NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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. 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.
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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 and nine months ended September 30, 2020.
The results of 1847 Neese are included within
discontinued operations for the nine months ended September 30, 2021 and for the three and nine months ended September 30, 2020. The Company
retrospectively updated the consolidated financial statements as of December 31, 2020 and for the three and nine months ended September
30, 2020 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 nine
months September 30, 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, CA, 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, ID, 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with the original maturities of three months or less to be cash equivalents.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 Exchange
Bank that its loan had been forgiven in its entirety by the Small Business Administration (see Note 11).
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 and nine months ended September 30, 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.
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.
Customer deposits ‒ Asien’s records
customer deposits when payments are received in advance of the delivery of the merchandise. Asien’s expects that substantially all
of the customer deposits will be recognized within six months as the performance obligations are satisfied.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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, Kyle’s 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. Kyle’s 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.
Contract assets and liabilities – Construction
contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Contract liabilities consist
of advance payments and billings in excess of revenue recognized.
Automotive Supplies Segment
Wolo designs and manufactures horn and safety
products (electric, air, truck, marine, motorcycle and industrial equipment), and offers vehicle emergency and safety warning lights for
cars, trucks, industrial equipment and emergency vehicles. Focused on the automotive and industrial after-market, Wolo sells its products
to big-box national retail chains, through specialty and industrial distributors, as well as on- line/mail order retailers and original
equipment manufacturers.
Wolo collects 100% of the payment for internet
and phone orders, including tax, from the customer at the time the order is shipped. Customers placing orders with a purchase order through
the EDI (Electronic Data Interface) are allowed to purchase on credit and make payment after receipt of product on the agreed upon terms.
Performance Obligations – The revenue that
Wolo recognizes arises from orders it receives from contracts with customers. Wolo’s performance obligations under the customer
orders correspond to each sale of merchandise that it makes to customers and each 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, Wolo’s products, which generally occurs when the customer assumes the risk of loss.
The transfer of control generally occurs at the point of shipment of the order. Once this occurs, Wolo has satisfied its performance obligation
and Wolo recognizes revenue.
Transaction Price ‒ Wolo agrees with customers
on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price. In Wolo’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 Wolo collects concurrently with revenue-producing
activities are excluded from revenue.
Cost of sales includes the cost of purchased merchandise
plus freight, warehouse salaries, tariffs, and any applicable delivery charges from the vendor to Wolo.
Warranties vary and are typically 90 days to consumers
and manufacturing defect warranty to are available to resellers. At times, depending on the product, Wolo can also offer a warranty up
to 12 months.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Receivables
Receivables consist of credit card transactions
in the process of settlement. Vendor rebates receivable represent amounts due from manufactures from whom the Company purchases products.
Rebates receivable are stated at the amount that management expects to collect from manufacturers, net of accounts payable amounts due
the vendor. Rebates are calculated on product and model sales programs from specific vendors. The rebates are paid at intermittent periods
either in cash or through issuance of vendor credit memos, which can be applied against vendor accounts payable. Based on the Company’s
assessment of the credit history with its manufacturers, it has concluded that there should be no allowance for uncollectible accounts.
The Company historically collects substantially all of its outstanding rebates receivables. Uncollectible balances are expensed in the
period it is determined to be uncollectible.
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. Wolo’s inventory consists of finished goods acquired
for resale and is valued at the weighted-average cost determined on a specific item basis. The Company periodically evaluates the value
of items in inventory and provides write-downs to inventory based on its estimate of market conditions. The Company estimated an obsolescence
allowance of $160,824 and $12,824 at September 30, 2021 and December 31, 2020, respectively.
Property and Equipment
Property and equipment is stated at historical
cost less accumulated depreciation. 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
|
|
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 recorded at fair value using generally accepted valuation
methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated
useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for
impairment within one year of acquisitions or annually as of December 1, and whenever indicators of impairment exist. The fair value of
intangible assets are compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying
amount exceeds its fair value.
Acquired identifiable intangible assets are amortized over the following
periods:
Acquired intangible Asset
|
|
Amortization Basis
|
|
Expected Life
(years)
|
Customer-Related
|
|
Straight-line basis
|
|
5-15
|
Marketing-Related
|
|
Straight-line basis
|
|
5
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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.
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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 ended September 30, 2021, potentially dilutive securities were excluded
from diluted loss per share: 4,450,460 for outstanding warrants and 5,265,722 for principal and accrued interest of Series A convertible
preferred shares. As the Company had a net income for the nine months ended September 30, 2021, the following potentially dilutive securities
were included in diluted loss per share under the treasury method: 4,450,460 outstanding warrants and 5,265,722 for the conversion of
Series A convertible preferred shares and cumulative dividends.
As the Company had a net loss for the three and
nine months ended September 30, 2020, the following 2,189,835 potentially dilutive securities were excluded from diluted loss per share:
2,189,835 for outstanding warrants.
Leases
ASC 842 requires recognition of leases on the
consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities. ROU assets represent the Company’s
right to use underlying assets for the lease terms and lease liabilities represent the Company’s obligation to make lease payments
arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future
minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company
used its estimated incremental borrowing rate based on the information available at commencement date in determining the present value
of lease payments. A number of the lease agreements contain options to renew and options to terminate the leases early. The lease term
used to calculate ROU assets and lease liabilities only includes renewal and termination options that are deemed reasonably certain to
be exercised.
The Company recognized lease liabilities, with
corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months.
The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related balances of accrued and prepaid rent, and unamortized
lease incentives provided by lessors. Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease
term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes
and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable
lease payments are based occur. The Company has elected not to separate lease and non-lease components for all property leases for the
purposes of calculating ROU assets and lease liabilities.
Going Concern Assessment
Management assesses going concern uncertainty
in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including
available borrowings on loans, to operate for a period of at least one year from the date the 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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
The Company has generated operating losses since
its inception and has relied on cash on hand, sales of securities, external bank lines of credit, and issuance of third-party and related
party debt to support cashflow from operations. For the nine months ended September 30, 2021, the Company incurred operating losses of
$1,450,727 (before deducting losses attributable to non-controlling interests and excluding the loss of discontinued operations and gain
on the disposition of subsidiary), cash flows used in operations of $381,346 (excluding the cashflow from discontinued operations) and
negative working capital of $1,373,869 (excluding the negative working capital from discontinued operations).
On October 8, 2021, the Company and each of its
subsidiaries 1847 Asien, 1847 Wolo, 1847 Cabinet, Asien’s, Wolo Mfg, Wolo H&S, Kyle’s, High Mountain and Sierra Homes,
entered into a note purchase agreement with two institutional investors, pursuant to which the Company issued to these purchasers secured
convertible promissory notes in the aggregate principal amount of $24,860,000. The notes contain an aggregate original issue discount
of $497,200. As a result, the total purchase price was $24,362,800. After payment of expenses of $742,825, the Company received net proceeds
of $23,619,975, of which $10,687,500 was used to fund the cash portion of the purchase price for the acquisition of High Mountain and
Sierra Homes (see Note 18).
Management has prepared estimates of operations
for fiscal year 2022 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 SBA.
