UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended:
or
For the transition period from ____________ to _____________
Commission File Number:
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 13, 2023, there were
1847 HOLDINGS LLC
Quarterly Report on Form 10-Q
Period Ended September 30, 2023
TABLE OF CONTENTS
| PART I FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 46 |
| Item 4. | Controls and Procedures | 47 |
| PART II OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 48 |
| Item 1A. | Risk Factors | 48 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 48 |
| Item 3. | Defaults Upon Senior Securities | 48 |
| Item 4. | Mine Safety Disclosures | 48 |
| Item 5. | Other Information | 48 |
| Item 6. | Exhibits | 48 |
i
PART I
FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS. |
1847 HOLDINGS LLC
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
1847 HOLDINGS LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investments | ||||||||
| Receivables, net | ||||||||
| Contract assets | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Long-term deposits | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Contract liabilities | ||||||||
| Customer deposits | ||||||||
| Due to related parties | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of finance lease liabilities | ||||||||
| Current portion of notes payable, net | ||||||||
| Current portion of convertible notes payable, net | ||||||||
| Related party note payable | ||||||||
| Derivative liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Finance lease liabilities, net of current portion | ||||||||
| Notes payable, net of current portion | ||||||||
| Convertible notes payable, net | ||||||||
| Revolving line of credit, net | ||||||||
| Deferred tax liability, net | ||||||||
| TOTAL LIABILITIES | ||||||||
| Shareholders’ Equity | ||||||||
| Series A senior convertible preferred shares, par value, | ||||||||
| Series B senior convertible preferred shares, par value, | ||||||||
| Allocation shares, | ||||||||
| Common shares, $ | ||||||||
| Distribution receivable | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL 1847 HOLDINGS SHAREHOLDERS’ EQUITY | ||||||||
| NON-CONTROLLING INTERESTS | ( | ) | ||||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
1847 HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Personnel | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on disposal of property and equipment | ||||||||||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Loss on change in fair value of warrant liability | ( | ) | ( | ) | ||||||||||||
| Gain on change in fair value of derivative liabilities | ||||||||||||||||
| Loss on write-down of contingent note payable | - | ( | ) | - | ( | ) | ||||||||||
| Gain on bargain purchase | ||||||||||||||||
| Total Other Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME TAX BENEFIT (EXPENSE) | ( | ) | ||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS ATTRIBUTABLE TO 1847 HOLDINGS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| PREFERRED SHARE DIVIDENDS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| DEEMED DIVIDENDS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
1847 HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
Three and Nine Months Ended September 30, 2023
| Series
A Senior Convertible Preferred Shares | Series
B Senior Convertible Preferred Shares | Allocation | Common Shares | Distribution | Additional Paid-In | Accumulated | Non- Controlling | Total Shareholders’ | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Shares | Amount | Receivable | Capital | Deficit | Interests | Equity | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||
| Issuance of common shares upon settlement of accrued series A preferred share dividends | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares and warrants in connection with a private debt offering | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon cashless exercise of warrants | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend from issuance of warrants to common shareholders | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend from down round provision in warrants | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Dividends - series A senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends - series B senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||
| Issuance of common shares upon settlement of accrued series A preferred share dividends | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon cashless exercise of warrants | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon exercise of warrants | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon conversion of series B senior convertible preferred shares | - | ( | ) | ( | ) | - | ||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend from down round provision in warrants | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Dividends - series A senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends - series B senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||
| Issuance of common shares and prefunded warrants in public offering | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Fair value of warrant liability recognized upon issuance of prefunded warrants | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon exercise of prefunded warrants | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Extinguishment of warrant liability upon exercise of prefunded warrants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants in connection with a private debt offering | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon conversion of series A senior convertible preferred shares | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon conversion of series B senior convertible preferred shares | - | ( | ) | ( | ) | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon cashless exercise of warrants | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon conversion of promissory notes | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon settlement of accrued series A preferred share dividends | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon settlement of accrued series B preferred share dividends | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend from down round provision in warrants | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Dividends - series A senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends - series B senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||
4
Three and Nine Months Ended September 30, 2022
| Series
A Senior Convertible Preferred Shares | Series
B Senior Convertible Preferred Shares | Allocation | Common Shares | Distribution | Additional Paid-In | Accumulated | Non- Controlling | Total
Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Shares | Amount | Receivable | Capital | Deficit | Interests | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | - | $ | - | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||
| Issuance of common shares upon conversion of series A senior convertible preferred shares | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of series B senior convertible preferred shares and warrants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends - common shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends - series A senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends - series B senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | - | $ | - | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||
| Issuance of series B convertible preferred shares and warrants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends - series A senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends - series B senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | - | $ | - | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||
| Issuance of warrants in connection with notes payable | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon cashless exercise of warrants | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon partial extinguishment of convertible notes payable | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon partial extinguishment of contingent note payable | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares upon settlement of debt | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares and warrants in connection with a public offering | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of preferred shares from mezzanine equity to permanent equity | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of series A senior convertible preferred shares | ( | ) | ( | ) | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Redemption of series B senior convertible preferred shares | - | ( | ) | ( | ) | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Deemed dividends – down round provision in warrants | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Dividends - common shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends - series A senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends - series B senior convertible preferred shares | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
1847 HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Gain on bargain purchase | ( | ) | ||||||
| Gain on disposal of property and equipment | ( | ) | ( | ) | ||||
| Loss on extinguishment of debt | ||||||||
| Loss on write-down of contingent note payable | ||||||||
| Loss on change in fair value of warrant liability | ||||||||
| Gain on change in fair value of derivative liabilities | ( | ) | ||||||
| Deferred tax asset (liability) | ( | ) | ( | ) | ||||
| Bad debt expense | ||||||||
| Inventory reserve | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discounts | ||||||||
| Amortization of right-of-use assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | ( | ) | ( | ) | ||||
| Contract assets | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Customer deposits | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash paid in acquisition, net of cash acquired | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of property and equipment | ||||||||
| Investments in certificates of deposit | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net proceeds from issuance of common shares and warrants in connection with private debt offerings | ||||||||
| Net proceeds from issuance of common shares and warrants in public offerings | ||||||||
| Net proceeds from issuance of series B senior convertible preferred shares | ||||||||
| Net proceeds from notes payable | ||||||||
| Net proceeds from revolving line of credit | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Repayments of notes payable and finance lease liabilities | ( | ) | ( | ) | ||||
| Redemption of series A senior convertible preferred shares | ( | ) | ||||||
| Redemption of series B senior convertible preferred shares | ( | ) | ||||||
| Accrued series A preferred share dividends paid | ( | ) | ||||||
| Accrued series B preferred share dividends paid | ( | ) | ( | ) | ||||
| Accrued common share dividends paid | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | ||||||||
| CASH AND CASH EQUIVALENTS | ||||||||
| Beginning of the period | ||||||||
| End of the period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Net assets acquired in the acquisition of ICU Eyewear | $ | $ | ||||||
| Deemed dividend from issuance of warrants to common shareholders | $ | $ | ||||||
| Deemed dividend from down round provision in warrants | $ | $ | ||||||
| Accrued dividends on series A preferred shares | $ | $ | ||||||
| Accrued dividends on series B preferred shares | $ | $ | ||||||
| Issuance of common shares upon settlement of accrued series A dividends | $ | $ | ||||||
| Issuance of common shares upon settlement of accrued series B dividends | $ | $ | ||||||
| Issuance of common shares upon conversion of series A preferred shares | $ | $ | ||||||
| Issuance of common shares upon conversion of series B preferred shares | $ | $ | ||||||
| Issuance of common shares upon cashless exercise of warrants | $ | $ | ||||||
| Debt discounts on notes payable | $ | $ | ||||||
| Fair value of derivative liabilities recognized upon issuance of notes payable | $ | $ | ||||||
| Fair value of warrant liability recognized upon issuance of prefunded warrants | $ | $ | ||||||
| Issuance of common shares upon exercise of prefunded warrants | $ | $ | ||||||
| Extinguishment of warrant liability upon exercise of prefunded warrants | $ | $ | ||||||
| Reclassification of notes payable to convertible notes payable upon default | $ | $ | ||||||
| Issuance of common shares upon conversion of convertible notes payable and accrued interest | $ | $ | ||||||
| Settlement of revolving line of credit and accrued interest through the issuance of a new revolving line of credit | $ | $ | ||||||
| Financed purchases of property and equipment | $ | $ | ||||||
| Operating lease right-of-use asset and liability initial measurement | $ | $ | ||||||
| Operating lease right-of-use asset and liability remeasurement | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(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 the information and footnotes required by GAAP for complete financial statements. The December 31, 2022 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, 2022 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on April 11, 2023. 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, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
Reverse Share Split
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.”
Warrant liability
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), and ASC 815-40, Contracts in Entity’s Own Equity (“ASC 815-40”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815-40, including whether the warrants are indexed to the Company’s own shares and whether the events where holders of the warrants could potentially require net cash settlement are within the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
Embedded Derivative Liabilities
The Company evaluates the embedded features in accordance with ASC 480, and ASC 815, Derivatives and Hedging Activities (“ASC 815”). Certain conversion options and redemption features are required to be bifurcated from their host instrument and accounted for as free-standing derivative financial instruments should certain criteria be met. The Company applies significant judgment to identify and evaluate complex terms and conditions of all of its financial instruments, including notes payable and warrants, to determine whether such instruments are derivatives or contain features that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract and the features of the derivatives. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the consolidated statement of operations each period.
Reclassifications
Certain reclassifications within operating expenses have been made to the 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.
NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). The Company has evaluated all recent accounting pronouncements and determined that the adoption of pronouncements applicable to the Company has not had or is not expected to have a material impact on the Company’s 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.
7
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
As of September 30, 2023, the Company had cash
and cash equivalents of $
Management plans to address the above as needed by, securing additional bank lines of credit and obtaining additional financing through debt or equity transactions. Management has implemented tight cost controls to conserve cash.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and to eventually attain profitable operations. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
NOTE 4—DISAGGREGATION OF REVENUES AND SEGMENT REPORTING
The Company has
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 Retail and Eyewear Segment provides a wide variety of eyewear products (non-prescription reading glasses, sunglasses, blue light blocking eyewear, sun readers and outdoor specialty sunglasses).
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.
