NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
NOTE
1—BASIS OF PRESENTATION AND OTHER INFORMATION
The
accompanying unaudited condensed consolidated financial statements of 1847 Holdings LLC (the “Company,” “we,”
“us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They
do not include all information and footnotes required by GAAP for complete financial statements. The December 31, 2021 consolidated balance
sheet data was derived from audited financial statements but do not include all disclosures required by GAAP. However, except as disclosed
herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the
year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission
on March 31, 2022. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated
financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation
of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three and nine
months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Reverse
Share Split
On
August 2, 2022, we effected a 1-for-4 reverse split of our outstanding common shares. All outstanding common shares and warrants were
adjusted to reflect the 1-for-4 reverse split, with respective exercise prices of the warrants proportionately increased. The outstanding
convertible notes and series A and B convertible senior preferred shares conversion prices were adjusted to reflect a proportional decrease
in the number of common shares to be issued upon conversion.
All
share and per share data throughout these condensed consolidated financial statements have been retroactively adjusted to reflect the
reverse share split. The total number of authorized common shares did not change. As a result of the reverse common share split, an amount
equal to the decreased value of common shares was reclassified from “common shares” to “additional paid-in capital.”
Reclassifications
Certain
reclassifications within property and equipment, notes payable, preferred shares, and operating expenses have been made to prior period’s
financial statements to conform to the current period financial statement presentation. There is no impact in total to the results of
operations and cash flows in all periods presented.
Sequencing
Under
ASC 815-40-35 (“ASC 815”), the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts
from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient
authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares will be allocated on the
basis of the earliest maturity date of potentially dilutive instruments first, with the earliest maturity date of grants receiving the
first allocation of shares. Pursuant to ASC 815, issuances of securities to the Company’s employees and directors, or to compensate
grantees in a share-based payment arrangement, are not subject to the sequencing policy.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
NOTE
2—RECENT ACCOUNTING PRONOUCEMENTS
The
Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting
Standards Board (“FASB”). ASUs not listed below were assessed and determined to be either not applicable or are expected
to have minimal impact on the Company’s condensed consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which 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 our condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06 Accounting
for Convertible Instruments and Contracts In An Entity’s Own Equity. ASU 2020-06 simplifies the accounting for certain convertible
instruments by removing the separation models for convertible debt with a cash conversion feature and for convertible instruments with
a beneficial conversion feature. As a result, more convertible debt instruments will be reported as a single liability instrument with
no separate accounting for embedded conversion features. Additionally, ASU 2020-06 amends the diluted earnings per share calculation for
convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available. For SEC filers,
excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim
periods within those fiscal years. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023,
including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December
15, 2020, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2022. The Company’s
adoption of this update did not have a material impact on the condensed consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business
Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU amends ASC
805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in business combinations.
The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal
years. This ASU should be applied prospectively to acquisitions occurring on or after the effective date of December 15, 2022, and early
adoption is permitted. The Company adopted this guidance on January 1, 2022. The Company’s adoption of this update did not have
a material impact on the condensed consolidated financial statements.
NOTE
3—LIQUIDITY AND GOING CONCERN ASSESSMENT
Management
assesses liquidity and going concern uncertainty in the Company’s condensed consolidated financial statements to determine whether
there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one
year from the date the consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward
period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management,
management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing
and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise
additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, management makes certain
assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable
those implementations can be achieved and management has the proper authority to execute them within the look-forward period.
As
of September 30, 2022, the Company had cash and cash equivalents of $1,584,499. For the nine months ended September 30, 2022, the Company
incurred an operating loss of $1,096,364 (before deducting losses attributable to non-controlling interests), cash flows used in operations
of $3,977,286, and working capital of $1,839,424. 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.
Management
has prepared estimates of operations for fiscal year 2022 and 2023 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 these condensed consolidated financial
statements, 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.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
The
accompanying condensed 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 these condensed
consolidated financial statements. The Company has contingency plans to reduce or defer expenses and cash outlays should operations not
improve in the look forward period.
NOTE
4—DISAGGREGATION OF REVENUES AND SEGMENT REPORTING
The
Company has three reportable segments:
The
Retail and Appliances Segment provides a wide variety of appliance products (laundry, refrigeration, cooking, dishwashers, outdoor, accessories,
parts, and other appliance related products) and services (delivery, installation, service and repair, extended warranties, and financing).
The
Construction Segment provides finished carpentry products and services (door frames, base boards, crown molding, cabinetry, bathroom
sinks and cabinets, bookcases, built-in closets, fireplace mantles, windows, and custom design and build of cabinetry and countertops).
The
Automotive Supplies Segment provides 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.