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.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill,
the update requires only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit’s
carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative
impairment test is necessary. The update is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will test goodwill
for impairment within one year of the acquisition or annually as of December 1, and whenever indicators of impairment exist.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 September 30, 2021 and 2020 is presented below.
|
|
Three Months Ended September 30, 2021
|
|
|
|
Retail & Appliances
|
|
|
Construction
|
|
|
Automotive Supplies
|
|
|
Corporate Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and appliances
|
|
$
|
3,145,955
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,145,955
|
|
Construction
|
|
|
-
|
|
|
|
1,338,428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,338,428
|
|
Automotive supplies
|
|
|
-
|
|
|
|
-
|
|
|
|
2,250,645
|
|
|
|
-
|
|
|
|
2,250,645
|
|
Total Revenue
|
|
|
3,145,955
|
|
|
|
1,338,428
|
|
|
|
2,250,645
|
|
|
|
-
|
|
|
|
6,735,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
2,300,664
|
|
|
|
805,513
|
|
|
|
1,466,946
|
|
|
|
-
|
|
|
|
4,573,123
|
|
Total operating expenses
|
|
|
683,110
|
|
|
|
612,880
|
|
|
|
1,249,778
|
|
|
|
475,679
|
|
|
|
3,021,447
|
|
Income (loss) from operations
|
|
$
|
162,181
|
|
|
$
|
(79,965
|
)
|
|
$
|
(466,079
|
)
|
|
$
|
(475,679
|
)
|
|
$
|
(859,542
|
)
|
|
|
Three Months Ended September 30, 2020
|
|
|
|
Retail & Appliances
|
|
|
Construction
|
|
|
Automotive Supplies
|
|
|
Corporate Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and appliances
|
|
$
|
3,141,313
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,141,313
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Automotive supplies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Revenue
|
|
|
3,141,313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,141,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
2,429,714
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,429,714
|
|
Total operating expenses
|
|
|
843,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
126,836
|
|
|
|
969,836
|
|
Loss from operations
|
|
$
|
(131,401
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(126,836
|
)
|
|
$
|
(258,237
|
)
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Summarized financial information concerning the
Company’s reportable segments for the nine months ended September 30, 2021 and 2020 is presented below.
|
|
Nine Months Ended September 30, 2021
|
|
|
|
Retail & Appliances
|
|
|
Construction
|
|
|
Automotive Supplies
|
|
|
Corporate Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and appliances
|
|
$
|
9,762,939
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,762,939
|
|
Construction
|
|
|
-
|
|
|
|
4,169,305
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,169,305
|
|
Automotive supplies
|
|
|
-
|
|
|
|
-
|
|
|
|
4,231,013
|
|
|
|
-
|
|
|
|
4,231,013
|
|
Total Revenue
|
|
|
9,762,939
|
|
|
|
4,169,305
|
|
|
|
4,231,013
|
|
|
|
-
|
|
|
|
18,163,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
7,409,913
|
|
|
|
2,280,009
|
|
|
|
2,658,672
|
|
|
|
-
|
|
|
|
12,348,594
|
|
Total operating expenses
|
|
|
2,095,280
|
|
|
|
1,687,998
|
|
|
|
2,509,008
|
|
|
|
973,105
|
|
|
|
7,265,391
|
|
Income (loss) from operations
|
|
$
|
257,746
|
|
|
$
|
201,298
|
|
|
$
|
(936,667
|
)
|
|
$
|
(973,105
|
)
|
|
$
|
(1,450,728
|
)
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
Retail & Appliances
|
|
|
Construction
|
|
|
Automotive Supplies
|
|
|
Corporate Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and appliances
|
|
$
|
4,327,294
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,327,294
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Automotive supplies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Revenue
|
|
|
4,327,294
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,327,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
3,353,608
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,353,608
|
|
Total operating expenses
|
|
|
1,278,284
|
|
|
|
-
|
|
|
|
-
|
|
|
|
648,488
|
|
|
|
1,926,772
|
|
Loss from operations
|
|
$
|
(304,598
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(648,488
|
)
|
|
$
|
(953,086
|
)
|
NOTE 4—CASH EQUIVALENTS AND INVESTMENTS
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
Operating accounts
|
|
$
|
973,172
|
|
|
$
|
976,538
|
|
Restricted accounts
|
|
|
-
|
|
|
|
403,811
|
|
Subtotal
|
|
$
|
973,172
|
|
|
$
|
1,380,349
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity Investments
|
|
|
|
|
|
|
|
|
Restricted accounts - certificates of deposit (4 – 24-month maturities, FDIC insured)
|
|
$
|
276,540
|
|
|
$
|
276,270
|
|
Subtotal
|
|
$
|
276,540
|
|
|
$
|
276,270
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
1,249,713
|
|
|
$
|
1,656,619
|
|
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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
The discontinued operations as of December 31,
2020 and for the nine months ended September 30, 2021 are comprised entirely of the business of Neese. The discontinued operations for
the three and nine months ended September 30, 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 December 31,
2020:
|
|
December 31,
2020
|
|
Current Assets – discontinued operations:
|
|
|
|
Cash
|
|
$
|
416,831
|
|
Accounts receivable, net
|
|
|
334,095
|
|
Inventories, net
|
|
|
305,080
|
|
Prepaid expenses and other current assets
|
|
|
268,602
|
|
Total current assets – discontinued operations
|
|
|
1,324,608
|
|
|
|
|
|
|
Noncurrent Assets – discontinued operations:
|
|
|
|
|
Property and equipment, net
|
|
|
1,925,844
|
|
Operating lease right of use assets
|
|
|
501,827
|
|
Goodwill
|
|
|
22,166
|
|
Intangible assets, net
|
|
|
7,933
|
|
|
|
|
|
|
Total noncurrent assets
|
|
$
|
2,457,770
|
|
|
|
|
|
|
Current liabilities – discontinued operations:
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
484,852
|
|
Current portion of operating lease liability
|
|
|
67,725
|
|
Notes payable – current portion
|
|
|
446,545
|
|
Total current liabilities – discontinued operations
|
|
|
999,122
|
|
|
|
|
|
|
Long term liabilities – discontinued operations:
|
|
|
|
|
Notes payable – long term, net of current portion
|
|
|
4,187,376
|
|
Accrued expenses – long term, related party
|
|
|
1,359,989
|
|
Financing lease liability, net of current portion
|
|
|
434,102
|
|
Total long term liabilities – discontinued operations
|
|
$
|
5,981,467
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine months
ended September 30, 2021 and 2020 and for the three months ended September 30, 2020:
|
|
Nine Months Ended
September 30,
2021
|
|
|
Nine Months Ended
September 30,
2020
|
|
|
Three Months
Ended
September 30,
2020
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
612,862
|
|
|
$
|
1,853,721
|
|
|
$
|
640,695
|
|
Sales of parts and equipment
|
|
|
324,189
|
|
|
|
2,053,964
|
|
|
|
1,448,917
|
|
Furniture and appliances
|
|
|
-
|
|
|
|
38,397,306
|
|
|
|
13,435,098
|
|
TOTAL REVENUE
|
|
|
937,051