| Three Months Ended September 30, 2023 | ||||||||||||||||||||
| Retail and Appliances | Retail and Eyewear | Construction | Automotive Supplies | Total | ||||||||||||||||
| Revenues | ||||||||||||||||||||
| Appliances | $ | $ | $ | $ | $ | |||||||||||||||
| Appliance accessories, parts, and other | ||||||||||||||||||||
| Eyewear | ||||||||||||||||||||
| Eyewear accessories, parts, and other | ||||||||||||||||||||
| Automotive horns | ||||||||||||||||||||
| Automotive lighting | ||||||||||||||||||||
| Custom cabinets and countertops | ||||||||||||||||||||
| Finished carpentry | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
8
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| Three Months Ended September 30, 2022 | ||||||||||||||||||||
| Retail and Appliances | Retail and Eyewear | Construction | Automotive Supplies | Total | ||||||||||||||||
| Revenues | ||||||||||||||||||||
| Appliances | $ | $ | $ | $ | $ | |||||||||||||||
| Appliance accessories, parts, and other | ||||||||||||||||||||
| Eyewear | ||||||||||||||||||||
| Eyewear accessories, parts, and other | ||||||||||||||||||||
| Automotive horns | ||||||||||||||||||||
| Automotive lighting | ||||||||||||||||||||
| Custom cabinets and countertops | ||||||||||||||||||||
| Finished carpentry | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||
| Retail and Appliances | Retail and Eyewear | Construction | Automotive Supplies | Total | ||||||||||||||||
| Revenues | ||||||||||||||||||||
| Appliances | $ | $ | $ | $ | $ | |||||||||||||||
| Appliance accessories, parts, and other | ||||||||||||||||||||
| Eyewear | ||||||||||||||||||||
| Eyewear accessories, parts, and other | ||||||||||||||||||||
| Automotive horns | ||||||||||||||||||||
| Automotive lighting | ||||||||||||||||||||
| Custom cabinets and countertops | ||||||||||||||||||||
| Finished carpentry | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||
| Retail and Appliances | Retail and Eyewear | Construction | Automotive Supplies | Total | ||||||||||||||||
| Revenues | ||||||||||||||||||||
| Appliances | $ | $ | $ | $ | $ | |||||||||||||||
| Appliance accessories, parts, and other | ||||||||||||||||||||
| Eyewear | ||||||||||||||||||||
| Eyewear accessories, parts, and other | ||||||||||||||||||||
| Automotive horns | ||||||||||||||||||||
| Automotive lighting | ||||||||||||||||||||
| Custom cabinets and countertops | ||||||||||||||||||||
| Finished carpentry | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
9
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||
| Retail and Appliances | Retail and Eyewear | Construction | Automotive Supplies | Corporate Services | Total | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Personnel | ||||||||||||||||||||||||
| Personnel – corporate allocation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||
| General and administrative – management fees | ||||||||||||||||||||||||
| General and administrative – corporate allocation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total Operating Expenses | ||||||||||||||||||||||||
| Income (loss) from operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||
| Retail and Appliances | Retail and Eyewear | Construction | Automotive Supplies | Corporate Services | Total | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Personnel | ||||||||||||||||||||||||
| Personnel – corporate allocation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||
| General and administrative – management fees | ||||||||||||||||||||||||
| General and administrative – corporate allocation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total Operating Expenses | ||||||||||||||||||||||||
| Income (loss) from operations | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||
| Retail and Appliances | Retail and Eyewear | Construction | Automotive Supplies | Corporate Services | Total | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Personnel | ||||||||||||||||||||||||
| Personnel – corporate allocation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||
| General and administrative – management fees | ||||||||||||||||||||||||
| General and administrative – corporate allocation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total Operating Expenses | ||||||||||||||||||||||||
| Income (loss) from operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||
10
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||
| Retail and Appliances | Retail and Eyewear | Construction | Automotive Supplies | Corporate Services | Total | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Personnel | ||||||||||||||||||||||||
| Personnel – corporate allocation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| General and administrative | ( | ) | ||||||||||||||||||||||
| General and administrative – management fees | ||||||||||||||||||||||||
| General and administrative – corporate allocation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total Operating Expenses | ||||||||||||||||||||||||
| Income (loss) from operations | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
NOTE 5—PROPERTY AND EQUIPMENT
| September 30, 2023 | December 31, 2022 | |||||||
| Equipment and machinery | $ | $ | ||||||
| Office furniture and equipment | ||||||||
| Transportation equipment | ||||||||
| Displays | ||||||||
| Leasehold improvements | ||||||||
| Total property and equipment | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense for the three and nine months
ended September was $261,275 and $
NOTE 6—INTANGIBLE ASSETS
September 30, | December 31, 2022 | |||||||
| Customer relationships | $ | $ | ||||||
| Marketing-related | ||||||||
| Technology-related | ||||||||
| Total intangible assets | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
Amortization expense for the three and nine months
ended September 30, 2023 was $
11
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| Year Ending December 31, | Amount | |||
| 2023 - remaining | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
NOTE 7—SELECTED ACCOUNT INFORMATION
Receivables
| September 30, 2023 | December 31, 2022 | |||||||
| Trade accounts receivable | $ | $ | ||||||
| Vendor rebates receivable | ||||||||
| Credit card payments in process of settlement | ||||||||
| Retainage | ||||||||
| Total receivables | ||||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total receivables, net | $ | $ | ||||||
Inventories
| September 30, 2023 | December 31, 2022 | |||||||
| Appliances | $ | $ | ||||||
| Eyewear | ||||||||
| Automotive | ||||||||
| Construction | ||||||||
| Total inventories | ||||||||
| Less reserve for obsolescence | ( | ) | ( | ) | ||||
| Total inventories, net | $ | $ | ||||||
Inventory balances are composed of finished goods. Raw materials and work in process inventory are immaterial to the condensed consolidated financial statements.
12
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Accounts payable and accrued expenses
| September 30, 2023 | December 31, 2022 | |||||||
| Trade accounts payable | $ | $ | ||||||
| Credit cards payable | ||||||||
| Accrued payroll liabilities | ||||||||
| Accrued interest | ||||||||
| Accrued dividends | ||||||||
| Other accrued liabilities | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
NOTE 8—LEASES
Operating Leases
On July 1, 2023, ICU Eyewear Holdings, Inc. (“ICU
Eyewear”) entered into a lease amendment to renew its office and warehouse space in the retail and eyewear segment, located in Hollister,
California. The lease renewal commenced on July 1, 2023 and shall expire on June 30, 2028. Under the terms of the lease renewal, ICU Eyewear
will lease the premises at the monthly rate of $
| September 30, 2023 | December 31, 2022 | |||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Lease liabilities, current portion | ||||||||
| Lease liabilities, long-term | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Weighted-average remaining lease term (months) | ||||||||
| Weighted average discount rate | % | % | ||||||
Rent expense for the three and nine months ended
September 30, 2023 was $
| Year Ending December 31, | Amount | |||
| 2023 - remaining | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | ||||
| Less: imputed interest | ( | ) | ||
| Total operating lease liabilities | $ | |||
13
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Finance Leases
| Year Ending December 31, | Amount | |||
| 2023 - remaining | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | ||||
| Less: amount representing interest | ( | ) | ||
| Present value of minimum lease payments | $ | |||
As of September 30, 2023, the weighted-average
remaining lease term for all finance leases is
NOTE 9—BUSINESS COMBINATIONS
On December 21, 2022, the Company’s newly formed wholly owned subsidiaries 1847 ICU Holdings Inc. (“1847 ICU”) and 1847 ICU Acquisition Sub Inc. entered into an agreement and plan of merger with ICU Eyewear and San Francisco Equity Partners, as the stockholder representative, which was amended on February 9, 2023.
On February 9, 2023, closing of the transactions
contemplated by the agreement and plan of merger was completed. Pursuant to the agreement and plan of merger, 1847 ICU Acquisition Sub
Inc. merged with and into ICU Eyewear, with ICU Eyewear surviving the merger as a wholly owned subsidiary of 1847 ICU. The merger consideration
paid by 1847 ICU to the stockholders of ICU Eyewear consists of (i) $
ICU Eyewear specializes in the sale and distribution of reading eyewear and sunglasses, blue light blocking eyewear, sun readers, and other outdoor specialty sunglasses, as well as select health and personal care items, including face masks. This transaction aligned with the Company’s acquisition strategy of targeting small businesses in various industries that the Company expects will face minimal threats of technological or competitive obsolescence, produce positive and stable earnings and cash flow, as well as achieve attractive returns on the Company’s invested capital.
The Company accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”). In accordance with ASC 805, the Company used its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill is measured as the excess of the purchase consideration over the fair value of the net tangible assets and identifiable assets acquired, or if the fair value of the net assets acquired exceeds the purchase consideration, a bargain purchase gain is recorded.
The preliminary fair value of the purchase consideration
issued to the ICU Eyewear stockholders was allocated to the net tangible assets acquired. The preliminary fair value of the net assets
acquired was $
14
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| Provisional purchase consideration at preliminary fair value: | ||||
| Cash | $ | |||
| Notes payable | ||||
| Amount of consideration | $ | |||
| Assets acquired and liabilities assumed at preliminary fair value | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventory | ||||
| Prepaids and other current assets | ||||
| Property and equipment | ||||
| Other assets | ||||
| Marketing related intangibles | ||||
| Accounts payable and accrued expenses | ( | ) | ||
| Net tangible assets acquired | $ | |||
| Consideration paid | ||||
| Preliminary gain on bargain purchase | $ | ( | ) | |
Pro Forma Information
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
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.
NOTE 10—DEBT
Revolving Lines of Credit
On February 9, 2023, 1847 ICU and ICU Eyewear
entered into a loan and security agreement with Industrial Funding Group, Inc. for a revolving loan of up to $
The note was to mature on February 9, 2025 with
all advances bearing interest at an annual rate equal to the greater of
15
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
On September 11, 2023, GemCap Solutions, LLC sold
and assigned the loan to AB Lending SPV I LLC d/b/a Mountain Ridge Capital. On the same date, 1847 ICU and ICU Eyewear entered into an
amended and restated credit and security agreement with the AB Lending SPV I LLC d/b/a Mountain Ridge Capital for a revolving loan of
up to $
The revolving loan matures on
The amended and restated credit and security agreement
contains customary affirmative and negative financial and other covenants and events of default for a loan of this type. The loan is secured
by a first priority security interest in all of the assets of 1847 ICU and ICU Eyewear and is guaranteed by the Company pursuant to a
limited guaranty. The Company may satisfy its obligations under the limited guaranty by paying such amounts in cash, or by issuing to
the lender a number of common shares equal to the sum needed to satisfy the obligations under the limited guaranty in full divided by
a price equal to the lesser of $
Notes Payable
6% Subordinated Promissory Notes
As part of the consideration paid in the acquisition
of ICU Eyewear, 1847 ICU issued the sellers
Purchase and Sale of Future Revenues Agreement
On March 31, 2023, the Company and its subsidiary
1847 Cabinet Inc. (“1847 Cabinet”) entered into a non-recourse funding agreement with a third-party for the sale of future
revenues totaling $
The Company recorded a debt discount of $
16
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Private Placement of 20% OID Promissory Notes and Warrants
On August 11, 2023, the Company entered into a
securities purchase agreement in a private placement transaction with certain accredited investors, pursuant to which the Company issued
and sold to the investors
The notes are due and payable on February 11, 2024. The Company may voluntarily prepay the notes in full at any time. In addition, if the Company consummates any equity or equity-linked or debt securities issuance, or enters into a loan agreement or other financing, other than certain excluded debt (as defined in the notes), then the Company must prepay the notes in full. The notes are unsecured and have priority over all other unsecured indebtedness of the Company, except for certain senior indebtedness (as defined in the notes). The notes contain customary affirmative and negative covenants and events of default for a loan of this type.
