NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
NOTE 1—ORGANIZATION AND NATURE OF BUSINESS
1847 Holdings LLC (the “Company”)
was formed under the laws of the State of Delaware on January 22, 2013. The Company is in the business of acquiring small businesses
in a variety of different industries.
On March 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 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
(“Wolo Mfg”), and Wolo Industrial Horn & Signal, Inc., a New York corporation (“Wolo H&S”), and Barbara
Solow and Stanley Solow (together, the “Wolo Sellers”), pursuant to which 1847 Wolo acquired all of the issued and outstanding
stock of Wolo Mfg and Wolo H&S on March 30, 2021 (see Note 10). As a result of this transaction, the Company owns 92.5% of 1847 Wolo,
with the remaining 7.5% held by a third-party, and 1847 Wolo owns 100% of Wolo Mfg and Wolo H&S.
The Company previously owned two additional companies,
1847 Neese Inc. (which was still owned by the Company as of March 31, 2021) and 1847 Goedeker Inc.
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, the Company
owned 55% of 1847 Neese, with the remaining 45% held by the Neese Sellers. On April 19, 2021, the Company entered into a stock purchase
agreement with the Neese Sellers, pursuant to which the Neese Sellers purchased the Company’s 55% ownership interest in 1847 Neese
for a purchase price of $325,000 in cash (the “Neese Spin-Off”). As a result of the Neese Spin-Off, 1847 Neese is no longer
a subsidiary of the Company.
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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
The consolidated financial statements include
the accounts of the Company and its consolidated subsidiaries, 1847 Asien, 1847 Cabinet, 1847 Wolo, Asien’s, Kyle’s, Wolo
Mfg and Wolo H&S. All significant intercompany balances and transactions have been eliminated in consolidation.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been
prepared without audit in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
and are presented in US dollars.
The results of Goedeker are included within discontinued
operations for three months ended March 31, 2020. The Company retrospectively updated the consolidated financial statements as of December
31, 2020 and for the three months ended March 31, 2020 to reflect this change.
The results of 1847 Neese are included within
discontinued operations for the three months ended March 31, 2021 and 2020, respectively. The Company retrospectively updated the consolidated
financial statements as of March 31, 2021 and December 31, 2020, and for the three months ended March 31, 2021 and 2020, respectively,
to reflect this change.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three
months March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
These unaudited interim consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s
annual report on Form 10-K for the year ended December 31, 2020.
Accounting Basis
The Company uses the accrual basis of accounting
and GAAP. The Company has adopted a calendar year end.
Segment Reporting
The Financial Accounting Standards Board (“FASB”)
Accounting Standard Codification (“ASC”) Topic 280, Segment Reporting, requires that an enterprise report selected
information about reportable segments in its financial reports issued to its stockholders. The Company has three reportable segments -
the Retail and Appliances Segment, which is operated by Asien’s, the Construction Segment, which is operated by Kyle’s, and
the Automotive Supplies Segment, which is operated by Wolo Mfg and Wolo H&S (together, “Wolo”).
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 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 Automotive Supplies Segment is comprised of
the business of Wolo, which is based in Deer Park, NY, and 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.
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
MARCH 31, 2021
(UNAUDITED)
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 28, 2020, Asien’s received $357,500 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. Asien’s used the proceeds from the PPP loans for qualifying expenses and to applied for forgiveness
of the PPP loans in accordance with the terms of the CARES Act. On February 16, 2021, Asien’s received notice from Home State
Bank and Exchange Bank that its loan had been forgiven in its entirety by the Small Business Administration.
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
for the three months ended March 31, 2021. 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
MARCH 31, 2021
(UNAUDITED)
Transaction Price ‒ Asien’s agrees
with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price. In
Asien’s contracts with customers, it allocates the entire transaction price to the sales price, which is the basis for the determination
of the relative standalone selling price allocated to each performance obligation. Any sales tax that Asien’s collects concurrently
with revenue-producing activities are excluded from revenue.
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 three months ended March 31, 2021 is as follows:
|
|
Three Months Ended
March 31, 2021
|
|
Appliance sales
|
|
$
|
3,193,700
|
|
Other sales
|
|
|
70,666
|
|
Total revenue
|
|
$
|
3,264,366
|
|
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.
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.
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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
Allowance for Credit Losses
Provisions for credit losses are charged to income
as losses are estimated to have occurred and in amounts sufficient to maintain an allowance for credit losses at an adequate level to
provide for future losses on the Company’s accounts receivable. The Company charges credit losses against the allowance and credits
subsequent recoveries, if any, to the allowance. Historical loss experience and contractual delinquency of accounts receivables, and management’s
judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses. While management
uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant
changes in economic conditions or portfolio performance. This evaluation is inherently subjective as it requires estimates that are susceptible
to significant revisions as more information becomes available.
The allowance for credit losses consists of general
and specific components. The general component of the allowance estimates credit losses for groups of accounts receivable on a collective
basis and relates to probable incurred losses of unimpaired accounts receivables. The Company records a general allowance for credit losses
that includes forecasted future credit losses.