The
Company’s revenues for the three and nine months ended September 30, 2022 and 2021 are disaggregated as follows:
| |
Three
Months Ended September 30, 2022 | |
| |
Retail
and
Appliances | | |
Construction | | |
Automotive
Supplies | | |
Total | |
Revenues | |
| | |
| | |
| | |
| |
Appliances | |
$ | 2,492,544 | | |
$ | - | | |
$ | - | | |
$ | 2,492,544 | |
Appliance accessories, parts,
and other | |
| 442,161 | | |
| - | | |
| - | | |
| 442,161 | |
Automotive horns | |
| - | | |
| - | | |
| 1,094,636 | | |
| 1,094,636 | |
Automotive lighting | |
| - | | |
| - | | |
| 395,074 | | |
| 395,074 | |
Custom cabinets and countertops | |
| - | | |
| 2,990,767 | | |
| - | | |
| 2,990,767 | |
Finished
carpentry | |
| - | | |
| 7,057,179 | | |
| - | | |
| 7,057,179 | |
Total Revenues | |
$ | 2,934,705 | | |
$ | 10,047,946 | | |
$ | 1,489,710 | | |
$ | 14,472,361 | |
| |
Three
Months Ended September 30, 2021 | |
| |
Retail
and
Appliances | | |
Construction | | |
Automotive
Supplies | | |
Total | |
Revenues | |
| | |
| | |
| | |
| |
Appliances | |
$ | 2,745,305 | | |
$ | - | | |
$ | - | | |
$ | 2,745,305 | |
Appliance accessories, parts,
and other | |
| 400,650 | | |
| - | | |
| - | | |
| 400,650 | |
Automotive horns | |
| | | |
| - | | |
| 1,694,928 | | |
| 1,694,928 | |
Automotive lighting | |
| - | | |
| - | | |
| 555,717 | | |
| 555,717 | |
Custom cabinets and countertops | |
| - | | |
| 1,338,428 | | |
| - | | |
| 1,338,428 | |
Finished
carpentry | |
| - | | |
| - | | |
| - | | |
| - | |
Total Revenues | |
$ | 3,145,955 | | |
$ | 1,338,428 | | |
$ | 2,250,645 | | |
$ | 6,735,028 | |
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
| |
Nine
Months Ended September 30, 2022 | |
| |
Retail
and
Appliances | | |
Construction | | |
Automotive
Supplies | | |
Total | |
Revenues | |
| | |
| | |
| | |
| |
Appliances | |
$ | 7,206,386 | | |
$ | - | | |
$ | - | | |
$ | 7,206,386 | |
Appliance accessories, parts,
and other | |
| 1,116,114 | | |
| - | | |
| - | | |
| 1,116,114 | |
Automotive horns | |
| - | | |
| - | | |
| 3,766,415 | | |
| 3,766,415 | |
Automotive lighting | |
| - | | |
| - | | |
| 1,348,340 | | |
| 1,348,340 | |
Custom cabinets and countertops | |
| - | | |
| 10,288,711 | | |
| - | | |
| 10,288,711 | |
Finished
carpentry | |
| - | | |
| 15,711,516 | | |
| - | | |
| 15,711,516 | |
Total Revenues | |
$ | 8,322,500 | | |
$ | 26,000,227 | | |
$ | 5,114,755 | | |
$ | 39,437,482 | |
| |
Nine
Months Ended September 30, 2021 | |
| |
Retail
and
Appliances | | |
Construction | | |
Automotive
Supplies | | |
Total | |
Revenues | |
| | |
| | |
| | |
| |
Appliances | |
$ | 8,587,939 | | |
$ | - | | |
$ | - | | |
$ | 8,587,939 | |
Appliance accessories, parts,
and other | |
| 1,175,000 | | |
| - | | |
| - | | |
| 1,175,000 | |
Automotive horns | |
| - | | |
| - | | |
| 3,326,835 | | |
| 3,326,835 | |
Automotive lighting | |
| - | | |
| - | | |
| 904,178 | | |
| 904,178 | |
Custom cabinets and countertops | |
| - | | |
| 4,169,305 | | |
| - | | |
| 4,169,305 | |
Finished
carpentry | |
| - | | |
| - | | |
| - | | |
| - | |
Total Revenues | |
$ | 9,762,939 | | |
$ | 4,169,305 | | |
$ | 4,231,013 | | |
$ | 18,163,257 | |
Segment information
for the three and nine months ended September 30, 2022 and 2021 is as follows:
| |
Three
Months Ended September 30, 2022 | |
| |
Retail
and
Appliances | | |
Construction | | |
Automotive
Supplies | | |
Corporate
Services | | |
Total | |
Revenues | |
$ | 2,934,705 | | |
$ | 10,047,946 | | |
$ | 1,489,710 | | |
$ | - | | |
$ | 14,472,361 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 2,183,972 | | |
| 6,544,843 | | |
| 867,572 | | |
| - | | |
| 9,596,387 | |
Personnel | |
| 202,443 | | |
| 2,406,195 | | |
| 277,398 | | |
| 296,250 | | |
| 3,182,286 | |
Depreciation and amortization | |
| 48,019 | | |
| 416,525 | | |
| 51,870 | | |
| - | | |
| 516,414 | |
General
and administrative | |
| 494,719 | | |
| 1,245,668 | | |
| 384,870 | | |
| 563,620 | | |
| 2,688,877 | |
Total
Operating Expenses | |
| 2,929,153 | | |
| 10,613,231 | | |
| 1,581,710 | | |
| 859,870 | | |
| 15,983,964 | |
Income (loss) from Operations | |
$ | 5,552 | | |
$ | (565,285 | ) | |
$ | (92,000 | ) | |
$ | (859,870 | ) | |
$ | (1,511,603 | ) |
| |
Three
Months Ended September 30, 2021 | |
| |
Retail
and
Appliances | | |
Construction | | |
Automotive
Supplies | | |
Corporate
Services | | |
Total | |
Revenues | |
$ | 3,145,955 | | |
$ | 1,338,428 | | |
$ | 2,250,645 | | |
$ | - | | |
$ | 6,735,028 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 2,300,663 | | |
| 805,513 | | |
| 1,466,947 | | |
| - | | |
| 4,573,123 | |
Personnel | |
| 196,592 | | |
| 273,366 | | |
| 407,034 | | |
| - | | |
| 876,992 | |
Depreciation and amortization | |
| 47,104 | | |
| 83,112 | | |
| 169,260 | | |
| - | | |
| 299,476 | |
General
and administrative | |
| 439,414 | | |
| 256,402 | | |
| 673,484 | | |
| 475,679 | | |
| 1,844,979 | |
Total
Operating Expenses | |
| 2,983,774 | | |
| 1,418,393 | | |
| 2,716,724 | | |
| 475,679 | | |
| 7,594,570 | |
Income (Loss) from Operations | |
$ | 162,182 | | |
$ | (79,965 | ) | |
$ | (466,080 | ) | |
$ | (475,679 | ) | |
$ | (859,542 | ) |
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
| |
Nine
Months Ended September 30, 2022 | |