The warrants are exercisable for a period five
(5) years at an exercise price of $
Pursuant to the securities purchase agreement,
the Company is required to hold a special meeting of its shareholders on or before the date that is sixty (60) calendar days after the
date of the securities purchase agreement for the purpose of obtaining shareholder approval of the issuance of all common shares that
may be issued upon conversion of the notes and exercise of the warrants in accordance with NYSE American rules (the “Shareholder
Approval”). In connection with the securities purchase agreement, the Company also entered into a registration rights agreement
with the investors, pursuant to which the Company agreed to file a registration statement to register all common shares underlying the
notes and the warrants under the Securities Act of 1933, as amended, within fifteen (15) days following an event of default and use its
best efforts to cause such registration statement to be declared effective within ninety (90) days after the filing thereof. If the Company
fails to meet these deadlines or comply with certain other requirements in the registration rights agreement, then on each date that the
Company fails to comply, and on each monthly anniversary thereof, the Company shall pay to each investor an amount in cash, as partial
liquidated damages and not as a penalty, equal to
Spartan Capital Securities, LLC (“Spartan”)
acted as placement agent in connection with the securities purchase agreement and received (i) a cash transaction fee equal to
Subject to Shareholder Approval, the notes are
convertible into common shares at the option of the holders at any time on or following the date that an event of default (as defined
in the notes) occurs at a conversion price equal to
The Company evaluated the embedded features within
these promissory notes in accordance with ASC 480 and ASC 815. The Company determined that the embedded features, specifically (i) the
default penalty of
The initial fair value of the derivative liabilities was determined
using a Monte Carlo Simulation valuation model, considering various potential outcomes and scenarios. The model used the following assumptions:
(i) dividend yield of
17
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Convertible Notes Payable
Private Placements of Promissory Notes and Warrants
On February 3, 2023, the Company entered into
securities purchase agreements with two accredited investors, Mast Hill Fund, L.P. (“Mast Hill”) and Leonite Fund I,
LP (“Leonite”), pursuant to which the Company issued to such investors (i) promissory notes in the aggregate principal amount
of $
On February 9, 2023, the Company entered into
securities purchase agreements with two accredited investors, Mast Hill and Leonite, pursuant to which the Company issued to such investors
(i) promissory notes in the aggregate principal amount of $
On February 22, 2023, the Company entered into
securities purchase agreement with one accredited investor, Mast Hill, pursuant to which the Company issued to such investor (i) a promissory
note in the principal amount of $
These notes bear interest at a rate of
The notes become convertible into common shares
at the option of the holders at any time on or following the date that an event of default (as defined in the notes) occurs under the
notes at a conversion price equal the lower of (i) $
The Company evaluated the embedded features within
these promissory notes in accordance with ASC 480 and ASC 815. The Company determined that the embedded features, specifically (i) the
default penalty of
The initial fair value of the derivative liabilities
was determined using a Monte Carlo Simulation valuation model, considering various potential outcomes and scenarios. The model used the
following assumptions: (i) dividend yield of
18
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
On August 4, 2023, the Company received notices
from Mast Hill and Leonite that an event of default had occurred under the notes issued on February 3, 2023 for failure to make certain
payments when due. Mast Hill and Leonite agreed in writing that they would not require any payments in cash for the over-due amounts or
accelerate the payments due under the notes for a period of 60 days. Since an event of default occurred, Mast Hill and Leonite has the
right to convert the notes, including the over-due amounts, penalties and fees, into common shares at their election. On August 4, 2023,
Mast Hill converted its note in full into
On August 9, 2023, the Company received notices
from Mast Hill and Leonite that an event of default had occurred under the notes issued on February 9, 2023 for failure to make certain
payments when due. Mast Hill and Leonite agreed in writing that they would not require any payments in cash for the over-due amounts or
accelerate the payments due under the notes for a period of 60 days. Since an event of default occurred, Mast Hill and Leonite has the
right to convert the notes, including the over-due amounts, penalties and fees, into common shares at their election. In August 2023,
Mast Hill converted a portion of its note into
On August 31, 2023, the Company, Mast Hill and
Leonite entered into amendments to the notes issued on February 9, 2023 and February 22, 2023, pursuant to which the parties agreed to
extend the maturity date of these remaining notes to August 31, 2024 and the Company agreed to make monthly payments commencing on September
30, 2023, as further described in the amendments. Mast Hill and Leonite also agreed not to convert any portion of the remaining notes
as long as the Company makes these payments when due. As consideration for Mast Hill and Leonite’s entry into the amendments, the
Company agreed to pay Mast Hill and Leonite an amendment fee equal to
19
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Derivative Liabilities
| Amount | ||||
| Balance at December 31, 2022 | $ | |||
| Initial fair value of derivative liabilities upon issuance | ||||
| Gain on change in fair value of derivative liabilities | ( | ) | ||
| Extinguishment of derivative liabilities upon conversion of convertible notes | ( | ) | ||
| Balance at September 30, 2023 | $ | |||
| Amount | ||||
| Initial derivative expense | $ | |||
| Gain on change in fair value of derivative liabilities | ( | ) | ||
| Gain on change in fair value of derivative liabilities | $ | ( | ) | |
Interest Expense and Accrued Interest Reconciliation
| Amount | ||||
| Interest expense from amortization of debt discounts | $ | |||
| Interest expense from notes payable | ||||
| Interest expense from related party notes payable | ||||
| Interest expense from convertible notes payable | ||||
| Interest expense from revolving lines of credit | ||||
| Interest expense from financing leases | ||||
| Other interest expense | ||||
| $ | ||||
20
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| Amount | ||||
| Accrued interest balance at December 31, 2022 | $ | |||
| Interest expense from notes payable | ||||
| Interest expense from related party notes payable | ||||
| Interest expense from convertible notes payable | ||||
| Interest expense from revolving lines of credit | ||||
| Interest expense from financing leases | ||||
| Cash paid for interest | ( | ) | ||
| Common shares issued in settlement of interest | ( | ) | ||
| Settlement of interest through the issuance of a new revolving line of credit | ( | ) | ||
| Accrued interest balance at September 30, 2023 | $ | |||
NOTE 11—RELATED PARTIES
Related Party Notes Payable
On September 30, 2020, a portion of the purchase
price for the acquisition of Kyle’s Custom Wood Shop, Inc. (“Kyle’s”) was paid by the issuance of a promissory
note by 1847 Cabinet to the sellers in the principal amount of $
On July 26, 2022, the Company and 1847 Cabinet
entered into a conversion agreement with sellers, pursuant to which they agreed to convert $
On March 30, 2023, the Company entered into an
amendment to the conversion agreement, effective retroactively to October 1, 2022. Pursuant to the amendment, the Company agreed to pay
a total of $
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
21
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
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, 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),
the Company’s subsidiary 1847 Wolo Inc. (“1847 Wolo”) entered into an offsetting management services agreement with
the Manager on March 30, 2021 and 1847 ICU entered into an offsetting management services agreement with the Manager on February 9, 2023.
1847 Asien expensed management fees of $
1847 Cabinet expensed management fees of $
1847 Wolo expensed management fees of $
1847 ICU expensed management fees of $
On a consolidated basis, the Company expensed
total management fees of $
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, 2023 and December 31, 2022, a total of
$
As of September 30, 2023 and December 31, 2022,
the Manager has funded the Company $
Building Lease
The total rent expense under this related party
lease was $
22
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
NOTE 12—SHAREHOLDERS’ EQUITY
Series A Senior Convertible Preferred Shares
During the three months ended September 30, 2023,
the Company accrued dividends of $
On May 15, 2023, the Company entered into amendments
to the securities purchase agreements relating to the series A senior convertible preferred shares, pursuant to which the securities purchase
agreements were amended to include a provision giving the Company to option to force the exercise of warrants issued pursuant to such
securities purchase agreements for the issuance of a number of common shares equal to the quotient of (i) eighty percent (
During the three and nine months ended September
30, 2023, an aggregate of
As of September 30, 2023 and December 31, 2022,
the Company had
Series B Senior Convertible Preferred Shares
During the three months ended September 30, 2023,
the Company accrued dividends of $
On May 15, 2023, the Company entered into amendments
to the securities purchase agreements relating to the series B senior convertible preferred shares, pursuant to which the securities purchase
agreements were amended to include a provision giving the Company to option to force the exercise of warrants issued pursuant to such
securities purchase agreements for the issuance of a number of common shares equal to the quotient of (i) eighty percent (
During the three months ended September 30, 2023,
an aggregate of
As of September 30, 2023 and December 31, 2022,
the Company had
Common Shares
As of September 30, 2023 and December 31, 2022,
the Company was authorized to issue
In February 2023, the Company issued an aggregate
of
On May 16, 2023, the Company issued an aggregate
of
23
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
In May 2023, the Company issued
On July 3, 2023, the Company entered into a securities
purchase agreement with certain purchasers and a placement agency agreement with Spartan, pursuant to which the Company agreed to issue
and sell to such purchasers an aggregate of
On July 14, 2023, the Company entered into a securities
purchase agreement with certain purchasers and a placement agency agreement with Spartan, which were amended pursuant to an amendatory
agreement, dated July 18, 2023, among the Company, Spartan and such purchasers. Pursuant to the foregoing, on July 18, 2023, the Company
issued and sold to such purchasers an aggregate of
During the nine months ended September 30, 2023,
the Company issued an aggregate
During the nine months ended September 30, 2023,
the Company issued an aggregate of
During the nine months ended September 30, 2023,
the Company issued an aggregate of
During the nine months ended September 30, 2023,
the Company issued an aggregate of
During the nine months ended September 30, 2023,
the Company issued an aggregate of
24
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Warrants
Warrant Dividend Issued to Common Shareholders
On January 3, 2023, the Company issued warrants
for the purchase of
Warrants Issued in Private Placements of Promissory Notes
On February 3, 2023 (as described in Note 10),
the Company entered into securities purchase agreements with two accredited investors, Mast Hill and Leonite, pursuant to which the Company
issued to such investors (i) promissory notes in the aggregate principal amount of $
Accordingly, a portion of the proceeds were allocated
to the warrants and common shares based on their 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
On February 9, 2023 (as described in Note 10),
the Company entered into securities purchase agreements with two accredited investors, Mast Hill and Leonite, pursuant to which the Company
issued to such investors -year warrants for the purchase of an aggregate of
25
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Accordingly, a portion of the proceeds were allocated
to the warrants and common shares based on their 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
On February 22, 2023 (as described in Note 10),
the Company entered into securities purchase agreement with one accredited investor, Mast Hill, pursuant to which the Company issued to
such investor five-year warrants for the purchase of an aggregate of
Accordingly, a portion of the proceeds were allocated
to the warrants based on their 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
Warrants Issued in Public Equity Offering
On July 7, 2023 (as described above), the Company
closed on a securities purchase agreement with certain purchasers and a placement agency agreement with Spartan, pursuant to which the
Company agreed to issue and sell to such purchasers prefunded warrants for the purchase of
The Company evaluated the prefunded warrants as
either equity-classified or liability-classified instruments based on an assessment of the specific terms of the prefunded warrants and
applicable authoritative guidance in ASC 480 and ASC 815-40. The Company determined the prefunded warrants issued failed the indexation
guidance under ASC 815-40, specifically, the prefunded warrants provide for a Black-Scholes value calculation in the event of certain
transactions (“Fundamental Transactions”), which includes a floor on volatility utilized in the value calculation at
The fair value of the warrants deemed
to be a liability, due to certain contingent put features, was determined using the Black-Scholes option pricing model, which was deemed
to be an appropriate model due to the terms of the warrants issued, including a fixed term and exercise price. The assumptions used in
the model were as follows: (i) dividend yield of
26
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| Amount | ||||
| Balance at December 31, 2022 | $ | |||
| Fair value of warrant liability upon issuance | ||||
| Loss on change in fair value of warrant liability | ||||
| Extinguishment of warrant liability upon exercise of prefunded warrants | ( | ) | ||
| Balance at September 30, 2023 | $ | |||
Warrants Issued in Private Placement of
On August 11, 2023 (as described in Note 10),
the Company entered into a securities purchase agreement in a private placement transaction with certain accredited investors, pursuant
to which the Company issued five-year warrants for the purchase of an aggregate of
Accordingly, a portion of the proceeds were allocated
to the warrants based on their relative fair value using the Black-Scholes option pricing model. The assumptions used in the model were
as follows: (i) dividend yield of
Exercise Price Adjustments to Warrants
As a result of the issuance of common shares in
settlement of series A senior convertible preferred shares accrued dividends on January 30, 2023, the exercise price of certain of the
Company’s outstanding warrants was adjusted to $
As a result of the issuance of common shares in
settlement of series A senior convertible preferred shares accrued dividends on April 30, 2023, the exercise price of certain of the Company’s
outstanding warrants was adjusted to $
As a result of the issuance of common shares in
the offering on July 7, 2023, the exercise price of certain of the Company’s outstanding warrants was adjusted to $
As a result of the issuance of common shares in
settlement of series A senior convertible preferred shares and series B senior convertible preferred shares accrued dividends on July
30, 2023, the exercise price of certain of the Company’s outstanding warrants was adjusted to $
As a result of the issuance of common shares upon
the conversion of promissory notes on August 30, 2023, the exercise price of certain of the Company’s outstanding warrants was adjusted
to $
27
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| Warrants | Weighted- Average Exercise Price | |||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised/settled | ( | ) | ( | ) | ||||
| Outstanding at September 30, 2023 | $ | |||||||
| Exercisable at September 30, 2023 | $ | |||||||
As of September 30, 2023, the outstanding warrants
have a weighted average remaining contractual life of
NOTE 13—EARNINGS (LOSS) PER SHARE
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
For the three and nine months ended September
30, 2023, there were
For the three and nine months ended September
30, 2022, there were
NOTE 14—DEFERRED INCOME TAXES
As of September 30, 2023, the Company has net
operating loss carry forwards of approximately $
28
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Deferred income taxes reflect the net tax effect
of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The Company has
a net cumulative long-term deferred tax liability of $
September 30, | December 31, | |||||||
| Deferred tax assets | ||||||||
| Inventory obsolescence | $ | $ | ||||||
| Reserves | ||||||||
| Business interest limitations | ||||||||
| Lease liabilities | ||||||||
| Other | ||||||||
| Loss carryforward | ||||||||
| Valuation allowance | ( | ) | ||||||
| Total deferred tax asset | ||||||||
| Deferred tax liabilities | ||||||||
| Fixed assets | ( | ) | ( | ) | ||||
| Right-of-use assets | ( | ) | ( | ) | ||||
| Intangibles | ( | ) | ( | ) | ||||
| Total deferred tax liability | ( | ) | ( | ) | ||||
| Total deferred tax liability, net | $ | ( | ) | $ | ( | ) | ||
NOTE 15—SUBSEQUENT EVENTS
On October 30, 2023, the Company issued
29
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 “our company” refer to 1847 Holdings LLC, a Delaware limited liability company, and its consolidated subsidiaries. References to “our manager” refer to 1847 Partners LLC, a Delaware limited liability company.
Special Note Regarding Forward Looking Statements
This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| ● | our ability to effectively integrate and operate the businesses that we acquire; | |
| ● | our ability to successfully identify and acquire additional businesses; | |
| ● | our organizational structure, which may limit our ability to meet our dividend and distribution policy; | |
| ● | our ability to service and comply with the terms of indebtedness; | |
| ● | our cash flow available for distribution and our ability to make distributions to our common shareholders; | |
| ● | our ability to pay the management fee, profit allocation and put price to our manager when due; | |
| ● | labor disputes, strikes or other employee disputes or grievances; | |
| ● | the regulatory environment in which our businesses operate under; | |
| ● | trends in the industries in which our businesses operate; | |
| ● | the competitive environment in which our businesses operate; | |
| ● | changes in general economic or business conditions or economic or demographic trends in the United States including changes in interest rates and inflation; | |
| ● | our and our manager’s ability to retain or replace qualified employees of our businesses and our manager; | |
| ● | casualties, condemnation or catastrophic failures with respect to any of our business’ facilities; | |
| ● | costs and effects of legal and administrative proceedings, settlements, investigations and claims; and | |
| ● | extraordinary or force majeure events affecting the business or operations of our businesses. |
In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022 and elsewhere in this report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
30
Overview
We are an acquisition holding company focused on acquiring and managing a group of small businesses, which we characterize as those that have an enterprise value of less than $50 million, in a variety of different industries headquartered in North America.