|
|
|
|
42,304,991
|
|
|
|
15,524,710
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
298,050
|
|
|
|
33,913,519
|
|
|
|
12,588,302
|
|
Personnel costs
|
|
|
485,774
|
|
|
|
5,780,986
|
|
|
|
2,571,387
|
|
Depreciation and amortization
|
|
|
360,746
|
|
|
|
1,213,102
|
|
|
|
405,499
|
|
Fuel
|
|
|
112,746
|
|
|
|
275,368
|
|
|
|
89,169
|
|
General and administrative
|
|
|
290,872
|
|
|
|
7,407,433
|
|
|
|
3,315,868
|
|
TOTAL OPERATING EXPENSES
|
|
|
1,548,188
|
|
|
|
48,590,408
|
|
|
|
18,970,226
|
|
LOSS FROM OPERATIONS
|
|
|
(611,137
|
)
|
|
|
(6,285,417
|
)
|
|
|
(3,445,516
|
)
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs and loss on early extinguishment of debt
|
|
|
(320
|
)
|
|
|
(2,646,757
|
)
|
|
|
(508,943
|
)
|
Gain on forgiveness of debt
|
|
|
380,247
|
|
|
|
-
|
|
|
|
(903,570
|
)
|
Gain on sale of assets
|
|
|
548,723
|
|
|
|
54,748
|
|
|
|
16,981
|
|
Loss on acquisition receivable
|
|
|
-
|
|
|
|
(809,000
|
)
|
|
|
-
|
|
Change in warrant liability
|
|
|
-
|
|
|
|
(2,127,656
|
)
|
|
|
-
|
|
Interest expense
|
|
|
(78,308
|
)
|
|
|
(913,028
|
)
|
|
|
(235,927
|
)
|
Other income (expense)
|
|
|
1,200
|
|
|
|
9,400
|
|
|
|
3,075
|
|
TOTAL OTHER INCOME (EXPENSE)
|
|
|
851,542
|
|
|
|
(6,432,293
|
)
|
|
|
(1,628,384
|
)
|
NET LOSS BEFORE INCOME TAXES
|
|
|
240,405
|
|
|
|
(12,717,710
|
)
|
|
|
(5,073,900
|
)
|
INCOME TAX BENEFIT
|
|
|
-
|
|
|
|
(2,309,929
|
)
|
|
|
(873,176
|
)
|
NET INCOME (LOSS) BEFORE NON-CONTROLLING INTERESTS
|
|
|
240,405
|
|
|
|
(10,407,780
|
)
|
|
|
(4,200,724
|
)
|
LESS NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
|
|
|
108,182
|
|
|
|
(3,260,361
|
)
|
|
|
(1,669,777
|
)
|
NET INCOME (LOSS) ATTRIBUTABLE TO SHAREHOLDERS
|
|
$
|
132,223
|
|
|
$
|
(7,147,420
|
)
|
|
$
|
(2,530,948
|
)
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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:
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Cash flows from operating activities of discontinued operations:
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
240,405
|
|
|
$
|
(10,407,780
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities of discontinued operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
360,746
|
|
|
|
1,213,357
|
|
Amortization of financing costs and warrant features
|
|
|
2,187
|
|
|
|
841,305
|
|
Stock compensation
|
|
|
-
|
|
|
|
281,194
|
|
Amortization of operating lease right-of-use assets
|
|
|
19,007
|
|
|
|
47,033
|
|
Gain on forgiveness of PPP loans
|
|
|
(380,247
|
)
|
|
|
-
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
1,699,463
|
|
Gain on sale of equipment
|
|
|
(548,723
|
)
|
|
|
(54,748
|
)
|
Change in fair value of warrant liability
|
|
|
-
|
|
|
|
2,127,656
|
|
Write-off of acquisition receivable
|
|
|
-
|
|
|
|
809,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
10,698
|
|
|
|
637,776
|
|
Inventory
|
|
|
(161,286
|
)
|
|
|
(2,239,997
|
)
|
Prepaid expenses and other assets
|
|
|
49,222
|
|
|
|
(873,580
|
)
|
Accounts payable and accrued expenses
|
|
|
118,980
|
|
|
|
2,656,694
|
|
Change in operating lease ROU assets
|
|
|
-
|
|
|
|
314,332
|
|
Operating lease liability
|
|
|
(19,007
|
)
|
|
|
(361,365
|
)
|
Vendor deposits
|
|
|
-
|
|
|
|
(252,688
|
)
|
Deposits
|
|
|
-
|
|
|
|
12,925,530
|
|
Customer deposits
|
|
|
-
|
|
|
|
(1,962,129
|
)
|
Accrued expense long-term
|
|
|
137,438
|
|
|
|
340,656
|
|
Net cash used in operating activities from discontinued operations
|
|
$
|
(170,580
|
)
|
|
$
|
7,741,709
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities in discontinued operations:
|
|
|
|
|
|
|
|
|
Proceeds from sale of equipment
|
|
$
|
675,000
|
|
|
$
|
49,494
|
|
Purchase of equipment
|
|
|
(30,697
|
)
|
|
|
(67,396
|
)
|
Net cash provided by (used in) investing activities in discontinued operations
|
|
$
|
644,303
|
|
|
$
|
(17,902
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities in discontinued operations:
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering
|
|
|
-
|
|
|
|
8,602,166
|
|
Proceeds from note payable
|
|
$
|
380,385
|
|
|
$
|
1,612,297
|
|
Repayments of notes payable
|
|
|
(589,078
|
)
|
|
|
(2,432,337
|
)
|
Payments on convertible notes payable
|
|
|
-
|
|
|
|
(771,431
|
)
|
Repayment of floor plan
|
|
|
-
|
|
|
|
(10,581
|
)
|
Net borrowings from lines of credit
|
|
|
-
|
|
|
|
(1,339,430
|
)
|
Financing fees
|
|
|
-
|
|
|
|
(219,110
|
)
|
Repayment of financing lease
|
|
|
-
|
|
|
|
(634,458
|
)
|
Net cash used in financing activities in discontinued operations
|
|
$
|
(208,693
|
)
|
|
$
|
4,807,116
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
The following are the financial instruments of
the discontinued operations:
Lines of Credit
Burnley Capital LLC
On April 5, 2019, Goedeker, as borrower, and Holdco
entered into a loan and security agreement with Burnley Capital LLC (“Burnley”) for revolving loans in an aggregate principal
amount that will not exceed the lesser of (i) the borrowing base (as defined in the loan and security agreement) or (ii) $1,500,000
minus reserves established Burnley at any time in accordance with the loan and security agreement. In connection with the closing of the
acquisition of Goedeker Television on April 5, 2019, Goedeker borrowed $744,000 under the loan and security agreement and issued a revolving
note to Burnley in the principal amount of up to $1,500,000. As of December 31, 2019, the balance of the line of credit was $571,997.
On August 4, 2020, Goedeker used a portion of
the proceeds from its initial public offering (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 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.
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.
If Neese sells property, plant, and equipment
securing the loan, it must remit the appraised value of the equipment to Home State Bank. During the nine months ended September 30, 2021
and 2020, $400,000 and $145,690, respectively, was remitted to Home State Bank pursuant to this requirement.
Notes Payable and Warrant Liability
Arvest Loan
On August 25, 2020, Goedeker entered into a promissory
note and security agreement with Arvest Bank for a loan in the principal amount of $3,500,000. As of October 23, 2020, the outstanding
balance of this loan is $3,340,602, comprised of principal of $3,446,126, net of unamortized loan costs of $103,524.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
PPP Loan
On April 8, 2020, Goedeker received a $642,600
PPP loan from the SBA under the provisions of the CARES Act. The PPP loan had an 18-month term and bore interest at a rate of 1.0% per
annum. Monthly principal and interest payments were deferred for six months after the date of disbursement. The PPP provides that the
loan could be partially or wholly forgiven if the funds were used for certain qualifying expenses as described in the CARES Act. The balance
of the PPP loan was $642,600 as of September 30, 2020 and was classified as a current liability. On November 2, 2020, Goedeker repaid
the PPP loan.
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.
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 continued 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.
