UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10−Q

 

(Mark One) 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2020

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to _____________

 

Commission File Number: 333-193821

 

1847 HOLDINGS LLC
(Exact name of registrant as specified in its charter)

 

Delaware   38-3922937
(State or other jurisdiction of
incorporation)
  (I.R.S. Employer
Identification No.)

 

590 Madison Avenue, 21st Floor, New York, NY   10022
(Address of principal executive offices)   (Zip Code)

 

(212) 521-4052
(Registrant’s telephone number, including area code)

 

N/A
(Former name or former address, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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
Non-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 August 14, 2020, there were 3,830,625 common shares of the registrant issued and outstanding. 

 

 

 

 
 

 

1847 HOLDINGS LLC

 

Quarterly Report on Form 10-Q

 Period Ended June 30, 2020

 

 

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   38
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   61
Item 4.   Controls and Procedures   61

 

PART II

OTHER INFORMATION

 

Item 1.   Legal Proceedings   63
Item 1A.   Risk Factors   63
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   63
Item 3.   Defaults Upon Senior Securities   63
Item 4.   Mine Safety Disclosures   63
Item 5.   Other Information   63
Item 6.   Exhibits   64

  

  i  
 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

1847 HOLDINGS LLC

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
     
Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019   2
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)   3
Consolidated Statements of Shareholders’ Deficit for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)   4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (unaudited)   5
Notes to Unaudited Consolidated Financial Statements   6

  

1  
 

 

1847 HOLDINGS LLC

CONSOLIDATED BALANCE SHEETS

 

   

June 30,

2020

    December 31,
2019
 
    (unaudited)        
ASSETS            
Current Assets            
Cash   $ 4,340,001     $ 238,760  
Restricted cash     175,990       -  
Accounts receivable, net     3,848,990       2,453,455  
Vendor deposits     345,502       294,960  
Inventories, net     3,587,157       1,615,432  
Prepaid expenses and other current assets     1,154,862       1,123,486  
TOTAL CURRENT ASSETS     13,452,502       5,726,093  
Property and equipment, net     2,930,772       3,367,427  
Operating lease right of use assets     2,326,865       2,565,835  
Goodwill     7,083,144       4,998,182  
Intangible assets, net     1,728,411       1,893,577  
Deferred tax asset     1,802,256       635,503  
Other assets     45,375       45,375  
TOTAL ASSETS   $ 29,369,325     $ 19,231,992  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
CURRENT LIABILITIES                
Accounts payable and accrued expenses   $ 7,311,489     $ 4,017,630  
Floor plan payable     -       10,581  
Current portion of operating lease liability     441,336       485,773  
Advances, related party     184,678       181,333  
Lines of credit     456,105       1,250,930  
Note payable – related party     119,400       119,400  
Notes payable – current portion     5,030,487       5,367,539  
Warrant liability     2,250,000       122,344  
Convertible promissory note – current portion     821,431       584,943  
Factoring Agreement     410,374       -  
Contract liabilities     12,431,608       4,164,296  
Current portion of financing lease liability     388,023       358,584  
TOTAL CURRENT LIABILITIES     29,844,931       16,663,353  
                 
Operating lease liability – long term, net of current portion     1,885,529       2,080,062  
Notes payable – long term, net of current portion     4,972,230       3,256,469  
Contingent note payable     49,248       49,248  
Accrued expenses – long term, related party     1,132,884       905,780  
Financing lease liability, net of current portion     90,021       275,874  
TOTAL LIABILITIES   $ 37,974,843     $ 23,230,786  
1847 HOLDINGS SHAREHOLDERS’ DEFICIT                
Allocation shares, 1,000 shares issued and outstanding     1,000       1,000  
Common Shares, 500,000,000 shares authorized, 3,780,625 and 3,165,625 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively     3,780       3,165  
Additional paid-in capital     2,638,496       442,014  
Accumulated deficit     (9,317,042 )     (4,402,043 )
TOTAL 1847 HOLDINGS SHAREHOLDERS’ DEFICIT     (6,673,766 )     (3,955,864 )
NONCONTROLLING INTERESTS     (1,931,752 )     (42,930 )
TOTAL SHAREHOLDERS’ DEFICIT     (8,605,518 )     (3,998,794 )
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT   $ 29,369,325     $ 19,231,992  

 

The accompanying notes are an integral part of these consolidated financial statements

 

2  
 

 

1847 HOLDINGS LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
    2020     2019     2020     2019  
REVENUES                        
Services   $ 766,927     $ 976,327     $ 1,213,026     $ 1,551,724  
Sales of parts and equipment     316,976       615,836       605,047       852,810  
Furniture and appliances revenue    

16,471,014

      10,616,050       26,148,192       10,616,050  
TOTAL REVENUE    

17,554,917

      12,208,213       27,966,265       13,020,584  
                                 
OPERATING EXPENSES                                
Cost of sales     13,882,672       9,331,976       22,249,110       9,545,726  
Personnel costs     1,526,434       1,439,036       3,290,884       1,896,233  
Depreciation and amortization     407,909       349,264       811,145       688,086  
Fuel     82,435       171,888       186,199       360,265  
General and administrative     3,115,893       1,710,935       4,963,682       2,086,670  
TOTAL OPERATING EXPENSES     19,015,343       13,003,099       31,501,020       14,576,980  
NET LOSS FROM OPERATIONS     (1,460,426 )     (794,886 )     (3,534,755 )     (1,556,396 )
OTHER INCOME (EXPENSE)                                
Financing costs     (111,178 )     (167,406 )     (313,960 )     (175,506 )
Loss on extinguishment of debt     (948,856 )     -       (948,856 )     -  
Interest expense     (350,385 )     (306,568 )     (683,939 )     (450,860 )
Loss on acquisition receivable     (809,000 )     -       (809,000 )     -  
Change in warrant liability     (2,127,656 )     2,600       (2,127,656 )     2,600  
Other income (expense)     3,942       5,089       6,325       5,089  
Gain (loss) on sale of property and equipment     37,767       -       37,767       24,224  
TOTAL OTHER INCOME (EXPENSE)     (4,305,366 )     (466,285 )     (4,839,319 )     (594,453 )
NET LOSS BEFORE INCOME TAXES     (5,765,792 )     (1,261,171 )     (8,374,074 )     (2,150,849 )
INCOME TAX BENEFIT     (953,953 )     (5,431 )     (1,451,753 )     (259,850 )
NET LOSS BEFORE NON-CONTROLLING INTERESTS     (4,811,839 )     (1,255,740 )     (6,922,321 )     (1,890,999 )
LESS NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS     (1,269,137 )     (430,789 )     (2,007,322 )     (697,469 )
NET LOSS ATTRIBUTABLE TO 1847 HOLDINGS SHAREHOLDERS   $ (3,542,702 )   $ (824,951 )   $ (4,914,999 )   $ (1,193,530 )
                                 
Net Loss Per Common Share: Basic and diluted   $ (1.04 )   $ (0.26 )   $ (1.49 )   $ (0.38 )
Weighted-average number of common shares outstanding: Basic and diluted     3,418,378       3,162,322       3,290,747       3,138,981  

 

The accompanying notes are an integral part of these consolidated financial statements

 

3  
 

 

1847 HOLDINGS LLC

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(UNAUDITED)

 

For the Three and Six Months Ended June 30, 2020

 

    Allocation     Common Shares     Additional Paid-In     Accumulated     Non-
Controlling
    Shareholders’  
     Shares     Shares     Amount      Capital      Deficit      Interest      Deficit  
BALANCE – January 1, 2020   $ 1,000       3,165,625     $ 3,165     $ 442,014     $ (4,402,043 )   $ (42,930 )   $ (3,998,794 )
Net loss     -       -       -       -       (1,372,297 )     (738,185 )     (2,110,482 )
BALANCE – March 31, 2020   $ 1,000       3,165,625     $ 3,165     $ 442,014     $ (5,774,340 )   $ (781,115 )   $ (6,109,276 )
Common shares issued in connection with acquisition     -       415,000       415       1,037,085       -       -       1,037,500  
Common shares issued for service     -       100,000       100       244,900       -       -       245,000  
Common shares issued upon partial conversion of convertible note payable     -       100,000       100       274,900       -       -       275,000  

Warrants issued in connection with convertible note payable

    -       -       -       448,211       -       118,500       566,711  
Stock compensation                             191,386                       191,386  
Net loss     -       -       -       -       (3,542,702 )     (1,269,137 )     (4,811,839 )
BALANCE – June 30, 2020   $ 1,000       3,780,625     $ 3,780     $ 2,638,496     $ (9,317,042 )   $ (1,931,752 )   $ (8,605,518 )

 

For the Three and Six Months Ended June 30, 2019

 

    Allocation     Common Shares     Additional Paid-In     Accumulated     Non-
Controlling
    Shareholders’  
    Shares     Shares     Amount     Capital      Deficit     Interest      Deficit  
BALANCE – January 1, 2019   $ 1,000       3,115,625     $ 3,115     $ 11,891     $ (2,155,084 )   $ 112,011     $ (2,027,067 )
Net loss     -       -       -       -       (368,579 )     (266,680 )     (635,259 )
BALANCE – March 31, 2019   $ 1,000       3,115,625     $ 3,115     $ 11,891     $ (2,523,663 )   $ (154,669 )   $ (2,662,326 )
Common shares and warrants issued in connection with convertible note payable     -       50,000       50       430,123       -       -       430,173  
Net loss     -       -       -       -       (824,951 )     (430,789 )     (1,255,740 )
BALANCE – June 30, 2019   $ 1,000       3,165,625     $ 3,165     $ 442,014     $ (3,348,614 )   $ (585,458 )   $ (3,487,893 )

 

The accompanying notes are an integral part of these consolidated financial statements

 

4  
 

 

1847 HOLDINGS LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Six Months Ended
June 30,
 
    2020     2019  
OPERATING ACTIVITIES            
Net loss   $ (6,922,321 )   $ (1,890,999 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                
Gain on sale of property and equipment     (37,767 )     (24,224 )
Depreciation and amortization     811,145       688,086  
Stock compensation     436,386       -  
Loss on extinguishment of debt     948,856       -  
Amortization of financing costs     208,837       106,736  
Amortization of warrant feature of note payable     108,325       68,770  
Amortization of original interest discount     46,212       16,205  
Amortization of operating lease right-of-use assets     238,970       19,107  
Changes in operating assets and liabilities:                
Accounts receivable     (1,281,527 )     (1,246,154 )
Inventory     (514,236 )     315,390  
Prepaid expenses and other assets     10,050       57,716  
Deposits     (50,542 )        
Accounts payable and accrued expenses     3,019,380       607,378  
Operating lease liability     (238,970 )     (19,107 )
Customer deposits     5,861,609       1,107,639  
Deferred taxes and uncertain tax position     (1,201,753 )     (259,831 )
Warrant liability     2,127,656       (2,600 )
Due to related parties     3,345       3,150  
Accrued expense long-term     227,104       -  
Net cash provided by (used in) operating activities     3,800,759       (452,738 )
                 
INVESTING ACTIVITIES                
Cash acquired in acquisition     1,268,285       1,285,214  
Proceeds from the sale of property and equipment     31,500       39,750  
Purchase of property and equipment     (46,004 )     (14,876 )
Net cash provided by investing activities     1,253,781       1,310,088  
                 
FINANCING ACTIVITIES                
Proceeds (repayments) of short-term borrowings     1,026,200       (88,029 )
Repayments of notes payable     (1,197,796 )     (483,266 )
Net borrowings from lines of credit     (443,270 )     -  
Repayment of financing lease     (162,443 )     (302,099 )
Net cash used in financing activities     (777,309 )     (873,394 )
                 
NET CHANGE IN CASH     4,277,231       (16,044 )
                 
CASH                
Beginning of period     238,760       333,880  
End of period   $ 4,515,991     $ 317,836  

 

The accompanying notes are an integral part of these consolidated financial statements

 

5  
 

  

NOTE 1—ORGANIZATION AND NATURE OF BUSINESS

 

1847 Holdings LLC (the “Company”) was formed under the laws of the State of Delaware on January 22, 2013. The Company is in the business of acquiring small businesses in a variety of different industries.

 

On March 3, 2017, the Company’s wholly owned subsidiary 1847 Neese Inc., a Delaware corporation (“1847 Neese”), entered into a stock purchase agreement with Neese, Inc., an Iowa corporation (“Neese”), and Alan Neese and Katherine Neese, pursuant to which 1847 Neese acquired all of the issued and outstanding capital stock of Neese. As a result of this transaction, 1847 Neese owns 55% of 1847 Neese, with the remaining 45% held by the sellers.

 

On January 10, 2019, the Company established 1847 Goedeker Inc. (“Goedeker”) as a wholly owned subsidiary in the State of Delaware in connection with the proposed acquisition of assets from Goedeker Television Co., Inc., a Missouri corporation (“Goedeker Television”), described below. On March 20, 2019, the Company established 1847 Goedeker Holdco Inc. (“1847 Goedeker”) as a wholly owned subsidiary in the State of Delaware and subsequently transferred all of its shares in Goedeker to 1847 Goedeker, such that Goedeker became a wholly owned subsidiary of 1847 Goedeker.

 

On January 18, 2019, Goedeker entered into an asset purchase agreement with Goedeker Television and Steve Goedeker and Mike Goedeker, pursuant to which, on April 5, 2019, Goedeker acquired substantially all of the assets of Goedeker Television used in its retail appliance and furniture business (see Note 9). As a result of this transaction, the Company owns 70% of 1847 Goedeker, with the remaining 30% held by third parties, and 1847 Goedeker owns 100% of Goedeker.

 

On March 27, 2020, the Company and it’s wholly owned subsidiary 1847 Asien Inc., a Delaware corporation (“1847 Asien”), entered into a stock purchase agreement with Asien’s Appliance, Inc. (“Asien’s”) and Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992, as amended, pursuant to which on May 28, 2020, 1847 Asien acquired all of the issued and outstanding stock of Asien’s (see Note 9). As a result of this transaction, the Company owns 95% of 1847 Asien, with the remaining 5% held by a third party, and 1847 Asien owns 100% of Asien’s.

 

The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries, 1847 Neese, Neese, 1847 Goedeker, Goedeker, 1847 Asien and Asien’s. All significant intercompany balances and transactions have been eliminated in consolidation.

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The financial statements of the Company have been prepared without audit in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and are presented in US dollars.

 

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020.

 

These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2019.

 

Accounting Basis

 

The Company uses the accrual basis of accounting and GAAP. The Company has adopted a calendar year end.

 

6  
 

 

Segment Reporting

 

The Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. Beginning with the second quarter of 2019, the Company changed its operating and reportable segments from one segment to two segments: the Retail and Appliances Segment, which is operated by Goedeker, and the Land Management Segment, which is operated by Neese.

 

The Retail and Appliances Segment is comprised of a retail store and an e-commerce destination for home furnishings, including appliances, furniture, home goods and related products, based in St. Louis, Missouri. In May 2020, the Company’s acquisition located in Santa Rosa, California, provides a wide variety of appliance services including sales, delivery, installation, service and repair, extended warranties, and financing to the North Bay area.

 

The Land Management Services Segment is comprised of professional services for waste disposal and a variety of agricultural services, wholesaling of agricultural equipment and parts, local trucking services, various shop services, and sales of other products and services, based in Grand Junction, Iowa.

 

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 “Holding Company” below and these include costs associated with executive management, financing activities and public company compliance.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with the original maturities of three months or less to be cash equivalents.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications

 

Certain Statements of Operations reclassifications have been made in the presentation of the Company’s prior financial statements and accompanying notes to conform to the presentation as of and for the three and six months ended June 30, 2020. The Company reclassified certain operating expense accounts in the Consolidated Statement of Operations. The reclassification had no impact on financial position, net income, or shareholder’s equity.

 

Revenue Recognition and Cost of Revenue 

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant judgments. The Company’s adoption of this ASU resulted in no change to the Company’s results of operations or balance sheet.

 

7  
 

  

Retail and Appliances Segment

 

Goedeker 

 

Goedeker collects the full sales price from the customer at the time the order is placed. Goedeker does not incur incremental costs obtaining purchase orders from customers, however, if it did, because all of Goedeker’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized.

 

The revenue that Goedeker recognizes arises from orders it receives from its customers. Goedeker’s performance obligations under the customer orders correspond to each sale of merchandise that it makes to customers under the purchase orders; as a result, each purchase order generally contains only one performance obligation based on the merchandise sale to be completed.

 

Control of the delivery transfers to customers when the customer can direct the use of, and obtain substantially all the benefits from, Goedeker’s products, which generally occurs when the customer assumes the risk of loss. The risk of loss shifts to the customer at different times depending on the method of delivery. Goedeker delivers products to its customers in three possible ways. The first way is through a shipment of the products through a third-party carrier from Goedeker’s warehouse to the customer (a “Company Shipment”). The second way is through a shipment of the products through a third-party carrier from a warehouse other than Goedeker’s warehouse to the customer (a “Drop Shipment”) and the third way is where Goedeker itself delivers the products to the customer and often also installs the product (a “Local Delivery”). In the case of a Local Delivery, Goedeker loads the product on to its own truck and delivers and installs the product at the customer’s location. When a product is delivered through a Local Delivery, risk of loss passes to the customer at the time of installation and revenue is recognized upon installation at the customer’s location. In the case of a Company Shipment and a Drop Shipment, the delivery to the customer is made free on board, or FOB, shipping point (whether from Goedeker’s warehouse or a third party’s warehouse). Therefore, risk of loss and title transfers to the customer once the products are shipped (i.e., leaves the Goedeker’s warehouse or a third-party’s warehouse). After shipment and prior to delivery, the customer is able to redirect the product to a different destination, which demonstrates the customer’s control over the product once shipped. Once the risk of loss has shifted to the customer, Goedeker has satisfied its performance obligation and recognizes revenue.

 

Goedeker agrees with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price. In Goedeker’s contracts with customers, it allocates the entire transaction price to the sales price, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Any sales tax, value added tax, and other tax Goedeker collects concurrently with revenue-producing activities are excluded from revenue.

 

If Goedeker continued to apply legacy revenue recognition guidance for the three and six months ended June 30, 2020 and 2019, revenues, gross margin, and net loss would not have changed.

 

Cost of revenue includes the cost of purchased merchandise plus the cost of shipping merchandise and where applicable installation, net of promotional rebates and other incentives received from vendors.

 

Substantially all Goedeker’s sales are to individual retail consumers.

 

Shipping and Handling ‒ Goedeker bills its customers for shipping and handling charges, which are included in net sales for the applicable period, and the corresponding shipping and handling expense is reported in cost of sales.

 

Disaggregated Revenue ‒ Goedeker disaggregates revenue from contracts with customers by contract type, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Asien’s

 

Asien’s collects 100% of the payment for special-order models including tax, and 50% of the payment for non-special orders from the customer at the time the order is placed. Asien’s does not incur incremental costs obtaining purchase orders from customers; however, if Asien’s did, because all Asien’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. 

 

Performance Obligations – The revenue that Asien’s recognizes arises from orders it receives from customers. Asien’s performance obligations under the customer orders correspond to each sale of merchandise that it makes to customers under the purchase orders; as a result, each purchase order generally contains only one performance obligation based on the merchandise sale to be completed. Control of the delivery transfers to customers when the customer can direct the use of, and obtain substantially all the benefits from, Asien’s products, which generally occurs when the customer assumes the risk of loss. The transfer of control generally occurs at the point of pickup, shipment, or installation. Once this occurs, Asien’s has satisfied its performance obligation and Asien’s recognizes revenue.

 

8  
 

 

Transaction Price ‒ Asien’s agrees with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price. In Asien’s contracts with customers, it allocates the entire transaction price to the sales price, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Any sales tax that Asien’s collects concurrently with revenue-producing activities are excluded from revenue.

 

Cost of revenue includes the cost of purchased merchandise plus freight and any applicable delivery charges from the vendor to the company. Substantially all Asien’s sales are to individual retail consumers (homeowners), builders and designers. The large majority of customers are homeowners and their contractors, with the homeowner being key in the final decisions. The Company has a diverse customer base with no one client accounting for more than 5% of total revenue.

 

Goedeker’s and Asien’s disaggregated revenue by sales type for the three and six months ended June 30, 2020 and 2019 is as follows:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2020     2019     2020     2019  
Appliance sales   $ 13,188,035     $ 8,759,916     $ 21,316,809     $ 8,759,916  
Furniture sales     2,944,013       1,702,284       4,326,378       1,702,284  
Other sales     338,966       153,850       505,005       153,850  
Total revenue   $ 16,471,014     $ 10,616,050     $ 26,148,192     $ 10,616,050  

 

Land Management Segment

 

Neese’s payment terms are due on demand from acceptance of delivery. Neese does not incur incremental costs obtaining purchase orders from customers, however, if Neese did, because all of Neese’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. 

 

The revenue that Neese recognizes arises from orders it receives from customers. Neese’s performance obligations under the customer orders correspond to each service delivery or sale of equipment that Neese makes to customers under the purchase orders; as a result, each purchase order generally contains only one performance obligation based on the service or equipment sale to be completed. Control of the delivery transfers to customers when the customer is able to direct the use of, and obtain substantially all of the benefits from, Neese’s products, which generally occurs at the later of when the customer obtains title to the equipment or when the customer assumes risk of loss. The transfer of control generally occurs at a point of delivery. Once this occurs, Neese has satisfied its performance obligation and Neese recognizes revenue.

 

Neese also sells equipment by posting it on auction sites specializing in farm equipment. Neese posts the equipment for sale on a “magazine” site for several weeks before the auction. When Neese decides to sell, it moves the equipment to the auction site. The auctions are one day. If Neese accepts a bid, the customer pays the bid price and arranges for pick-up of the equipment.

 

Transaction Price ‒ Neese agrees with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon service fee. In Neese’s contracts with customers, it allocates the entire transaction price to the service fee to the customer, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Any sales tax, value added tax, and other tax Neese collects concurrently with revenue-producing activities are excluded from revenue.

 

If Neese continued to apply legacy revenue recognition guidance for the three and six months ended June 30, 2020, revenues, gross margin, and net loss would not have changed.

 

Substantially all of Neese’s sales are to businesses, including farmers or municipalities and very little to individuals.

 

Disaggregated Revenue ‒ Neese disaggregates revenue from contracts with customers by contract type, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

9  
 

  

Neese’s disaggregated revenue by sales type for the three and six months ended June 30, 2020 and 2019 is as follows:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2020     2019     2020     2019  
Services                        
Trucking   $ 278,734     $ 511,369     $ 519,497     $ 883,841  
Waste hauling     321,919       272,028       439,049       376,357  
Repairs     45,609       84,679       106,293       137,607  
Other     120,665       108,250       148,187       153,919  
Total services     766,927       976,326       1,213,026       1,551,724  
Sales of parts and equipment     316,976       615,836       605,047       852,810  
Total revenue   $ 1,083,903     $ 1,592,162     $ 1,818,073     $ 2,404,534  

 

Performance Obligations ‒ Performance obligations for the different types of services are discussed below:

 

Trucking ‒ Revenues for time and material contracts are recognized when the merchandise or commodity is delivered to the destination specified in the agreement with the customer.

 

Waste Hauling and pumping ‒ Revenues for waste hauling and pumping is recognized when the hauling, pumping, and spreading are complete.

 

Repairs ‒ Revenues for repairs are recognized upon completion of equipment serviced.

 

Sales of parts and equipment ‒ Revenues for the sale of parts and equipment are recognized upon the transfer and acceptance by the customer.

 

Accounts Receivable, Net ‒ Accounts receivable, net, are amounts due from customers where there is an unconditional right to consideration. Unbilled receivables of $0 and $121,989 are included in this balance at June 30, 2020 and December 31, 2019, respectively. The payment of consideration related to these unbilled receivables is subject only to the passage of time.

 

Neese reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After Neese has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance. Additions to the provision for bad debt are charged to expense.

 

Neese determined that an allowance for loss of $14,614 and $29,001 was required at June 30, 2020 and December 31, 2019, respectively.

 

Receivables

 

Receivables consist of credit card transactions in the process of settlement. Vendor rebates receivable represent amounts due from manufactures from whom the Company purchases products. Rebates receivable are stated at the amount that management expects to collect from manufacturers, net of accounts payable amounts due the vendor. Rebates are calculated on product and model sales programs from specific vendors. The rebates are paid at intermittent periods either in cash or through issuance of vendor credit memos, which can be applied against vendor accounts payable. Based on the Company’s assessment of the credit history with its manufacturers, it has concluded that there should be no allowance for uncollectible accounts. The Company historically collects substantially all of its outstanding rebates receivables. Uncollectible balances are expensed in the period it is determined to be uncollectible.

 

10  
 

  

Allowance for Credit Losses

 

Provisions for credit losses are charged to income as losses are estimated to have occurred and in amounts sufficient to maintain an allowance for credit losses at an adequate level to provide for future losses on the Company’s accounts receivable. The Company charges credit losses against the allowance and credits subsequent recoveries, if any, to the allowance. Historical loss experience and contractual delinquency of accounts receivables, and management’s judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or portfolio performance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available.

 

The allowance for credit losses consists of general and specific components. The general component of the allowance estimates credit losses for groups of accounts receivable on a collective basis and relates to probable incurred losses of unimpaired accounts receivables. The Company records a general allowance for credit losses that includes forecasted future credit losses.

 

Inventory

 

Inventory consists of finished products acquired for resale and is valued at the lower-of-cost-or-market with cost determined on a specific item basis for the Neese and of finished products acquired for resale and is valued at the low-of-cost-or-market with cost determined on an average item basis for Goedeker. For Asien’s, inventory mainly consists of appliances that are acquired for resale and is valued at the average cost determined on a specific item basis. Inventory also consists of parts that are used in service and repairs and may or may not be charged to the customer depending on warranty and contractual relationship The Company periodically evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. The Company estimated an obsolescence allowance of $463,687 and $425,000 at June 30, 2020 and December 31, 2019, respectively.

 

Property and Equipment

 

Property and equipment is stated at cost. Depreciation of furniture, vehicles and equipment is calculated using the straight-line method over the estimated useful lives as follows:

 

  Useful Life
(Years)
Building and Improvements 4
Machinery and Equipment 3-7
Tractors 3-7
Trucks and Vehicles 3-6

 

Goodwill and Intangible Assets

 

In applying the acquisition method of accounting, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment within one year of acquisitions or annually as of December 1, and whenever indicators of impairment exist. The fair value of intangible assets are compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value.

 

Acquired identifiable intangible assets are amortized over the following periods:

 

Acquired intangible Asset   Amortization Basis  

Expected Life

(years)

Customer-Related   Straight-line basis   5-15
Marketing-Related   Straight-line basis   5

 

11  
 

 

Long-Lived Assets 

 

The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents and amounts due to shareholders. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.

 

Derivative Instrument Liability

 

The Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At June 30, 2020, the Company classified a warrant issued in conjunction with a term loan as a derivative instrument (see Note 11).

 

Income Taxes

 

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

 

Stock-Based Compensation

 

The Company records stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued and are recognized over the employees required service period, which is generally the vesting period.

 

Basic Income (Loss) Per Share

 

Basic income (loss) per share is calculated by dividing the net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. As the Company had a net loss for the three and six months ended June 30, 2020, the following 1,311,437 potentially dilutive securities were excluded from diluted loss per share: 90,000 for stock options, 400,000 for outstanding warrants and 821,437 related to the convertible note payable and accrued interest. As the Company had a net loss for the three and six months ended June 30, 2019, the following 919,451 potentially dilutive securities were excluded from diluted loss per share: 200,000 for outstanding warrants and 719,451 related to the convertible note payable and accrued interest.

 

Going Concern Assessment

 

Management assesses going concern uncertainty in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, management makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable those implementations can be achieved and management has the proper authority to execute them within the look-forward period.

 

12  
 

 

The Company has generated losses since its inception and has relied on cash on hand, external bank lines of credit, issuance of third party and related party debt and the sale of a note to support cashflow from operations. For the six months ended June 30, 2020, the Company incurred operating losses of $6,922,321 (before deducting losses attributable to non-controlling interests), cash flows from operations of $3,800,759 and negative working capital of $16,392,429. In addition to the estimates of funds available from operations, the Company has unpledged assets that it believes could provide for $478,000 of additional borrowings.

 

Management has prepared estimates of operations for fiscal year 2020 and believes that sufficient funds will be generated from operations to fund its operations, and to service its debt obligations for one year from the date of the filing of the consolidated financial statements in the Company’s Quarterly Report on Form 10-Q, indicate improved operations and the Company’s ability to continue operations as a going concern.

 

The impact of COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing on a return to more normal operations. Further, the recently enacted Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) provides for economic assistance loans through the United States Small Business Administration (the “SBA”). On April 8, 2020 and April 10, 2020, and prior to the acquisition on April 28, 2020, Goedeker, Neese and Asien received $642,600, $383,600 and $357,500, respectively, in Payroll Protection Program (“PPP”) loans from the SBA under the CARES Act. The PPP provides that the PPP loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. Goedeker and Neese intend to use the proceeds from the PPP loans for qualifying expenses and to apply for forgiveness of the PPP loans in accordance with the terms of the CARES Act.

 

The accompanying consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.

 

Management believes that based on relevant conditions and events that are known and reasonably knowable that its forecasts, for one year from the date of the filing of the financial statements in this registration statement, indicate improved operations and the Company’s ability to continue operations as a going concern. The Company has contingency plans to reduce or defer expenses and cash outlays should operations not improve in the look forward period.

 

Recent Accounting Pronouncements

 

Not Yet Adopted

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the update requires only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. The update is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will test goodwill for impairment within one year of the acquisition or annually as of December 1, and whenever indicators of impairment exist.

 

13  
 

 

In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. This pronouncement was amended under ASU 2019-10 to allow an extension on the adoption date for entities that qualify as a small reporting company. The Company has elected this extension and the effective date for the Company to adopt this standard will be for fiscal years beginning after December 15, 2022. The Company has not completed its assessment of the standard, but does not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.

 

NOTE 3—BUSINESS SEGMENTS

 

Summarized financial information concerning the Company’s reportable segments is presented below:

 

    For the Six Months ended June 30, 2020     For the Six Months ended June 30, 2019  
    Retail &
Appliances
    Land
Management Services
    Corporate
Services
    Total     Retail &
Appliances
    Land
Management
Services
    Corporate
Services
    Total  
Revenue                                                
Services   $ -     $ 1,213,026     $ -     $ 1,213,026     $ -     $ 1,551,724     $ -     $ 1,551,724  
Sales of parts and equipment     -       605,047       -       605,047       -       852,810       -       852,810  
Furniture and appliances revenue     26,148,192               -       26,148,192       10,616,050       -       -       10,616,050  
Total Revenue     26,148,192       1,818,073       -       27,966,265       10,616,050       2,404,534       -       13,020,584  
                                                                 
Total cost of sales     21,720,221       528,889       -       22,249,110       8,772,572       773,154       -       9,545,726  
Total operating expenses     6,431,104       2,299,153       521,653       9,251,910       2,193,887       2,757,490       79,877       5,031,254  
Loss from operations   $ (2,003,125 )   $ (1,009,969 )   $ (521,653 )   $ (3,534,755 )   $ (350,409 )   $ (1,126,110 )   $ (79,877 )   $ (1,556,396 )

  

    For the Three Months ended June 30, 2020     For the Three Months ended June 30, 2019  
    Retail & Appliances     Land Management Services     Corporate Services     Total     Retail & Appliances     Land Management Services     Corporate Services     Total  
Revenue                                                
Services   $ -     $ 766,927     $ -       766,927     $ -     $ 976,327     $ -     $ 976,327  
Sales of parts and equipment     -       316,976       -       316,976       -       615,836       -       615,836  
Furniture and appliances revenue     16,471,014       -       -       16,471,014       10,616,050       -       -       10,616,050  
Total Revenue     16,471,014       1,083,903       -       17,554,917       10,616,050       1,592,163       -       12,208,213  
                                                                 
Total cost of sales     13,609,051       273,621       -       13,882,672       8,772,572       559,404       -       9,331,976  
Total operating expenses     3,549,965       1,100,338       482,368       5,132,671       2,193,887       1,437,654       39,582       3,671,123  
Loss from operations   $ (688,002 )   $ (290,056 )   $ (482,368 )   $ (1,460,426 )   $ (350,409 )   $ (404,895 )   $ (39,582 )   $ (794,886 )

 

 

14  
 

 

NOTE 4—RECEIVABLES

 

At June 30, 2020 and December 31, 2019, receivables consisted of the following:

 

    June 30,
2020
    December 31,
2019
 
Credit card payments in process of settlement   $ 997,475     $ 406,838  
Vendor rebates receivable     2,694,078       1,380,369  
Trade receivables from customers     172,051       695,249  
Total receivables     3,863,604       2,482,456  
Allowance for doubtful accounts     (14,614 )     (29,001 )
Accounts receivable, net   $ 3,848,990     $ 2,453,455  

  

NOTE 5—INVENTORIES

 

At June 30, 2020 and December 31, 2019, the inventory balances are composed of:

 

    June 30,
2020
    December 31,
2019
 
Machinery and Equipment   $ 123,706     $ 119,444  
Parts     247,702       142,443  
Appliances     3,476,039       1,562,359  
Furniture     151,490       189,376  
Other     51,906       53,356  
Subtotal     4,050,843       2,066,978  
Allowance for inventory obsolescence     (463,686 )     (451,546 )
Inventories, net   $ 3,587,157     $ 1,615,432  

  

Inventory and accounts receivable are pledged to secure a loan from Burnley, SBCC and Home State Bank described and defined in the notes below.