Inventory
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.
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 $12,824 at March 31, 2021 and December 31, 2020.
Property and Equipment
Property and equipment is stated at cost. Depreciation
of furniture, vehicles and equipment is calculated using the straight-line method over the estimated useful lives as follows:
|
|
Useful Life (Years)
|
|
Building and Improvements
|
|
|
4
|
|
Machinery and Equipment
|
|
|
3-7
|
|
Tractors
|
|
|
3-7
|
|
Trucks and Vehicles
|
|
|
3-6
|
|
Goodwill and Intangible Assets
In applying the acquisition method of accounting,
amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with
the remainder recorded as goodwill. Identifiable intangible assets are initially valued at fair value using generally accepted valuation
methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated
useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for
impairment within one year of acquisitions or annually as of December 1, and whenever indicators of impairment exist. The fair value of
intangible assets are compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying
amount exceeds its fair value.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
Acquired identifiable intangible assets are amortized over the following
periods:
Acquired intangible Asset
|
|
Amortization Basis
|
|
Expected Life
(years)
|
|
Customer-Related
|
|
Straight-line basis
|
|
|
5-15
|
|
Marketing-Related
|
|
Straight-line basis
|
|
|
5
|
|
Long-Lived Assets
The Company reviews its property and equipment
and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected
to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The Company’s financial instruments consist
of cash and cash equivalents, 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
MARCH 31, 2021
(UNAUDITED)
Stock-Based Compensation
The Company records stock-based compensation in
accordance with ASC 718, Compensation-Stock Compensation. All transactions in which goods or services are the consideration received
for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received
as consideration are measured and recognized based on the fair value of the equity instruments issued and are recognized over the employees
required service period, which is generally the vesting period.
Basic Income (Loss) Per Share
Basic income (loss) per share is calculated by
dividing the net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings
per share is calculated by dividing the net income available to common shareholders by the diluted weighted average number of shares outstanding
during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially
dilutive debt or equity. As the Company had a net loss for the three months ended March 31, 2021, the following 4,450,460 potentially
dilutive securities were excluded from diluted loss per share: 4,450,460 for outstanding warrants. As the Company had a net loss for the
three months ended March 31, 2020, the following 895,565 potentially dilutive securities were excluded from diluted loss per share: 200,000
for outstanding warrants and 695,565 related to the convertible note payable and accrued interest.
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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
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 unaudited consolidated financial statements
are issued or available to be issued, which is referred to as the “look-forward period”, as defined in GAAP. As part of this
assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts,
projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs,
its ability to delay or curtail expenditures or programs and its ability to raise additional capital, if necessary, among other factors.
Based on this assessment, as necessary or applicable, management makes certain assumptions around implementing curtailments or delays
in the nature and timing of programs and expenditures to the extent it deems probable those implementations can be achieved and management
has the proper authority to execute them within the look-forward period.
The Company has generated losses since its inception
and has relied on cash on hand, 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 three months ended March 31, 2021, the Company incurred operating losses
of $853,992 (before deducting losses attributable to non-controlling interests and excluding the loss of discontinued operations), cash
flows from operations of $360,719 (excluding the cashflow from discontinued operations) and negative working capital of $893,504 (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 $530,000 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 unaudited consolidated financial statements in the Company’s Quarterly
Report on Form 10-Q, which 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 CARES Act provides for economic assistance loans through the SBA. On April 28,
2020, Asien’s received $357,500 in 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. Asien’s used the proceeds
from the PPP loans for qualifying expenses and to applied for forgiveness of the PPP loans in accordance with the terms of the CARES Act.
On February 16, 2021, Asien’s received notice from Exchange Bank that its loan had been forgiven in its entirety by the Small Business
Administration.
The accompanying unaudited 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 unaudited consolidated
financial statements in the Company’s Quarterly Report on Form 10-Q indicate improved operations and the Company’s ability
to continue operations as a going concern. The Company has contingency plans to reduce or defer expenses and cash outlays should
operations not improve in the look forward period.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
Recent Accounting Pronouncements
Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill,
the update requires only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit’s
carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative
impairment test is necessary. The update is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will test goodwill
for impairment within one year of the acquisition or annually as of December 1, and whenever indicators of impairment exist.
In June 2016, the FASB issued ASU 2016-13 Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement and recognition
of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model
with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual
reporting periods, and interim periods within those years beginning after December 15, 2019. This pronouncement was amended under ASU 2019-10 to
allow an extension on the adoption date for entities that qualify as a small reporting company. The Company has elected this extension
and the effective date for the Company to adopt this standard will be for fiscal years beginning after December 15, 2022. The Company
has not completed its assessment of the standard, but does not expect the adoption to have a material impact on the Company’s consolidated
financial position, results of operations, or cash flows.