| |
Retail
and
Appliances | | |
Construction | | |
Automotive
Supplies | | |
Corporate
Services | | |
Total | |
Revenues | |
$ | 8,322,500 | | |
$ | 26,000,227 | | |
$ | 5,114,755 | | |
$ | - | | |
$ | 39,437,482 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 6,245,993 | | |
| 15,835,830 | | |
| 3,028,040 | | |
| - | | |
| 25,109,863 | |
Personnel | |
| 587,073 | | |
| 4,715,419 | | |
| 847,403 | | |
| 296,250 | | |
| 6,446,145 | |
Depreciation and amortization | |
| 175,835 | | |
| 1,195,314 | | |
| 155,610 | | |
| - | | |
| 1,526,759 | |
General
and administrative | |
| 1,480,465 | | |
| 4,006,636 | | |
| 1,188,618 | | |
| 775,360 | | |
| 7,451,079 | |
Total
Operating Expenses | |
| 8,489,366 | | |
| 25,753,199 | | |
| 5,219,671 | | |
| 1,071,610 | | |
| 40,533,846 | |
Income (Loss) from Operations | |
$ | (166,866 | ) | |
$ | 247,028 | | |
$ | (104,916 | ) | |
$ | (1,071,610 | ) | |
$ | (1,096,364 | ) |
| |
Nine
Months Ended September 30, 2021 | |
| |
Retail
and
Appliances | | |
Construction | | |
Automotive
Supplies | | |
Corporate
Services | | |
Total | |
Revenues | |
$ | 9,762,939 | | |
$ | 4,169,305 | | |
$ | 4,231,013 | | |
$ | - | | |
$ | 18,163,257 | |
Operating expenses | |
| | | |
| | | |
| | | |
| - | | |
| | |
Cost of sales | |
| 7,409,913 | | |
| 2,280,009 | | |
| 2,658,672 | | |
| - | | |
| 12,348,594 | |
Personnel | |
| 688,842 | | |
| 739,711 | | |
| 769,678 | | |
| - | | |
| 2,198,231 | |
Depreciation and amortization | |
| 135,782 | | |
| 242,613 | | |
| 169,260 | | |
| - | | |
| 547,655 | |
General
and administrative | |
| 1,270,655 | | |
| 705,674 | | |
| 1,570,070 | | |
| 973,105 | | |
| 4,519,504 | |
Total
Operating Expenses | |
| 9,505,192 | | |
| 3,968,007 | | |
| 5,167,680 | | |
| 973,105 | | |
| 19,613,984 | |
Income (Loss) from Operations | |
$ | 257,747 | | |
$ | 201,298 | | |
$ | (936,667 | ) | |
$ | (973,105 | ) | |
$ | (1,450,727 | ) |
NOTE
5—PROPERTY AND EQUIPMENT
Property
and equipment at September 30, 2022 and December 31, 2021 consisted of the following:
| |
September 30,
2022 | | |
December 31,
2021 | |
Equipment and machinery | |
$ | 1,401,103 | | |
$ | 808,592 | |
Office furniture and equipment | |
| 156,544 | | |
| 105,203 | |
Transportation equipment | |
| 911,426 | | |
| 864,121 | |
Leasehold improvements | |
| 169,143 | | |
| 112,356 | |
Total property and equipment | |
| 2,638,216 | | |
| 1,890,272 | |
Less: Accumulated depreciation | |
| (588,720 | ) | |
| (194,961 | ) |
Property and equipment,
net | |
$ | 2,049,496 | | |
$ | 1,695,311 | |
Depreciation
expense for the three and nine months ended September 30, 2022 was $151,722 and $432,683, respectively. Depreciation expense for the
three and nine months ended September 30, 2021 was $32,420 and $85,005, respectively.
NOTE
6—INTANGIBLE ASSETS
Intangible
assets at September 30, 2022 and December 31, 2021 consisted of the following:
| |
September 30,
2022 | | |
December 31,
2021 | |
Customer relationships | |
$ | 5,791,000 | | |
$ | 5,791,000 | |
Marketing-related | |
| 5,917,000 | | |
| 5,917,000 | |
Technology-related | |
| 623,000 | | |
| 623,000 | |
Total intangible assets | |
| 12,331,000 | | |
| 12,331,000 | |
Less: accumulated amortization | |
| (1,981,179 | ) | |
| (887,103 | ) |
Intangible assets, net | |
$ | 10,349,821 | | |
$ | 11,443,897 | |
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Amortization
expense for the three and nine months ended September 30, 2022 was $364,692 and $1,094,076, respectively. Amortization expense for the
three and nine months ended September 30, 2021 was $267,057 and $462,651, respectively.
Estimated
amortization expense for intangible assets for the next five years consists of the following as of September 30, 2022:
Year Ending
December 31, | |
Amount | |
2022 – remaining | |
$ | 364,704 | |
2023 | |
| 1,458,780 | |
2024 | |
| 1,458,750 | |
2025 | |
| 1,325,745 | |
2026 | |
| 1,157,523 | |
Thereafter | |
| 4,584,319 | |
Total | |
$ | 10,349,821 | |
NOTE
7—SELECTED ACCOUNT INFORMATION
Receivables
at September 30, 2022 and December 31, 2021 consisted of the following:
| |
September 30,
2022 | | |
December 31,
2021 | |
Trade accounts receivable | |
$ | 5,110,116 | | |
$ | 2,691,702 | |
Vendor rebates receivable | |
| 139,322 | | |
| 126,118 | |
Credit card payments in process of settlement | |
| - | | |
| 116,187 | |
Retainage | |
| 445,580 | | |
| 803,989 | |
Total receivables | |
| 5,695,018 | | |
| 3,737,996 | |
Allowance for doubtful
accounts | |
| (359,000 | ) | |
| (359,000 | ) |
Total receivables, net | |
$ | 5,336,018 | | |
$ | 3,378,996 | |
Inventories
at September 30, 2022 and December 31, 2021 consisted of the following:
| |
September 30,
2022 | | |
December 31,
2021 | |
Appliances | |
$ | 2,146,254 | | |
$ | 2,206,336 | |
Automotive | |
| 1,248,947 | | |
| 2,064,834 | |
Construction | |
| 1,749,250 | | |
| 1,543,980 | |
Total inventories | |
| 5,144,451 | | |
| 5,815,150 | |
Less reserve for obsolescence | |
| (387,848 | ) | |
| (387,848 | ) |
Total inventories, net | |
$ | 4,756,603 | | |
$ | 5,427,302 | |
Inventory
balances are composed of finished goods. Raw materials and work in process inventory are immaterial to the condensed consolidated financial
statements.