 

NOTE 6—DEPOSITS WITH VENDORS

 

Deposits with vendors represent cash on deposit with one vendor arising from accumulated rebates paid by the vendor. The deposits are used by the vendor to seek to secure the Company’s purchases. The deposit can be withdrawn at any time up to the amount of the Company’s credit line with the vendor. Alternatively, the Company could secure their credit line with a floor plan line from a lender and withdraw all its deposits. The Company has elected to leave the deposits with the vendor on which it earns interest income. As of June 30, 2020 and December 31, 2019, deposits with vendors totalled $345,502 and $294,960, respectively.

 

NOTE 7—PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at June 30, 2020 and December 31, 2019:

 

Classification   June 30,
2020
    December 31,
2019
 
Buildings and improvements   $ 5,338     $ 5,338  
Equipment and machinery     3,160,298       3,120,498  
Tractors     2,723,296       2,694,888  
Trucks and other vehicles     1,235,914       1,138,304  
Leasehold improvements     117,626       117,626  
Total     7,242,472       7,076,654  
Less: Accumulated depreciation     (4,311,700 )     (3,709,227 )
Property and equipment, net   $ 2,930,772     $ 3,367,427  

 

Depreciation expense for the six months ended June 30, 2020 and 2019 was $645,979 and $684,686, respectively.

 

All property and equipment are pledged to secure loans from Burnley, SBCC and Home State Bank as described and defined in the notes below.

 

15  
 

 

NOTE 8—INTANGIBLE ASSETS

 

The following provides a breakdown of identifiable intangible assets as of June 30, 2020 and December 31, 2019:

 

    June 30,
2020
    December 31,
2019
 
Customer Relationships            
Identifiable intangible assets, gross   $ 783,000     $ 783,000  
Accumulated amortization     (84,393 )     (56,023 )
Customer relationship identifiable intangible assets, net     698,607       726,977  
Marketing Related                
Identifiable intangible assets, gross     1,368,000       1,368,000  
Accumulated amortization     (338,196 )     (201,400 )
Marketing related identifiable intangible assets, net     1,029,804       1,166,600  
Total Identifiable intangible assets, net   $ 1,728,411     $ 1,893,577  

  

In connection with the acquisitions of Goedeker and Neese, the Company identified intangible assets of $2,117,000 and $34,000, respectively, representing trade names and customer relationships. These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 7.8 years and amortization expense amounted to $165,166 and $3,400 for the six months ended June 30, 2020 and 2019, respectively.

 

As of June 30, 2020, the estimated annual amortization expense for each of the next five fiscal years is as follows:

 

2020 (remainder)   $ 165,166  
2021     330,332  
2022     324,665  
2023     323,532  
2024     122,132  
Thereafter     462,584  
Total   $ 1,728,411  

 

16  
 

 

NOTE 9—ACQUISITIONS

 

Goedeker

 

On January 18, 2019, Goedeker entered into an asset purchase agreement with Goedeker Television and Steve Goedeker and Mike Goedeker (the “Stockholders”), pursuant to which Goedeker agreed to acquire substantially all of the assets of Goedeker Television used in its retail appliance and furniture business (the “Goedeker Business”).

 

On April 5, 2019, Goedeker, 1847 Goedeker, and the Stockholders entered into an amendment to the asset purchase agreement and closing of the acquisition of substantially all of the assets of Goedeker Television used in the Goedeker Business was completed (the “Goedeker Acquisition”).

 

The aggregate purchase price was $6,200,000 consisting of: (i) $1,500,000 in cash, subject to adjustment; (ii) the issuance of a promissory note in the principal amount of $4,100,000; and (iii) up to $600,000 in earn out payments (as described below). As additional consideration, 1847 Goedeker agreed to issue to each of the Stockholders a number of shares of its common stock equal to a 11.25% non-dilutable interest (22.5% total) in all of the issued and outstanding stock of 1847 Goedeker as of the closing date.

 

The cash portion was decreased by the amount of outstanding indebtedness of Goedeker Television for borrowed money existing as of the closing. As a result, the cash portion was adjusted to $478,000.

 

The asset purchase agreement also provided for an adjustment to the purchase price based on the difference between actual working capital at closing and Goedeker Television’s preliminary estimate of closing date working capital.  In accordance with the asset purchase agreement, an independent CPA firm was retained by Goedeker and Goedeker Television to resolve differences in the working capital amounts.  The report issued by that CPA firm determined that Goedeker Television owed Goedeker $809,000, which Goedeker Television has not paid.  On or about March 23, 2020, Goedeker submitted a claim for arbitration to the American Arbitration Association relating to Goedeker Television’s failure to pay the amount owed. The claim alleges, inter alia, breach of contract, fraud, indemnification and the breach of the covenant of good faith and fair dealing. Goedeker is alleging damages in the amount of $809,000, plus attorneys’ fees and costs. The $809,000 is included in other assets in the accompanying balance sheet as of December 31, 2019.

 

On June 1, 2020, Goedeker entered into a settlement agreement with Goedeker Television, Steve Goedeker, Mike Goedeker and 1847 Goedeker. The settlement agreement and the related transaction documents that are exhibits to the settlement agreement were all signed on June 1, 2020 but will only become effective upon the closing of Goedeker’s initial public offering (the “IPO”), which has not yet occurred. Pursuant to the settlement agreement, the parties entered into an amendment and restatement of the 9% subordinated promissory note described below (see Note 11). In addition, the parties agreed that the arbitration action described above would be settled effective upon the closing of the IPO and that each party to such arbitration action would release all claims that it has against the other parties to such action. As part of the settlement of the arbitration action, Goedeker agreed that the sellers will not have to pay the $809,000 working capital adjustment amount resulting in a loss on the acquisition receivable in the period ending June 30, 2020.

 

Goedeker Television is also entitled to receive the following earn out payments to the extent the Goedeker Business achieves the applicable EBITDA (as defined in the asset purchase agreement) targets:

 

1. An earn out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing twelve (12) month period from the closing date is $2,500,000 or greater;

 

2. An earn out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing twelve (12) month period from the first anniversary of closing date is $2,500,000 or greater; and

 

3. An earn out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing twelve (12) month period from the second anniversary of the closing date is $2,500,000 or greater.

 

17  
 

  

To the extent the EBITDA of the Goedeker Business for any applicable period is less than $2,500,000 but greater than $1,500,000, Goedeker must pay a partial earn out payment to Goedeker Television in an amount equal to the product determined by multiplying (i) the EBITDA Achievement Percentage by (ii) the applicable earn out payment for such period, where the “Achievement Percentage” is the percentage determined by dividing (A) the amount of (i) the EBITDA of the Goedeker Business for the applicable period less (ii) $1,500,000, by (B) $1,000,000. For avoidance of doubt, no partial earn out payments shall be earned or paid to the extent the EBITDA of the Goedeker Business for any applicable period is equal or less than $1,500,000. For the trailing twelve (12) month period from the closing date, EBITDA for the Goedeker Business was $(2,825,000), so Goedeker Television is not entitled to an earn our payment for that period.

 

To the extent Goedeker Television is entitled to all or a portion of an earn out payment, the applicable earn out payment(s) (or portion thereof) shall be paid on the date that is three (3) years from the closing date, and shall accrue interest from the date on which it is determined Goedeker Television is entitled to such earn out payment (or portion thereof) at a rate equal to five percent (5%) per annum, computed on the basis of a 360 day year for the actual number of days elapsed.

 

The rights of Goedeker Television to receive any earn out payment are subordinate to the rights of Burnley and SBCC under separate subordination agreements that Goedeker Television entered into with them on April 5, 2019 in connection with the Acquisition (see Notes 9 and 11). The Company determined the fair value of the earnout on the date of acquisition was $81,494. Such amount was recorded as a contingent consideration liability within the accounts payable and accrued expense line item on the consolidated balance sheet and is revalued to fair value each reporting period until settled. The year 1 contingent liability of $32,246 was written-off in the year ended December 31, 2019 as the target was not met and the balance of the liability at June 30, 2020 is $49,248.

 

The provisional fair value of the purchase consideration issued to Goedeker Television was allocated to the net tangible assets acquired. The Company accounted for the Goedeker Acquisition as the purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value of the net liabilities assumed was approximately $614,337. The excess of the aggregate fair value of the net tangible assets has been allocated to goodwill.

 

The table below shows the analysis for the Goedeker asset purchase:

 

Purchase consideration at final fair value:      
Note payable, net of $462,102 debt discount and $215,500 of capitalized financing costs   $ 3,422,398  
Contingent note payable     81,494  
Non-controlling interest     979,523  
Amount of consideration   $ 4,483,415  
         
Assets acquired and liabilities assumed at fair value        
Accounts receivable   $ 334,446  
Inventories     1,851,251  
Working capital adjustment receivable and other assets     1,104,863  
Property and equipment     216,286  
Customer related intangibles     749,000  
Marketing related intangibles     1,368,000  
Accounts payable and accrued expenses     (3,929,876 )
Customer deposits     (2,308,307 )
Net tangible assets acquired (liabilities assumed)   $ (614,337 )
         
Total net assets acquired (liabilities assumed)   $ (614,337 )
Consideration paid     4,483,415  
Goodwill   $ 5,097,752  

 

The estimated useful life remaining on the property and equipment acquired is 4 to 5 years.

 

18  
 

 

Asien’s

 

On March 27, 2020, the Company and 1847 Asien entered into a stock purchase agreement with Asien’s and Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992 (the “Seller”), pursuant to which 1847 Asien agreed to acquire all of the issued and outstanding capital stock of Asien’s.

 

On May 282020, the Company, 1847 Asien, Asien’s and the Seller entered into an amendment to the stock purchase agreement and closing of the acquisition of all of the issued and outstanding capital stock of Asien’s was completed (the “Asien’s Acquisition”).

 

The aggregate purchase price was $1,918,000 consisting of: (i) $233,000 in cash, subject to adjustment; (ii) the issuance of an amortizing promissory note in the principal amount of $200,000; (iii) the issuance of a demand promissory note in the principal amount of $655,000; and (iv) 415,000 common shares of the Company, having a fair value of $1,037,500 (the “Shares”), which may be repurchased by the Company for a period of one year following the closing at a purchase price of $2.50 per share.

 

The purchase price is subject to a post-closing working capital adjustment provision based on the difference between actual working capital at closing and Goedeker Television’s preliminary estimate of closing date working capital. If the final working capital exceeds the preliminary working capital estimate, 1847 Asien must pay to the Seller an amount of cash that is equal to such excess. If the preliminary working capital estimate exceeds the final working capital, the Seller must pay to 1847 Asien an amount in cash equal to such excess, provided, however, that the Seller may, at its option, in lieu of paying such excess in cash, deliver and transfer to 1847 Asien a number of Shares that is equal to such excess divided by $2.00.

 

The provisional fair value of the purchase consideration issued to the Seller was allocated to the net tangible assets acquired. The Company accounted for the Asien’s Acquisition as the purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value of the net assets acquired was approximately $162,272. The excess of the aggregate fair value of the net tangible assets has been allocated to goodwill.

 

The Company is currently in the process of completing the preliminary purchase price allocation as an acquisition of certain assets. The final purchase price allocation for Asien’s will be included in the Company’s financial statements in future periods. The table below shows preliminary analysis for the Asien’s Acquisition: 

 

Provisional Purchase Consideration at preliminary fair value:      
Common stock   $ 1,037,500  
Notes payable     855,000  
Cash     233,000  
Amount of consideration   $ 2,125,500  
         
Assets acquired and liabilities assumed at preliminary fair value        
Cash   $ 1,501,285  
Accounts receivable     235,746  
Inventories     1,457,489  
Other current assets     41,427  
Property and equipment     157,052  
Accounts payable and accrued expenses     (280,752 )
Customer deposits     (2,405,703 )
Notes payable     (509,272 )
Deferred tax liability     (35,000 )
Net tangible assets acquired   $ 162,272  
         
Total net assets acquired   $ 162,272  
Consideration paid     2,125,500  
Preliminary goodwill   $ 1,963,228  

 

19  
 

 

The estimated useful life remaining on the property and equipment acquired is 5 to 13 years.

 

The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the Goedeker and Asien’s Acquisitions been completed as of January 1, 2019 or to project potential operating results as of any future date or for any future periods. The revenue and net loss before non-controlling interest of Asien since May 28, 2020 acquisition date through June 30, 2020 included in the consolidated income statement amounted to approximately $1,185,980 and $188,781, respectively.

    

    For the Six Months Ended
June 30,
 
    2020     2019  
Revenues, net   $ 33,759,878     $ 19,360,577  
Net loss allocable to common shareholders   $ (4,353,514 )   $ (759,928 )
Net loss per share   $ (1.26 )   $ (0.22 )
Weighted average number of shares outstanding     3,460,158       3,530,625  

 

NOTE 10—LINES OF CREDIT

 

Northpoint Commercial Finance LLC

 

On June 24, 2019, Goedeker, as borrower, entered into a loan and security agreement with Northpoint Commercial Finance LLC (“Northpoint”), which was amended on August 2, 2019, for revolving loans up to an aggregate maximum loan amount of $1,000,000 for the acquisition, financing or refinancing by Goedeker of inventory at an interest rate of LIBOR plus 7.99%. There is no outstanding balance on the line of credit as of June 30, 2020.

 

Pursuant to the loan and security agreement, Goedeker shall pay the following fees to Northpoint: (i) an audit fee for each audit conducted as determined by Northpoint, equal to the out-of-pocket expense incurred by Northpoint plus any minimum audit fee established by Northpoint; (ii) a fee for any returned payments equal to the lesser of the maximum amount permitted by law or $50; (iii) a late fee for each payment not received by the 25th day of a calendar month, and each month thereafter until such payment is paid, equal to the greater of 5% of the amount past due or $25; (iv) a billing fee equal to $250 for any month for which Goedeker requests a paper billing statement; (v) a live check fee equal to $50 for each check that Goedeker sends to Northpoint for payment of obligations under the loan and security agreement; (vi) processing fees to be determined by Northpoint; and (vii) any additional fees that Northpoint may implement from time to time.

 

The loan and security agreement contains customary events of default, including in the event of (i) non-payment, (ii) a breach by Goedeker of any of its representations, warranties or covenants under the loan and security agreement or any other agreement entered into with Northpoint, or (iii) the bankruptcy or insolvency of Goedeker.  The loan and security agreement contains customary representations, warranties and affirmative and negative financial and other covenants for a loan of this type.

 

The loans are secured by a security interest in all of the inventory of Goedeker that is manufactured or sold by vendors identified in the loan and security agreement. In connection with the loan and security agreement, on June 24, 2019, 1847 Goedeker entered into a guaranty in favor of Northpoint, to guaranty the obligations of Goedeker under the loan and security agreement.

 

Burnley Capital LLC

 

On April 5, 2019, Goedeker, as borrower, and 1847 Goedeker entered into a loan and security agreement with Burnley Capital LLC (“Burnley”) for revolving loans in an aggregate principal amount that will not exceed the lesser of (i) the borrowing base or (ii) $1,500,000 (provided that such amount may be increased to $3,000,000 in Burnley’s sole discretion) minus reserves established Burnley at any time in accordance with the loan and security agreement. The “borrowing base” means an amount equal to the sum of the following: (i) the product of 85% multiplied by the liquidation value of Goedeker’s inventory (net of all liquidation costs) identified in the most recent inventory appraisal by an appraiser acceptable to Burnley (ii) multiplied by Goedeker’s eligible inventory (as defined in the loan and security agreement), valued at the lower of cost or market value, determined on a first-in-first-out basis. In connection with the closing of the Acquisition on April 5, 2019, Goedeker borrowed $744,000 under the loan and security agreement and issued a revolving note to Burnley in the principal amount of up to $1,500,000. There is no available borrowing base and the balance of the line of credit amounts to $456,104 as of June 30, 2020, comprised of principal of $524,938 and net of unamortized debt discount of $68,834.

 

The revolving note matures on April 5, 2022, provided that at Burnley’s sole and absolute discretion, it may agree to extend the maturity date for two successive terms of one year each. The revolving note bears interest at a per annum rate equal to the greater of (i) the LIBOR Rate (as defined in the loan and security agreement) plus 6.00% or (ii) 8.50%; provided that upon an event of default (as defined below) all loans, all past due interest and all fees shall bear interest at a per annum rate equal to the foregoing rate plus 3.00%. Goedeker shall pay interest accrued on the revolving note in arrears on the last day of each month commencing on April 30, 2019.

 

20  
 

 

Goedeker may at any time and from time to time prepay the revolving note in whole or in part. If at any time the outstanding principal balance on the revolving note exceeds the lesser of (i) the difference of the total loan amount minus any reserves and (ii) the borrowing base, then Goedeker shall immediately prepay the revolving note in an aggregate amount equal to such excess. In addition, in the event and on each occasion that any net proceeds (as defined in the loan and security agreement) are received by or on behalf of Goedeker or 1847 Goedeker in respect of any prepayment event following the occurrence and during the continuance of an event of default, Goedeker shall, immediately after such net proceeds are received, prepay the revolving note in an aggregate amount equal to 100% of such net proceeds. A “prepayment event” means (i) any sale, transfer, merger, liquidation or other disposition (including pursuant to a sale and leaseback transaction) of any property of Goedeker or 1847 Goedeker; (ii) a change of control (as defined in the loan and security agreement); (iii) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property of Goedeker or 1847 Goedeker with a fair value immediately prior to such event equal to or greater than $25,000; (iv) the issuance by Goedeker of any capital stock or the receipt by Goedeker of any capital contribution; or (v) the incurrence by Goedeker or 1847 Goedeker of any indebtedness (as defined in the loan and security agreement), other than indebtedness permitted under the loan and security agreement.

 

Under the loan and security agreement, Goedeker is required to pay a number of fees to Burnley, including the following:

 

a commitment fee during the period from closing to the earlier of the maturity date or termination of Burnley’s commitment to make loans under the loan and security agreement, which shall accrue at the rate of 0.50% per annum on the average daily difference of the total loan amount then in effect minus the sum of the outstanding principal balance of the revolving note, which such accrued commitment fees are due and payable in arrears on the first day of each calendar month and on the date on which Burnley’s commitment to make loans under the loan and security agreement terminates, commencing on the first such date to occur after the closing date;

 

an annual loan facility fee equal to 0.75% of the revolving commitment (i.e., the maximum amount that Goedeker may borrow under the revolving loan), which is fully earned on the closing date for the term of the loan (including any extension) but shall be due and payable on each anniversary of the closing date;

 

a monthly collateral management fee for monitoring and servicing the revolving loan equal to $1,700 per month for the term of revolving note, which is fully earned and non-refundable as of the date of the loan and security agreement, but shall be payable monthly in arrears on the first day of each calendar month; provided that payment of the collateral management fee may be made, at the discretion of Burnley, by application of advances under the revolving loan or directly by Goedeker; and

 

if the revolving loan is terminated for any reason, including by Burnley following an event of default, then Goedeker shall pay, as liquidated damages and compensation for the costs of being prepared to make funds available, an amount equal to the applicable percentage multiplied by the revolving commitment (i.e., the maximum amount that Goedeker may borrow under the revolving loan), wherein the term applicable percentage means (i) 3%, in the case of a termination on or prior to the first anniversary of the closing date, (ii) 2%, in the case of a termination after the first anniversary of the closing date but on or prior to the second anniversary thereof, and (iii) 0.5%, in the case of a termination after the second anniversary of the closing date but on or prior to the maturity date.

 

The loan and security agreement contains customary events of default, including, among others: (i) for failure to pay principal and interest on the revolving note when due, or to pay any fees due under the loan and security agreement; (ii) if any representation, warranty or certification in the loan and security agreement or any document delivered in connection therewith is incorrect in any material respect; (iii) for failure to perform any covenant or agreement contained in the loan and security agreement or any document delivered in connection therewith; (iv) for the occurrence of any default in respect of any other indebtedness of more than $100,000; (v) for any voluntary or involuntary bankruptcy, insolvency or dissolution; (vi) for the occurrence of one or more judgments, non-interlocutory orders, decrees or arbitration awards involving in the aggregate a liability of $25,000 or more; (vii) if Goedeker or 1847 Goedeker, or officer thereof, is charged by a governmental authority, criminally indicted or convicted of a felony under any law that would reasonably be expected to lead to forfeiture of any material portion of collateral, or such entity is subject to an injunction restraining it from conducting its business; (viii) if Burnley determines that a material adverse effect (as defined in the loan and security agreement) has occurred; (ix) if a change of control (as defined in the loan and security agreement) occurs; (x) if there is any material damage to, loss, theft or destruction of property which causes, for more than thirty consecutive days beyond the coverage period of any applicable business interruption insurance, the cessation or substantial curtailment of revenue producing activities; (xi) if there is a loss, suspension or revocation of, or failure to renew any permit if it could reasonably be expected to have a material adverse effect; and (xii) for the occurrence of any default or event of default under the term loan with SBCC (as defined below), the 9% subordinated promissory note issued to Goedeker Television, the secured convertible promissory note issued to Leonite (as defined below) or any other debt that is subordinated to the revolving loan.

 

The loan and security agreement contains customary representations, warranties and affirmative and negative financial and other covenants for a loan of this type. The revolving note is secured by a first priority security interest in all of the assets of Goedeker and 1847 Goedeker. In connection with such security interest, on April 5, 2019, (i) 1847 Goedeker entered into a pledge agreement with Burnley, pursuant to which 1847 Goedeker pledged the shares of Goedeker held by it to Burnley, and (ii) Goedeker entered into a deposit account control agreement with Burnley, SBCC and Montgomery Bank relating to the security interest in Goedeker’s bank accounts.

 

In addition, on April 5, 2019, the Company entered into a guaranty with Burnley to guaranty the obligations under the loan and security agreement upon the occurrence of certain prohibited acts described in the guaranty.

 

The rights of Burnley to receive payments under the revolving note are subordinate to the rights of Northpoint under a subordination agreement that Burnley entered into with Northpoint.

 

21  
 

 

At June 30, 2020, Goedeker did not meet certain loan covenants under the loan and security agreement. The agreement requires compliance with the following ratios as a percentage of earnings before interest, taxes, depreciation, and amortization for the twelve-month period ended June 30, 2020. The table below shows the required ratio and actual ratio for such period.

 

Covenant   Actual Ratio   Required Ratio
Total debt ratio   (2.9)x   4.0x
Senior debt ratio   (0.7)x   1.5x
Interest coverage ratio   (1.2)x   1.0x

 

In addition, Goedeker was not in compliance with a requirement with respect to the liquidity ratio, which is the ratio of cash and available borrowings to customer deposits. At June 30, 2020, the actual ratio was 0.36x compared to a requirement of 0.35x.

 

The loan and security agreement with SBCC described below contains the same covenants and a cross default provision, whereby a default under the Burnley loan and security agreement triggers a default under the SBCC loan and security agreement. Accordingly, the Company is in technical, not payment default, on these loan and security agreements and has classified such debt as a current liability. The Company has developed plans that will return it to full compliance including a recently received proposal from a new asset-based lender.

 

NOTE 11—NOTES PAYABLE

 

Small Business Community Capital II, L.P.

 

On April 5, 2019, Goedeker, as borrower, and 1847 Goedeker entered into a loan and security agreement with Small Business Community Capital II, L.P. (“SBCC”) for a term loan in the principal amount of $1,500,000, pursuant to which Goedeker issued to SBCC a term note in the principal amount of up to $1,500,000 and a ten-year warrant to purchase shares of the most senior capital stock of Goedeker equal to 5.0% of the outstanding equity securities of Goedeker on a fully-diluted basis for an aggregate price equal to $100. The Company classified the warrant as a derivative liability on the balance sheet of $122,344 and subject to remeasurement on every reporting period. The balance of the term note amounts to $877,604 as of June 30, 2020, comprised of principal of $1,130,826, capitalized PIK interest of $27,473, and net of unamortized debt discount of $122,375 and unamortized warrant feature of $158,321.

 

The term note matures on April 5, 2023 and bears interest at the sum of the cash interest rate (defined as 11% per annum) plus the Paid-in-Kind (“PIK”) interest rate (defined as 2% per annum); provided that upon an event of default all principal, past due interest and all fees shall bear interest at a per annum rate equal to the cash interest rate and the PIK interest rate, in each case plus 3.00%. Interest accrued at the cash interest rate shall be due and payable in arrears on the last day of each month commencing May 31, 2019. Interest accrued at the PIK interest rate shall be automatically capitalized, compounded and added to the principal amount of the term note on each last day of each quarter unless paid in cash on or prior to the last day of each quarter; provided that (i) interest accrued pursuant to an event of default shall be payable on demand, and (ii) in the event of any repayment or prepayment, accrued interest on the principal amount repaid or prepaid (including interest accrued at the PIK interest rate and not yet added to the principal amount of term note) shall be payable on the date of such repayment or prepayment. Notwithstanding the foregoing, all interest on term note, whether accrued at the cash interest rate or the PIK interest rate, shall be due and payable in cash on the maturity date unless payment is sooner required by the loan and security agreement.

 

Goedeker must repay to SBCC on the last business day of each March, June, September and December, commencing with the last business day of June 2019, an aggregate principal amount of the term note equal to $93,750, regardless of any prepayments made, and must pay the unpaid principal on the maturity date unless payment is sooner required by the loan and security agreement.

 

Goedeker may prepay the term note in whole or in part from time to time; provided that if such prepayment occurs (i) prior to the first anniversary of the closing date, Goedeker shall pay SBCC an amount equal to 5.0% of such prepayment, (ii) prior to the second anniversary of the closing date and on or after the first anniversary of the closing date, Goedeker shall pay SBCC an amount equal to 3.0% of such prepayment, or (iii) prior to the third anniversary of the closing date and on or after the second anniversary of the closing date, Goedeker shall pay SBCC an amount equal to 1.0% of such prepayment, in each case as liquidated damages for damages for loss of bargain to SBCC. In addition, in the event and on each occasion that any net proceeds (as defined in the loan and security agreement) are received by or on behalf of Goedeker or 1847 Goedeker in respect of any prepayment event following the occurrence and during the continuance of an event of default, Goedeker shall, immediately after such net proceeds are received, prepay the term note in an aggregate amount equal to 100% of such net proceeds. A “prepayment event” means (i) any sale, transfer, merger, liquidation or other disposition (including pursuant to a sale and leaseback transaction) of any property of Goedeker or 1847 Goedeker; (ii) a change of control (as defined in the loan and security agreement); (iii) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property of Goedeker or 1847 Goedeker with a fair value immediately prior to such event equal to or greater than $25,000; (iv) the issuance by Goedeker of any capital stock or the receipt by Goedeker of any capital contribution; or (v) the incurrence by Goedeker or 1847 Goedeker of any indebtedness (as defined in the loan and security agreement), other than indebtedness permitted under the loan and security agreement.

 

The loan and security agreement with SBCC contains the same events of default as the loan and security agreement with Burnley, provided that the reference to the term loan in the cross-default provision refers instead to the revolving loan.

 

22  
 

 

The loan and security agreement contains customary representations, warranties and affirmative and negative financial and other covenants for a loan of this type. The term note is secured by a second priority security interest (subordinate to the revolving loan) in all of the assets of Goedeker and 1847 Goedeker. In connection with such security interest, on April 5, 2019, (i) 1847 Goedeker entered into a pledge agreement with SBCC, pursuant to which 1847 Goedeker pledged the shares of Goedeker held by it to SBCC, and (ii) Goedeker entered deposit account control agreement with Burnley, SBCC and Montgomery Bank relating to the security interest in Goedeker’s bank accounts.

 

In addition, on April 5, 2019, the Company entered into a guaranty with SBCC to guaranty the obligations under the loan and security agreement upon the occurrence of certain prohibited acts described in the guaranty.

 

The rights of SBCC to receive payments under the term note are subordinate to the rights of Northpoint and Burnley under separate subordination agreements that SBCC entered into with them.

 

As noted above, the Company is in technical, not payment default, on this loan and security agreement and has classified such debt as a current liability.

 

Home State Bank

 

On June 13, 2018, Neese entered into a term loan agreement with Home State Bank, pursuant to which Neese issued a promissory note to Home State Bank in the principal amount of $3,654,074 with an annual interest rate of 6.85% with covenants to maintain a minimum debt coverage ratio of 1.00 to 1.25 measured at December 31, 2019. Neese did not comply with this covenant for the year ended December 31, 2019. Accordingly, because of the violation of this covenant and because the loan matured July 20, 2020, the loan is classified as a current liability in the balance sheet. Pursuant to the terms of the note, Neese will make semi-annual payments of $302,270 beginning on January 20, 2019 and continuing every six months thereafter until July 20, 2020, the maturity date; provided however, that Neese will pay the note in full immediately upon demand by Home State Bank. The principal balance of the note amounts to $2,953,867 as of June 30, 2020.

 

The loan agreement contains customary representations and warranties. Pursuant to the terms of the loan agreement and the note, an “event of default” includes: (i) if Neese fails to make any payment when due under the note; (ii) if Neese fails to comply with or to perform any other term, obligation, covenant or condition contained in the note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Home State Bank and Neese; (iii) if Neese defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Home State Bank’s property or Neese’s ability to repay the note or perform Neese’s obligations under the note or any of the related documents; (iv) if any warranty, representation or statement made or furnished to Home State Bank by Neese or on Neese’s behalf under the note or the related documents is false or misleading in any material respect; (v) upon the dissolution or termination of Neese’s existence as a going business, the insolvency of Neese, the appointment of a receiver for any part of Neese’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Neese, (vi) upon commencement of foreclosure or forfeiture proceedings by any creditor of Neese or by any governmental agency against any collateral securing the loan; and (vii) if a material adverse change occurs in Neese’s financial condition, or Home State Bank believes the prospect of payment or performance of the note is impaired. If any event of default occurs, all commitments and obligations of Home State Bank immediately will terminate and, at Home State Bank’s option, all indebtedness immediately will become due and payable, all without notice of any kind to Neese. Additionally, upon an event of default, the interest rate on the note will be increased by 3 percentage points. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.