On May 28, 2020, our subsidiary 1847 Asien Inc., or 1847 Asien, acquired Asien’s Appliance, Inc., a California corporation, or Asien’s. Asien’s has been in business since 1948 serving the North Bay area of Sonoma County, California. It provides a wide variety of appliance services, including sales, delivery/installation, in-home service and repair, extended warranties, and financing. Its main focus is delivering personal sales and exceptional service to its customers at competitive prices.
On September 30, 2020, our subsidiary 1847 Cabinet Inc., or 1847 Cabinet, acquired Kyle’s Custom Wood Shop, Inc., an Idaho corporation, or Kyle’s. Kyle’s is a leading custom cabinetry maker servicing contractors and homeowners since 1976 in Boise, Idaho and the surrounding area. Kyle’s focuses on designing, building, and installing custom cabinetry primarily for custom and semi-custom builders.
On March 30, 2021, our subsidiary 1847 Wolo Inc., or 1847 Wolo, acquired Wolo Mfg. Corp., a New York corporation, and Wolo Industrial Horn & Signal, Inc., a New York corporation (which we collectively refer to as Wolo). Headquartered in Deer Park, New York and founded in 1965, Wolo designs and sells 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.
On October 8, 2021, our subsidiary 1847 Cabinet acquired High Mountain Door & Trim Inc., a Nevada corporation, or High Mountain, and Sierra Homes, LLC d/b/a Innovative Cabinets & Design, a Nevada limited liability company, or Innovative Cabinets. Headquartered in Reno, Nevada and founded in 2014, High Mountain specializes in all aspects of finished carpentry products and services, including doors, door frames, base boards, crown molding, cabinetry, bathroom sinks and cabinets, bookcases, built-in closets, and fireplace mantles, among others, working primarily with large homebuilders of single-family homes and commercial and multi-family developers. Innovative Cabinets is headquartered in Reno, Nevada and was founded in 2008. It specializes in custom cabinetry and countertops for a client base consisting of single-family homeowners, builders of multi-family homes, as well as commercial clients.
On February 9, 2023, our subsidiary, 1847 ICU Holdings Inc., or 1847 ICU, acquired ICU Eyewear Holdings, Inc., a California corporation, and its subsidiary ICU Eyewear, Inc., a California corporation, which we collectively refer to as ICU Eyewear. Headquartered in Hollister, California and founded in 1956, ICU Eyewear specializes in the sale and distribution of reading eyewear and sunglasses, blue light blocking eyewear, sun readers, and other outdoor specialty sunglasses, as well as select health and personal care items, including face masks.
Through our structure, we offer investors an opportunity to participate in the ownership and growth of a portfolio of businesses that traditionally have been owned and managed by private equity firms, private individuals or families, financial institutions or large conglomerates. We believe that our management and acquisition strategies will allow us to achieve our goals to make and grow regular distributions to our common shareholders and increase common shareholder value over time.
We seek to acquire controlling interests in small businesses that we believe operate in industries with long-term macroeconomic growth opportunities, and that have positive and stable earnings and cash flows, face minimal threats of technological or competitive obsolescence and have strong management teams largely in place. We believe that private company operators and corporate parents looking to sell their businesses will consider us to be an attractive purchaser of their businesses. We make these businesses our majority-owned subsidiaries and actively manage and grow such businesses. We expect to improve our businesses over the long term through organic growth opportunities, add-on acquisitions and operational improvements.
Management Fees
On April 15, 2013, we and our manager entered into a management services agreement, pursuant to which we are required to pay our manager a quarterly management fee equal to 0.5% of our adjusted net assets for services performed (which we refer to as the parent management fee). The amount of the parent management fee with respect to any fiscal quarter is (i) reduced by the aggregate amount of any management fees received by our manager under any offsetting management services agreements with respect to such fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid (or under-paid) parent management fees received by (or owed to) our manager as of the end of such fiscal quarter, and (iii) increased by the amount of any outstanding accrued and unpaid parent management fees. We did not expense any parent management fees for the three and nine months ended September 30, 2023 and 2022.
31
1847 Asien entered into an offsetting management services agreement with our manager on May 28, 2020, 1847 Cabinet entered into an offsetting management services agreement with our manager on August 21, 2020 (which was amended and restated on October 8, 2021), 1847 Wolo entered into an offsetting management services agreement with our manager on March 30, 2021 and 1847 ICU entered into an offsetting management services agreement with our manager on February 9, 2023. Pursuant to the offsetting management services agreements, each of 1847 Asien, 1847 Wolo and 1847 ICU appointed our manager to provide certain services to it for a quarterly management fee equal to the greater of $75,000 or 2% of adjusted net assets (as defined in the management services agreement) and 1847 Cabinet appointed our manager to provide certain services to it for a quarterly management fee equal to the greater of $75,000 or 2% of adjusted net assets (as defined in the management services agreement), which was increased to $125,000 or 2% of adjusted net assets on October 8, 2021; 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 our 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 our manager under other offsetting management services agreements.
Each of these entities shall also reimburse our 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 our manager or its affiliates on behalf of these entities in connection with performing services under the offsetting management services agreements.
1847 Asien expensed management fees of $75,000 and $225,000 for the three and nine months ended September 30, 2023 and 2022, respectively.
1847 Cabinet expensed management fees of $125,000 and $375,000 for the three and nine months ended September 30, 2023 and 2022, respectively.
1847 Wolo expensed management fees of $75,000 and $225,000 for the three and nine months ended September 30, 2023 and 2022, respectively.
1847 ICU expensed management fees of $75,000 and $150,000 for the three and nine months ended September 30, 2023.
On a consolidated basis, our company expensed total management fees of $350,000 and $975,000 for the three and nine months ended September 30, 2023, respectively, compared to $275,000 and $825,000 for the three and nine months ended September 30, 2022, respectively.
Segments
The Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its shareholders. As of September 30, 2023, we have four reportable segments – the retail and appliances segment, which is operated by Asien’s, the retail and eyewear segment, which is operated by ICU Eyewear, the construction segment, which is operated by Kyle’s, High Mountain and Innovative Cabinets, and the automotive supplies segment, which is operated by Wolo.
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 retail and eyewear segment provides a wide variety of eyewear products (non-prescription reading glasses, sunglasses, blue light blocking eyewear, sun readers and outdoor specialty sunglasses).
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).
32
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.
We provide general corporate services to our 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.
Results of Operations
Comparison of the Three Months Ended September 30, 2023 and 2022
The following table sets forth key components of our results of operations during the three months ended September 30, 2023 and 2022, both in dollars and as a percentage of our revenues.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
| Revenues | $ | 18,777,921 | 100.0 | % | $ | 14,472,361 | 100.0 | % | ||||||||
| Operating expenses | ||||||||||||||||
| Cost of revenues | 10,737,174 | 57.2 | % | 9,596,387 | 66.3 | % | ||||||||||
| Personnel | 4,006,639 | 21.3 | % | 3,365,592 | 23.3 | % | ||||||||||
| Depreciation and amortization | 625,967 | 3.3 | % | 516,414 | 3.6 | % | ||||||||||
| General and administrative | 4,195,261 | 22.3 | % | 2,505,571 | 17.3 | % | ||||||||||
| Total operating expenses | 19,565,041 | 104.2 | % | 15,983,964 | 110.4 | % | ||||||||||
| Loss from operations | (787,120 | ) | (4.2 | )% | (1,511,603 | ) | (10.4 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Other income (expense) | (187,200 | ) | (1.0 | )% | 2,756 | 0.0 | % | |||||||||
| Interest expense | (5,704,169 | ) | (30.4 | )% | (1,875,757 | ) | (13.0 | )% | ||||||||
| Gain on disposal of property and equipment | 18,026 | 0.1 | % | 15,614 | 0.1 | % | ||||||||||
| Loss on extinguishment of debt | - | - | (2,039,815 | ) | (14.1 | )% | ||||||||||
| Loss on change in fair value of warrant liability | (27,900 | ) | (0.1 | )% | - | - | ||||||||||
| Gain on change in fair value of derivative liabilities | 425,977 | 2.3 | % | - | - | |||||||||||
| Loss on write-down of contingent note payable | - | - | (158,817 | ) | (1.1 | )% | ||||||||||
| Total other expense | (5,475,266 | ) | (29.2 | )% | (4,056,019 | ) | (28.0 | )% | ||||||||
| Net loss before income taxes | (6,262,386 | ) | (33.3 | )% | (5,567,622 | ) | (38.5 | )% | ||||||||
| Income tax benefit | 403,314 | 2.1 | % | 1,095,000 | 7.6 | % | ||||||||||
| Net loss | $ | (5,859,072 | ) | (31.2 | )% | $ | (4,472,622 | ) | (30.9 | )% | ||||||
Revenues. Our total revenues were $18,777,921 for the three months ended September 30, 2023, as compared to $14,472,361 for the three months ended September 30, 2022.
The retail and appliances segment generates revenue through sales of home furnishings, including appliances and related products. Revenues from the retail and appliances segment decreased by $513,697, or 17.5%, to $2,421,008 for the three months ended September 30, 2023, from $2,934,705 for the three months ended September 30, 2022. The decline in revenues was primarily attributed to ongoing supply chain delays and decreased customer demand.
The retail and eyewear segment generates revenue through sales of eyewear products, including non-prescription reading glasses, sunglasses, blue light blocking eyewear, sun readers and outdoor specialty sunglasses. Revenues for the retail and eyewear segment were $4,243,254 for the three months ended September 30, 2023.
The construction segment generates revenue through the sale of finished carpentry products and services, including doors, door frames, base boards, crown molding, cabinetry, bathroom sinks and cabinets, bookcases, built-in closets, and fireplace mantles, among others, as well as kitchen countertops. Revenues from the construction segment increased by $1,182,633, or 11.8%, to $11,230,579 for the three months ended September 30, 2023, from $10,047,946 for the three months ended September 30, 2022. The increase in revenues was primarily attributed to an increase in new multi-family projects and an increase in the average customer contract value.
33
The automotive supplies segment generates revenue through the design and sale of horn and safety products (electric, air, truck, marine, motorcycle and industrial equipment), including vehicle emergency and safety warning lights for cars, trucks, industrial equipment and emergency vehicles. Revenues from the automotive supplies segment decreased by $606,630, or 40.7%, to $883,080 for the three months ended September 30, 2023, from $1,489,710 for the three months ended September 30, 2022. The decline in revenues was primarily attributed to ongoing supply chain delays with manufacturers and decreased customer demand.
Cost of revenues. Our total cost of revenues was $10,737,174 for the three months ended September 30, 2023, as compared to $9,596,387 for the three months ended September 30, 2022.
Cost of revenues for the retail and appliances segment consists of the cost of purchased merchandise plus the cost of delivering merchandise and where applicable installation, net of promotional rebates and other incentives received from vendors. Cost of revenues for the retail and appliances segment decreased by $207,941, or 9.5%, to $1,976,031 for the three months ended September 30, 2023, from $2,183,972 for the three months ended September 30, 2022. Such decrease was primarily attributed to the corresponding decrease in revenues, offset by increased product costs. As a percentage of retail and appliances revenues, cost of revenues for the retail and appliances segment was 81.6% and 74.4% for the three months ended September 30, 2023 and 2022, respectively.
Cost of revenues for the retail and eyewear segment consists of the costs of purchased finished goods plus freight and tariff costs. Cost of revenues for the retail and eyewear segment was $2,662,586, or 62.7% of retail and eyewear revenues, for the three months ended September 30, 2023.
Cost of revenues for the construction segment consists of finished goods, lumber, hardware and materials and plus direct labor and related costs, net of any material discounts from vendors. Cost of revenues for the construction segment decreased by $1,072,127, or 16.4%, to $5,472,716 for the three months ended September 30, 2023, from $6,544,843 for the three months ended September 30, 2022. Such decrease was primarily attributed to improved supply chain negotiations leading to better pricing and more efficient procurement processes, offset by the corresponding increase in revenues. As a percentage of construction revenues, cost of revenues for the construction segment was 48.7% and 65.1% for the three months ended September 30, 2023 and 2022, respectively.
