PART
I
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 five acquisitions and distributed the stock of one of the acquired companies to our shareholders.
In March 2017, our subsidiary 1847 Neese Inc., or 1847 Neese, acquired
Neese, Inc., or 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 1847 Goedeker Inc., or Goedeker, acquired substantially all of the assets of Goedeker Television Co.,
or Goedeker Television, 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 Inc., or
1847 Asien, acquired Asien’s Appliance, Inc., or 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
Inc., or 1847 Cabinet, acquired Kyle’s Custom Wood Shop, Inc., an Idaho corporation, or 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.
In March 2021, our subsidiary 1847 Wolo Inc., or 1847 Wolo, acquired
Wolo Mfg. Corp., a New York corporation, and Wolo Industrial Horn & Signal, Inc., a New York corporation, which we collectively refer
to as Wolo. Headquartered in Deer Park, New York and founded in 1965, Wolo designs and manufactures horn and safety products (electric,
air, truck, marine, motorcycle and industrial equipment), and offers vehicle emergency and safety warning lights for cars, trucks, industrial
equipment and emergency vehicles.
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 Leverage Report (February 2021)
Source:
GF Data Leverage Report (February 2021)
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 Item
1A “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 December 31, 2020, the only full-time employee of our company was Ellery W. Roberts, our Chairman and Chief Executive Officer.
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 Internal Revenue Service, or 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” included in our prospectus, dated November
12, 2020 and filed with the Securities and Exchange Commission, or the SEC, on November 13, 2020, relating to our registration
statement on Form S-1 (registration No. 333-249752), 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 the Description of Securities filed as Exhibit 4.1 to this report 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 Goedeker Holdco Inc., or 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 initial public offering 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 could 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.
On
March 30, 2021, our newly formed wholly-owned subsidiary 1847 Wolo acquired all of the issued and outstanding capital stock of Wolo
for an aggregate purchase price of $7,400,000 (subject to adjustment) consisting of (i) $6,550,000 in cash and (ii) the issuance of
a secured promissory note in the principal amount of $850,000. As a result of this transaction, we own 92.5% of 1847 Wolo, with the
remaining 7.5% held by a third party. 1847 Wolo was formed in the State of Delaware on December 3, 2020, and Kyle’s was formed
in the State of Idaho on May 7, 1991. Wolo Mfg. Corp. was formed in the State of New York on August 6, 1965 and Wolo Industrial Horn
& Signal, Inc. was formed in the State of New York on January 28, 1999.
On
January 30, 2020, we formed 1847 Hydroponic Inc., or 1847 Hydroponic, as a wholly-owned subsidiary in the State of Delaware. On
February 9, 2021, 1847 Hydroponic entered into a securities purchase agreement with GSH One Enterprises, Inc., a California corporation
(d/b/a Bayside Garden Supply), Hone Brothers Retail, LLC, an Oregon limited liability company (d/b/a Endless Summer Garden Supply),
and Hone Brothers Retail Tulsa LLC, an Oklahoma limited liability company (d/b/a Endless Summer Garden Supply) (which we collectively
refer to as the Garden Companies) and the sellers named therein, pursuant to which 1847 Hydroponic agreed to acquire all of the
issued and outstanding capital stock or other equity securities of the Garden Companies for an aggregate purchase price of $100,000,000,
subject to adjustment, consisting of (i) $90,000,000 in cash and (ii) a three-year 8% secured subordinated convertible promissory
note in the aggregate principal amount of $10,000,000. The closing of the securities purchase agreement is subject to standard
closing conditions and has not yet been completed.
The
following chart depicts our current organizational structure:
See
below 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 Item 10 “Directors,
Executive Officers and Corporate Governance” 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, 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, 1847 Asien entered into an offsetting
management services agreement with our manager on May 28, 2020, 1847 Cabinet entered into an offsetting management services agreement
with our manager on August 21, 2020 and 1847 Wolo entered into an offsetting management services agreement with our manager on
March 30, 2021. 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, 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), 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) and 1847 Wolo 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, 1847 Asien, 1847 Cabinet or 1847 Wolo, 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, 1847 Asien, 1847 Cabinet or 1847 Wolo
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, 1847 Asien, 1847 Cabinet or 1847 Wolo, 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, 1847 Asien, 1847 Cabinet
or 1847 Wolo, 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, 1847 Asien, 1847 Cabinet or 1847 Wolo 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, 1847 Asien, 1847 Cabinet
or 1847 Wolo, 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 we do not expect to be granted within the forthcoming year.
In
addition, the rights of our manager to receive payments under the 1847 Wolo offsetting management services agreement are subordinate
to the rights of Sterling National Bank under its loan documents.
Each
of 1847 Neese, 1847 Asien, 1847 Cabinet and 1847 Wolo 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, 1847 Asien, 1847 Cabinet and 1847 Wolo 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:
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(in thousands)
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Quarterly management fee:
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|
1
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Consolidated total assets
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$
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100,000
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2
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Consolidated accumulation amortization of intangibles
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5,000
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3
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Total cash and cash equivalents
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5,000
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|
4
|
Adjusted total liabilities
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(10,000
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)
|
5
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Adjusted net assets (Line 1 + Line 2 – Line 3 – Line 4)
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|
90,000
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|
6
|
Multiplied by quarterly rate
|
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|
0.5
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%
|
7
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Quarterly management fee
|
|
$
|
450
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|
Offsetting management fees:
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|
|
|
|
8
|
Acquired company A offsetting management fees
|
|
$
|
(100
|
)
|
9
|
Acquired company B offsetting management fees
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|
|
(100
|
)
|
10
|
Acquired company C offsetting management fees
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|
|
(100
|
)
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11
|
Acquired company D offsetting management fees
|
|
|
(100
|
)
|
12
|
Total offsetting management fees (Line 8 + Line 9 – Line 10 – Line 11)
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|
|
(400
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)
|
13
|
Quarterly management fee payable by Company (Line 7 + Line 12)
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|
$
|
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:
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“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 U.S.
generally accepted accounting principles, or 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.
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●
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“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.
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|
●
|
“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.
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●
|
“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 is 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:
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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
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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.
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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:
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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
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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).
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Specifically,
manager’s profit allocation will be calculated and paid as follows:
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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
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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:
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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
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○
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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
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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.
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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 $20
Manager
elects to have holding period measured for purposes of profit allocation for Company B
Profit Allocation Calculation:
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Year 4
A, due to
sale
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Year 6
B, due to
5 year hold
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1
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Contribution-based profit since acquisition for respective subsidiary
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$
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5
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$
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7
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2
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Gain/ Loss on sale of company
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25
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0
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3
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Cumulative gains and losses
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25
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20
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4
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High water mark prior to transaction
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0
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20
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5
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Total Profit Allocation Amount (Line 1 + Line 3)
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30
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27
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6
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Business’ holding period in quarters since ownership or last measurement due to holding event
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12
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20
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7
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Business’ average allocated share of consolidated net equity
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50
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25
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8
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Business’ level 1 hurdle amount (2.00% * Line 6 * Line 7)
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12
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10
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9
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Business’ excess over level 1 hurdle amount (Line 5 – Line 8)
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18
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17
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10
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Business’ level 2 hurdle amount (125% * Line 8)
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15
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12.5
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11
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Allocated to manager as “catch-up” (Line 10 – Line 8)
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3
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2.5
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12
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Excess over level 2 hurdle amount (Line 9 – Line 11)
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15
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14.5
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13
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Allocated to manager from excess over level 2 hurdle amount (20% * Line 12)
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3
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2.9
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14
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Cumulative allocation to manager (Line 11 + Line 13)
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6
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5.4
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15
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High water mark allocation (20% * Line 4)
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0
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4
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16
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Manager’s Profit
Allocation for Current Period (Line 14 – Line 15, > 0)
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$
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6
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$
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1.4
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For
purposes of calculating profit allocation:
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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.
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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.
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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.
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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.
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“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.
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“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.
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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.
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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.
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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.
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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.
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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.
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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.
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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%.
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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.
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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.
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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.
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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.
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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
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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●
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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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●
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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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We
have also 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.
RETAIL
AND APPLIANCES BUSINESS
Our retail
and appliances segment is comprised of the business operated by Asien’s. This business segment accounted for approximately
49.4% of our total revenues for the year ended December 31, 2020.
Overview
of Asien’s
On
May 28, 2020, we completed the acquisition of 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.
Asien’s
is one of the area’s oldest appliance stores and is well known and highly respected throughout the North Bay area. Asien’s
has strong, established relationships with customers and contractors in the community. It 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, and
similar benefits, Asien’s offers a full line of top brands from U.S. and international manufacturers.
Products
and Services
Appliance
Sales
With
a showroom display area of approximately 6,000 square feet, Asien’s offers a complete line of home and kitchen appliances
to both residential and commercial customers, including:
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Cooking:
Products include cooktops, microwaves, warming drawers, ventilation, wall ovens, ranges
and range tops. Major brands include Beko, BlueStar, Café, DCS, Fisher Paykel,
Five Star, Fulgor Milano, GE, Haier, Jenn-Air, KitchenAid, Maytag, Miele, Monogram, Sub-Zero,
Viking, Whirlpool and Wolf.
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●
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Refrigeration:
Products include a wide variety of refrigerator configurations, freezers and ice makers,
and wine and beer coolers. Major brands include Fisher Paykel, Jenn-Air, KitchenAid,
Liebherr, Miele, Monogram, Perlick, Sub-Zero, Viking and Whirlpool.
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Laundry:
Products include washers, dryers and laundry extras. Major brands include Amana, ASKO,
Beko, Fisher & Paykel, GE, Maytag, Miele, Speed Queen and Whirlpool.
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Clean
Up: Products include dishwashers, trash compactors, and in-sink food waste disposers.
Major brands include AGA, Amana, ASKO, Beko, Café, Cove, Crosley, Fisher Paykel,
GE, Hot Point, Jenn-Air, KitchenAid, Maytag, Miele, Monogram, Viking and Whirlpool.
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Outdoor:
Products include outdoor grills, refrigeration and storage. Major brands include DCS,
Green Mountain Grills, LYNX, Marvel, Perlick, Sub-Zero, Viking and Wolf.
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Product
sales is Asien’s largest revenue source, accounting for approximately 99.2% of its total revenue from the date of acquisition
through the year ended December 31, 2020.
Appliance
Services
Asien’s
also offers a variety of appliance services, including delivery, installation, warranty service and appliance repair and maintenance.
Asien’s is the largest independent appliance service company in Sonoma County. Asien’s service technicians are experts,
averaging 15 years of field experience with factory training. They are vendor certified to handle our customers’ kitchen
appliance, laundry, and outdoor appliance service needs. Asien’s also offers extended warranties.
These
services accounting for approximately 6% and 8% of Asien’s total revenue for the years ended December 31, 2020 and 2019,
respectively.
Pricing
Asien’s
provides premium and super premium products to the North Bay customer. A significant number of the appliances in Asien’s
6,000 SKU catalog are subject to a unilateral minimum retail price policy, or UMRP, or minimum advertised pricing restrictions.
UMRP restricts a reseller from discounting the customer price for an appliance below a vendor published UMRP and product promotions
are solely those specified by the vendor and unilaterally available. Asien’s thrives in the premium market by proving the
customer with a higher overall perceived value as well as a competitive total invoice cost by offering premium service at reasonable
rates. Asien’s sales associates are industry professionals with an average more than 10 years of experience selling appliances.
This team of seven averages over seven years seniority with Asien’s with the senior member having been with Asien’s
for 26 years. The premium appliance market requires this expertise as very often sales and customer service teams are interacting
with designers, builders, and contractors, as well as Asien’s core customer, the homeowner. Asien’s hard earned reputation
for this expertise in sales, installation and service accretes to its advantage when it competes directly across product lines
that are also available from other local resellers and big box competitors. Asien’s merchant and sales team are responsible
to ensure that pricing and promotion for these appliances are competitive.
Vendor/Supplier
Relationships
Asien’s offers more than 40 brands and over
6,000 SKUs available for purchase. This depth of vendor relationships gives consumers numerous options in all product categories. Asien’s
top vendors and suppliers are listed in the table below.
Supplier
|
|
Total
Purchases
(2019)
|
|
|
Total
Purchases
(2020)
|
|
|
Percent
of
Purchases
(2020)
|
|
Riggs Distributing, Inc.
|
|
$
|
3,162,559
|
|
|
$
|
3,063,734
|
|
|
|
33.6
|
%
|
Whirlpool
|
|
|
1,741,113
|
|
|
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1,176,219
|
|
|
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12.9
|
%
|
General Electric
|
|
|
1,504,306
|
|
|
|
1,527,220
|
|
|
|
16.8
|
%
|
Middleby / Viking Range
|
|
|
634,987
|
|
|
|
647,809
|
|
|
|
7.1
|
%
|
Miele
|
|
|
430,757
|
|
|
|
780,726
|
|
|
|
8.6
|
%
|
Fisher Paykel
|
|
|
357,142
|
|
|
|
202,258
|
|
|
|
2.2
|
%
|
R&B
|
|
|
340,854
|
|
|
|
238,647
|
|
|
|
2.6
|
%
|
Blue Star
|
|
|
331,176
|
|
|
|
437,816
|
|
|
|
4.8
|
%
|
Zephyr
|
|
|
269,969
|
|
|
|
258,055
|
|
|
|
2.8
|
%
|
Beko Appliances
|
|
|
118,013
|
|
|
|
143,091
|
|
|
|
1.6
|
%
|
Products
are purchased from all suppliers on an at-will basis. Asien’s has no long-term purchase agreements with any supplier. Relationships
with suppliers are subject to change from time to time. Changes in relationships with suppliers occur periodically and could positively
or negatively impact Asien’s net sales and operating profits. We believe that Asien’s can be successful in mitigating
negative effects resulting from unfavorable changes in the relationships with suppliers through, among other things, the development
of new or expanded supplier relationships. Please see Item 1A “Risk Factors—Risks Related to Retail and Appliances
Business” and Item 1A “Risk Factors—Risks Related to Our Business and Structure—The coronavirus
pandemic may cause a material adverse effect on our business” for a description of the risks related to Asien’s
supplier relationships, including those associated with the coronavirus pandemic.
BrandSource
Membership
Asien’s
is part of the member-owned buying group, BrandSource, which has an internal marketing company as well as a company to finance
their purchases from some brands.
Members
of BrandSource can compete with box stores by banding together under the buying group; the dealers/members own the buying group/co-op.
Simply put, the group aids members in helping them buy better, reduce costs, drive business into their stores and educate them
in a way an independent dealer could not do it alone.
We
believe that the benefits of Asien’s membership with this group include:
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$19
billion dollar buying power allowing members to compete on the price of products (same
as box store);
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BrandSource
credit card to complete consumer financing (12, 18 and 24 month);
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BrandSource
finance so members can get credit approved to purchase goods;
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BrandSource
marketing so members can compete for consumer store traffic. This includes turnkey websites,
digital and social marketing, as well as print and video marketing. This allows members
to actually out-market the box stores locally; and
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National
and regional education forums for members to be “in the know” on industry
trends, vendor product knowledge and idea exchange.
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Marketing
Asien’s
markets its products through a variety of methods, both digital and traditional. Some examples include digital advertising, radio,
billboards and “go local” marketing.
Digital
Advertising
Asien’s
participates in pay-per-click ads, digital banner ads, YouTube videos, Facebook posts, etc., through its membership in BrandSource.
Asien’s also has a professional and easy-to-use website (www.asiensappliance.com), which allows customers to research, compare,
and order products online. This site is hosted and maintained by BrandSource.
Radio
Asien’s
runs radio spots on various stations throughout the year, with most spots promoting the Asien’s brand. These advertisements
strive to promote Asien’s experience, expertise, service, local ownership, 70 years in business, etc. Some radio spots are
paid for by appliance manufacturers, in which case Asien’s will promote the quality of the brand, rather than the price.
Billboards
Asien’s
has secured two prominent billboards in Sonoma County:
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Northbound
101 across from the Corby Avenue auto row in Santa Rosa. Asien’s advertises on
it half the year at different intervals.
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Southbound
101 in Petaluma near the Petaluma Village Premium Outlets.
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In
many cases, as with the radio ads, appliance manufacturers will pay for advertising on the billboards.
“Go
Local” Marketing
Asien’s
also participates in the “GO LOCAL” marketing organization for locally-owned independent businesses. Members of this
organization use a shared brand, targeted advertising, and a rewards card to increase sales and gain market share.
Customers
and Markets
Asien’s
currently serves customers in the areas of Sonoma, Napa, Marin, Lake and Mendocino counties, California. 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 customer accounting for more than 5% of total revenue.
Customer
Support
Customer
Service is of critical importance to the success of Asien’s. Asien’s primarily conducts customer service in person
or on the telephone, although web-initiated chat, text and email are available and rapidly growing coordination and communication.
Asien’s believes in allowing its customer to set the preferred method for communication. Asien’s role in providing
premium appliances can often require substantial pre-sales support, such as when quoting a multi-appliance bid package for a builder.
During 2020, there has been a material shift toward online sales and the appliance industry is no exception. In 2019, the most
popular search terms for the appliance industry ended with the modifier “near me” and in 2020 that modifier has been
replaced with “delivered.” Confirming availability, managing backordered product and coordinating delivery and installation
are all critical service functions for Asien’s in the COVID-19 environment.
Asien’s
customer service is available to field inbound customer calls from 8:00 am to 5:30 pm PST, Monday through Friday and Saturday
from 9:00 am to 5:00 pm.