 

The loan is secured by inventory, accounts receivable, and certain fixed assets of Neese. The loan agreement limited the payment of interest on certain promissory notes to $40,000 annually. The Company continues to accrue interest at the contractual amounts. Such accruals (in excess of $40,000 in interest on the promissory notes) are shown as long-term accrued expenses in the accompanying balance sheet as of June 30, 2020.

 

On July 30, 2020, Home State Bank renewed this loan to July 30, 2022. See Footnote 20, Subsequent Events.

 

23  
 

 

If the Company sells property, plant, and equipment securing the loan, it must remit the appraised value of the equipment to Home State Bank. During the six months ended June 30, 2020 and 2019, $145,690 and $21,500, respectively, was remitted to Home State Bank pursuant to this requirement.

 

The Company adopted ASU 2015-03 by deducting debt issuance costs from the long-term portion of the loan. Amortization of debt issuance costs totaled $10,173 and $16,200 for the six months ended June 30, 2020 and 2019, respectively.

 

9% Subordinated Promissory Note

 

A portion of the purchase price for the Goedeker Acquisition was paid by the issuance by Goedeker to Steve Goedeker, as representative of Goedeker Television, of a 9% subordinated promissory note in the principal amount of $4,100,000. The note will accrue interest at 9% per annum, amortized on a five-year straight-line basis and payable quarterly in accordance with the amortization schedule attached thereto, and mature on April 5, 2023. The remaining balance of the note at June 30, 2020 is $3,395,243, comprised of principal of $3,930,293 and net of unamortized debt discount of $535,050.

 

Pursuant to the settlement agreement described above (see Note 9), the parties entered into an amendment and restatement of the note that will become effective as of the closing of the IPO, pursuant to which (i) the principal amount of the existing note shall be increased by $250,0000, (ii) upon the closing of the IPO, Goedeker agreed to make all payments of principal and interest due under the note through the date of the closing, and (iii) from and after the closing, the interest rate of the note shall be increased from 8% to 12%. Goedeker also agreed to grant to the sellers, Goedeker Television, Steve Goedeker and Mike Goedeker, a security interest in all of the assets of Goedeker to secure its obligations under the amended and restated note and entered into a security agreement with them that will become effective upon the closing of the IPO.

 

At the closing of the IPO, Goedeker agreed to pay $516,301 to the sellers, which is equal to the principal due and owing for quarters 2, 3 and 4 under the note plus accrued interest thereon, which is equal to $324,672 as of June 1, 2020 and will accrue at a rate of $984 per day thereafter.

 

Goedeker has the right to redeem all or any portion of the note at any time prior to the maturity date without premium or penalty of any kind. The note contains customary events of default, including in the event of (i) non-payment, (ii) a default by Goedeker of any of its covenants under the asset purchase agreement or any other agreement entered into in connection with the asset purchase agreement, or a breach of any of representations or warranties under such documents, or (iii) the bankruptcy of Goedeker. The note also contains a cross default provision which provides that if there occurs with respect to the revolving loan with Burnley or the term loan with SBCC (A) a default with respect to any payment obligation thereunder that entitles the holder thereof to declare such indebtedness to be due and payable prior to its stated maturity or (B) any other default thereunder that entitles, and has caused, the holder thereof to declare such indebtedness to be due and payable prior to maturity. Since the defaults under the loans with Burnley and SBCC are not payment defaults, they fall under clause (B) above and would require Burnley or SBCC to accelerate the payment of indebtedness under their notes (which they have not done) before the cross default provisions would result in a default under this note.

 

The rights of the holder to receive payments under the note are subordinate to the rights of Northpoint, Burnley and SBCC under separate subordination agreements that the holder entered into with them.

 

10% Promissory Note

 

A portion of the purchase price for the acquisition of Neese was paid by the issuance of a promissory note in the principal amount of $1,025,000 by 1847 Neese and Neese to the sellers of Neese. The note bears interest on the outstanding principal amount at the rate of ten percent (10%) per annum and was due and payable in full on March 3, 2018; provided, however, that the unpaid principal, and all accrued, but unpaid, interest thereon shall be prepaid if at any time, and from time to time, the cash on hand of 1847 Neese and Neese exceeds $250,000 and, then, the prepayment shall be equal to the amount of cash in excess of $200,000 until the unpaid principal and accrued, but unpaid, interest thereon is fully prepaid.

 

The note contains customary events of default, including in the event of: (i) non-payment; (ii) a default by 1847 Neese or Neese of any of their covenants under the stock purchase agreement or any other agreement entered into in connection with the stock purchase agreement, or a breach of any of their representations or warranties under such documents; or (iii) the bankruptcy of 1847 Neese or Neese.

 

The note has not been repaid; thus, the Company is in default under this note. Under terms of the term loan with Home State Bank described above, this note may not be paid until the term loan is paid in full. The payees on the note agreed to the modification of its terms by signing the loan agreement for the Home State Bank term loan. Accordingly, the loan is shown as a long-term liability as of June 30, 2020. Additionally, the term loan lender limits the payment of interest on this note to $40,000 annually. The Company continues to accrue interest at the contract rate; however, given the limitations of the term loan, all accrued interest in excess of $40,000 is included in long-term accrued expenses.

 

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8% Subordinated Amortizing Promissory Note

 

A portion of the purchase price for acquisition of Asien’s was paid by the issuance of an 8% subordinated amortizing promissory note in the principal amount of $200,000 by 1847 Asien to the Seller. Interest on the outstanding principal amount will be payable quarterly at the rate of eight percent (8%) per annum. The outstanding principal amount of the note will amortize on a one-year straight-line basis in accordance with a specified amortization schedule, with all unpaid principal and accrued, but unpaid interest being fully due and payable on May 28, 2021. The remaining balance of the note at June 30, 2020 is $201,447, comprised of principal of $200,000 and accrued interest of $1,447.

 

The note contains customary events of default, including in the event of (i) non-payment, (ii) a default by 1847 Asien of any of its covenants under the stock purchase agreement, the note, or any other agreement entered into in connection with the stock purchase agreement, or a breach of any of its representations or warranties under such documents, or (iii) the bankruptcy of 1847 Asien.

 

The right of the Seller to receive payments under the note is subordinated to all indebtedness of 1847 Asien to banks, insurance companies and other financial institutions or funds, and federal or state taxation authorities.

 

Demand Promissory Note

 

A portion of the purchase price for acquisition of Asien’s was paid by the issuance of demand promissory note in the principal amount of $655,000 by 1847 Asien to the Seller. The note accrues interest at a rate of one percent (1%) computed on the basis of a 360-day year. Principal and accrued interest on the note shall be payable 24 hours after written demand by the Seller. The note was repaid in June 2020.

 

PPP Loans

 

On April 8, 2020, April 10, 2020 and prior to the acquisition on April 28, 2020, Goedeker, Neese and Asien received $642,600, $383,600 and $357,500, respectively, in Payroll Protection Program (“PPP”) loans from the United States Small Business Administration (“SBA”) under provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).  The PPP loans have two-year terms and bear interest at a rate of 1.0% per annum.  Monthly principal and interest payments are deferred for six months after the date of disbursement.  The PPP loans may be prepaid at any time prior to maturity with no prepayment penalties.  The PPP loans contain events of default and other provisions customary for loans of this type.  The PPP provides that the PPP loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act.  Goedeker, Neese and Asien intend to use the proceeds from the PPP loans for qualifying expenses and to apply for forgiveness of the PPP loans in accordance with the terms of the CARES Act.  The Company has classified $612,417 of the PPP loans as current liabilities and $771,283 as long-term liabilities pending SBA clarification of the final loan terms.

 

TVT Direct Funding LLC

 

On May 28, 2020, 1847 Asien and Asien’s entered into an agreement of sale of future receipts with TVT Direct Funding LLC (“TVT”), pursuant to which 1847 Asien and Asien’s agreed to sell future receivables with a value of $685,000 to TVT for a purchase price of $500,000. 1847 Asien and Asien’s agreed to deliver to TVT 20% of its weekly future receipts, or approximately $23,300, over the course of an estimated seven-month term, or such date when the above amount of receivables has been delivered to TVT. 1847 Asien used the proceeds from this sale to finance the Asien’s Acquisition. In addition to all other sums due to TVT under this agreement, 1847 Asien and Asien’s agreed to pay to TVT certain additional fees, including a one-time origination fees of $25,000, as reimbursement of costs incurred by TVT for financial and legal due diligence. The future payments under the TVT agreement are secured by a subordinated security interest in all of the tangible and intangible assets of 1847 Asien and Asien’s. The remaining balance of the note at June 30, 2020 is $410,374, comprised of principal of $591,803 and net of unamortized debt discount of $181,429.

 

The agreement with TVT contains customary events of default, including the occurrence of the following: (i) a violation by 1847 Asien or Asien’s of any term, condition or covenant in the agreement other than as the result of Asien’s business to ceases its operations, (ii) any representation or warranty made by 1847 Asien or Asien’s is proven to have been incorrect, false or misleading in any material respect when made, and (iii) a default by 1847 Asien or Asien’s under any of the terms, covenants and conditions of any other agreement with TVT, if any.

 

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4.5% Unsecured Promissory Note

 

On October 30, 2017, the Asien entered into a stock repurchase agreement with Paul A. Gwilliam and Terri L. Gwilliam, co-trustees of the Gwilliam Family Trust (Paul and Terri) pursuant to which Asien’s Appliance, Inc. issued to Paul and Terri a unsecured promissory note in the aggregate principal amount of $540,000 for a term of 5 years or 60 months. The note bears interest at the rate of the 4.25% per annum. The balance on the note is $65,374 as of June 30, 2020.

 

Loans on Vehicles

 

The Company entered into a three Retail Installment Sale contracts used as company’s delivery trucks pursuant to which Asien’s Appliance, Inc. agreed to finance at rates ranging 3.98% to 6.99% with an aggregate remaining principal amount of $79,498 as of June 30, 2020.

 

NOTE 12—FLOOR PLAN LOANS PAYABLE

 

At June 30, 2020 and December 31, 2019, $0 and $10,581, respectively, of machinery and equipment inventory was pledged to secure a floor plan loan from a commercial lender. The Company must remit proceeds from the sale of the secured inventory to the floor plan lender and pays a finance charge that can vary monthly at the option of the lender. The balance of the floor plan payable as of June 30, 2020 and December 31, 2019 amounted to $0 and $10,581, respectively. The balance of the floor plan payable was repaid in the six months ended June 30, 2020.

 

NOTE 13—CONVERTIBLE PROMISSORY NOTE

 

On April 5, 2019, the Company, 1847 Goedeker and Goedeker (collectively, “1847”) entered into a securities purchase agreement with Leonite Capital LLC, a Delaware limited liability company (“Leonite”), pursuant to which 1847 issued to Leonite a secured convertible promissory note in the aggregate principal amount of $714,286 due April 5, 2020. As additional consideration for the purchase of the note, (i) the Company issued to Leonite 50,000 common shares, (ii) the Company issued to Leonite a five-year warrant to purchase 200,000 common shares at an exercise price of $1.25 per share (subject to adjustment), which may be exercised on a cashless basis, and (iii) 1847 Goedeker issued to Leonite shares of common stock equal to a 7.5% non-dilutable interest in 1847 Goedeker.

 

The note carries an original issue discount of $64,286 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred in connection with the purchase of the note. Furthermore, the Company issued 50,000 shares of common stock valued at $137,500 and a debt-discount related to the warrants valued at $292,673. The Company amortized $129,343 of financing costs related to the shares and warrants in the six months ended June 30, 2020.

 

On May 11, 2020, 1847 and Leonite entered into a first amendment to secured convertible promissory note, pursuant to which the parties agreed (i) to extend the maturity date of the note to October 5, 2020, (ii) that 1847’s failure to repay the note on the original maturity date of April 5, 2020 shall not constitute and event of default under the note and (iii) to increase the principal amount of the note by $207,145, as a forbearance fee. Notwithstanding the foregoing, in the event that 1847 completes an offering of debt, equity, or closes on an asset sale (other than in the ordinary course of business), then 1847 agreed to promptly use the net proceeds of such offering to repay Leonite; provided that, in no event shall this requirement cause 1847 to default on any of its agreements and obligations that were outstanding at the time of the amendment.

 

In connection with the amendment, (i) the Company issued to Leonite another five-year warrant to purchase 200,000 common shares at an exercise price of $1.25 per share (subject to adjustment), which may be exercised on a cashless basis and (ii) upon closing of the Asien’s Acquisition, 1847 Asien issued to Leonite shares of common stock equal to a 5% interest in 1847 Asien. The amendment represented a prepayments of principal and accrued interest resulting in a loss on extinguishment of debt of $773,856.

 

On May 4, 2020, Leonite converted $100,000 of the outstanding balance of the note into 100,000 common shares resulting is a loss on conversion of debt of $175,000. The remaining net principal balance of the note is $821,437 at June 30, 2020.

 

The note bears interest at the rate of the greater of (i) 12% per annum and (ii) the prime rate as set forth in the Wall Street Journal on April 5, 2019 plus 6.5% guaranteed over the holding period on the unconverted principal amount, on the terms set forth in the note (the “Stated Rate”). Any amount of principal or interest on the note which is not paid by the maturity date shall bear interest at the rate at the lesser of 24% per annum or the maximum legal amount permitted by law (the “Default Interest”).

 

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Beginning on May 5, 2019 and on the same day of each and every calendar month thereafter throughout the term of the note, 1847 shall make monthly payments of interest only due under the note to Leonite at the Stated Rate as set forth above. 1847 shall pay to Leonite on an accelerated basis any outstanding principal amount of the note, along with accrued, but unpaid interest, from: (i) net proceeds of any future financings by the Company, but not its subsidiaries, whether debt or equity, or any other financing proceeds, except any transaction having a specific use of proceeds requirement that such proceeds are to be used exclusively to purchase the assets or equity of an unaffiliated business and the proceeds are used accordingly; (ii) net proceeds from any sale of assets of 1847 or any of its subsidiaries other than sales of assets in the ordinary course of business or receipt by 1847 or any of its subsidiaries of any tax credits, subject to rights of Goedeker, or other financing sources of 1847 (including its subsidiaries) existing prior to the date of the note; and (iii) net proceeds from the sale of any assets outside of the ordinary course of business or securities in any subsidiary.

 

Unless an event of default as set forth in the note has occurred, 1847 has the right to prepay principal amount of, and any accrued and unpaid interest on, the note at any time prior to the maturity date at 115% of the principal amount (the “Premium”), provided, however, that if the prepayment is the result of any of the occurrence of any of the transactions described in subparagraphs (i), (ii) or (iii) above then such prepayment shall be the unpaid principal amount, plus accrued and unpaid interest and other amounts due but without the Premium.

 

The note contains customary events of default, including in the event of (i) non-payment, (ii) a breach by 1847 of its covenants under the securities purchase agreement or any other agreement entered into in connection with the securities purchase agreement, or a breach of any of representations or warranties under the note, or (iii) the bankruptcy of 1847. The note also contains a cross default provision, whereby a default by 1847 of any covenant or other term or condition contained in any of the other financial instrument issued by of 1847 to Leonite or any other third party after the passage all applicable notice and cure or grace periods that results in a material adverse effect shall, at Leonite’s option, be considered a default under the note, in which event Leonite shall be entitled to apply all rights and remedies under the terms of the note.

 

Under the note, Leonite has the right at any time at its option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the note into fully paid and non-assessable common shares or any shares of capital stock or other securities of the Company into which such common shares may be changed or reclassified. The number of common shares to be issued upon each conversion of the note shall be determined by dividing the conversion amount by the applicable conversion price then in effect. The conversion amount is the sum of: (i) the principal amount of the note to be converted plus (ii) at Leonite’s option, accrued and unpaid interest, plus (iii) at Leonite’s option, Default Interest, if any, plus (iv) Leonite’s expenses relating to a conversion, plus (v) at Leonite’s option, any amounts owed to Leonite. The conversion price shall be $1.00 per share (subject to adjustment as further described in the note for common share distributions and splits, certain fundamental transactions, and anti-dilution adjustments), provided that at any time after any event of default under the note, the conversion price shall immediately be equal to the lesser of (i) such conversion price less 40%; and (ii) the lowest weighted average price of the common shares during the 21 consecutive trading day period immediately preceding the trading day that 1847 receives a notice of conversion or (iii) the discount to market based on subsequent financings with other investors.

 

Notwithstanding the foregoing, in no event shall Leonite be entitled to convert any portion of the note in excess of that portion of the note upon conversion of which the sum of (1) the number of common shares beneficially owned by Leonite and its affiliates (other than common shares which may be deemed beneficially owned through the ownership of the unconverted portion of the note or the unexercised or unconverted portion of any other security of the Company subject to a limitation on conversion or exercise analogous to the limitations contained in the note, and, if applicable, net of any shares that may be deemed to be owned by any person not affiliated with Leonite who has purchased a portion of the note from Leonite) and (2) the number of common shares issuable upon the conversion of the portion of the note with respect to which the determination of this proviso is being made, would result in beneficial ownership by Leonite and its affiliates of more than 4.99% of the outstanding common shares of the Company. Such limitations on conversion may be waived (up to a maximum of 9.99%) by Leonite upon, at its election, not less than 61 days’ prior notice to the Company, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by Leonite, as may be specified in such notice of waiver).

 

Concurrently with 1847 and Leonite entering into the securities purchase agreement and as security for 1847’s obligations thereunder, on April 5, 2019, the Company, 1847 Goedeker and Goedeker entered into a security and pledge agreement with Leonite, pursuant to which, in order to secure 1847’s timely payment of the note and related obligations and the timely performance of each and all of its covenants and obligations under the securities purchase agreement and related documents, 1847 unconditionally and irrevocably granted, pledged and hypothecated to Leonite a continuing security interest in and to, a lien upon, assignment of, and right of set-off against, all presently existing and hereafter acquired or arising assets. Such security interest is a first priority security interest with respect to the securities that the Company owns in 1847 Goedeker and in 1847 Neese, and a third priority security interest with respect to all other assets.

 

The rights of Leonite to receive payments under the note are subordinate to the rights of Northpoint, Burnley and SBCC under separate subordination agreements that Leonite entered into with them.

 

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NOTE 14—FINANCING LEASE

 

The cash portion of the purchase price for the acquisition of Neese was financed under a capital lease transaction for Neese’s equipment with Utica Leaseco, LLC (“Utica”), pursuant to a master lease agreement, dated March 3, 2017, between Utica, as lessor, and 1847 Neese and Neese, as co-lessees (collectively, the “Lessee”), which was amended on June 14, 2017. Under the master lease agreement, as amended, Utica loaned an aggregate of $3,240,000 for certain of Neese’s equipment listed therein, which it leases to the Lessee. A portion of the proceeds from the term loan from Home State Bank (see Note 11) were applied to reduce the balance of this lease to $475,000. The lease is payable in 46 payments of $12,882 beginning July 3, 2018 and an end-of-term buyout of $38,000.

 

On October 31, 2017, the parties entered into a second equipment schedule to the master lease agreement, pursuant to which Utica loaned an aggregate of $980,000 for certain of Neese’s equipment listed therein. The term of the second equipment schedule is 51 months and agreed monthly payments are $25,807.

 

If any rent is not received by Utica within five (5) calendar days of the due date, the Lessee shall pay a late charge equal to ten (10%) percent of the amount. In addition, in the event that any payment is not processed or is returned on the basis of insufficient funds, upon demand, the Lessee shall pay Utica a charge equal to five percent (5%) of the amount of such payment. The Lessee is also required to pay an annual administration fee of $5,000. Upon the expiration of the term of the master lease agreement, the Lessee is required to pay, together with all other amounts then due and payable under the master lease agreement, in cash, an end of term buyout price equal to the lesser of: (a) $162,000 (five percent (5%) of the total invoice cost (as defined in the master lease agreement)); or (b) the fair market value of the equipment, as determined by Utica. Upon the expiration of the master lease agreement, the Lessee is required to pay, together with all other amounts then due and payable under the master lease agreement, in cash, an end of term buyout price equal to the lesser of: (a) $49,000 (five percent (5%) of the total invoice cost); or (b) the fair market value of the equipment, as determined by Utica.

 

Provided that no default under the master lease agreement has occurred and is continuing beyond any applicable grace or cure period, the Lessee has an early buy-out option with respect to all but not less than all of the equipment, upon the payment of any outstanding rental payments or other fees then due, plus an additional amount set forth in the master lease agreement, which represents the anticipated fair market value of the equipment as of the anticipated end date of the master lease agreement. In addition, the Lessee shall pay to Utica an administrative charge to be determined by Utica to cover its time and expenses incurred in connection with the exercise of the option to purchase, including, but not limited to, reasonable attorney fees and costs. Furthermore, upon the exercise by the Lessee of this option to purchase the equipment, the Lessee shall pay all sales and transfer taxes and all fees payable to any governmental authority as a result of the transfer of title of the equipment to Lessee. The early buy-out option was not available on the second equipment schedule to the master lease agreement until after December 31, 2018.

 

In connection with the master lease agreement, the Lessee granted a security interest on all of its right, title and interest in and to: (i) the equipment, together with all related software (embedded therein or otherwise) and general intangibles, all additions, attachments, accessories and accessions thereto whether or not furnished by the supplier; (ii) all accounts, chattel paper, deposit accounts, documents, other equipment, general intangibles, instruments, inventory, investment property, letter of credit rights and any supporting obligations related to any of the foregoing; (iii) all books and records pertaining to the foregoing; (iv) all property of such Lessee held by Utica, including all property of every description, in the custody of or in transit to Utica for any purpose, including safekeeping, collection or pledge, for the account of such Lessee or as to which such Lessee may have any right or power, including but not limited to cash; and (v) to the extent not otherwise included, all insurance, substitutions, replacements, exchanges, accessions, proceeds and products of the foregoing.

 

If the Company sells equipment or inventory, it must remit to Utica the amount loaned against the equipment. Such payments are accumulated and applied to the balance at the end of the lease term. During the three months ended June 30, 2020, there were no sales of equipment or inventory required to be remitted to Utica.

 

The assets and liabilities under the master lease agreement are recorded at the fair value of the assets at the time of acquisition.  

 

The Company adopted ASU 2015-03 by deducting $22,060 of net debt issuance costs from the long-term portion of the financing lease. Amortization of debt issuance costs totaled $6,030 and $8,100 for the three months ended June 30, 2020 and 2019, respectively.

 

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At June 30, 2020, annual minimum future lease payments under this Master Lease Agreement are as follows:

 

    Amount  
2020 (remainder of year)   $ 257,942  
2021     464,269  
2022     77,335  
Total minimum lease payments     799,546  
Less amount representing interest     131,299  
Present value of minimum lease payments     668,247  
Less current portion of minimum lease     (388,023 )
Less debt issuance costs, net     (19,025 )
Less payments to Utica for release of lien     (249,784 )
Less lease deposits     (38,807 )
End of lease buyout payments     117,413  
Long-term present value of minimum lease payment   $ 90,021  

  

The interest rate on the capitalized lease is approximately 15.7%.

 

NOTE 15—OPERATING LEASES

 

On March 3, 2017, Neese entered into an agreement of lease with K&A Holdings, LLC, a limited liability company that is wholly owned by officers of Neese. The agreement of lease is for a term of ten (10) years and provides for a base rent of $8,333 per month. In the event of late payment, interest shall accrue on the unpaid amount at the rate of eighteen percent (18%) per annum. The agreement of lease contains customary events of default, including if Neese shall fail to pay rent within five (5) days after the due date, or if Neese shall fail to perform any other terms, covenants or conditions under the agreement of lease, and other customary representations, warranties and covenants. Under terms of the term loan agreement with Home State Bank (Note 11), the Company may not pay salary or rent to such officers of Neese in excess of $100,000 per year beginning on the date of the term loan agreement, June 13, 2018. The Company is accruing monthly rent, but because of the limitation in the term loan, $250,000 of accrued rent is classified as a long-term accrued liability.

 

The amount accrued for amounts included in the measurement of operating lease liabilities was $25,000 for the three months ended June 30, 2020.

 

Supplemental balance sheet information related to leases was as follows:

 

    June 30,
2020
 
Operating lease right-of-use lease asset   $ 624,157  
Accumulated amortization     90,164  
Net balance   $ 533,993  
         
Lease liability, current portion     65,451  
Lease liability, long term     468,542  
Total operating lease liabilities   $ 533,993  
         
Weighted Average Remaining Lease Term - operating leases   80 months  
         
Weighted Average Discount Rate - operating leases     6.85 %

 

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Maturities of the lease liability are as follows:

 

    For the Years
Ended
 
2020 (reminder of year)   $ 50,000  
2021     100,000  
2022     100,000  
2023     100,000  
2024     100,000  
Thereafter     216,667  
Total lease payments     666,667  
Less imputed interest     (132,674 )
Maturities of lease liabilities   $ 533,993  

 

Neese leased a piece of equipment on an operating lease. The lease originated in May 2014 for a five-year term with annual payments of $11,830 with a final payment in July 2019.

 

On April 5, 2019, Goedeker entered into a lease agreement with S.H.J., L.L.C., a Missouri limited liability company and affiliate of Goedeker Television. The lease is for a term five (5) years and provides for a base rent of $45,000 per month. In addition, Goedeker is responsible for all taxes and insurance premiums during the lease term. In the event of late payment, interest shall accrue on the unpaid amount at the rate of eighteen percent (18%) per annum. The lease contains customary events of default, including if: (i) Goedeker shall fail to pay rent within five (5) days after the due date; (ii) any insurance required to be maintained by Goedeker pursuant to the lease shall be canceled, terminated, expire, reduced, or materially changed; (iii) Goedeker shall fail to comply with any term, provision, or covenant of the lease and shall not begin and pursue with reasonable diligence the cure of such failure within fifteen (15) days after written notice thereof to Goedeker; (iv) Goedeker shall become insolvent, make an assignment for the benefit of creditors, or file a petition under any section or chapter of the Bankruptcy Code, or under any similar law or statute of the United States of America or any State thereof; or (v) a receiver or trustee shall be appointed for the leased premises or for all or substantially all of the assets of Goedeker.

 

Supplemental balance sheet information related to leases was as follows:

  

    June 30,
2020
 
Operating lease right-of-use lease asset   $ 2,300,000  
Accumulated amortization     507,128  
Net balance   $ 1,792,872  
         
Lease liability, current portion     375,885  
Lease liability, long term     1,416,987  
Total operating lease liabilities   $ 1,792,872  
         
Weighted Average Remaining Lease Term - operating leases   45 months  
         
Weighted Average Discount Rate - operating leases     6.5 %

  

Maturities of the lease liability are as follows:

 

    For the Years
Ended
 
2020 (remainder of year)   $ 270,000  
2021     540,000  
2022     540,000  
2023     540,000  
2024     135,000  
Total lease payments     2,025,000  
Less imputed interest     (232,128 )
Maturities of lease liabilities   $ 1,792,872  

 

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Asien Office Lease

 

The company has an office and showroom space that has been leased on a month-by-month basis. The Company elected the following practical expedients: the Company has not reassessed whether any expired or existing contracts are or contain leases, the Company has not reassessed lease classification for any expired or existing leases; the Company has not reassessed initial direct costs for any existing leases; and the Company has not separated lease and non-lease components. The Company’s adoption of this ASU resulted in no change to the Company’s results of operations or balance sheet.

 

NOTE 16—RELATED PARTIES

 

Management Services Agreement

 

On April 15, 2013, the Company and 1847 Partners LLC (the “Manager”) entered into a management services agreement, pursuant to which the Company is required to pay the Manager a quarterly management fee equal to 0.5% of its adjusted net assets for services performed (the “Parent Management Fee”). The amount of the Parent Management Fee with respect to any fiscal quarter is (i) reduced by the aggregate amount of any management fees received by the Manager under any offsetting management services agreements with respect to such fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid (or under-paid) Parent Management Fees received by (or owed to) the Manager as of the end of such fiscal quarter, and (iii) increased by the amount of any outstanding accrued and unpaid Parent Management Fees. The Company expensed $0 in Parent Management Fees for the six months ended June 30, 2020 and 2019.

 

Offsetting Management Services Agreements

 

1847 Neese entered into an offsetting management services agreement with the Manager on March 3, 2017, Goedeker entered into an offsetting management services agreement with the Manager on April 5, 2019 and 1847 Asien entered into an offsetting management services agreement with the Manager on May 28, 2020. Pursuant to the offsetting management services agreements, 1847 Neese appointed the Manager to provide certain services to it for a quarterly management fee equal to $62,500, Goedeker appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of $62,500 or 2% of adjusted net assets (as defined in the management services agreement) and 1847 Asien appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of $75,000 or 2% of adjusted net assets (as defined in the management services agreement); provided, however, in each case that (i) pro rated payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate amount of management fees paid or to be paid by 1847 Neese, Goedeker or 1847 Asien, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal year exceeds, or is expected to exceed, 9.5% of the Company’s gross income with respect to such fiscal year, then the management fee to be paid by 1847 Neese, Goedeker or 1847 Asien for any remaining fiscal quarters in such fiscal year shall be reduced, on a pro rata basis determined by reference to the management fees to be paid to the Manager by all of the subsidiaries of the Company, until the aggregate amount of the management fee paid or to be paid by 1847 Neese, Goedeker or 1847 Asien, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to such fiscal year, does not exceed 9.5% of the Company’s gross income with respect to such fiscal year, and (iii) if the aggregate amount the management fee paid or to be paid by 1847 Neese, Goedeker or 1847 Asien, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal quarter exceeds, or is expected to exceed, the Parent Management Fee with respect to such fiscal quarter, then the management fee to be paid by 1847 Neese, Goedeker or 1847 Asien for such fiscal quarter shall be reduced, on a pro rata basis, until the aggregate amount of the management fee paid or to be paid by 1847 Neese, Goedeker or 1847 Asien, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to such fiscal quarter, does not exceed the Parent Management Fee calculated and payable with respect to such fiscal quarter.

 

Each of 1847 Neese, Goedeker or 1847 Asien shall also reimburse the Manager for all of its costs and expenses which are specifically approved by its board of directors, including all out-of-pocket costs and expenses, which are actually incurred by the Manager or its affiliates on behalf of 1847 Neese, Goedeker or 1847 Asien in connection with performing services under the offsetting management services agreements.

 

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1847 Neese expensed $125,000 in management fees for the six months ended June 30, 2020 and 2019. Under terms of the term loan from Home State Bank (see Note 11), no fees may be paid to the Manager without permission of the bank, which the Manager does not expect to be granted within the forthcoming year. Accordingly, $575,808 due from 1847 Neese to the Manager is classified as a long-term accrued liability as of June 30, 2020.

 

Goedeker expensed $125,000 and $58,790 in management fees for the six months ended June 30, 2020 and 2019, respectively. Payment of the management fee is subordinated to the payment of interest on the 9% subordinated promissory note (see Note 11), such that no payment of the management fee may be made if Goedeker is in default under the note with regard to interest payments and, for the avoidance of doubt, such payment of the management fee will be contingent on Goedeker being in good standing on all associated loan covenants. In addition, during the period that that any amounts are owed under the 9% subordinated promissory note or the earn out payments, the annual management fee shall be capped at $250,000. The rights of the Manager to receive payments under the offsetting management services agreement with Goedeker are also subordinate to the rights of Burnley and SBCC under separate subordination agreements that the Manager entered into with Burnley and SBCC on April 5, 2019. Accordingly, $188,653 due from Goedeker to the Manager is classified as an accrued liability as of June 30, 2020.

 

1847 Asien expensed $28,022 in management fees for the six months ended June 30, 2020.

 

Advances

 

From time to time, the Company has received advances from its chief executive officer to meet short-term working capital needs. As of June 30, 2020 and December 31, 2019, a total of $118,834 in advances from related parties are outstanding. These advances are unsecured, bear no interest, and do not have formal repayment terms or arrangements.

 

As of June 30, 2020 and December 31, 2019, the Manager has funded the Company $65,844 and $62,499 in related party advances, respectively. These advances are unsecured, bear no interest, and do not have formal repayment terms or arrangements.

