance sheet as of the closing date. If the net working capital reflected on the balance sheet (the “Final
Working Capital”) exceeds the net working capital reflected on the unaudited balance sheet of Asien’s Appliance delivered
to 1847 Asien on the Closing Date (the “Preliminary Working Capital”), 1847 Asien’s shall, within seven days,
pay to the Seller an amount of cash that is equal to such excess. If the Preliminary Working Capital exceeds the Final Working
Capital, the Seller shall, within seven days, 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 the Buyer a number of Buyer Shares
that is equal to such excess divided by $2.00.
Pursuant to the Amendment, upon five calendar
days written notice to the Seller and the transfer agent, from time to time during the one year period following the closing of
the Acquisition, the Company shall have the right to repurchase any or all of the Buyer Shares then held by the Seller from the
Seller for a purchase price of $2.50 per share.
On April 28, 2020, Asien’s received
$357,500 in Payroll Protection Program (“PPP”) loan 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 term 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 loan may be prepaid at any time prior to its maturity date,
April 1, 2020, with no prepayment penalties. The PPP loan 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. Asien’s intend to use the proceeds from the PPP loan for qualifying
expenses and to apply for forgiveness of the PPP loan in accordance with the terms of the CARES Act.
On July 29, 2020, 1847 Asien Inc. (“the
Buyer”) executed a securities purchase agreement with the Wilhelmsen Family Trust, (the “Seller,” and collectively
with Company, the “Parties”). Pursuant to the agreement, The Seller sold to the Buyer, 415,000 common shares of 1847
Holdings LLC at a purchase price of $2.50 per share and the Buyer hereby acquires and purchases from the Seller the shares. As
consideration, the Buyer issued to the 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) (the “Amortized Principal”) 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) (the “Unamortized Principal”) with all accrued, but unpaid interest thereon is due on July 28, 2022 (the
“Maturity Date”) along with any other unpaid principal or accrued interest.
1847 HOLDINGS LLC
UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION
1847 HOLDINGS LLC
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2020
|
|
1847 Holdings LLC
|
|
|
Asien’s
Appliance, Inc.
January
1 to May 28,
2020
|
|
|
Pro Forma Adjustments
|
|
|
Notes
|
|
Pro Forma Condensed
|
|
Revenue
|
|
$
|
3,004,056
|
|
|
$
|
5,154,012
|
|
|
$
|
-
|
|
|
|
|
$
|
8,158,068
|
|
Cost of revenue
|
|
|
1,452,782
|
|
|
|
3,916,192
|
|
|
|
-
|
|
|
|
|
|
5,368,974
|
|
Gross profit
|
|
|
1,551,274
|
|
|
|
1,237,820
|
|
|
|
-
|
|
|
|
|
|
2,789,094
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
939,290
|
|
|
|
333,900
|
|
|
|
-
|
|
|
|
|
|
1,273,190
|
|
Depreciation and amortization
|
|
|
627,514
|
|
|
|
21,199
|
|
|
|
-
|
|
|
|
|
|
648,713
|
|
Fuel
|
|
|
186,199
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
186,199
|
|
General and administrative
|
|
|
1,503,096
|
|
|
|
439,185
|
|
|
|
121,978
|
|
|
(m-2)
|
|
|
2,064,259
|
|
Total operating expenses
|
|
|
3,256,099
|
|
|
|
794,284
|
|
|
|
121,978
|
|
|
|
|
|
4,172,361
|
|
Net income (loss) from operations
|
|
|
(1,704,825
|
)
|
|
|
443,536
|
|
|
|
(121,978
|
)
|
|
|
|
|
(1,383,267
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs
|
|
|
(44,774
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(44,774
|
)
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Interest expense
|
|
|
(236,343
|
)
|
|
|
(3,122
|
)
|
|
|
(6,597
|
)
|
|
(a-2)
|
|
|
(335,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(2,701
|
)
|
|
(a-3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86,589
|
)
|
|
(r-3)
|
|
|
|
|
Loss on acquisition receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Change in warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Other income (expense)
|
|
|
-
|
|
|
|
18,394
|
|
|
|
-
|
|
|
|
|
|
18,394
|
|
Gain on sale of property and equipment
|
|
|
37,767
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
37,767
|
|
Total other income (expense)
|
|
|
(243,350
|
)
|
|
|
15,272
|
|
|
|
(95,887
|
)
|
|
|
|
|
(323,965
|
)
|
Net income (loss) before income taxes
|
|
|
(1,948,176
|
)
|
|
|
458,808
|
|
|
|
(217,865
|
)
|
|
|
|
|
(1,707,233
|
)
|
Income tax benefit (expense)
|
|
|
327,800
|
|
|
|
-
|
|
|
|
(50,598
|
)
|
|
(a-4)
|
|
|
277,202
|
|
Net income (loss) before non-controlling interests
|
|
|
(1,620,376
|
)
|
|
|
458,808
|
|
|
|
(268,463
|
)
|
|
|
|
|
(1,430,031
|
)
|
Net income (loss) from discontinued operations
|
|
|
(3,711,361
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(3,711,361
|
)
|
Less net income (loss) attributable
to non-controlling interests
|
|
|
(416,738
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(416,738
|
)
|
Net income (loss) attributable
to 1847 Holdings shareholders
|
|
$
|
(4,914,999
|
)
|
|
$
|
458,808
|
|
|
$
|
(268,463
|
)
|
|
|
|
$
|
(4,724,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
basic and diluted
|
|
$
|
(1.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.37
|
)
|
Weighted-average number
of common shares outstanding: Basic and diluted
|
|
|
3,290,747
|
|
|
|
|
|
|
|
169,411
|
|
|
|
|
|
3,460,158
|
|
1847
HOLDINGS LLC
PRO FORMA COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER
31, 2019
|
|
1847 Holdings LLC
|
|
|
Goedeker
Television Co.