In August 2020, Goedeker refinanced this note
payable with proceeds from a 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
12 for further details of the convertible promissory note.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 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—ACCOUNTS RECEIVABLES
At September 30, 2021 and December 31, 2020, receivables
consisted of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Credit card payments in process of settlement
|
|
$
|
137,489
|
|
|
$
|
158,924
|
|
Trade receivables from customers
|
|
|
1,976,848
|
|
|
|
366,701
|
|
Total receivables
|
|
|
2,114,337
|
|
|
|
525,625
|
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable, net
|
|
$
|
2,114,337
|
|
|
$
|
525,625
|
|
NOTE 7—INVENTORIES
At September 30, 2021 and December 31, 2020, the
inventory balances are composed of parts and components consisting of materials and parts used in construction and the appliances and
automotive are finished goods for sale.
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Parts and components
|
|
$
|
24,554
|
|
|
$
|
6,308
|
|
Appliances
|
|
|
1,974,708
|
|
|
|
2,029,270
|
|
Automotive
|
|
|
2,317,488
|
|
|
|
-
|
|
Subtotal
|
|
|
4,316,750
|
|
|
|
2,035,578
|
|
Allowance for inventory obsolescence
|
|
|
(160,824
|
)
|
|
|
(12,824
|
)
|
Inventories, net
|
|
$
|
4,155,926
|
|
|
$
|
2,022,754
|
|
NOTE 8—PROPERTY AND EQUIPMENT
Property and equipment consist of the following
at September 30, 2021 and December 31, 2020:
Classification
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Buildings and improvements
|
|
$
|
241,225
|
|
|
$
|
42,601
|
|
Equipment and machinery
|
|
|
69,011
|
|
|
|
173,792
|
|
Trucks and other vehicles
|
|
|
365,552
|
|
|
|
213,850
|
|
Total
|
|
|
675,788
|
|
|
|
430,243
|
|
Less: Accumulated depreciation
|
|
|
(113,553
|
)
|
|
|
(31,740
|
)
|
Property and equipment, net
|
|
$
|
562,235
|
|
|
$
|
398,503
|
|
Depreciation expense for the nine months ended
September 30, 2021 and 2020 was $85,005 and $16,183, respectively.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
NOTE 9—INTANGIBLE ASSETS
The following provides
a breakdown of identifiable intangible assets as of September 30, 2021 and December 31, 2020:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Customer Relationships
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
$
|
3,422,000
|
|
|
$
|
3,189,000
|
|
Accumulated amortization
|
|
|
(230,636
|
)
|
|
|
(63,419
|
)
|
Customer relationship identifiable intangible assets, net
|
|
|
3,191,364
|
|
|
|
3,125,581
|
|
Marketing Related
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
1,833,000
|
|
|
|
841,000
|
|
Accumulated amortization
|
|
|
(314,250
|
)
|
|
|
(81,114
|
)
|
Marketing related identifiable intangible assets, net
|
|
|
1,518,750
|
|
|
|
759,886
|
|
Technology Related
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
623,000
|
|
|
|
-
|
|
Accumulated amortization
|
|
|
(62,298
|
)
|
|
|
-
|
|
Technology related identifiable intangible assets, net
|
|
|
560,702
|
|
|
|
-
|
|
Total Identifiable intangible assets, net
|
|
$
|
5,270,816
|
|
|
$
|
3,885,467
|
|
In connection with the
acquisitions of Asien’s, Kyle’s and Wolo, the Company identified intangible assets of $1,009,000, $3,021,000 and $1,848,000,
respectively, representing trade names, customer relationships and technology. These assets are being amortized on a straight-line basis
over their weighted average estimated useful life of 10.3 years and amortization expense amounted to $462,651 and $46,736 for the nine
months ended September 30, 2021 and 2020, respectively.
As of September 30, 2021,
the estimated annual amortization expense for each of the next five fiscal years is as follows:
2021 (remainder)
|
|
$
|
182,427
|
|
2022
|
|
|
729,708
|
|
2023
|
|
|
729,708
|
|
2024
|
|
|
729,678
|
|
2025
|
|
|
596,529
|
|
Thereafter
|
|
|
2,302,766
|
|
Total
|
|
$
|
5,270,816
|
|
NOTE 10—ACQUISITIONS
Asien’s
On March 27, 2020, the Company and 1847 Asien
entered into a stock purchase agreement with the Asien’s Seller, pursuant to which 1847 Asien agreed to acquire all of the issued
and outstanding capital stock of Asien’s. The Company acquired Asien’s, which provides a wide variety of appliance services,
including sales, delivery/installation, in-home service and repair, extended warranties, and financing in the North Bay area of Sonoma
County, California, to expand into the appliance industry.
On May 28, 2020, the Company, 1847
Asien, Asien’s and the Asien’s Seller entered into an amendment to the stock purchase agreement and closing of the acquisition
of all of the issued and outstanding capital stock of Asien’s was completed (the “Asien’s Acquisition”).
The aggregate purchase price was $1,918,000 consisting
of: (i) $233,000 in cash; (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 in exchange for a 6% amortizing promissory
note (See Note 11).
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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
The table below shows analysis for the Asien’s
Acquisition:
Purchase Consideration at fair value:
|
|
|
|
Common shares
|
|
$
|
1,037,500
|
|
Notes payable
|
|
|
855,000
|
|
Cash paid to Seller (post closing)
|
|
|
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 Kyle’s Sellers, 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”).
The aggregate purchase price was $6,839,792, consisting
of (i) $4,389,792 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 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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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
|
|
Cash
|
|
|
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.
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 $8,344,055, consisting
of (i) $6,550,000 in cash, (ii) a 6% secured promissory note in the aggregate principal amount of $850,000 and (iii) cash paid to seller,
net of working capital adjustment, of $944,055.
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
$6,653,102. 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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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
|
|
Net cash paid to Seller (post closing)
|
|
|
944,055
|
|
Amount of consideration
|
|
$
|
8,344,055
|
|
|
|
|
|
|
Assets acquired and liabilities assumed at preliminary fair value
|
|
|
|
|
Cash
|
|
$
|
1,171,654
|
|
Accounts receivable
|
|
|
1,860,107
|
|
Inventory
|
|
|
1,991,629
|
|
Customer related intangibles
|
|
|
233,000
|
|
Marketing related intangibles
|
|
|
992,000
|
|
Technology related intangibles
|
|
|
623,000
|
|
Other current assets
|
|
|
218,154
|
|
Deferred tax liability
|
|
|
(325,000
|
)
|
Accounts payable and accrued expenses
|
|
|
(111,442
|
)
|
Net tangible assets acquired
|
|
$
|
6,653,102
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
8,344,055
|
|
Consideration paid
|
|
|
6,653,102
|
|
Preliminary Goodwill
|
|
$
|
1,690,953
|
|
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 loss before
non-controlling interest of Asien’s from May 29, 2020 through September 30, 2020 included in the consolidated income statement amounted
to approximately $4,327,294 and $496,859, respectively. The revenue and net loss before non-controlling interest of Wolo from April 1,
2021 through September 30, 2021 included in the consolidated income statement amounted to approximately $4,072,303 and $1,363,331, respectively.
The unaudited proforma results of operations also removes the effect of Goedeker and Neese as if they had been disposed of on January
1, 2020.