Accounts
payable and accrued expenses at September 30, 2022 and December 31, 2021 consisted of the following:
| |
September 30,
2022 | | |
December 31,
2021 | |
Trade accounts payable | |
$ | 2,705,828 | | |
$ | 3,117,825 | |
Credit cards payable | |
| 130,013 | | |
| 52,300 | |
Accrued payroll liabilities | |
| 630,846 | | |
| 263,590 | |
Accrued interest | |
| 1,045,917 | | |
| 711,258 | |
Accrued dividends | |
| 644,139 | | |
| 242,160 | |
Other accrued liabilities | |
| 282,152 | | |
| 431,539 | |
Total accounts payable
and accrued expenses | |
$ | 5,438,895 | | |
$ | 4,818,672 | |
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
NOTE
8—LEASES
Operating
Leases
In
April 2022, the Company entered into a lease amendment to renew its office and warehouse space in the automotive supplies segment, located
in Deer Park, New York. The lease renewal will commence on August 1, 2022 and shall expire on July 31, 2025. Under the terms of the lease
renewal, the Company will lease the premises at the monthly rate of $7,518 for the first year, with scheduled annual increases. The lease
agreement contains customary events of default, representations, warranties, and covenants. The remeasurement of the ROU asset and liability
associated with this operating lease was $254,713.
The
following was included in our condensed consolidated balance sheet at September 30, 2022 and December 31, 2021:
| |
September 30,
2022 | | |
December 31,
2021 | |
Operating lease right-of-use assets | |
$ | 3,037,676 | | |
$ | 3,192,604 | |
Lease liabilities, current portion | |
| 707,419 | | |
| 613,696 | |
Lease liabilities, long-term | |
| 2,419,449 | | |
| 2,607,862 | |
Total operating lease
liabilities | |
$ | 3,126,868 | | |
$ | 3,221,558 | |
Weighted-average remaining lease term (months) | |
| 49 | | |
| 59 | |
Weighted average discount rate | |
| 4.37 | % | |
| 4.29 | % |
Rent
expense for the three and nine months ended September 30, 2022 was $278,823 and $804,544, respectively.
As
of September 30, 2022, maturities of operating lease liabilities were as follows:
Year Ending
December 31, | |
Amount | |
2022 – remaining | |
$ | 239,421 | |
2023 | |
| 830,221 | |
2024 | |
| 848,210 | |
2025 | |
| 803,685 | |
2026 | |
| 514,079 | |
Thereafter | |
| 194,495 | |
Total | |
| 3,430,111 | |
Less: imputed interest | |
| (303,243 | ) |
Total operating lease
liabilities | |
$ | 3,126,868 | |
Finance
Leases
On
March 28, 2022, the Company entered an equipment financing lease to purchase machinery and equipment totaling $316,798, maturing in January
2028.
On
April 11, 2022, the Company entered in an equipment financing lease to purchase machinery and equipment totaling $11,706, maturing in
June 2027.
On
July 13, 2022, the Company entered in an equipment financing lease to purchase machinery and equipment totaling $240,260, maturing in
June 2028.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
As
of September 30, 2022, maturities of finance lease liabilities were as follows:
Year Ending
December 31, | |
Amount | |
2022 – remaining | |
$ | 58,482 | |
2023 | |
| 234,556 | |
2024 | |
| 218,099 | |
2025 | |
| 211,332 | |
2026 | |
| 211,332 | |
Thereafter | |
| 238,875 | |
Total payments | |
| 1,172,676 | |
Less: amount representing
interest | |
| (158,003 | ) |
Present value of minimum
finance lease payments | |
$ | 1,014,673 | |
As
of September 30, 2022, the weighted-average remaining lease term for all finance leases is 5.20 years.
NOTE
9—ACQUISITIONS
On
March 30, 2021, the Company acquired 100% of the outstanding capital stock of Wolo Mfg. Corp and Wolo Industrial Horn & Signal, Inc.
(“Wolo”) for an aggregate purchase price of $8,344,056. For the three and nine months ended September 30, 2022, Wolo contributed
revenue of $1,489,710 and $5,114,755, respectively, and net loss from continuing operations of $393,493 and $1,034,427, respectively,
which are included in our condensed consolidated statements of operations for the three and nine months ended September 30, 2022.
On
October 8, 2021, the Company acquired 100% of the outstanding capital stock of High Mountain Door & Trim, Inc. (“High Mountain”)
and Sierra Homes, LLC (“Sierra Homes”) for an aggregate purchase price of $15,441,173. For the three and nine months ended
September 30, 2022, High Mountain and Sierra Homes contributed combined revenue of $8,299,589 and $21,049,530, respectively, and combined
net loss from continuing operations of $2,846,780 and $3,633,437, respectively, which are included in our condensed consolidated statements
of operations for the three and nine months ended September 30, 2022.
Pro
Forma Information
The
following unaudited pro forma results presented below include the effects of the Wolo, High Mountain and Sierra Homes acquisitions as
if they had been consummated as of January 1, 2021, with adjustments to give effect to pro forma events that are directly attributable
to the acquisitions.
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues | |
$ | 14,472,361 | | |
$ | 15,328,672 | | |
$ | 39,437,482 | | |
$ | 39,091,277 | |
Net income (loss) | |
| (4,472,622 | ) | |
| 100,042 | | |
| (5,547,498 | ) | |
| 3,956,288 | |
Net income (loss) attributable to common shareholders’ | |
| (13,440,062 | ) | |
| (149,043 | ) | |
| (14,801,040 | ) | |
| 1,614,167 | |
Earnings (loss) per share attributable to common
shareholders’: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (4.51 | ) | |
$ | (0.12 | ) | |
$ | (8.08 | ) | |
$ | 1.37 | |
Diluted | |
$ | (4.51 | ) | |
$ | (0.12 | ) | |
$ | (8.08 | ) | |
$ | 0.78 | |
These
unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results
of operations would have been if the acquisitions had occurred at the beginning of the period presented, nor are they indicative of future
results of operations.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
NOTE 10—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 three and nine months ended September 30, 2022 and
$0 for the three and nine months ended September 30, 2021.