NOTE 3—BUSINESS SEGMENTS
Summarized financial information concerning the
Company’s reportable segments for the three months ended March 31, 2021 is presented below. The Company had no revenue from continuing
operations for the three months ended March 31, 2020.
|
|
Three Months Ended March 31, 2021
|
|
|
|
Retail & Appliances
|
|
|
Construction
|
|
|
Automotive Supplies
|
|
|
Corporate Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and appliances revenue
|
|
$
|
3,264,366
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,264,366
|
|
Construction
|
|
|
-
|
|
|
|
1,515,909
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,515,909
|
|
Total Revenue
|
|
|
3,264,366
|
|
|
|
1,515,909
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,780,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
2,506,652
|
|
|
|
754,030
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,260,682
|
|
Total operating expenses
|
|
|
732,344
|
|
|
|
524,332
|
|
|
|
598,295
|
|
|
|
76,003
|
|
|
|
1,930,974
|
|
Loss from operations
|
|
$
|
25,370
|
|
|
$
|
237,547
|
|
|
$
|
(598,295
|
)
|
|
$
|
(76,003
|
)
|
|
$
|
(411,381
|
)
|
NOTE 4—CASH EQUIVALENTS AND INVESTMENTS
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Operating accounts
|
|
$
|
1,814,016
|
|
|
$
|
976,538
|
|
Restricted accounts
|
|
|
299,877
|
|
|
|
403,811
|
|
Subtotal
|
|
$
|
2,113,893
|
|
|
$
|
1,380,349
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity Investments
|
|
|
|
|
|
|
|
|
Restricted accounts - certificates of deposit (4 – 24 month maturities, FDIC insured)
|
|
$
|
276,270
|
|
|
$
|
276,270
|
|
Subtotal
|
|
$
|
276,270
|
|
|
$
|
276,270
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
2,390,163
|
|
|
$
|
1,656,619
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
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. For the Goedeker Spin-Off, these criteria were 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. These criteria were achieved in March 2021 for the Neese Spin-Off.
The discontinued operations as of March 31, 2021 and December 31, 2020
and for the three months then ended are comprised entirely of the business of Neese. The discontinued operations for the three months
ended March 31, 2020 are comprised of the businesses of Neese and Goedeker.
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 sheets as of March 31,
2021 and December 31, 2020.
|
|
March 31,
2021
|
|
|
December 31, 2020
|
|
Current Assets – discontinued operations:
|
|
|
|
|
|
|
Cash
|
|
$
|
708,852
|
|
|
$
|
416,831
|
|
Accounts receivable, net
|
|
|
248,621
|
|
|
|
334,095
|
|
Inventories, net
|
|
|
467,062
|
|
|
|
305,080
|
|
Prepaid expenses and other current assets
|
|
|
259,059
|
|
|
|
268,602
|
|
Total current assets – discontinued operations
|
|
|
1,683,594
|
|
|
|
1,324,608
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Assets – discontinued operations:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,541,996
|
|
|
|
1,925,844
|
|
Operating lease right of use assets
|
|
|
485,326
|
|
|
|
501,827
|
|
Goodwill
|
|
|
22,166
|
|
|
|
22,166
|
|
Intangible assets, net
|
|
|
6,234
|
|
|
|
7,933
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets
|
|
$
|
2,055,722
|
|
|
$
|
2,457,770
|
|
|
|
|
|
|
|
|
|
|
Current liabilities – discontinued operations:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
666,908
|
|
|
$
|
484,852
|
|
Current portion of operating lease liability
|
|
|
68,891
|
|
|
|
67,725
|
|
Notes payable – current portion
|
|
|
446,545
|
|
|
|
446,545
|
|
Total current liabilities – discontinued operations
|
|
|
1,182,344
|
|
|
|
999,122
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities – discontinued operations:
|
|
|
|
|
|
|
|
|
Notes payable – long term, net of current portion
|
|
|
3,686,766
|
|
|
|
4,187,376
|
|
Accrued expenses – long term, related party
|
|
|
1,473,470
|
|
|
|
1,359,989
|
|
Financing lease liability, net of current portion
|
|
|
416,435
|
|
|
|
434,102
|
|
Total long term liabilities – discontinued operations
|
|
$
|
5,576,671
|
|
|
$
|
5,981,467
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
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 three
months ended March 31, 2021 and 2020:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
REVENUES
|
|
|
|
|
|
|
Services
|
|
$
|
474,795
|
|
|
$
|
446,099