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Revenues, net
|
|
$
|
20,521,944
|
|
|
$
|
17,163,879
|
|
Net income (loss)
|
|
$
|
(1,794,399
|
)
|
|
$
|
(671,350
|
)
|
Basic earnings (loss) per share
|
|
$
|
(0.38
|
)
|
|
$
|
(0.16
|
)
|
Diluted earnings (loss) per share
|
|
$
|
(0.38
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
Basic Number of Shares (*)
|
|
|
4,718,671
|
|
|
|
4,309,526
|
|
Diluted Number of Shares (*)
|
|
|
4,718,671
|
|
|
|
4,309,526
|
|
* shares assuming as if issued as of January 1.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 December 31, 2020 is $301,081
and it has accrued interest of $995. The remaining principal balance of the note at September 30, 2021 is $300,000 and it has accrued
interest of $2,564. On October 8, 2021, the revolving loan was paid off and terminated for $301,240 (See note 18).
8% Subordinated Amortizing Promissory Note
A portion of the purchase price for acquisition
of Asien’s on May 28, 2020 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 were payable quarterly at the rate of
eight percent (8%) per annum. The outstanding principal amount of the note amortized 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.
As of December 31, 2020, the remaining principal balance of the note was $101,980 and it had accrued interest of $1,095. The note
and accrued interest were repaid in May 2021.
6% Amortizing Promissory Note
On July 29, 2020, 1847 Asien entered into a securities
purchase agreement with the Asien’s Seller, pursuant to which the Asien’s Seller sold to 415,000 of the Company’s common
shares to 1847 Asien a purchase price of $2.50 per share. As consideration, 1847 Asien issued to the Asien’s Seller a two-year 6%
amortizing promissory note in the aggregate principal amount of $1,037,500. One-half (50%) of the outstanding principal amount of the
note ($518,750) and all accrued interest thereon, will be amortized on a two-year straight-line basis and is payable quarterly. The second-half
(50%) of the outstanding principal amount of the note ($518,750) with all accrued, but unpaid interest thereon, is due on the second anniversary
of the note. The note is unsecured and contains customary events of default. The remaining principal balance of the note at December 31,
2020 is $785,846 and it has accrued interest of $17,752. The remaining principal balance of the note at September 30, 2021 is $785,846
and it has accrued interest of $17,752. On October 8, 2021, this note was amended and $138,593 payment reduced the principal balance to
$647,253 (see Note 18).
Demand Promissory Note
A portion of the purchase price for acquisition
of Asien’s on May 28, 2020 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 Asien’s 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 September 30, 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 bore interest
at the rate of the 4.25% per annum. The remaining principal balance of the note at December 31, 2020 is $41,675. The note and accrued
interest were repaid in July 2021.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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. This agreement was terminated on September 10, 2020.
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 $114,845 as of September 30, 2021.
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 September 30, 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 15 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 September 30, 2021 is $4,885,129 and it
has accrued interest of $194,380. This note was amended on October 8, 2021 (see Note 18).
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Loans on Vehicles
Kyle’s has entered into two retail installment
sale contracts pursuant to which it agreed to finance its delivery trucks at rates ranging 5.90% to 6.54% with an aggregate remaining
principal amount of $67,465 as of September 30, 2021.
1847 Wolo/Wolo
6% Secured Promissory Note
As noted above, a portion of the purchase price
for the acquisition of Wolo on March 30, 2021 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 September
30, 2021 is $850,000 and it has accrued interest of $12,750. On October 8, 2021, the promissory note was repaid in full (See note 18).
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 September 30, 2021 is $996,309 and it has accrued interest of $3,529. The remaining
principal balance of the term note at September 30, 2021 is $3,193,558, comprised of principal of $3,331,250, net of debt discount of
$137,692, and it has accrued interest of $17,350. On October 8, 2021, the revolving loan and the term loan were repaid in full (See note
18).
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, 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
SEPTEMBER 30, 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 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 SBA.
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 carried 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 nine months
ended September 30, 2020.
On May 11, 2020, 1847 and Leonite entered into
a first amendment to secured convertible promissory note, pursuant to which the parties agreed (i) to extend the maturity date of the
note to October 5, 2020, (ii) that 1847’s failure to repay the note on the original maturity date of April 5, 2020 shall not constitute
and event of default under the note and (iii) to increase the principal amount of the note by $207,145, as a forbearance fee.
In connection with the amendment, (i) 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 the Company 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
SEPTEMBER 30, 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.
On June 9, 2021, Kyle’s entered into an
additional industrial lease agreement with a third party. The lease is for a term of five years and two months, with an option for a renewal
term of five years. 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 (18%) per annum. The lease agreement
contains customary events of default, representations, warranties and covenants. The lease increased the operating lease right to use
asset and corresponding operating lease liability by $361,158.
Supplemental balance sheet information related
to leases was as follows:
|
|
September 30,
2021
|
|
Operating lease right-of-use lease asset
|
|
$
|
735,074
|
|
Accumulated amortization
|
|
|
(68,164
|
)
|
Net balance
|
|
$
|
666,910
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
112,120
|
|
Lease liability, long term
|
|
|
558,181
|
|
Total operating lease liabilities
|
|
$
|
670,301
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
|
55 months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
5.5
|
%
|
Future minimum lease payments under this operating
lease as of September 30, 2021 were as follows:
2021 (remainder of year)
|
|
$
|
48,314
|
|
2022
|
|
|
167,973
|
|
2023
|
|
|
171,282
|
|
2024
|
|
|
175,529
|
|
2025
|
|
|
148,416
|
|
2026
|
|
|
52,558
|
|
Total lease payments
|
|
|
764,072
|
|
Less imputed interest
|
|
|
(93,771
|
)
|
Maturities of lease liabilities
|
|
$
|
670,301
|
|
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
SEPTEMBER 30, 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.
|
|
September 30,
2021
|
|
Operating lease right-of-use lease asset
|
|
$
|
153,663
|
|
Accumulated amortization
|
|
|
87,393
|
|
Net balance
|
|
$
|
66,270
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
67,111
|
|
Lease liability, long term
|
|
|
-
|
|
Total operating lease liabilities
|
|
$
|
67,111
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
|
10 months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
6.0
|
%
|
Future minimum lease payments under this operating
lease as of September 30, 2021 were as follows:
2021 (remainder of year)
|
|
$
|
20,691
|
|
2022
|
|
|
48,279
|
|
Total lease payments
|
|
|
68,970
|
|
Less imputed interest
|
|
|
(1,859
|
)
|
Maturities of lease liabilities
|
|
$
|
67,111
|
|
NOTE 14—RELATED PARTIES
Management Services Agreement
On April 15, 2013, the Company and 1847 Partners
LLC (the “Manager”) entered into a management services agreement, pursuant to which the Company is required to pay the Manager
a quarterly management fee equal to 0.5% of its adjusted net assets for services performed (the “Parent Management Fee”).
The amount of the Parent Management Fee with respect to any fiscal quarter is (i) reduced by the aggregate amount of any management fees
received by the Manager under any offsetting management services agreements with respect to such fiscal quarter, (ii) reduced (or increased)
by the amount of any over-paid (or under-paid) Parent Management Fees received by (or owed to) the Manager as of the end of such fiscal
quarter, and (iii) increased by the amount of any outstanding accrued and unpaid Parent Management Fees. The Company expensed $0 in Parent
Management Fees for the nine months ended September 30, 2021 and 2020.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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. The 1847 Cabinet
offsetting management services agreement was amended on October 8, 2021 (see Note 18).
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, 1847 Cabinet and 1847 Wolo expensed
$225,000, $225,000 and $260,833, respectively, in management fees for the nine months ended September 30, 2021. In conjunction with the
acquisition of Wolo, the Manager received a fee of $110,000. 1847 Asien expensed $103,022 in management fees for the period from May 29,
2020 to September 30, 2020.