Logistics
The
large majority of Asien’s inventory consists of customers’ completed orders, most of which are selected from models
in its extensive showroom. Asien’s does, however, maintain a supply of common and in-demand appliances for walk-in customers
who are looking to make same-day purchases.
Asien’s
takes ownership of inventory when it is delivered to its warehouse. At this point, warehouse staff unloads the product, determines
the delivery location and arranges for delivery of the product. Customers may arrange for a delivery service or their third-party
installers and contractors to pick-up their appliances at our warehouse or have it scheduled for delivery. Asien’s will
coordinate third party delivery or recommend factory trained third-party installation services when necessary. Asien’s also
offers installation services.
Asien’s
return and exchange policy is designed to be as worry-free and customer friendly as possible. An Asien’s customer may cancel
or exchange an item that is on order or is not subject to a vendor mandated restocking fee. Asien’s may pass any supplier
assessed restocking fee on to the customer in the event a special ordered appliance is returned or exchanged without defect.
Competition
Asien’s
competes with big box retailers, independent appliance retailers, hybrid retail and direct-to-consumer companies and web only
companies. As a hybrid retail and direct-to-consumer company, Asien’s has the ability to successfully rival the offerings
of each competitor, utilizing impressions from both online and traditional marketing, its consultative selling practice and customer
service expertise, and a curated assortment of premier brands to attract and retain new customers.
The
U.S. appliance market in general is highly fragmented with thousands of local and regional retailers competing for share. Asien’s
primary competitors in the appliance market include 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.
The
shifting landscape to online sales in the segment is providing a significant market share capture and positioning opportunity
for companies. Asien’s is rapidly evolving their business processes to capitalize on this market shift. While premium brands
continue to place restrictions on the pure ecommerce distribution models, Asien’s is adapting the concierge selling available
on their showroom floor for the web customer at home. The COVID-19 pandemic has accelerated this shift and is rewarding the entrepreneurial
innovation necessary for this transition. This ongoing adaptation and continual process improvement will allow Asien’s to
continue to enjoy a preferred reseller status with the premium brands that differentiate Asien’s offerings.
Competitive
Strengths
Based
on management’s belief and experience in the industry, we believe that the following competitive strengths enable Asien’s
to compete effectively.
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Name
and reputation. We believe that Asien’s enjoys a long-standing (70+ years)
reputation with vendors and customers for its focus on offering a full line of appliances,
including premium brands unavailable from the competition, with consultative selling,
competitive pricing and superior customer service.
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●
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Highly
experienced management and personnel. We believe that Asien’s personnel
are its most important asset. Asien’s has an experienced management team with decades
of industry knowledge and a team of experienced, knowledgeable and skilled field personnel.
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●
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Diverse
product and service offerings. Asien’s offers a full line of top brands
from U.S. and international manufacturers. It currently offers approximately 6,000 appliance
SKU’s. Asien’s also offers delivery, installation and repair and maintenance
services provided by its highly knowledgeable personnel.
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|
●
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Inventory
discipline. Resellers in the appliance industry are experiencing unprecedented
supply chain issues with backorder on many appliance categories. Increasingly, the most
success in appliance sales is found for those with available inventory on hand. Asien’s
reacts quickly to the expression of customer demand by confirming availability for products
and placing orders to reserve potential stock needs. Asien’s curated assortment
allows it to react to micro-trends and adjust assortment and buying decisions quickly.
On the showroom floor, Asien’s experienced team has quickly pivoted to first sell
what is available and then over-communicate with the customer when an item is on backorder.
As a result, Asien’s is maintaining a low cancelation rate. Customer service processes
and resources to allow more efficient ongoing customer communication and coordination
will allow Asien’s to earn loyalty within its market by exceeding the service levels
customers receive from other specialty retailers.
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●
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Extended
repair, delivery, and loaner services. Approximately 60%-70% of Asien’s
sales are “duress” sales for broken or antiquated equipment. It is not uncommon
for service to provide a gateway sales. A customer looking to replace their appliance
still wants a quality product and they need it quickly. This is where the value of Asien’s
full-service approach wins customer loyalty.
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●
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Online
sales expertise. We believe that Asien’s ability to transact online, big
ticket, home delivery sales give it strategic positioning and capability to sell more
products to its current customer base, as well as to add new big ticket product categories.
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●
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Membership
in BrandSource. As discussed in more detail above, we believe that Asien’s
membership in BrandSouce provides it with a number of competitive advantages.
|
Growth
Strategies
Asien’s
will strive to grow its business by pursuing the following growth strategies:
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●
|
Digital
strategy. Asien’s plans to implement best-in-class solutions from parallel
industries focused on a click-to-brick digital strategy. This includes enhancing Asien’s
web presence and digital advertising while providing tools to facilitate consultation,
guided customer support and service. Asien’s also plans to enhance the full-cycle
customer relationship including loyalty, incentives for referral, and long-tail satisfaction
surveys. Asien’s also plans to enhance its geographic reach through installation
partnerships.
|
|
●
|
Increase
local marketing spend. Asien’s plans to increase its local marketing spending.
Outreach messaging will increase the emphasis on Asien’s as a trusted community
resource and other local first values. Asien’s plans to build incrementally on
ad spending where a return is measurable. This involves first optimizing local market
internet search and digital advertising campaigns, while at the same time innovating
a COVID-19 appropriate approach to what was traditionally outside sales by more regularly
engaging builders, designers, and contractors and encouraging regular digital meeting
place. Asien’s plans to provide local leadership by being efficient and providing
secure online tools to enable project management and data exchange.
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|
●
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Store
Growth. Asien’s is actively looking for underserved and growing communities
on the west coast that echo the attributes that serve its success in the current Sonoma
County location.
|
Intellectual
Property
Asien’s
does not own any registered intellectual property. The agreements with Asien’s suppliers generally provide Asien’s
with a limited, non-exclusive license to use the supplier’s trademarks, service marks and trade names for the sole purpose
of promoting and selling their products.
To
protect intellectual property, Asien’s relies on a combination of laws and regulations, as well as contractual restrictions.
Asien’s relies on the protection of laws regarding unregistered copyrights for certain content it creates. Asien’s
also relies on trade secret laws to protect its proprietary technology and other intellectual property. To further protect its
intellectual property, Asien’s enters into confidentiality agreements with its executive officers and directors.
Employees
As
of December 31, 2020, Asien’s employed 25 full-time employees. The following table sets forth the number of Asien’s
employees by function. Asien’s also employs a team of two (2) part-time employees dedicated exclusively to Saturday deliveries.
Department/Function
|
|
Employees
|
|
Accounting/Finance
|
|
2
|
|
Sales and Marketing
|
|
7
|
|
Customer Service
|
|
8
|
|
Warehouse and Delivery
|
|
6
|
|
Administrative
|
|
2
|
|
TOTALS
|
|
25
|
|
None
of Asien’s employees are represented by labor unions, and we believe that it has an excellent relationship with its employees.
Regulation
Asien’s
business is subject a variety of laws and regulations applicable to companies conducting business on the Internet. Jurisdictions
vary as to how, or whether, existing laws governing areas such as personal privacy and data security, consumer protection or sales
and other taxes, among other areas, apply to the Internet and e-commerce, and these laws are continually evolving. For example,
certain applicable privacy laws and regulations require Asien’s to provide customers with its policies on sharing information
with third parties, and advance notice of any changes to these policies. Related laws may govern the manner in which Asien’s
stores or transfers sensitive information or impose obligations on Asien’s in the event of a security breach or inadvertent
disclosure of such information. Additionally, tax regulations in jurisdictions where Asien’s does not currently collect
state or local taxes may subject it to the obligation to collect and remit such taxes, or to additional taxes, or to requirements
intended to assist jurisdictions with their tax collection efforts. New legislation or regulation, the application of laws from
jurisdictions whose laws do not currently apply to Asien’s business, or the application of existing laws and regulations
to the Internet and e-commerce generally could result in significant additional taxes on Asien’s business. Further, Asien’s
could be subject to fines or other payments for any past failures to comply with these requirements. The continued growth and
demand for e-commerce is likely to result in more laws and regulations that impose additional compliance burdens on companies
doing business on the Internet.
CUSTOM
CABINETRY BUSINESS
Our
custom cabinetry business is operated by Kyle’s. This business segment, which was acquired in the third quarter of 2020,
accounted for approximately 7.3% of our total revenues for the year ended December 31, 2020.
Overview
On
September 30, 2020, we completed the acquisition of Kyle’s. Headquartered in Boise, Idaho and founded in 1976, Kyle’s
designs, builds, and installs custom cabinetry for contractors and homeowners in Boise and the surrounding area. Kyle’s
focuses on designing, building and installing custom cabinetry primarily for custom and semi-custom builders. Its products include
kitchen, bath, home and office cabinets. Kyle’s also offers fireplace mantels, surrounds, entertainment systems, wall units
and bookcases. Kyle’s products are sold on a regional basis directly to homeowners and contractors and through a network
of several long-term recurring customers.
Established
for over 40 years in its markets, Kyle’s has built a strong reputation for best-in-class processes, product quality, and
timeliness.
Products
and Services
Kyle’s
builds cabinets for every area of a home - kitchen and bath cabinets, fireplace mantels and surrounds, entertainment systems and
wall units, bookcases and office cabinets. Kyle’s provides service to builders, designers and homeowners when they are building
a new home or conduct remodeling. Kyle’s builds and installs quality cabinets with fine design.
Kyle’s
starts every project with a professional cabinet design that blends artistic design elements with maximum efficiency. Whether
they are modern, traditional or rustic custom cabinets, Kyle’s provides complete design from conceptual layout and functional
accessories to fine artisan finishes.
Kyle’s
design service starts with a base package, based on what the builder’s standard package or tendencies are. Its designers
will update or modify the package based on the homeowner’s add-ons or changes and send the job pricing detail to the builder.
Professional
installation has everything to do with how the final product turns out. Kyle’s hires professional technicians to install
the cabinets it builds, and they take great care over the final fit and finish to ensure that the finished cabinets are second
to none.
Kyle’s
has focused most of its efforts toward supplying custom or semi-custom builders, within which 96% were residential customers’
projects in 2020. In order to develop end-user markets, Kyle’s has a custom cabinet showroom in Boise, Idaho to present
customers with a wide selection of cabinet styes, decorative finishes and functional cabinet hardware options.
In
the last several years, the majority of Kyle’s projects have been kitchen and bathroom/vanities, but Kyle’s machinery
system would also support garage and closet systems, which represent future growth opportunities.
Manufacturing
Kyle’s
cabinet shop is equipped with state-of-the-art tools operated by skilled cabinetmakers. Its priority is producing quality cabinets
in a timely fashion. Kyle’s has been building cabinets in Boise since 1976 with a reputation of great service and outstanding
quality.
Kyle’s
manufactures its cabinets using its computer numerical control, or CNC, machinery in order to maximize efficiency. The details
of each custom cabinet it makes are created by its own employees from hand sanding to staining and painting to adding a wide array
of specialty finishes, coatings, distressing and glazing.
Kyle’s
cabinets are made primarily of alder, paint-grade material and melamine. Cabinets are manufactured using CNC routing of all job
components from sheet goods. Kyle’s can cut a complete job in four to six hours. The estimated total cycle time for projects
from production design to install-ready is seven business days.
Pricing
Kyle’s
strategy has been to deliver quality and performance at a mid-level price target. Kyle’s pricing model is generally offering
better features or efficiencies than general market competitors in each product category to its builder markets. Kyle’s
has developed a bid sheet that prices base cabinets on a per lineal foot basis with unit price adders for each of the different
options or items in the cabinet package. The base cabinet package is for a stained alder cabinet with an inset panel door installed.
The adders are added to the bare cabinet per foot charge to develop a total cabinet base bid.
Supplier
Relationships
The
primary raw materials used in the manufacture of Kyle’s products are melamine and veneered sheet goods, lumber, doors and
hardware. Cost of these raw materials is a key factor in pricing our products. We believe that there is an ample supply of most
of the raw materials that Kyle’s needs. Recently, potentially as a result of the coronavirus pandemic and resulting impact,
Kyle’s has seen price increases in certain key raw materials such as wood products and hardware. These increases may negatively
affect Kyle’s profitability and financial condition. Item 1A “Risk Factors—Risks Related to Our Business
and Structure—The coronavirus pandemic may cause a material adverse effect on our business.”
For
the years ended December 31, 2020 and 2019, about six suppliers accounted for a majority of Kyle’s purchases. Kyle’s
is seeking to identify alternative raw material suppliers to the extent there are viable alternatives and to expand its use of
alternative raw materials. Kyle’s aims to maintain multiple supply sources for each of its key raw materials to ensure that
supply problems with any one supplier will not materially disrupt its operations. In addition, Kyle’s strives to develop
strategic relationships with new suppliers to secure a stable supply of materials and introduce competition in its supply chain,
thereby increasing its ability to negotiate better pricing and reducing its exposure to possible price fluctuations. Please see
Item 1A “Risk Factors—Risks Related to Custom Cabinetry Business” for a description of the risks related
to Kyle’s supplier relationships.
Sales
and Marketing
Kyle’s
primary customer markets in the last several years have been custom or semi-custom home builders. Kyle’s job sizes range
from small residential projects generating approximately $5,000 to $9,000, medium size jobs of $15,000 to $25,000, to larger jobs
ranging $50,000 to over $100,000.
CUSTOMER
MARKETS
2020
Kyle’s
continues to derive most of its work in the residential single family, new construction segment of the construction market. Due
to strong housing demands in the area, Kyle’s is also tapping into the residential multi-family, new construction segment
of the market. Kyle’s has experience and capabilities to support the aforementioned market segments in addition to others
such as condo and commercial projects.
Kyle’s
has a high customer retention level and has generated a considerable number of broader revenue opportunities through direct and
specific interaction with its customer base. Kyle’s has negotiated pricing with several long-term recurring contractor customers
who send out a weekly schedule; and others who send out the job when the site foundation is laid. The revenue generated from the
service provided for these long-term recurring contractor customers represented a majority of total revenue for the years ended
December 31, 2020 and 2019. Please also see Item 1A “Risk Factors—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.”
Kyle’s
primarily relies on direct consumer marketing and its extensive relationships with local builders to market its products. It also
maintains a website www.kylescabinets.com and conducts social media marketing through its Facebook page.
Technology
By
adopting the advanced technology, Kyle’s can cut a full project in four to six hours. The total estimated cycle time from
the production design to install-ready is five to seven business days.
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Frameless
Operation. In 2013, Kyle’s converted to a frameless cabinet operation from
face frame operation. Frameless cabinets do not have the face frame and are known as
“full access” cabinets, European style, or modern cabinetry. A frameless
box offers more ease of access and storage space without the face frame. Additionally,
there is less cost, without milling, and attaching the frame to the box.
|
|
●
|
Automated
Processes. In 2015, Kyle’s acquired a CNC router and automated the production
of all projects. Kyle’s works primarily with alder, or paint-grade materials, and
orders goods for in-house scheduled jobs. Jobs are run on a nested program, which, once
data is entered, provides the number of sheets needed, and makes the most efficient use
of those sheets. The job materials are lowered by lift to the router, where parts are
machined directly from each sheet.
|
Competition
Kyle’s
competes with numerous competitors in its primary markets, Boise and the surrounding area (Twin Falls, McCall, and Sun Valley),
with reputation, price, workmanship and services being the principal competitive factors. Kyle’s mostly competes against
other specialty custom cabinet builders in the region. Kyle’s also competes with regional home improvement contractors and
suppliers such as Franklin’s and to a lesser extent against national retail chains such as Home Depot and Lowes. As a result
of the implementation of Kyle’s business strategy which is delivering high value, quality products and customized solutions
and installations to the condo/multi-family, and single-family projects in the new construction markets, we anticipate that Kyle’s
will continue to effectively compete against the aforementioned competition.
Competitive
Strengths
Based
on management’s belief and experience in the industry, we believe that the following competitive strengths enable Kyle’s
to compete effectively.
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●
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Superior
Name and reputation. Established for over 40 years in its markets, Kyle’s
has built a strong reputation for best-in-class processes, product quality, and timeliness.
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Established
Blue-Chip Clients. Kyle’s customer list includes a list of regional contractors
in the area, many of whom have used Kyle’s as their go-to cabinet vendor for many
years.
|
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●
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Streamlined
Operations. Kyle’s CNC router process, along with other operational systems
and refinements, helped Kyle’s yield higher than average efficiencies, accuracy,
and profitability.
|
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●
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Diversified
Capabilities. Kyle’s has diversified capabilities to support multi-family
and commercial project work, providing flexibility toward trending markets and growth
opportunities.
|
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●
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Outstanding
Growth Opportunities. Kyle’s portfolio, brand and reputation, and streamlined
operational platform can be leveraged for expansion, both in existing regions, and other
high-value surrounding areas.
|
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●
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Strong
Regional Presence. Kyle’s has strong ties to the community. With nearly
100% business referral rate, Kyle’s has built a significant amount of trust and
goodwill in its region.
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Growth
Strategies
Kyle’s
will strive to grow its business by pursuing the following growth strategies.
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Product
Line Expansion. Kyle’s capabilities extend to closets and garages, and
management estimates there is an appropriate demand for these product lines among Kyle’s
current customer base. Kyle’s may expand its product line to closets and garages.
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Geographic
Expansion. With more service requests in the surrounding area, there is immediate
opportunities for expansion to homeowners and contractors located near Twin Falls, McCall,
and Sun Valley areas of Idaho. We believe that Kyle’s sophisticated business model
would be received well by these surrounding areas
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Expansion
to Multi-Family Projects. Evidence of market demand is ongoing for multi-family
projects, both within Kyle’s current customer markets and within other potential
customers. Given appropriate infrastructure to support the market’s volume, immediate
market penetration for multi-family projects could be achieved.