|
|
Sales of parts and equipment
|
|
|
182,329
|
|
|
|
288,071
|
|
Furniture and appliances
|
|
|
-
|
|
|
|
9,677,178
|
|
TOTAL REVENUE
|
|
|
657,124
|
|
|
|
10,411,348
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
169,921
|
|
|
|
8,366,438
|
|
Personnel costs
|
|
|
422,550
|
|
|
|
1,764,450
|
|
Depreciation and amortization
|
|
|
300,579
|
|
|
|
403,236
|
|
Fuel
|
|
|
99,758
|
|
|
|
103,764
|
|
General and administrative
|
|
|
248,316
|
|
|
|
1,808,504
|
|
TOTAL OPERATING EXPENSES
|
|
|
1,241,124
|
|
|
|
12,446,392
|
|
LOSS FROM OPERATIONS
|
|
|
(584,000
|
)
|
|
|
(2,035,044
|
)
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Financing costs and loss on early extinguishment of debt
|
|
|
(320
|
)
|
|
|
(202,782
|
)
|
Gain on forgiveness of debt
|
|
|
380,247
|
|
|
|
-
|
|
Gain/loss on sale of assets
|
|
|
449,334
|
|
|
|
-
|
|
Interest expense
|
|
|
(67,951
|
)
|
|
|
(331,139
|
)
|
Other income (expense)
|
|
|
1,200
|
|
|
|
2,383
|
|
TOTAL OTHER INCOME (EXPENSE)
|
|
|
762,510
|
|
|
|
(531,538
|
)
|
NET LOSS BEFORE INCOME TAXES
|
|
|
178,510
|
|
|
|
(2,566,582
|
)
|
INCOME TAX BENEFIT
|
|
|
-
|
|
|
|
(497,800
|
)
|
NET INCOME (LOSS) BEFORE NON-CONTROLLING INTERESTS
|
|
|
178,510
|
|
|
|
(2,068,782
|
)
|
LESS NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
|
|
|
80,329
|
|
|
|
(738,185
|
)
|
NET INCOME (LOSS) ATTRIBUTABLE TO 1847 HOLDINGS SHAREHOLDERS
|
|
$
|
98,181
|
|
|
$
|
(1,330,597
|
)
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
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:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Cash flows from operating activities of discontinued operations:
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
178,510
|
|
|
$
|
(2,068,782
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities of discontinued operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
300,579
|
|
|
|
403,236
|
|
Amortization of financing costs
|
|
|
2,187
|
|
|
|
202,782
|
|
Amortization of original interest discount
|
|
|
-
|
|
|
|
14,451
|
|
Amortization of operating lease right-of-use assets
|
|
|
16,500
|
|
|
|
118,555
|
|
Gain on forgiveness of PPP loans
|
|
|
(380,247
|
)
|
|
|
-
|
|
Gain on sale of equipment
|
|
|
(449,334
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
85,473
|
|
|
|
727,985
|
|
Inventory
|
|
|
(161,982
|
)
|
|
|
215,760
|
|
Prepaid expenses and other assets
|
|
|
9,545
|
|
|
|
167,977
|
|
Accounts payable and accrued expenses
|
|
|
178,702
|
|
|
|
687,126
|
|
Operating lease liability
|
|
|
(16,500
|
)
|
|
|
(118,555
|
)
|
Customer deposits
|
|
|
-
|
|
|
|
1,270,489
|
|
Deferred taxes and uncertain tax position
|
|
|
-
|
|
|
|
(497,800
|
)
|
Accrued expense long-term
|
|
|
113,481
|
|
|
|
113,553
|
|
Net cash provided by (used in) operating activities from discontinued operations
|
|
$
|
(123,086
|
)
|
|
$
|
1,236,777
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities in discontinued operations:
|
|
|
|
|
|
|
|
|
Proceeds from sale of equipment
|
|
$
|
565,000
|
|
|
$
|
-
|
|
Purchase of equipment
|
|
|
(30,697
|
)
|
|
|
(19,758
|
)
|
Net cash used in investing activities in discontinued operations
|
|
$
|
534,303
|
|
|
$
|
(19,758
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities in discontinued operations:
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
$
|
380,385
|
|
|
$
|
-
|
|
Repayments of notes payable
|
|
|
(499,582
|
)
|
|
|
(392,337
|
)
|
Net borrowings from lines of credit
|
|
|
-
|
|
|
|
(681,401
|
)
|
Repayment of financing lease
|
|
|
-
|
|
|
|
(79,624
|
)
|
Net cash used in financing activities in discontinued operations
|
|
$
|
(119,197
|
)
|
|
$
|
(1,153,362
|
)
|
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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
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.
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.
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.
Notes
Payable and Warrant Liability
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
MARCH
31, 2021
(UNAUDITED)
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.
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.
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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
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.