(January
1 to April 5,
2019
|
|
|
Asien’s Appliance, Inc.
|
|
|
Pro Forma Adjustments
|
|
|
Notes
|
|
Pro Forma Condensed
|
|
Revenue
|
|
$
|
6,380,025
|
|
|
$
|
-
|
|
|
$
|
13,361,870
|
|
|
$
|
-
|
|
|
|
|
$
|
19,741,895
|
|
Cost of revenue
|
|
|
1,830,067
|
|
|
|
-
|
|
|
|
10,255,654
|
|
|
|
-
|
|
|
|
|
|
12,085,721
|
|
Gross profit
|
|
|
4,549,958
|
|
|
|
-
|
|
|
|
3,106,216
|
|
|
|
-
|
|
|
|
|
|
7,656,174
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
2,228,194
|
|
|
|
-
|
|
|
|
500,581
|
|
|
|
-
|
|
|
|
|
|
2,728,775
|
|
Advertising
|
|
|
-
|
|
|
|
-
|
|
|
|
66,570
|
|
|
|
-
|
|
|
|
|
|
66,570
|
|
Depreciation and amortization
|
|
|
1,352,874
|
|
|
|
-
|
|
|
|
35,337
|
|
|
|
-
|
|
|
|
|
|
1,388,211
|
|
Fuel
|
|
|
718,495
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
718,495
|
|
Bank and credit card fees
|
|
|
-
|
|
|
|
-
|
|
|
|
264,759
|
|
|
|
-
|
|
|
|
|
|
264,759
|
|
General and administrative expenses
|
|
|
1,569,149
|
|
|
|
-
|
|
|
|
825,620
|
|
|
|
65,753
|
|
|
(m-1)
|
|
|
2,760,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
(m-2)
|
|
|
|
|
Other operating expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,452
|
|
|
(c-1)
|
|
|
39,452
|
|
Total operating expenses
|
|
|
5,868,712
|
|
|
|
-
|
|
|
|
1,692,867
|
|
|
|
405,205
|
|
|
|
|
|
7,966,784
|
|
Net income (loss) from operations
|
|
|
(1,318,754
|
)
|
|
|
-
|
|
|
|
1,413,349
|
|
|
|
(405,205
|
)
|
|
|
|
|
(310,610
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs and loss on early extinguishment of
debt
|
|
|
(32,400
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,765
|
)
|
|
(r-1)
|
|
|
(40,165
|
)
|
Gain on write-down of contingency
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Interest expense
|
|
|
(523,780
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(96,041
|
)
|
|
(a-1)
|
|
|
(1,138,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,308
|
)
|
|
(t-1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,427
|
)
|
|
(r-2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(191,487
|
)
|
|
(e-1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,000
|
)
|
|
(a-2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,550
|
)
|
|
(a-3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(210,000
|
)
|
|
(r-3)
|
|
|
|
|
Change in warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Gain on sale of property and equipment
|
|
|
57,603
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
57,603
|
|
Other income (expense), net
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,504
|
)
|
|
|
-
|
|
|
|
|
|
(8,504
|
)
|
Total other income (expense)
|
|
|
(498,577
|
)
|
|
|
-
|
|
|
|
(8,504
|
)
|
|
|
(622,578
|
)
|
|
|
|
|
(1,129,659
|
)
|
Net income (loss) before income taxes
|
|
|
(1,817,331
|
)
|
|
|
-
|
|
|
|
1,404,845
|
|
|
|
(1,027,783
|
)
|
|
|
|
|
(1,440,269
|
)
|
Income tax benefit
|
|
|
504,060
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172,866
|
|
|
(a-4)
|
|
|
676,926
|
|
Net income (loss) before non-controlling interests
|
|
|
(1,313,271
|
)
|
|
|
-
|
|
|
|
1,404,845
|
|
|
|
(854,917
|
)
|
|
|
|
|
(763,343
|
)
|
Net income (loss) from discontinued operations
|
|
|
(1,447,707
|
)
|
|
|
(311,685
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(1,759,392
|
)
|
Non-controlling interest
|
|
|
(514,019
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(148,570
|
)
|
|
(a-5)
|
|
|
(662,589
|
)
|
Net income (loss) attributable to 1847 Holdings shareholders
|
|
$
|
(2,246,959
|
)
|
|
$
|
-
|
|
|
$
|
1,404,845
|
|
|
$
|
(706,347
|
)
|
|
|
|
$
|
(1,860,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: basic and diluted
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.52
|
)
|
Weighted-average number of common shares outstanding:
basic and diluted
|
|
|
3,152,349
|
|
|
|
|
|
|
|
432,707
|
|
|
|
|
|
|
|
|
|
3,585,056
|
|
1847
HOLDINGS LLC
NOTES TO UNAUDITED
PRO FORMA COMBINED FINANCIAL INFORMATION
NOTE 1 – DESCRIPTION OF THE TRANSACTIONS
Goedeker
On January 18, 2019, 1847 Goedeker Inc.
(“1847 Goedeker”), a wholly-owned subsidiary of 1847 Holdings LLC (the “Company”), entered
into an Asset Purchase Agreement (the “Goedeker Purchase Agreement”) with Goedeker Television Co., a Missouri
corporation (“Goedeker”), and Steve Goedeker and Mike Goedeker (the “Stockholders”), pursuant
to which 1847 Goedeker agreed to acquire substantially all of the assets of Goedeker used in its retail appliance and furniture
business (the “Goedeker Business”) for an aggregate purchase price $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; (iii) up to $600,000
in Earn Out Payments (as defined below) and (iv) the issuance to each Stockholder of a number of shares of common stock equal
to 11.25% of the issued and outstanding stock of 1847 Goedeker as of the closing date (22.50% in the aggregate) (the “Goedeker
Acquisition”).
On March 20, 2019, the Company established
1847 Goedeker Holdco Inc. (“1847 Holdco”) as a wholly-owned subsidiary in the State of Delaware and subsequently
transferred all of its shares in 1847 Goedeker to 1847 Holdco, such that 1847 Goedeker became a wholly-owned subsidiary of 1847
Holdco.