Offsetting
Management Services Agreements
The
Company’s subsidiary 1847 Asien Inc. (“1847 Asien”) entered into an offsetting management services agreement with the
Manager on May 28, 2020, the Company’s subsidiary 1847 Cabinet Inc. (“1847 Cabinet”) entered into an offsetting management
services agreement with the Manager on August 21, 2020 (which was amended and restated on October 8, 2021) and the Company’s subsidiary
1847 Wolo Inc. (“1847 Wolo”) entered into an offsetting management services agreement with the Manager on March 30, 2021.
Pursuant to the offsetting management services agreements, 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), which was increased to $125,000 or 2% of adjusted net assets on October
8, 2021, 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 if the aggregate
amount of management fees paid or to be paid by such entities, together with all other management fees paid or to be paid to the Manager
under other offsetting management services agreements, exceeds, or is expected to exceed, 9.5% of our gross income in any fiscal year
or the Parent Management Fee in any fiscal quarter, then the management fee to be paid by such entities shall be reduced, on a pro rata
basis determined by reference to the other management fees to be paid to the Manager under other offsetting management services agreements.
1847
Asien expensed management fees of $75,000 and $225,000 for the three and nine months ended September 30, 2022, respectively, and $75,000
and $225,000 for the three and nine months ended September 30, 2021, respectively.
1847
Cabinet expensed management fees of $125,000 and $375,000 for the three and nine months ended September 30, 2022, respectively, and $75,000
and $225,000 for the three and nine months ended September 30, 2021, respectively.
1847
Wolo expensed management fees of $75,000 and $225,000 for the three and nine months ended September 30, 2022, respectively, and $75,000
and $150,000 for the three and nine months ended September 30, 2021, respectively.
On
a consolidated basis, the Company expensed total management fees of $275,000 and $825,000 for the three and nine months ended September
30, 2022, respectively, and $225,000 and $600,000 for the three and nine months ended September 30, 2021, 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, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, the Manager has funded the Company $74,928 in related party advances. These advances are
unsecured, bear no interest, and do not have formal repayment terms or arrangements.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Building
Lease
On
September 1, 2020, Kyle’s entered into an industrial lease agreement with Stephen Mallatt, Jr. and Rita Mallatt, 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.
The
total rent expense under this related party leases was $21,777 and $65,330 for the three and nine months ended September 30, 2022.
NOTE 11—MEZZANINE
EQUITY
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. Following is a description of the rights
of the series A senior convertible preferred shares.
Ranking.
The series A senior convertible preferred shares rank, with respect to the payment of dividends and the distribution of assets upon
liquidation, (i) senior to all common shares, allocation shares, and each other class or series that is not expressly made senior to
or on parity with the series A senior convertible preferred shares; (ii) on parity with the series B senior convertible preferred shares
and each other class or series that is not expressly subordinated or made senior to the series A senior convertible preferred shares;
and (iii) junior to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company and
each other class or series that is expressly made senior to the series A senior convertible preferred shares.
Dividend
Rights. Holders of series A senior convertible preferred shares are entitled to dividends at a rate per annum of 14.0% of the stated
value ($2.00 per share, subject to adjustment). 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 for the common shares on the Company’s principal trading market (the “VWAP”) 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 Rule
144 rulemaking referred to below is effective on the payment date, the dividends payable in common shares shall be calculated based upon
the fixed price of $1.57; provided further, that the Company may only elect to pay dividends in common shares based upon such fixed price
if the VWAP for the five (5) trading days immediately prior to the applicable dividend payment date is $1.57 or higher.
Liquidation
Rights. Subject to the rights of 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, including the common shares
and allocation shares, 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, the assets, 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, 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.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
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 Capital LLC so long as it 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 creation or issuance by the Company or by its subsidiaries
Kyle’s Custom Wood Shop, Inc. (“Kyle’s”) and Wolo Mfg. Corp. and Wolo Industrial Horn & Signal, Inc. (together,
“Wolo”) 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 will
be used 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 ($2.00 per share), plus the value of the accrued, but unpaid, dividends thereon, by a conversion price of
$7.00 per share (subject to adjustment); 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. 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
Rights. 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. 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.
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 automatically increase by five percent (5.0%) per annum and the conversion price shall automatically adjust to the lower of the (i) initial conversion price and (ii) the price equal to the lowest VWAP of the ten (10) trading days immediately preceding such date. |
| ● | On
the first day of the 24th month following the
issuance date of any series A senior convertible preferred shares, the stated dividend
rate shall automatically increase by an additional five percent (5.0%) per annum, the stated
value shall automatically increase by ten percent (10%) and the conversion price shall automatically
adjust to the lower of the (i) initial conversion price and (ii) the price equal to the lowest
VWAP of the ten (10) trading days immediately preceding such date. |
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
| ● | On
the first day of the 36th month following the
issuance date of any series A senior convertible preferred shares, the stated dividend
rate shall automatically increase by an additional five percent (5.0%) per annum, the stated
value shall automatically
increase by ten percent (10%) and the conversion price shall automatically adjust to the
lower of the (i) initial conversion price and (ii) the price equal to the lowest VWAP of
the ten (10) trading days immediately preceding the third adjustment date. |
Notwithstanding
the foregoing, the conversion price for purposes of the adjustments above shall not be adjusted to a number that is below $0.03. 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 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 such 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 initial 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.
As
of September 30, 2022 and December 31, 2021, the Company had 1,593,940 and 1,818,182 series A senior convertible preferred shares issued
and outstanding, respectively.
During
the three months ended September 30, 2022, the Company accrued dividends attributable to the series A senior convertible preferred shares
in the amount of $156,738 and paid prior period accrued dividends of $174,701. During the nine months ended September 30, 2022, the Company
accrued dividends attributable to the series A senior convertible preferred shares in the amount of $437,491 and paid prior period accrued
dividends of $462,925.
On
February 16, 2022, 133,333 shares of series A senior convertible preferred shares were converted into 38,096 common shares.