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Capacity
and Infrastructure Expansion. Kyle’s plans to purchase more CNC machines
and build a separate finishing facility with automated spray finishing for stains, clear
lacquers and pigmented lacquers.
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Employees
As
of December 31, 2020, Kyle’s employed 28 full-time employees. The following table sets forth the number of Kyle’s
employees by function.
Department/Function
|
|
Employees
|
|
Management
|
|
3
|
|
Office Employees
|
|
1
|
|
Design
|
|
3
|
|
Front End/ Build
|
|
7
|
|
Finish
|
|
4
|
|
Load/ Deliver
|
|
3
|
|
Install
|
|
4
|
|
Specialty
|
|
3
|
|
TOTALS
|
|
28
|
|
None
of Kyle’s employees are represented by labor unions, and Kyle’s believes that it has an excellent relationship with
its employees.
Regulation
Kyle’s
facilities are subject to Idaho Department of Environmental Quality in connection with air quality 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. Kyle’s believes that
it is in substantial compliance with all applicable requirements. However, its efforts to comply with environmental requirements
do not remove the risk that it 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 its properties
from activities conducted by previous occupants.
Permits
are required for certain of Kyle’s operations, and these permits are subject to revocation, modification and renewal by
issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations may
result in the payment of fines or the entry of injunctions, or both.
Changes
in environmental laws and regulations or the discovery of previously unknown contamination or other liabilities relating to Kyle’s
properties and operations could result in significant environmental liabilities. In addition, Kyle’s might incur significant
capital and other costs to comply with increasingly stringent air emission control laws and enforcement policies which would decrease
its cash flow.
LAND
MANAGEMENT SERVICES BUSINESS
Our
land management services business is operated by Neese. This business segment accounted for approximately 43.3% and 100% of our
total revenues for the years ended December 31, 2020 and 2019, respectively.
Overview
On
March 3, 2017, we completed the acquisition of 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. Neese’s revenue mix is composed of waste
disposal and a variety of agricultural services, wholesaling of agricultural equipment and parts, local trucking services, various
shop services, and other products and services. Services to the local agricultural and farming communities include manure spreading,
land rolling, bin whipping, cleaning of bulk storage bins and silos, equipment rental, trucking, vacuuming, building erection,
and others.
Neese
carries high-quality farm and ranch equipment from prominent manufacturers, including Buhler Versatile Tractors, Harvest International,
Nuhn Industries Ltd., Twinstar, Fantini, Loftness, Roto-Grind, Sage Oil Vac, Dixie Chopper, and many others.
Products
and Services
Waste
Disposal, Land Application and other Services
Neese’s
largest revenue source is providing waste disposal, land application and other services, primarily for the agricultural industry,
and to a lesser extent, industrial and municipal customers. Services to the local agricultural and farming communities include
manure spreading, land rolling, bin whipping, cleaning all types of bulk storage bins and silos, equipment rental, trucking, vacuuming,
building erection, and other services. Neese also has a fleet of trucks that haul products for a variety of customers. Service
revenues accounted for approximately 50.1% and 65.9% of Neese’s total revenues for the years ended December 31, 2020 and
2019, respectively.
Equipment
and Parts Sales
Neese
sells a wide range of farm and agricultural equipment. Some of the major brands offered include, but are not limited to, the following:
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Versatile
Tractors, which have a heavy frame and powerful Cummins QSX 15-liter engine that are
hard working with the lugging power to pull pans and clear land;
|
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Harvest
International, which is a leading manufacturer of grain augers and grain handling equipment;
|
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●
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Nuhn
Industries Ltd., which is a leading manufacturer of liquid manure spreaders, liquid manure
agitators, liquid manure pumps, and manure hauling equipment;
|
|
●
|
Twinstar
Basket rakes, which are designed to produce the highest quality hay;
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●
|
Fantini,
which is a leading company in the production of corn and sunflower headers;
|
|
●
|
Loftness
crop shredders and grain baggers;
|
|
●
|
Roto-Grind
grain handling and storage equipment;
|
|
●
|
Dixie
Chopper, marketed as the world’s fastest lawnmower; and
|
|
●
|
Sage
Oil Vac’s innovative, alternative fluid handling systems.
|
Sales
of parts and equipment accounted for approximately 49.9% and 34.1% of Neese’s total revenues for the years ended December
31, 2020 and 2019, respectively.
Pricing
Neese
prices its products and services at what the market will bear. Pricing is generally determined by product and service mix, supply
and demand, wholesale prices on equipment/parts, competitive forces, and other factors.
Supplier
Relationships
Neese employs a variety of suppliers with one
supplier representing 10% or more of our total purchases. Neese maintains close relationships with its suppliers. Neese’s key vendors
and suppliers are listed in the table below.
Supplier
|
|
Relationship
Established (Year)
|
|
Product or
Service Supplied
|
|
Total
Purchases
(2019)
|
|
|
Total
Purchases
(2020)
|
|
|
Percent of
Purchases
(2020)
|
|
Nuhn Industries
|
|
2002
|
|
Agricultural Equipment
|
|
$
|
719,058
|
|
|
$
|
1,724,401
|
|
|
42.3
|
%
|
Quick Oil Co.
|
|
1993
|
|
Fuel
|
|
|
570,226
|
|
|
|
311,038
|
|
|
7.6
|
%
|
Meyer Mfg
|
|
1993
|
|
Agricultural Equipment
|
|
|
180,776
|
|
|
|
106,374
|
|
|
2.6
|
%
|
ComData
|
|
2009
|
|
Fuel
|
|
|
102,006
|
|
|
|
40,960
|
|
|
1.0
|
%
|
Products
are purchased from these suppliers on an at-will basis. Such manufacturers could discontinue sales to Neese at any time or upon
short notice. If any of these suppliers discontinued selling or were unable to continue selling to Neese, there could be a material
adverse effect on our business and results of operations.
Relationships
with suppliers are subject to change from time to time. Changes in Neese’s relationships with suppliers occur periodically,
and could positively or negatively impact our net sales and operating profits. However, we believe that we can be successful in
mitigating negative effects resulting from unfavorable changes in the relationships between Neese and its suppliers through, among
other things, the development of new or expanded supplier relationships. Please see Item 1A “Risk Factors—Risks
Related to Land Management Services Business—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” and Item 1A “Risk Factors—Risks
Related to Our Business and Structure—The coronavirus pandemic may cause a material adverse effect on our business”
for a description of the risks related to Neese’s supplier relationships, including those associated with the coronavirus
pandemic.
Sales
and Marketing
Neese
relies primarily on the following methods to generate new business:
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●
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one
inside salesperson;
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●
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the
founders’ business development efforts;
|
|
●
|
a
corporate website: www.neeseinc.com;
|
|
●
|
advertising
in local/regional trade publications and newspapers;
|
|
●
|
attending
agricultural trade shows; and
|
We
believe that Neese’s growth to date is also the result of the creation and maintenance of an excellent reputation with numerous
farms and other players throughout the agricultural community of central Iowa. In addition, we believe that the founders have
been instrumental in building the account base through extensive industry experience and product knowledge. Neese has a firm commitment
to product quality and timely delivery, and customer satisfaction.
Customers
and Markets
Neese
currently serves approximately 573 active accounts. The end user market is the agricultural industry (livestock and crop production
markets). Neese also performs work for and sells to industrial and municipal customers. The general service area is within a 60-mile
radius of Neese’s headquarters in Grand Junction, Iowa.
We
believe that Neese’s established customer base is a strong asset that contributes to its stability and presents opportunities
for sales growth. Neese has a diversified customer base without reliance on several large customers. For the year ended December
31, 2020, no customer accounted for more than 10% of sales.
Competition
The
U.S. farm and garden equipment wholesalers industry includes manufacturers’ wholesale sales branches as well as retail dealers
in farm equipment, which are grouped with wholesalers because their products are sold primarily for business use rather than personal
or household use. Large distributors have few economies of scale but can offer customers a wider range of products. Small distributors
can compete successfully by holding exclusive territory rights to popular products.
Neese
competes with numerous companies that offer similar products and/or services. We believe that Neese’s primary competitive
advantage is its decades-long, superior reputation for high quality products, service, reliability and stability, and safety record.
Additionally, Neese is located in central Iowa, a strategic location due to its proximity to the State’s agricultural industry
and its easy access to Interstate 35.
Competitive
Strengths
Based
on our management’s belief and experience in the industry, we believe that the following competitive strengths enable
Neese to compete effectively.
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●
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Name
and reputation. We believe that Neese enjoys a long-standing (25-year) reputation
for its focus on offering a full line of new and used farm equipment and parts, and providing
superior waste hauling, land application, and other services with competitive pricing
and superior customer service.
|
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●
|
Strong
customer relationships. We believe that Neese has strong ties to hundreds of
agricultural, industrial, and municipal organizations throughout its marketplace.
|
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●
|
Highly
trained and professional staff. We believe that Neese’s personnel are its
most important asset. Neese employs dedicated and highly skilled professionals who have
extensive industry experience. In order to ensure that customers receive the most efficient
and cost-effective service, Neese provides continuous safety and management training
to its dedicated team of professionals.
|
Growth
Strategies
We
will strive to grow Neese’s business by pursuing the following growth strategies.
|
●
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Expansion
of product and service lines. Neese plans to continue expanding its product and
service lines based on management’s assessment of customer needs.
|
|
●
|
Expansion
of trucking services. Neese has increased its trucking business with a
fleet of 13 trucks that it owns. The trucking business increases revenue during times
when waste hauling is not as busy.
|
|
●
|
Increased
sales and marketing. Neese also plans to continue spending additional resources
on sales and marketing personnel and strategies in order to secure new client accounts.
|
Intellectual
Property
We
do not own or license any material intellectual property in connection with the operation of Neese.
Employees
As
of December 31, 2020, Neese employed 21 full-time employees, as depicted in the table below.
Department/Function
|
|
Employees
|
|
Management
|
|
2
|
|
Office Employees
|
|
3
|
|
Truck Drivers
|
|
8
|
|
Mechanics
|
|
2
|
|
General Labor
|
|
3
|
|
Sales
|
|
0
|
|
Product Supervisors
|
|
3
|
|
TOTALS
|
|
21
|
|
None
of Neese’s employees are represented by labor unions, and Neese believes that it has an excellent relationship with its
employees.
Regulation
Neese
is subject to a wide variety of laws and regulations, which historically have not had a material effect on our business. For example,
most of the products sold and service provided are regulated by a host of state and federal agencies, including, one or more of
the following: the Environmental Protection Agency, the Iowa Department of Natural Resources and the Consumer Products Safety
Commission. Since we are a wholesaler (and not a manufacturer) of these products, responsibility for compliance generally falls
upon the manufacturer. Neese is required to hold a commercial manure handler license which requires an annual training program.
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 report, 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 three 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. Asien’s has
remained open since this date under these modified occupancy restrictions, so it did not experience any meaningful business interruption.
However, Asien’s is dependent upon suppliers to provide it with all of the products that its sells. The pandemic has impacted
and may continue to impact suppliers and manufacturers of certain of its products. As a result, Asien’s has faced and may
continue to face delays or difficulty sourcing certain products, which could negatively affect its business and financial results.
Even if Asien’s is able to find alternate sources for such products, they may cost more, which could adversely impact Asien’s
profitability and financial condition.
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 is under Stage
3 of Stay Healthy Guidelines, which allow businesses and governmental agencies to continue operations at physical locations in
the state of Idaho; however, all individuals, businesses, and governmental agencies should adhere to the physical distancing and
sanitation requirements prescribed. 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; although recently, potentially as a result of the pandemic
and resulting impact, Kyle’s has seen price increases in certain key raw materials such as wood products and hardware. These
increases may negatively affect Kyle’s profitability and financial condition. 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, as
well as impact the cost of raw materials. Therefore, Kyle’s business operations may experience further delays and experience
lost sales opportunities and increased costs, which could further adversely impact Kyle’s profitability and financial condition.
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:
|
●
|
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;
|
|
●
|
the
potential disruption of existing business and diversion of management’s attention
from day-to-day operations;
|
|
●
|
the
inability to maintain uniform standards, controls, procedures and policies;
|
|
●
|
the
need or obligation to divest portions of the acquired companies;
|
|
●
|
the
potential failure to identify material problems and liabilities during due diligence
review of acquisition targets;
|
|
●
|
the
potential failure to obtain sufficient indemnification rights to fully offset possible
liabilities associated with acquired businesses; and
|
|
●
|
the
challenges associated with operating in new geographic regions.
|
We
have a limited operating 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. In March 2021, we acquired Wolo, which designs and manufactures horn and safety products (electric,
air, truck, marine, motorcycle and industrial equipment), and offers vehicle emergency and safety warning lights for cars, trucks,
industrial equipment and emergency vehicles. We 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 Item 1 “Business—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 Item 7 “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 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” below. 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, 2020, 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 Item 1 “Business—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 Item 1 “Business—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 Item 1 “Business—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 Item 1 “Business—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 Item 1 “Business—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 Item 1 “Business—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 Item
1 “Business—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 Item 1 “Business—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 Item “Business—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 Item 1 “Business—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” included in
our prospectus, dated November 12, 2020 and filed with the SEC on November 13, 2020, relating to our registration statement on
Form S-1 (registration No. 333-249752), 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 24 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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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 of 1933, as amended, or 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.
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ITEM
1B.
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UNRESOLVED
STAFF COMMENTS.
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Not
applicable.
Our
principal office is located at 590 Madison Avenue, 21st Floor, New York, NY 10022. We entered into an office service agreement
with Regus Management Group, LLC for use of office space at this location effective January 22, 2013. Under the agreement,
in exchange for our right to use the office space at this location, we are required to pay a monthly fee of $479 (excluding
taxes).
Neese
is headquartered at 303 Division St. E., Grand Junction, Iowa 50107. Neese operates from one facility totaling 9,150-square feet
on an eight-acre property. The layout consists of a 5,400-square foot wash bay and 3,750-square feet of shop and office space.
Neese leases this facility pursuant to an agreement of lease entered into with K&A Holdings, LLC, which is owned by Neese’s
founders, on March 3, 2017. The 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.
Asien’s
is located at 1801 Piner Rd., Santa Rosa, CA 95401. The site is approximately 11,000 square feet in total and consists of a 6,000
square foot showroom display area as well as a general office, accounting office, service department and 4,000 square foot warehouse.
Asien’s leases this site on a month-to-month basis for approximately $9,700 per month. Asien’s also rents an additional
3,000 square feet of warehouse and office space in an adjacent building for $2,000 per month.
Kyle’s
is located at 10849 W. Emerald St. Boise, ID 83713. Kyle’s operates from one standalone 6,600 square foot facility, which
includes corporate offices, administration, production floor, warehouse, and employee areas. On September 1, 2020, Kyle’s
entered into an industrial lease agreement with Stephen Mallatt, Jr. and Rita Mallatt, the sellers of Kyle’s. The lease
is for a term of five years, with an option for a renewal term of five years, and provides for a base rent of $7,000 per month
for the first 12 months, which will increase to $7,210 for months 13-16 and to $7,426 for months 37-60. In addition, Kyle’s
is responsible for all taxes, insurance and certain operating costs during the lease term. In the event of late payment, interest
shall accrue on the unpaid amount at the rate of twelve percent (12%) per annum. The lease agreement contains customary events
of default, representations, warranties and covenants.
We
believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate
for our businesses.
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ITEM
3.
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LEGAL
PROCEEDINGS.
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From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may harm our business. We are not currently aware of any such legal proceedings or claims that we believe will have
a material adverse effect on our business, financial condition or operating results.
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ITEM
4.
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MINE
SAFETY DISCLOSURES.
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Not
applicable.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
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 (the “Neese Sellers”), pursuant to which 1847 Neese acquired all of the issued and outstanding capital stock
of Neese on March 3, 2017. As a result of this transaction, 1847 Neese owns 55% of 1847 Neese, with the remaining 45% held by
the sellers.
On
March 27, 2020, the Company and the Company’s wholly owned subsidiary 1847 Asien Inc., a Delaware corporation (“1847
Asien”), entered into a stock purchase agreement with Asien’s Appliance, Inc., a California corporation (“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
“Asien’s Seller”), pursuant to which 1847 Asien acquired all of the issued and outstanding stock of Asien’s
on May 28, 2020 (see Note 10). 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.
On
August 27, 2020, the Company and the Company’s wholly owned subsidiary 1847 Cabinet Inc., a Delaware corporation (“1847
Cabinet”), entered into a stock purchase agreement with Kyle’s Custom Wood Shop, Inc., an Idaho corporation (“Kyle’s”),
and Stephen Mallatt, Jr. and Rita Mallatt (the “Kyle’s Sellers”), pursuant to which 1847 Cabinet acquired all
of the issued and outstanding stock of Kyle’s on September 30, 2020 (see Note 10). As a result of this transaction, the
Company owns 92.5% of 1847 Cabinet, with the remaining 7.5% held by a third party, and 1847 Cabinet owns 100% of Kyle’s.
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., a Missouri corporation (“Goedeker
Television”). On March 20, 2019, the Company established 1847 Goedeker Holdco Inc. (“Holdco”) as a wholly owned
subsidiary in the State of Delaware and subsequently transferred all of its shares in Goedeker to Holdco, such that Goedeker became
a wholly owned subsidiary of Holdco.