Cost of revenues for the automotive supplies segment consists of the costs of purchased finished goods plus freight and tariff costs. Cost of revenues for the automotive supplies segment decreased by $241,731, or 27.9%, to $625,841 for the three months ended September 30, 2023, from $867,572 for the three months ended September 30, 2022. Such decrease was primarily attributed to the corresponding decrease in revenues, offset by increased product costs. As a percentage of automotive supplies revenues, cost of revenues for the automotive supplies segment was 70.9% and 58.2% for the three months ended September 30, 2023 and 2022, respectively.
Personnel costs. Personnel costs include employee salaries and bonuses plus related payroll taxes. It also includes health insurance premiums, 401(k) contributions, and training costs. Our total personnel costs were $4,006,639 for the three months ended September 30, 2023, as compared to $3,365,592 for the three months ended September 30, 2022.
Personnel costs for the retail and appliances segment decreased by $27,276, or 13.5%, to $175,167 for the three months ended September 30, 2023, from $202,443 for the three months ended September 30, 2022. Such decrease was primarily attributed to decreased employee headcount as a result of decreased revenues. As a percentage of retail and appliances revenue, personnel costs for the retail and appliances segment were 7.2% and 6.9% for the three months ended September 30, 2023 and 2022, respectively.
Personnel costs for the retail and eyewear segment was $751,485, or 17.7% of retail and eyewear revenues, for the three months ended September 30, 2023.
Personnel costs for the construction segment decreased by $207,514, or 9.0%, to $2,103,481 for the three months ended September 30, 2023, from $2,310,995 for the three months ended September 30, 2022. Such decrease was primarily attributed to the implementation of revised compensation policies aimed at enhancing cost efficiency. As a percentage of construction revenue, personnel costs for the construction segment were 18.7% and 23.0% for the three months ended September 30, 2023 and 2022, respectively.
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Personnel costs for the automotive supplies segment decreased by $68,382, or 24.7%, to $209,016 for the three months ended September 30, 2023, from $277,398 for the three months ended September 30, 2022. Such decrease was primarily attributed to decreased employee headcount as a result of decreased revenues. As a percentage of automotive supplies revenue, personnel costs for the automotive supplies segment were 23.7% and 18.6% for the three months ended September 30, 2023 and 2022, respectively.
Personnel costs for the corporate services segment increased by $192,734, or 33.5%, to $767,490 for the three months ended September 30, 2023, from $574,756 for the three months ended September 30, 2022. Such increase was primarily attributed to accrued management bonuses and wages.
Depreciation and amortization. Our total depreciation and amortization expense increased by $109,553, or 21.2%, to $625,967 for the three months ended September 30, 2023, from $516,414 for the three months ended September 30, 2022.
General and administrative expenses. Our general and administrative expenses consist primarily of professional advisor fees, stock-based compensation, bad debts reserve, rent expense, advertising, bank fees, and other expenses incurred in connection with general operations. Our total general and administrative expenses were $4,195,261 for the three months ended September 30, 2023, as compared to $2,505,571 for the three months ended September 30, 2022.
General and administrative expenses for the retail and appliances segment decreased by $151,965, or 30.7%, to $342,754 for the three months ended September 30, 2023, from $494,719 for the three months ended September 30, 2022. Such decrease was primarily attributed to the decrease in revenues, offset by increased rent and office expenditures. As a percentage of retail and appliances revenue, general and administrative expenses for the retail and appliances segment were 13.7% and 16.9% for the three months ended September 30, 2023 and 2022, respectively.
General and administrative expenses for the retail and eyewear segment was $741,678, or 17.5% of retail and eyewear revenues, for the three months ended September 30, 2023.
General and administrative expenses for the construction segment increased by $294,115, or 24.0%, to $1,521,170 for the three months ended September 30, 2023, from $1,227,055 for the three months ended September 30, 2022. Such increase was primarily attributed to increased revenues, along with increases in rent and office expenditures, offset by decreased professional fees. As a percentage of construction revenue, general and administrative expenses for the construction segment were 13.5% and 12.2% for the three months ended September 30, 2023 and 2022, respectively.
General and administrative expenses for the automotive supplies segment decreased by $9,131, or 3.1%, to $287,230 for the three months ended September 30, 2023, from $296,361 for the three months ended September 30, 2022. Such decrease was primarily attributed to the decrease in revenues, offset by increased office expenditures. As a percentage of automotive supplies revenue, general and administrative expenses for the automotive supplies segment were 32.5% and 19.9% for the three months ended September 30, 2023 and 2022, respectively.
General and administrative expenses for the corporate services segment increased by $814,993, or 167.2%, to $1,302,429 for the three months ended September 30, 2023, from $487,436 for the three months ended September 30, 2022. Such increase was primarily attributed to the increased professional fees, insurance expenses, and board fees.
Total other income (expense). We had $5,475,266 in total other expense, net, for the three months ended September 30, 2023, as compared to other expense, net, of $4,056,019 for the three months ended September 30, 2022. Other expense, net, for the three months ended September 30, 2023, consisted of interest expense of $5,704,169, other expense of $187,200 and a loss on change in fair value of warrant liability of $27,900, offset by a gain on disposal of property and equipment of $18,026 and a gain on change in fair value of derivative liabilities of $425,977, while other expense, net, for the three months ended September 30, 2022, consisted of a loss on extinguishment of debt of $2,039,815, interest expense of $1,875,757 and a loss on write-down of contingent note payable of $158,817, offset by a gain on disposal of property and equipment of $15,614 and other income of $2,756. As noted above, our total interest expense increased by $3,828,412, or 204.1%, primarily due to a new revolving loan and promissory notes issued in 2023, as described in more detail below.
Income tax benefit. We had an income tax benefit of $403,314 and $1,095,000 for the three months ended September 30, 2023 and 2022, respectively.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $5,859,072 and $4,472,622 for the three months ended September 30, 2023 and 2022, respectively.
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Comparison of the Nine Months Ended September 30, 2023 and 2022
The following table sets forth key components of our results of operations during the nine months ended September 30, 2023 and 2022, both in dollars and as a percentage of our revenues.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
| Revenues | $ | 53,572,198 | 100.0 | % | $ | 39,437,482 | 100.0 | % | ||||||||
| Operating expenses | ||||||||||||||||
| Cost of revenues | 32,774,377 | 61.2 | % | 25,109,863 | 63.7 | % | ||||||||||
| Personnel | 9,960,863 | 18.6 | % | 7,159,442 | 18.2 | % | ||||||||||
| Depreciation and amortization | 1,818,373 | 3.4 | % | 1,526,759 | 3.9 | % | ||||||||||
| General and administrative | 10,715,638 | 20.0 | % | 6,737,782 | 17.1 | % | ||||||||||
| Total operating expenses | 55,269,251 | 103.2 | % | 40,533,846 | 102.8 | % | ||||||||||
| Loss from operations | (1,697,053 | ) | (3.2 | )% | (1,096,364 | ) | (2.8 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Other income (expense) | (135,232 | ) | (0.3 | )% | 3,431 | 0.0 | % | |||||||||
| Interest expense | (9,747,299 | ) | (18.2 | )% | (3,714,623 | ) | (9.4 | )% | ||||||||
| Gain on disposal of property and equipment | 18,026 | 0.0 | % | 47,690 | 0.1 | % | ||||||||||
| Loss on extinguishment of debt | - | - | (2,039,815 | ) | (5.2 | )% | ||||||||||
| Loss on change in fair value of warrant liability | (27,900 | ) | (0.1 | )% | - | - | ||||||||||
| Gain on change in fair value of derivative liabilities | 425,977 | 0.8 | % | - | - | |||||||||||
| Loss on write-down of contingent note payable | - | - | (158,817 | ) | (0.4 | )% | ||||||||||
| Gain on bargain purchase | 2,639,861 | 4.9 | % | - | - | |||||||||||
| Total other expense | (6,826,567 | ) | (12.7 | )% | (5,862,134 | ) | (14.9 | )% | ||||||||
| Net loss before income taxes | (8,523,620 | ) | (15.9 | )% | (6,958,498 | ) | (17.6 | )% | ||||||||
| Income tax benefit (expense) | (258,007 | ) | (0.5 | )% | 1,411,000 | 3.6 | % | |||||||||
| Net loss | $ | (8,781,627 | ) | (16.4 | )% | $ | (5,547,498 | ) | (14.1 | )% | ||||||
Revenues. Our total revenues were $53,572,198 for the nine months ended September 30, 2023, as compared to $39,437,482 for the nine months ended September 30, 2022.
Revenues from the retail and appliances segment decreased by $1,434,911, or 17.2%, to $6,887,589 for the nine months ended September 30, 2023, from $8,322,500 for the nine months ended September 30, 2022. The decline in revenues was primarily attributed to ongoing supply chain delays and decreased customer demand.
Revenues for the retail and eyewear segment were $11,530,027 for the period from February 9, 2023 (date of acquisition) to September 30, 2023.
Revenues from the construction segment increased by $5,646,972, or 21.7%, to $31,647,199 for the nine months ended September 30, 2023, from $26,000,227 for the nine months ended September 30, 2022. The increase in revenues was primarily attributed to an increase in new multi-family projects and an increase in the average customer contract value.
Revenues from the automotive supplies segment decreased by $1,607,372, or 31.4%, to $3,507,383 for the nine months ended September 30, 2023 from $5,114,755 for the nine months ended September 30, 2022. The decline in revenues was primarily attributed to ongoing supply chain delays with manufacturers and decreased customer demand.
Cost of revenues. Our total cost of revenues was $32,774,377 for the nine months ended September 30, 2023, as compared to $25,109,863 for the nine months ended September 30, 2022.
Cost of revenues for the retail and appliances segment decreased by $784,127, or 12.6%, to $5,461,866 for the nine months ended September 30, 2023, from $6,245,993 for the nine months ended September 30, 2022. Such decrease was primarily attributed to the corresponding decrease in revenues, offset by increased product costs. As a percentage of retail and appliances revenues, cost of revenues for the retail and appliances segment was 79.3% and 75.0% for the nine months ended September 30, 2023 and 2022, respectively.
Cost of revenues for the retail and eyewear segment was $7,102,908, or 61.6% of retail and eyewear revenues, for the period from February 9, 2023 (date of acquisition) to September 30, 2023.
Cost of revenues for the construction segment increased by $2,212,564, or 14.0%, to $18,048,394 for the nine months ended September 30, 2023, from $15,835,830 for the nine months ended September 30, 2022. Such increase was primarily attributed to the corresponding increase in revenues, offset by improved supply chain negotiations leading to better pricing and more efficient procurement processes. As a percentage of construction revenues, cost of revenues for the construction segment was 57.0% and 60.9% for the nine months ended September 30, 2023 and 2022, respectively.
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Cost of revenues for the automotive supplies segment decreased by $866,831, or 28.6%, to $2,161,209 for the nine months ended September 30, 2023, from $3,028,040 for the nine months ended September 30, 2022. Such decrease was primarily attributed to the corresponding decrease in revenues, offset by increased product costs. As a percentage of automotive supplies revenues, cost of revenues for the automotive supplies segment was 61.6% and 59.2% for the nine months ended September 30, 2023 and 2022, respectively.
Personnel costs. Our total personnel costs were $9,960,863 for the nine months ended September 30, 2023, as compared to $7,159,442 for the nine months ended September 30, 2022.
Personnel costs for the retail and appliances segment decreased by $28,612, or 4.9%, to $558,461 for the nine months ended September 30, 2023, from $587,073 for the nine months ended September 30, 2022. Such decrease was primarily attributed to decreased employee headcount as a result of decreased revenues. As a percentage of retail and appliances revenue, personnel costs for the retail and appliances segment were 8.1% and 7.1% for the nine months ended September 30, 2023 and 2022, respectively.
Personnel costs for the retail and eyewear segment was $2,070,996, or 18.0% of retail and eyewear revenues, for the period from February 9, 2023 (date of acquisition) to September 30, 2023.
Personnel costs for the construction segment increased by $800,313, or 17.3%, to $5,420,532 for the nine months ended September 30, 2023, from $4,620,219 for the nine months ended September 30, 2022. Such increase was primarily attributed to increased employee headcount as a result of increased revenues, offset the implementation of revised compensation policies aimed at enhancing cost efficiency. As a percentage of construction revenue, personnel costs for the construction segment were 17.1% and 17.8% for the nine months ended September 30, 2023 and 2022, respectively.
Personnel costs for the automotive supplies segment decreased by $146,258, or 17.3%, to $701,145 for the nine months ended September 30, 2023, from $847,403 for the nine months ended September 30, 2022. Such decrease was primarily attributed to decreased employee headcount as a result of decreased revenues. As a percentage of automotive supplies revenue, personnel costs for the automotive supplies segment were 20.0% and 16.6% for the nine months ended September 30, 2023 and 2022, respectively.