 

Grid Promissory Note

 

On January 3, 2018, the Company issued a grid promissory note to the Manager in the initial principal amount of $50,000. The note provides that the Company may from time to time request additional advances from the Manager up to an aggregate additional amount of $100,000, which will be added to the note if the Manager, in its sole discretion, so provides. Interest shall accrue on the unpaid portion of the principal amount and the unpaid portion of all advances outstanding at a fixed rate of 8% per annum, and along with the outstanding portion of the principal amount and the outstanding portion of all advances, shall be payable in one lump sum due on the maturity date, January 3, 2021. If all or a portion of the principal amount or any advance under the note, or any interest payable thereon is not paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate of 12% per annum. In the event the Company completes a financing involving at least $500,000, the Company must, contemporaneously with the closing of such financing transaction, repay the entire outstanding principal and accrued and unpaid interest on the note. The note is unsecured and contains customary events of default. As of June 30, 2020 and December 31, 2019, the Manager has advanced $119,400 of the note and the Company has accrued interest of $21,944 and $17,115, respectively.

 

Building Lease

 

On March 3, 2017, Neese entered into an agreement of lease with K&A Holdings, LLC, a limited liability company that is wholly owned by officers of Neese. See Note 15 for details regarding this lease.

 

NOTE 17—SHAREHOLDERS’ DEFICIT

 

Allocation Shares

 

As of June 30, 2020 and December 31, 2019, the Company had authorized and outstanding 1,000 allocation shares. These allocation shares do not entitle the holder thereof to vote on any matter relating to the Company other than in connection with amendments to the Company’s operating agreement and in connection with certain other corporate transactions as specified in the operating agreement.

 

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The Manager owns 100% of the allocation shares of the Company, which are a separate class of limited liability company interests that, together with the common shares, will comprise all of the classes of equity interests of the Company. The Manager received the allocation shares with its initial capitalization of the Company. The allocation shares generally will entitle the Manager to receive a twenty percent (20%) profit allocation as a form of incentive designed to align the interests of the Manager with those of the Company’s shareholders. Profit allocation has two components: an equity-based component and a distribution-based component. The equity-based component will be paid when the market for the Company’s shares appreciates, subject to certain conditions and adjustments. The distribution-based component will be paid when the distributions the Company pays to shareholders exceed an annual hurdle rate of eight percent (8.0%), subject to certain conditions and adjustments. While the equity-based component and distribution-based component are interrelated in certain respects, each component may independently result in a payment of profit allocation if the relevant conditions to payment are satisfied.

 

The 1,000 allocation shares are issued and outstanding and held by the Manager, which is controlled by Mr. Roberts, the Company’s chief executive officer and controlling shareholder.

 

Common Shares

 

The Company is authorized to issue 500,000,000 common shares as of June 30, 2020 and December 31, 2019. As of June 30, 2020 and December 31, 2019, the Company had 3,780,625 and 3,165,625 common shares issued and outstanding, respectively. The common shares entitle the holder thereof to one vote per share on all matters coming before the shareholders of the Company for a vote.

 

On April 5, 2019, the Company issued 50,000 common shares to Leonite pursuant to the securities purchase agreement (see Note 13).

 

On May 4, 2020, the Company issued 100,000 common shares to Leonite upon conversion of $100,000 of the outstanding balance of the secured convertible promissory note resulting is a loss on conversion of debt of $175,000 (see Note 13).

 

On May 28, 2020, the Company issued 415,000 common shares, having a fair value of $1,037,500, to the Seller in connection with the Asien’s Acquisition (see Note 9).

 

On June 4, 2020, the Company issued 100,000 common shares to a service provider for services provided to the Company. The fair market value of the services amounted to $245,000.

 

Options

 

On May 11, 2020, the Company granted options to directors Paul A. Froning and Robert D. Barry to purchase 60,000 and 30,000 common shares, respectively, each at an exercise price of $2.50 per share.  The options vested immediately on the date of grant and terminate on May 11, 2025.

 

    Number of
Options
    Weighted Average
Exercise Price
    Weighted Average
Contractual
Term in Years
 
Outstanding at January 1, 2020     -     $ -       -  
Granted     90,000     $ 2.50       5.0  
Exercised     -       -       -  
Forfeited     -       -       -  
Cancelled     -       -       -  
Expired     -       -       -  
Outstanding at June 30, 2020     90,000     $ 2.50       4.9  
Exercisable at June 30, 2020     90,000     $ 2.50       4.9  

 

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As of June 30, 2020, vested outstanding stock options had no intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock.

 

The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period. The following assumptions were used to calculate share-based compensation expense for the six months ended June 30, 2020:

 

Volatility     128.52 %
Risk-free interest rate     0.36 %
Dividend yield     0.0 %
Expected term     5 years  

 

Warrants

 

    Number     Weighted     Weighted     Intrinsic  
    of     average     average     value  
    Common Stock     exercise     life     of  
    Warrants     price     (years)     Warrants  
Outstanding, January 1, 2019     -     $ -       -          
Granted     200,000       1.25       5.00          
Exercised     -       -       -          
Canceled     -       -       -          
Outstanding, December 31, 2019     200,000       1.25       4.26          
Granted     200,000       1.25       5.00          
Exercised     -       -       -          
Canceled     -       -       -          
Outstanding, June 30, 2020     400,000     $ 1.25       4.32     $ 808,000  
                                 
Exercisable, June 30, 2020     400,000     $ 1.25       4.32     $ 808,000  

 

On April 5, 2019, the Company issued a warrant to purchase 200,000 common shares to Leonite pursuant to the securities purchase agreement. On May 11, 2020, the Company issued another warrant to purchase 200,000 common shares to Leonite pursuant to an amendment to the securities purchase agreement. The warrants have a term of five years, an exercise price of $1.25 per share (subject to adjustment), and may be exercised on a cashless basis (see Note 13).

 

Accordingly, a portion of the proceeds was allocated to the warrant based on its relative fair value using the Black Scholes option-pricing model. The assumptions used in the Black-Scholes model are as follows: (i) dividend yield of 0%; (ii) expected volatility of 128.52%, (iii) weighted average risk-free interest rate of 0.36%, (iv) expected life of five years, and (v) estimated fair value of the common shares of $2.50 per share in the amount of $448,211 and recorded as part of the Loss on Extinguishment of Debt in the six months ended June 30, 2020.

 

The warrant also contains an ownership limitation. The Company shall not effect any exercise of the warrant, and Leonite shall not have the right to exercise any portion of the warrant, to the extent that after giving effect to issuance of common shares upon exercise the warrant, Leonite, together with its affiliates, and any other persons acting as a group together with Leonite or any of its affiliates, would beneficially own in excess of 4.99% of the number of common shares outstanding immediately after giving effect to the issuance of common shares issuable upon exercise of the warrant.  Upon no fewer than 61 days’ prior notice to the Company, Leonite may increase or decrease such beneficial ownership limitation provisions and any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. 

 

On April 5, 2019, Goedeker, as borrower, and 1847 Goedeker entered into a loan and security agreement with Small Business Community Capital II, L.P. (“SBCC”) for a term loan in the principal amount of $1,500,000, pursuant to which Goedeker issued to SBCC a term note in the principal amount of up to $1,500,000 and a ten-year warrant to purchase shares of the most senior capital stock of Goedeker equal to 5.0% of the outstanding equity securities of Goedeker on a fully-diluted basis for an aggregate price equal to $100. At June 30, 2020 and December 31, 2019 the warrants were valued at $2,250,000 and $122,344, respectively.

 

In connection with the amendment, (i) the Company issued to Leonite another five-year warrant to purchase 200,000 common shares at an exercise price of $1.25 per share (subject to adjustment), which may be exercised on a cashless basis and (ii) upon closing of the Asien’s Acquisition, 1847 Asien issued to Leonite shares of common stock equal to a 5% interest in 1847 Asien. At June 30, 2020 the warrants were valued at $118,500.

 

Noncontrolling Interests

 

The Company owns 55.0% of 1847 Neese, 70% of 1847 Goedeker and 95% of 1847 Asien.  For financial interests in which the Company owns a controlling financial interest, the Company applies the provisions of ASC 810, which are applicable to reporting the equity and net income or loss attributable to noncontrolling interests. The results of 1847 Neese, 1847 Goedeker and 1847 Asien are included in the consolidated statement of income. The net loss attributable to the 45% non-controlling interest of 1847 Neese amount to $407,299 and $501,647 for the six months ended June 30, 2020 and 2019, respectively. The net loss attributable to the 30% non-controlling interest of 1847 Goedeker amounted to $1,590,584 for the six months ended June 30, 2020 and $195,822 for the period from April 5, 2019 (acquisition) to June 30, 2019. The net loss attributable to the 5% non-controlling interest of 1847 Asien amounted to $9,439 for the period from May 29, 2020 to June 30, 2020.

 

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NOTE 18—COMMITMENTS AND CONTINGENCIES

 

An office space has been leased on a month-by-month basis.

 

The officers and directors are involved in other business activities and most likely will become involved in other business activities in the future.

 

NOTE 19—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

Supplemental disclosures of cash flow information for the six months ended June 30, 2020 and 2019 were as follows:

 

    For the Six Months Ended
June 30,
 
    2020     2019  
Interest paid   $ 243,063     $ 423,539  
Income tax paid   $ -     $ -  
                 
Business Combinations:                
Current Assets   $ 1,734,663     $ 3,308,301  
Property and equipment   $ 157,052     $ 207,604  
Working capital adjustment receivable   $ -     $ 553,643  
Assumed liabilities   $ (3,195,726 )   $ (4,668,977 )
Goodwill   $ 1,720,726     $ 6,381,715  
Net cash acquired in acquisition of Goedeker   $ 1,501,285     $ 1,285,214  
Financing:                
Due to seller (cash paid to seller day after closing)   $ 233,000       -  
Term Loan   $ -     $ 1,500,000  
Debt discount financing costs     -       (178,000 )
Warrant feature upon issuance of term loan     -       (229,244 )
Term loan, net   $ -     $ 1,092,756  
                 
Line of Credit   $ -     $ 754,682  
Debt discount on line of credit     -       (128,682 )
Issuance of common shares on promissory note     -       (137,500 )
Line of Credit, net   $ -     $ 488,500  
                 
Promissory Notes   $ 855,000     $ 714,286  
Promissory Note original issue and debt discount     -       (79,286 )
Warrants issued in conjunction with notes payable             (292,673 )
Promissory Note, net   $ 855,000     $ 342,327  
                 
9% Subordinated Promissory Note   $ -     $ 4,700,000  
Debt discount financing costs     -       (215,500 )
9% Subordinated Promissory Note, net   $ -     $ 4,484,500  
                 
Warrant liability   $ -     $ 229,244  
Common stock     415       -  
Additional Paid in Capital   $ 829,585     $ 430,173  

 

 

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NOTE 20—SUBSEQUENT EVENTS

 

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2020 to the date these financial statements were issued and has determined that it does not have any material subsequent events to disclose in these financial statements, except as set forth below.

 

Underwriting Agreement, Representative’s Warrants and Closing of IPO

 

On July 30, 2020, Goedeker entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity, a division of Fordham Financial Management, Inc., (the “Representative”), as representative of the underwriters set forth on Schedule 1 thereto (collectively, the “Underwriters”), relating to the IPO. Under the Underwriting Agreement, Goedeker agreed to sell 1,111,200 shares of common stock to the Underwriters, and also agreed to grant the Underwriters’ a 45-day over-allotment option to purchase an additional 166,577 shares of common stock, at a purchase price per share of $8.325 (the offering price to the public of $9.00 per share minus the underwriters’ discount).

 

Pursuant to the Underwriting Agreement, Goedeker also agreed to issue to the Representative and/or its affiliates warrants to purchase a number of shares of common stock equal in the aggregate to 5% of the total shares sold. The warrants will be exercisable at any time and from time to time, in whole or in part, beginning on January 26, 2021 until July 30, 2025, at a per share exercise price equal to $11.25 (125% of the public offering price per share).

 

On August 4, 2020, Goedeker sold 1,111,200 shares of its common stock to the Underwriters for total gross proceeds of $10,000,800. After deducting the underwriting commission and expenses, Goedeker received net proceeds of approximately $8,992,029. Goedeker also issued warrants for the purchase of 55,560 shares of common stock to affiliates of the Representative.

 

Repayment of Northpoint Loan

 

The Northpoint loan was terminated on May 18, 2020 and there is no outstanding balance as of June 30, 2020.

 

Repayment of Burnley Loan

 

On August 4, 2020, Goedeker used a portion of the proceeds from the IPO to repay the loan from Burnley (Note 9). The total payoff amount was $118,194, consisting of principal of $32,350 interest of $42 and prepayment, legal, and other fees of $85,802

 

Repayment of SBCC Loan

 

On August 4, 2020, Goedeker used a portion of the proceeds from the IPO to repay the loan from SBCC (Note 10). The total payoff amount was $1,122,412 consisting of principal of $1,066,640, interest of $11,773 and prepayment, legal, and other fees of $43,999.

 

Leonite Conversion and Repayment

 

On July 21, 2020, Leonite converted $50,000 of the outstanding balance of the secured convertible promissory note (Note 12) into 50,000 common shares of 1847 Holdings.

 

On August 4, 2020, Goedeker used a portion of the proceeds from the IPO to repay the secured convertible promissory note. The total payoff amount was $780,653, consisting of principal of $771,431 and interest of $9,222.

 

Payment on Subordinated Promissory Note

 

In accordance with the terms of the amended and restated note that became effective upon closing of the IPO on August 4, 2020 (Note 11), Goedeker used a portion of the proceeds from the IPO to pay $1,083,842 of the balance of the note.

 

Renewal of Home State Bank loan

 

As previously disclosed, Neese, a subsidiary of 1847 Holdings LLC, entered into a business loan agreement (the “Loan Agreement”) with Home State Bank (the “Lender”) on June 13, 2018 for a revolving line of credit, pursuant to which Neese issued a revolving promissory note to the Lender in the principal amount of $3,654,074 with an annual interest rate of 6.85% (the “Note”), which matured on July 20, 2020. Neese also entered into a commercial security agreement (the “Security Agreement”) with the Lender, pursuant to which the Note was secured by a security interest in certain assets of Neese.

 

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On July 30, 2020, Neese entered into a change in terms agreement (the “Amendment”) with the Lender, pursuant to which: (i) the maturity date was extended to July 30, 2022; (ii) the interest rate was changed to 5.50%; (iii) Neese agreed to pay accrued interest in the amount of $95,970.42; (iv) Neese agreed to make payments of $30,000.00 beginning on September 30, 2020 and continuing thereafter on a monthly basis until maturity at which time a final interest payment is due; (v) Neese agreed to make a payment of $260,000.00 on December 30, 2020 and December 30, 2021; (vi) Neese agreed to make two new advances under the Note in the amounts $51,068.19 and $517,528.86 to repay in full Neese’s capital lease transactions due to Utica Leaseco LLC; (vii) Neese agreed to pay a loan fee of $17,500.00 at the time of signing the Amendment; and (viii) the Lender agreed to make a loan advance to checking for $17,500.00.

 

Except for the foregoing amendments, the terms of the Loan Agreement, the Note and the Security Agreement remain unchanged and in full force and effect.

 

Asien Promissory Note

 

On July 29, 2020, 1847 Asien executed a securities purchase agreement with the Wilhelmsen Family Trust, (the “Asien’s Seller”. Pursuant to the agreement, the Asien’s Seller sold to the 1847 Asien, 415,000 common shares of 1847 Holdings LLC at a purchase price of $2.50 per share. As consideration, 1847 Asien issued to the Asien’s Seller a two-year, 6% amortizing promissory note in the aggregate principal amount of $1,037,500.

 

One-half (50%) of the outstanding principal amount of this Note ($518,750) and all accrued interest thereon will be amortized on a two-year straight-line basis and is payable quarterly. The second-half (50%) of the outstanding principal amount of this Note ($518,750) with all accrued, but unpaid interest thereon is due on the second anniversary of the note, along with any other unpaid principal or accrued interest.

 

Arvest Promissory Note and Security Agreement

 

On July 19, 2020, Asien’s entered into a Promissory Note and Security Agreement with Arvest Bank dated July 10, 2020 (the “Arvest Loan Agreement”), pursuant to which Arvest Bank will provide to Asien’s a revolving loan for up to $400,000 (the “Arvest Loan”). The term of the Arvest Loan is one year. Interest will accrue on the Arvest Loan at a rate of 5.25%, subject to change in accordance with the Variable Rate (as defined in the Arvest Loan Agreement), the calculation for which is the U.S. Prime Rate plus 2%. Asien’s will pay accrued interest on the outstanding balance of the Arvest Loan in regular monthly payments beginning on August 10, 2020. A final payment of the entire unpaid outstanding principal and interest is due on July 10, 2021. Asien’s may prepay the Arvest Loan in full or in part at any time.

 

Pursuant to the terms of the arvest Loan Agreement, Asien’s has granted to Arvest Bank a security interest in its inventory and equipment, accounts and other rights of payments, and general intangibles, as such terms are defined in the Uniform Commercial Code. The Arvest Loan Agreement contains customary events of default, including the occurrence of the following: (i) a failure to make a payment in full when due; (ii) insolvency or bankruptcy; (iii) a merger, dissolution, reorganization of Asien’s; (iv) a consolidation with, or the acquisition of substantially all of the assets of, another entity; and (v) a violation by Asien of any term, condition or covenant in the Arvest Loan Agreement. The Arvest Loan Agreement contains customary representations, warranties, and affirmative and negative covenants for a loan of this type.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition. The following financial information is derived from our financial statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein.

 

Use of Terms

 

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and the “Company” refer to 1847 Holdings LLC, a Delaware limited liability company, and its consolidated subsidiaries. References to the “Manager” refer to 1847 Partners LLC, a Delaware limited liability company.

 

Special Note Regarding Forward Looking Statements

 

Certain information contained in this report includes forward-looking statements. The statements herein which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to our management and our interpretation of what is believed to be significant factors affecting our businesses, including many assumptions regarding future events. The following factors, among others, may affect our forward-looking statements:

 

our ability to successfully identify and acquire additional businesses, and to operate such businesses that we may acquire in the future and to effectively integrate and improve such 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 our indebtedness;

 

our cash flow available for distribution and our ability to make distributions in the future to our common shareholders;

 

our ability to pay the management fee, profit allocation and put price to the Manager when due;

 

labor disputes, strikes or other employee disputes or grievances;

 

our ability to implement our acquisition and management strategies;

 

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 ability to retain or replace qualified employees of our businesses;

 

casualties, condemnation or catastrophic failures with respect to any of our businesses’ facilities;

 

costs and effects of legal and administrative proceedings, settlements, investigations and claims; and

 

extraordinary or force majeure events affecting our business or operations.

 

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019 and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur.

 

Potential investors should not place undue reliance on any forward-looking statements. 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.

 

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Overview

 

We are an acquisition holding company focused on acquiring and managing a group of small businesses, which we characterize as those that have an enterprise value of less than $50 million, in a variety of different industries headquartered in North America. To date, we have completed two acquisitions.

 

In March 2017, our subsidiary 1847 Neese Inc. (“1847 Neese”) acquired Neese, Inc. (“Neese”). Headquartered in Grand Junction, Iowa and founded in 1991, Neese is an established business specializing in providing a wide range of land application services and selling equipment and parts, primarily to the agricultural industry, but also to the construction and lawn and garden industries. Neese’s revenue mix is composed of waste disposal and a variety of agricultural services, wholesaling of agricultural equipment and parts, local trucking services, various shop services, and other products and services. Services to the local agricultural and farming communities include manure spreading, land rolling, bin whipping, cleaning of bulk storage bins and silos, equipment rental, trucking, vacuuming, building erection, and others.

 

In April 2019, our subsidiary 1847 Goedeker Inc. (“Goedeker”) acquired substantially all of the assets of Goedeker Television Co. (“Goedeker Television”). As a result of this transaction, Goedeker acquired the former business of Goedeker Television, which was established in 1951, and continues to operate this business. Headquartered in St. Louis, Missouri, Goedeker is a one-stop e-commerce destination for home furnishings, including appliances, furniture, home goods and related products. Goedeker has evolved from a local brick and mortar operation serving the St. Louis metro area to a large nationwide omnichannel retailer that offers one-stop shopping for the leading brands.

 

In May 2020, our subsidiary 1847 Asien Inc. (“1847 Asien”) acquired Asien’s Appliance, Inc. (“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.

 

Through our structure, we offer investors an opportunity to participate in the ownership and growth of a portfolio of businesses that traditionally have been owned and managed by private equity firms, private individuals or families, financial institutions or large conglomerates. We believe that our management and acquisition strategies will allow us to achieve our goals to begin making and growing regular distributions to our common shareholders and increasing common shareholder value over time.

 

We seek to acquire controlling interests in small businesses that we believe operate in industries with long-term macroeconomic growth opportunities, and that have positive and stable earnings and cash flows, face minimal threats of technological or competitive obsolescence and have strong management teams largely in place. We believe that private company operators and corporate parents looking to sell their businesses will consider us to be an attractive purchaser of their businesses. We intend to make these future businesses our majority-owned subsidiaries and intend to 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.

 

Recent Developments

 

Impact of Coronavirus Pandemic

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The virus has since spread to over 150 countries and every state in the United States. On March 11, 2020, the World Health Organization declared the outbreak a pandemic, and on March 13, 2020, the United States declared a national emergency. Most states and cities have reacted by instituting quarantines, restrictions on travel, “stay-at-home” rules and restrictions on the types of businesses that may continue to operate, as well as guidance in response to the pandemic and the need to contain it.

 

Effective April 6, 2020, the Governor of Missouri announced a stay-at-home order that was in effect until May 3, 2020. Pursuant to this order, non-essential businesses, such as Goedeker’s showroom, were forced to close. However, Goedeker’s call center and warehouse continued to operate. According to Missouri’s re-opening plan, retail stores, such as Goedeker’s showroom, may re-open effective May 4, 2020 but with limitations on the number of individuals allowed in the showroom. Goedeker had not yet determined when it may re-open. Since over 90% of Goedeker’s sales are completed online and its call center and warehouse and distribution operations continued to operate, the restrictions put in place have not yet had a negative impact on Goedeker’s operations. On June 16, 2020, Goedeker’s showroom re-opened to the public, with restrictions that masks be worn by customers and employees, in compliance with St Louis County mandates later issued on July 3, 2020 requiring face masks be worn in public places.

 

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In Iowa, where Neese is located, non-essential businesses in certain counties, include where Neese’s principal office is located, began re-opening on May 1, 2020, but the pandemic has had a negative effect on business activity throughout Iowa.

 

Effective March 18, 2020, the County of Sonoma, California issued a shelter in place order. Pursuant to this order, non-essential businesses were ordered to close. Asien’s was qualified as an essential business and remained open under a modified service plan whereby customers were allowed access to the demonstration floor by appointment only with access limited to one customer party (following published guidelines a customer party was defined as no more than 3 adults and no children).  Customers and staff wore face masks at all times and hand sanitizer was available at the door and throughout the store.  Employees would wipe down all objects touched with disinfectant surface cleaner before the next appointment.  Effective June 6, 2020, Sonoma County modified the retail guidelines for essential businesses and Asien’s store allowed access for retail customer parties without appointment but with limitations on the number of individuals allowed in the store.  More recently, on July 13, 2020, the state of California issued new restrictions on business activities in certain counties, including Sonoma County, due to the increase in cases. These new restrictions primarily relate to indoor activities of certain businesses and do not affect retail stores, such as Asien’s; however, if the spread of the virus is not contained, we expect that additional restrictions may be imposed. 

 

We have taken steps to take care of our employees, including providing the ability for employees to work remotely and implementing strategies to support appropriate social distancing techniques for those employees who are not able to work remotely. We have also taken precautions with regard to employee, facility and office hygiene as well as implementing significant travel restrictions. We are also assessing our business continuity plans for all business units in the context of the pandemic. This is a rapidly evolving situation, and we will continue to monitor and mitigate developments affecting our workforce, our suppliers, our customers, and the public at large to the extent we are able to do so. We have and will continue to carefully review all rules, regulations, and orders and responding accordingly.

 

Goedeker and Asien’s are dependent upon suppliers to provide them with all of the products that they sell. The pandemic has impacted and may continue to impact suppliers and manufacturers of certain of their products. As a result, Goedeker and Asien’s have faced and may continue to face delays or difficulty sourcing certain products, which could negatively affect their business and financial results. Even if Goedeker and Asien’s are able to find alternate sources for such products, they may cost more, which could adversely impact their profitability and financial condition.

 

Neese is also dependent upon suppliers to provide it with all of the equipment and parts that it sells, and several have notified it of disruptions to their production and/or supply chain related to the pandemic. Any business disruption or failure of these suppliers to meet delivery requirements and commitments may cause delays in future shipments and potential lost or delayed revenue.

 

If the current pace of the pandemic cannot be slowed and the spread of the virus is not contained, our business operations could be further delayed or interrupted. We expect that government and health authorities may announce new or extend existing restrictions, which could require us to make further adjustments to our operations in order to comply with any such restrictions. We may also experience limitations in employee resources. In addition, our operations could be disrupted if any of our employees were suspected of having the virus, which could require quarantine of some or all such employees or closure of our facilities for disinfection. The duration of any business disruption cannot be reasonably estimated at this time but may materially affect our ability to operate our business and result in additional costs.

 

The extent to which the pandemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted as of the date of this report, including new information that may emerge concerning the severity of the pandemic and steps taken to contain the pandemic or treat its impact, among others. Nevertheless, the pandemic and the current financial, economic and capital markets environment, and future developments in the global supply chain and other areas present material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.

 

Subsequent events

 

Underwriting Agreement, Representative’s Warrants and Closing of IPO

 

On July 30, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity, a division of Fordham Financial Management, Inc., (the “Representative”), as representative of the underwriters set forth on Schedule 1 thereto (collectively, the “Underwriters”), relating to the IPO. Under the Underwriting Agreement, Goedeker agreed to sell 1,111,200 shares of common stock to the Underwriters, and also agreed to grant the Underwriters’ a 45-day over-allotment option to purchase an additional 166,577 shares of common stock, at a purchase price per share of $8.325 (the offering price to the public of $9.00 per share minus the underwriters’ discount).

 

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Pursuant to the Underwriting Agreement, Goedeker also agreed to issue to the Representative and/or its affiliates warrants to purchase a number of shares of common stock equal in the aggregate to 5% of the total shares sold. The warrants will be exercisable at any time and from time to time, in whole or in part, beginning on January 26, 2021 until July 30, 2025, at a per share exercise price equal to $11.25 (125% of the public offering price per share).

 

On August 4, 2020, Goedeker sold 1,111,200 shares of its common stock to the Underwriters for total gross proceeds of $10,000,800. After deducting the underwriting commission and expenses, Goedeker received net proceeds of approximately $8,992,029. Goedeker also issued warrants for the purchase of 55,560 shares of common stock to affiliates of the Representative.

 

Repayment of Northpoint Loan

 

The Northpoint loan was terminated on May 18, 2020 and there is no outstanding balance as of June 30, 2020.

 

Repayment of Burnley Loan

 

On August 4, 2020, Goedeker used a portion of the proceeds from the IPO to repay the loan from Burnley (Note 9). The total payoff amount was $118,194, consisting of principal of $32,350 interest of $42 and prepayment, legal, and other fees of $85,802

 

Repayment of SBCC Loan

 

On August 4, 2020, Goedeker used a portion of the proceeds from the IPO to repay the loan from SBCC (Note 10). The total payoff amount was $1,122,412 consisting of principal of $1,066,640, interest of $11,773 and prepayment, legal, and other fees of $43,999.

 

Leonite Conversion and Repayment

 

On July 24, 2020, Leonite converted $50,000 of the outstanding balance of the secured convertible promissory note (Note 12) into 50,000 common shares of 1847 Holdings.

 

On August 4, 2020, Goedeker used a portion of the proceeds from the IPO to repay the secured convertible promissory note. The total payoff amount was $780,653, consisting of principal of $771,431 and interest of $9,222.

 

Payment on Subordinated Promissory Note

 

In accordance with the terms of the amended and restated note that became effective upon closing of the IPO on August 4, 2020 (Note 11), Goedeker used a portion of the proceeds from the IPO to pay $1,083,842 of the balance of the note.

 

Renewal of Home State Bank loan

 

As previously disclosed, Neese, a subsidiary of 1847 Holdings LLC, entered into a business loan agreement (the “Loan Agreement”) with Home State Bank (the “Lender”) on June 13, 2018 for a revolving line of credit, pursuant to which Neese issued a revolving promissory note to the Lender in the principal amount of $3,654,074 with an annual interest rate of 6.85% (the “Neese Note”), which matured on July 20, 2020. Neese also entered into a commercial security agreement (the “Security Agreement”) with the Lender, pursuant to which the Neese Note was secured by a security interest in certain assets of Neese.

 

On July 30, 2020, Neese entered into a change in terms agreement (the “Amendment”) with the Lender, pursuant to which: (i) the maturity date was extended to July 30, 2022; (ii) the interest rate was changed to 5.50%; (iii) Neese agreed to pay accrued interest in the amount of $95,970.42; (iv) Neese agreed to make payments of $30,000.00 beginning on September 30, 2020 and continuing thereafter on a monthly basis until maturity at which time a final interest payment is due; (v) Neese agreed to make a payment of $260,000.00 on December 30, 2020 and December 30, 2021; (vi) Neese agreed to make two new advances under the Neese Note in the amounts $51,068.19 and $517,528.86 to repay in full Neese’s capital lease transactions due to Utica Leaseco LLC; (vii) Neese agreed to pay a loan fee of $17,500.00 at the time of signing the Amendment; and (viii) the Lender agreed to make a loan advance to checking for $17,500.00.

 

Except for the foregoing amendments, the terms of the Loan Agreement, the Neese Note and the Security Agreement remain unchanged and in full force and effect.

 

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Asien Promissory Note

 

On July 29, 2020, 1847 Asien executed a securities purchase agreement with the Asien’s Seller. Pursuant to the agreement, the Asien’s Seller sold to 1847 Asien, 415,000 common shares of 1847 Holdings LLC at a purchase price of $2.50 per share. As consideration, 1847 Asien issued to the Asien’s Seller a two-year, 6% amortizing promissory note in the aggregate principal amount of $1,037,500 (the “Asien Note”).

 

One-half (50%) of the outstanding principal amount of the Asien Note ($518,750) \ and all accrued interest thereon will be amortized on a two-year straight-line basis and is payable quarterly. The second-half (50%) of the outstanding principal amount of the Asien Note ($518,750) \ with all accrued, but unpaid interest thereon is due on the second anniversary of the Asien Note, along with any other unpaid principal or accrued interest.

 

Arvest Promissory Note and Security Agreement

 

On July 19, 2020, Asien’s entered into a Promissory Note and Security Agreement with Arvest Bank dated July 10, 2020 (the “Arvest Loan Agreement”), pursuant to which Arvest Bank will provide to Asien’s a revolving loan for up to $400,000 (the “Arvest Loan”). The term of the Arvest Loan is one year. Interest will accrue on the Arvest Loan at a rate of 5.25%, subject to change in accordance with the Variable Rate (as defined in the Arvest Loan Agreement), the calculation for which is the U.S. Prime Rate plus 2%. Asien’s will pay accrued interest on the outstanding balance of the Arvest Loan in regular monthly payments beginning on August 10, 2020. A final payment of the entire unpaid outstanding principal and interest is due on July 10, 2021. Asien’s may prepay the Arvest Loan in full or in part at any time.