NOTE
6—RECEIVABLES
At
March 31, 2021 and December 31, 2020, receivables consisted of the following:
|
|
March
31,
2021
|
|
|
December 31,
2020
|
|
Credit card payments
in process of settlement
|
|
$
|
101,649
|
|
|
$
|
158,924
|
|
Trade
receivables from customers
|
|
|
2,408,149
|
|
|
|
366,701
|
|
Total receivables
|
|
|
2,509,798
|
|
|
|
525,625
|
|
Allowance
for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Accounts
receivable, net
|
|
$
|
2,509,798
|
|
|
$
|
525,625
|
|
NOTE
7—INVENTORIES
At
March 31, 2021 and December 31, 2020, the inventory balances are composed of:
|
|
March
31,
2021
|
|
|
December 31,
2020
|
|
Parts and components
|
|
$
|
2,325,548
|
|
|
$
|
6,308
|
|
Appliances
|
|
|
2,151,123
|
|
|
|
2,029,270
|
|
Subtotal
|
|
|
4,476,671
|
|
|
|
2,035,578
|
|
Allowance
for inventory obsolescence
|
|
|
(12,824
|
)
|
|
|
(12,824
|
)
|
Inventories,
net
|
|
$
|
4,463,847
|
|
|
$
|
2,022,754
|
|
NOTE
8—PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at March 31, 2021 and December 31, 2020:
Classification
|
|
March
31,
2021
|
|
|
December 31,
2020
|
|
Buildings and
improvements
|
|
$
|
58,986
|
|
|
$
|
42,601
|
|
Equipment and machinery
|
|
|
170,821
|
|
|
|
173,792
|
|
Trucks
and other vehicles
|
|
|
348,939
|
|
|
|
213,850
|
|
Total
|
|
|
578,746
|
|
|
|
430,243
|
|
Less:
Accumulated depreciation
|
|
|
(55,732
|
)
|
|
|
(31,740
|
)
|
Property
and equipment, net
|
|
$
|
523,014
|
|
|
$
|
398,503
|
|
Depreciation
expense for the three months ended March 31, 2021 and 2020 was $24,309 and $0, respectively.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
NOTE
9—INTANGIBLE ASSETS
The
following provides a breakdown of identifiable intangible assets as of March 31, 2021 and December 31, 2020:
|
|
March
31,
2021
|
|
|
December 31,
2020
|
|
Customer Relationships
|
|
|
|
|
|
|
Identifiable
intangible assets, gross
|
|
$
|
3,189,000
|
|
|
$
|
3,189,000
|
|
Accumulated
amortization
|
|
|
(116,570
|
)
|
|
|
(63,419
|
)
|
Customer
relationship identifiable intangible assets, net
|
|
|
3,072,430
|
|
|
|
3,125,581
|
|
Marketing
Related
|
|
|
|
|
|
|
|
|
Identifiable
intangible assets, gross
|
|
|
841,000
|
|
|
|
841,000
|
|
Accumulated
amortization
|
|
|
(125,760
|
)
|
|
|
(81,114
|
)
|
Marketing
related identifiable intangible assets, net
|
|
|
715,240
|
|
|
|
759,886
|
|
Total
Identifiable intangible assets, net
|
|
$
|
3,787,670
|
|
|
$
|
3,885,467
|
|
In
connection with the acquisitions of Asien’s and Kyle’s, the Company identified intangible assets of $1,009,000 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 12.8 years and amortization expense amounted to $97,797 and $0 for the three months ended March
31, 2021 and 2020, respectively.
As
of March 31, 2021, the estimated annual amortization expense for each of the next five fiscal years is as follows:
2021 (remainder)
|
|
$
|
293,391
|
|
2022
|
|
|
391,188
|
|
2023
|
|
|
391,188
|
|
2024
|
|
|
391,173
|
|
2025
|
|
|
258,169
|
|
Thereafter
|
|
|
2,062,561
|
|
Total
|
|
$
|
3,787,670
|
|
NOTE
10—ACQUISITIONS
Goedeker
On
January 18, 2019, Goedeker entered into an asset purchase agreement with Goedeker Television and Steve Goedeker and Mike Goedeker, which
was amended on April 5, 2019, pursuant to which on April 5, 2019 Goedeker acquired substantially all of the assets of Goedeker Television
used in its retail appliance and furniture business.
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.
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”).
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
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.
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
|
|
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
|
|
$
|
1,182,925
|
|
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
MARCH
31, 2021
(UNAUDITED)
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
|
|
$
|
5,047,241
|
|
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
MARCH
31, 2021
(UNAUDITED)
Wolo
On
December 22, 2020, the Company 1847 Wolo entered into a stock purchase agreement with Wolo and the Wolo Sellers, pursuant to which 1847
Wolo agreed to acquire all of the issued and outstanding capital stock of Wolo.
On
March 30, 2021, the Company, 1847 Wolo, Wolo and the Wolo Sellers entered into amendment No. 1 to the stock purchase agreement and closing
of the acquisition of all of the issued and outstanding capital stock of Wolo was completed (the “Wolo Acquisition”).
The
aggregate purchase price was $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.
The
provisional fair value of the purchase consideration issued to the Wolo Sellers was allocated to the net tangible assets acquired. The
Company accounted for the Wolo 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 $5,386,891. The excess of the aggregate fair value of the
net tangible assets has been allocated to goodwill.
The
Company is currently in the process of completing the preliminary purchase price allocation as an acquisition of certain assets. The
final purchase price allocation for Wolo will be included in the Company’s financial statements in future periods.