Personnel costs for the corporate services segment increased by $104,982, or 9.5%, to $1,209,729 for the nine months ended September 30, 2023, from $1,104,747 for the nine months ended September 30, 2022. Such increase was primarily attributed to accrued management bonuses and wages.
Depreciation and amortization. Our total depreciation and amortization expense increased by $291,614, or 19.1%, to $1,818,373 for the nine months ended September 30, 2023, from $1,526,759 for the nine months ended September 30, 2022.
General and administrative expenses. Our total general and administrative expenses were $10,715,638 for the nine months ended September 30, 2023, as compared to $6,737,782 for the nine months ended September 30, 2022.
General and administrative expenses for the retail and appliances segment decreased by $357,062, or 24.1%, to $1,123,403 for the nine months ended September 30, 2023, from $1,480,465 for the nine months ended September 30, 2022. Such decrease was primarily attributed to the decrease in revenues, offset by increased rent and office expenditures. As a percentage of retail and appliances revenue, general and administrative expenses for the retail and appliances segment were 16.2% and 17.8% for the nine months ended September 30, 2023 and 2022, respectively.
General and administrative expenses for the retail and eyewear segment was $2,554,342, or 22.2% of retail and eyewear revenues, for the period from February 9, 2023 (date of acquisition) to September 30, 2023.
General and administrative expenses for the construction segment increased by $401,454, or 11.3%, to $3,958,394 for the nine months ended September 30, 2023, from $3,556,940 for the nine months ended September 30, 2022. Such increase was primarily attributed to increased revenues, along with increases in rent and office expenditures, offset by decreased professional fees. As a percentage of construction revenue, general and administrative expenses for the construction segment were 12.5% and 13.7% for the nine months ended September 30, 2023 and 2022, respectively.
General and administrative expenses for the automotive supplies segment decreased by $66,083, or 7.2%, to $855,287 for the nine months ended September 30, 2023, from $921,370 for the nine months ended September 30, 2022. Such decrease was primarily attributed to the decrease in revenues, offset by increased office expenditures. As a percentage of automotive supplies revenue, general and administrative expenses for the automotive supplies segment were 24.4% and 18.0% for the nine months ended September 30, 2023 and 2022, respectively.
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General and administrative expenses for the corporate services segment increased by $1,445,205, or 185.5%, to $2,224,212 for the nine months ended September 30, 2023, from $779,007 for the nine months ended September 30, 2022. Such increase was primarily attributed to increased professional fees, insurance expenses, and board fees.
Total other income (expense). We had $6,826,567 in total other expense, net, for the nine months ended September 30, 2023, as compared to $5,862,134 for the nine months ended September 30, 2022. Other expense, net, for the nine months ended September 30, 2023, consisted of interest expense of $9,747,299, other expense of $135,232 and a loss on change in fair value of warrant liability of $27,900, offset by a gain on bargain purchase of $2,639,861, a gain on disposal of property and equipment of $18,026, and a gain on change in fair value of derivative liabilities of $425,977, while other expense, net, for the nine months ended September 30, 2022 consisted interest expense of $3,714,623, a loss on extinguishment of debt of $2,039,815 and a loss on write-down of contingent note payable of $158,817, offset by a gain on disposal of property of equipment of $47,690 and other income of $3,431. As noted above, our total interest expense increased by $6,032,676, or 162.4%, primarily due to a new revolving loan and promissory notes issued in 2023, as described in more detail below.
Income tax benefit (expense). We had an income tax expense of $258,007 and an income tax benefit of $1,411,000 for the nine months ended September 30, 2023 and 2022, respectively.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $8,781,627 and $5,547,498 for the nine months ended September 30, 2023 and 2022, respectively.
Liquidity and Capital Resources
As of September 30, 2023, we had cash and cash equivalents of $2,056,751. For the nine months ended September 30, 2023, we incurred a loss from operations of $1,697,053, cash flows used in operations of $5,697,319 and working capital of $618,235. We have generated operating losses since inception and have 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, which creates substantial doubt about our ability to continue as a going concern for a period at least one year.
Management plans to address the above as needed by, securing additional bank lines of credit, and obtaining additional financing through debt or equity transactions. Management has implemented tight cost controls to conserve cash.
The ability of our company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and to eventually attain profitable operations. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if our company is unable to continue as a going concern. If our company is unable to obtain adequate capital, it could be forced to cease operations.
We believe additional funds are required to execute our business plan and our strategy of acquiring additional businesses. The funds required to execute our business plan will depend on the size, capital structure and purchase price consideration that the seller of a target business deems acceptable in a given transaction. The amount of funds needed to execute our business plan also depends on what portion of the purchase price of a target business the seller of that business is willing to take in the form of seller notes or our equity or equity in one of our subsidiaries. We will seek growth as funds become available from cash flow, borrowings, additional capital raised privately or publicly, or seller retained financing.
Our primary use of funds will be for future acquisitions, public company expenses including regular distributions to our shareholders, investments in future acquisitions, payments to our manager pursuant to the management services agreement, potential payment of profit allocation to our manager and potential put price to our manager in respect of the allocation shares it owns. The management fee, expenses, potential profit allocation and potential put price are paid before distributions to shareholders and may be significant and exceed the funds we hold, which may require us to dispose of assets or incur debt to fund such expenditures. See Item 1. “Business—Our Manager” included in our Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning the management fee, the profit allocation and put price.
The amount of management fee paid to our manager by us is reduced by the aggregate amount of any offsetting management fees, if any, received by our manager from any of our businesses. As a result, the management fee paid to our manager may fluctuate from quarter to quarter. The amount of management fee paid to our manager may represent a significant cash obligation. In this respect, the payment of the management fee will reduce the amount of cash available for distribution to shareholders.
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Our manager, as holder of 100% of our allocation shares, is entitled to receive a twenty percent (20%) profit allocation as a form of preferred equity distribution, subject to an annual hurdle rate of eight percent (8%), as follows. Upon the sale of a subsidiary, our manager will be paid a profit allocation if the sum of (i) the excess of the gain on the sale of such subsidiary over a high-water mark plus (ii) the subsidiary’s net income since its acquisition by us exceeds the 8% hurdle rate. The 8% hurdle rate is the product of (i) a 2% rate per quarter, multiplied by (ii) the number of quarters such subsidiary was held by us, multiplied by (iii) the subsidiary’s average share (determined based on gross assets, generally) of our consolidated net equity (determined according to U.S. generally accepted accounting principles, or GAAP, with certain adjustments). In certain circumstances, after a subsidiary has been held for at least 5 years, our manager may also trigger a profit allocation with respect to such subsidiary (determined based solely on the subsidiary’s net income since its acquisition). The amount of profit allocation may represent a significant cash payment and is senior in right to payments of distributions to our shareholders. Therefore, the amount of profit allocation paid, when paid, will reduce the amount of cash available to us for our operating and investing activities, including future acquisitions. See Item 1. “Business—Our Manager—Our Manager as an Equity Holder—Manager’s Profit Allocation” included in our Annual Report on Form 10-K for the year ended December 31, 2022 for more information on the calculation of the profit allocation.
Our operating agreement also contains a supplemental put provision, which gives our manager the right, subject to certain conditions, to cause us to purchase the allocation shares then owned by our manager upon termination of the management services agreement. The amount of put price under the supplemental put provision is determined by assuming all of our subsidiaries are sold at that time for their fair market value and then calculating the amount of profit allocation would be payable in such a case. If the management services agreement is terminated for any reason other than our manager’s resignation, the payment to our manager could be as much as twice the amount of such hypothetical profit allocation. As is the case with profit allocation, the calculation of the put price is complex and based on many factors that cannot be predicted with any certainty at this time. See Item 1. “Business—Our Manager—Our Manager as an Equity Holder—Supplemental Put Provision” included in our Annual Report on Form 10-K for the year ended December 31, 2022 for more information on the calculation of the put price. The put price obligation, if our manager exercises its put right, will represent a significant cash payment and is senior in right to payments of distributions to our shareholders. Therefore, the amount of put price will reduce the amount of cash available to us for our operating and investing activities, including future acquisitions.
Summary of Cash Flow
The following table provides detailed information about our net cash flow for the period indicated:
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (5,697,319 | ) | $ | (3,977,286 | ) | ||
| Net cash used in investing activities | (3,901,545 | ) | (178,944 | ) | ||||
| Net cash provided by financing activities | 10,576,260 | 4,357,196 | ||||||
| Net change in cash and cash equivalents | 977,396 | 200,966 | ||||||
| Cash and cash equivalents at beginning of period | 1,079,355 | 1,383,533 | ||||||
| Cash and cash equivalents at end of period | $ | 2,056,751 | $ | 1,584,499 | ||||
Net cash used in operating activities was $5,697,319 for the nine months ended September 30, 2023, as compared to $3,977,286 for the nine months ended September 30, 2022. The increase in the net cash used in operating activities was primarily a result of the net loss during the period, gain on bargain purchase of $2,639,861 related to the acquisition of ICU Eyewear, and increased prepaid expenses.
Net cash used in investing activities was $3,901,545 for the nine months ended September 30, 2023, as compared to $178,944 for the nine months ended September 30, 2022. The increase in the net cash used in investing activities was primarily a result of the cash paid for the acquisition of ICU Eyewear.
Net cash provided by financing activities was $10,576,260 for the nine months ended September 30, 2023, as compared to $4,357,196 for the nine months ended September 30, 2022. The increase in the net cash provided by investing activities was primarily a result of the proceeds from the private placements and revolving loan described below, offset by decreased proceeds from public offerings.
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Public Offering
On July 3, 2023, we entered into a securities purchase agreement with certain purchasers and a placement agency agreement with Spartan Capital Securities, LLC, or Spartan, pursuant to which we agreed to issue and sell to such purchasers an aggregate of 153,800 common shares and prefunded warrants for the purchase of 220,000 common shares at an offering price of $5.00 per common share and $4.75 per pre-funded warrant, pursuant to our effective registration statement on Form S-1 (File No. 333-272057). On July 7, 2023, the closing of this offering was completed. At the closing, the purchasers prepaid the exercise price of the prefunded warrants in full. Therefore, we received total gross proceeds of $1,869,000. Pursuant to the placement agency agreement, Spartan received a cash transaction fee equal to 8% of the aggregate gross proceeds and reimbursement of certain out-of-pocket expenses. After deducting these and other offering expenses, we received net proceeds of approximately $1,494,480. All of the purchasers exercised the prefunded warrants in full either at closing or shortly thereafter and we issued an aggregate of 220,000 common shares upon such exercise.
Registered Direct Offering
On July 14, 2023, we entered into a securities purchase agreement with certain purchasers and a placement agency agreement with Spartan, which were amended pursuant to an amendatory agreement, dated July 18, 2023, among our company, Spartan and such purchasers. Pursuant to the foregoing, on July 18, 2023, we issued and sold to such purchasers an aggregate of 160,000 common shares at a purchase price of $6.00 per share for total gross proceeds of $960,000, pursuant to our effective shelf registration statement on Form S-3 (File No. 333-269509). Spartan received a cash transaction fee equal to 8% of the aggregate gross proceeds and reimbursement of certain out-of-pocket expenses. After deducting these and other offering expenses, we received net proceeds of approximately $858,200.
Debt
Revolving Lines of Credit
On February 9, 2023, 1847 ICU and ICU Eyewear entered into a loan and security agreement with Industrial Funding Group, Inc. for a revolving loan of up to $5,000,000, which was evidenced by a secured promissory note in the principal amount of up to $5,000,000. On February 9, 2023, 1847 ICU received an advance of $2,063,182 under the note, of which $1,963,182 was used to repay certain debt of ICU Eyewear in connection with the agreement and plan of merger, with the remaining $100,000 used to pay lender fees. On February 11, 2023, the Industrial Funding Group, Inc. sold and assigned the loan and security agreement, the note and related loan documents to GemCap Solutions, LLC.
The note was to mature on February 9, 2025 with all advances bearing interest at an annual rate equal to the greater of (i) the sum of (a) the “Prime Rate” as reported in the “Money Rates” column of The Wall Street Journal, adjusted as and when such prime rate changes, plus (b) eight percent (8.00%), and (ii) fifteen percent (15.00%); provided that following and during the continuation of an event of default (as defined in the loan and security agreement), interest on the unpaid principal balance of the advances shall accrue at an annual rate equal to such rate plus three percent (3.00%). Interest accrued on the advances was payable monthly commencing on March 7, 2023. The note was secured by all of the assets of 1847 ICU and ICU Eyewear.
On September 11, 2023, GemCap Solutions, LLC sold and assigned the loan to AB Lending SPV I LLC d/b/a Mountain Ridge Capital. On the same date, 1847 ICU and ICU Eyewear entered into an amended and restated credit and security agreement with the AB Lending SPV I LLC d/b/a Mountain Ridge Capital for a revolving loan of up to $15,000,000, which loan may be drawn in advances. On the same date, we received an advance of $4,218,985, which was used to pay the amounts outstanding under the loan from GemCap Solutions, LLC, to pay certain closing fees and expenses in connection with the closing and for general working capital purposes.