 

Pursuant to the terms of the arvest Loan Agreement, Asien’s has granted to Arvest Bank a security interest in its inventory and equipment, accounts and other rights of payments, and general intangibles, as such terms are defined in the Uniform Commercial Code. The Arvest Loan Agreement contains customary events of default, including the occurrence of the following: (i) a failure to make a payment in full when due; (ii) insolvency or bankruptcy; (iii) a merger, dissolution, reorganization of Asien’s; (iv) a consolidation with, or the acquisition of substantially all of the assets of, another entity; and (v) a violation by Asien of any term, condition or covenant in the Arvest Loan Agreement. The Arvest Loan Agreement contains customary representations, warranties, and affirmative and negative covenants for a loan of this type.

 

Management Fees

 

On April 15, 2013, the Company and the Manager entered into a management services agreement, pursuant to which the Company is required to pay the Manager a quarterly management fee equal to 0.5% of its adjusted net assets for services performed (the “Parent Management Fee”). The amount of the Parent Management Fee with respect to any fiscal quarter is (i) reduced by the aggregate amount of any management fees received by the Manager under any offsetting management services agreements with respect to such fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid (or under-paid) Parent Management Fees received by (or owed to) the Manager as of the end of such fiscal quarter, and (iii) increased by the amount of any outstanding accrued and unpaid Parent Management Fees. The Company expensed $0 in Parent Management Fees for the six months ended June 30, 2020 and 2019, respectively.

 

1847 Neese entered into an offsetting management services agreement with the Manager on March 3, 2017, Goedeker entered into an offsetting management services agreement with the Manager on April 5, 2019 and 1847 Asien entered into an offsetting management services agreement with the Manager on May 28, 2020. Pursuant to the offsetting management services agreements, 1847 Neese appointed the Manager to provide certain services to it for a quarterly management fee equal to $62,500, Goedeker appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of $62,500 or 2% of adjusted net assets (as defined in the management services agreement) and 1847 Asien appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of $75,000 or 2% of adjusted net assets (as defined in the management services agreement); provided, however, in each case that (i) pro rated payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate amount of management fees paid or to be paid by 1847 Neese, Goedeker or 1847 Asien, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal year exceeds, or is expected to exceed, 9.5% of the Company’s gross income with respect to such fiscal year, then the management fee to be paid by 1847 Neese, Goedeker or 1847 Asien for any remaining fiscal quarters in such fiscal year shall be reduced, on a pro rata basis determined by reference to the management fees to be paid to the Manager by all of the subsidiaries of the Company, until the aggregate amount of the management fee paid or to be paid by 1847 Neese, Goedeker or 1847 Asien, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to such fiscal year, does not exceed 9.5% of the Company’s gross income with respect to such fiscal year, and (iii) if the aggregate amount the management fee paid or to be paid by 1847 Neese, Goedeker or 1847 Asien, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal quarter exceeds, or is expected to exceed, the Parent Management Fee with respect to such fiscal quarter, then the management fee to be paid by 1847 Neese, Goedeker or 1847 Asien for such fiscal quarter shall be reduced, on a pro rata basis, until the aggregate amount of the management fee paid or to be paid by 1847 Neese, Goedeker or 1847 Asien, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to such fiscal quarter, does not exceed the Parent Management Fee calculated and payable with respect to such fiscal quarter.

 

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Each of 1847 Neese, Goedeker or 1847 Asien shall also reimburse the Manager for all of its costs and expenses which are specifically approved by its board of directors, including all out-of-pocket costs and expenses, which are actually incurred by the Manager or its affiliates on behalf of 1847 Neese, Goedeker or 1847 Asien in connection with performing services under the offsetting management services agreements.

 

1847 Neese expensed $125,000 in management fees for the six months ended June 30, 2020 and 2019. Under terms of the term loan from Home State Bank described below, no fees may be paid to the Manager without permission of the bank, which the Manager does not expect to be granted within the forthcoming year. Accordingly, $575,808 due from 1847 Neese to the Manager is classified as a long-term accrued liability as of June 30, 2020.

 

Goedeker expensed $125,000 and $58,790 in management fees for the six months ended June 30, 2020 and 2019, respectively. Payment of the management fee is subordinated to the payment of interest on the 9% subordinated promissory note described below, such that no payment of the management fee may be made if Goedeker is in default under the note with regard to interest payments and, for the avoidance of doubt, such payment of the management fee will be contingent on Goedeker being in good standing on all associated loan covenants. In addition, during the period that that any amounts are owed under the 9% subordinated promissory note or the earn out payments, the annual management fee shall be capped at $250,000. The rights of the Manager to receive payments under the offsetting management services agreement with Goedeker are also subordinate to the rights of Burnley and SBCC (each as defined below) under separate subordination agreements that the Manager entered into with Burnley and SBCC on April 5, 2019. Accordingly, $188,653 due from Goedeker to the Manager is classified as an accrued liability as of June 30, 2020.

 

1847 Asien expensed $28,022 in management fees for the six months ended June 30, 2020.

 

On a consolidated basis, we expensed total management fees of $278,022 and $183,790 for the six months ended June 30, 2020 and 2019, respectively, and $216,675 due to the Manager is classified as an accrued liability and $575,808 as non-current accrued liability as of June 30, 2020.

 

Segments

 

We have two reportable segments: the retail and appliances segment and the land management services segment. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, are presented as corporate services.

 

The retail and appliances segment, operated by Goedeker, is comprised of a retail store and an e-commerce destination for home furnishings, including appliances, furniture, home goods and related products. In May 2020, the Company’s Asien acquisition located in Santa Rosa, California, provides a wide variety of appliance services including sales, delivery, installation, service and repair, extended warranties, and financing to the North Bay area.

 

The land management services segment, operated by Neese, is comprised of professional services for waste disposal and a variety of agricultural services, wholesaling of agricultural equipment and parts, local trucking services, various shop services, and sales of other products and services.

 

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Results of Operations

 

Comparison of Three Months Ended June 30, 2020 and 2019

 

The following table sets forth key components of our results of operations during the three months ended June 30, 2020 and 2019, both in dollars and as a percentage of our revenue.

 

    June 30,
2020
    June 30,
2019
 
    Amount     % of
Revenues
    Amount     % of
Revenues
 
Revenues                        
Services   $ 766,927       4.4 %   $ 976,327       8.0 %
Sales of parts and equipment     316,976       1.8 %     615,836       5.0 %
Furniture and appliances     16,471,014       93.8 %     10,616,050       87.0 %
Total revenues     17,554,917       100.0 %     12,208,213       100.0 %
Operating expenses                                
Cost of sales     13,882,672       79.1 %     9,331,976       76.4 %
Personnel costs     1,526,434       8.7 %     1,439,036       11.8 %
Depreciation and amortization     407,909       2.3 %     349,264       2.9 %
Fuel     82,435       0.5 %     171,888       1.4 %
General and administrative     3,115,893       17.7 %     1,710,935       14.0 %
Total operating expenses     19,015,343       108.3 %     13,003,099       106.5 %
Net loss from operations     (1,460,426 )     (8.3 )%     (794,886 )     (6.5 )%
Other income (expense)                                
Financing costs     (111,178 )     (0.6 )%     (167,406 )     (1.4 )%
Loss on extinguishment of debt     (948,856 )     (5.4 )%     -       0.0 %
Interest expense     (350,385 )     (2.0 )%     (306,568 )     (2.5 )%
Loss on acquisition receivable     (809,000 )     (4.6 )%     -       0.0 %
Change in warrant liability     (2,127,656 )     (12.1 )%     5,089       0.0 %
Other income (expense)     3,942       0.0 %     2,600       0.0 %
Gain (loss) on sale of property and equipment     37,767       0.2 %     -       0.0 %
Total other income (expense)     (4,305,366 )     (24.5 )%     (466,285 )     (3.9 )%
Net loss before income taxes     (5,765,787 )     (32.8 )%     (1,261,171 )     (10.3 )%
Income tax benefit     (953,953 )     (5.4 )%     5,431       0.0 %
Net loss before non-controlling interests     (4,811,839 )     (27,4 )%     (1,255,740 )     (10.3 )%
Less net loss attributable to non-controlling interests     (1,269,137 )     (7.2 )%     (430,789 )     (3.5 )%
Net loss attributable to company shareholders   $ (3,542,702 )     (20.2 )%   $ (824,951 )     (6.8 )%

 

Total revenues. Our total revenues were $17,554,917 for the three months ended June 30, 2020, including $1,185,980 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $12,208,213 for the three months ended June 30, 2019.

 

The retail and appliances segment generates revenue through the sales of home furnishings, including appliances, furniture, home goods and related products. Revenues from the retail and appliances segment was $16,471,014 for the three months ended June 30, 2020 as compared $10,616,050 for the period from April 6, 2019 to June 30, 2019. The increase was due to a full quarter of sales from the prior Goedeker acquisition and increased sales volume to meet appliance and furniture demand under Covid-19 and to increased advertising and marketing activities.

 

The following table summarizes our revenues by sales type:

 

    Three  Months
Ended
June 30, 
2020
    Period from
April 6, 2019 to
June 30,
2019
 
Appliance sales   $ 13,188,035     $ 8,759,916  
Furniture sales     2,944,013       1,702,284  
Other sales     338,966       153,850  
Total revenues   $ 16,471,014     $ 10,616,050  

 

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The land management services segment generates revenue through the provision of waste disposal and a variety of land application services, wholesaling of agricultural equipment and parts, local trucking services, various shop services, and sales of other products and services. Revenues from the land management segment decreased by $508,289, or 32%, to $1,083,903 for the three months ended June 30, 2020 from $1,592,192 for the three months ended June 30, 2019. Such decrease resulted from a $209,399 decrease in services revenue and $298,860 decrease in sales of parts and equipment. The decrease in services revenue was primarily due to a $232,635 decline in trucking revenue primarily attributable to COVID related reduced demand for trucking services. The following table summarizes our revenues by type for the three months ended June 30, 2020 and 2019:

 

    Three Months Ended
June 30,
 
    2020     2019  
Services            
Trucking   $ 278,734     $ 511,369  
Waste hauling     321,919       272,028  
Repairs     45,609       84,679  
Other     120,665       108,250  
Total services     766,927       976,326  
Sales of parts and equipment     316,976       615,836  
Total revenues   $ 1,083,903     $ 1,592,192  

 

Cost of sales. Cost of sales for the retail and appliances segment consist 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 sales for the land management services segment consist of the direct costs of our equipment and parts. Our total cost of sales was $13,882,672 for the three months ended June 30, 2020, including $923,892 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $9,331,976 for the three months ended June 30, 2019.

 

Cost of sales for the retail and appliances segment was $13,609,051 for the three months ended June 30, 2020, including $923,892 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $8,772,572 for the period from April 6, 2019 to June 30, 2019. Such increase was due to the increase in sales volume to meet appliance and furniture demand under Covid-19, and to increased advertising and marketing activities. As a percentage of retail and appliances revenues, cost of sales was 83% for the three months ended June 30, 2020.

 

Cost of sales for the land management services segment parts and equipment decreased by $285,825, or 51.1%, to $273,621 for the three months ended June 30, 2020 from $559,446 for the three months ended June 30, 2019. As a percentage of the sales of parts and equipment, cost of sales was 86.2% and 90.6% for the three months ended June 30, 2020 and 2019, respectively. The sale of a $205,628 tractor at costs to another dealer in the three-months ended June 30, 2019 was attributable to a higher cost in the prior year period.

 

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 personnel costs were $1,526,434 for the three months ended June 30, 2020, including $81,284 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $1,439,036 for the three months ended June 30, 2019.

 

Personnel costs for the retail and appliances segment was $1,121,396 for the three months ended June 30, 2020 as compared to $893,008 for the period from April 6, 2019 to June 30, 2019. Such increase was due to hiring additional senior management, and other staff needed for increased customer demand for product.

 

Personnel costs for the land management services segment decreased by $140,991, or 25.8%, to $405,038 for the three months ended June 30, 2020 from $546,029 for the three months ended June 30, 2019. Such decrease was due to reduction of staff attributable to COVID related reduced demand for trucking services .

 

Fuel costs. Fuel costs, which are attributable to our land management services segment, include fuel for our on-road trucking and off-road manure spreading services. Our fuel costs decreased by $89,453, or 52.0%, to $82,435 for the three months ended June 30, 2020 from $171,888 for the three months ended June 30, 2019. The decrease in fuel costs is the result of a decline in market prices for fuel purchases and the decline in trucking services provided.

 

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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 increased by $1,406,426, or 82.1%, to $3,115,893 for the three months ended June 30, 2020, including $350,459 from Asien’s for the period from May 29, 2020 to June 30, 2020, from $1,710,935 for the three months ended June 30, 2019.

 

General and administrative expenses for the retail and appliances segment was $2,333,230 for the three months ended June 30, 2020 as compared to $1,289,833 for the period from April 6, 2019 to June 30, 2019. Such increase was primarily due to $350,459 of Asien expenses for the period from May 29, 2020 to June 30, 2020, and also to additional advertising expenses and bank fees due to the increase in customer orders and revenue. As a percentage of retail and appliances revenue, general and administrative expenses for the retail and appliances segment amounted to 14.2% for the three months ended June 30, 2020.

 

General and administrative expenses for the land management services segment decreased by $81,232, or 21.3%, to $300,288 for the three months ended June 30, 2020 from $381,520 for the three months ended June 30, 2019. The decrease primarily resulted from a decrease in equipment repairs of $50,380, decrease in general and administrative costs of $16,619, and a decrease of professional fees of $14,232. As a percentage of land management services revenue, general and administrative expenses for the land management services segment amounted to 27.7% and 35.1% for the three months ended June 30, 2020 and 2019, respectively.

 

General and administrative expenses for our holding company increased by $442,786, or 1,118.7%, to $482,368 for the three months ended June 30, 2020, from $39,582 for the three months ended June 30, 2019. The increase was due to an increase in professional fees of $42,115 compared to the prior year and issuance of stock-based compensation in the current year of $436,386.

 

Total other income (expense). We had $4,305,366 in total other expense, net, for the three months ended June 30, 2020, as compared to other expense, net, of $466,285 for the three months ended June 30, 2019. Other expense in the three months ended June 30, 2020 consisted primarily of interest expense of interest expense of $350,385, amortization of financing costs of $111,178, loss on debt modification and extinguishment of $948,856, loss on acquisition working capital receivable of $809,000, change in the warrant liability of 1847 Goedeker warrants of $2,127,656 offset by gain on sale of property and equipment of $37,767 and other income of $3,942. while other expense for the three months ended June 30, 2019 consisted of financing costs of $167,406 and interest expense, net, of $306,568, offset by a change in warrant liability and other income of $7,689.

 

Net loss attributable to company shareholders. As a result of the cumulative effect of the factors described above, our net loss attributable to our shareholders increased by $2,717,751, or 329.4%, to $3,542,702 for the three months ended June 30, 2020 from $824,951 for the three months ended June 30, 2019.

 

Comparison of Six Months Ended June 30, 2020 and 2019

 

The following table sets forth key components of our results of operations during the six months ended June 30, 2020 and 2019, both in dollars and as a percentage of our revenue.

 

    June 30,
2020
    June 30,
2019
 
    Amount     % of
Revenues
    Amount     % of
Revenues
 
Revenues                        
Services   $ 1,213,026       4.3 %   $ 1,551,724       11.9 %
Sales of parts and equipment     605,047       2.2 %     852,810       6.5 %
Furniture and appliances     26,148,192       93.5 %     10,616,050       81.5 %
Total revenues     27,966,265       100.0 %     13,020,584       100.0 %
Operating expenses                                
Cost of sales     22,249,110       79.6 %     9,545,726       73.3 %
Personnel costs     3,290,884       11.8 %     1,896,233       14.6 %
Depreciation and amortization     811,145       2.9 %     688,086       5.3 %
Fuel     186,199       0.7 %     360,265       2.8 %
General and administrative     4,963,682       17.7 %     2,086,670       16.0 %
Total operating expenses     31,501,020       112.7 %     14,576,980       112.0 %
Net loss from operations     (3,534,755 )     (12.6 )%     (1,556,396 )     (12.0 )%
Other income (expense)                                
Financing costs     (313,960 )     (1.1 )%     (175,506 )     (1.3 )%
Loss on extinguishment of debt     (948,856 )     (3.4 )%     -       0.0 %
Interest expense     (683,939 )     (2.4 )%     (450,860 )     (3.5 )%
Loss on acquisition receivable     (809,000 )     (2.9 )%     -       0.0 %
Change in warrant liability     (2,127,656 )     (7.6 )%     2,600       0.0 %
Other income (expense)     6,325       0.0 %     5,089       0.0 %
Gain (loss) on sale of property and equipment     37,767       0.1 %     24,224       0.2 %
Total other income (expense)     (4,839,319 )     (17.3 )%     (594,453 )     (4.6 )%
Net loss before income taxes     (8,374,074 )     (29.9 )%     (2,150,849 )     (16.5 )%
Income tax benefit     (1,451,753 )     (5.2 )%     259,850       2.0 %
Net loss before non-controlling interests     (6,922,321 )     (24.8 )%     (1,890,999 )     (14.5 )%
Less net loss attributable to non-controlling interests     (2,007,322 )     (7.2 )%     (697,469 )     (5.2 )%
Net loss attributable to company shareholders   $ (4,914,999 )     (17.6 )%   $ (1,193,530 )     (9.2 )%

 

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Total revenues. Our total revenues were $27,966,265 for the six months ended June 30, 2020, including $1,185,980 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $13,020,584 for the six months ended June 30, 2019.

 

Revenues from the retail and appliances segment was $26,148,192, including $1,185,980 from Asien’s for the period from May 29, 2020 to June 30, 2020, for the six months ended June 30, 2020 as compared $10,616,050 for the period from April 6, 2019 to June 30, 2019.

 

The following table summarizes our revenues by sales type:

 

    Six Months
Ended
June 30,
2020
    Period from
April 6, 2020 to
June 30,
2020
 
Appliance sales   $ 21,316,809     $ 8,759,916  
Furniture sales     4,326,378       1,702,284  
Other sales     505,005       153,850  
Total revenues   $ 26,148,192     $ 10,616,050  

 

Revenues from the land management segment decreased by $586,461, or 24.4 %, to $1,818,073 for the six months ended June 30, 2020 from $2,404,534 for six three months ended June 30, 2019. Such decrease resulted from a $338,698 decrease in services revenue and by a $247,763 decrease in sales of parts and equipment. The decrease in services revenue was primarily due to a $364,344 decline in trucking revenue primarily attributable to COVID related reduced demand for trucking services compared to 2019. The following table summarizes our revenues by type for the six months ended June 30, 2020 and 2019:

 

    Six Months Ended
June 30,
 
    2020     2019  
Services            
Trucking   $ 519,497     $ 883,841  
Waste hauling     439,049       376,357  
Repairs     106,293       137,607  
Other     148,187       153,919  
Total services     1,213,026       1,551,724  
Sales of parts and equipment     605,047       852,810  
Total revenues   $ 1,818,073     $ 2,404,534  

 

Cost of sales. Our total cost of sales was $22,249,110 for the six months ended June 30, 2020, including $923,892 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $9,545,726 for the six months ended June 30, 2019.

 

Cost of sales for the retail and appliances segment was $21,720,220, including $923,892 from Asien’s for the period from May 29, 2020 to June 30, 2020, for the six months ended June 30, 2020 as compared to $8,772,572 for the period from April 6, 2019 to June 30, 2019. As a percentage of retail and appliances revenues, cost of sales was 83% for the six months ended June 30, 2020.

 

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Cost of sales for the land management segment sale of parts and equipment decreased by $244,265, or 31.6%, to $528,889 for the six months ended June 30, 2020 from $773,154 for the six months ended June 30, 2019. As a percentage of the sales of parts and equipment, land management services revenues, cost of sales was 87.4% and 90.7% for the six months ended June 30, 2020 and 2019, respectively. Such decrease was due to the sale of a $205,628 tractor at cost to another dealer in the six-months ended June 30, 2019.

 

Personnel costs. Our personnel costs were $3,290,884 for the six months ended June 30, 2020 as compared to $1,896,233 for the six months ended June 30, 2019.

 

Personnel costs for the retail and appliances segment was $2,432,879 for the six months ended June 30, 2020, including $81,284 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $893,008 for the period from April 6, 2019 to June 30, 2019.

 

Personnel costs for the land management services segment decreased by $145,221, or 14.5%, to $858,005 for the six months ended June 30, 2020 from $1,003,226 for the six months ended June 30, 2019. Such decrease was due to reduction of staff attributable to COVID related reduced demand for trucking services.

 

Fuel costs. Our fuel costs decreased by $174,066, or 48.3%, to $186,199 for the six months ended June 30, 2020 from $360,265 for the six months ended June 30, 2019. The decrease in fuel costs is the result of a decline in market prices for fuel purchases and the decline in trucking services provided.

 

General and administrative expenses. Our total general and administrative expenses increased by $2,878,480, or 137.9%, to $4,963,682 for the six months ended June 30, 2020 from $2,086,670 for the three months ended June 30, 2019.

 

General and administrative expenses for the retail and appliances segment was $3,811,052 for the six months ended June 30, 2020, including $350,459 from Asien’s for the period from May 29, 2020 to June 30, 2020, as compared to $1,289,833 for the period from April 6, 2019 to June 30, 2019. As a percentage of retail and appliances revenue, general and administrative expenses for the retail and appliances segment amounted to 14.6% for the six months ended June 30, 2020.

 

General and administrative expenses for the land management services segment decreased by $85,983, or 12.0%, to $630,978 for the six months ended June 30, 2020 from $716,961 for the six months ended June 30, 2019. The decrease primarily resulted from a decrease in maintenance and repairs of $55,199 and insurance of $34,233. As a percentage of land management services revenue, general and administrative expenses for the land management services segment amounted to 34.7% and 32.1% for the six months ended June 30, 2020 and 2019, respectively.

 

General and administrative expenses for our holding company increased by $441,779, or 553.1%, to $521,653 for the six months ended June 30, 2020, from $79,877 for the six months ended June 30, 2019. The increase was due to a increase in professional fees compared to the prior year and issuance of stock-based compensation in the current year of $436,386.

 

Total other income (expense). We had $4,839,319 in total other expense, net, for the six months ended June 30, 2020, as compared to other expense, net, of $594,453 for the six months ended June 30, 2019. Other expense in the six months ended June 30, 2020 consisted primarily of interest expense of $683,939, amortization of financing costs of $313,960, loss on debt modification and extinguishment of $948,856, loss on acquisition working capital receivable of $809,000, change in the warrant liability of 1847 Goedeker warrants of $2,127,656 offset by gain on sale of property and equipment of $37,767 and other income of $6,325. while other expense for the six months ended June 30, 2019 consisted of financing costs of $175,506 and interest expense, net, of $450,860, offset by gain on sale of property and equipment of $24,224 and a change in warrant liability and other income of $7,689.

 

Net loss attributable to company shareholders. As a result of the cumulative effect of the factors described above, our net loss attributable to our shareholders increased by $3,721,469, or 311.8%, to $4,914,999 for the six months ended June 30, 2020 from $1,193,530 for the six months ended June 30, 2019.

 

Liquidity and Capital Resources

 

As of June 30, 2020, we had cash and cash equivalents of $4,515,991. To date, we have financed our operations primarily through cash proceeds from financing activities, borrowings and equity contributions by our shareholders.

 

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Although we do not believe that we will require additional cash to continue our operations over the next twelve months (i.e., we do not believe that there is a going concern issue), we do 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 in one of our subsidiaries. Given these factors, we believe that the amount of outside additional capital necessary to execute our business plan on the low end (assuming target company sellers accept a significant portion of the purchase price in the form of seller notes or our equity or in one of our subsidiaries) ranges between $100,000 to $250,000. If, and to the extent, that sellers are unwilling to accept a significant portion of the purchase price in seller notes and equity, then the cash required to execute our business plan could be as much as $5,000,000. 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 the Manager pursuant to the management services agreement, potential payment of profit allocation to the Manager and potential put price to the 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, 2019 for more information concerning the management fee, the profit allocation and put price.

 

At June 30, 2020, Goedeker did not meet certain loan covenants under the loan and security agreements with Burnley Capital LLC and Small Business Community Capital II, L.P. The agreements require compliance with the following ratios as a percentage of earnings before interest, taxes, depreciation, and amortization for the twelve-month period ended June 30, 2020. The table below shows the required ratio and actual ratio for such period.

 

Covenant   Actual Ratio     Required Ratio  
Total debt ratio     (2.9)x     4.0x
Senior debt ratio     (0.7)x     1.5x
Interest coverage ratio     (1.2)x     1.0x

 

In addition, Goedeker was not in compliance with a requirement with respect to the liquidity ratio, which is the ratio of cash and available borrowings to customer deposits. At June 30, 2020, the actual ratio was 0.36x compared to a requirement of 0.35x.

 

Accordingly, Goedeker is in technical, not payment default, on these loan and security agreements and we have classified such debt as a current liability. We have developed plans that will return us to full compliance, including the recently completed underwritten public offering of Goedeker’s common stock (the “IPO”), the proceeds of which were used to repay these two loans. Goedeker filed a registration statement on Form S-1 relating to the IPO on April 22, 2020. In addition, we have taken the following two steps that we believe will positively impact our retail and appliance business:

 

we hired an appliance industry veteran as chief executive officer of our retail and appliance business to drive growth and increase profitability; and

 

we have engaged outside consultants to increase traffic to the website of our retail and appliance business and improve our on-line shopping experience.

 

We believe these efforts and others will increase revenue and allow us to regain compliance with our debt covenants.

 

There are no cross-default provisions that would require any other long-term liabilities to be classified as current. Although the 9% subordinated promissory note described below contains a cross default provision that is triggered by the acceleration of the senior debt, such cross default provision would only be triggered for a technical default like the one that occurred if the senior lender accelerated the senior debt, which has not happened.

 

The amount of management fee paid to the Manager by us is reduced by the aggregate amount of any offsetting management fees, if any, received by the Manager from any of our businesses. As a result, the management fee paid to the Manager may fluctuate from quarter to quarter. The amount of management fee paid to the 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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The 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 company subsidiary, the 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 the Company exceeds the 8% hurdle rate. The 8% hurdle rate is the product of (i) a 2% rate per quarter, multiplied by (ii) the number of quarters such subsidiary was held by the Company, multiplied by (iii) the subsidiary’s average share (determined based on gross assets, generally) of our consolidated net equity (determined according to GAAP with certain adjustments). In certain circumstances, after a subsidiary has been held for at least 5 years, the 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, 2019 for more information on the calculation of the profit allocation.

 

Our operating agreement also contains a supplemental put provision, which gives the Manager the right, subject to certain conditions, to cause us to purchase the allocation shares then owned by the 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 the Manager’s resignation, the payment to the 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, 2019 for more information on the calculation of the put price. The put price obligation, if the 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:

 

Cash Flow

 

    Six Months Ended
June 30,
 
    2020     2019  
Net cash provided by (used in) operating activities   $ 3,800,759     $ (452,738 )
Net cash provided by investing activities     1,253,781       1,310,088  
Net cash used in financing activities     (777,309 )     (873,394 )
Net decrease in cash and cash equivalents     4,277,231       (16,044 )
Cash and cash equivalents at beginning of period     238,760       333,880  
Cash and cash equivalent at end of period   $ 4,515,991     $ 317,836  

 

Net cash provided by operating activities was $3,800,759 for the six months ended June 30, 2020, as compared to net cash used in operating activities of $452,738 for the six months ended June 30, 2019. For the six months ended June 30, 2020, the net loss of $6,922,321, an increase in deferred taxes and uncertain tax position of $1,201,753, an increase in inventory of $514,236, an increase in vendor deposits of $50,542, offset by depreciation and amortization of $811,145, stock compensation of $436,386, amortization of financing related costs and extinguishment of debt of $393,507, an increase in accounts payable and accrued expenses of $3,019,374, an increase in customer deposits of $5,861,609 and a change in warrant liability of $2,127,656, were the primary drivers of the net cash used in operating activities. were the primary drivers of the net cash used in operating activities. For the six months ended June 30, 2019, the net loss of $1,890,999, a decrease in accounts receivable of $1,246,154, and a decrease in uncertain tax position of $259,831, offset by an increase in customer deposits of $1,107,639, depreciation and amortization of $688,086, an increase in accounts payable and accrued expenses of $607,378 and an decrease in inventory of $315,390, were the primary drivers of the net cash used in operating activities.

 

Net cash provided by investing activities was $1,253,781, for the six months ended June 30, 2020, as compared to net cash provided by investing activities of $1,310,088 for the six months ended June 30, 2019. For the six months ended June 30, 2020, net cash provided by investing activities consisted of net cash acquired in the acquisition of Asien of $1,268,285 and proceeds from sale of fixed assets of $31,500, offset of the purchase of equipment of $46,004, while net cash provided by investing activities for the six months ended June 30, 2019 consisted of net cash acquired in the acquisition of Goedeker of $1,285,214 and proceeds from sale of fixed assets of $39,750, offset by purchase of equipment in the amount of $14,876.

 

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Net cash used in financing activities was $777,309 for the six months ended June 30, 2020, as compared to $873,394 for the six months ended June 30, 2019. For the six months ended June 30, 2020, net cash used in financing activities consisted of repayment of notes payable of $1,197,796, net repayments of the lines of credit of $443,270 and repayment of the financing lease of $162,443 net of proceeds from term loans of $1,026,200, while net cash used in financing activities for the six months ended June 30, 2019 consisted of repayments of notes payable of $483,266, repayments of capital lease obligations of $302,099 and repayments of short-term borrowing $88,029.

 

Grid Promissory Note

 

On January 3, 2018, the Company issued a grid promissory note to the Manager in the initial principal amount of $50,000. The note provides that the Company may from time to time request additional advances from the Manager up to an aggregate additional amount of $100,000, which will be added to the note if the Manager, in its sole discretion, so provides. Interest shall accrue on the unpaid portion of the principal amount and the unpaid portion of all advances outstanding at a fixed rate of 8% per annum, and along with the outstanding portion of the principal amount and the outstanding portion of all advances, shall be payable in one lump sum due on the maturity date, January 3, 2021. If all or a portion of the principal amount or any advance under the note, or any interest payable thereon is not paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate of 12% per annum. In the event the Company completes a financing involving at least $500,000, the Company must, contemporaneously with the closing of such financing transaction, repay the entire outstanding principal and accrued and unpaid interest on the note. The note is unsecured and contains customary events of default. As of June 30, 2020, the Manager has advanced $119,400 of the note and the Company has accrued interest of $21,944.

 

Revolving Loan – Northpoint

 

On June 24, 2019, Goedeker, as borrower, entered into a loan and security agreement with Northpoint Commercial Finance LLC (“Northpoint”), which was amended on August 2, 2019, for revolving loans up to an aggregate maximum loan amount of $1,000,000 for the acquisition, financing or refinancing by Goedeker of inventory at an interest rate of LIBOR plus 7.99%. There is no outstanding balance of the line of credit as of June 30, 2020.

 

The loan and security agreement contains customary events of default, representations, warranties and affirmative and negative financial and other covenants for a loan of this type. The loans are secured by a security interest in all of the inventory of Goedeker that is manufactured or sold by vendors identified in the loan and security agreement and are guaranteed by 1847 Goedeker.

 

Revolving Loan - Burnley

 

On April 5, 2019, Goedeker, as borrower, and 1847 Goedeker entered into a loan and security agreement with Burnley Capital LLC (“Burnley”) for revolving loans in an aggregate principal amount that will not exceed the lesser of (i) the borrowing base or (ii) $1,500,000 (provided that such amount may be increased to $3,000,000 in Burnley’s sole discretion) minus reserves established Burnley at any time in accordance with the loan and security agreement. The “borrowing base” means an amount equal to the sum of the following: (i) the product of 85% multiplied by the liquidation value of Goedeker’s inventory (net of all liquidation costs) identified in the most recent inventory appraisal by an appraiser acceptable to Burnley (ii) multiplied by Goedeker’s eligible inventory (as defined in the loan and security agreement), valued at the lower of cost or market value, determined on a first-in-first-out basis. In connection with the closing of the acquisition of Goedeker Television’s business on April 5, 2019, Goedeker borrowed $744,000 under the loan and security agreement and issued a revolving note to Burnley in the principal amount of up to $1,500,000. There is no available borrowing base and the balance of the line of credit amounts to $456,104 as of June 30, 2020, comprised of principal of $584,938 and net of unamortized debt discount of $68,834.