On
January 18, 2019, Goedeker entered into an asset purchase agreement with Goedeker Television and Steve Goedeker and Mike Goedeker,
pursuant to which Goedeker acquired substantially all of the assets of Goedeker Television used in its retail appliance and furniture
business on April 5, 2019. As a result of this transaction, the Company owned 70% of Holdco, with the remaining 30% held by third
parties, and Holdco owned 100% of Goedeker.
On
August 4, 2020, Holdco distributed all of its shares of Goedeker to its stockholders in accordance with their pro rata ownership
in Holdco, after which time Holdco was dissolved. Following this transaction, and the closing of Goedeker’s initial public
offering on August 4, 2020 (the “Goedeker IPO”), 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 (the “Goedeker
Spin-Off”). As a result of the Goedeker Spin-Off, Goedeker is no longer a subsidiary of the Company.
The
consolidated financial statements include the accounts of the Company and its consolidated subsidiaries, 1847 Neese, Neese, 1847
Asien, Asien’s, 1847 Cabinet and Kyle’s. All significant intercompany balances and transactions have been eliminated
in consolidation.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
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.
The
results of Goedeker are included within discontinued operations for the years ended December 31, 2020 and 2019, respectively.
The Company retrospectively updated the consolidated financial statements as of and for the years ended December 31, 2020 and
2019, respectively, to reflect this change.
Accounting
Basis
The
Company uses the accrual basis of accounting and GAAP. The Company has adopted a calendar year end.
Proposed
Acquisition
On
February 9, 2021, the Company’s wholly-owned subsidiary 1847 Hydroponic Inc. (“1847 Hydroponic”) entered into
a securities purchase agreement with GSH One Enterprises, Inc., a California corporation (d/b/a Bayside Garden Supply), Hone Brothers
Retail, LLC, an Oregon limited liability company (d/b/a Endless Summer Garden Supply), and Hone Brothers Retail Tulsa LLC, an
Oklahoma limited liability company (d/b/a Endless Summer Garden Supply) (the “Garden Companies”) and the sellers named
therein, pursuant to which 1847 Hydroponic agreed to acquire all of the issued and outstanding capital stock or other equity securities
of the Garden Companies for an aggregate purchase price of $100,000,000, subject to adjustment, consisting of (i) $90,000,000
in cash and (ii) a three-year 8% secured subordinated convertible promissory note in the aggregate principal amount of $10,000,000.
The closing of the securities purchase agreement is subject to standard closing conditions and has not yet been completed.
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 Asien’s (and was previously operated
by Goedeker), and the Land Management Segment, which is operated by Neese. Commencing with the fourth quarter of 2020, the Company
added an additional segment - the Construction Segment, which is operated by Kyle’s.
The Retail
and Appliances Segment is comprised of the business of Asien’s, which is based in Santa Rosa, California, and provides a
wide variety of appliance services including sales, delivery, installation, service and repair, extended warranties, and financing.
The
Land Management Services Segment is comprised of the business of Neese, which is based in Grand Junction, Iowa, and provides 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.
The Construction
Segment is comprised of the business of Kyle’s, which is based in Boise, Idaho, and provides a wide variety of construction
services including custom design and build of kitchen and bathroom cabinetry, delivery, installation, service and repair, extended
warranties, and financing.
The
Company provides general corporate services to its segments; however, these services are not considered when making operating
decisions and assessing segment performance. These services are reported under “Corporate Services” below and these
include costs associated with executive management, financing activities and public company compliance.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
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.
Impact
of COVID-19
The
impact of COVID-19 on the Company’s business has been considered in management’s estimates and 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 10, 2020 and April 28, 2020, Neese
and Asien’s received $383,600 and $357,500, respectively, in Paycheck 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. 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.
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, 2020. The Company reclassified
certain operating expense accounts in the Consolidated Statement of Operations. The reclassification had no impact on financial
position, net income, or shareholder’s equity.
Revenue
Recognition and Cost of Revenue
On
January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with
Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. This
ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This
ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from
customer purchase orders, including significant judgments. The Company’s adoption of this ASU resulted in no change
to the Company’s results of operations or balance sheet.
Retail
and Appliances Segment
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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
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 Asien’s.
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.
Disaggregated
revenue for the Retail and Appliances Segment by sales type for the period from May 29, 2020 (date of acquisition) to December
31, 2020 is as follows:
|
|
Period
May 29,
2020 to
December 31,
2020
|
|
Appliance sales
|
|
$
|
7,563,547
|
|
Other sales
|
|
|
61,675
|
|
Total revenue
|
|
$
|
7,625,222
|
|
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 year ended December 31, 2020, revenues, gross margin, and net
loss would not have changed.
Substantially
all of Neese’s sales are to businesses, including farmers or municipalities and very little to individuals.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
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 years ended December 31, 2020 and 2019 is as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
Trucking
|
|
$
|
923,398
|
|
|
$
|
1,579,660
|
|
Waste hauling and pumping
|
|
|
1,588,010
|
|
|
|
1,901,314
|
|
Repairs
|
|
|
464,475
|
|
|
|
377,004
|
|
Other
|
|
|
403,772
|
|
|
|
343,436
|
|
Total services
|
|
|
3,379,655
|
|
|
|
4,201,414
|
|
Sales of parts and equipment
|
|
|
3,322,944
|
|
|
|
2,178,611
|
|
Total revenue
|
|
$
|
6,702,599
|
|
|
$
|
6,380,025
|
|
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 $38,000 and $121,989 are included in this balance at December 31, 2020 and 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 December 31, 2020 and 2019, respectively.
Construction
Segment
Kyle’s
generates revenues from providing cabinet design, construction and installation primary from cabinet-related products and supplies.
Kyle’s
provides cabinet design, construction and installation services to customers with both residential and commercial projects. A
majority of Kyle’s contracts are recurring work from a builder team. Kyle’s will provide pricing and work with individual
homeowners, designers and builders to determine pricing options and upgrades to the base proposed contact pricing.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
Performance
Obligations - For substantially all landscaping construction contracts, the Company recognizes revenue over time, as performance
obligations are satisfied, on a percentage completion basis on a total project cost basis. Typical contacts will last approximately
4-6 weeks from start to the substantial completion of the project.
Significant
Judgments and Estimates - For cabinet construction contracts, measuring the percent completion on an individual project requires
estimates obtained by discussions with field personnel. Estimates are also used in determining the total estimated total costs
of a project. These estimates and assumptions are the best information management has at the time percent complete is calculated.
The Company employs the same estimation methodology on a quarterly basis.
Accounts
Receivable, Net ‒ Accounts receivable, net, are amounts due from customers where there is an unconditional right to consideration.
|
|
Period
October 1
to
December 31,
2020
|
|
Construction sales
|
|
$
|
1,120,224
|
|
Other sales
|
|
|
-
|
|
Total revenue
|
|
$
|
1,120,224
|
|
Receivables
Receivables
consist of credit card transactions in the process of settlement. Vendor rebates receivable represent amounts due from manufactures
from whom the Company purchases products. Rebates receivable are stated at the amount that management expects to collect from
manufacturers, net of accounts payable amounts due the vendor. Rebates are calculated on product and model sales programs from
specific vendors. The rebates are paid at intermittent periods either in cash or through issuance of vendor credit memos, which
can be applied against vendor accounts payable. Based on the Company’s assessment of the credit history with its manufacturers,
it has concluded that there should be no allowance for uncollectible accounts. The Company historically collects substantially
all of its outstanding rebates receivables. Uncollectible balances are expensed in the period it is determined to be uncollectible.
Allowance
for Credit Losses
Provisions
for credit losses are charged to income as losses are estimated to have occurred and in amounts sufficient to maintain an allowance
for credit losses at an adequate level to provide for future losses on the Company’s accounts receivable. The Company charges
credit losses against the allowance and credits subsequent recoveries, if any, to the allowance. Historical loss experience and
contractual delinquency of accounts receivables, and management’s judgment are factors used in assessing the overall adequacy
of the allowance and the resulting provision for credit losses. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or portfolio
performance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as
more information becomes available.
The
allowance for credit losses consists of general and specific components. The general component of the allowance estimates credit
losses for groups of accounts receivable on a collective basis and relates to probable incurred losses of unimpaired accounts
receivables. The Company records a general allowance for credit losses that includes forecasted future credit losses.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
Inventory
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.
For Neese, 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. Kyle’s typically orders inventory on a job by job basis and those jobs are put into production within
hours of being received. The inventory in production is accounted for in the contact assets and liabilities and follows the percentage
completion methodology. Inventories consisting of materials and supplies are stated at lower of costs or market. 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 $181,370 and $26,546 at December 31, 2020 and 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
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
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, certificates of deposit 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.
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 three-level hierarchy is as follows:
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 date.
The
Company’s held to maturity securities are comprised of certificates of deposit.
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.
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
DECEMBER 31, 2020 AND 2019
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 year ended December 31, 2020, the following 2,632,278 potentially dilutive securities were excluded from diluted loss per
share: 2,632,278 for outstanding warrants. 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.
Leases
The
Company adopted ASC Topic 842, Leases, on January 1, 2019.
The
new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets
and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities
represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating
lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement
date. As the Company’s leases do not provide an implicit rate, the Company used its estimated incremental borrowing rate
based on the information available at commencement date in determining the present value of lease payments. A number of the lease
agreements contain options to renew and options to terminate the leases early. The lease term used to calculate ROU assets and
lease liabilities only includes renewal and termination options that are deemed reasonably certain to be exercised.
The
Company recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing
operating leases longer than twelve months. The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related
balances of accrued and prepaid rent, and unamortized lease incentives provided by lessors. Operating lease cost is recognized
as a single lease cost on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses.
Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in
the period when the changes in facts and circumstances on which the variable lease payments are based occur. The Company has elected
not to separate lease and non-lease components for all property leases for the purposes of calculating ROU assets and lease liabilities.
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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
The
Company has generated losses since its inception and has relied on cash on hand, sales of securities, 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 year ended
December 31, 2020, the Company incurred operating losses of $3,032,612 (before deducting losses attributable to non-controlling
interests and excluding the loss of discontinued operations), cash flows from operations of $789,306 (excluding the cashflow from
discontinued operations) and negative working capital of $1,933,026 (excluding the negative working capital from discontinued
operations). In addition to the estimates of funds available from operations, the Company has unpledged assets that it believes
could provide for approximately $914,000 of additional borrowings.
Management
has prepared estimates of operations for fiscal year 2021 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 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 10, 2020 and April 28, 2020, Neese and Asien’s received
$383,600 and $357,500, respectively, in Paycheck 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. 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.
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 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 Company has contingency
plans to reduce or defer expenses and cash outlays should operations not improve in the look forward period.
Recent
Accounting Pronouncements
Not
Yet Adopted
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.
To simplify the subsequent measurement of goodwill, the update requires only a single-step quantitative test to identify and
measure impairment based on the excess of a reporting unit’s carrying amount over its fair value. A qualitative assessment
may still be completed first for an entity to determine if a quantitative impairment test is necessary. The update is effective
for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company will test goodwill for impairment within one year of the acquisition
or annually as of December 1, and whenever indicators of impairment exist.
In
June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized
cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in
more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those
years beginning after December 15, 2019. This pronouncement was amended under ASU 2019-10 to allow an extension
on the adoption date for entities that qualify as a small reporting company. The Company has elected this extension and the effective
date for the Company to adopt this standard will be for fiscal years beginning after December 15, 2022. The Company has not completed
its assessment of the standard, but does not expect the adoption to have a material impact on the Company’s consolidated
financial position, results of operations, or cash flows.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE
3—BUSINESS SEGMENTS
Summarized
financial information concerning the Company’s reportable segments is presented below:
|
|
Year Ended December 31, 2020
|
|
|
|
Retail &
Appliances
|
|
|
Land
Management
Services
|
|
|
Construction
|
|
|
Corporate
Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
-
|
|
|
$
|
3,379,655
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,379,655
|
|
Sales of parts and equipment
|
|
|
-
|
|
|
|
3,322,944
|
|
|
|
|
|
|
|
-
|
|
|
|
3,322,944
|
|
Furniture and appliances revenue
|
|
|
7,625,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,625,222
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
1,120,224
|
|
|
|
-
|
|
|
|
1,120,224
|
|
Total Revenue
|
|
|
7,625,222
|
|
|
|
6,702,599
|
|
|
|
1,120,224
|
|
|
|
-
|
|
|
|
15,448,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
5,866,414
|
|
|
|
2,874,792
|
|
|
|
665,022
|
|
|
|
-
|
|
|
|
9,406,228
|
|
Total operating expenses
|
|
|
1,986,775
|
|
|
|
5,000,313
|
|
|
|
681,040
|
|
|
|
896,095
|
|
|
|
8,564,223
|
|
Loss from operations
|
|
$
|
(227,967
|
)
|
|
$
|
(1,172,506
|
)
|
|
$
|
(225,838
|
)
|
|
$
|
(896,095
|
)
|
|
$
|
(2,522,406
|
)
|
|
|
Year Ended December 31, 2019
|
|
|
|
Retail &
Appliances
|
|
|
Land
Management
Services
|
|
|
Construction
|
|
|
Corporate
Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
-
|
|
|
$
|
4,201,414
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,201,414
|
|
Sales of parts and equipment
|
|
|
-
|
|
|
|
2,178,611
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,178,611
|
|
Furniture and appliances revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Revenue
|
|
|
-
|
|
|
|
6,380,025
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,380,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
-
|
|
|
|
1,830,067
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,830,067
|
|
Total operating expenses
|
|
|
-
|
|
|
|
5,707,272
|
|
|
|
-
|
|
|
|
161,441
|
|
|
|
5,868,713
|
|
Loss from operations
|
|
$
|
-
|
|
|
$
|
(1,157,314
|
)
|
|
$
|
-
|
|
|
$
|
(161,441
|
)
|
|
$
|
(1,318,755
|
)
|
NOTE
4—CASH EQUIVALENTS AND INVESTMENTS
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Operating accounts
|
|
$
|
1,393,369
|
|
|
$
|
174,290
|
|
Restricted accounts
|
|
|
403,811
|
|
|
|
-
|
|
Subtotal
|
|
$
|
1,797,180
|
|
|
$
|
174,290
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity Investments
|
|
|
|
|
|
|
|
|
Restricted accounts - certificates of deposit (4 – 24 month maturities, FDIC insured)
|
|
$
|
276,270
|
|
|
$
|
-
|
|
Subtotal
|
|
$
|
276,270
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
2,073,450
|
|
|
$
|
174,290
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE
5—DISCONTINUED OPERATIONS
ASC
360-10-45-9 requires that a long-lived asset (disposal group) to be sold shall be classified as held for sale in the period in
which a set of criteria have been met, including criteria that the sale of the asset (disposal group) is probable and actions
required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan
will be withdrawn. This criteria was achieved on September 10, 2020, when the board approved the Goedeker Spin-Off and subsequently
on October 23, 2020, when the Company completed the Goedeker Spin-Off. Additionally, the discontinued operations are comprised
of the entirety of the business of Goedeker. Lastly, for comparability purposes certain prior period line items relating to the
assets held for sale have been reclassified and presented as discontinued operations for all periods presented in the accompanying
consolidated statements of operations, consolidated statements of cash flows, and the consolidated balance sheets.
In
accordance with ASC 205-20-S99, “Allocation of Interest to Discontinued Operations”, the Company elected to not allocate
consolidated interest expense to discontinued operations where the debt is not directly attributable to or related to discontinued
operations.