On
August 12, 2022, the Company redeemed 90,909 series A senior convertible preferred shares for a total redemption price of $209,091.
Series
B Senior Convertible Preferred Shares
On
February 17, 2022, the Company executed a share designation to designate 583,334 of its shares as series B senior convertible preferred
shares. Following is a description of the rights of the series B senior convertible preferred shares.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Ranking.
The series B senior convertible preferred shares rank, with respect to the payment of dividends and the distribution of assets upon
liquidation, (i) senior to all common shares, allocation shares, and each other class or series that is not expressly made senior to
or on parity with the series B senior convertible preferred shares; (ii) on parity with the series A senior convertible preferred shares
and each other class or series that is not expressly subordinated or made senior to the series A senior convertible preferred shares;
and (iii) junior to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company and
each other class or series that is expressly made senior to the series B senior convertible preferred shares.
Dividend
Rights. Holders of series B senior convertible preferred shares are entitled to dividends at a rate per annum of 14.0% of the stated
value ($3.00 per share, subject to adjustment). 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 VWAP 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 regarding the Rule 144 holding period referred to below is effective on the payment date, the dividends payable in common
shares shall be calculated based upon the fixed price of $2.70; 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 $2.70 or higher.
Liquidation
Rights. Subject to the rights of 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
B senior convertible preferred shares as to the distribution of assets on any liquidation of the Company, including the common shares
and allocation shares, each holder of outstanding series B 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, the assets, or proceeds
thereof, distributable among the holders of the series B senior convertible preferred shares shall be insufficient to pay in full the
preferential amount payable to the holders of the series B 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, then such assets, or the proceeds
thereof, shall be distributed among the holders of series B senior convertible preferred shares and any such other parity securities
ratably in accordance with the respective amounts that would be payable on such series B senior convertible preferred shares and any
such other parity securities if all amounts payable thereon were paid in full.
Voting
Rights. The series B senior convertible preferred shares do not have any voting rights; provided that, so long as any series B senior
convertible preferred shares are outstanding, the affirmative vote of holders of a majority of series B senior convertible preferred
shares, voting as a separate class, shall be necessary for approving, effecting or validating (i) any amendment, alteration or repeal
of any of the provisions of the share designation or (ii) the Company’s creation or issuance of any parity securities or any senior
securities. Notwithstanding the foregoing, such vote of the holders shall not be required in connection with the issuance of parity securities
or senior securities if, and so long as, the proceeds resulting from the issuance of such securities are used to redeem in full the outstanding
series B senior convertible preferred shares.
Conversion
Rights. Each series B 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 ($3.00 per share), plus the value of the accrued, but unpaid, dividends thereon, by the conversion price
of $12.00 per share (subject to adjustments); provided that in no event shall the holder of any series B senior convertible preferred
shares be entitled to convert any number of series B 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 B 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. This limitation may
be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, upon not less than sixty-one (61) days’ prior notice
to the Company.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Redemption
Rights. The Company may redeem in whole (but not in part) the series B 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 dividends and any other amounts due pursuant to the terms
of the series B 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 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 of the first series B senior convertible preferred share, the stated dividend
rate shall automatically increase by five percent (5.0%) per annum and the conversion price
shall automatically adjust to the lower of the (i) initial conversion price and (ii) the
price equal to the lowest VWAP of the ten (10) trading days immediately preceding such date. |
| ● | On
the first day of the 24th month following the issuance of the first series B senior
convertible preferred share, the stated dividend rate shall automatically increase by an
additional five percent (5.0%) per annum, the stated value shall automatically increase by
ten percent (10%) and the conversion price shall automatically adjust to the lower of the
(i) initial conversion price and (ii) the price equal to the lowest VWAP of the ten (10)
trading days immediately preceding such date. |
| ● | On
the first day of the 36th month following the issuance of the first series B senior
convertible preferred share, the stated dividend rate shall automatically increase by an
additional five percent (5.0%) per annum, the stated value shall automatically increase by
ten percent (10%) and the conversion price shall automatically adjust to the lower of the
(i) initial conversion price and (ii) the price equal to the lowest VWAP of the ten (10)
trading days immediately preceding such date. |
Notwithstanding
the foregoing, the conversion price for purposes of the adjustments above shall not be adjusted to a number that is below $0.03 per share
(subject to adjustment for splits or dividends of the common shares). 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 B 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.
From
February 24, 2022 to March 24, 2022, the Company sold an aggregate of 426,999 units, at a price of $3.00 per unit, for aggregate gross
proceeds of $1,281,000. From April 20, 2022 to May 19, 2022, the Company sold an aggregate of 54,567 units to our Chief Executive
Officer, Ellery W. Roberts, for aggregate gross proceeds of $163,700. The Company had total issuance costs relating to these offerings
of approximately $15,000, resulting in net proceeds of $1,429,700.
Each
unit consists of one (1) series B senior convertible preferred share and a three-year warrant to purchase one (1) common share at an
exercise price of $3.00 per common share (subject to adjustment), which may be exercised on a cashless basis under certain circumstances.
The embedded conversion options of the series B senior convertible preferred shares and warrants were clearly and closely related to
the equity host and did not require bifurcation. The $1,429,700 of net proceeds were allocated on a relative fair value basis of $1,257,650
to the series B preferred shares and $172,050 to the warrants. The series B preferred shares fair value was derived using an Option Pricing
Method and the warrants fair value was derived using a Monte Carlo Simulation Model.
As
of September 30, 2022 and December 31, 2021, the Company had 464,899 and 0 series B senior convertible preferred shares issued and outstanding,
respectively.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
During
the three months ended September 30, 2022, the Company accrued dividends attributable to the series B senior convertible preferred shares
in the amount of $50,309 and paid prior period accrued dividends of $48,197. During the nine months ended September 30, 2022, the Company
accrued dividends attributable to the series B senior convertible preferred shares in the amount of $113,052 and paid prior period accrued
dividends of $77,548.
On
August 26, 2022, the Company redeemed 16,667 series B senior convertible preferred shares for a total redemption price of $57,501.