The revolving loan matures on September 11, 2026 and bears interest at an annual rate equal to Term SOFR plus eight percent (8.00%) per annum or, if at any time the Term SOFR cannot be determined, then at the Base Rate plus seven percent (7.00%), but in any event at a rate no higher than that permitted under applicable law. “Term SOFR” means the secured overnight financing rate published by the Federal Reserve Bank of New York for a one-month period on the date that is two (2) business days prior to the first day of such one-month period and “Base Rate” means a rate per annum equal to the greatest of (i) the Federal Funds Rate in effect on such day plus 1.00%, (ii) the Prime Rate in effect on such day, and (iii) Term SOFR for a one-month tenor plus 1.00%. However, following and during the continuation of an event of default (as defined in the amended and restated credit and security agreement), interest shall accrue at a default rate equal to such above rate plus two percent (2.00%) per annum. Interest accrued on the advances shall be payable monthly on the first day of each month commencing on October 1, 2023. We may voluntarily prepay the entire unpaid principal amount of the advances prior to the maturity date, but must pay a prepayment fee determined as follows: (i) a fee of three percent (3.00%) if the prepayment is made on or before September 11, 2024, (ii) a fee of two percent (2.00%) if the prepayment is made between September 12, 2024 and September 11, 2025, or (iii) a fee of one percent (1.00%) if the prepayment is made between September 12, 2025 and September 11, 2026.
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The amended and restated credit and security agreement contains customary affirmative and negative financial and other covenants and events of default for a loan of this type. The loan is secured by a first priority security interest in all of the assets of 1847 ICU and ICU Eyewear and is guaranteed by our company pursuant to a limited guaranty. Our company may satisfy its obligations under the limited guaranty by paying such amounts in cash, or by issuing to the lender a number of common shares equal to the sum needed to satisfy the obligations under the limited guaranty in full divided by a price equal to the lesser of $4.575 or the closing price of the common shares on the day prior to such issuance; provided that if such issuance would violate Section 7.13 of the NYSE American Company Guide, which restricts the issuance of shares equal to 20% or more of the outstanding common shares for less than the greater of book or market value, then we must obtain shareholder approval of such issuance.
The outstanding principal balance of the revolving loan at September 30, 2023 is $3,311,558, net of debt discounts of $746,825, and an accrued interest balance of $37,141.
Private Placements of Promissory Notes and Warrants
On February 3, 2023, we entered into securities purchase agreements with two accredited investors, Mast Hill Fund, L.P., or Mast Hill, and Leonite Fund I, LP, or Leonite, pursuant to which we issued to such investors (i) promissory notes in the aggregate principal amount of $604,000 and (ii) five-year warrants for the purchase of an aggregate of 5,034 common shares at an exercise price of $105.00 per share (subject to adjustment) for total cash proceeds of $540,000. As additional consideration, we issued an aggregate of 5,034 common shares to the investors as a commitment fee. Additionally, we issued a five-year warrant to J.H. Darbie & Co (the broker) for the purchase of 36 common shares at an exercise price of $131.25 (subject to adjustment).
On February 9, 2023, we entered into securities purchase agreements with two accredited investors, Mast Hill and Leonite, pursuant to which we issued to such investors (i) promissory notes in the aggregate principal amount of $2,557,575 and (ii) five-year warrants for the purchase of an aggregate of 21,314 common shares at an exercise price of $105.00 per share (subject to adjustment) for total cash proceeds of $2,271,818. As additional consideration, we issued 11,591 common shares to Mast Hill and issued to Leonite a five-year warrant for the purchase of 9,723 common shares at an exercise price of $0.25 per share (subject to adjustment), which were issued as a commitment fee. Additionally, we issued a five-year warrant to J.H. Darbie & Co (the broker) for the purchase of 477 common shares at an exercise price of $131.25 (subject to adjustment).
On February 22, 2023, we entered into securities purchase agreement with one accredited investor, Mast Hill, pursuant to which we issued to such investor (i) a promissory note in the principal amount of $878,000 and (ii) five-year warrants for the purchase of an aggregate of 7,317 common shares at an exercise price of $105.00 per share (subject to adjustment) for total cash proceeds of $737,700. As additional consideration, we issued a five-year warrant for the purchase of 7,934 common shares at an exercise price of $0.25 per share (subject to adjustment) to the investor as a commitment fee. Additionally, we issued a five-year warrant to J.H. Darbie & Co (the broker) for the purchase of 302 common shares at an exercise price of $131.25 (subject to adjustment).
These notes bear interest at a rate of 12% per annum and mature on the first anniversary of the date of issuance; provided that any principal amount or interest which is not paid when due shall bear interest at a rate of the lesser of 16% per annum or the maximum amount permitted by law from the due date thereof until the same is paid. The notes require monthly payments of principal and interest commencing in May 2023. We may voluntarily prepay the outstanding principal amount and accrued interest of each note in whole upon payment of certain prepayment fees. In addition, if at any time we receive cash proceeds from any source or series of related or unrelated sources, including, but not limited to, the issuance of equity or debt, the exercise of outstanding warrants, the issuance of securities pursuant to an equity line of credit (as defined in the notes) or the sale of assets outside of the ordinary course of business, each holder shall have the right in its sole discretion to require us to immediately apply up to 50% of such proceeds to repay all or any portion of the outstanding principal amount and interest then due under the notes. The notes are unsecured and have priority over all other unsecured indebtedness. The notes contain customary affirmative and negative covenants and events of default for a loan of this type.
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The notes become convertible into common shares at the option of the holders at any time on or following the date that an event of default (as defined in the notes) occurs under the notes at a conversion price equal the lower of (i) $105.00 (subject to adjustments) and (ii) 80% of the lowest volume weighted average price of the common shares on any trading day during the five (5) trading days prior to the conversion date; provided that such conversion price shall not be less than $0.75 (subject to adjustments).
We evaluated the embedded features within these promissory notes in accordance with ASC 480 and ASC 815. We determined that the embedded features, specifically (i) the default penalty of 15% on outstanding principal and accrued interest, and (ii) the conversion option into common shares at the lower of $105.00 or 80% of the lowest VWAP in the five days preceding conversion, subject to a $0.75 floor price, constitute derivative liabilities. These features, arising from default provisions not within our control, including the contingent interest feature and the contingent conversion (deemed redemption) feature, meet the definition of a derivative and do not qualify for derivative accounting exemptions. Consequently, these embedded features are bifurcated from the debt host and recognized as a single derivative liability.
The initial fair value of the derivative liabilities was determined using a Monte Carlo Simulation valuation model, considering various potential outcomes and scenarios. The model used the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 160.45%; (iii) risk-free interest rate of 4.68%; (iv) maximum term of one year; (v) estimated fair value of the common shares of $48.25 per share; and (vi) various probability assumptions. Subsequent changes in fair value are recognized in the statement of operations each reporting period. The issuance costs for the promissory notes, along with the allocated fair values of both the warrants and the bifurcated embedded derivative liability, have been collectively treated as a debt discount. This discount is being amortized to interest expense over the term of the promissory notes using the effective interest method.
On August 4, 2023, we received notices from Mast Hill and Leonite that an event of default had occurred under the notes issued on February 3, 2023 for failure to make certain payments when due. Mast Hill and Leonite agreed in writing that they would not require any payments in cash for the over-due amounts or accelerate the payments due under the notes for a period of 60 days. Since an event of default occurred, Mast Hill and Leonite have the right to convert the notes, including the over-due amounts, penalties and fees, into common shares at their election. On August 4, 2023, Mast Hill converted its note in full into 22,141 common shares, which conversion amount included $91,174 of principal, interest and certain penalties and fees. In August 2023, Leonite converted its note in full into 191,916 common shares, which conversion amount included $730,814 of principal, interest and certain penalties and fees.
On August 9, 2023, we received notices from Mast Hill and Leonite that an event of default had occurred under the notes issued on February 9, 2023 for failure to make certain payments when due. Mast Hill and Leonite agreed in writing that they would not require any payments in cash for the over-due amounts or accelerate the payments due under the notes for a period of 60 days. Since an event of default occurred, Mast Hill and Leonite have the right to convert the notes, including the over-due amounts, penalties and fees, into common shares at their election. In August 2023, Mast Hill converted a portion of its note into 402,762 common shares, which conversion amount included $1,002,556 of principal, interest and certain penalties and fees. In August 2023, Leonite converted a portion of its note into 580,000 common shares, which conversion amount included $1,305,432 of principal, interest and certain penalties and fees.
On August 31, 2023, our company, Mast Hill and Leonite entered into amendments to the notes issued on February 9, 2023 and February 22, 2023, pursuant to which the parties agreed to extend the maturity date of these remaining notes to August 31, 2024 and we agreed to make monthly payments commencing on September 30, 2023, as further described in the amendments. Mast Hill and Leonite also agreed not to convert any portion of the remaining notes as long as we make these payments when due. As consideration for Mast Hill and Leonite’s entry into the amendments, we agreed to pay Mast Hill and Leonite an amendment fee equal to 10% of the principal amounts of the remaining notes.
The outstanding principal balance of these notes at September 30, 2023 is $1,447,427 and an accrued interest balance of $168,487.
Private Placement of 20% OID Notes and Warrants
On August 11, 2023, we entered into a securities purchase agreement in a private placement transaction with certain accredited investors, pursuant to which we issued and sold to the investors 20% OID subordinated promissory notes in the aggregate principal amount of $3,125,000 and warrants for the purchase of an aggregate of 163,939 common shares for total cash proceeds of $2,218,000.
The notes are due and payable on February 11, 2024. We may voluntarily prepay the notes in full at any time. In addition, if we consummate any equity or equity-linked or debt securities issuance, or enter into a loan agreement or other financing, other than certain excluded debt (as defined in the notes), then we must prepay the notes in full. The notes are unsecured and have priority over all other unsecured indebtedness of our company, except for certain senior indebtedness (as defined in the notes). The notes contain customary affirmative and negative covenants and events of default for a loan of this type.
The warrants are exercisable for a period five (5) years at an exercise price of $4.58 (subject to standard adjustments for share splits, share combinations, share dividends, reclassifications, mergers, consolidations, reorganizations and similar transactions) and may be exercised on a cashless basis if at the time of exercise there is no effective registration statement registering, or the prospectus contained therein is not available for, the issuance of common shares upon exercise thereof.
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Spartan acted as placement agent in connection with the securities purchase agreement and received (i) a cash transaction fee equal to 6% of the aggregate gross proceeds, (ii) a non-accountable and non-reimbursable due diligence and expense fee equal to 1% of the aggregate gross proceeds and (iii) a warrant for the purchase of a number of common shares equal to eight percent (8%) of the number common shares issuable upon conversion of the notes and exercise of the warrants at an exercise price of $5.03 per share (subject to adjustment), resulting in the issuance of a warrant for 346,449 common shares. The warrant is exercisable at any time six months after the date of issuance and until the fifth anniversary thereof.
Subject to equityholder approval (as defined in the securities purchase agreement), the notes are convertible into common shares at the option of the holders at any time on or following the date that an event of default (as defined in the notes) occurs at a conversion price equal to 90% of the lowest volume weighted average price of our common shares on any trading day during the five (5) trading days prior to the conversion date; provided that such conversion price shall not be less than $0.75 (subject to adjustments). The conversion price of the notes is subject to standard adjustments, including a price-based adjustment in the event that we issue any common shares or other securities convertible into or exercisable for common shares at an effective price per share that is lower than the conversion price, subject to certain exceptions.
We evaluated the embedded features within these promissory notes in accordance with ASC 480 and ASC 815. We determined that the embedded features, specifically (i) the default penalty of 40% on outstanding principal, and (ii) the conversion option into common shares at 90% of the lowest VWAP in the five days preceding conversion, subject to a $0.75 floor price, constitute derivative liabilities. These features, arising from default provisions not within our control, including the contingent interest feature and the contingent conversion (deemed redemption) feature, meet the definition of a derivative and do not qualify for derivative accounting exemptions. Consequently, these embedded features are bifurcated from the debt host and recognized as a single derivative liability.
The initial fair value of the derivative liabilities was determined using a Monte Carlo Simulation valuation model, considering various potential outcomes and scenarios. The model used the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 145.37%; (iii) risk-free interest rate of 5.37%; (iv) maximum term of one year; (v) estimated fair value of the common shares of $4.63 per share; and (vi) various probability assumptions. Subsequent changes in fair value are recognized in the statement of operations each reporting period. The issuance costs for the promissory notes, along with the allocated fair values of both the warrants and the bifurcated embedded derivative liability, have been collectively treated as a debt discount. This discount is being amortized to interest expense over the term of the promissory notes using the effective interest method.