 

The revolving note matures on April 5, 2022, provided that at Burnley’s sole and absolute discretion, it may agree to extend the maturity date for two successive terms of one year each. The revolving note bears interest at a per annum rate equal to the greater of (i) the LIBOR Rate (as defined in the loan and security agreement) plus 6.00% or (ii) 8.50%; provided that upon an event of default all loans, all past due interest and all fees shall bear interest at a per annum rate equal to the foregoing rate plus 3.00%.

 

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The loan and security agreement contains customary events of default, representations, warranties and affirmative and negative financial and other covenants for a loan of this type. The revolving note is secured by a first priority security interest in all of the assets of Goedeker and 1847 Goedeker and is guaranteed by the Company. The rights of Burnley to receive payments under the revolving note are subordinate to the rights of Northpoint under a subordination agreement that Burnley entered into with Northpoint.

 

As noted above, Goedeker is in technical, not payment default, on this loan and security agreement and has classified such debt as a current liability.

 

Term Loan - SBCC

 

On April 5, 2019, Goedeker, as borrower, and 1847 Goedeker entered into a loan and security agreement with Small Business Community Capital II, L.P. (“SBCC”) for a term loan in the principal amount of $1,500,000, pursuant to which Goedeker issued to SBCC a term note in the principal amount of up to $1,500,000 and a ten-year warrant to purchase shares of the most senior capital stock of Goedeker equal to 5.0% of the outstanding equity securities of Goedeker on a fully-diluted basis for an aggregate price equal to $100. The Company classified the warrant as a derivative liability on the balance sheet of $122,344 and subject to remeasurement on every reporting period. The balance of the term note amounts to $877,604 as of June 30, 2020, comprised of principal of $1,130,826, capitalized PIK interest of $27,473, and net of unamortized debt discount of $122,375 and unamortized warrant feature of $158,320.

 

The term note matures on April 5, 2023 and bears interest at the sum of the cash interest rate (defined as 11% per annum) plus the Paid-in-Kind interest rate (defined as 2% per annum); provided that upon an event of default all principal, past due interest and all fees shall bear interest at a per annum rate equal to the cash interest rate and the Paid-in-Kind interest rate, in each case plus 3.00%.

 

The loan and security agreement contains customary events of default, representations, warranties and affirmative and negative financial and other covenants for a loan of this type. The term note is secured by a second priority security interest (subordinate to the revolving loan) in all of the assets of Goedeker and 1847 Goedeker and is guaranteed by the Company. The rights of SBCC to receive payments under the term note are subordinate to the rights of Northpoint and Burnley under separate subordination agreements that SBCC entered into with them.

 

As noted above, Goedeker is in technical, not payment default, on this loan and security agreement and has classified such debt as a current liability.

 

Term Loan - Home State Bank

 

On June 13, 2018, Neese entered into a term loan agreement with Home State Bank, pursuant to which Neese issued a promissory note to Home State Bank in the principal amount of $3,654,074 with an annual interest rate of 6.85% with covenants to maintain a minimum debt coverage ratio of 1.00 to 1.25 measured at December 31, 2019. Neese did not comply with this covenant for the year ended December 31, 2019. Accordingly, because of the violation of this covenant and because the loan matured July 20, 2020, the loan is classified as a current liability in the balance sheet. Pursuant to the terms of the note, Neese will make semi-annual payments of $302,270 beginning on January 20, 2019 and continuing every six months thereafter until July 20, 2020, the maturity date; provided however, that Neese will pay the note in full immediately upon demand by Home State Bank. The principal balance of the note amounts to $2,953,910 as of June 30, 2020.

 

The loan agreement contains customary events of default, representations and warranties and covenants. Upon an event of default, the interest rate on the note will be increased by 3 percentage points. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.

 

The loan is secured by inventory, accounts receivable, and certain fixed assets of Neese. The loan agreement limited the payment of interest on certain promissory notes to $40,000 annually. The Company continues to accrue interest at the contractual amounts. Such accruals (in excess of $40,000 in interest on the promissory notes) are shown as long-term accrued expenses in the accompanying balance sheet as of June 30, 2020.

 

If the Company sells property, plant, and equipment securing the loan, it must remit the appraised value of the equipment to Home State Bank. During the six months ended June 30, 2020 and 2019, $145,690 and $21,500, respectively, was remitted to Home State Bank pursuant to this requirement.

 

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On July 30, 2020, Neese entered into a change in terms agreement (the “Amendment”) with the Lender, pursuant to which: (i) the maturity date was extended to July 30, 2022; (ii) the interest rate was changed to 5.50%; (iii) Neese agreed to pay accrued interest in the amount of $95,970.42; (iv) Neese agreed to make payments of $30,000.00 beginning on September 30, 2020 and continuing thereafter on a monthly basis until maturity at which time a final interest payment is due; (v) Neese agreed to make a payment of $260,000.00 on December 30, 2020 and December 30, 2021; (vi) Neese agreed to make two new advances under the note in the amounts $51,068.19 and $517,528.86 to repay in full Neese’s capital lease transactions due to Utica Leaseco LLC; (vii) Neese agreed to pay a loan fee of $17,500.00 at the time of signing the Amendment; and (viii) the Lender agreed to make a loan advance to checking for $17,500.00.

 

Secured Convertible Promissory Note

 

On April 5, 2019, the Company, 1847 Goedeker and Goedeker (collectively, “1847”) entered into a securities purchase agreement with Leonite Capital LLC, a Delaware limited liability company (“Leonite”), pursuant to which 1847 issued to Leonite a secured convertible promissory note in the aggregate principal amount of $714,286. As additional consideration for the purchase of the note, (i) the Company issued to Leonite 50,000 common shares, (ii) the Company issued to Leonite a five-year warrant to purchase 200,000 common shares at an exercise price of $1.25 per share (subject to adjustment), which may be exercised on a cashless basis, and (iii) 1847 Goedeker issued to Leonite shares of common stock equal to a 7.5% non-dilutable interest in 1847 Goedeker.

 

The note carries an original issue discount of $64,286 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred in connection with the purchase of the note. Furthermore, the Company issued 50,000 shares of common stock valued at $137,500 and a debt-discount related to the warrants valued at $292,673. The Company amortized $129,343 of financing costs related to the shares and warrants in the six months ended June 30, 2020.

 

On May 11, 2020, 1847 and Leonite entered into a first amendment to secured convertible promissory note, pursuant to which the parties agreed (i) to extend the maturity date of the note to October 5, 2020, (ii) that 1847’s failure to repay the note on the original maturity date of April 5, 2020 shall not constitute and event of default under the note and (iii) to increase the principal amount of the note by $207,145, as a forbearance fee. Notwithstanding the foregoing, in the event that 1847 completes an offering of debt, equity, or closes on an asset sale (other than in the ordinary course of business), then 1847 agreed to promptly use the net proceeds of such offering to repay Leonite; provided that, in no event shall this requirement cause 1847 to default on any of its agreements and obligations that were outstanding at the time of the amendment.

 

In connection with the amendment, (i) the Company issued to Leonite another five-year warrant to purchase 200,000 common shares at an exercise price of $1.25 per share (subject to adjustment), which may be exercised on a cashless basis and (ii) upon closing of the Asien’s acquisition, 1847 Asien issued to Leonite shares of common stock equal to a 5% interest in 1847 Asien. The amendment represented a prepayments of principal and accrued interest resulting in a debt extinguishments recorded an aggregate extinguishment loss of $773,856.

 

On May 4, 2020, Leonite converted $100,000 of the outstanding balance of the note into 100,000 common shares. The remaining net principal balance of the note is $821,431 at June 30, 2020.

 

The note bears interest at the rate of the greater of (i) 12% per annum and (ii) the prime rate as set forth in the Wall Street Journal on April 5, 2019 plus 6.5% guaranteed over the holding period on the unconverted principal amount, on the terms set forth in the note. Any amount of principal or interest on the note which is not paid by the maturity date shall bear interest at the rate at the lesser of 24% per annum or the maximum legal amount permitted by law.

 

The note contains customary events of default, is convertible into our common shares and is secured first priority security interest with respect to the securities that we own in 1847 Goedeker and in 1847 Neese, and a third priority security interest with respect to all other assets. The rights of Leonite to receive payments under the note are subordinate to the rights of Northpoint, Burnley and SBCC under separate subordination agreements that Leonite entered into with them.

 

9% Subordinated Promissory Note

 

A portion of the purchase price for the acquisition of assets of Goedeker Television was paid by the issuance by Goedeker to Steve Goedeker, as representative of Goedeker Television (the “Goedeker Seller”), of a 9% subordinated promissory note in the principal amount of $4,100,000. The note will accrue interest at 9% per annum, amortized on a five-year straight-line basis and payable quarterly in accordance with the amortization schedule attached thereto, and mature on April 5, 2023. The remaining balance of the note at June 30, 2020 is $3,395,243, comprised of principal of $3,930,293 and net of unamortized debt discount of $535,050.

 

The note is currently unsecured and contains customary events of default. The rights of the Goedeker Seller to receive payments under the note are subordinate to the rights of Northpoint, Burnley and SBCC under separate subordination agreements that the Goedeker Seller entered into with them.

 

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On June 2, 2020 the parties entered into an amendment and restatement of the note that will become effective as of the closing of the IPO, pursuant to which (i) the principal amount of the existing note shall be increased by $250,0000, (ii) upon the closing of the IPO, Goedeker agreed to make all payments of principal and interest due under the note through the date of the closing, and (iii) from and after the closing, the interest rate of the note shall be increased from 8% to 12%. Goedeker also agreed to grant to the sellers, Goedeker Television, Steve Goedeker and Mike Goedeker, a security interest in all of the assets of Goedeker to secure its obligations under the amended and restated note and entered into a security agreement with them that will become effective upon the closing of the IPO.

 

At the closing of the IPO, Goedeker agreed to pay $516,301.26 to the sellers, which is equal to the principal due and owing for quarters 2, 3 and 4 under the note plus accrued interest thereon, which is equal to $324,671.94 as of June 1, 2020 and will accrue at a rate of $983.85 per day thereafter.

 

10% Promissory Note

 

A portion of the purchase price for the acquisition of Neese was paid by the issuance of a promissory note in the principal amount of $1,025,000 by 1847 Neese and Neese to the sellers of Neese, Alan Neese and Katherine Neese (the “Neese Sellers”). The note bears interest on the outstanding principal amount at the rate of ten percent (10%) per annum and was due and payable in full on March 3, 2018; provided, however, that the unpaid principal, and all accrued, but unpaid, interest thereon shall be prepaid if at any time, and from time to time, the cash on hand of 1847 Neese and Neese exceeds $250,000 and, then, the prepayment shall be equal to the amount of cash in excess of $200,000 until the unpaid principal and accrued, but unpaid, interest thereon is fully prepaid. The note is unsecured and contains customary events of default.

 

The note has not been repaid; thus, the Company is in default under this note. Under terms of the term loan with Home State Bank described above, this note may not be paid until the term loan is paid in full. The Neese Sellers agreed to the modification of its terms by signing the loan agreement for the Home State Bank term loan. Accordingly, the loan is shown as a long-term liability as of June 30, 2020. Additionally, the term loan lender limits the payment of interest on this note to $40,000 annually. The Company continues to accrue interest at the contract rate; however, given the limitations of the term loan, all accrued interest in excess of $40,000 is included in long-term accrued expenses.

 

8% Subordinated Amortizing Promissory Note

 

A portion of the purchase price for acquisition of Asien’s was paid by the issuance of an 8% subordinated amortizing promissory note in the principal amount of $200,000 by 1847 Asien to the seller of Asien’s, Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992 (the “Asien’s Seller”). Interest on the outstanding principal amount will be payable quarterly at the rate of eight percent (8%) per annum. The outstanding principal amount of the note will amortize on a one-year straight-line basis in accordance with a specified amortization schedule, with all unpaid principal and accrued, but unpaid interest being fully due and payable on May 28, 2021. The remaining balance of the note at June 30, 2020 is $201,447 comprised of principal of $200,000 and capitalized interest of $1,447.

 

The note is unsecured and contains customary events of default. The rights of the Asien’s Seller to receive payments under the note is subordinated to all indebtedness of 1847 Asien to banks, insurance companies and other financial institutions or funds, and federal or state taxation authorities.

 

Demand Promissory Note

 

A portion of the purchase price for acquisition of Asien’s was paid by the issuance of demand promissory note in the principal amount of $655,000 by 1847 Asien to the Asien’s Seller. The note accrues interest at a rate of one percent (1%) computed on the basis of a 360-day year. Principal and accrued interest on the note shall be payable 24 hours after written demand by the Asien’s Seller. The remaining balance of the note was repaid in June 30, 2020.

 

PPP Loans

 

On April 8, 2020, April 10, 2020 and prior to the acquisition on April 28, 2020, Goedeker, Neese and Asien received $642,600, $383,600, and $357,500, respectively, in Payroll Protection Program (“PPP”) loans from the United States Small Business Administration (“SBA”) under provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).  The aggregate $1,383,700 PPP loans have two-year terms and bear interest at a rate of 1.0% per annum.  Monthly principal and interest payments are deferred for six months after the date of disbursement.  The PPP loans may be prepaid at any time prior to maturity with no prepayment penalties.  The PPP loans contain events of default and other provisions customary for loans of this type.  The PPP provides that the PPP loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act.  Goedeker, Neese and Asien intend to use the proceeds from the PPP loans for qualifying expenses and to apply for forgiveness of the PPP loans in accordance with the terms of the CARES Act.  The Company has classified $612,417 of the PPP loans as current liabilities and $771,283 as long-term liabilities pending SBA clarification of the final loan terms.

 

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Floor Plan Loans Payable

 

At December 31, 2019, $10,581 of machinery and equipment inventory was pledged to secure a floor plan loan from a commercial lender. The Company must remit proceeds from the sale of the secured inventory to the floor plan lender and pays a finance charge that can vary monthly at the option of the lender. The balance of the floor plan payable was repaid in the six months ended June 30, 2020.

 

Master Lease Agreement

 

The cash portion of the purchase price for the acquisition of Neese was financed under a capital lease transaction for Neese’s equipment with Utica Leaseco, LLC (“Utica”), pursuant to a master lease agreement, dated March 3, 2017, between Utica, as lessor, and 1847 Neese and Neese, as co-lessees (collectively, the “Lessee”), which was amended on June 14, 2017. Under the master lease agreement, as amended, Utica loaned an aggregate of $3,240,000 for certain of Neese’s equipment listed therein, which it leases to the Lessee. A portion of the proceeds from the term loan from Home State Bank described above were applied to reduce the balance of this lease to $475,000. The lease is payable in 46 payments of $12,882 beginning July 3, 2018 and an end-of-term buyout of $38,000.

 

On October 31, 2017, the parties entered into a second equipment schedule to the master lease agreement, pursuant to which Utica loaned an aggregate of $980,000 for certain of Neese’s equipment listed therein. The term of the second equipment schedule is 51 months and agreed monthly payments are $25,807.

 

The remaining balance of the lease amounts to $478,045 as of June 30, 2020, comprised of principal of $668,248 and net of unamortized debt discount of $19,025, accrued payments on lien release of $249,784 and lease deposits of $38,807, offset by end of lease buyout payments of $117,413.

 

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 June 30, 2020. See the above disclosures for more details regarding these loans.

 

    Short-Term     Long-Term     Total Debt  
Grid Promissory Note   $ 119,400     $ -     $ 119,400  
Revolving Loan – Burnley     456,105       -       456,105  
Term Loan - SBCC     3,127,604 (1)     -       3,127,604  
Term Loan - Home State Bank     2,953,867       -       2,953,867  
Secured Convertible Promissory Note – Leonite     821,431       -       821,431  
9% Subordinated Promissory Note – Goedeker Seller     311,931       3,153,543 (2)     3,465,474  
10% Promissory Note – Neese Sellers     -       1,025,000       1,025,000  
8% Subordinated Amortizing Promissory Note – Asien’s Seller     201,447       -       201,447  
Demand Promissory Note – Asien’s (Paul William)     47,907       17,467       65,374  
TVT Direct Funding LLC     410,374       -       410,374  
PPP Loans     612,417       771,283       1,383,700  
Vehicle loans     25,314       54,184       79,498  
Master Lease Agreement – Utica     388,023       90,021       478,044  
Total   $ 9,475,820     $ 5,111,498     $ 14,587,318  

 

(1) Includes warrant liability of $2,250,000
(2) Includes contingent note payable of $49,248 

 

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Contractual Obligations

 

Agreements with Manager

 

We have engaged the Manager to manage our day-to-day operations and affairs. Our relationship with the Manager will be governed principally by the following agreements:

 

the management services agreement and offsetting management services agreements relating to the management services the Manager will perform for us and the businesses we own and the management fee to be paid to the Manager in respect thereof; and

 

our company’s operating agreement setting forth the 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 the Manager’s right to cause us to purchase the allocation shares it owns.

 

Goedeker Earn Out Payments

 

Pursuant to the asset purchase agreement with Goedeker Television, dated April 5, 2019, Goedeker Television is also entitled to receive the following earn out payments to the extent the Goedeker business achieves the applicable EBITDA (as defined in the asset purchase agreement) targets:

 

1. An earn out payment of $200,000 if the EBITDA of the Goedeker business for the trailing twelve (12) month period from the closing date is $2,500,000 or greater;

 

2. An earn out payment of $200,000 if the EBITDA of the Goedeker business for the trailing twelve (12) month period from the first anniversary of closing date is $2,500,000 or greater; and

 

3. An earn out payment of $200,000 if the EBITDA of the Goedeker business for the trailing twelve (12) month period from the second anniversary of the closing date is $2,500,000 or greater.

 

To the extent the EBITDA of the Goedeker business for any applicable period is less than $2,500,000 but greater than $1,500,000, Goedeker must pay a partial earn out payment to Goedeker Television in an amount equal to the product determined by multiplying (i) the EBITDA Achievement Percentage by (ii) the applicable earn out payment for such period, where the “Achievement Percentage” is the percentage determined by dividing (A) the amount of (i) the EBITDA of the Goedeker business for the applicable period less (ii) $1,500,000, by (B) $1,000,000. For avoidance of doubt, no partial earn out payments shall be earned or paid to the extent the EBITDA of the Goedeker business for any applicable period is equal or less than $1,500,000. For the trailing twelve (12) month period from the closing date, EBITDA for the Goedeker business was $($2,825,000), so Goedeker Television is not entitled to an earn our payment for that period.

 

To the extent Goedeker Television is entitled to all or a portion of an earn out payment, the applicable earn out payment(s) (or portion thereof) shall be paid on the date that is three (3) years from the closing date, and shall accrue interest from the date on which it is determined Goedeker Television is entitled to such earn out payment (or portion thereof) at a rate equal to five percent (5%) per annum, computed on the basis of a 360 day year for the actual number of days elapsed.

 

The rights of Goedeker Television to receive any earn out payment are subordinate to the rights of Burnley and SBCC under separate subordination agreements that Goedeker Television entered into with them on April 5, 2019.

 

Asien’s Sale of Future Receipts

 

On May 28, 2020, 1847 Asien and Asien’s entered into an agreement of sale of future receipts with TVT Direct Funding LLC (“TVT”), pursuant to which 1847 Asien and Asien’s agreed to sell future receivables with a value of $685,000 to TVT for a purchase price of $500,000. 1847 Asien and Asien’s agreed to deliver to TVT 20% of its weekly future receipts, or approximately $23,300, over the course of an estimated seven-month term, or such date when the above amount of receivables has been delivered to TVT. 1847 Asien used the proceeds from this sale to finance the Asien’s acquisition. In addition to all other sums due to TVT under this agreement, 1847 Asien and Asien’s agreed to pay to TVT certain additional fees, including a one-time origination fees of $25,000, as reimbursement of costs incurred by TVT for financial and legal due diligence. The future payments under the TVT agreement are secured by a subordinated security interest in all of the tangible and intangible assets of 1847 Asien and Asien’s.

 

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The agreement with TVT contains customary events of default, including the occurrence of the following: (i) a violation by 1847 Asien or Asien’s of any term, condition or covenant in the agreement other than as the result of Asien’s business to ceases its operations, (ii) any representation or warranty made by 1847 Asien or Asien’s is proven to have been incorrect, false or misleading in any material respect when made, and (iii) a default by 1847 Asien or Asien’s under any of the terms, covenants and conditions of any other agreement with TVT, if any.

 

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

 

The following discussion relates to critical accounting policies for our consolidated company. The preparation of financial statements in conformity with GAAP requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:

 

Revenue Recognition and Cost of Revenue 

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant judgments. The Company’s adoption of this ASU resulted in no change to the Company’s results of operations or balance sheet.

 

Retail and Appliances Segment

 

Goedeker collects the full sales price from the customer at the time the order is placed. Goedeker does not incur incremental costs obtaining purchase orders from customers, however, if it did, because all of Goedeker’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized.

 

The revenue that Goedeker recognizes arises from orders it receives from its customers. Goedeker’s performance obligations under the customer orders correspond to each sale of merchandise that it makes to customers under the purchase orders; as a result, each purchase order generally contains only one performance obligation based on the merchandise sale to be completed.

 

Control of the delivery transfers to customers when the customer can direct the use of, and obtain substantially all the benefits from, Goedeker’s products, which generally occurs when the customer assumes the risk of loss. The risk of loss shifts to the customer at different times depending on the method of delivery. Goedeker delivers products to its customers in three possible ways. The first way is through a shipment of the products through a third-party carrier from Goedeker’s warehouse to the customer (a “Company Shipment”). The second way is through a shipment of the products through a third-party carrier from a warehouse other than Goedeker’s warehouse to the customer (a “Drop Shipment”) and the third way is where Goedeker itself delivers the products to the customer and often also installs the product (a “Local Delivery”). In the case of a Local Delivery, Goedeker loads the product on to its own truck and delivers and installs the product at the customer’s location. When a product is delivered through a Local Delivery, risk of loss passes to the customer at the time of installation and revenue is recognized upon installation at the customer’s location. In the case of a Company Shipment and a Drop Shipment, the delivery to the customer is made free on board, or FOB, shipping point (whether from Goedeker’s warehouse or a third party’s warehouse). Therefore, risk of loss and title transfers to the customer once the products are shipped (i.e., leaves the Goedeker’s warehouse or a third-party’s warehouse). After shipment and prior to delivery, the customer is able to redirect the product to a different destination, which demonstrates the customer’s control over the product once shipped. Once the risk of loss has shifted to the customer, Goedeker has satisfied its performance obligation and recognizes revenue.

 

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Goedeker agrees with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price. In Goedeker’s contracts with customers, it allocates the entire transaction price to the sales price, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Any sales tax, value added tax, and other tax Goedeker collects concurrently with revenue-producing activities are excluded from revenue.

 

If Goedeker continued to apply legacy revenue recognition guidance for the three and six months ended June 30, 2020 and 2019, revenues, gross margin, and net loss would not have changed.

 

Cost of revenue includes the cost of purchased merchandise plus the cost of shipping merchandise and where applicable installation, net of promotional rebates and other incentives received from vendors.

 

Substantially all Goedeker’s sales are to individual retail consumers.

 

Shipping and Handling ‒ Goedeker bills its customers for shipping and handling charges, which are included in net sales for the applicable period, and the corresponding shipping and handling expense is reported in cost of sales.

 

Disaggregated Revenue ‒ Goedeker disaggregates revenue from contracts with customers by contract type, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Asien’s collects 100% of the payment for special-order models including tax, and 50% of the payment for non-special orders from the customer at the time the order is placed. Asien’s does not incur incremental costs obtaining purchase orders from customers; however, if Asien’s did, because all Asien’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized.

 

Performance Obligations – The revenue that Asien’s recognizes arises from orders it receives from customers. Asien’s performance obligations under the customer orders correspond to each sale of merchandise that it makes to customers under the purchase orders; as a result, each purchase order generally contains only one performance obligation based on the merchandise sale to be completed. Control of the delivery transfers to customers when the customer can direct the use of, and obtain substantially all the benefits from, Asien’s products, which generally occurs when the customer assumes the risk of loss. The transfer of control generally occurs at the point of pickup, shipment, or installation. Once this occurs, Asien’s has satisfied its performance obligation and Asien’s recognizes revenue.

 

Transaction Price ‒ Asien’s agrees with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price. In Asien’s contracts with customers, it allocates the entire transaction price to the sales price, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Any sales tax that Asien’s collects concurrently with revenue-producing activities are excluded from revenue.

 

Cost of revenue includes the cost of purchased merchandise plus freight and any applicable delivery charges from the vendor to the company. Substantially all Asien’s sales are to individual retail consumers (homeowners), builders and designers. The large majority of customers are homeowners and their contractors, with the homeowner being key in the final decisions. The Company has a diverse customer base with no one client accounting for more than 5% of total revenue.

 

Land Management Segment

 

Neese’s payment terms are due on demand from acceptance of delivery. Neese does not incur incremental costs obtaining purchase orders from customers, however, if Neese did, because all of Neese’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. 

 

The revenue that Neese recognizes arises from orders it receives from customers. Neese’s performance obligations under the customer orders correspond to each service delivery or sale of equipment that Neese makes to customers under the purchase orders; as a result, each purchase order generally contains only one performance obligation based on the service or equipment sale to be completed. Control of the delivery transfers to customers when the customer is able to direct the use of, and obtain substantially all of the benefits from, Neese’s products, which generally occurs at the later of when the customer obtains title to the equipment or when the customer assumes risk of loss. The transfer of control generally occurs at a point of delivery. Once this occurs, Neese has satisfied its performance obligation and Neese recognizes revenue.

 

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Neese also sells equipment by posting it on auction sites specializing in farm equipment. Neese posts the equipment for sale on a “magazine” site for several weeks before the auction. When Neese decides to sell, it moves the equipment to the auction site. The auctions are one day. If Neese accepts a bid, the customer pays the bid price and arranges for pick-up of the equipment.

 

Transaction Price ‒ Neese agrees with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon service fee. In Neese’s contracts with customers, it allocates the entire transaction price to the service fee to the customer, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Any sales tax, value added tax, and other tax Neese collects concurrently with revenue-producing activities are excluded from revenue.

 

If Neese continued to apply legacy revenue recognition guidance for the three and six months ended June 30, 2020, revenues, gross margin, and net loss would not have changed.

 

Substantially all of Neese’s sales are to businesses, including farmers or municipalities and very little to individuals.

 

Disaggregated Revenue ‒ Neese disaggregates revenue from contracts with customers by contract type, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Performance Obligations ‒ Performance obligations for the different types of services are discussed below:

 

Trucking ‒ Revenues for time and material contracts are recognized when the merchandise or commodity is delivered to the destination specified in the agreement with the customer.

 

Waste Hauling and pumping ‒ Revenues for waste hauling and pumping is recognized when the hauling, pumping, and spreading are complete.

 

Repairs ‒ Revenues for repairs are recognized upon completion of equipment serviced.

 

Sales of parts and equipment ‒ Revenues for the sale of parts and equipment are recognized upon the transfer and acceptance by the customer.

 

Accounts Receivable, Net ‒ Accounts receivable, net, are amounts due from customers where there is an unconditional right to consideration. Unbilled receivables of $0 and $121,989 are included in this balance at June 30, 2020 and December 31, 2019, respectively. The payment of consideration related to these unbilled receivables is subject only to the passage of time.

 

Neese reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After Neese has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance. Additions to the provision for bad debt are charged to expense.

 

Neese determined that an allowance for loss of $14,614 and $29,001 was required at June 30, 2020 and December 31, 2019, respectively.

 

Receivables

 

Receivables consist of credit card transactions in the process of settlement. Vendor rebates receivable represent amounts due from manufactures from whom the Company purchases products. Rebates receivable are stated at the amount that management expects to collect from manufacturers, net of accounts payable amounts due the vendor. Rebates are calculated on product and model sales programs from specific vendors. The rebates are paid at intermittent periods either in cash or through issuance of vendor credit memos, which can be applied against vendor accounts payable. Based on the Company’s assessment of the credit history with its manufacturers, it has concluded that there should be no allowance for uncollectible accounts. The Company historically collects substantially all of its outstanding rebates receivables. Uncollectible balances are expensed in the period it is determined to be uncollectible.

 

59  
 

 

Allowance for Credit Losses

 

Provisions for credit losses are charged to income as losses are estimated to have occurred and in amounts sufficient to maintain an allowance for credit losses at an adequate level to provide for future losses on the Company’s accounts receivable. The Company charges credit losses against the allowance and credits subsequent recoveries, if any, to the allowance. Historical loss experience and contractual delinquency of accounts receivables, and management’s judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or portfolio performance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available.

 

The allowance for credit losses consists of general and specific components. The general component of the allowance estimates credit losses for groups of accounts receivable on a collective basis and relates to probable incurred losses of unimpaired accounts receivables. The Company records a general allowance for credit losses that includes forecasted future credit losses.

 

Inventory

 

Inventory consists of finished products acquired for resale and is valued at the lower-of-cost-or-market with cost determined on a specific item basis for the Neese and of finished products acquired for resale and is valued at the low-of-cost-or-market with cost determined on an average item basis for Goedeker. For Asien’s, inventory mainly consists of appliances that are acquired for resale and is valued at the average cost determined on a specific item basis. Inventory also consists of parts that are used in service and repairs and may or may not be charged to the customer depending on warranty and contractual relationship The Company periodically evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. The Company estimated an obsolescence allowance of $463,687 and $451,546 at June 30, 2020 and December 31, 2019, respectively.

 

Property and Equipment

 

Property and equipment is stated at cost. Depreciation of furniture, vehicles and equipment is calculated using the straight-line method over the estimated useful lives as follows:

 

    Useful Life
(Years)
 
Building and Improvements     4  
Machinery and Equipment     3-7  
Tractors     3-7  
Trucks and Vehicles     3-6  

 

Goodwill and Intangible Assets

 

In applying the acquisition method of accounting, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment within one year of acquisitions or annually as of December 1, and whenever indicators of impairment exist. The fair value of intangible assets are compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value.

 

Acquired identifiable intangible assets are amortized over the following periods:

 

 

Acquired intangible Asset

  Amortization Basis   Expected Life
(years)
Customer-Related   Straight-line basis   5-15
Marketing-Related   Straight-line basis   5

 

60  
 

 

Long-Lived Assets 

 

The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

 

Derivative Instrument Liability

 

The Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At June 30, 2020, the Company classified a warrant issued in conjunction with a term loan as a derivative instrument (see Note 11).

 

Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the update requires only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit’s carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. The update is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will test goodwill for impairment within one year of the acquisition or annually as of December 1, and whenever indicators of impairment exist.

 

In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. This pronouncement was amended under ASU 2019-10 to allow an extension on the adoption date for entities that qualify as a small reporting company. We have elected this extension and the effective date for us to adopt this standard will be for fiscal years beginning after December 15, 2022. We have not completed our assessment of the standard, but we do not expect the adoption to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

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 (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 Securities and Exchange Commission 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 June 30, 2020. 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, 2019, which we are still in the process of remediating as of June 30, 2020, 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, 2019 for the description of these weaknesses.

 

61  
 

 

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 June 30, 2020, 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.

 

As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, our management has identified the steps necessary to address the material weaknesses, and in the second quarter of 2020, we continued to implement the following remedial procedures:

 

Once we raise additional funds, Robert D. Barry, CPA intends to resign as a director of our company and will become our Chief Financial Officer. Mr. Barry has more than 15 years of experience acting as chief financial officer of various companies and has significant GAAP and SEC reporting experience.

 

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 plan to hire a financial controller for Neese. Mr. Barry is acting as interim controller for Neese until a permanent controller is hired.