Mezzanine
Equity Classification
We
applied the guidance in ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815, “Derivatives
and Hedging” (“ASC 815”), in order to determine the appropriate classification for both the series A senior convertible
preferred shares and the series B senior convertible preferred shares.
ASC
480 requires equity instruments to be evaluated on an ongoing basis for mezzanine equity (temporary equity) vs permanent equity classification.
As a result of the maximum number of common shares that may be issuable (upon conversion of the preferred securities) exceeded the number
of authorized but unissued common shares available, temporary equity classification is required. As of December 31, 2021, there were
1,818,182 series A senior convertible preferred shares presented in mezzanine equity.
As a result of the 1-for-4 reverse split of our outstanding common shares
(see Note 1 for additional information), the maximum number of common shares that may be issuable (upon conversion of the preferred securities)
no longer exceeded the number of unissued common shares available, resulting in the reclassification of 1,684,849 series A senior convertible
preferred shares and 481,566 series B senior convertible preferred shares from mezzanine equity to permanent equity.
NOTE 12—SHAREHOLDERS’
DEFICIT
Reverse
Stock Split
The
Company’s board of directors approved a 1-for-4 reverse stock split of its issued, outstanding common shares, which became effective
August 2, 2022. See Note 1 for additional information.
Common
Shares
As
of September 30, 2022, the Company was authorized to issue 500,000,000 common shares. As of September 30, 2022 and December 31, 2021,
the Company had 4,079,137 and 1,210,918 common shares issued and outstanding, respectively.
On
February 16, 2022, the Company issued 38,096 common shares upon the conversion of 133,333 series A senior convertible preferred shares.
From
July 12, 2022 to September 15, 2022, the Company issued 126,669 common shares upon cashless exercises of a warrants.
On
August 2, 2022, the Company entered into an underwriting agreement with Craft Capital Management LLC and R.F. Lafferty & Co. Inc.,
as representatives of the underwriters named on Schedule 1 thereto, relating to the Company’s public offering of common shares.
Under the underwriting agreement, the Company agreed to sell 1,428,572 common shares to the underwriters, at a gross purchase price per
share of $4.20 per share, pursuant to the Company’s registration statement on Form S-1 (File No. 333-259011) under the Securities
Act of 1933, as amended. On August 5, 2022, the closing of the public offering was completed and the Company sold 1,428,572 common shares
for total gross proceeds of $6 million. After deducting underwriting commissions and expenses, the Company received net proceeds of approximately
$5.15 million.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
On
August 2, 2022, the Company issued an aggregate of 800,000 common shares upon the partial extinguishment of convertible promissory
notes. On October 8, 2021, 1847 Cabinet issued 6% subordinated convertible promissory notes in the aggregate principal amount of $5,880,345
to Steven J. Parkey and Jose D. Garcia-Rendon. On July 26, 2022, the Company and 1847 Cabinet entered into a conversion agreement with
Steven J. Parkey and Jose D. Garcia-Rendon, pursuant to which they agreed to convert an aggregate of $3,360,000 of the convertible notes
into an aggregate of 800,000 common shares of the Company at a conversion price of $4.20 per share. As a result, the Company recognized
a loss on extinguishment of debt of $1,280,000.
On
August 2, 2022, the Company issued 189,815 common shares upon the partial extinguishment of a contingent note payable. On September
30, 2020, 1847 Cabinet Inc. issued an 8% vesting promissory note in the principal amount of up to $1,260,000 to Stephen Mallatt, Jr.
and Rita Mallatt. On July 26, 2022, the Company and 1847 Cabinet entered into a conversion agreement with Stephen Mallatt, Jr. and Rita
Mallatt, pursuant to which they agreed to convert $797,221 of the vesting note into 189,815 common shares of the Company at a conversion
price of $4.20 per share. As a result, the Company recognized a loss on extinguishment of debt of $303,706.
On
August 2, 2022, the Company issued 285,067 common shares to Bevilacqua PLLC, the Company’s outside securities counsel, upon
the settlement of accounts payable. On July 26, 2022, the Company also entered into a conversion agreement with Bevilacqua PLLC, pursuant
to which it agreed to convert $1,197,280 of the accounts payable owed to it into 285,067 common shares of the Company at a conversion
price of $4.20 per share. As a result, the Company recognized a loss on extinguishment of debt of $456,109.
On
March 23, 2022, the Company declared a common share dividend of $0.05 per share, or an aggregate of $249,762, to shareholders of record
as of March 31, 2022. This dividend was paid on April 15, 2022.
On
July 29, 2022, the Company declared a common share dividend of $0.13125 per share, or an aggregate of $337,841, to shareholders of record
as of August 4, 2022. This dividend was paid on August 19, 2022.
On
August 23, 2022, the Company declared a common share dividend of $0.13125 per share, or an aggregate of $505,751 to shareholders of record
as of September 30, 2022. This dividend was paid on October 17, 2022.
Warrants
As
described in Note 11, the Company issued units during the nine months ended September 30, 2022, with each unit consisting of one (1)
series B senior convertible preferred share and a three-year warrant to purchase one (1) common share at an exercise price of $12.00
per common share (subject to adjustment), which such exercise price was adjusted to $4.20 following the adjustments described below.
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 51.81%; (iii) weighted average risk-free interest rate of 0.31%; (iv) expected life of three years; (v) estimated fair value of the
common shares of $7.76 per share; and (vi) various probability assumptions related to redemption, calls and price resets. The fair value
of the warrants was $428,034, or $0.89 per warrant, resulting in the amount allocated to the warrants, based on their relative fair of
$172,050, which was recorded as additional paid-in capital.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
The
warrants allow the holder to purchase one (1) common share at an exercise price of $12.00 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.