On April 5, 2019, 1847 Goedeker, 1847
Holdco, Goedeker and the Stockholders entered into Amendment No. 1 to the Asset Purchase Agreement (the “Goedeker Amendment”)
to amend certain terms of the Goedeker Purchase Agreement. Following entry into the Goedeker Amendment, closing of the Goedeker
Acquisition was completed on the same day.
Pursuant to the Goedeker Amendment, 1847
Holdco, rather than 1847 Goedeker, issued to each Stockholder a number of shares of its common stock equal to a 11.25% non-dilutable
interest in all of the issued and outstanding stock of 1847 Goedeker as of the closing date. The Goedeker Amendment also added
certain representations and warranties by 1847 Holdco and certain closing conditions for 1847 Holdco.
The Goedeker Amendment also clarified
that a Digital Marketing Agreement between Goedeker and Power Digital Marketing would not be assigned to 1847 Goedeker in the
Goedeker Acquisition. Goedeker agreed to cooperate with 1847 Goedeker in determining a reasonable arrangement designed to provide
1847 Goedeker with the benefits under such Digital Marketing Agreement. In consideration for Goedeker so cooperating, 1847 Goedeker
agreed to pay to Goedeker a total of $20,000, which amount Goedeker will use to pay Power Digital Marketing for amounts due under
the Digital Marketing Agreement for services to be rendered during the months of April 2019 and May 2019. Goedeker also agreed
to cause the Digital Marketing Agreement to be terminated as of May 30, 2019 to ensure that Goedeker no longer has any obligations
under the Digital Marketing Agreement.
As noted above, a portion of the purchase
price was paid by the issuance by 1847 Goedeker of a 9% Subordinated Promissory Note in the principal amount of $4,100,000 (the
“Goedeker Note”). The Goedeker 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 the fifth (5th) anniversary
of the closing date. 1847 Goedeker has the right to redeem all or any portion of the Goedeker Note at any time prior to the maturity
date without premium or penalty of any kind. The Goedeker Note contains customary events of default, including in the event of
(i) non-payment, (ii) a default by 1847 Goedeker of any of its covenants under the Goedeker Purchase Agreement or any other agreement
entered into in connection with the Goedeker Purchase Agreement, or a breach of any of representations or warranties under such
documents, or (iii) the bankruptcy of 1847 Goedeker. The Goedeker Note also contains a cross default provision, whereby a default
under the Revolving Loan or Term Loan (each as defined below), will also constitute an event of default under the Goedeker Note.
Goedeker is also entitled to receive the
following payments (the “Earn Out Payments”) to the extent the Goedeker Business achieves the applicable EBITDA
(as defined in the Goedeker 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.
|
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
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, 1847 Goedeker must pay a partial Earn
Out Payment to Goedeker in an amount equal to the product determined by multiplying (i) the EBITDA Achievement Percentage by (ii)
the applicable Earn Out Payment for such period, where the “Achievement Percentage” is the percentage determined
by dividing (A) the amount of (i) the EBITDA of the Goedeker Business for the applicable period less (ii) $1,500,000, by (B) $1,000,000.
For avoidance of doubt, no partial Earn Out Payments shall be earned or paid to the extent the EBITDA of the Goedeker Business
for any applicable period is equal or less than $1,500,000.
To the extent Goedeker 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 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.
During the earn out periods stated above,
1847 Goedeker agreed to (i) operate the Goedeker Business in the ordinary course of business substantially consistent with past
practices, (ii) operate the Goedeker Business as a distinct business entity or division so that its results can be verified for
purposes of calculating the Earn Out Payment, and (iii) adequately fund the Goedeker Business during the periods. Furthermore,
1847 Goedeker agreed that it would not, directly or indirectly, take any actions in bad faith that would have the purpose of avoiding
the Earn Out Payment.
The rights of Goedeker to receive payments
under the Goedeker Note and any Earn Out Payments are subordinate to the rights of Burnley and SBCC (each as defined below) under
separate Subordination Agreements that Goedeker entered into with Burnley and SBCC on April 5, 2019 in connection with the Goedeker
Acquisition.
Pursuant to the Goedeker Purchase Agreement,
on April 5, 2019, 1847 Goedeker entered into a Lease Agreement (the “Lease”) with S.H.J., L.L.C., a Missouri
limited liability company and affiliate of Goedeker. The Lease is for a term five (5) years and provides for a base rent of $45,000
per month. In addition, 1847 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.
Management Services Agreement
On April 5, 2019, 1847 Goedeker Inc. entered
into a Management Services Agreement (the “Goedeker Offsetting MSA”) with the Company’s manager, 1847
Partners LLC (the “Manager”). The MSA is an Offsetting Management Services Agreement as defined in that certain
Management Services Agreement, dated April 15, 2013, between the Company and the Manager (the “MSA”).
Pursuant to the Goedeker Offsetting MSA,
1847 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 MSA) (the “Goedeker Management Fee”); provided, however, that
(i) pro rated payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate amount of management
fees paid or to be paid by 1847 Goedeker, together with all other management fees paid or to be paid by all other subsidiaries
of the Company to the Manager, in each case, with respect to any fiscal year exceeds, or is expected to exceed, 9.5% of the Company’s
gross income with respect to such fiscal year, then the Goedeker Management Fee to be paid by 1847 Goedeker for any remaining
fiscal quarters in such fiscal year shall be reduced, on a pro rata basis determined by reference to the management fees to be
paid to the Manager by all of the subsidiaries of the Company, until the aggregate amount of the Goedeker Management Fee paid
or to be paid by 1847 Goedeker, together with all other management fees paid or to be paid by all other subsidiaries of the Company
to the Manager, in each case, with respect to such fiscal year, does not exceed 9.5% of the Company’s gross income with
respect to such fiscal year, and (iii) if the aggregate amount the Goedeker Management Fee paid or to be paid by 1847 Goedeker,
together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case,
with respect to any fiscal quarter exceeds, or is expected to exceed, the aggregate amount of the management fee (before any adjustment
thereto) calculated and payable under the MSA (the “Parent Management Fee”) with respect to such fiscal quarter,
then the Goedeker Management Fee to be paid by 1847 Goedeker for such fiscal quarter shall be reduced, on a pro rata basis, until
the aggregate amount of the Goedeker Management Fee paid or to be paid by 1847 Goedeker, together with all other management fees
paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to such fiscal quarter,
does not exceed the Parent Management Fee calculated and payable with respect to such fiscal quarter.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
Notwithstanding the foregoing, payment
of the Goedeker Management Fee is subordinated to the payment of interest on the Goedeker Note, such that no payment of the Goedeker
Management Fee may be made if 1847 Goedeker is in default under the Goedeker Note with regard to interest payments and, for the
avoidance of doubt, such payment of the Goedeker Management Fee will be contingent on 1847 Goedeker being in good standing on
all associated loan covenants. In addition, during the period that that any amounts are owed under the Goedeker Note or the Earn
Out Payments, the annual Goedeker Management Fee shall be capped at $250,000.