 

We have engaged the outsourced accounting and financial reporting services of Carrollton Partners, LLC and will continue to use its services after Robert D. Barry assumes the role of Chief Financial Officer.

 

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 second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

62  
 

 

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 three months ended June 30, 2020 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 June 30, 2020.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

We have no information to disclose that was required to be in a report on Form 8-K during the second quarter of fiscal 2020 but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

 

63  
 

 

ITEM 6. EXHIBITS.

 

Exhibit No.

  Description of Exhibit
3.1   Certificate of Formation of 1847 Holdings LLC (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed on February 7, 2014)
3.2   Second Amended and Restated Operating Agreement of 1847 Holdings LLC, dated January 19, 2018 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on January 22, 2018)
4.1   Common Share Purchase Warrant issued by 1847 Holdings LLC to Leonite Capital LLC on May 11, 2020 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on May 14, 2020)
10.1   First Amendment to Secured Convertible Promissory Note, dated May 11, 2020, among 1847 Holdings LLC, 1847 Goedeker Holdco Inc. and 1847 Goedeker Inc. and Leonite Capital LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on May 14, 2020)
10.2   Stock Option Agreement, dated May 11, 2020, between 1847 Holdings LLC and Paul A. Froning (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on May 14, 2020)
10.3   Stock Option Agreement, dated May 11, 2020, between 1847 Holdings LLC and Robert D. Barry (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on May 14, 2020)
10.4   Amendment No. 1 to Stock Purchase Agreement, dated May 28, 2020, by and among 1847 Holdings LLC, 1847 Asien Inc., Asien’s Appliance, Inc. and Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on June 3, 2020)
10.5   8% Subordinated Amortizing Promissory Note, dated May 28, 2020, issued by 1847 Asien Inc. to Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on June 3, 2020)
10.6   Demand Promissory Note, dated May 28, 2020, issued by 1847 Asien Inc. to Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on June 3, 2020)
10.7   Management Services Agreement, dated May 28, 2020, by and between 1847 Asien Inc. and 1847 Partners LLC (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on June 3, 2020)
10.8   Agreement of Sale of Future Receipts, dated May 28, 2020, by and between 1847 Asien Inc., Asien’s Appliance, Inc. and TVT Direct Funding LLC (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed on June 3, 2020)
10.9*   Settlement Agreement, dated June 2, 2020, among 1847 Goedeker Holdco Inc., 1847 Goedeker Inc., Goedeker Television Co., Steve Goedeker and Mike Goedeker
10.10*   12% Amended and Restated Promissory Note issued by 1847 Goedeker Inc. to Steve Goedeker, in his capacity as the Seller’s Representative, on June 2, 2020
10.11*   Security Agreement, dated June 2, 2020, between 1847 Goedeker Inc. and Steve Goedeker, in his capacity as the Seller’s Representative
31.1*   Certifications of Principal Executive Officer and Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certifications of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

* Filedherewith

 

64  
 

 

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: August 14, 2020

1847 HOLDINGS LLC
   
  /s/ Ellery W. Roberts
  Name: Ellery W. Roberts
  Title: Chief Executive Officer and Chief Financial Officer
  (Principal Executive Officer and
Principal Financial and Accounting Officer)

 

 

65

 

Exhibit 10.9

 

SETTLEMENT AGREEMENT

 

THIS SETTLEMENT AGREEMENT (this “Agreement”) is made and entered into as of June 2, 2020, by and among 1847 GOEDEKER HOLDCO INC., a Delaware corporation (“Holdco”), 1847 GOEDEKER INC., a Delaware corporation (“1847 Sub”), GOEDEKER TELEVISION CO., INC., a Missouri corporation (“GTC”), STEVE GOEDEKER, an individual (“Steve”) and MIKE GOEDEKER, an individual (“Mike”). Holdco, 1847 Sub, GTC, Steve and Mike are sometimes referred to herein as, collectively, the “Parties” and, each, a “Party.”

 

WITNESSETH:

 

WHEREAS, 1847 Sub, as “Buyer”, and GTC, Steve and Mike (collectively, the “Sellers”), previously entered into that certain Asset Purchase Agreement dated January 18, 2019, as amended by that certain Amendment No. 1 to the Asset Purchase Agreement dated April 5, 2019, by and among 1847 Sub, Holdco and Sellers (collectively, and as so further amended, restated, supplemented, or otherwise modified from time to time, the “Asset Purchase Agreement”);

 

WHEREAS, pursuant to the Asset Purchase Agreement, 1847 Sub purchased all or substantially all of the assets of GTC, as further described in the Asset Purchase Agreement (the “Purchased Assets”);

 

WHEREAS, in consideration of the sale, delivery and assignment of the Purchased Assets, 1847 Sub agreed to (i) pay an aggregate purchase price of $6,200,000.00 (the “Purchase Price”), subject to certain adjustments as set forth in the Asset Purchase Agreement, (ii) assume certain liabilities of GTC, and (iii) issue to each of Steve and Mike, an 11.25% non- dilutable interest in all of the issued and outstanding common stock of Holdco;

 

WHEREAS, a portion of the Purchase Price was evidenced by that certain 9% Subordinated Promissory Note dated as of April 5, 2019, in the original principal amount of

$4,100,000.00, executed by 1847 Sub to the order of Steve, in his capacity as Sellers’ representative (the “Note”);

 

WHEREAS, the $1,500,000.00 cash portion of the Purchase Price is subject to a working capital adjustment (the “Working Capital Adjustment”), as further described in the Asset Purchase Agreement;

 

WHEREAS, certain disputes relating the Asset Purchase Agreement have arisen between the Parties, including (i) 1847 Sub’s non-payment of certain amounts due and owing under the Note, and (ii) the amount of the Working Capital Adjustment;

 

WHEREAS, the Parties are involved in a pending arbitration matter styled In Re 1847 Goedeker Inc. and 1847 Goedeker Holdco Inc. v. Steve Goedeker, Mike Goedeker and Goedeker Television Co., Inc., regarding the Parties’ disputes related to the Asset Purchase Agreement (the “Arbitration”);

 

WHEREAS, the Holdco shares issued to Steve and Mike are subject to that certain Stockholders Agreement dated April 5, 2019, by and among, Holdco, 1847 Holdings LLC, a Delaware limited liability company (“Holdings”), Leonite Capital LLC, a Delaware limited liability company (“Leonite”), Steve and Mike (the “Stockholders Agreement”);

 

  1  

 

 

WHEREAS, 1847 Sub is undertaking an initial public offering of at least $10 million of its securities (the “IPO”) with the assistance of ThinkEquity, a division of Fordham Financial Management, Inc. (the “Underwriter”);

 

WHEREAS, in connection with the IPO, Holdco proposes to distribute restricted stock in 1847 Sub currently held by Holdco to the current Holdco shareholders on a pro-rata basis;

 

WHEREAS, Holdings desires to terminate the Stockholders Agreement upon the closing of the IPO; and

 

WHEREAS, the Parties now desire to fully and finally resolve the disputes giving rise to the Arbitration, in accordance with the terms and conditions set forth in this Agreement, and to take certain actions further described herein to permit Holdco and 1847 Sub to proceed with the IPO, in accordance with the terms and conditions set forth in this Agreement.

 

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the Parties, intending to be legally bound, hereby agree as follows:

 

1. Incorporation of Recitals. The above recitals are hereby incorporated into this Agreement and form a material part hereof as though set forth herein verbatim.

 

2. Definitions. The following initially capitalized terms and phrases shall, when used herein, have the following meanings ascribed to them:

 

a. 1847 Parties” means (i) Holdco, and (ii) 1847 Sub.

 

b. Burnley” means Burnley Capital LLC, a Delaware limited liability company.

 

c. “Burnley Indebtedness” means all indebtedness owed by 1847 Sub and/or Holdco to Burnley under the Burnley Loan Agreement or otherwise.

 

d. “Burnley Loan Agreement” means that certain Loan and Security Agreement dated April 5, 2019, by and among 1847 Sub, Holdco and Burnley (as amended, modified, supplemented, replaced or refinanced from time to time).

 

e. Burnley Subordination Agreementmeans that certain Subordination Agreement dated April 5, 2019, by and between Burnley and GTC.

 

  2  

 

 

f. “Claim” or “Claims” means any and all claims, counterclaims, actions, causes of action, litigation, demands, defenses, judgments, settlements, suits, arbitrations, proceedings (administrative or otherwise), controversies, investigations, audits, awards, decisions, injunctions, judgments, orders, rulings, subpoenas, verdicts, obligations, contracts, debts, loans, undertakings, costs, liens, damages (including, without limitation, incidental and consequential damages), losses, liabilities, obligations, indebtedness, settlement payments, penalties, assessments, citations, directives, disbursements, or expenses, of any kind or of any nature whatsoever (including, without limitation, attorneys’, consultants’, and experts’ fees and expenses and disbursements incurred in investigating, defending against, settling, or prosecuting any claim, litigation, or proceeding), whether any of the foregoing arise out of contract, tort, violation of laws or regulations or otherwise, for, upon, or by reason of any matter, cause or thing whatsoever, either direct or consequential, whether known or unknown, from the beginning of time until the Effective Date.

 

g. “Closing” shall mean the consummation of the transactions contemplated by Sections 4 through 6 of this Agreement.

 

h. “Closing Date” shall mean the first business day after the Effective Date.

 

i. “Closing of the IPO” shall mean 1847 Sub’s sale of its securities to the Underwriter or another underwriter engaged by the Company in connection with the IPO.

 

j. “Effective Date” shall have the meaning set forth in Section 3.

 

k. “Goedeker Parties” means (i) GTC, (ii) Steve, and (iii) Mike.

 

l. “Governmental Authority” means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other legislative, judicial, regulatory, administrative or governmental authority.

 

m. “Insolvent” means that the sum of liabilities of the applicable person exceeds the present fair market value of such person’s assets.

 

n. “IRC” means the Internal Revenue Code of 1986, as amended.

 

o. “Prospectus” means the prospectus included in the Registration Statement on Form S-1 of 1847 Sub (File No. 333-237786) originally filed with the Securities and Exchange Commission on April 22, 2020 as the same may be amended, supplemented or otherwise modified from time to time.

 

p. “Restricted Stock” means shares of 1847 Sub issued pursuant to Section 5 of this Agreement which are subject to the restrictions of Rule 144 of the Securities Act of 1933.

 

q. “SBCC” means Small Business Community Capital L.P., a Delaware limited partnership.

 

r. “SBCC Indebtedness” means all indebtedness owed by 1847 Sub and/or Holdco to SBCC under the SBCC Loan Agreement or otherwise.

 

s. “SBCC Loan Agreement” means that certain Loan and Security Agreement dated April 5, 2019, by and among 1847 Sub, Holdco and SBCC (as amended, modified, supplemented, replaced or refinanced from time to time).

 

  3  

 

  

t. SBCC Subordination Agreementmeans that certain Subordination Agreement dated April 5, 2019, by and between SBCC and GTC.

 

u. “Transaction Documents” means this Agreement and the other agreements contemplated to be delivered pursuant to Section 8 of this Agreement or otherwise.

 

3. Effectiveness. The Parties acknowledge and agree that although the Parties are signing this Agreement and the exhibits hereto on the date hereof, the effectiveness of this Agreement and such exhibits is conditioned upon the Closing of the IPO, and, accordingly, the terms and conditions and obligations of the Parties contemplated herein shall only become effective upon the date that the Closing of the IPO occurs (the “Effective Date”). If the Closing of the IPO does not occur, for any reason or no reason, this Agreement shall automatically terminate and be deemed void and of no further force or effect. The 1847 Parties shall provide the Goedeker Parties (i) at least ten (10) days advance written notification of the anticipated date of the Closing of the IPO, and (ii) written confirmation (the “Confirmation”) of the Closing of the IPO no later than 5:00 PM Eastern Standard Time on the date of such closing. The Confirmation shall thereafter be attached as Exhibit A to a fully executed copy of this Agreement.

 

4. Promissory Note.

 

a. Termination of Subordination Agreements. On or before the Closing Date, and as a condition precedent to the effectiveness hereof, 1847 Sub and Holdco shall cause both of the Burnley Subordination Agreement and the SBCC Subordination Agreement to terminate and be of no further force and effect (the “Subordination Agreement Terminations”) by fully paying and discharging the Burnley Indebtedness and the SBCC Indebtedness with proceeds of the Closing of the IPO or otherwise.

 

b. Payment by 1847 Sub. On the Closing Date, 1847 Sub shall pay to Steve the aggregate amount of (i) $516,301.26, which is equal to the principal due and owing for quarters 2, 3, and 4 under the Note (the “Outstanding Principal Amount”), plus (ii) all accrued, unpaid interest thereon, which is equal to $324,671.94 as of June 1, 2020, and shall accrue at a rate of $983.85 per day thereafter (the “Outstanding Interest Amount”), plus (iii) if the Closing Date occurs on or after July 1, 2020, any additional quarterly payments then due and owing under the Note (the “Quarterly Payments”, and together with the Outstanding Principal Amount and the Outstanding Interest Amount, the “Outstanding Note Amount”).

 

c. Amendment to Note. On the date hereof, the Note shall be amended and restated and replaced, by an amended and restated promissory note executed by 1847 Sub to the order of Steve, in his capacity as Sellers’ representative (the “Amended and Restated Note”), in the form attached hereto as Exhibit B. The Amended and Restated Note shall have an original principal amount of $4,185,418.00 with interest payable thereon at a rate of twelve percent (12%) per annum and shall be effective upon the Closing Date.

 

  4  

 

 

d. Security Agreement. On the date hereof, 1847 Sub shall execute a security agreement in favor of Steve, in his capacity as Sellers’ representative (the “Security Agreement”), in the form attached hereto as Exhibit C. The Security Agreement shall grant Steve a continuing first priority security interest in 1847 Sub’s Collateral (as such term is defined in the Security Agreement) to secure payment and performance of 1847 Sub’s obligations under the Amended and Restated Note and shall be effective upon the Closing Date.

 

e. Executed Agreements. The Parties shall execute the Amended and Restated Note and the Security Agreement on the date hereof and deliver to each other signed copies of the same; provided, however, that the Amended and Restated Note and Security Agreement shall only become effective upon the Closing of the IPO and receipt of the Outstanding Note Amount.

 

5. Stockholders Agreement/Exchange of Holdco Stock.

 

a. On the date hereof, the Parties are executing an agreement terminating the Stockholders Agreement (the “Termination of Stockholders Agreement”), in the form attached hereto as Exhibit D. The Termination of Stockholders Agreement shall be deemed to become effective immediately upon the Closing of the IPO so long as the Outstanding Note Amount is paid at the Closing of the IPO and the other obligations of the 1847 Parties hereunder that are to take place at the Closing of the IPO are then satisfied.

 

b. The Parties acknowledge and agree that immediately prior to the Closing of the IPO, it is contemplated that 1847 Sub will complete a 3,166.666-for-1 forward stock split of its outstanding common stock (the “Stock Split”). As a result of the Stock Split, 1847 Sub’s issued and outstanding common stock will be increased from 1,000 shares (currently outstanding) to shares 3,166,666 shares. The Underwriter may require 1847 Sub to effectuate the Stock Split on a basis different than 3,166.666-for-1 and none of the Parties objects or will object to a Stock Split on a different basis if proposed by the Underwriter.

 

c. On or before the Closing Date, Holdco shall distribute or cause to be distributed, in a transaction which qualifies under Section 355 of the IRC, shares of the Restricted Stock of 1847 Sub to the stockholders of Holdco (the “Distribution”), as follows (it being understood that the below table reflects the Stock Split on a 3,166.666- for-1 and such ratio is subject to change):

 

Holdco Stockholder   No. of Holdco Shares Held Immediately Prior to Closing of IPO     Percentage of Holdco Shares Held Immediately Prior to Closing of IPO     No. of 1847 Sub Shares to be Received Immediately Upon the Closing of IPO  
Holdings     1,400       70.0 %     2,216,666  
Steve     225       11.25 %     356,250  
Mike     225       11.25 %     356,250  
Leonite     150       7.50 %     237,500  

 

  5  

 

 

d. Upon the request of Mike or Steve from to time to time, 1847 Sub shall be responsible (at its cost) for promptly supplying to 1847 Sub’s transfer agent and Steve and/or Mike a customary legal opinion letter of its counsel (the “Legal Counsel Opinion”) to the effect that the resale of the shares of common stock of 1847 Sub received by Mike and Steve in the Distribution (the “Shares”) is exempt from the registration requirements of the Securities Act of 1933, as amended pursuant to Rule 144 (provided the requirements of Rule 144 are satisfied). Should 1847 Sub’s legal counsel fail for any reason to issue the Legal Counsel Opinion, Mike and Steve may (at 1847 Sub’s cost) secure another legal counsel to issue the Legal Counsel Opinion, and 1847 Sub will instruct its transfer agent to accept such opinion. 1847 Sub shall not impede the removal by its stock transfer agent of the restricted legend from any certificate representing Shares upon receipt by the transfer agent of a Rule 144 Opinion Letter or the sale of such Shares in accordance with Rule 144.

 

e. On the Closing Date, 1847 Sub shall pay Steve the amount of $10,000.00 for legal fees incurred by Steve in connection with the negotiation and drafting of this Agreement, the documents contemplated hereunder or attached hereto, and the transactions contemplated herein (“Steve’s Attorney’s Fees”).

 

6. Arbitration.

 

a. The Parties acknowledge and agree that there is a genuine, good-faith dispute over the amount, if any, of the Working Capital Adjustment.

 

b. As of the Closing Date, Holdco and 1847 Sub, in consideration of the transactions contemplated herein, agree to relinquish and release any Claim each now has or may ever have in or related to the Working Capital Adjustment.

 

c. No Working Capital Adjustment is or shall be required under the Asset Purchase Agreement.

 

d. On the Closing Date, the 1847 Parties shall execute a stipulation of dismissal of the Arbitration, substantially in the form attached hereto as Exhibit E.

 

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7. Asset Purchase Agreement. Notwithstanding anything herein to the contrary, the Parties acknowledge and agree that:

 

a. All the Parties to the Asset Purchase Agreement have satisfied all of their respective obligations under the Asset Purchase Agreement as of the Closing Date; provided, however, that the (i) the “Earn Out Payments” contemplated in Section 1.6 of the Asset Purchase Agreement and (ii) the “Covenant Not to Compete” set forth in Section 4.3 of the Asset Purchase Agreement shall each continue in full force and effect on and after the Closing Date of this Agreement.

 

b. Effective upon the Closing of the IPO Section 4.9 of the Asset Purchase Agreement captioned “Rights to Participate in Future Stock Issuances” shall be terminated and of no force and effect such that the right to participate in future stock issuances provided for thereunder shall not apply to the IPO or any stock issuance of 1847 Sub following the IPO.

 

8. Lock Up Agreement.

 

a. Steve and Mike shall execute the Lock Up Agreement in the form of Exhibit F to this Agreement on the date hereof. The Lock Up Agreement shall automatically become effective upon the Closing of the IPO.

 

9. Closing Deliverables.

 

a. The 1847 Parties shall deliver the following items at or in connection with the Closing:

 

i. The Outstanding Note Amount, to be delivered by wire transfer in accordance with wire transfer instructions supplied by the Goedeker Parties;

 

ii. Stock certificates representing 356,250 shares of Restricted Stock to Steve (subject to equitable adjustment by the Underwriter, as set forth in Section 5.b of this Agreement);

 

iii. Stock certificates representing 356,250 shares of Restricted Stock to Mike (subject to equitable adjustment by the Underwriter, as set forth in Section 5.b of this Agreement);

 

iv. Steve’s Attorney’s Fees, to be delivered by wire transfer in accordance with wire transfer instructions supplied by the Goedeker Parties; and

 

v. A stipulation of dismissal of the Arbitration, in the form attached hereto as Exhibit E, executed by the 1847 Parties or their respective legal counsel on behalf of Holdco and 1847 Sub.

 

b. The executed documents delivered by the Parties to each other on the date hereof, including the Termination of Stockholders Agreement and the Lock Up Agreements shall automatically become effective upon the Closing of the IPO.

 

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10. Representations and Warranties of the 1847 Parties. With respect to all periods through and including the Closing Date, the representations, warranties, covenants and acknowledgments of the 1847 Parties contained in this Agreement will survive the execution, delivery and acceptance of this Agreement. Each of the 1847 Parties, jointly and severally, represents and warrants to the Goedeker Parties as follows:

 

a. Authority. The execution and delivery of this Agreement and the other Transaction Documents have been duly and validly authorized by all necessary organizational action in respect thereof, as applicable, on the part of each of the 1847 Parties. This Agreement represents the legal, valid and binding obligation of each of the 1847 Parties, enforceable against each of the 1847 Parties in accordance with its terms.

 

b. Closing of the IPO. The definition of “Closing of the IPO” used in this Settlement Agreement is not inconsistent with how such term is defined in any other agreement entered into by any of the 1847 Parties in connection with or related to the IPO.

 

c. Securities Laws. The 1847 Parties have taken or will take all necessary actions to comply with the federal and/or state securities laws and rules and regulations applicable to the IPO and the Distribution.

 

d. Tax-Free Distribution. The 1847 Parties have determined that the Distribution satisfies the requirements necessary for said Distribution to receive tax-free treatment under Section 355 and related provisions of the IRC.

 

e. No Prohibition. No order, injunction or decree issued by any Governmental Authority or court of competent jurisdiction or other legal restraint or prohibition preventing consummation of (i) the IPO, the Distribution or the respective transactions related thereto, or (ii) any other transactions contemplated herein, is in effect or will be in effect as of the Closing Date, and no other event outside the control of 1847 Parties shall have occurred or failed to occur that prevents the consummation of (i) the IPO. the Distribution or the respective transactions related thereto, or (ii) any other transactions contemplated herein.

 

f. Solvency. None of the 1847 Parties is now insolvent and none of the 1847 Parties will be rendered insolvent by any of the transactions contemplated by this Agreement.

 

11. Representations and Warranties of the Goedeker Parties. With respect to all periods through and including the Closing Date, the representations, warranties, covenants and acknowledgments of the Goedeker Parties contained in this Agreement will survive the execution, delivery and acceptance of this Agreement. Each of the Goedeker Parties, jointly and severally, represents and warrants to the 1847 Parties as follows:

 

a. The execution and delivery of this Agreement and the other Transaction Documents have been duly and validly authorized by all necessary organizational action in respect thereof, as applicable, on the part of GTC. This Agreement represents the legal, valid and binding obligation of the GTC, Steve and Mike, enforceable against the GTC, Steve and Mike in accordance with its terms.

 

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12. Mutual Releases.

 

a. As of the Closing Date, each of the 1847 Parties on behalf of itself, and its respective officers, directors, agents, employees, attorneys, members, managers, successors, and assigns (each an “1847 Related Party” and collectively, the “1847 Related Parties”), releases, remises, and forever discharges each of the Goedeker Parties, and their respective affiliates, subsidiaries, parents, shareholders, officers, directors, agents, employees, attorneys, members, managers, executors, personal representatives, trustees, heirs, beneficiaries, successors, and assigns (each a “Goedeker Released Party” and collectively, the “Goedeker Released Parties”) from any and all Claims that such 1847 Related Party now has or has ever had against the respective Goedeker Released Parties (each an “1847 Claim” and collectively, the “1847 Claims”), whether arising contemporaneously with or prior to the Closing Date or on account of or arising out of any matter, cause, or event occurring contemporaneously with or prior to the Closing Date; provided, however, that 1847 Claims shall not include, and nothing contained herein shall operate to release, (i) any obligations of any Party hereto relating to this Agreement, the other Transaction Documents, or any other document, instrument or agreement contemplated, executed, or delivered in connection with any of the foregoing or (ii) any Claim(s) that arise out of or relate to any misrepresentation or breach of any covenant under this Agreement, the other Transaction Documents, or any other document, instrument or agreement contemplated, executed, or delivered in connection with any of the foregoing, including but not limited to the failure of any representation or warranty made not being true and correct in all respects when made. Without limiting the foregoing, the 1847 Related Parties’ releases include all Claims asserted in the Arbitration or which could have been asserted in the Arbitration.

 

b. As of the Closing Date, each of Goedeker Parties, on behalf of himself or itself, and his or its respective officers, directors, agents, employees, attorneys, members, managers, executors, personal representatives, trustees, heirs, beneficiaries, successors, and assigns (each a “Goedeker Related Party” and collectively, the “Goedeker Related Parties”), releases, remises, and forever discharges each of the 1847 Parties and their respective affiliates, subsidiaries, parents, shareholders, officers, directors, agents, employees, attorneys, members, managers, successors, and assigns (each an “1847 Released Party” and collectively, the “1847 Released Parties”) from any and all Claims that such Goedeker Related Party now has or has ever had against the respective 1847 Released Parties (each a “Goedeker Claim” and collectively, the “Goedeker Claims”), whether arising contemporaneously with or prior to the Closing Date or on account of or arising out of any matter, cause, or event occurring contemporaneously with or prior to the Closing Date; provided, however, that Goedeker Claims shall not include, and nothing contained herein shall operate to release, (i) any obligations of any party hereto relating to this Agreement, the other Transaction Documents, or any other document, instrument or agreement contemplated, executed, or delivered in connection with any of the foregoing or (ii) any Claim(s) that arise out of or relate to any misrepresentation or breach of any covenant under this Agreement, the other Transaction Documents, or any other document contemplated, executed, or delivered in connection with any of the foregoing, including but not limited to the failure of any representation or warranty made not being true and correct in all respects when made. Without limiting the foregoing, the Goedeker Related Parties’ releases include all Claims asserted in the Arbitration or which could have been asserted in the Arbitration.

 

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13. No Admission of Liability. Neither this Agreement nor any action taken in connection with this Agreement by any party hereto shall in any way be construed as an admission of any liability, wrongdoing, or violation of law, regulation, contract or policy.

 

14. Confidentiality. None of the Parties shall, without the approval of all of the other Parties, make any statement, communication, press release or other public announcement concerning this Agreement or any other document relating hereto or thereto, except (a) as and to the extent such statement or communication is previously consented to, in writing, by each of the other Parties, (b) as and to the extent that such communication shall be required by law, in which case the other party shall be given prior notice thereof, (c) to their professional advisors, attorney, accountants, investors, prospective investors, agents and employees as and to the extent reasonably necessary to enforce the terms and provisions of this Agreement or any other document relating hereto or thereto, (d) in connection with the IPO, or (e) in connection with the reasonable business activities of any such Party. For the avoidance of doubt, the Parties acknowledge and agree that this Agreement shall be summarized in the Prospectus and shall be filed as an exhibit to the Registration Statement of which the Prospectus forms a part.

 

15. Specific Enforcement. Each Party hereto acknowledges and agrees that the damages resulting from any breach of any of the covenants set forth herein may be intangible in whole or in part and that the promisees are entitled to seek specific enforcement, injunctive relief, and other equitable remedies in addition to monetary damages and legal remedies. Each party hereto hereby stipulates to the entering of such injunctive relief enforcing the provisions hereof.

 

16. Survival. The provisions of this Agreement shall survive the Closing.

 

17. Prevailing Party. If a party hereto commences a proceeding against another party to enforce and/or recover damages for breach of this Agreement, the prevailing party in such proceeding shall be entitled to recover from the other party all reasonable costs and expenses of enforcement and collection of any and all remedies and damages, or all reasonable costs and expenses of defense, as the case may be. The foregoing costs and expenses shall include reasonable attorneys’ fees.

 

18. Jointly Drafted. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring either party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder unless the context requires otherwise. The word “including” shall mean including without limitation.

 

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19. Severability. If any provision of this Agreement is found or declared to be invalid or unenforceable by any arbitrator, referee, court, or other competent authority having jurisdiction, such finding or declaration shall not invalidate any other provision hereof and this Agreement shall thereafter continue in full force and effect except that such invalid or unenforceable provision, and (if necessary) other provisions hereof, shall be reformed by such arbitrator, referee, court, or other competent authority so as to effect insofar as is practicable, the intention of the Parties set forth in this Agreement, provided that if such arbitrator, referee, court, or other competent authority is unable or unwilling to effect such reformation, the invalid or unenforceable provision shall be deemed deleted to the same extent as if it had never existed.

 

20. Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of each of the Parties and their respective successors and assigns.

 

21. Amendment. This Agreement may not be amended except in a writing signed by all of the Parties.

 

22. No Assignment. No party may assign any of their rights or obligations under this Agreement.

 

23. Governing Law and Arbitration. This Agreement shall be governed by and construed under the laws of the State of Missouri without regard to principles of conflicts of law. Any dispute hereunder or related hereto shall be resolved by arbitration conducted in St. Louis Missouri, in accordance with Chapter 435 of the Missouri Revised Statutes. Each Party agrees to follow and participate in the rules governing any such arbitration. The provisions of this Section 22 shall survive the entry of any judgment, and will not merge, or be deemed to have merged, into any judgment.

 

24. Additional Documents. All parties agree to cooperate fully and to execute and deliver any and all supplementary documents and to take any and all additional actions which may be necessary or appropriate to give effect to the terms and intent of this Agreement.

 

25. No Waiver. Failure to insist on compliance with any term, covenant or condition contained herein shall not be deemed a waiver of that term, covenant or condition, nor shall any waiver or relinquishment of any right or power contained in this Agreement at any one time or more times be deemed a waiver or relinquishment of any right or power at any other time or times.

 

26. Counterparts; Electronic Signature. More than one counterpart of this Agreement may be executed by any of the Parties, each of which shall be deemed an original, but all of which shall constitute one and the same Agreement. This Agreement and any other document to be executed and delivered in connection herewith may be executed and delivered by facsimile or other electronic transmission, and any document delivered in such a manner shall be binding as though an original thereof had been executed and delivered.

 

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27. Entire Agreement. This Agreement, including the other documents referred to herein, contains the entire understanding of the Parties with respect to the subject matter contained herein and therein. This Agreement supersedes all prior agreements and understandings between the Parties with respect to such subject matter.

 

28. Further Assurances. Each of the Parties covenants and agrees to execute and deliver, or cause to be executed and delivered, all such further acts, assignments, transfers, assurances, conveyances, notices, assumptions, releases and acquittances and such other instruments, and shall take such further actions, as may be reasonably necessary or appropriate to assure fully effectuate the transactions contemplated by this Agreement.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

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COUNTERPART SIGNATURE PAGE TO SETTLEMENT AGREEMENT

 

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date and year first written above.

 

THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

 

  HOLDCO
   
  1847 Goedeker Holdco Inc., a Delaware corporation
     
  By: /s/ Robert D. Barry
  Name:  Robert D. Barry
  Title: President
     
  1847 SUB”
     
  1847 Goedeker Inc., a Delaware corporation
     
  By: /s/ Douglas T. Moore
  Name:  Douglas T. Moore
  Title: CEO

 

Signature Page to Settlement Agreement

 

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COUNTERPART SIGNATURE PAGE TO SETTLEMENT AGREEMENT

 

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date and year first written above.

 

THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

 

  GTC
     
  Goedeker Television Co., Inc., a Missouri corporation
     
  By: /s/ Steve Goedeker
  Name:  Steve Goedeker
  Title: president

 

  STEVE
   
  /s/ Steve Goedeker
  Steve Goedeker
   
  MIKE
   
  /s/ Mike Goedeker
  Mike Goedeker

 

 

Signature Page to Settlement Agreement

 

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Exhibit 10.10

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.