On a consolidated basis, the Company expensed
total management fees of $710,833 and $103,022 for the nine months ended September 30, 2021 and 2020, respectively.
Advances
From time to time, the Company has received advances
from its chief executive officer to meet short-term working capital needs. As of September 30, 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.
As of September 30, 2021 and December 31, 2020,
the Manager has funded the Company $74,928 and $71,358 in related party advances, respectively. These advances are unsecured, bear no
interest, and do not have formal repayment terms or arrangements.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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. 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 September 30, 2021 and December 31, 2020, the Manager
has advanced $56,900 of the note and the Company has accrued interest of $28,611 and $25,159, respectively. On October 8, 2021, the loan
was repaid in full and the grid note was terminated (see Note 18).
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 September 30, 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, including if the Company distributes its equity ownership in a subsidiary to
the Company’s shareholders in a spin-off or similar transaction (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 a principal shareholder.
Series A Senior Convertible Preferred Shares
On September 30, 2020, the Company executed a
share designation, which was amended on November 20, 2020, March 26, 2021 and September 29, 2021, to designate 4,450,460 of its shares
as series A senior convertible preferred shares. On October 12, 2021, the Company redeemed 2,632,278 series A senior convertible preferred
shares (See Note 18).
Following is a description of the rights of the
series A senior convertible preferred shares.
Dividends. Dividends at the rate per annum
of 14.0% of the stated value ($2.00 per share, subject to adjustment) shall accrue on the series A senior convertible preferred shares.
Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends shall be payable quarterly in arrears
on each dividend payment date in cash or common shares at the Company’s discretion. Dividends payable in common shares shall be
calculated based on a price equal to eighty percent (80%) of the volume weighted average price (“VWAP”) for the common shares
on the Company’s principal trading market during the five (5) trading days immediately prior to the applicable dividend payment
date; 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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 share 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 share 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.
Redemption. The Company may redeem in whole,
or upon the written consent of the Requisite Holders and in the manner provided for in such written consent, 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. The share designation contains
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. In addition,
the share designation provides that if, but only if, the Requisite Holders provide the Company with at least ten (10) business day’s
prior written notice, then, from and after the date of such notice, the stated dividend rate, the stated value and the conversion price
shall automatically adjust 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 increase by five percent (5.0%) per annum
and the conversion price shall 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 increase by an additional five percent
(5.0%) per annum, the stated value shall 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 increase by an additional five percent
(5.0%) per annum, the stated value shall 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.
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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.
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 nine months ended September 30, 2021, the
Company accrued dividends attributable to the series A senior convertible preferred shares in the amount of $314,093 and paid the prior
period accrued dividends of $676,339.
Common Shares
The Company is authorized to issue 500,000,000
common shares as of September 30, 2021 and December 31, 2020. As of September 30, 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.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
On May 4, 2020, the Company issued 100,000 common
shares to Leonite upon conversion of $100,000 of the outstanding balance of the secured convertible promissory note resulting is a loss
on conversion of debt of $175,000 (see Note 12).
On May 28, 2020, the Company issued 415,000 common
shares, having a fair value of $1,037,500, to the Asien’s Seller in connection with the Asien’s Acquisition (see Note 10).
On June 4, 2020, the Company issued 100,000 common
shares to a service provider for services provided to the Company. The fair market value of the services amounted to $245,000.
On 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, September 30, 2021
|
|
|
4,450,460
|
|
|
$
|
2.50
|
|
|
|
2.21
|
|
|
$
|
-
|
|
Exercisable, September 30, 2021
|
|
|
4,450,460
|
|
|
$
|
2.50
|
|
|
|
2.21
|
|
|
$
|
-
|
|
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
The Company has entered into three financing lease
agreements for expansion equipment at Kyle’s. The equipment is in production and expected to be installed in November 2021. These
agreements have terms of six years beginning at the time of installation.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Future minimum lease payments under the leases
as of September 30, 2021 are as follows:
2021 (remainder of year)
|
|
$
|
11,962
|
|
2022
|
|
|
143,541
|
|
2023
|
|
|
143,541
|
|
2024
|
|
|
143,541
|
|
2025
|
|
|
143,541
|
|
2026
|
|
|
143,541
|
|
2027
|
|
|
134,409
|
|
Total lease payments
|
|
$
|
864,076
|
|
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 nine months ended September 30, 2021 and 2020 were as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Interest paid
|
|
$
|
139,016
|
|
|
$
|
-
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Business combinations:
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
5,201,957
|
|
|
$
|
1,734,663
|
|
Intangible assets
|
|
|
1,848,000
|
|
|
|
-
|
|
Deferred tax liability
|
|
|
-
|
|
|
|
157,052
|
|
Preliminary goodwill
|
|
|
1,690,915
|
|
|
|
1,720,726
|
|
Deferred tax liability
|
|
|
(325,000
|
)
|
|
|
-
|
|
Assumed liabilities
|
|
|
(111,442
|
)
|
|
|
(3,195,726
|
)
|
Cash acquired in acquisitions, net of working capital adjustment
|
|
$
|
1,174,654
|
|
|
$
|
1,268,285
|
|
Financing:
|
|
|
|
|
|
|
|
|
Due to seller (net cash paid to seller after closing)
|
|
$
|
944,055
|
|
|
$
|
233,000
|
|
Note payable seller
|
|
$
|
850,000
|
|
|
$
|
855,000
|
|
Common Shares
|
|
|
|
|
|
|
|
|
Deemed Dividend related to issuance of Preferred stock
|
|
$
|
1,527,086
|
|
|
$
|
-
|
|
Additional Paid-in Capital – common shares and warrants issued
|
|
$
|
757,772
|
|
|
$
|
-
|
|
Common stock
|
|
$
|
-
|
|
|
$
|
415
|
|
Additional Paid in Capital
|
|
$
|
-
|
|
|
$
|
829,585
|
|
Operating lease, ROU assets and liabilities
|
|
$
|
466,294
|
|
|
$
|
-
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
NOTE 18—SUBSEQUENT EVENTS
In accordance with ASC 855-10, the Company has
analyzed its operations subsequent to September 30, 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.
Completion of Acquisition
On September 23, 2021, 1847 Cabinet entered into
a securities purchase agreement with High Mountain Door & Trim Inc., a Nevada corporation (“High Mountain”), Sierra Homes,
LLC, a Nevada limited liability company (“Sierra Homes”), and Steven J. Parkey and Jose D. Garcia-Rendon (together, the “H&S
Sellers”), pursuant to which 1847 Cabinet agreed to acquire all of the issued and outstanding capital stock or other equity securities
of High Mountain and Sierra Homes from the H&S Sellers.
On October 6, 2021, 1847 Cabinet, High Mountain,
Sierra Homes and the H&S Sellers entered into amendment No. 1 to securities purchase agreement to amend certain terms of the securities
purchase agreement. On October 8, 2021, closing of the acquisition was completed.
Pursuant to the terms of the securities purchase
agreement, as amended, 1847 Cabinet acquired all of the issued and outstanding capital stock or other equity securities of High Mountain
and Sierra Homes from the H&S Sellers for an aggregate purchase price of $16,567,845, after certain adjustments made at closing and
subject to additional post-closing adjustments as described below. The purchase price consists of (i) $10,687,500 in cash and (ii) the
issuance by 1847 Cabinet of 6% subordinated convertible promissory notes in the aggregate principal amount of $5,880,345.