In addition, the rights of the Manager
to receive payments under the Goedeker Offsetting MSA are subordinate to the rights of Burnley and SBCC (each as defined below)
under separate Subordination Agreements that the Manager entered into with Burnley and SBCC on April 5, 2019 in connection with
the Goedeker Acquisition.
1847 Goedeker shall also reimburse the
Manager for all costs and expenses of 1847 Goedeker which are specifically approved by the board of directors of 1847 Goedeker,
including all out-of-pocket costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of 1847
Goedeker in connection with performing services under the Goedeker Offsetting MSA.
The services provided by the Manager include:
conducting general and administrative supervision and oversight of 1847 Goedeker’s day-to-day business and operations, including,
but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative
policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability
insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses
and permits that become necessary, participation in risk management policies and procedures; and overseeing and consulting with
respect to 1847 Goedeker’s business and operational strategies, the implementation of such strategies and the evaluation
of such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions
or dispositions and product or service lines.
Goedeker Spin-Off
On October 23, 2020, the Company distributed
all of the shares of Goedeker that it held to its shareholders (the “Goedeker Spin-Off”). As a result of the
Spin-Off, Goedeker is no longer a subsidiary of the Company.
Asien’s Appliance
On March 27, 2020, the Company and 1847
Asien Inc. (“1847 Asien”), a wholly-owned subsidiary of the Company, entered into a Stock Purchase Agreement
(the “Asien’s Purchase Agreement”) with Asien’s Appliance, Inc. (“Asien’s Appliance”)
and Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992 (the
“Seller”), pursuant to which 1847 Asien agreed to acquire all of the issued and outstanding capital stock of
Asien’s Appliance (the “Asien’s Acquisition”).
On May 28, 2020, 1847 Asien,
the Company, Asien’s Appliance and the Seller entered into Amendment No. 1 to the Asien’s Purchase Agreement (the
“Asien’s Amendment”) to amend certain terms of the Asien’s Purchase Agreement. Following entry
into the Asien’s Amendment, closing of the Asien’s Acquisition was completed on the same day.
Pursuant to the terms of the Asien’s
Purchase Agreement, as amended by the Asien’s Amendment, 1847 Asien agreed to acquire all of the issued and outstanding
capital stock of Asien’s Appliance for an aggregate purchase price of $2,125,500, subject to adjustment as described below.
The purchase price consists of (i) $233,000 in cash, (ii) the Amortizing Note (as defined below) in the aggregate principal amount
of $200,000, (iii) the Demand Note (as defined below) in the aggregate principal amount of $655,000, and (iv) 415,000 common shares
of the Company, having a fair market value of $1,037,500 (the “Buyer Shares”).
The purchase price is subject to a post-closing
working capital adjustment provision. On or before the 75th day following May 28, 2020 (the “Closing
Date”), 1847 Asien shall deliver to the Seller an audited balance sheet as of the Closing Date (the “Final
Balance Sheet”). If the net working capital reflected on the Final Balance Sheet (the “Final Working Capital”)
exceeds the net working capital reflected on the unaudited balance sheet of Asien’s Appliance delivered to 1847 Asien on
the Closing Date (the “Preliminary Working Capital”), 1847 Asien’s shall, within seven days, pay to the
Seller an amount of cash that is equal to such excess. If the Preliminary Working Capital exceeds the Final Working Capital, the
Seller shall, within seven days, 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 the Buyer a number of Buyer Shares that is
equal to such excess divided by $2.00.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
Pursuant to the Asien’s Amendment,
upon five calendar days written notice to the Seller and the transfer agent, from time to time during the one year period following
the closing of the Asien’s Acquisition, the Company shall have the right to repurchase any or all of the Buyer Shares then
held by the Seller from the Seller for a purchase price of $2.50 per share.
Subordinated Amortizing Promissory
Note
As noted above, a portion of the purchase
price under the Asien’s Purchase Agreement, as amendment by the Asien’s Amendment, was paid by the issuance of a subordinated
amortizing promissory note (the “Amortizing 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 Amortizing 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 right of the Seller to receive payments
under the Amortizing Note is subordinated to all indebtedness of 1847 Asien, whether outstanding as of the Closing Date or thereafter
created, to banks, insurance companies and other financial institutions or funds, and federal or state taxation authorities.
The Amortizing Note contains customary
events of default, including in the event of (i) non-payment, (ii) a default by 1847 Asien of any of their covenants under the
Purchase Agreement, the Amortizing Note, or any other agreement entered into in connection with the Asien’s Purchase Agreement,
or a breach of any of their representations or warranties under such documents, or (iii) the bankruptcy of 1847 Asien.
Demand Promissory Note
As noted above, a portion of the purchase
price under the Asien’s Purchase Agreement, as amendment by the Asien’s Amendment, was paid by the issuance by 1847
Asien to the Seller of a demand promissory note (the “Demand Note”) in the principal amount of $655,000 at
an interest rate of one percent (1%) computed on the basis of a 360 day year. Principal and accrued interest on the Demand Note
shall be payable 24 hours after written demand by the Seller.