The Company may force the exercise of the warrants at any time after the one year anniversary of the date of the warrants, if (i) the
Company is listed on a national securities exchange or the over-the-counter market, (ii) the underlying common shares are registered
or the holder of the warrant otherwise has the ability to trade the underlying common shares without restriction, (iii) the 30-day volume-weighted
daily average price of the common shares exceeds 200% of the exercise price, as adjusted, and (iv) the average daily trading volume is
at least 100,000 common shares during such 30-day period. The Company may redeem the warrants held by any holder in whole (but not in
part) by paying in cash to such holder as follows: (i) $0.50 per share then underlying the warrant if within the first twelve (12) months
of issuance; (ii) $1.00 per share then underlying the warrant if after the first twelve (12) months, but before twenty-four (24) months
of issuance; and (iii) $1.50 per share then underlying the warrant if after twenty-four months, but before thirty-six (36) months.
On
July 8, 2022, the Company entered into a securities purchase agreement with Mast Hill Fund, L.P., pursuant to which the Company issued
to it a promissory note in the principal amount of $600,000, and a five-year warrant for the purchase of 100,000 common shares at an
exercise price of $6.00 per share (subject to adjustment), which such exercise price was adjusted to $4.20 following the adjustments
described below, which may be exercised on a cashless basis if the market price of the Company’s common shares is greater than
the exercise price, for total net proceeds of $499,600. Additionally, the Company issued a three-year warrant to J.H. Darbie & Co
(the broker) for the purchase of 3,600 common shares at an exercise price of $7.50 (subject to adjustment), which such exercise price
was adjusted to $4.20 following the adjustments described below, which may be exercised on a cashless basis if the market price of the
Company’s common shares is greater than the exercise price. Accordingly, a portion of the proceeds were allocated to the warrants
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 49.11%; (iii) weighted average risk-free interest rate of 3.13%;
(iv) expected life of five years; (v) estimated fair value of the common shares of $7.23 per share; and (vi) various probability assumptions
related to down round price adjustments. The fair value of the warrants was $2,405,306, or $6.01 per warrant, resulting in the amount
allocated to the warrants, based on their relative fair of $402,650, which was recorded as additional paid-in capital. On August 10,
2022, the promissory note was repaid in full.
As
a result of the issuance of the note to Mast Hill Fund, L.P. on July 8, 2022, the exercise price of certain of the Company’s outstanding
warrants was adjusted to $5.20 pursuant to certain antidilution provisions of such warrants (down round feature). In addition, certain
of the Company’s outstanding warrants include an “full ratchet” feature, whereby the
exercise price was reset to $5.20 and the number of shares underlying the warrants was increased in the same proportion as the exercise
price decrease. As a result, the Company recognized a deemed dividend of approximately $6.4 million, which was calculated using
a Black-Scholes pricing model.
From
July 12, 2022 to September 15, 2022, warrants for the purchase of 209,635 common shares were exercised on a cashless basis resulting
in the issuance of 126,669 common shares.
On
August 5, 2022, the Company issued a common share purchase warrant to each of Craft Capital Management LLC and R.F. Lafferty & Co.
Inc., the representatives of the underwriters for the public offering described above, for the purchase of 35,715 common shares at an
exercise price of $5.25, subject to adjustments. The warrants will be exercisable at any time and from time to time, in whole or in part,
during the period commencing on February 5, 2023 and ending on August 2, 2027 and may be exercised on a cashless basis under certain
circumstances.
As
a result of the public offering, the exercise price of certain of the Company’s outstanding warrants was adjusted to $4.20 pursuant
to certain antidilution provisions of such warrants (down round feature). In addition, certain of the Company’s outstanding warrants
include an “full ratchet” feature, whereby the exercise price was reset to $4.20 and
the number of shares underlying the warrants was increased in the same proportion as the exercise price decrease. As a result,
the Company recognized a deemed dividend of approximately $2.6 million, which was calculated using a Black-Scholes pricing model.
1847
HOLDINGS LLC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Below
is a table summarizing the changes in warrants outstanding during the nine months ended September 30, 2022:
| |
Warrants | | |
Weighted-
Average
Exercise
Price | |
Outstanding at December 31, 2021 | |
| 1,300,122 | | |
$ | 9.52 | |
Granted(1) | |
| 1,978,432 | | |
| 5.25 | |
Exercised | |
| (209,635 | ) | |
| (5.58 | ) |
Outstanding at September 30, 2022 | |
| 3,068,919 | | |
$ | 5.10 | |
Exercisable at September 30, 2022 | |
| 2,997,489 | | |
$ | 5.10 | |
| (1) | Includes the issuance of warrants for the purchase of 295,427 common shares and an increase of 1,683,005 common shares underlying warrants pursuant to the adjustments described above. |
As
of September 30, 2022, the outstanding warrants have a weighted average remaining contractual life of 1.68 years and a total intrinsic
value of $98,125.
NOTE 13—EARNINGS
(LOSS) PER SHARE
The
computation of weighted average shares outstanding and the basic and diluted loss per common share attributable to common shareholders
for the three and nine months ended September 30, 2022 consisted of the following:
| |
Three Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2022 | |
Net loss per common share attributable to common shareholders’ | |
| (13,440,062 | ) | |
$ | (14,801,040 | ) |
Weighted average common shares outstanding | |
| 2,979,949 | | |
| 1,832,076 | |
Basic and diluted loss per share | |
$ | (4.51 | ) | |
$ | (8.08 | ) |
For
the three and nine months ended September 30, 2022, there were 6,462,938 potential common share equivalents from warrants, convertible
debt, and series A and B convertible preferred shares excluded from the diluted earnings per share calculations as their effect is anti-dilutive.
For
the three and nine months ended September 30, 2021, there were 547,459 potential common share equivalents from warrants excluded from
the diluted earnings per share calculations as their effect is anti-dilutive.
NOTE 14—SUBSEQUENT
EVENTS
On
October 20, 2022, 1847 Asien and Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T
Dated May 1, 1992 entered into a letter agreement to amend the terms of that certain 6% amortizing promissory note in the aggregate principal
amount of $1,037,500. Pursuant to the letter agreement, the parties agreed to extend the maturity date of this note to February 28, 2023
and revised the repayment terms so that the outstanding principal amount and all accrued interest thereon shall be payable monthly, beginning
on November 30, 2022, in accordance with the payment schedule set forth on Exhibit A to the letter agreement. As additional consideration
for entering into the letter agreement, 1847 Asien also agreed to pay the lender $87,707 as an amendment fee.