The purchase price is
subject to a post-closing working capital adjustment provision. Under this provision, the H&S Sellers delivered to 1847 Cabinet
at the closing an unaudited balance sheet of High Mountain and Sierra Homes and a calculation of estimated net working capital of High
Mountain and Sierra Homes as of that date. On or before the 75th day following the closing, 1847 Cabinet must deliver to the H&S
Sellers an unaudited balance sheet of High Mountain and Sierra Homes and its calculation of the final net working capital of High Mountain
and Sierra Homes as of the closing date. If such final net working capital exceeds the estimated net working capital, 1847 Cabinet must,
within seven days, pay to the H&S Sellers an amount of cash that is equal to such excess. If the estimated net working capital exceeds
the final net working capital, the H&S Sellers must, within seven days, pay to 1847 Cabinet an amount in cash equal to such excess.
6% Subordinated
Convertible Promissory Notes
As noted above, a portion
of the purchase price for the acquisition of High Mountain and Sierra Homes was paid by the issuance of 6% subordinated convertible promissory
notes in the aggregate principal amount of $5,880,345 by 1847 Cabinet to the H&S Sellers. The notes bear interest at a rate of six
percent (6%) per annum and are due and payable on October 8, 2024; provided that upon an event of default (as defined in the notes), such
interest rate shall increase to ten percent (10%) per annum. 1847 Cabinet may prepay the notes in whole or in part, without penalty or
premium, upon ten (10) business days prior written notice to the holders of the notes.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
At any time prior to
October 8, 2022, the holders may, in their sole discretion, elect to convert up to twenty percent (20%) of the original principal amount
of the notes and all accrued, but unpaid, interest into such number of shares of the common stock of 1847 Cabinet determined by dividing
the amount to be converted by a conversion price determined by dividing (i) the fair market value of 1847 Cabinet (determined in accordance
with the notes) by (ii) the number of shares of 1847 Cabinet outstanding on a fully diluted basis. The holders may also exchange the notes
or any portion thereof for securities of the Company pursuant to the exchange agreement described below.
Pursuant to the terms
of the notes, 1847 Cabinet must provide at least thirty (30) days prior notice prior to the consummation of a corporate transaction (as
defined in the notes), which generally includes (i) the sale of all or substantially all of the assets of 1847 Cabinet, High Mountain
and Sierra Homes, (ii) the merger, consolidation or any other reorganization of any of these companies, other than a reorganization where
the holders of the voting securities of such companies prior to such reorganization continue to hold a majority of the outstanding voting
securities after such reorganization; or (iii) any transfer (whether by sale, merger, consolidation or otherwise) of more that fifty percent
(50%) of the outstanding voting securities of any of these companies. In the event of such corporate transaction, the H&S Sellers
may exercise their right to convert a portion of the outstanding principal balance and accrued but unpaid interest into 1847 Cabinet’s
common stock, exercise their right to exchange all or any portion of the outstanding principal balance and accrued but unpaid interest
pursuant to the exchange agreement, and/or accelerate the maturity date such that the outstanding principal balance together with all
accrued but unpaid interest and all other amounts payable under the notes (less any amounts to be converted or exchanged, if applicable)
shall become due and payable in full upon the consummation of the corporate transaction.
The notes contain customary
events of default, including in the event of a default under the secured convertible promissory notes described below. The rights of the
holders to receive payments under the notes are subordinated to the rights of the purchasers under secured convertible promissory notes
described below.
Exchange Agreement
On October 8, 2021, the
Company entered into an exchange agreement with the H&S Sellers, pursuant to which the Company granted the H&S Sellers and their
permitted assigns the right, but not the obligation, to exchange all of the principal amount and accrued but unpaid interest under the
6% subordinated convertible promissory notes as may be the outstanding from time to time or any portion thereof for a number of common
shares of the Company to be determined by dividing the amount to be converted by an exchange price equal to the higher of (i) the 30-day
volume weighted average price for the common shares on the primary national securities exchange or over the counter market on which the
common shares are traded over the thirty (30) trading days immediately prior to the applicable exchange date or (ii) $2.50 (subject to
equitable adjustments for stock splits, stock combinations, recapitalizations and similar transactions).
Amended and Restated
Offsetting Management Services Agreement
On October 8, 2021, 1847
Cabinet and the Manager entered into an amended and restated offsetting management services agreement to amend certain terms of the offsetting
management services agreement described in Note 14 above. Pursuant to the amended and restated offsetting management services, the quarterly
management fee was increased to $125,000 or 2% of adjusted net assets. The amended and restated offsetting management services also revised
the provision regarding removal of the Manager to provide that the Manager may be removed by 1847 Cabinet if: (i) a majority of 1847 Cabinet’s
board of directors vote to terminate the amended and restated offsetting management services and the holders of at least a majority of
the then outstanding voting stock (other than voting stock beneficially owned by the Manager) vote to terminate the amended and restated
offsetting management services; (ii) neither Ellery W. Roberts nor his designated successor, heirs, beneficiaries or permitted assigns
control the Manager, and such change occurred without the prior written consent of 1847 Cabinet’s board of directors; (iii) there
is a finding by a court of competent jurisdiction in a final, non-appealable order that the Manager materially breached the terms of the
amended and restated offsetting management services and such breach continued unremedied for sixty (60) days after the Manager received
written notice from 1847 Cabinet setting forth the terms of such breach, or the Manager acted with gross negligence, willful misconduct,
bad faith or reckless disregard in performing its duties and obligations under amended and restated offsetting management services or
engaged in fraudulent or dishonest acts in connection with the business and operations of 1847 Cabinet; (iv) the Manager has been convicted
of a felony under Federal or State law, 1847 Cabinet’s board of directors finds that the Manager is demonstrably and materially
incapable of performing its duties and obligations under the amended and restated offsetting management services, and the holders of at
least sixty-six and two-thirds percentage (66 ⅔%) of then outstanding voting stock (other than voting stock beneficially owned
by the Manager) vote to terminate the amended and restated offsetting management services; or (v) there is a finding by a court of competent
jurisdiction that the Manager has engaged in fraudulent or dishonest acts in connection with the business or operations of 1847 Cabinet
or acted with gross negligence, willful misconduct, bad faith or reckless disregard in performing its duties and obligations under the
amended and restated offsetting management services, and the holders of at least sixty-six and two-thirds percentage (66 ⅔%) of
the then outstanding voting stock (other than voting stock beneficially owned by the Manager) vote to terminate the amended and restated
offsetting management services.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Finally, the amended
and restated offsetting management services also revised the termination provision to provide that if there is a termination under section
(i) of the preceding paragraph, then 1847 Cabinet must pay a termination fee to the Manager that is equal to three times (3x) the then
current maximum annual management fee payable to the Manager, which shall be payable in eight (8) equal quarterly installments.
Second Amended
and Restated Intercompany Secured Promissory Note
On October 8, 2021, the
Company, 1847 Cabinet, Kyle’s, High Mountain and Sierra Homes entered into a second amended and restated subordinated secured promissory
note in the principal amount of up to $15,955,325 to amend and restate the terms of the secured promissory note described under Note 11
above.
The note bears interest
at the rate of 16% per annum. Interest on the note is cumulative and any unpaid accrued interest will compound on each anniversary date
of the note. Interest is due and payable in arrears to the Company on December 1, March 1, June 1 and October 1, commencing on December
1, 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 the third party sale of all or substantially all the assets and business of 1847 Cabinet or the third party
sale or other disposition of any capital stock of 1847 Cabinet. 1847 Cabinet may prepay the note at any time without penalty.