The following information presents the major classes
of line item of assets and liabilities included as part of discontinued operations in the consolidated balance sheet as of December 31,
2019. There was no balance sheet upon the completion of the Goedeker Spin-off.
|
|
December 31,
2019
|
|
Current Assets – discontinued operations:
|
|
|
|
Cash
|
|
$
|
64,470
|
|
Accounts receivable, net
|
|
|
1,862,086
|
|
Vendor deposits
|
|
|
294,960
|
|
Inventories, net
|
|
|
1,380,090
|
|
Prepaid expenses and other current assets
|
|
|
892,796
|
|
Total current assets – discontinued operations
|
|
$
|
4,494,402
|
|
|
|
|
|
|
Noncurrent Assets – discontinued operations:
|
|
|
|
|
Property and equipment, net
|
|
|
185,606
|
|
Operating lease right of use assets
|
|
|
2,000,755
|
|
Goodwill
|
|
|
4,976,016
|
|
Intangible assets, net
|
|
|
1,878,844
|
|
Deferred tax asset
|
|
|
698,303
|
|
Other assets
|
|
|
45,000
|
|
Total noncurrent assets
|
|
$
|
9,784,524
|
|
|
|
|
|
|
Current liabilities – discontinued operations:
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,465,220
|
|
Current portion of operating lease liability
|
|
|
422,520
|
|
Advances, related party
|
|
|
137,500
|
|
Lines of credit
|
|
|
1,250,930
|
|
Notes payable – current portion
|
|
|
2,068,175
|
|
Warrant liability
|
|
|
122,344
|
|
Convertible promissory note – current portion
|
|
|
584,943
|
|
Customer deposits
|
|
|
4,164,296
|
|
Total current liabilities – discontinued operations
|
|
$
|
11,215,928
|
|
|
|
|
|
|
Long term liabilities – discontinued operations:
|
|
|
|
|
Operating lease liability – long term, net of current portion
|
|
|
1,578,235
|
|
Notes payable – long term, net of current portion
|
|
|
2,231,469
|
|
Contingent note payable
|
|
|
49,248
|
|
Total long term liabilities – discontinued operations
|
|
$
|
3,858,952
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
The
following information presents the major classes of line items constituting the after-tax loss from discontinued operations in
the consolidated statements of operations for the period from January 1, 2020 through October 23, 2020 and the year ended December
31, 2019:
|
|
Period from
January 1,
2020
through
October 23,
2020
|
|
|
Period from
April 6,
2019
through
December 31,
2019
|
|
REVENUES
|
|
|
|
|
|
|
|
|
Furniture and appliances revenue
|
|
$
|
42,715,266
|
|
|
$
|
34,668,113
|
|
TOTAL REVENUE
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
35,613,453
|
|
|
|
28,596,127
|
|
Personnel costs
|
|
|
4,715,687
|
|
|
|
2,909,752
|
|
Depreciation and amortization
|
|
|
276,914
|
|
|
|
271,036
|
|
General and administrative
|
|
|
7,022,720
|
|
|
|
4,608,434
|
|
TOTAL OPERATING EXPENSES
|
|
|
47,628,774
|
|
|
|
7,789,221
|
|
NET LOSS FROM OPERATIONS
|
|
|
(4,919,059
|
)
|
|
|
(1,717,238
|
)
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Financing costs
|
|
|
(757,646
|
)
|
|
|
(520,160
|
)
|
Loss on extinguishment of debt
|
|
|
(1,756,095
|
)
|
|
|
-
|
|
Interest expense, net
|
|
|
(604,909
|
)
|
|
|
(683,211
|
)
|
Loss on acquisition receivable
|
|
|
(809,000
|
)
|
|
|
-
|
|
Change in warrant liability
|
|
|
(2,127,656
|
)
|
|
|
106,900
|
|
Interest income
|
|
|
9,674
|
|
|
|
-
|
|
Other income (expense)
|
|
|
-
|
|
|
|
15,010
|
|
TOTAL OTHER INCOME (EXPENSE)
|
|
|
(6,045,632
|
)
|
|
|
(1,049,215
|
)
|
NET LOSS BEFORE INCOME TAXES
|
|
|
(10,964,691
|
)
|
|
|
(2,766,453
|
)
|
INCOME TAX BENEFIT
|
|
|
(698,303
|
)
|
|
|
(698,303
|
)
|
NET LOSS BEFORE NON-CONTROLLING INTERESTS
|
|
|
(11,662,984
|
)
|
|
|
(2,068,150
|
)
|
LESS NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
|
|
|
(4,491,222
|
)
|
|
|
(620,445
|
)
|
NET LOSS ATTRIBUTABLE TO 1847 HOLDINGS SHAREHOLDERS
|
|
$
|
(7,172,772
|
)
|
|
$
|
(1,447,705
|
)
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
The
following information presents the major classes of line items constituting significant operating, investing and financing cash
flow activities in the unaudited consolidated statements of cash flows relating to discontinued operations:
|
|
Period from
January 1,
2020
through
October 23,
2020
|
|
|
Period from
April 6,
2019
through
December 31,
2019
|
|
Cash flows from operating activities of discontinued operations:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,662,994
|
)
|
|
$
|
(2,068,152
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities of discontinued operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
276,913
|
|
|
|
271,036
|
|
Stock compensation
|
|
|
281,194
|
|
|
|
599,814
|
|
Amortization of financing costs
|
|
|
842,174
|
|
|
|
-
|
|
Loss on extinguishment of debt
|
|
|
1,955,787
|
|
|
|
-
|
|
Gain on write-down of contingent liability
|
|
|
-
|
|
|
|
(32,246
|
)
|
Write-off of acquisition receivable
|
|
|
809,000
|
|
|
|
-
|
|
Change in fair value of warrant liability
|
|
|
2,127,656
|
|
|
|
(106,900
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,585,090
|
)
|
|
|
(1,405,904
|
)
|
Vendor deposits
|
|
|
(252,688
|
)
|
|
|
(294,960
|
)
|
Inventory
|
|
|
(2,055,293
|
)
|
|
|
471,161
|
|
Prepaid expenses and other assets
|
|
|
(1,106,409
|
)
|
|
|
167,066
|
|
Change in operating lease right-of-use assets
|
|
|
-
|
|
|
|
299,245
|
|
Deferred tax asset
|
|
|
698,303
|
|
|
|
(698,303
|
)
|
Accounts payable and accrued expenses
|
|
|
381,443
|
|
|
|
(1,464,657
|
)
|
Customer deposits
|
|
|
14,427,180
|
|
|
|
1,855,990
|
|
Operating lease liability
|
|
|
-
|
|
|
|
(299,245
|
)
|
Net cash provided by (used in) operating activities from discontinued operations
|
|
|
3,137,176
|
|
|
|
(2,706,053
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities in discontinued operations:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(51,059
|
)
|
|
|
(2,200
|
)
|
Net cash provided by investing activities in discontinued operations
|
|
|
(51,059
|
)
|
|
|
(2,200
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities in discontinued operations:
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering
|
|
|
8,602,166
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
642,600
|
|
|
|
1,500,000
|
|
Repayment of notes payable
|
|
|
(2,818,098
|
)
|
|
|
(357,207
|
)
|
Payments on convertible notes payable
|
|
|
-
|
|
|
|
650,000
|
|
Net borrowings (payments) from lines of credit
|
|
|
(1,339,430
|
)
|
|
|
1,339,430
|
|
Cash paid for financing costs
|
|
|
(105,279
|
)
|
|
|
(359,500
|
)
|
Net cash used in financing activities
|
|
$
|
4,981,959
|
|
|
$
|
2,772,723
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
The
following are the financial options of the discontinued operations:
Lines
of Credit
Burnley
Capital LLC
On
April 5, 2019, Goedeker, as borrower, and Holdco entered into a loan and security agreement with Burnley Capital LLC (“Burnley”)
for revolving loans in an aggregate principal amount that will not exceed the lesser of (i) the borrowing base (as defined
in the loan and security agreement) or (ii) $1,500,000 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 December 31, 2019, the balance of the line of credit was $571,997.
On
August 4, 2020, Goedeker used a portion of the proceeds from the Goedeker IPO to repay the revolving note 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.
Northpoint
Commercial Finance LLC
On
June 24, 2019, Goedeker, as borrower, entered into a loan and security agreement with Northpoint Commercial Finance LLC, 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%. As of December 31, 2019, the balance of
the line of credit was $678,993. Goedeker terminated the loan and security agreement on May 18, 2020 and there is no outstanding
balance as of October 23, 2020.
Notes
Payable and Warrant Liability
Arvest
Loan
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. As of October 23, 2020, the outstanding balance of this loan is $3,340,602, comprised of principal of $3,446,126,
net of unamortized loan costs of $103,524.
PPP
Loan
On
April 8, 2020, Goedeker received a $642,600 PPP loan from the United States Small Business Administration under provisions of
the CARES Act. The PPP loan has an 18-month term and bears 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 maturity
with no prepayment penalties. The PPP loan contains events of default and other provisions customary for a loan of this type.
The PPP provides that the loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described
in the CARES Act. The balance of the PPP loan was $642,600 as of October 23, 2020 and was classified as a current liability. Goedeker
repaid the PPP loan on November 2, 2020.
Small
Business Community Capital II, L.P.
On
April 5, 2019, Goedeker, as borrower, and Holdco entered into a loan and security agreement with Small Business Community Capital
II, L.P. (“SBCC”) for a term loan in the principal amount of $1,500,000, pursuant to which Goedeker issued to
SBCC a term note in the principal amount of up to $1,500,000 and a ten-year warrant to purchase shares of the most senior capital
stock of Goedeker equal to 5.0% of the outstanding equity securities of Goedeker on a fully-diluted basis for an aggregate price
equal to $100. As of December 31, 2019, the balance of the note was $999,201.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
On
August 4, 2020, Goedeker used a portion of the proceeds from the Goedeker IPO to repay the term note 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.
Goedeker
classified the warrant as a derivative liability on the balance sheet at June 30, 2020 of $2,250,000 based on the estimated value
of the warrant in the Goedeker IPO. The increase in the value of the warrant from the estimated value of $122,344 at December
31, 2020 resulted in a charge of $2,127,656 during the period January 1, 2020 through October 23, 2020 (date of distribution).
Immediately prior to the closing of the Goedeker IPO on August 4, 2020, SBCC converted the warrant into 250,000 shares of common
stock.
Notes
payable, related parties
A
portion of the purchase price for the acquisition of Goedeker Television 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. As of December
31, 2019, the balance of the note was $3,300,444.
Pursuant
to a settlement agreement, the parties entered into an amendment and restatement of the note that became effective as of the closing
of the Goedeker 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 Goedeker 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%. In
accordance with the terms of the amended and restated note, Goedeker used a portion of the proceeds from the Goedeker 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.
Goedeker
refinanced this note payable with proceeds from the loan from Arvest Bank. In connection with the refinance, Goedeker recorded
a $757,239 loss on extinguishment of debt consisting of a $250,000 forbearance fee, write-off of unamortized loan discount of
$338,873, and write-off of unamortized debt costs of $168,366.
Convertible
Promissory Note
On
April 5, 2019, the Company, Holdco and Goedeker entered into a securities purchase agreement with Leonite Capital LLC, a Delaware
limited liability company, pursuant to which they issued to Leonite Capital LLC a secured convertible promissory note in the aggregate
principal amount of $714,286 due April 5, 2020. See Note 13 for further details of the convertible promissory note.
NOTE
6—RECEIVABLES
At
December 31, 2020 and 2019, receivables consisted of the following:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Credit card payments in process of settlement
|
|
$
|
158,924
|
|
|
$
|
-
|
|
Trade receivables from customers
|
|
|
715,410
|
|
|
|
620,370
|
|
Total receivables
|
|
|
874,334
|
|
|
|
620,370
|
|
Allowance for doubtful accounts
|
|
|
(14,614
|
)
|
|
|
(29,001
|
)
|
Accounts receivable, net
|
|
$
|
859,720
|
|
|
$
|
591,369
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE
7—INVENTORIES
At
December 31, 2020 and 2019, the inventory balances are composed of:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Machinery and Equipment
|
|
$
|
331,935
|
|
|
$
|
119,444
|
|
Parts
|
|
|
147,999
|
|
|
|
142,443
|
|
Appliances
|
|
|
2,029,270
|
|
|
|
-
|
|
Subtotal
|
|
|
2,509,204
|
|
|
|
261,887
|
|
Allowance for inventory obsolescence
|
|
|
(181,371
|
)
|
|
|
(26,545
|
)
|
Inventories, net
|
|
$
|
2,327,833
|
|
|
$
|
235,342
|
|
Inventory
and accounts receivable are pledged to secure a loan from Home State Bank described below.
NOTE
8—PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at December 31, 2020 and 2019:
Classification
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Buildings and improvements
|
|
$
|
47,939
|
|
|
$
|
5,338
|
|
Equipment and machinery
|
|
|
3,127,158
|
|
|
|
3,019,638
|
|
Tractors
|
|
|
2,578,296
|
|
|
|
2,694,888
|
|
Trucks and other vehicles
|
|
|
1,363,156
|
|
|
|
1,138,304
|
|
Total
|
|
|
7,116,549
|
|
|
|
6,858,168
|
|
Less: Accumulated depreciation
|
|
|
(4,792,202
|
)
|
|
|
(3,676,347
|
)
|
Property and equipment, net
|
|
$
|
2,324,347
|
|
|
$
|
3,181,821
|
|
Depreciation
expense for the years ended December 31, 2020 and 2019 was $1,295,744 and $1,378,952, respectively.
All
Neese property and equipment are pledged to secure loans from Home State Bank as described below.
NOTE
9—INTANGIBLE ASSETS
The
following provides a breakdown of identifiable intangible assets as of December 31, 2020 and 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Customer Relationships
|
|
|
|
|
|
|
|
|
Identifiable intangible assets, gross
|
|
$
|
3,223,000
|
|
|
$
|
34,000
|
|
Accumulated amortization
|
|
|
(89,486
|
)
|
|
|
(19,267
|
)
|
Customer relationship identifiable intangible assets, net
|
|
|
3,133,514
|
|
|
|
14,733
|
|
Marketing Related
|
|
|
|
|
|
|
|
|
Identifiable intangible assets, gross
|
|
|
841,000
|
|
|
|
-
|
|
Accumulated amortization
|
|
|
(81,114
|
)
|
|
|
-
|
|
Marketing related identifiable intangible assets, net
|
|
|
759,886
|
|
|
|
-
|
|
Total Identifiable intangible assets, net
|
|
$
|
3,893,400
|
|
|
$
|
14,733
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
In
connection with the acquisitions of Asien’s, Neese and Kyle’s, the Company identified intangible assets of $1,009,000,
$34,000 and $3,021,000, 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 9.5 years and amortization expense amounted to $151,333
and $14,733 for the years ended December 31, 2020 and 2019, respectively.
As
of December 31, 2020, the estimated annual amortization expense for each of the next five fiscal years is as follows:
2021
|
|
$
|
397,988
|
|
2022
|
|
|
392,321
|
|
2023
|
|
|
391,188
|
|
2024
|
|
|
391,173
|
|
2025
|
|
|
258,169
|
|
Thereafter
|
|
|
2,062,561
|
|
Total
|
|
$
|
3,893,400
|
|
NOTE
10—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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 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 only became effective upon the closing of the Goedeker IPO. Pursuant to the settlement agreement, the parties
entered into an amendment and restatement of the 9% subordinated promissory note described above (see Note 5). In addition, the
parties agreed that the arbitration action described above would be settled effective upon the closing of the Goedeker 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 year ended December 31, 2020.
Goedeker
Television is also entitled to receive the following earn out payments to the extent the Goedeker Business achieves the applicable
EBITDA (as defined in the asset purchase agreement) targets:
|
1.
|
An
earn out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing twelve (12) month period from the closing
date is $2,500,000 or greater;
|
|
2.
|
An
earn out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing twelve (12) month period from the first anniversary
of closing date is $2,500,000 or greater; and
|
|
3.
|
An
earn out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing twelve (12) month period from the second
anniversary of the closing date is $2,500,000 or greater.
|
To
the extent the EBITDA of the Goedeker Business for any applicable period is less than $2,500,000 but greater than $1,500,000,
Goedeker must pay a partial earn out payment to Goedeker Television in an amount equal to the product determined by multiplying
(i) the EBITDA Achievement Percentage by (ii) the applicable earn out payment for such period, where the “Achievement Percentage”
is the percentage determined by dividing (A) the amount of (i) the EBITDA of the Goedeker Business for the applicable period less
(ii) $1,500,000, by (B) $1,000,000. For avoidance of doubt, no partial earn out payments shall be earned or paid to the extent
the EBITDA of the Goedeker Business for any applicable period is equal or less than $1,500,000. 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 out 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
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 October 23, 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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
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
|
|
On October 23, 2020, the Company completed a distribution
of Goedeker. As a result of this distribution, Goedeker is no longer a majority-owned subsidiary of the Company. The distribution therefore
resulted in the disposition of the business and assets of Goedeker (see Note 21).
Asien’s
On
March 27, 2020, the Company and 1847 Asien entered into a stock purchase agreement with the Asien’s Seller, pursuant to
which 1847 Asien agreed to acquire all of the issued and outstanding capital stock of Asien’s. The Company 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, to expand into the appliance industry.
On
May 28, 2020, the Company, 1847 Asien, Asien’s and the Asien’s 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 $2,125,000 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 mutually agreed upon value of $830,000 and a fair value of $1,037,500,
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.
The shares were repurchased by 1847 Asien on July 29, 2020.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
The
fair value of the purchase consideration issued to the Asien’s 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 $1,171,272. The excess
of the aggregate fair value of the net tangible assets has been allocated to goodwill.
The table below shows analysis for the Asien’s
Acquisition:
Purchase Consideration at fair value:
|
|
|
|
Common shares
|
|
$
|
1,037,500
|
|
Notes payable
|
|
|
855,000
|
|
Due to seller
|
|
|
233,000
|
|
Amount of consideration
|
|
$
|
2,125,500
|
|
|
|
|
|
|
Assets acquired and liabilities assumed at fair value
|
|
|
|
|
Cash
|
|
$
|
1,501,285
|
|
Accounts receivable
|
|
|
235,746
|
|
Inventories
|
|
|
1,457,489
|
|
Other current assets
|
|
|
41,427
|
|
Deferred tax asset
|
|
|
11,653
|
|
Property and equipment
|
|
|
157,052
|
|
Customer related intangibles
|
|
|
462,000
|
|
Marketing related intangibles
|
|
|
547,000
|
|
Accounts payable and accrued expenses
|
|
|
(280,752
|
)
|
Customer deposits
|
|
|
(2,405,703
|
)
|
Notes payable
|
|
|
(509,272
|
)
|
Other liabilities
|
|
|
(23,347
|
)
|
Net assets acquired
|
|
$
|
1,182,925
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
1,171,272
|
|
Consideration paid
|
|
|
2,125,500
|
|
Goodwill
|
|
$
|
942,575
|
|
The
estimated useful life remaining on the property and equipment acquired is 5 to 13 years.
Kyle’s
On
August 27, 2020, the Company and 1847 Cabinet entered into a stock purchase agreement with Kyle’s and the Asien’s
Seller, pursuant to which 1847 Cabinet agreed to acquire all of issued and outstanding capital stock of Kyle’s. The Company
acquired Kyle’s, a leading custom cabinetry maker servicing contractors and homeowners in Boise, Idaho, to expand into contracting
services.