Management Services Agreement
On May 28, 2020, 1847 Asien entered into
a Management Services Agreement (the “Asien’s Offsetting MSA”) with the Manager. The MSA is an Offsetting
Management Services Agreement as defined in the MSA).
Pursuant to the Asien’s Offsetting
MSA, 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 MSA) (the “Asien’s Management Fee”); provided,
however, that (i) pro rated payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate
amount of management fees paid or to be paid by 1847 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 Asien’s Management Fee to be paid by
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
Asien’s Management Fee paid or to be paid by 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 Asien’s Management
Fee paid or to be paid by 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 aggregate
amount of the Parent Management Fee with respect to such fiscal quarter, then the Asien’s Management Fee to be paid by 1847
Asien for such fiscal quarter shall be reduced, on a pro rata basis, until the aggregate amount of the Asien’s Management
Fee paid or to be paid by 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.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
1847 Asien shall also reimburse the Manager
for all costs and expenses of 1847 Asien which are specifically approved by the board of directors of 1847 Asien, including all
out-of-pocket costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of 1847 Asien in connection
with performing services under the Asien’s Offsetting MSA.
The services provided by the Manager include:
conducting general and administrative supervision and oversight of 1847 Asien’s day-to-day business and operations, including,
but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative
policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability
insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses
and permits that become necessary, participation in risk management policies and procedures; and overseeing and consulting with
respect to 1847 Asien’s business and operational strategies, the implementation of such strategies and the evaluation of
such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions
or dispositions and product or service lines.
NOTE 2 – FINANCING TRANSACTIONS
Goedeker
Revolving Loan
On April 5, 2019, 1847 Goedeker, as borrower,
and 1847 Holdco entered into a Loan and Security Agreement (the “Revolving Loan 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)
(the “Revolving Loan Amount”) minus reserves established Burnley at any time (the “Reserves”)
in accordance with the Revolving Loan Agreement (the “Revolving Loan”). The “Borrowing Base”
means an amount equal to the sum of the following: (i) the product of 85% multiplied by the liquidation value of 1847 Goedeker’s
inventory (net of all liquidation costs) identified in the most recent inventory appraisal by an appraiser acceptable to Burnley
(ii) multiplied by 1847 Goedeker’s Eligible Inventory (as defined in the Revolving Loan 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, 1847 Goedeker borrowed $744,000 under the Revolving Loan Agreement and issued a Revolving Note to Burnley in the principal
amount of up to $1,500,000.
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 Revolving Loan 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%. 1847 Goedeker
shall pay interest accrued on the Revolving Note in arrears on the last day of each month commencing on April 30, 2019.
1847 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 Revolving Loan Amount minus any Reserves and (ii) the Borrowing
Base, then 1847 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 Revolving Loan Agreement) are received by or on behalf
of 1847 Goedeker or 1847 Holdco in respect of any Prepayment Event following the occurrence and during the continuance of an Event
of Default, 1847 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 1847 Goedeker or 1847 Holdco;
(ii) a Change of Control (as defined in the Revolving Loan 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 1847 Goedeker or 1847 Holdco with a
fair value immediately prior to such event equal to or greater than $25,000; (iv) the issuance by 1847 Goedeker of any capital
stock or the receipt by 1847 Goedeker of any capital contribution; or (v) the incurrence by 1847 Goedeker or 1847 Holdco of any
Indebtedness (as defined in the Revolving Loan Agreement), other than Indebtedness permitted under the Revolving Loan Agreement.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
Under the Revolving Loan Agreement, 1847
Goedeker is required to pay a number of fees to Burnley, including the following:
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an
origination fee of $15,000, which was paid at closing on April 5, 2019;
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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 Revolving Loan Agreement,
which shall accrue at the rate of 0.50% per annum on the average daily difference of
the Revolving 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 Revolving Loan Agreement terminates, commencing on the first
such date to occur after the closing date;
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an
annual loan facility fee equal to 0.75% of the Revolving Commitment (i.e., the maximum
amount that 1847 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;
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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 Revolving Loan 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 1847 Goedeker; and
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if
the Revolving Loan is terminated for any reason, including by Burnley following an Event
of Default, then 1847 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 1847
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.
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In addition to the foregoing, 1847 Goedeker
was required under the Revolving Loan Agreement and the Term Loan Agreement described below to pay a consulting fee of $150,000
to GVC Financial Services, LLC at closing.
The Revolving Loan Agreement contains
customary events of default, including, among others (each, an “Event of Default”): (i) for failure to pay
principal and interest on the Revolving Note when due, or to pay any fees due under the Revolving Loan Agreement; (ii) if any
representation, warranty or certification in the Revolving Loan 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 Revolving Loan 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 1847 Goedeker or 1847 Holdco, or officer thereof, is charged by a governmental authority, criminally indicted
or convicted of a felony under any law that would reasonably be expected to lead to forfeiture of any material portion of collateral,
or such entity is subject to an injunction restraining it from conducting its business; (viii) if Burnley determines that a Material
Adverse Effect (as defined in the Revolving Loan Agreement) has occurred; (ix) if a Change of Control (as defined in the Revolving
Loan 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 (as defined below), the Goedeker Note, the Leonite Note (as defined below) or any other debt that
is subordinated to the Revolving Loan.
The Revolving Loan 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 1847 Goedeker and 1847 Holdco. In connection
with such security interest, on April 5, 2019, (i) 1847 Holdco entered into a Pledge Agreement with Burnley, pursuant to which
1847 Holdco pledged the shares of 1847 Goedeker held by it to Burnley, and (ii) 1847 Goedeker entered into a Deposit Account Control
Agreement with Burnley, Small Business Community Capital II, L.P. and Montgomery Bank relating to the security interest in 1847
Goedeker’s bank accounts.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
In addition, on April 5, 2019, the Company
entered into a Guaranty with Burnley to guaranty the obligations under the Revolving Loan Agreement upon the occurrence of certain
prohibited acts described in the Guaranty.