The
table below shows a preliminary analysis for the Wolo Acquisition:
Purchase consideration at
preliminary fair value:
|
|
|
|
Notes
payable
|
|
$
|
850,000
|
|
Cash
|
|
|
6,550,000
|
|
Due to seller
|
|
|
1,094,524
|
|
Amount of consideration
|
|
$
|
8,494,524
|
|
|
|
|
|
|
Assets
acquired and liabilities assumed at preliminary fair value
|
|
|
|
|
Cash
|
|
$
|
1,094,524
|
|
Accounts
receivable
|
|
|
1,860,107
|
|
Inventory
|
|
|
2,325,548
|
|
Other
current assets
|
|
|
218,154
|
|
Accounts
payable and accrued expenses
|
|
|
(111,442
|
)
|
Other
liabilities
|
|
|
|
|
Net tangible
assets acquired
|
|
$
|
5,386,891
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
5,386,891
|
|
Consideration
paid
|
|
|
8,494,524
|
|
Preliminary
Goodwill
|
|
$
|
3,107,633
|
|
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
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, the Kyle’s Acquisition
and the Wolo Acquisition been completed as of January 1, 2020 or to project potential operating results as of any future date or for
any future periods. The revenue and net income before non-controlling interest of Asien’s for the three months ended March 31,
2021 included in the consolidated statement of operations amounted to approximately $3,264,366 and $362,402, respectively. The revenue
and net income before non-controlling interest of Kyle’s for the three months ended March 31, 2021 included in the consolidated
statement of operations amounted to approximately $1,515,909 and $25,000, respectively. The unaudited proforma also removes the effect
of Goedeker and Neese as if they had been disposed of on January 1, 2020.
|
|
Three
Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenues, net
|
|
$
|
7,138,962
|
|
|
$
|
6,121,977
|
|
Net income (loss)
|
|
$
|
(349,945
|
)
|
|
$
|
431,420
|
|
Basic earnings (loss) per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.09
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Basic Number of Shares (a)
|
|
|
4,865,009
|
|
|
|
4,629,463
|
|
Diluted Number of Shares (a)
|
|
|
4,865,009
|
|
|
|
4,629,463
|
|
Note:
(a) shares assuming as if issued as of Jan 1.
NOTE
11—NOTES PAYABLE
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 March 31, 2021 is $100,00 and it has accrued interest of $2,564.
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 March 31, 2021 is $53,534 and it has accrued
interest of $776.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
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 March 31, 2021 is $913,546 and it has accrued interest of $24,551.
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 March 31, 2021, 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 March 31, 2021
is comprised of principal of $29,635.
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 March 31, 2021.
Loans
on Vehicles
Asien’s
has entered into six retail installment sale contracts pursuant to which Asien’s agreed to finance its delivery trucks at rates
ranging 3.74% to 6.99% with an aggregate remaining principal amount of $134,027 as of March 31, 2021.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
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. As of March 31, 2021, the outstanding balance of
this note is $498,979.
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
March 31, 2021 is $4,885,129 and it has accrued interest of $189,193.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
1847
Wolo/Wolo
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. The remaining principal balance of
the note at March 31, 2021 is $850,000.
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 remaining principal balance of the revolving credit note at March 31, 2021 is $770,475. The remaining
principal balance of the term note at March 31, 2021 is $3,384,770 comprised of principal of $3,550,000, net of debt discount of $165,230,
and it has accrued interest of $21,173.
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
MARCH
31, 2021
(UNAUDITED)
PPP
Loans
On
April 28, 2020, Asien’s received $357,500 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. Asien’s
used the proceeds from the PPP loans for qualifying expenses and to applied for forgiveness of the PPP loans in accordance with the terms
of the CARES Act. On February 16, 2021, Asien’s received notice from Exchange Bank that its loan had been forgiven in its
entirety by the Small Business Administration.
NOTE
12—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
MARCH
31, 2021
(UNAUDITED)
NOTE
13—OPERATING LEASES
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 principal 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:
|
|
March
31, 2021
|
|
Operating lease
right-of-use lease asset
|
|
$
|
373,916
|
|
Accumulated
amortization
|
|
|
21,777
|
|
Net balance
|
|
$
|
352,139
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
65,268
|
|
Lease
liability, long term
|
|
|
308,648
|
|
Total
operating lease liabilities
|
|
$
|
373,916
|
|
|
|
|
|
|
Weighted Average Remaining
Lease Term - operating leases
|
|
|
41
months
|
|
|
|
|
|
|
Weighted Average Discount
Rate - operating leases
|
|
|
5.5
|
%
|
Future
minimum lease payments under this operating lease as of March 31, 2021 were as follows:
2021
(remainder of year)
|
|
$
|
63,840
|
|
2022
|
|
|
86,520
|
|
2023
|
|
|
87,385
|
|
2023
|
|
|
89,116
|
|
2025
|
|
|
59,410
|
|
Total lease payments
|
|
|
386,271
|
|
Less
imputed interest
|
|
|
(43,943
|
)
|
Maturities
of lease liabilities
|
|
$
|
342,328
|
|
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
MARCH
31, 2021
(UNAUDITED)
Wolo
On
October 4, 1978, Wolo Mfg entered into a lease agreement with PKL Realty LLC (formerly P.K.L. Realty Corp). This lease agreement has
been amended numerous times. Pursuant to the latest amendment entered into in July 2020, the lease expires on July 31, 2022. The lease
agreement contains customary events of default representations, warranties and covenants.