On
September 30, 2020, the Company, 1847 Cabinet, Kyle’s and the Kyle’s Sellers entered into addendum to the stock
purchase and closing of the acquisition of all of the issued and outstanding capital stock of Kyle’s was completed (the
“Kyle’s Acquisition”)
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
The
aggregate purchase price was $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 the Company, having a mutually agreed upon value of $1,400,000 and a fair value of $3,675,000. The shares were issued on October
16, 2020, immediately following the record date for the Goedeker Spin-Off described above.
The
purchase price is subject to a post-closing working capital adjustment provision based on the difference between actual working
capital at closing and the Kyle’s Sellers’ preliminary estimate of closing date working capital. If the final
working capital exceeds the preliminary working capital estimate, 1847 Cabinet must pay to the Kyle’s Sellers an amount
of cash that is equal to such excess. If the preliminary working capital estimate exceeds the final working capital, the Kyle’s
Sellers must pay to 1847 Cabinet an amount in cash equal to such excess, provided, however, that the Kyle’s Sellers may,
at their option, in lieu of paying such excess in cash, deliver and transfer to 1847 Cabinet a number of common shares of the
Company that is equal to such excess divided by $2.00.
In
addition to the post-closing net working capital adjustment described above, there was a target working capital adjustment, pursuant
to which if at the closing 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 fair value of the purchase consideration issued to the Kyle’s Sellers was allocated to the net tangible assets
acquired. The Company accounted for the Kyle’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 $527,618. The excess
of the aggregate fair value of the net tangible assets has been allocated to goodwill.
The table below shows an analysis for
the Kyle’s Acquisition:
Purchase Consideration at fair value:
|
|
|
|
Common shares
|
|
$
|
3,675,000
|
|
Notes payable
|
|
|
498,979
|
|
Due to seller
|
|
|
4,389,792
|
|
Amount of consideration
|
|
$
|
8,563,771
|
|
|
|
|
|
|
Assets acquired and liabilities assumed at fair value
|
|
|
|
|
Cash
|
|
$
|
130,000
|
|
Accounts receivable
|
|
|
385,095
|
|
Costs in excess of billings
|
|
|
122,016
|
|
Other current assets
|
|
|
13,707
|
|
Property and equipment
|
|
|
200,737
|
|
Customer related intangibles
|
|
|
2,727,000
|
|
Marketing related intangibles
|
|
|
294,000
|
|
Accounts payable and accrued expenses
|
|
|
(263,597
|
)
|
Billings in excess of costs
|
|
|
(43,428
|
)
|
Other liabilities
|
|
|
(49,000
|
)
|
Net tangible assets acquired
|
|
$
|
3,516,530
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
3,516,530
|
|
Consideration paid
|
|
|
8,563,771
|
|
Goodwill
|
|
$
|
5,047,243
|
|
The
estimated useful life remaining on the property and equipment acquired is 3 to 7 years.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
Proforma
The following unaudited proforma results of operations
are presented for information purposes only. The unaudited proforma results of operations are not intended to present actual results that
would have been attained had the Asien’s Acquisition and Kyle’s Acquisition been completed as of January 1, 2019 or to project
potential operating results as of any future date or for any future periods. The revenue and net loss before non-controlling interest
of Asien’s since the May 28, 2020 acquisition date through December 31, 2020 included in the consolidated statement of operations
amounted to approximately $7,625,222 and $431,641, respectively. The revenue and net loss before non-controlling interest of Kyle’s
since the September 30, 2020 acquisition date through December 31, 2020 included in the consolidated statement of operations amounted
to approximately $1,120,224 and $380,500, respectively. The unaudited proforma also removes the effect of Goedeker as if it had been disposed
of on January 1, 2019.
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues, net
|
|
$
|
24,376,944
|
|
|
$
|
23,849,214
|
|
Net income (loss)
|
|
$
|
(1,402,208
|
)
|
|
$
|
(230,704
|
)
|
Basic earnings (loss) per share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.05
|
)
|
Diluted earnings (loss) per share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Basic Number of Shares (a)
|
|
|
4,561,840
|
|
|
|
4,230,625
|
|
Diluted Number of Shares (a)
|
|
|
4,561,840
|
|
|
|
4,230,625
|
|
Note:
(a) shares assuming as if issued as of Jan 1.
NOTE
11—NOTES PAYABLE
1847
Neese/Neese
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% and with covenants to maintain
a minimum debt coverage ratio of 1.00 to 1.25 measured at December 31, 2020. Neese met this covenant for the year ended December
31, 2020. On July 30, 2020, Neese entered into a change in terms agreement with Home State Bank to amend the terms of the term
loan. 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; (iv) Neese agreed to make payments of $30,000
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 on December 30, 2020 and December 30, 2021; (vi) Neese agreed to make two
new advances under the note in the amounts $51,068 and $517,529 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; and (viii) Home State Bank agreed to
make a loan advance to checking for $17,500. The balance of the note amounts to $3,225,321, comprised of principal of $3,239,176,
net of unamortized debt discount of $13,855 as of December 31, 2020.
The
loan agreement contains customary representations and warranties and events of default. 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 the 10% promissory note described below 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 note)
are shown as long-term accrued expenses in the accompanying balance sheet as of December 31, 2020.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 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 years ended December 31, 2020 and 2019, $0 and $30,500, 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 the Home
State Bank debt issuance costs totaled $15,513 and $18,645 for the years ended December 31, 2020 and 2019, respectively.
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 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. The note is unsecured and contains customary
events of default. The note has not been repaid, so 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 December 31, 2020. Additionally, Home State Bank limits the payment of interest on this note to
$40,000 annually. The Company continues to accrue interest at the contract rate; however, given the limitations of the term loan,
all accrued interest in excess of $40,000 is included in long-term accrued expenses.
1847
Asien/Asien’s
Arvest
Bank
On
July 10, 2020, Asien’s entered into a promissory note and security agreement with Arvest Bank for a revolving loan for 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. Asien’s may
prepay the loan in full or in part at any time without penalty. 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. The remaining principal balance of the note at December 31, 2020 is $301,081 and it has accrued
interest of $995.
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 note contains customary events of default. The right 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. The remaining principal balance
of the note at December 31, 2020 is $101,980 and it has accrued interest of $1,095.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
6%
Amortizing Promissory Note
On
July 29, 2020, 1847 Asien entered into a securities purchase agreement with the Asien’s Seller, pursuant to which the Asien’s
Seller sold to 415,000 of the Company’s 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. The remaining principal balance of the note at December 31, 2020 is $975,985 and it
has accrued interest of $17,894.
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 accrued interest at a rate of one percent (1%) computed
on the basis of a 360-day year. Principal and accrued interest on the note was payable 24 hours after written demand by the Seller.
The note was repaid in June 2020.
Inventory
Financing Agreement
On
September 25, 2020, Asien’s entered into an inventory financing agreement with Wells Fargo Commercial Distribution Finance,
LLC (“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. 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 the Company. As of December 31, 2020, Asien’s
has not borrowed any funds under this agreement.
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 for a term of 5 years. The note bears interest at the rate of the 4.25% per annum. The remaining balance of the note
at December 31, 2020 is comprised of principal of $41,675.
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 (“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.
This agreement was terminated in 2020 and there is no remaining balance at December 31, 2020.
Loans
on Vehicles
Asien’s
has entered into four retail installment sale contracts pursuant to which Asien’s agreed to finance its delivery trucks
at rates ranging 3.98% to 6.99% with an aggregate remaining principal amount of $90,375 as of December 31, 2020.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
1847
Cabinet/Kyle’s
Vesting
Promissory Note
A
portion of the purchase price for the acquisition of Kyle’s on September 30, 2020 was paid by the issuance of a vesting
promissory note by 1847 Cabinet to the Kyle’s Sellers in the principal amount of $1,050,000, which increased to a principal
amount of up to $1,260,000 pursuant to the vested percentage calculation described below. Payment of the principal and accrued
interest on the note is subject to vesting as described below. The note bears interest on the vested portion of principal amount
at the rate of eight percent (8%) per annum. To the extent vested, the vested portion of the principal and all accrued but unpaid
interest on such vested portion of the principal shall be paid in one lump sum on the last day of the thirty-sixth (36th) month
following the date of the note.
The
vested principal of the note due at the maturity date shall be calculated each year based on the average annual consolidated EBITDA
(as defined in the note) of 1847 Cabinet for each of the years ended December 31, 2020, 2021 and 2022. The EBITDA for each year
shall be divided by $1.4 million multiplied by 100 to obtain the vested percentage. The vested principal for each year shall be
equal to the vested percentage for that year multiplied by $350,000. To the extent that the vested percentage for the subject
year is less than 80%, no portion of the note for that year shall vest. To the extent that the vested percentage for the subject
year is equal to or greater than 120%, the vested principal shall be equal to $420,000 for that year and no more. For the year
ended December 31, 2020, EBITDA of 1847 Cabinet was approximately $1,531,000, resulting in a vested amount of approximately $415,000.
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 Kyle’s Sellers 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, the Company 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 the Company in the principal amount of $4,525,000, which was amended and restated on December 11, 2020. Pursuant
to such amendment and restatement, if and to the extent any amounts are owing under the units described under Note 17 below, due
to a default or redemption, in addition to payment obligations due under the note, 1847 Cabinet is required to immediately make
payments to the Company so that it may make any required payments in compliance with the terms of the units. 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. The Company 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. The remaining principal balance of the note at December 31,
2020 is $4,525,000 and it has accrued interest of $182,488.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
PPP
Loans
On April 10, 2020 and April 28, 2020, Neese and Asien’s received
$383,600 and $357,500, respectively, in PPP loans from the SBA under provisions of 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. 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. The Company has classified
$741,100 of the PPP loans as long-term liabilities upon receiving SBA forgiveness of the loans in early 2021.
NOTE
12—FLOOR PLAN LOANS PAYABLE
At
December 31, 2020 and 2019, $0 and $10,581, respectively, of machinery and equipment inventory of Neese was pledged to secure
a floor plan loan from a commercial lender. Neese 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 was
repaid in 2020.
NOTE
13—CONVERTIBLE PROMISSORY NOTE
On
April 5, 2019, the Company, Holdco and Goedeker (collectively, “1847”) entered into a securities purchase agreement
with Leonite Capital LLC, a Delaware limited liability company (“Leonite”), pursuant to which 1847 issued to Leonite
a secured convertible promissory note in the aggregate principal amount of $714,286 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) Holdco issued to Leonite shares of common stock equal to a 7.5% non-dilutable interest in Holdco.
The
note carries an original issue discount of $64,286 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or
other transactional costs incurred in connection with the purchase of the note. Furthermore, the Company issued 50,000 common
shares valued at $137,500 and a debt-discount related to the warrants valued at $292,673. The Company amortized $292,673 of financing
costs related to the shares and warrants in the year ended December 31, 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) 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 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 had 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.
On
May 4, 2020, Leonite converted $100,000 of the outstanding balance of the note into 100,000 common shares.
On
July 21, 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 Goedeker 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.
On
September 2, 2020, the Company entered into amendment to the warrant issued to Leonite on April 5, 2019. 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 the Company issued 180,000 common shares to Leonite. As a result of this exercise, both warrants were cancelled.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
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 was 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
was 51 months and agreed monthly payments are $25,807.
On
July 29, 2020, the Company paid $568,597 to repay this capital lease transaction with Utica in full.
The
Company adopted ASU 2015-03 by deducting debt issuance costs from the long-term portion of the loan. Amortization of the Utica
debt issuance costs totaled $23,360 and $11,055 for the years ended December 31, 2020 and 2019, respectively.
NOTE
15—OPERATING LEASES
Neese
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, $300,000
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, 2020.
Supplemental balance sheet information related
to leases was as follows:
|
|
December
31,
2020
|
|
|
December
31,
2019
|
|
Operating lease right-of-use
lease asset
|
|
$
|
624,157
|
|
|
$
|
624,157
|
|
Accumulated amortization
|
|
|
(122,330
|
)
|
|
|
(59,077
|
)
|
Net balance
|
|
$
|
501,827
|
|
|
$
|
565,080
|
|
|
|
|
|
|
|
|
|
|
Lease liability, current portion
|
|
$
|
67,725
|
|
|
$
|
63,253
|
|
Lease liability,
long term
|
|
|
434,102
|
|
|
|
501,827
|
|
Total operating lease
liabilities
|
|
$
|
501,827
|
|
|
$
|
565,080
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term -
operating leases
|
|
|
74
months
|
|
|
|
86
months
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating
leases
|
|
|
6.85
|
%
|
|
|
6.85
|
%
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
Future
minimum lease payments under this operating lease as of December 31, 2020 were as follows:
|
|
For the
Years Ended
|
|
2021
|
|
$
|
100,000
|
|
2022
|
|
|
100,000
|
|
2023
|
|
|
100,000
|
|
2024
|
|
|
100,000
|
|
2025
|
|
|
100,000
|
|
Thereafter
|
|
|
116,667
|
|
Total lease payments
|
|
|
616,667
|
|
Less imputed interest
|
|
|
(114,840
|
)
|
Maturities of lease liabilities
|
|
$
|
501,827
|
|
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.
Kyle’s
On
September 1, 2020, Kyle’s entered into an industrial lease agreement with the Kyle’s Sellers, who are officers of
Kyle’s and principle shareholders of the Company. The lease is for a term of five years, with an option for a renewal term
of five years, and provides for a base rent of $7,000 per month for the first 12 months, which will increase to $7,210 for months
13-16 and to $7,426 for months 37-60. In addition, Kyle’s is responsible for all taxes, insurance and certain operating
costs during the lease term. In the event of late payment, interest shall accrue on the unpaid amount at the rate of twelve percent
(12%) per annum. The lease agreement contains customary events of default, representations, warranties and covenants.
Supplemental balance sheet information related
to leases was as follows:
|
|
December 31,
2020
|
|
Operating lease right-of-use lease asset
|
|
$
|
373,916
|
|
Accumulated amortization
|
|
|
(15,931
|
)
|
Net balance
|
|
$
|
357,985
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
66,803
|
|
Lease liability, long term
|
|
|
291,182
|
|
Total operating lease liabilities
|
|
$
|
357,985
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
|
44 months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
5.50
|
%
|
Future
minimum lease payments under this operating lease as of December 31, 2020 were as follows:
|
|
For the
Years Ended
|
|
2021
|
|
$
|
84,840
|
|
2022
|
|
|
86,520
|
|
2023
|
|
|
87,385
|
|
2023
|
|
|
89,116
|
|
2025
|
|
|
59,410
|
|
Total lease payments
|
|
|
407,271
|
|
Less imputed interest
|
|
|
(49,286
|
)
|
Maturities of lease liabilities
|
|
$
|
357,985
|
|
Asien’s
Asien’s
has an office and showroom space that has been leased on a month-by-month basis for $11,665 per month.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE
16—RELATED PARTIES
Management
Services Agreement
On
April 15, 2013, the Company and the Manager entered into a management services agreement, pursuant to which the Company is required
to pay the Manager a quarterly management fee equal to 0.5% of its adjusted net assets for services performed (the “Parent
Management Fee”). The amount of the Parent Management Fee with respect to any fiscal quarter is (i) reduced by the aggregate
amount of any management fees received by the Manager under any offsetting management services agreements with respect to such
fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid (or under-paid) Parent Management Fees received by
(or owed to) the Manager as of the end of such fiscal quarter, and (iii) increased by the amount of any outstanding accrued and
unpaid Parent Management Fees. The Company expensed $0 in Parent Management Fees for the years ended December 31, 2020 and 2019.
Offsetting
Management Services Agreements
1847
Neese entered into an offsetting management services agreement with the Manager on March 3, 2017, Goedeker entered into an offsetting
management services agreement with the Manager on April 5, 2019, which is included in discontinued operations, 1847 Asien entered
into an offsetting management services agreement with the 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 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 $62,500, 1847 Asien appointed the Manager
to provide certain services to it for a quarterly management fee equal to the greater of $75,000 or 2% of adjusted net assets
(as defined in the management services agreement) and 1847 Cabinet appointed the Manager to provide certain services to it for
a quarterly management fee equal to the greater of $75,000 or 2% of adjusted net assets (as defined in the management services
agreement); 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, 1847 Asien or 1847 Cabinet, 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, 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 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, 1847 Asien
or 1847 Cabinet, 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, 1847 Asien or 1847 Cabinet,
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, 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, 1847 Asien or 1847 Cabinet, 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, 1847 Asien or 1847 Cabinet 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, 1847 Asien or 1847 Cabinet in connection with performing services under the offsetting
management services agreements.
1847
Neese expensed $250,000 in management fees for the years ended December 31, 2020 and 2019. Under terms of the term loan from Home
State Bank (see Note 11), no fees may be paid to the Manager without permission of the bank, which the Manager does not expect
to be granted within the forthcoming year. Accordingly, $700,808 due from 1847 Neese to the Manager is classified as a long-term
accrued liability as of December 31, 2020.
1847
Asien expensed $178,022 in management fees for the period from May 29, 2020 to December 31, 2020.
1847
Cabinet expensed $75,000 in management fees for the period from October 1, 2020 to December 31, 2020.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 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, 2020 and 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 December 31, 2020 and 2019, the Manager has funded the Company $71,358 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
provided that the Company could request additional advances from the Manager up to an aggregate additional amount of $150,000.
On December 7, 2020, parties amended and restated the note for a new principal amount of $56,900 and maturity date of December
7, 2021. Interest on the note accrues on the unpaid portion of the principal amount and the outstanding portion of all advances
at a fixed rate of 8% per annum. 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 that the Company completes a financing that includes an uplisting of the Company’s
common shares to a national exchange, then the Company must, contemporaneously with the closing of such financing transaction,
repay the entire outstanding principal, outstanding advances, and accrued and unpaid interest on the note. The note is unsecured
and contains customary events of default. As of December 31, 2020 and 2019, the Manager has advanced $56,900 and $119,400 of the
note and the Company has accrued interest of $25,159 and $17,115, respectively.