Term Loan
On April 5, 2019, 1847 Goedeker, as borrower,
and 1847 Holdco entered into a Loan and Security Agreement (the “Term Loan Agreement”) with Small Business
Community Capital II, L.P. (“SBCC”) for a term loan in the principal amount of $1,500,000 (the “Term
Loan”), pursuant to which 1847 Goedeker issued to SBCC a Term Note in the principal amount of up to $1,500,000 and a
ten-year warrant (the “SBCC Warrant”) to purchase shares of the most senior capital stock of 1847 Goedeker
equal to 5.0% of the outstanding equity securities of 1847 Goedeker on a fully-diluted basis for an aggregate price equal to $100.
The Term Note matures on April 5, 2023
and bears interest at the sum of the Cash Interest Rate (defined as 11% per annum) plus the PIK Interest Rate (defined as 2% per
annum); provided that upon an Event of Default all principal, past due interest and all fees shall bear interest at a per annum
rate equal to the Cash Interest Rate and the PIK Interest Rate, in each case plus 3.00%. Interest accrued at the Cash Interest
Rate shall be due and payable in arrears on the last day of each month commencing May 31, 2019. Interest accrued at the PIK Interest
Rate shall be automatically capitalized, compounded and added to the principal amount of the Term Note on each last day of each
quarter unless paid in cash on or prior to the last day of each quarter; provided that (i) interest accrued pursuant to an Event
of Default shall be payable on demand, and (ii) in the event of any repayment or prepayment, accrued interest on the principal
amount repaid or prepaid (including interest accrued at the PIK Interest Rate and not yet added to the principal amount of Term
Note) shall be payable on the date of such repayment or prepayment. Notwithstanding the foregoing, all interest on Term Note,
whether accrued at the Cash Interest Rate or the PIK Interest Rate, shall be due and payable in cash on the maturity date unless
payment is sooner required by the Term Loan Agreement.
1847 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 Term Loan Agreement.
1847 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, 1847 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, 1847 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, 1847 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 Term Loan Agreement) are received
by or on behalf of 1847 Goedeker or 1847 Holdco in respect of any Prepayment Event (as defined above) following the occurrence
and during the continuance of an Event of Default, 1847 Goedeker shall, immediately after such Net Proceeds are received, prepay
the Term Note below in an aggregate amount equal to 100% of such Net Proceeds.
Under the Term Loan Agreement, 1847 Goedeker
was required at closing to pay an origination fee of $30,000 to SBCC. Also, as described above, GVC Financial Services, LLC was
paid a fee of $150,000 in connection with services it provided in connection with the Term Loan and the Revolving Loan.
The Term Loan Agreement contains the same
Events of Default as the Revolving Loan Agreement, provided that the reference to the Term Loan in the cross-default provision
refers instead to the Revolving Loan.
The Term Loan 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 1847 Goedeker and
1847 Holdco. In connection with such security interest, on April 5, 2019, (i) 1847 Holdco entered into a Pledge Agreement with
SBCC, pursuant to which 1847 Holdco pledged the shares of 1847 Goedeker held by it to SBCC, and (ii) 1847 Goedeker entered Deposit
Account Control Agreement with Burnley, SBCC and Montgomery Bank relating to the security interest in 1847 Goedeker’s bank
accounts.
In addition, on April 5, 2019, the Company
entered into a Guaranty with SBCC to guaranty the obligations under the Term Loan Agreement upon the occurrence of certain prohibited
acts described in the Guaranty.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
Equity-Linked Financing
On April 5, 2019, the Company, 1847 Holdco
and 1847 Goedeker (collectively, “1847”) entered into a Securities Purchase Agreement (the “Leonite
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 $714,285.71
(the “Leonite Note”). As additional consideration for the purchase of the Leonite 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 (the “Leonite Warrant”),
and (iii) 1847 Holdco issued to Leonite shares of common stock equal to a 7.5% non-dilutable interest in 1847 Holdco.
The Leonite Note carries an original issue
discount of $64,285.71 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs
incurred in connection with the purchase of the Leonite Note. Therefore, the purchase price of the Leonite Note was $650,000.
The Leonite 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 Leonite Note (the “Stated
Rate”). Any amount of principal or interest on the Leonite 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 Leonite Note, 1847 shall make monthly
payments of interest only due under the Leonite 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 Leonite 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 Leonite Note; and (iii) net proceeds from the sale of any assets outside of
the ordinary course of business or securities in any subsidiary.
The Leonite Note will mature 12 months
from the issue date, or April 5, 2020, at which time the principal amount and all accrued and unpaid interest, if any, and other
fees relating to the Leonite Note, will be due and payable. Unless an event of default as set forth in the Leonite Note has occurred,
1847 has the right to prepay principal amount of, and any accrued and unpaid interest on, the Leonite 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 Leonite Note contains customary events
of default, including in the event of (i) non-payment, (ii) a breach by 1847 of its covenants under the Leonite Purchase Agreement
or any other agreement entered into in connection with the Leonite Purchase Agreement, or a breach of any of representations or
warranties under the Leonite Note, or (iii) the bankruptcy of 1847. The Leonite 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 Leonite Note, in which event
Leonite shall be entitled to apply all rights and remedies under the terms of the Leonite Note.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
Under the Leonite 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 Leonite 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 Leonite Note shall be determined by dividing the Conversion Amount by the applicable conversion price then in
effect. The term “Conversion Amount” means, with respect to any conversion of the Leonite Note, the sum of:
(i) the principal amount of the Leonite 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 (the “Fixed
Conversion Price”) (subject to adjustment as further described in the Leonite 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 Leonite Note, the conversion price shall immediately be equal to the lesser of (i) the Fixed 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 Leonite Note in excess of that portion of the Leonite 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 Leonite 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 Leonite 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 Leonite Note from Leonite) and (2) the number of common shares
issuable upon the conversion of the portion of the Leonite 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).