|
|
March
31,
2021
|
|
Operating lease
right-of-use lease asset
|
|
$
|
105,136
|
|
Accumulated
amortization
|
|
|
|
|
Net balance
|
|
$
|
105,136
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
84,650
|
|
Lease
liability, long term
|
|
|
20,486
|
|
Total
operating lease liabilities
|
|
$
|
105,136
|
|
|
|
|
|
|
Weighted Average Remaining
Lease Term - operating leases
|
|
|
16
months
|
|
|
|
|
|
|
Weighted Average Discount
Rate - operating leases
|
|
|
6.0
|
%
|
Future
minimum lease payments under this operating lease as of March 31, 2021 were as follows:
2021
(remainder of year)
|
|
$
|
61,401
|
|
2022
|
|
|
48,279
|
|
Total lease payments
|
|
|
109,680
|
|
Less
imputed interest
|
|
|
(4,544
|
)
|
Maturities
of lease liabilities
|
|
$
|
105,136
|
|
NOTE
14—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 three months ended March 31, 2021 and 2020.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
Offsetting
Management Services Agreements
1847
Neese entered into an offsetting management services agreement with the Manager on March 3, 2017, which is included in discontinued operations,
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, 1847 Cabinet entered
into an offsetting management services agreement with the Manager on August 21, 2020 and 1847 Wolo entered into an offsetting management
services agreement with the Manager on March 30, 2021. 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), 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) and 1847 Wolo 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 such subsidiaries, 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 such subsidiaries 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 such subsidiaries, 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 such subsidiaries, 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 such subsidiaries 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 such subsidiaries, 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 these subsidiaries shall also reimburse the Manager for all of their costs and expenses which are specifically approved by their board
of directors, including all out-of-pocket costs and expenses, which are actually incurred by the Manager or its affiliates on behalf
of these subsidiaries in connection with performing services under the offsetting management services agreements.
The
rights of the Manager to receive payments under this offsetting management services agreement with Wolo are subordinate to the rights
of Sterling under separate a subordination agreement that the Manager entered into with Sterling on March 30, 2021.
1847
Asien and 1847 Cabinet expensed $75,000 and $75,000, respectively, in management fees for the three months ended March 31, 2021. In conjunction
with the Wolo acquisition, the Manager received a fee of $110,000.
On
a consolidated basis, the Company expensed total management fees of $260,000 for the three months ended March 31, 2021.
Advances
From
time to time, the Company has received advances from its chief executive officer to meet short-term working capital needs. As of March
31, 2021 and December 31, 2020, 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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
As
of March 31, 2021 and December 31, 2020, the Manager has funded the Company $73,143 and $71,358 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 March 31,
2021 and December 31, 2020, the Manager has advanced $56,900 of the note and the Company has accrued interest of $26,297 and $25,159,
respectively.
Building
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 principal shareholders of the Company. See Note 13 for details regarding this lease.
NOTE
15—SHAREHOLDERS’ EQUITY (DEFICIT)
Allocation
Shares
As
of March 31, 2021 and December 31, 2020, 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.
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, which was amended on November 20, 2020 and amended and restated
on March 26, 2021, to designate 4,450,460 of its shares as series A senior convertible preferred shares. Following is a description of
the rights of the series A senior convertible preferred shares.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
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; provided, however, that if the common shares are not registered, and rulemaking referred to below is effective
on the payment date, the dividends payable in common shares shall be calculated based upon the fixed price of $1.57; provided further,
that the Company may only elect to pay dividends in common shares based upon such fixed price if the VWAP for the five (5) trading days
immediately prior to the applicable dividend payment date is $1.57 or higher.
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 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. Notwithstanding the foregoing, this shall not apply to 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 issued in connection therewith.
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 $1.75 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
MARCH
31, 2021
(UNAUDITED)
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. In
addition, 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 common shares issuable upon conversion are then registered under an effective registration
statement.
Additional
Equity Interest. On the third adjustment date set forth above, the Company is required to cause Kyle’s and Wolo 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 and/or
Wolo (the “Additional Equity Interest”). The holders of series A senior convertible preferred shares issued in connection
with the financing to complete the acquisition of Kyle’s shall receive the equity stake in Kyle’s and the holders of series
A senior convertible preferred shares issued in connection with the financing to complete the acquisition of Wolo shall receive the equity
stake in Wolo. The Company is required to cause Kyle’s and Wolo 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 or Wolo if Kyle’s or Wolo 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 or Wolo to be issued in such instance shall be equal
to a number of shares of common stock of Kyle’s or Wolo which, when added to the number of shares of common stock of Kyle’s
or Wolo 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 or Wolo was
equivalent to the price per equity security paid by such third-party in Kyle’s or Wolo. For purposes of this provision, “acquisition
price” means the price per share of Kyle’s and Wolo that was paid by the Company upon the acquisition of Kyle’s and
Wolo, respectively.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
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.