Building
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. See Note 15 for details regarding this lease.
On
September 1, 2020, Kyle’s entered into an industrial lease agreement with the Kyle’s Sellers, who are officers of
Kyle’s and principle shareholders of the Company. See Note 15 for details regarding this lease.
NOTE
17—SHAREHOLDERS’ EQUITY (DEFICIT)
Allocation
Shares
As
of December 31, 2020 and 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 represent the original equity interest in the Company. As a holder of the allocation shares, the Manager is entitled
to receive a 20% profit allocation as a form of preferred distribution, pursuant to a profit allocation formula upon the occurrence of
certain events. Generally, the distribution of the profit allocation is paid upon the occurrence of the sale of a material amount of
capital stock or assets of one of the Company’s businesses (a “Sale Event”) or, at the option of the Manager, at the
five year anniversary date of the acquisition of one of the Company’s businesses (a “Holding Event”). The Company records
distributions of the profit allocation to the holders upon occurrence of a Sale Event or Holding Event as dividends declared on allocation
interests to stockholders’ equity when they are approved by the Company’s board of directors.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
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.
Series
A Senior Convertible Preferred Shares
On
September 30, 2020, the Company executed a certificate of designation to designate 3,157,895 of its shares as series A senior
convertible preferred shares, which was amended on November 20, 2020. Following is a description of the rights of the series A
senior convertible preferred shares.
Dividends.
Dividends at the rate per annum of 14.0% of the stated value ($2.00 per share, subject to adjustment) shall accrue on the
series A senior convertible preferred shares. Dividends shall accrue from day to day, whether or not declared, and shall be cumulative.
Dividends shall be payable quarterly in arrears on each dividend payment date in cash or common shares at the Company’s
discretion. Dividends payable in common shares shall be calculated based on a price equal to eighty percent (80%) of the volume
weighted average price (“VWAP”) for the common shares on the Company’s principal trading market during the five
(5) trading days immediately prior to the applicable dividend payment date.
Liquidation.
Subject to the rights of the Company’s creditors and the holders of any senior securities or parity securities (in each
case, as defined in the certificate of designation), upon any liquidation of the Company or its subsidiaries, before any payment
or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of securities
that are junior to the series A senior convertible preferred shares as to the distribution of assets on any liquidation of the
Company, each holder of outstanding series A senior convertible preferred shares shall be entitled to receive an amount of cash
equal to 115% of the stated value plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether
or not declared) to, but not including the date of final distribution to such holders. If, upon any liquidation of the Company,
the assets of the Company, or proceeds thereof, distributable among the holders of the series A senior convertible preferred shares
shall be insufficient to pay in full the preferential amount payable to the holders of the series A senior convertible preferred
shares and liquidating payments on any other shares of any class or series of parity securities as to the distribution of assets
on any liquidation of the Company, then such assets, or the proceeds thereof, shall be distributed among the holders of series
A senior convertible preferred shares and any such other parity securities ratably in accordance with the respective amounts that
would be payable on such series A senior convertible preferred shares and any such other parity securities if all amounts payable
thereon were paid in full.
Voting
Rights. The series A senior convertible preferred shares do not have any voting rights; provided that, so long as any series
A senior convertible preferred shares are outstanding, the affirmative vote of holders of a majority of series A senior convertible
preferred shares, which majority must include Leonite so long as Leonite holds any series A senior convertible preferred shares
(the “Requisite Holders”), voting as a separate class, shall be necessary for approving, effecting or validating any
amendment, alteration or repeal of any of the provisions of the certificate of designation. In addition, so long as any series
A senior convertible preferred shares are outstanding, the affirmative vote of the Requisite Holders shall be required prior to
the Company’s or Kyle’s creation or issuance of (i) any parity securities; (ii) any senior securities; and (iii) any
new indebtedness other than intercompany indebtedness by Kyle’s in favor of the Company, except any financing transaction
the use of proceeds of which the Company will use to redeem the series A senior convertible preferred shares and the warrants.
Conversion
Rights. Each series A senior convertible preferred share, plus all accrued and unpaid dividends thereon, shall be convertible,
at the option of the holder thereof, at any time and from time to time into such number of fully paid and nonassessable common
shares determined by dividing the stated value, plus the value of the accrued, but unpaid, dividends thereon, by the conversion
price of $2.00 per share; provided that in no event shall the holder of any series A senior convertible preferred shares be entitled
to convert any number of series A senior convertible preferred shares that upon conversion the sum of (i) the number of common
shares beneficially owned by the holder and its affiliates and (ii) the number of common shares issuable upon the conversion of
the series A senior convertible preferred shares with respect to which the determination of this proviso is being made, would
result in beneficial ownership by the holder and its affiliates of more than 4.99% of the then outstanding common shares of the
Company. This limitation may be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, upon not less than
sixty-one (61) days’ prior notice to the Company.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
Redemption.
The Company may redeem in whole (but not in part) the series A senior convertible preferred shares by paying in cash therefore
a sum equal to 115% of the stated value plus the amount of accrued and unpaid plus any other amounts due pursuant to the terms
of the series A senior convertible preferred shares.
Adjustments.
In addition to standard adjustments to the conversion price in the event of any share splits, share combinations, share reclassifications,
dividends paid in common shares, sales of substantially all of the Company’s assets, mergers, consolidations or similar
transactions, the certificate of designation contains a provision regarding adjustments to the dividend rate, stated value and
conversion price as follows:
|
●
|
On
the first day of the 12th month following the issuance date of any series
A senior convertible preferred shares, the stated dividend rate shall automatically increase
by five percent (5.0%) per annum and the conversion price shall automatically adjust
to the lower of the (i) initial conversion price and (ii) the price equal to the lowest
VWAP of the ten (10) trading days immediately preceding such date.
|
|
●
|
On
the first day of the 24th month following the issuance date of any series
A senior convertible preferred shares, the stated dividend rate shall automatically increase
by an additional five percent (5.0%) per annum, the stated value shall automatically
increase by ten percent (10%) and the conversion price shall automatically adjust to
the lower of the (i) initial conversion price and (ii) the price equal to the lowest
VWAP of the ten (10) trading days immediately preceding such date.
|
|
●
|
On
the first day of the 36th month following the issuance date of any series
A senior convertible preferred shares, the stated dividend rate shall automatically increase
by an additional five percent (5.0%) per annum, the stated value shall automatically
increase by ten percent (10%) and the conversion price shall automatically adjust to
the lower of the (i) initial conversion price and (ii) the price equal to the lowest
VWAP of the ten (10) trading days immediately preceding the third adjustment date.
|
Notwithstanding
the foregoing, the conversion price for purposes of the adjustments above shall not be adjusted to a number that is below $0.0075.
Additional
Equity Interest. On the third adjustment date set forth above, the Company is required to cause Kyle’s to issue to the
holders of series A senior convertible preferred shares, on a pro rata basis, a ten percent (10%) equity stake Kyle’s (the
“Additional Equity Interest”). The Company is required to cause Kyle’s to grant to the holders of the series
A senior convertible preferred shares upon the issuance to them of the Additional Equity Interest a right to receive an additional
number of shares of common stock of Kyle’s if Kyle’s issues to any third party equity securities at a price below
the acquisition price (as defined below). Such additional number of shares of common stock of Kyle’s to be issued in such
instance shall be equal to a number of shares of common stock of Kyle’s which, when added to the number of shares of common
stock of Kyle’s constituting the Additional Equity Interest, would be equal to the total number of shares of common stock
which would have been issued to a holder of series A senior convertible preferred shares if the price per share of common stock
of Kyle’s was equivalent to the price per equity security paid by such third party in Kyle’s. For purposes of this
provision, “acquisition price” means the price per share of Kyle’s that was paid by the Company upon the acquisition
of Kyle’s.
On September 30, 2020, the Company sold an aggregate
of 2,189,835 units, at a price of $1.90 per unit, for aggregate gross proceeds of $4,160,684. On October 26, 2020, the Company sold an
additional 442,443 units for an aggregate purchase price of $840,640. 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. In accordance with ASC 470, if debt or stock is issued with detachable
warrants and/or stock, the guidance in ASC 470 requires that the proceeds be allocated to the instruments based on their relative fair
values. The Company applied this guidance and recorded a deemed dividend of $2,874,478 as a result of a beneficial conversion feature.
As the Company does not have any retained earnings this deemed dividend was netting against additional paid-in capital and the net accounting
effect was none.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
Common
Shares
The
Company is authorized to issue 500,000,000 common shares as of December 31, 2020 and 2019. As of December 31, 2020 and 2019, the
Company had 4,444,013 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 Asien’s Seller in connection
with the Asien’s Acquisition, which were subject to repurchase 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 by 1847 Asien on July 29, 2020. On August 28, 2020, 1847
Asien distributed these 415,000 shares to its stockholders, pro rata in accordance with their holdings. The Company, as the holder
of 95% of the outstanding common stock of 1847 Asien, received 394,112 shares in connection with this distribution, which were
then returned to the Company’s treasury and cancelled (see Note 11).
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.
On
July 21, 2020, the Company issued 50,000 common shares to Leonite upon conversion of $50,000 of the outstanding balance of the
secured convertible promissory note resulting is a loss on conversion of debt of $50,000 (see Note 13).
On
September 2, 2020, the Company issued 180,000 common shares to Leonite upon exercise of its warrants (see Note 13).
The
Company issued a total of 50,000 warrants to service providers for services provided to the Company. The fair market value of
the services amounted to $87,550. On September 2, 2020, the warrants were exercised at $1.25 per warrant for proceeds of $62,500.
Options
|
|
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
|
|
|
77,500
|
|
|
|
2.50
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(12,500
|
)
|
|
|
2.50
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercisable at December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
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. On September 29, 2020, Mr. Barry exercised the options cashless and on September 30, 2020, Mr.
Froning exercised the options for proceeds of $150,000.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
Warrants
|
|
Number
of
Common
Stock
Warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
life
(years)
|
|
|
Intrinsic
value
of
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
|
|
|
2,882,278
|
|
|
|
2.39
|
|
|
|
3.20
|
|
|
|
|
|
Exercised
|
|
|
(180,000
|
)
|
|
|
1.25
|
|
|
|
-
|
|
|
|
|
|
Canceled
|
|
|
(230,000
|
)
|
|
|
1.25
|
|
|
|
-
|
|
|
|
|
|
Outstanding, December 31, 2020
|
|
|
2,632,278
|
|
|
$
|
2.50
|
|
|
|
2.76
|
|
|
$
|
-
|
|
Exercisable, December 31, 2020
|
|
|
2,632,278
|
|
|
$
|
2.50
|
|
|
|
2.76
|
|
|
$
|
-
|
|
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 had a term of five years, an exercise price of $1.25 per share (subject to adjustment)
and could be exercised on a cashless basis (see Note 13).
On
September 2, 2020, the Company entered into amendment to the warrant issued to Leonite on April 5, 2019. 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 the Company issued 180,000 common shares to Leonite. As a result of this exercise, both warrants were cancelled
(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 included in discontinued operations in the year ended December 31, 2020.
On
April 5, 2019, Goedeker, as borrower, and 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 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 December 31, 2019 the warrants were valued at $122,344.
On August 4, 2020, SBCC converted the warrant into 250,000 shares of Goedeker’s common stock (see Note 5).
On
September 30, 2020, the Company sold an aggregate of 2,189,835 units, at a price of $1.90 per unit, for aggregate gross proceeds
of $4,160,654. On October 26, 2020, the Company sold an additional 442,443 units for an aggregate purchase price of $840,640.
Each unit consists of one (1) series A senior convertible preferred share and one (1) three-year warrant. Accordingly, a portion
of the proceeds were allocated to the warrant based on its relative fair value using the Geometric Brownian Motion Stock Path
Monte Carlo Simulation. The assumptions used in the model were as follows: (i) dividend yield of 0%; (ii) expected volatility
of 62.52-63.25%; (iii) weighted average risk-free interest rate of 0.16%; (iv) expected life of three years; (v) estimated fair
value of the common shares of $2.60-$5.25 per share; and (vi) various probability assumptions related to redemption, calls and
price resets. The ultimate amount allocated to the warrants was $2,209,566, which was recorded as additional paid in capital.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
The
warrants allow the holder to purchase one (1) common share at an exercise price of $2.50 per common share (subject to adjustment
including upon any future equity offering with a lower exercise price), which may be exercised on a cashless basis under certain
circumstances. Upon a reduction to the exercise price of such warrants, the number of warrant shares shall increase such that
the aggregate exercise price will remain the same. The warrants have a term of three years and are callable by the Company after
one year if the 30-day average stock price is in excess of $5 and the trading volume in the Company’s shares exceed 100,000
shares a day over such period. The Company can also redeem the warrants during the term for $0.50 a warrant in the first year;
$1.00 a warrant in the second year; and $1.50 a warrant in the third year.
Noncontrolling
Interests
The
Company owns 55.0% of 1847 Neese, 95% of 1847 Asien and 92.5% of 1847 Cabinet. 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 Asien and 1847 Cabinet and are
included in the consolidated statement of operations as of December 31, 2020. The net loss attributable to the 45% non-controlling
interest of 1847 Neese amounted to $545,610 and $514,019 for the years ended December 31, 2020 and 2019, respectively. The net
loss attributable to the 5% non-controlling interest of 1847 Asien amounted to $18,479 for the period from May 29, 2020 to December
31, 2020. The net income attributable to the 7.5% non-controlling interest of 1847 Cabinet amounted to $28,538 for the period
from October 1, 2020 to December 31, 2020.
NOTE
18—COMMITMENTS AND CONTINGENCIES
An
office space has been leased on a month-by-month basis.
The
officers and directors are involved in other business activities and most likely will become involved in other business activities
in the future.
NOTE
19—INCOME TAXES
As
of December 31, 2020 and 2019, the Company had net operating loss carry forwards of approximately $349,000 and $2,297,000, 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.
The
provision for Federal income tax consists of the following:
The
cumulative tax effect at the expected rate of 26.3% and 26.3% of significant items comprising the Company’s net deferred
tax amount is as follows:
The
components for the provision of income taxes include:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Current Federal and State
|
|
$
|
(102,200
|
)
|
|
$
|
16,500
|
|
Deferred Federal and State
|
|
|
368,600
|
|
|
|
(1,218,900
|
)
|
Total (benefit) provision for income taxes
|
|
$
|
266,400
|
|
|
$
|
(1,202,400
|
)
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
A
reconciliation of the statutory US Federal income tax rate to the Company’s effective income tax rate is as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Federal tax
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State tax
|
|
|
4.5
|
%
|
|
|
5.5
|
%
|
Discontinued operations
|
|
|
(4.8
|
)%
|
|
|
0.0
|
%
|
Permanent items
|
|
|
(1.6
|
)%
|
|
|
(0.2
|
)%
|
Valuation Allowance
|
|
|
(21.7
|
)%
|
|
|
0.0
|
%
|
Other
|
|
|
0.8
|
%
|
|
|
0.0
|
%
|
Effective income tax rate
|
|
|
(1.9
|
)%
|
|
|
26.3
|
%
|
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 Company has a net cumulative current deferred tax asset of $324,000 and a net cumulative long-term
deferred tax liability of ($324,000). The major components of deferred tax assets and liabilities are as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
4,000
|
|
|
$
|
8,000
|
|
Related party accruals
|
|
|
204,000
|
|
|
|
156,000
|
|
Inventory obsolescence
|
|
|
53,000
|
|
|
|
115,000
|
|
Sales return reserve
|
|
|
48,000
|
|
|
|
51,000
|
|
Business interest limitation
|
|
|
185,000
|
|
|
|
343,000
|
|
Lease liability
|
|
|
241,000
|
|
|
|
-
|
|
Other
|
|
|
55,000
|
|
|
|
8,000
|
|
Loss carryforward
|
|
|
174,000
|
|
|
|
624,000
|
|
Valuation Allowance
|
|
|
(364,000
|
)
|
|
|
-
|
|
Total deferred tax assets
|
|
$
|
600,000
|
|
|
$
|
1,305,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
(359,000
|
)
|
|
$
|
(652,000
|
)
|
Intangibles
|
|
|
(241,000
|
)
|
|
|
(18,000
|
)
|
Total deferred tax liabilities
|
|
$
|
(600,000
|
)
|
|
$
|
(670,000
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
635,000
|
|
The
Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. At December 31,
2020 and 2019, the Company does not believe that a liability for uncertain tax provisions exists, and therefore, accrued interest
and penalties were $0 and $0, respectively. The tax years ended December 31, 2015 through December 31, 2020 are considered to
be open under statute and therefore may be subject to examination by the Internal Revenue Service and various state jurisdictions.