The Leonite Warrant also contains an ownership
limitation. The Company shall not effect any exercise of the Leonite Warrant, and Leonite shall not have the right to exercise
any portion of the Leonite Warrant, to the extent that after giving effect to issuance of common shares upon exercise the Leonite
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 Leonite 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.
The Leonite Purchase Agreement contains
customary representations, warranties and covenants. In addition, pursuant to the Leonite Purchase Agreement, Leonite was granted
piggy-back registration rights with respect to the common shares, the Leonite Warrant and the shares issuable upon exercise of
the Leonite Warrant. Also, in the event that the Company proposes to offer and sell its securities in an Equity Financing (as
defined in the Leonite Purchase Agreement), Leonite shall have the right, but not the obligation, to participate in the purchase
of the securities being offered in such Equity Financing up to an amount equal to the principal amount of the Leonite Note until
the earliest of (i) the maturity date, (ii) the date that the Leonite Note and all accrued but unpaid interest shall have been
repaid in full, and (iii) the closing date of an Equity Financing in which all, or any remaining portion, of the outstanding principal
amount of the Leonite Note along with accrued but unpaid interest thereon shall have been converted, in full, into, and on the
same terms as, the securities being offered in such Equity Financing.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
In addition, as long as Leonite owns at
least five percent (5%) of the securities originally purchased under the Leonite Purchase Agreement, the Company must timely file
(or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed it pursuant
to the Securities Exchange Act of 1934, as amended, or make publicly available in accordance with Rule 144(c) such information
as is required for Leonite to sell the securities under Rule 144. If the Company fails to remain current in its reporting obligations
or to provide currently publicly available information in accordance with Rule 144(c) and such failure extends for a period of
more than fifteen trading days (the date which such five trading day-period is exceeded, the “Event Date”),
then in addition to any other rights Leonite may have under the Leonite Purchase Agreement or under applicable law, on each such
Event Date and on each monthly anniversary of each such Event Date until the information failure is cured, the Company shall pay
to Leonite an amount in cash, as partial liquidated damages and not as a penalty, equal to 0.75% of purchase price paid for the
securities held by Leonite at the Event Date with a maximum amount of liquidated damages payable being capped at $150,000.
Concurrently with 1847 and Leonite entering
into the Leonite Purchase Agreement and as security for 1847’s obligations thereunder, on April 5, 2019, the Company, 1847
Holdco and 1847 Goedeker entered into a Security and Pledge Agreement with Leonite (the “Security Agreement”).
Pursuant to the Security Agreement, and in order to secure 1847’s timely payment of the Leonite Note and related obligations
and the timely performance of each and all of its covenants and obligations under the Leonite Purchase Agreement and related documents,
1847 unconditionally and irrevocably granted, pledged and hypothecated to Leonite a continuing security interest in and to, a
lien upon, assignment of, and right of set-off against, all presently existing and hereafter acquired or arising assets. Such
security interest is a first priority security interest with respect to the securities that the Company owns in 1847 Holdco and
in 1847 Neese Inc., and a third priority security interest with respect to all other assets.
The rights of Leonite to receive payments
under the Leonite Note are subordinate to the rights of Burnley and SBCC under separate Subordination Agreements that Leonite
entered into with them on April 5, 2019.
Asien’s Appliance
Agreement of Sale of Future Receipts
On May 28, 2020, 1847 Asien entered into
an Agreement of Sale of Future Receipts (“Receipts Agreement”) with TVT Direct Funding LLC (“TVT”),
pursuant to which 1847 Asien and Asien’s Appliance agree to sell future receivables with a value of $685,000 (the “Sold
Amount of Future Receipts”) to TVT for a purchase price of $500,000. 1847 Asien and Asien’s Appliance agree 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 Sold Amount of Future Receipts has been delivered to TVT. Asien’s Appliance used the proceeds from
this sale to finance the Asien’s Acquisition. In addition to all other sums due to TVT under the Receipts Agreement, 1847
Asien and Asien’s Appliance shall pay to TVT certain additional fees, including a one-time origination fees of $25,000.00
as reimbursement of costs incurred by TVT for financial and legal due diligence.
The TVT Loan Agreement contains customary
events of default, including the occurrence of the following: (i) a violation by 1847 Asien or Asien’s Apliance of any term,
condition or covenant in the Receipts Agreement other than as the result of Asien’s Appliance’s business to ceases
its operations, (ii) any representation or warranty made by 1847 Asien or Asien’s Apliance 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 Apliance under any of
the terms, covenants and conditions of any other agreement with TVT, if any.
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 Appliance.
The TVT Agreement contains customary representations, warranties and covenants for an agreement of this type.
NOTE 3 – BASIS OF PRO FORMA PRESENTATION
The unaudited pro forma combined statement
of operations for the six months ended June 30, 2020 combines the historical statement of operations of the Company with the historical
statement of operations of Asien’s Appliance and reflects the Goedeker Spin-Off. The unaudited pro forma combined statement
of operations for the six months ended June 30, 2020 was prepared as if the Asien’s Acquisition and Goedeker Spin-Off had
occurred on January 1, 2020.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
The unaudited pro forma combined statement
of operations for the year ended December 31, 2019 combines the historical statement of operations of the Company with the historical
statement of operations of Asien’s Appliance and reflects the Goedeker Spin-Off. The unaudited pro forma combined statement
of operations for the year ended December 31, 2019 was prepared as if the Asien’s Acquisition and Goedeker Spin-Off had
occurred on January 1, 2019. The historical financial information is adjusted in the unaudited pro forma combined
financial information to give effect to pro forma events that are (1) directly attributable to the proposed acquisition, (2) factually
supportable, and (3) with respect to the combined statement of operations, expected to have a continuing impact on the combined
results.
The Company accounted for the Asien’s
Acquisition in the unaudited pro forma combined financial information using the acquisition method of accounting in accordance
with Financial Accounting Standards Board Accounting Standards Codification Topic 805 “Business Combinations” (“ASC
805”). In accordance with ASC 805, the Company used its best estimates and assumptions to assign fair value to
the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill as of the acquisition
dates is measured as the difference of fair value of the net tangible assets and identifiable assets acquired over the purchase
consideration.