On
March 26, 2021, the Company sold an aggregate of 1,818,182 units, at a price of $1.65 per unit, for aggregate gross proceeds of $3,000,000.
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.
The Company ASC 740 and recorded a deemed dividend of $1,527,086 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.
In
the period ending March 31, 2021, the Company accrued dividends attributable to the series A senior convertible preferred shares in the
amount of $188,109 and paid the prior period accrued dividends of $176,950.
Common
Shares
The
Company is authorized to issue 500,000,000 common shares as of March 31, 2021 and December 31, 2020. As of March 31, 2021 and December
31, 2020, the Company had 4,842,851 and 4,444,013 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.
The
Company did not issue any equity securities in the three months ended March 31, 2020.
On
March 26, 2021, the Company issued an aggregate of 398,838 common shares to the holders of the series A senior convertible preferred
shares issued on September 30, 2020 and October 26, 2020. As noted above, the purchase price for the units issued to such holders was
$1.90 per unit. As noted above, on March 26, 2021, the Company issued additional units at a purchase price of $1.65 per unit. In exchange
for the consent of the holders of the Company’s outstanding series A senior convertible preferred shares to the issuance of these
additional units at a lower purchase price than such holders paid for their shares, the Company issued 398,838 common shares to such
holders.
Warrants
|
|
Number
of
Common
Stock
Warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
life
(years)
|
|
|
Intrinsic
value
of
Warrants
|
|
Outstanding,
January 1, 2021
|
|
|
2,632,278
|
|
|
$
|
2.50
|
|
|
|
2.76
|
|
|
$
|
-
|
|
Granted
|
|
|
1,818,182
|
|
|
|
2.50
|
|
|
|
3.00
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding,
March 31, 2021
|
|
|
4,450,460
|
|
|
$
|
2.50
|
|
|
|
2.71
|
|
|
$
|
-
|
|
Exercisable,
March 31, 2021
|
|
|
4,450,460
|
|
|
$
|
2.50
|
|
|
|
2.71
|
|
|
$
|
-
|
|
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
(UNAUDITED)
On
March 26, 2021, the Company sold an aggregate of 1,818,182 units, at a price of $1.65 per unit, for aggregate gross proceeds of $3,000,000.
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). 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 $1,472,914, which was recorded
as additional paid in capital.
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.
NOTE
16—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
17—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental
disclosures of cash flow information for the three months ended March 31, 2021 and 2020 were as follows:
|
|
Three
Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Interest
paid
|
|
$
|
52,437
|
|
|
$
|
-
|
|
Income
tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Business combinations:
|
|
|
|
|
|
|
-
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
4,403,809
|
|
|
$
|
-
|
|
Preliminary
goodwill
|
|
|
3,107,633
|
|
|
|
-
|
|
Assumed
liabilities
|
|
|
(111,442
|
)
|
|
|
-
|
|
Cash
acquired in acquisitions
|
|
$
|
7,400,000
|
|
|
$
|
-
|
|
Financing:
|
|
|
|
|
|
|
|
|
Due
to seller (cash paid to seller day after closing)
|
|
$
|
1,094,524
|
|
|
$
|
-
|
|
Note
payable seller
|
|
$
|
850,000
|
|
|
$
|
-
|
|
Common Shares
|
|
|
|
|
|
|
|
|
Deemed
Dividend related to issuance of Preferred stock
|
|
$
|
1,527,086
|
|
|
$
|
-
|
|
Additional
Paid-in Capital – common shares and warrants issued
|
|
$
|
757,772
|
|
|
$
|
-
|
|
Operating lease, ROU assets
and liabilities
|
|
$
|
105,136
|
|
|
$
|
-
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(UNAUDITED)
NOTE
18—SUBSEQUENT EVENTS
In
accordance with ASC 855-10, the Company has analyzed its operations subsequent to March 31, 2021 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.
Neese Spin-Off
On April 19, 2021, the Company entered into a
stock purchase agreement with the Neese Sellers, pursuant to which the Neese Sellers purchased the Company’s 55% ownership interest
in 1847 Neese for a purchase price of $325,000 in cash. As a result of the Neese Spin-Off, 1847 Neese is no longer a subsidiary of the
Company.
Pursuant to the stock purchase agreement, the
Neese Sellers agreed to, within thirty (30) days following the closing of the Neese Spin-Off change the name of 1847 Neese by amending
its Certificate of Incorporation in the State of Delaware so that it does not include the number 1847 or the words Eighteen Forty Seven
or any other name that would be confusingly similar to the Company’s name and provide the Company with written evidence of such
name change. In addition, within fifteen (15) days following closing of the Neese Spin-Off, the Company agreed to limit the usage of Neese,
Inc. at its website to listing Neese, Inc. as a formerly owned company.