The
Company is a partnership for federal income taxes; however, its subsidiaries are C corporations. The Company will file consolidated
returns whenever possible. Following is a summary of prepaid and deferred tax assets and liabilities for December 31, 2020 and
2019.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Prepaid income taxes (accrued tax liability)
|
|
$
|
39,000
|
|
|
$
|
(24,000
|
)
|
Deferred tax asset (liability)
|
|
$
|
-
|
|
|
$
|
635,000
|
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Income tax (benefit)/expense
|
|
$
|
267,000
|
|
|
$
|
(1,202,000
|
)
|
NOTE
20—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental
disclosures of cash flow information for the years ended December 31, 2020 and 2019 were as follows:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Interest paid
|
|
$
|
415,451
|
|
|
$
|
413,894
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Business combinations:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
2,255,479
|
|
|
$
|
-
|
|
Property and equipment
|
|
|
357,789
|
|
|
|
-
|
|
Intangibles
|
|
|
4,030,000
|
|
|
|
-
|
|
Goodwill
|
|
|
5,989,818
|
|
|
|
-
|
|
Assumed liabilities
|
|
|
(3,575,100
|
)
|
|
|
-
|
|
Cash acquired in acquisitions
|
|
$
|
1,631,285
|
|
|
$
|
-
|
|
Financing:
|
|
|
|
|
|
|
|
|
Due to seller (cash paid to seller day after closing)
|
|
$
|
4,622,792
|
|
|
$
|
-
|
|
Line of credit
|
|
$
|
586,097
|
|
|
$
|
-
|
|
Debt discount on line of credit
|
|
|
(17,500
|
)
|
|
|
-
|
|
Issuance of common shares on promissory note
|
|
|
|
|
|
|
-
|
|
Line of credit, net
|
|
$
|
568,597
|
|
|
$
|
-
|
|
Convertible Promissory Note
|
|
$
|
1,353,979
|
|
|
$
|
-
|
|
Common Shares
|
|
$
|
1,115
|
|
|
|
-
|
|
Deemed Dividend related to issuance of Preferred stock
|
|
$
|
3,051,478
|
|
|
|
-
|
|
1847 Goedeker Spin-Off Dividend
|
|
$
|
283,257
|
|
|
$
|
-
|
|
Distribution – Allocation shares
|
|
$
|
5,985,000
|
|
|
$
|
-
|
|
Distribution
receivable - Allocation shares
|
|
$
|
2,000,000
|
|
|
$
|
-
|
|
Additional Paid-in Capital – common shares and warrants issued
|
|
$
|
4,711,385
|
|
|
$
|
430,173
|
|
Operating lease, ROU assets and liabilities
|
|
$
|
373,916
|
|
|
$
|
-
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 21—DISTRIBUTION
On October 23, 2020, the Company completed the distribution
of Goedeker’s stock then held by it. The common shareholders of the Company received an aggregate of 2,660,007 shares of the common
stock of Goedeker, which were distributed on a pro rata basis at a ratio of 0.710467618568632 shares of Goedeker’s common stock
for each common share of the Company held on the record date, and the Manager, as the sole holder of the allocation shares, received 664,993
shares of the common stock of Goedeker, which it then distributed to its members.
As discussed in Note 15, the Manager owns 100% of
the allocation shares of the Company which represent the original equity interest in the Company. As a holder of the allocation shares,
the Manager is entitled to receive a 20% profit allocation as a form of preferred distribution, pursuant to profit allocation formula
upon the occurrence of certain events. The distribution of the profit allocation is paid upon the occurrence of a Sale Event or a Holding
Event. The Company records distributions of the profit allocation to the holders upon occurrence of a Sale Event or a Holding Event as
dividends declared on allocation interests to stockholders’ equity when they are approved by the Company’s board of directors.
Upon the sale of a subsidiary of the Company, the
Manager will be paid a profit allocation based on the gain of the sale and net income (loss) since acquisition, subject to various hurdle
thresholds. Upon a Holding Event, the Manager will be paid a profit allocation based on the subsidiary’s net income since its acquisition,
subject to various hurdle thresholds. The calculation of the profit allocation and the rights of the Manager, as the holder of the allocation
shares, are governed by the operating agreement.
The following is a summary of the profit allocation
payments made during the year ended December 31, 2020. There were no allocation payments made to the allocation interest holders in 2019.
During the fourth quarter of 2020, the Company distributed
to its shareholders all of the common stock of Goedeker held by it, which resulted in the declaration and payment of a profit allocation
interest to the Manager. Payment was in the form of a distribution allocation of 664,993 Goedeker shares with a fair value of $5,985,000
which was calculated by the Company in accordance with the profit allocation formula outlined in the operating agreement. In calculating
the distribution, the board reached its preliminary determination based on the fact that no capital was contributed by the Company
in connection with the acquisition of Goedeker, and as such all profit from the Sale Event constituted Total Profit Allocation, as
outlined in the operating agreement, without regard to losses incurred by Goedeker from the date of acquisition through
the date of the spin off. Post allocation, the Company determined that the calculation required a revision to the shares distributed
to the Manager to 443,331 shares, with a fair value of approximately $3,990,000. As a result, $5,985,000 was recognized as a distribution
to the allocation shares, and a $1.995 million distribution receivable was established within shareholder’s equity.
NOTE
22 —SUBSEQUENT EVENTS
In
accordance with ASC 855-10, the Company has analyzed its operations subsequent to December 31, 2020 to the date these financial
statements were issued, and has determined that, except as set forth below, it does not have any material subsequent events to
disclose in these financial statements.
Wolo
Closing and Related Transactions
Amendment
to the Stock Purchase Agreement and Closing
On
December 22, 2020, the Company and its wholly-owned subsidiary 1847 Wolo Inc. (“1847 Wolo”) entered into a stock purchase
agreement with Wolo Mfg. Corp., a New York corporation, and Wolo Industrial Horn & Signal, Inc., a New York corporation (together,
“Wolo”), and the sellers named therein (together, the “Wolo Sellers”), pursuant to which 1847 Wolo agreed
to acquire all of the issued and outstanding capital stock of Wolo (the “Wolo Acquisition”).
On
March 30, 2021, the Company, 1847 Wolo, Wolo and the Wolo Sellers entered into amendment No. 1 to the stock purchase agreement
to amend certain terms of the stock purchase agreement. Following entry into such amendment, closing of the Wolo Acquisition was
completed on the same day.
Pursuant to the terms of the stock purchase agreement, as amended,
1847 Wolo agreed to acquire all of the issued and outstanding capital stock of Wolo for an aggregate purchase price of $7,400,000, subject
to adjustment as described below. The purchase price consists of (i) $6,550,000 in cash and (ii) a 6% secured promissory note in the aggregate
principal amount of $850,000.
The
purchase price is subject to a post-closing working capital adjustment provision. Under this provision, the Wolo Sellers
delivered to 1847 Wolo at the closing an unaudited balance sheet of Wolo as of that date. On or before the 75th day following
the closing, 1847 Wolo shall deliver to the Wolo Sellers an audited balance sheet as of the closing date. If the net working capital
reflected on such final balance sheet exceeds the net working capital reflected on the preliminary balance sheet delivered at
closing, 1847 Wolo shall, within seven days, pay to the Wolo Sellers an amount of cash that is equal to such excess. If the net
working capital reflected on the preliminary balance sheet exceeds the net working capital reflected on the final balance, the
Wolo Sellers shall, within seven days, pay to 1847 Wolo an amount in cash equal to such excess.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
Purchase
to the stock purchase agreement, 1847 Wolo agreed to indemnify and hold harmless the Wolo Sellers for any amounts in respect of
taxes payable by the Wolo Sellers in connection with the Wolo Acquisition that are in excess of the amounts of taxes that would
have been payable by the Wolo Sellers in connection with the Wolo Acquisition if the closing had occurred on or prior to December
31, 2020.
The
stock purchase agreement contains customary representations, warranties and covenants, including a covenant that the Wolo Sellers
will not compete with the business of Wolo for a period of three (3) years following closing.
The
stock purchase agreement also contains mutual indemnification for breaches of representations or warranties and failure to perform
covenants or obligations contained in the stock purchase agreement. In the case of the indemnification provided by the Wolo Sellers
with respect to breaches of certain non-fundamental representations and warranties, the Wolo Sellers will only become liable for
indemnified losses if the amount exceeds an aggregate of $10,000, whereupon the Wolo Sellers will be liable for all losses that
exceed the $100,000 threshold, provided that the liability of the Wolo Sellers for breaches of certain non-fundamental representations
and warranties shall not exceed $1,825,000.
6%
Secured Promissory Note
As
noted above, a portion of the purchase price for Wolo was paid by the issuance of a 6% secured promissory note in the principal
amount of $850,000 by 1847 Wolo to the Wolo Sellers. Interest on the outstanding principal amount will be payable quarterly at
the rate of six percent (6%) per annum. The note matures on the 39-month anniversary following the closing of the acquisition,
at which time the outstanding principal amount of the note, along with all accrued, but unpaid interest, shall be paid in one
lump sum. 1847 Wolo has the right to prepay 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 and is secured by all of the assets of Wolo; provided that
the rights of the Wolo Sellers under the note are subordinate to the rights of Sterling National Bank under the credit agreement
described below.
Management
Services Agreement
On
March 30, 2021, 1847 Wolo entered into an offsetting management services agreement with the Manager on the same terms as the other
offsetting management services agreements described in Note 16; provided that, the quarterly management fee is equal to the greater
of $75,000 or 2% of adjusted net assets (as defined in the management services agreement).
The
rights of the Manager to receive payments under this offsetting management services agreement are subordinate to the rights of
Sterling (as defined below) under separate a subordination agreement that the Manager entered into with Sterling on March 30,
2021.
Credit
Agreement and Notes
On
March 30, 2021, 1847 Wolo and Wolo entered into a credit Agreement with Sterling National Bank (“Sterling”) for (i)
revolving loans in an aggregate principal amount that will not exceed the lesser of the borrowing base (as defined below) or $1,000,000
and (ii) a term loan in the principal amount of $3,550,000. The revolving loan is evidenced by a revolving credit note and the
term loan is evidenced by a $3,550,000 term note. The “borrowing base” means an amount equal to the sum of the following:
(A) 80% of eligible accounts (as defined in the credit agreement) PLUS (B) the lesser of: (1) 50% percent of eligible inventory
(as defined in the credit agreement) or (2) $400,000.00, MINUS (C) such reserves as Sterling may establish from time to time in
its sole discretion. Sterling has the right from time to time, in its sole discretion, to amend, substitute or modify the percentages
set forth in the definition of borrowing base and the definition(s) of eligible accounts and eligible inventory.
The
revolving note matures on March 29, 2022 and bears interest at a per annum rate equal to the greater of (i) the prime rate (as
defined in the credit agreement) or (ii) 3.75%. The term note matures on April 1, 2024 and bears interest at a per annum rate
equal to the greater of (x) the prime rate plus 3.00% or (y) 5.00%; provided that, upon an event of default, all loans, all past
due interest and all fees shall bear interest at a per annum rate equal to the foregoing rate plus 5.00%. Interest accrued on
the revolving note and the term note shall be payable on the first day of each month commencing on the first such day of the first
month following the making of such revolving loan or term loan, as applicable.
With
respect to the term loan, 1847 Wolo and Wolo must repay to Sterling on the first day of each month, (i) beginning on May 1, 2021
and ending on March 1, 2022, eleven (11) equal monthly principal payments of $43,750 each, (ii) beginning on April 1, 2022 and
ending on March 1, 2024, twenty-four (24) equal monthly payments of $59,167 each and (iii) on April 1, 2024, a final principal
payment in the amount of $1,648,742. In addition, beginning on June 1, 2022 and on each anniversary thereof thereafter until such
time as the term loan is repaid in full, 1847 Wolo and Wolo must pay an additional principal payment equal to 50% of the excess
cash flow (as defined in the credit agreement), if any. If Sterling has not received the full amount of any monthly payment on
or before the date it is due (including as a result of funds not available to be automatically debited on the date on which any
such payment is due), 1847 Wolo and Wolo must pay a late fee in an amount equal to six percent (6%) of such overdue payment. 1847
Wolo and Wolo may at any time and from time to time voluntarily prepay the revolving note or the term note in whole or in part.
The
credit agreement contains customary representations, warranties, affirmative and negative financial and other covenants and events
of default for loans of this type. Each of the revolving note and the term note is secured by a first priority security interest
in all of the assets of 1847 Wolo and Wolo.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
Unit
Offering
On
March 26, 2021, the Company entered into several securities purchase agreements with certain purchasers, pursuant to which the
Company sold an aggregate of 1,818,182 units, at a price of $1.65 per unit, to the purchasers for an aggregate purchase price
of $3,000,000. Each unit consists of (i) one (1) series A senior convertible preferred share of the Company with a stated value
of $2.00 per share and (ii) a three-year warrant to purchase one (1) common share of the Company at an exercise price of $2.50
per share (subject to adjustment), which may be exercised on a cashless basis under certain circumstances. The proceeds of offering
were used to fund, in part, an acquisition of Wolo. As described in further detail below, we contributed to 1847 Wolo the $3,000,000
raised in this offering in exchange for 1,000 shares of 1847 Wolo’s series A preferred stock, at a price of $3,000 per share,
to fund, in part, the planned acquisition of Wolo by 1847 Wolo.
Pursuant
to the securities purchase agreements, the Company is required file a registration statement with the Securities and Exchange
Commission (the “SEC”) under the Securities Act of 1933, as amended, 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 its 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).
The
lead investors in the offering received participation rights that permit them, for a period of 12 months after the closing, to
participate in an offering of securities by the Company or any of its subsidiaries in an amount up to the aggregate amount that
the lead investor invested in the offering with customary exclusions.
In
addition to the participation right, and registration rights described above, the securities purchase agreements provided several
other covenants in favor of the purchasers and/or the lead investor, including information rights, observer rights, certain restrictive
covenants, and other covenants customary for similar transactions. The securities purchase agreements also contain customary representations,
warranties closing conditions and indemnities.
The
warrants issued in this offering have the same terms as the warrants issued on September 30, 2020 and October 26, 2020 in connection
with the prior unit offering (see Note 17). In connection with the unit offering, the Company amended and restated the certificate
of designation for the series A senior convertible preferred shares (See Note 17). The amendments include the following:
|
●
|
The
number of shares designated as series A senior convertible preferred shares was increased
to 4,450,460.
|
|
●
|
The
dividend provision has been amended to provide that if the Company’s common shares
are not registered, and rulemaking referred to below is effective, any dividends payable
in common shares shall be calculated based upon the fixed price of $1.57; provided that
the Company may only elect to pay dividends in common shares based upon such fixed price
if the VWAP for the common shares on the Company’s principal trading market during
the five (5) trading days immediately prior to the applicable dividend payment date is
$1.57 or higher.
|
|
●
|
The
conversion price (as defined in the certificate of designation) was changed to $1.75
per share.
|
|
●
|
The
voting provision was amended to provide that so long as any series A senior convertible
preferred shares are outstanding, the affirmative vote of the Requisite Holders shall
be required prior to the Company’s, Kyle’s or Wolo’s creation or issuance
of (i) any parity securities; (ii) any senior securities; and (iii) any new indebtedness
other than (A) intercompany indebtedness by Kyle’s or Wolo in favor of the Company,
(B) indebtedness incurred in favor of the sellers of Kyle’s or Wolo in connection
with the acquisition of Kyle’s or Wolo, or (C) indebtedness (or the refinancing
of such indebtedness) the proceeds of which are used to complete the acquisition of Kyle’s
or Wolo related expenses or working capital to operate the business of Kyle’s or
Wolo.
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020 AND 2019
|
●
|
The
adjustments provision was revised to add an additional adjustment which provides that
if any legislation or rules are adopted whereby the holding period of securities for
purposes of Rule 144 of the Securities Act of 1933, as amended, for convertible securities
that convert at market-adjusted rates is increased resulting in a longer holding period
for convertible securities like the series A senior convertible preferred shares and
the unavailability at the time of conversion of Rule 144, the pricing provisions that
are based upon the lowest VWAP of the previous ten (10) trading days immediately preceding
the relevant adjustment date shall be removed unless the shares issuable upon conversion
of series A senior convertible preferred shares are then registered under an effective
registration statement, in which case this provision shall not apply.
|
|
●
|
The
additional equity interest provision was revised to clarify that the holders of series
A senior convertible preferred shares previously issued in connection with the Kyle’s
Acquisition shall receive an equity stake in Kyle’s and the holders of series A
senior convertible preferred shares issued in connection with the Wolo Acquisition shall
receive an equity stake in Wolo.
|
In
exchange for the consent of the holders of the Company’s outstanding series A senior convertible preferred shares to the
issuance of these units at a lower purchase price than such holders paid for their shares, the Company issued an aggregate of
398,838 common shares to such holders.
Subscription
Agreement
On
March 29, 2021, the Company entered into a subscription agreement with 1847 Wolo, pursuant to which 1847 Wolo issued to the Company 1,000
shares of its series A preferred stock, for gross proceeds to 1847 Wolo of $3,000,000. The series A preferred stock has no voting
rights and is not convertible into the common stock or any other securities of 1847 Wolo. Dividends at the rate per annum of 16.0%
of the stated value of $3,000 per share shall accrue on the series A preferred stock (subject to adjustment) and shall accrue
from day to day, whether or not declared, and shall be cumulative. Accruing dividends are payable quarterly in arrears on each
of the following dividend payment dates: January 15, April 15, July 15 and October 15 beginning on April 15, 2021. Upon any liquidation,
dissolution or winding up of 1847 Wolo, before any payment shall be made to the holders of 1847 Wolo’s common stock, the
series A preferred stock then outstanding shall be entitled to be paid out of the funds and assets available for distribution
to 1847 Wolo’s stockholders an amount per share equal to the stated value of $3,000 per share, plus any accrued, but unpaid
dividends.
Paycheck
Protection Program – Phase II
On
March 26, 2021, Neese received a second PPP Loan in the amount of $380,385 under Phase II of the Paycheck
Protection Program which commenced on January 13, 2021 and allowed certain businesses that received an initial PPP Loan to
seek a second draw PPP Loan.