If and to the extent
any amounts are owing under the secured convertible promissory notes described below due to a default thereunder, in addition to payment
obligations due under the note, 1847 Cabinet is required to immediately make payments to the Company so that the Company may make payments
in compliance with the terms of the secured convertible promissory notes.
The
note contains customary covenants and events of default for loans of this type. The note is guaranteed by Kyle’s, High
Mountain and Sierra Homes and is secured by a security interest in all of the assets of 1847 Cabinet,
Kyle’s, High Mountain and Sierra Homes; provided that the rights of the Company to receive payments under the note are
subordinated to the rights of the purchasers under secured convertible promissory notes described below.
Amendment to 6%
Amortizing Promissory Note
On October 8, 2021, 1847
Asien and the Asien’s Seller entered into amendment no. 1 to securities purchase agreement to amend certain terms of the securities
purchase agreement and the 6% amortizing promissory note described in Note 11. Pursuant to the amendment, the repayment terms of the 6%
amortizing promissory note were revised so that one-half (50%) of the outstanding principal amount ($518,750) and all accrued interest
thereon shall be amortized on a two-year straight-line basis and payable quarterly in accordance with the amortization schedule set forth
on Exhibit A to the amendment, except for the payments that were initially scheduled on January 1, 2022 and April 1, 2022, which were
paid from the proceeds of the senior convertible promissory notes described below, and the second-half (50%) of the outstanding principal
amount ($518,750) and all accrued, but unpaid interest thereon shall be paid on the second anniversary of the date of the 6% amortizing
promissory note, along with any other unpaid principal or accrued interest thereon.
Secured Convertible
Promissory Notes
On October 8, 2021, the
Company and each of its subsidiaries 1847 Asien, 1847 Wolo, 1847 Cabinet, Asien’s, Wolo Mfg, Wolo H&S, Kyle’s, High Mountain
and Sierra Homes, entered into a note purchase agreement with two institutional investors, including Leonite, pursuant to which the Company
issued to these purchasers secured convertible promissory notes in the aggregate principal amount of $24,860,000.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
The notes contain an
aggregate original issue discount of $497,200. As a result, the total purchase price was $24,362,800. After payment of expenses of $742,825,
the Company received net proceeds of $23,619,975, of which $10,687,500 was used to fund the cash portion of the purchase price for the
acquisition of High Mountain and Sierra Homes.
The notes bear interest
at a rate per annum equal to the greater of (i) 4.75% plus the U.S. Prime Rate that appears in The Wall Street Journal from time
to time or (ii) 8%; provided that, upon an event of default (as defined in the notes), such rate shall increase to 24% or the maximum
legal rate. Payments of interest only, computed at such rate on the outstanding principal amount, will be due and payable quarterly in
arrears commencing on January 1, 2022 and continuing on the first day of each calendar quarter thereafter through and including the maturity
date, October 8, 2026.
The Company may voluntarily
prepay the notes in whole or in part upon payment of a prepayment fee in an amount equal to 10% of the principal and interest paid in
connection with such prepayment. In addition, immediately upon receipt by the Company or any subsidiary of any proceeds from any issuance
of indebtedness (other than certain permitted indebtedness), any proceeds of any sale or disposition by the Company or any subsidiary
of any of the collateral or any of its respective assets (other than asset sales or dispositions in the ordinary course of business which
are permitted by the note purchase agreement), or any proceeds from any casualty insurance policies or eminent domain, condemnation or
similar proceedings, the Company must prepay the notes in an amount equal to all such proceeds, net of reasonable and customary transaction
costs, fees and expenses properly attributable to such transaction and payable by the Company or a subsidiary in connection therewith
(in each case, paid to non-affiliates).
The holders of the notes
may, in their sole discretion, elect to convert any outstanding and unpaid principal portion of the notes, and any accrued but unpaid
interest on such portion, into common shares of the Company at a conversion price equal to $2.50 (subject to equitable adjustments for
stock splits, stock combinations, recapitalizations and similar transactions, as well as for future issuances below the conversion price).
Notwithstanding the foregoing, the notes contain a beneficial ownership limitation, which provides that the Company shall not effect any
conversion to the extent that after giving effect to the conversion, the holder, together with its affiliates, would beneficially own
in excess of 4.99% of the number of common shares outstanding immediately after giving effect to the issuance of common shares upon such
conversion. Upon no fewer than 61 days’ prior notice to the Company, a holder may increase or decrease such beneficial ownership
limitation (up to a maximum of 9.99%) and any such increase or decrease will not be effective until the 61st day after such
notice is delivered to the Company.
Pursuant to the terms
of the notes, until the date that is eighteen (18) months after the issuance date of the notes, the holders shall have the right, but
not the obligation, to participate in any securities offering of the Company other than a permitted issuance (as defined in the note purchase
agreement) in an amount of up to the original principal amount of the notes. In addition, the holders shall have the right of first refusal
to participate in any issuance of indebtedness by the Company until the notes have been terminated; provided, however, that this right
of first refusal shall not apply to permitted issuances.
The note
purchase agreement and the notes contain customary representations, warranties, affirmative and negative financial and other covenants
and events of default for loans of this type. The notes are guaranteed by each subsidiary and are secured by a first priority security
interest in all of the assets of the Company and its subsidiaries.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Warrants
In connection
with the loan made by Leonite, on October 8, 2021, the Company issued to Leonite a five-year warrant for the purchase of 250,000 common
shares with an exercise price of $0.01 per share and a five-year warrant for the purchase of 500,000 common shares with an exercise price
of $2.50 per share. The exercise price is subject to standard adjustments, including upon any future equity offering with a lower
exercise price. 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 may be exercised on a cashless basis under
certain circumstances and contain certain beneficial ownership limitations.
Subsidiary Equity
Issuance
In connection
with the loan made by Leonite, the Company also issued to Leonite a number of shares or membership units, as applicable, representing
a 7.50% fully-diluted ownership interest in each of High Mountain and Sierra Homes. As a result, 1847 Cabinet owns 92.5% of each of these
subsidiaries.
Redemption of Series
A Senior Convertible Preferred Shares
On October 12, 2021,
the Company redeemed 2,632,278 series A senior convertible preferred shares for a total redemption price, including dividends through
such date, of $6,395,645. As a result, there are 1,818,182 series A senior convertible preferred shares outstanding as of the date of
this report.
Repayment of Debt
On October 8, 2021, the
revolving loan from Arvest Bank was terminated and paid off for $301,240 (see Note 11).
On October 8, 2021, the
6% secured promissory note issued to the Asien’s Seller was paid down by $138,593 (See Note 11).
On October 8, 2021, the 6% secured promissory
note issued to the Wolo Sellers was repaid in full (See Note 11).
On October 8, 2021, the revolving loan and the
term loan from Sterling were repaid in full (See Note 11).
On October 8, 2021, the grid note issued to the
Manager was repaid in full and terminated (see Note 14).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management’s discussion
and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment
and understanding of our plans and financial condition. The following financial information is derived from our financial statements
and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein.
Use of Terms
Except as otherwise indicated by the context and
for the purposes of this report only, references in this report to “we,” “us,” “our” and the “Company”
refer to 1847 Holdings LLC, a Delaware limited liability company, and its consolidated subsidiaries. References to the “Manager”
refer to 1847 Partners LLC, a Delaware limited liability company.