The outstanding principal balance of these notes at September 30, 2023 is $126, net of debt discounts of $3,124,874.
Purchase and Sale of Future Revenues Agreement
On March 31, 2023, we and 1847 Cabinet entered into a non-recourse funding agreement with a third-party for the sale of future revenues totaling $1,965,000 for net cash proceeds of $1,410,000. We are required to make weekly ACH payments in the amount of $39,300. The agreement also allows for the third-party to file UCCs securing their interest in the receivables and includes customary events of default.
We recorded a debt discount of $555,000, which will be amortized under the effective interest method. We are utilizing the prospective method to account for subsequent changes in the estimated future payments, whereby if there is a change in the estimated future cash flows, a new effective interest rate is determined based on the revised estimate of remaining cash flows. The outstanding balance at September 30, 2023 is $797,487, net of debt discounts of $145,713, and the effective interest rate was 72.4%.
6% Subordinated Promissory Notes
As part of the consideration paid in the acquisition of ICU Eyewear, 1847 ICU issued the sellers 6% subordinated promissory notes in the aggregate principal amount of $500,000. The notes bear interest at the rate of 6% per annum with all principal and accrued interest being due and payable in one lump sum on February 9, 2024; provided that upon an event of default (as defined in the notes), such interest rate shall increase to 10%. 1847 ICU may prepay all or any portion of the notes at any time prior to the maturity date without premium or penalty of any kind. The notes contain customary events of default, including, without limitation, in the event of (i) non-payment, (ii) a default by 1847 ICU of any of its covenants in the notes, the agreement and plan of merger or any other agreement entered into in connection with the agreement and plan of merger, or a breach of any of the representations or warranties under such documents, (iii) the insolvency or bankruptcy of 1847 ICU or ICU Eyewear or (iv) a change of control (as defined in the notes) of 1847 ICU or ICU Eyewear. The notes are unsecured and subordinated to all senior indebtedness.
The outstanding balance of this note at September 30, 2023 is $500,000 and an accrued interest balance of $19,416.
Secured Convertible Promissory Notes
On October 8, 2021, we and each of our subsidiaries 1847 Asien, 1847 Wolo, 1847 Cabinet, Asien’s, Wolo, Kyle’s, High Mountain and Innovative Cabinets, entered into a note purchase agreement with two institutional investors, pursuant to which we 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 $617,825, we received net proceeds of $23,744,975, of which $10,687,500 was used to fund the cash portion of the purchase price for the acquisition of High Mountain and Innovative Cabinets. In addition, as consideration for the financing, we granted the financing agent 187,500 warrants with a fair value of $956,526 and 7.5% interest in High Mountain and Innovative Cabinets which had a fair value of $1,146,803. The agent fees were reflected as a discount against the convertible note payable with the warrants being included in additional paid in capital and the equity interest being included within noncontrolling interest on the consolidated balance sheet.
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.
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We 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 our 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 our 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, we 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 our 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 our common shares at a conversion price equal to $1.979 (subject to standard adjustments, including a full ratchet antidilution adjustment); provided that the notes contain certain beneficial ownership limitations.
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 our assets.
The outstanding principal balance of the convertible notes at September 30, 2023 is $22,894,397, net of debt discounts of $1,965,603, and an accrued interest balance of $1,043,310.
6% Subordinated 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, the sellers of High Mountain and Innovative Cabinets. On July 26, 2022, we 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 notes into an aggregate of 32,000 common shares at a conversion price of $105 per share. As a result, we recognized a loss on extinguishment of debt of $1,280,000.
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.
On October 8, 2021, we entered into an exchange agreement with the holders, pursuant to which we granted them the right to exchange all of the principal amount and accrued but unpaid interest under the notes or any portion thereof for a number of our common shares 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 our common shares on the primary national securities exchange or over-the-counter market on which our common shares are traded over the thirty (30) trading days immediately prior to the applicable exchange date or (ii) $10.00 (subject to equitable adjustments for stock splits, stock combinations, recapitalizations and similar transactions).
The notes contain customary events of default, including in the event of a default under the secured convertible promissory notes described above. 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 above.
The outstanding principal balance of these notes at September 30, 2023 is $2,351,224, net of debt discounts of $169,122, and an accrued interest balance of $496,104.
6% Amortizing Promissory Note
On July 29, 2020, 1847 Asien entered into a securities purchase agreement with Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992, pursuant to which 1847 Asien issued a two-year 6% amortizing promissory note in the aggregate principal amount of $1,037,500. The note was subsequently amended on multiple occasions. Pursuant to the latest amendment, the parties agreed to extend the maturity date of the note to July 30, 2023. The note is unsecured and contains customary events of default. This note is currently in default.
The outstanding principal balance of this note at September 30, 2023 is $465,805 and an accrued interest balance of $241,011.
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Related Party Promissory Note
On September 30, 2020, a portion of the purchase price for the acquisition of Kyle’s was paid by the issuance of a promissory note by 1847 Cabinet to Stephen Mallatt, Jr. and Rita Mallatt in the principal amount of $1,260,000. Payment of the principal and accrued interest on the note was subject to vesting. On July 26, 2022, we 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 7,593 common shares at a conversion price of $105 per share. As a result, we recognized a loss on extinguishment of debt of $303,706. The note was subsequently amended on multiple occasions. Pursuant to the latest amendment, the parties agreed to extend the maturity date of the note to July 30, 2023. This note is currently in default.
The outstanding principal balance of this note at September 30, 2023 is $362,779 and an accrued interest balance of 222,928.
Financing Leases
On February 14, 2019, High Mountain entered into an equipment financing lease to purchase equipment for $24,337, which matures in January 2024. The balance payable was $1,862 as of September 30, 2023.
On April 10, 2019, High Mountain entered into an equipment financing lease to purchase equipment for $67,577, which matures in April 2024. The balance payable was $9,114 as of September 30, 2023.
On June 2, 2020, High Mountain entered into an equipment financing lease to purchase equipment for $9,240, which matures in May 2024. The balance payable was $1,644 as of September 30, 2023.
On May 6, 2021, Kyle’s entered into an equipment financing lease to purchase equipment for $276,896, which matures in December 2027. The balance payable was $198,375 as of September 30, 2023.
On October 12, 2021, Kyle’s entered into an equipment financing lease to purchase equipment for $245,376, which matures in December 2027. The balance payable was $ 176,346 as of September 30, 2023.
On March 28, 2022, Kyle’s entered into an equipment financing lease to purchase machinery and equipment for $316,798, which matures in January 2028. The balance payable was $238,881 as of September 30, 2023.
On April 11, 2022, Kyle’s entered into an equipment financing lease to purchase machinery and equipment for $11,706, which matures in June 2027. The balance payable was $8,705 as of September 30, 2023.
On July 13, 2022, Kyle’s entered into an equipment financing lease to purchase machinery and equipment for $240,260, which matures in June 2028. The balance payable was $196,643 as of September 30, 2023.
Vehicle Loans
Asien’s has entered into five retail installment sale contracts pursuant to which it agreed to finance its delivery trucks at rates ranging from 3.74% to 8.72% with an aggregate remaining principal amount of $71,903 as of September 30, 2023.
Kyle’s has entered into two retail installment sale contracts pursuant to which it agreed to finance its delivery trucks at rates ranging from 5.90% to 6.54% with an aggregate remaining principal amount of $40,394 as of September 30, 2023.
High Mountain has entered into eleven retail installment sale contracts pursuant to which it agreed to finance delivery trucks and equipment at rates ranging from 3.74% to 9.94% with an aggregate remaining principal amount of $295,105 as of September 30, 2023.
Innovative Cabinets has entered into two retail installment sale contracts pursuant to which it agreed to finance delivery trucks and equipment at rates of 3.74% with an aggregate remaining principal amount of $10,087 as of September 30, 2023.
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Total Debt
The following table shows aggregate figures for the total debt, described above that is coming due in the short and long term as of September 30, 2023. See the above disclosures for more details regarding these loans.
| Short-Term | Long-Term | Total Debt | ||||||||||
| Notes Payable | ||||||||||||
| Vehicle loans | $ | 113,991 | $ | 303,498 | $ | 417,489 | ||||||
| 6% Amortizing promissory note | 465,805 | - | 465,805 | |||||||||
| 6% Subordinated promissory note | 500,000 | - | 500,000 | |||||||||
| Purchase and sale of future revenues loan | 943,200 | - | 943,200 | |||||||||
| 20% OID subordinated promissory notes | 3,125,000 | - | 3,125,000 | |||||||||
| Total notes payable | 5,147,996 | 303,498 | 5,451,494 | |||||||||
| Less: debt discounts on notes payable | (3,270,587 | ) | - | (3,270,587 | ) | |||||||
| Total notes payable, net | 1,877,409 | 303,498 | 2,180,907 | |||||||||
| Related Party Notes Payable | ||||||||||||
| Related party promissory note | 362,779 | - | 362,779 | |||||||||
| Convertible Notes Payable | ||||||||||||
| Secured convertible promissory notes | - | 24,860,000 | 24,860,000 | |||||||||
| 6% subordinated convertible promissory notes | - | 2,520,346 | 2,520,346 | |||||||||
| Promissory notes issued in private placements | 1,447,427 | - | 1,447,427 | |||||||||
| Total convertible notes payable | 1,447,427 | 27,380,346 | 28,827,773 | |||||||||
| Less: debt discounts on convertible notes payable | - | (2,134,725 | ) | (2,134,725 | ) | |||||||
| Total convertible notes payable, net | 1,447,427 | 25,245,621 | 26,693,048 | |||||||||
| Revolving Line of Credit | ||||||||||||
| Revolving loan | - | 4,058,383 | 4,058,383 | |||||||||
| Less: debt discounts on revolving line of credit | - | (746,825 | ) | (746,825 | ) | |||||||
| Total revolving line of credit, net | - | 3,311,558 | 3,311,558 | |||||||||
| Finance Leases | ||||||||||||
| Financing leases | 182,384 | 649,186 | 831,570 | |||||||||
| Total debt | $ | 7,140,586 | $ | 32,391,413 | $ | 39,531,999 | ||||||
| Less: debt discounts | (3,270,587 | ) | (2,881,550 | ) | (6,152,137 | ) | ||||||
| Total debt, net | $ | 3,869,999 | $ | 29,509,863 | $ | 33,379,862 | ||||||
Contractual Obligations
Our principal commitments consist mostly of obligations under the loans described above and other contractual commitments described below.
We have engaged our manager to manage our day-to-day operations and affairs. Our relationship with our manager will be governed principally by the following agreements:
| ● | the management services agreement and offsetting management services agreements relating to the management services our manager will perform for us and the businesses we own and the management fee to be paid to our manager in respect thereof; and |
| ● | our operating agreement setting forth our manager’s rights with respect to the allocation shares it owns, including the right to receive profit allocations from us, and the supplemental put provision relating to our manager’s right to cause us to purchase the allocation shares it owns. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission, or the SEC, on April 11, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of September 30, 2023. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer determined that, because of the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which we are still in the process of remediating as of September 30, 2023, our disclosure controls and procedures were not effective. Investors are directed to Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for the description of these weaknesses.
Changes in Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
During its evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2023, our management identified the following material weaknesses:
| ● | We did not have appropriate policies and procedures in place to evaluate the proper accounting and disclosures of key documents and agreements. |
| ● | We do not have adequate segregation of duties with our limited accounting personnel and rely upon outsourced accounting services. |
| ● | We do not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of GAAP commensurate with our financial reporting requirements. |
As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, our management has identified the steps necessary to address the material weaknesses, and in the third quarter of 2023, we continued to implement the following remedial procedures:
| ● | We plan to make necessary changes by providing training to our financial team and our other relevant personnel on the GAAP accounting guidelines applicable to financial reporting requirements. |
| ● | We have put in place new policies and procedures at the subsidiary level to standardize accounting procedures across all business units. We also plan to hire additional skilled accounting personnel at the subsidiary companies to implement the policies and procedures. |
We intend to complete the remediation of the material weaknesses discussed above as soon as practicable but we can give no assurance that we will be able to do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weaknesses that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.
Other than in connection with the implementation of the remedial measures described above, there were no changes in our internal controls over financial reporting during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during the three months ended September 30, 2023 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.
We did not repurchase any of our common shares during the three months ended September 30, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
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| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Date: November 14, 2023 |
1847 HOLDINGS LLC |
| /s/ Ellery W. Roberts | |
| Name: Ellery W. Roberts | |
| Title: Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ Vernice L. Howard | |
| Name: Vernice L. Howard | |
| Title: Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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