On October 23, 2020, the Company distributed
all of the shares of Goedeker that it held to its shareholders. As a result of the Spin-Off, Goedeker is no longer a subsidiary
of the Company. Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the results
of operations from Goedeker for the six months ended June 30, 2020 and year ended December31, 2019 have been classified as discontinued
operations as part of proforma combined statement of operations presented herein.
The pro forma adjustments described below
were developed based on management’s assumptions and estimates, including assumptions relating to the consideration paid
and the allocation thereof to the assets acquired and liabilities assumed from Asien’s Appliance based on preliminary estimates
to fair value. The final purchase consideration and allocation of the purchase consideration will differ from that
reflected in the unaudited pro forma combined financial information after the final valuation procedures are performed and the
amounts are finalized.
The unaudited pro forma combined financial
information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results
of operations or the consolidated financial position of the combined company would have been had the acquisition occurred on the
dates assumed, nor are the necessarily indicative of future consolidated results of operations or financial position.
The Company expects to incur costs and
realize benefits associated with integrating the operations of the Company and Asien’s Appliance. The unaudited
pro forma combined financial statements do not reflect the costs of any integration activities or any benefits that may result
from operating efficiencies or revenue synergies. The unaudited pro forma combined statement of operations does not
reflect any non-recurring charges directly related to the Asien’s Acquisition that the combined companies incurred upon
completion of the Asien’s Acquisition.
NOTE 4 – PURCHASE PRICE CONSIDERATION
Goedeker
The fair value of the purchase consideration
issued to Goedeker was allocated to the net tangible assets acquired. The Company accounted for the Goedeker Acquisition as the
purchase of a business 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 Acquisition:
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
|
|
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
Asien’s Appliance
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 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 Appliance 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
|
|
This preliminary purchase price allocation
has been used to prepare pro forma adjustments in the unaudited pro forma combined statement of operations. Due to the recent
completion of the Asien’s Acquisition, the determination of the purchase price and the allocation of the purchase price
used in the unaudited pro forma combined financial information are based upon preliminary estimates, which are subject to change
during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of the assets
acquired and liabilities assumed, including, but not limited to, contract receivables, prepaid expenses and other current assets,
intangible assets, accounts payable, and deferred revenue. It is expected that the financial statement basis and income tax basis
for the assets acquired and liabilities assumed will be the same. The final allocation could differ materially from the preliminary
allocation used in the pro forma adjustments.
1847 HOLDINGS LLC
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
NOTE 5 – PRO FORMA ADJUSTMENTS
As the Asien’s Acquisition has recently
been completed, the Company is currently in the process of completing the purchase price allocation treating the Asien’s
Acquisition as a business combination (see Note 4).
The pro forma adjustments included
in the unaudited pro forma condensed combined financial statements are as follows:
Asset Purchase Agreements
(a-1) Reflects the interest
expense resulting from the Promissory Notes of annualized interest of 9% or approximately $96,041 for the period of January 1,
2019 through April 5, 2019.
(a-2) Reflects the interest
expense resulting from the Promissory Notes of annualized interest of 8% or approximately $16,000 for the year ended December
31, 2019 and $6,597 for the period January 1, 2020 to May 28, 2020.
(a-3) Reflects the interest
expense resulting from the Promissory Notes of annualized interest of 1.0% or approximately $6,550 for the year ended December
31, 2019 and $2,701 for the period January 1, 2020 to May 28, 2020.
(a-4) Upon the acquisition
of the assets by the Company, the taxable income and losses from Asien’s Appliance will be included with the Company’s
future corporate income tax filings.
(a-5) Reflects the non-controlling
interest of the 30% interest in 1847 Holdco.
Management Services Agreements
(m-1) Reflects an annualized
management services agreement of a maximum of $250,000 paid to 1847 Partners LLC for the period of January 1, 2019 through April
5, 2019.
(m-2) Reflects an annualized
management services agreement of a maximum of $300,000 paid to 1847 Partners LLC for the year ended December 31, 2019 and $121,978
for the period January 1, 2020 to May 28, 2020.
Consulting Fee
(c-1) Represents the
$39,452 for a consulting fee due to GVC Financial Services, LLC for the period of January 1, 2019 through April 5, 2019.
Revolving Loan
(r-1) Financing costs – Reflects
financing costs of the Revolving Loan for a commitment fee of 0.5% per annum, loan facility fee of 0.75% per annum and monthly
collateral management fee of $1,700.
(r-2) Interest expense – Reflects
the interest expense $20,427 resulting from the Revolving Note of annualized interest of 8.5% or approximately $16,696 and the
amortization of debt discount of financing costs of $3,731 for the period of January 1, 2019 through April 5, 2019.
(r-3) Interest expense – Reflects
the interest expense of $210,000 resulting from the Revolving Note of amortized as interest expense for the year ended December
31, 2019 and $86,589 for the period January 1, 2020 to May 28, 2020.
Term Loan
(t-1) Interest expense – Reflects
the interest expense of $74,308 resulting from the Term Loan financing including the annualized interest of 11% or approximately
$44,897, PIK interest of 2% or approximately $7,808, the amortization of debt discount of financing costs of $6,702 and amortization
of the warrant feature of $14,901 for the period January 1, 2019 through April 5, 2019.
Equity-Linked Financing
(e-1) Interest expense – Reflects
the interest expense of $191,487 resulting from the Leonite Note including the annualized interest of 12% or approximately $22,309,
the amortization of debt discount of financing costs of $3,904, debt discount of amortization of share issuance of $26,027, amortization
of the warrant feature of $37,807 and amortization of the beneficial conversion feature of $101,439 for the period January 1,
2019 through April 5, 2019.
1847
HOLDINGS LLC
7,193,682
Common Shares
PROSPECTUS
[ ],
2020