 

1847 GOEDEKER INC.

 

12% AMENDED AND RESTATED PROMISSORY NOTE

 

US $4,185,418.00 June 2, 2020

 

FOR VALUE RECEIVED, 1847 GOEDEKER INC., a Delaware corporation (the “Company”), promises to pay to the order of STEVE GOEDEKER, in his capacity as the representative of Sellers under the hereinafter described Purchase Agreement (the “Holder”), the principal sum of FOUR MILLION ONE HUNDRED EIGHTY FIVE THOUSAND FOUR HUNDRED EIGHTEEN AND 00/100 DOLLARS

($4,185,418.00) (the “Principal”), in lawful money of the United States of America, with interest payable thereon at the rate of twelve percent (12%) per annum, in accordance with the provisions hereof. The unpaid principal amount hereof and all accrued but unpaid interest thereon shall be paid in full to the Holder on April 5, 2024 (the “Maturity Date”). Capitalized terms used herein but not defined herein shall have the meaning ascribed to them in that certain Asset Purchase Agreement, dated January 18, 2019, as amended by Amendment No.1 to the Asset Purchase Agreement dated April 5, 2019 (as so amended, the “Purchase Agreement”), among the Company, 1847 Goedeker Holdco Inc., the Holder, Mike Goedeker and Goedeker Television Co., Inc. (the “Seller”), pursuant to which the Company acquired all or substantially all of the assets of the Seller.

 

The Company filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission (File No. 33-237786) on April 22, 2020, relating to the initial public offering of the common stock of the Company as described therein (the “IPO”), and the Company and the Holder agree that this Note shall automatically become effective (and only become effective) upon the sale of its securities to ThinkEquity, a division of Fordham Financial Management, Inc. or another underwriter engaged by the Company in connection with the IPO (the “Closing of the IPO”) and shall be null and void if the IPO does not occur.

 

The following is a statement of the rights of the Holder of this Amended and Restated Note (this “Note”) and the terms and conditions to which this Note is subject, and to which the Holder, by acceptance of this Note, agrees:

 

1. Principal Repayment. Following the Closing of the IPO, the outstanding principal amount of this Note shall be amortized over the remaining term hereof on a straight-line basis and shall be payable quarterly in accordance with an amortization schedule that is materially consistent with the amortization schedule under the Existing Note (as defined below), but adjusted to reflect (a) the increase of the principal amount of the Existing Note by $250,000, and (b) the payments made (including without limitation payments made under Section 22 hereof) and remaining time until the Maturity Date, such schedule to be prepared by Holder and delivered to the Company (the “Amortization Schedule”), with all of the unpaid principal being fully due and payable on the Maturity Date, unless this Note has been earlier redeemed. Notwithstanding the foregoing, upon the sale of all or substantially all of the assets of the Company, the unpaid principal amount and all accrued but unpaid Interest thereon shall automatically become due and payable and the proceeds of any such sale shall be first used to repay amounts due under this Note.

 

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2. Interest.

 

(a) Computation. Following the Closing of the IPO, interest (the “Interest”) shall accrue on the unpaid principal amount of this Note until the principal balance hereof is repaid in full at the rate of twelve percent (12%) per annum. Interest shall be paid in accordance with the Amortization Schedule with all unpaid Interest being paid on the Maturity Date or the date of the redemption of this Note. All computations of the Interest rate hereunder shall be made on the basis of a 360-day year of twelve 30-day months. In the event that any Interest rate provided for herein shall be determined to be unlawful, such Interest rate shall be computed at the highest rate permitted by applicable law. Any payment by the Company of any Interest amount in excess of that permitted by law shall be considered a mistake, with the excess being applied to the principal of this Note without prepayment premium or penalty.

 

(b) Taxes, Charges, and Expenses. The Company, at its own cost, shall report interest income, if any, to the IRS and/or other applicable tax authorities and to the Holder on a Form 1099- INT or other appropriate form in accordance with applicable law. The Company shall bear sole responsibility for any costs or fees in connection with the payment of Interest with respect to this Note, including, but not limited to, wire transfer fees, bank check fees and escrow agent fees.

  

(c) Payment Dates. If the Closing of the IPO occurs on the first day of any month, quarterly payments of principal and interest due hereunder shall begin on the date that is exactly three months after the Closing of the IPO, and shall continue every three months thereafter. If Closing of the IPO occurs on a day other than the first day of a month, quarterly payments shall begin on the first day of the month that is three full months after the date of the Closing of the IPO, and shall continue every three months thereafter.

  

3. Redemption. The Company will have the right to redeem all or any portion of the Note at any time prior to the Maturity Date without premium or penalty of any kind. The redemption price will be payable in cash and shall equal the then outstanding principal amount of this Note plus accrued but unpaid interest thereon.

  

4. Events of Default. In the event that any of the following (each, an “Event of Default”) shall occur:

  

(a) Non-Payment. The Company shall fail to make any payment of principal and/or interest required hereunder when due; or

  

(b) Default in Covenants. The Company shall default in the observance or performance of any covenants or agreements set forth herein, or the Company shall default in any material manner in the observance or performance of any covenants or agreements set forth in any of the Transaction Documents; or

  

(c) Breach of Representations and Warranties. The Company materially breaches any representation or warranty contained in the Transaction Documents or herein; or

  

(d) Illegality of Note. Any court of competent jurisdiction issues an order declaring the Note or the Security Agreement or any provision thereunder to be illegal; or

 

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(e) Judgments. A judgment, decree, warrant, writ, attachment, execution or similar process which is not within thirty (30) days of the entry thereof satisfied, released, vacated, discharged, stayed or fully bonded pending appeal, is entered, issued or levied against the Company and together with other such processes, if any, represents an aggregate liability of Fifty Thousand Dollars ($50,000.00) or more; or

 

(f) Security Agreement Default. Any Event of Default (as defined in the Security Agreement) occurs under the Security Agreement; or

 

(g) Bankruptcy. The Company shall: (i) admit in writing its inability to pay its debts as they become due; (ii) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Company or any of its property, or make a general assignment for the benefit of creditors; (iii) in the absence of such application, consent or acquiesce in, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Company or for any part of its property; or (iv) cause, permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Company, and, if such case or proceeding is not commenced by the Company or converted to a voluntary case, such case or proceeding shall be consented to or acquiesced in by the Company or shall result in the entry of an order for relief, or shall not be dismissed within 90 days of the filing thereof;

 

then, and so long as such Event of Default is continuing for a period of two (2) business days in the case of non-payment under Section 4(a) or for a period of thirty (30) calendar days in the case of any Event of Default under Sections 4(b) through 4(d), after written notice to the Company from the Holder, or beyond any applicable notice and/or cure period provided for in the Security Agreement in the case of an Event of Default under Section 4(f) or at any time after the occurrence of any Event of Default under 4(e), all obligations of the Company under this Note shall be immediately due and payable without presentment, demand, protest or any other action nor obligation of the Holder of any kind, all of which are hereby expressly waived, and Holder may exercise any other rights and remedies the Holder may have at law or in equity or otherwise available to Holder under the Security Agreement. If an Event of Default specified in Section 4(g) above occurs, the principal of, and accrued interest on, the Note shall automatically, and without any declaration or other action on the part of any Holder, become immediately due and payable and Holder may exercise any other rights and remedies the Holder may have at law or in equity or otherwise available to Holder under the Security Agreement.

 

All rights and remedies of Holder hereunder are cumulative and may be exercised by Holder concurrently or successively. Any failure by any holder hereof to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any other time and from time to time thereafter.

 

5. Representations and Warranties. The Company hereby represents and warrants to the Holder that (a) the Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, (b) the execution, delivery and performance by the Company of this Note (i) are within the corporate powers of the Company, (ii) have been duly authorized by all necessary corporate action on the part of the Company, (iii) require no action by or in respect of, consent or approval of or filing or recording with, any governmental authority or any other person and (iv) do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under or result in any violation of, the terms of the certificate of incorporation and bylaws of the Company (each as amended and/or as restated), any applicable laws (including without limitation any order, writ, judgment or decree of any governmental authority or any agreement, document or instrument to which the Company is a party or by which the Company or any of its property (whether real or personal) is bound or to which the Company or any of its property (whether real or personal) is subject), (c) this Note constitutes the legal, valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) the Bankruptcy Code of the United States, and all other bankruptcy, liquidation, conservatorship, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), (d) no part of the proceeds of the loan evidenced by this Note have been or will be used in violation of any applicable laws, and (e) no part of the proceeds of the loan evidenced by this Note have been or will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately (i) to purchase or carry margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock, or to refund or repay indebtedness originally incurred for such purpose or (ii) for any purpose which entails a violation of, or which is inconsistent with, the provisions of any of the Regulations of The Board of Governors of the Federal Reserve System, including, without limitation, Regulations U, T or X thereof, as amended.

 

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6. Affirmative Covenants of the Company. The Company hereby agrees that, so long as the Note remains outstanding and unpaid, or any other amount is owing to the Holder hereunder, the Company will:

  

(a) Corporate Existence and Qualification. Take the necessary steps to preserve its corporate existence and its right to conduct business in all states in which the nature of its business requires qualification to do business;

 

(b) Compliance with Laws. Comply with the charter and bylaws or other organizational or governing documents of the Company, and any law, treaty, rule or regulation, or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon the Company or any of its property or to which each of the Company or any of its properties is subject;

 

(c) Taxes. Duly pay and discharge all taxes or other claims, which might become a lien upon any of its property except to the extent that any thereof are being in good faith appropriately contested with adequate reserves provided therefor;

 

(d) Further Assurances. Execute and deliver any and all such further documents and take any and all such other actions as may be reasonably necessary or appropriate to carry out the intent and purposes of this Note and to consummate the transactions contemplated herein;

 

(e) Financial Statements.

 

(i) As soon as available and in any event within 120 days after the end of each fiscal year of the Company, furnish to Holder a balance sheet and related statements of income and cash flows of the Company as of the end of such fiscal year, in each case audited by an independent public accounting firm reasonably satisfactory to Holder, accompanied by a report and opinion of such accountants, which report and opinion shall be prepared in accordance with GAAP and shall not be subject to any “going concern”, “emphasis on going concern,” or like qualification, exception or emphasis, or any qualification or exception as to the scope of such audit; provided, that so long as the Company is a public company, the filing by the Company of an Annual Report on Form 10-K of the Company for such fiscal year with the Securities & Exchange Commission shall be deemed to satisfy the requirements of this subparagraph (e)(i);

 

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(ii) As soon as available, and in any event within 45 days after the end of each fiscal quarter of each fiscal year of the Company, furnish to Holder a balance sheet and related statements of income and cash flows of the Company as of the end of such fiscal quarter, all in form and substance and in detail reasonably satisfactory to Holder and duly certified (subject to year-end review adjustments) by the Treasurer or CFO of the Company

 

(i) as fairly presenting in all material respects the financial position of the Company and the results of its operations and cash flows for such fiscal quarter, and (ii) as having been prepared in accordance with GAAP, provided, that so long as the Company is a public company, the filing by the Company of a Quarterly Report on Form 10-Q of the Company for such fiscal quarter with the Securities & Exchange Commission shall be deemed to satisfy the requirements of this subparagraph (e)(ii); and

 

(f) Financial Covenant. The Company shall maintain at least $1,000,000 of Stockholders’ Equity (as defined in accordance with U.S. Generally Accepted Accounting Principles).

 

7. Mutilated, Destroyed, Lost or Stolen Note. If this Note shall become mutilated or defaced, or be destroyed, lost or stolen, the Company shall execute and deliver a new note of like principal amount in exchange and substitution for the mutilated or defaced Note, or in lieu of and in substitution for the destroyed, lost or stolen Note. In the case of a mutilated or defaced Note, the Holder shall surrender such Note to the Company. In the case of any destroyed, lost or stolen Note, the Holder shall furnish to the Company: (i) evidence to its satisfaction of the destruction, loss or theft of such Note and (ii) such security or indemnity (which shall not include the posting of any bond) as may be reasonably required by the Company to hold the Company harmless.

 

8. Waiver of Demand, Presentment, etc. The Company hereby expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereunder, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder.

 

The Company agrees that, in the event of an Event of Default, to reimburse the Holder for all reasonable costs and expenses (including reasonable legal fees of one counsel) incurred in connection with the enforcement and collection of this Note, whether or not litigation is commenced.

 

9. Payment. All payments with respect to this Note shall be made in lawful money of the United States of America, at the address of the Holder as of the date hereof or as designated in writing by the Holder from time to time. The receipt by the Holder of immediately available funds shall constitute a payment of principal and interest hereunder and shall satisfy and discharge the liability for principal and interest on this Note to the extent of the sum represented by such payment. Payment shall be credited first to the accrued interest then due and payable and the remainder applied to principal.

 

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10. Assignment. The rights and obligations of the Company and the Holder of this Note shall be binding upon, and inure to the benefit of, the successors and permitted assigns of the parties hereto. To complete an assignment or transfer this Note, the Holder shall deliver a completed and executed Form of Assignment attached hereto as Exhibit A and surrender and deliver this Note, duly endorsed, to the Company’s office or such other address which the Company shall designate, upon receipt of which a new Note, in substantially the form of this Note (any such new Note, a “New Note”), evidencing the portion of this Note so transferred shall be issued to the transferee and a New Note evidencing the remaining portion of this Note not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Note by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations in respect of the New Note that the Holder has in respect of this Note. Interest and principal are payable only to the registered Holder of this Note set forth on the books and records of the Company.

 

11. Waiver and Amendment. Any provision of this Note, including, without limitation, the due date hereof, and the observance of any term hereof, may be amended, waived or modified (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder.

 

12. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if given in accordance with the provisions of the Purchase Agreement.

 

13. Governing Law and Arbitration. This Note shall be governed in all respects, including validity, interpretation and effect, by the internal laws of the State of Missouri, without reference to its conflicts of laws provisions. Any dispute hereunder or related hereto shall be resolved by arbitration conducted in St. Louis Missouri, in accordance with Chapter 435 of the Missouri Revised Statutes. The provisions of this Section 13 shall survive the entry of any judgment, and will not merge, or be deemed to have merged, into any judgment.

 

14. Headings. The descriptive headings contained in this Note are included for convenience of reference only and will not affect in any way the meaning or interpretation of this Note.

 

15. Severability. If one or more provisions of this Note are held to be unenforceable under applicable law, such provisions shall be excluded from this Note, and the balance of this Note shall be interpreted as if such provisions were so excluded and shall be enforceable in accordance with its terms.

 

16. Amended and Restated Note. This Note is an amendment, restatement and continuation of, and not a novation of, that certain 9% Subordinated Promissory Note dated as of April 5, 2019, executed by the Company to the order of the Holder, in the original principal amount of $4,100,000 (the “Existing Note”). All principal and interest evidenced by the Existing Note shall continue to be due and payable until paid. Upon the Closing of the IPO, subject to the foregoing, this Note shall supersede the Existing Note. Until such time as the Closing of the IPO occurs, the Existing Note shall remain in full force and effect.

 

17. Security Agreement. This Note is secured by that certain Security Agreement, dated as of even date herewith, between the Company and the Holder (the “Security Agreement”), as the same may be amended, modified, renewed or restated from time to time.

  

18. Counterpart Signature Pages. This Note and any amendments, waivers, consents or supplements hereto may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page to this Note by facsimile or in electronic (“pdf” or “tif”) format shall be effective as delivery of a manually executed counterpart of this Note.

 

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19. Conflict. To the extent of any conflict between the terms of this Note and/or the Security Agreement and the terms of the Purchase Agreement, the terms of this Note and the Security Agreement shall control. Notwithstanding the foregoing, the Purchase Agreement and the terms and provisions thereof are hereby reaffirmed by the Company in all respects.

 

20. Missouri Statutory Provision. This notice is provided pursuant to Section 432.047, R.S.Mo. As used herein, “creditor” means Holder, and “this writing” means this Note and the Security Agreement.

 

ORAL OR UNEXECUTED AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE, REGARDLESS OF THE LEGAL THEORY UPON WHICH IT IS BASED THAT IS IN ANY WAY RELATED TO THE CREDIT AGREEMENT. TO PROTECT YOU (BORROWER(S)) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT.

 

21. Effectiveness. Notwithstanding anything to the contrary herein, it is hereby acknowledged and agreed that this Note shall not be effective until the Closing of the IPO has occurred.

 

22. Payments Due upon Closing of the IPO. Without limitation of any other payments due hereunder, on the first business day immediately following the Closing of the IPO, the Company shall pay to the Holder the aggregate amount of (i) $516,301.26, which is an amount equal to the principal due and owing for quarters 2, 3, and 4 under the Existing Note, plus (ii) an amount equal to all accrued, unpaid interest thereon (as calculated under the Existing Note through the date of payment), which is equal to $324,671.94 as of June 1, 2020, and which shall accrue at a rate of $983.85 per day thereafter, plus (iii) any additional quarterly payments then due and owing under the Existing Note.

 

[Signature Page Follows]

 

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COUNTERPART SIGNATURE PAGE

 

to

 

AMENDED AND RESTATED PROMISSORY NOTE

 

THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

 

IN WITNESS WHEREOF, the undersigned has caused this Note to be issued as of the date first above written.

 

  1847 GOEDEKER INC.
   
  By: /s/ Douglas T. Moore
  Name: Douglas T. Moore
  Title: CEO

  

AGREED TO AND ACCEPTED BY:  
   
/s/ Steve Goedeker  
Steve Goedeker, in his capacity as the  
representative of Sellers under the Purchase Agreement  

 

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EXHIBIT A

 

Form of Assignment

 

TO: 1847 Goedeker Inc.,

  

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto                                       (name),                                                    (address), US$                                      of 12% Amended and Restated Promissory Note (“Note”) of 1847 Goedeker Inc. (the “Company”), including any and all accrued and unpaid interest owing thereon, registered in the name of the undersigned on the records of the Company represented by the within certificate, and irrevocably appoints the attorney of the undersigned to transfer the said securities on the books or register with full power of substitution.

 

DATED this                  day of,                                , 20          .

 

   
(Signature of Registered Note Holder)  
   
   
(Print name of Registered Note Holder)  

  

Instructions:

 

1. Signature of Holder must be the signature of the person appearing on the face of the Note.

 

2. If the transfer of Note is signed by a trustee, executor, administrator, curator, guardian, attorney, officer of a corporation or any person acting in a fiduciary or representative capacity, the certificate must be accompanied by evidence of authority to sign satisfactory to the Company.

 

 

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Exhibit 10.11

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (this Agreement”), dated as of June 2, 2020, shall become automatically effective upon the Closing of the IPO (as defined below) and is made and entered into by 1847 GOEDEKER INC., a Delaware corporation (the “Debtor”), in favor of STEVE GOEDEKER, in his capacity as the representative of the Sellers (together with any permitted successors and/or assigns, the “Secured Party”).

 

RECITALS

 

WHEREAS, Debtor, GOEDEKER TELEVISION CO., INC., a Missouri corporation (“Seller”), and STEVE GOEDEKER and MIKE GOEDEKER (the “Stockholders”, and together with the Seller, the “Sellers”) have previously entered in that certain Asset Purchase Agreement, dated January 18, 2019, as amended by that certain Amendment No. 1 to the Asset Purchase Agreement, dated April 5, 2019 (collectively, and as so further amended, restated, supplemented, or otherwise modified from time to time, the “Asset Purchase Agreement”);

 

WHEREAS, a portion of the purchase price of the assets purchased pursuant to the Asset Purchase Agreement was evidenced by that certain 9% Subordinated Promissory Note dated as of April 5, 2019, in the original principal amount of $4,100,000, executed by Debtor to the order of Secured Party (the “Original Note”);

 

WHEREAS, the Original Note is to be amended and restated, and replaced, by that certain 12% Amended and Restated Promissory Note dated as of the date hereof, in the original principal amount of US $4,185,418, executed by Debtor to the order of Secured Party (“Amended and Restated Note” or the “Note”) and will automatically become effective upon the closing of the IPO (as defined below);

 

WHEREAS, the Debtor filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission (File No. 33-237786) on April 22, 2020 relating to the initial public offering of the common stock of Debtor as described therein (the “IPO”) and the Debtor, the Stockholders, including the Secured Party, desire that this Agreement, the Amended and Restated Note and certain other agreements automatically become effective upon the sale of its securities to ThinkEquity, a division of Fordham Financial Management, Inc. or another underwriter engaged by the Company in connection with the IPO (the “Closing of the IPO”); and

 

WHEREAS, to induce Secured Party to accept the Amended and Restated Note, Debtor has agreed to execute and deliver this Agreement to Secured Party.

 

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AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, the Debtor and Secured Party hereby agree as follows:

 

1. Definitions.

 

(a) Defined Terms. In addition to the terms defined elsewhere in this Agreement, as used in this Agreement, the following terms shall be defined as set forth below:

 

Accounts” means all of the Debtor’s accounts, as such term is defined in the UCC, including each and every right of the Debtor to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by the Debtor or by some other person who subsequently transfers such person’s interest to the Debtor, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens) which the Debtor may at any time have by law or agreement against any Account Debtor or other obligor obligated to make any such payment or against any property of such Account Debtor or other obligor; all including, but not limited to, all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles.

 

Collateral” means all of the Debtor’s right, title and interest in and to any Accounts, Chattel Paper, Deposit Accounts, Documents, Equipment, General Intangibles, Goods, Instruments, Inventory, Investment Property, Letter of credit rights, Letters of credit, Software and Supporting Obligations; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) in the case of all goods, all accessions; (iii) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any goods; (iv) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; (v) any money, or other assets of the Debtor that now or hereafter come into the possession, custody, or control of the Secured Party; (vi) proceeds of any and all of the foregoing; and (vii) to the extent not otherwise included, all payments under, or with respect to, any indemnity, warranty, or guaranty of any and all of the foregoing, and any insurance payable by reason of loss or damage or otherwise in respect of the foregoing collateral.

 

Equipment” means all of the Debtor’s equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically the goods described in any equipment schedule or list herewith or hereafter furnished to the Secured Party by the Debtor.

 

Event of Default” means (a) the occurrence of any Event of Default under the Note, as such term is used and/or defined therein, taking into account any applicable notice and/or cure period provided for therein; (b) the existence of any material inaccuracy or untruth in any representation or warranty contained in this Agreement, or of any statement or certification as to facts delivered to the Secured Party by or on behalf of the Debtor hereunder; (c) any uninsured loss, theft, damage or destruction of any material portion of the Collateral, or the making of any levy, garnishment, seizure or attachment of any Collateral; (d) any indication or evidence received by the Secured Party that the Debtor may have directly or indirectly been engaged in any type of activity which, in the Secured Party’s discretion, might result in the forfeiture of any Collateral to any governmental authority, whether federal, state, local or otherwise; (e) the failure by the Debtor to perform or cause to be performed any obligation or observe any agreement, covenant, condition, provision or term contained in Section 4 or Section 5 hereof, which default or failure is not remedied to Secured Party’s satisfaction within thirty (30) days of notice from Secured Party to Debtor; or (f) the failure of Debtor to perform or observe any term, covenant, obligation or agreement of Debtor contained in this Agreement and not otherwise delineated in clauses (a) – (e) above, which default or failure is not remedied to Secured Party’s satisfaction within thirty (30) days of notice from Secured Party to Debtor.

 

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General Intangibles” means all of the Debtor’s general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including all present and future Intellectual Property Rights, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, payment intangibles, the right to use the Debtor’s name, and the goodwill of the Debtor’s business.

 

Intellectual Property Rights” means all of the Debtor’s actual or prospective rights arising in connection with any intellectual property or other proprietary rights, including all rights arising in connection with copyrights, patents, service marks, trade dress, trade secrets, trademarks, trade names or mask works, and including, without limitation, the Intellectual Property Rights specifically identified on Exhibit 1.1 attached hereto.

 

Inventory” means all of the Debtor’s inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located.

 

Investment Property” means all of the Debtor’s investment property, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, financial assets, stocks, bonds, mutual fund shares, money market shares and United States of America Government securities.

 

Obligations” means and includes all debts, obligations, and liabilities of the Debtor to the Secured Party evidenced by or arising under the Note, as the same may be amended, extended, modified, restated, renewed, replaced, consolidated, refinanced, and/or supplemented from time to time, and all debts, obligations, and liabilities of Debtor to the Secured Party hereunder.

 

Permitted Liens” means liens and security interests approved by Secured Party in writing.

 

Person” means an individual, partnership, joint venture, corporation, limited liability company, business trust, joint stock company, trust, unincorporated organization, governmental authority or other entity of whatever nature.

 

Premises” means all premises where the Debtor conducts its business and has any rights of possession, including the premises set forth in Exhibit 3(m) hereto.

 

Proceeds” shall have the meaning assigned thereto by the UCC and, in any event, shall include, but not be limited to, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to the Debtor from time to time with respect to any of the Collateral, including, but not limited to any and all proceeds of business disruption insurance, (ii) any and all payments (in any form whatsoever) made or due and payable to the Debtor from time to time in connection with any of the Collateral including, but not limited to, any rents, lease payments, or profits derived therefrom.

 

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UCC” means the Uniform Commercial Code as adopted by and in effect in the State of Missouri, as the same may be amended or enacted from time to time; provided, however, that if by reason of mandatory provisions of law, any or all of the perfection or priority of the Secured Party’s security interest in any item or portion of the Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Missouri, the term “UCC” means the Uniform Commercial Code as in effect from time to time in such other jurisdiction for purposes of the provisions hereof relating to such perfection or priority and for purposes of definitions relating to such provisions.

 

(b) Other Terms. The terms “Account Debtor,” “Deposit Account,” “Documents,” “Fixtures,” “Goods,” “Instruments,” “Letter-of-credit rights,” “Letters of credit,” “Software,” “Supporting Obligations” and “Chattel Paper” shall have the definitions ascribed thereto from time to time by the UCC.

 

(c) Terms Not Otherwise Defined. Capitalized terms used but not otherwise defined in this Agreement shall have the meanings given in the Asset Purchase Agreement.

 

2. Security Interest. To secure payment and performance of the Obligations, the Debtor hereby grants the Secured Party a continuing security interest in all of the Debtor’s Collateral, whether acquired now or hereafter. It is the true, clear, and express intention of the Debtor that the continuing grant of the security interests provided for herein remain as security for payment and performance of the Obligations, whether or not existing or hereinafter incurred by future advances or otherwise; and whether or not such Obligations are related to the transactions described herein or in the Note, by class or kind, or whether or not contemplated by the parties at the time of the granting of this security interest. The notice of the continuing grant of this security interest therefore shall not be required to be stated on the face of any document representing any such Obligation, nor otherwise identify it as being secured hereby.

 

3. Debtor’s Representations and Warranties. The Debtor represents and warrants to the Secured Party as of the date of the Closing of the IPO as follows:

 

(a) Ownership. The Debtor is and shall be the owner of the Collateral, free of all encumbrances and security interests other than the lien or liens on the Collateral in favor of Secured Party created hereby and excepting any Permitted Liens. The Debtor has the power and authority to grant a security interest in its Collateral and to enter into this Agreement.

 

(b) Permits. Debtor has all permits, licenses, waivers, exemptions, consents, certificates, authorizations, approvals and entitlements required for the ownership, possession and use of the Collateral by Debtor.

 

(c) Laws. Debtor is in compliance with all laws, statutes, treaties, rules, regulations, and determinations, orders or rulings of any arbitrator or a court or other governmental authority applicable to it and its properties.

 

(d) No Litigation or Judgments. No litigation, investigation or proceeding of or before any arbitrator, governmental authority or court is pending or, to the knowledge of Debtor, threatened by or against Debtor or against any of its properties or revenues. There are no orders, decrees or judgments relating to any litigation, investigator or proceedings which are outstanding and not satisfied, of record against Debtor.

 

(e) Other Financing. No financing statement is on file covering the Collateral or its products or Proceeds (other than financing statements with regard to Permitted Liens). There has been no default as of this date with regard to any indebtedness owed by Debtor to any third-party creditor, and no step has been taken to foreclose any security interest evidenced by any such financing statement.

 

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(f) Documents. If Inventory is represented or covered by Documents of title, the Debtor is the owner of the Documents, free of all encumbrances and security interests.

 

(g) Condition. The Collateral is in good condition, ordinary wear and tear excepted, and, in the case of Goods and Inventory held for sale (other than trade-ins or repossessed Goods), is new and unused. All Collateral upon acquisition shall be and shall at all times remain in good condition, ordinary wear and tear excepted. All Goods and Inventory have been, and will continue to be, produced or manufactured in compliance with the Fair Labor Standards Act.

 

(h) Sale of Goods or Services Rendered. Each Account and Chattel Paper constituting Collateral arose from the performance of services by the Debtor or from a bona fide sale or lease of Goods, which have been, or will be in the ordinary course of business, delivered or shipped to the Account Debtor and for which the Debtor has genuine invoices, shipping documents or receipts.

 

(i) Rights to Payment. Each right to payment and each Instrument, Document, Chattel Paper and other agreement constituting or evidencing Collateral is (or will be when arising, issued or assigned to the Secured Party) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim (other than those arising in the ordinary course of business), of the Account Debtor or other obligor named therein or in the Debtor’s records pertaining thereto as being obligated to pay such obligation.

 

(j) Authority to Contract. The execution and delivery of this Agreement and any instruments evidencing Obligations will not violate or constitute a breach of the Debtor’s organizational documents, or any material agreement or restriction to which the Debtor is a party or is subject. The Debtor is not in default under any agreement for the payment of money.

 

(k) Accuracy of Information. All information, certificates or statements given to the Secured Party pursuant to this Agreement shall be true and complete in all material respects when given.

 

(l) Fixtures. No Collateral is or shall be or become attached to real estate, without Secured Party’s prior written consent.

 

(m) Names and Addresses/Collateral Locations. Debtor is duly incorporated and validly existing under the laws of the state of its incorporation. The name appearing in the introductory paragraph hereof and on the signature page below is the correct name of the Debtor, and the Debtor does not do business under any other name. The Debtor’s chief executive office is identified on Exhibit 3(m) hereto. The address or addresses where the Debtor does business and/or where Collateral will be kept, located or stored are those appearing in Exhibit 3(m) hereto. No location shall be changed and no Collateral shall be moved to or kept at any other location without Secured Party’s prior written consent in each instance, but the parties intend that the Collateral, wherever located, is covered by this Agreement.

 

(n) Business Use. The Collateral is and will be used in Debtor’s business and not for personal, family, household or farming use.

 

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(o) Intellectual Property Rights. All Intellectual Property Rights of Debtor that exist as of the date hereof are set forth on Exhibit 1.1 attached hereto.

 

(p) Commercial Tort Claims. Debtor has no commercial tort claims pending against any person or entity, and has not threatened to bring commercial tort claims against any person or entity.

 

(q) No Subsidiaries. Debtor has no subsidiaries.

 

4. Sale and Collections.

 

(a) Proceeds of Collateral. Following the occurrence and during the continuance of an Event of Default, all Proceeds of Collateral received by the Debtor shall upon written demand of Secured Party be delivered directly to Secured Party, and Proceeds of Collateral received by Debtor, if any, shall be held by the Debtor in an express trust for the benefit of the Secured Party; shall not be commingled with any other funds or property of the Debtor; and shall be turned over to the Secured Party not later than the Business Day following the day of their receipt. All Proceeds received by the Secured Party shall be applied against the Obligations then due and payable in such order and at such times as the Secured Party shall determine.

 

(b) Lockboxes. Following the occurrence and during the continuance of an Event of Default, the Secured Party may, at any time, require the Debtor to establish and continuously maintain with the Secured Party or a depositary institution selected by Secured Party one or more lockboxes for the receipt of cash Proceeds of the Collateral, which lockboxes shall be under the sole and exclusive control of the Secured Party. In such event, the Debtor shall simultaneously instruct its Account Debtors to send payments on Accounts owing to the Debtor to such lockboxes and shall take whatever other action is deemed necessary to ensure that all Proceeds of the Debtor’s Accounts are sent to such lockboxes. The Debtor agrees to immediately forward to such lockboxes all Proceeds of the Collateral which are received by the Debtor and until so forwarded the Debtor shall not commingle any such Proceeds with any other funds of the Debtor but instead shall hold such Proceeds in trust for the benefit of the Secured Party. All amounts deposited in such lockboxes shall be applied against the Obligations then due and payable in such order and at such times as the Secured Party shall determine. If required by Secured Party, Debtor shall execute and deliver to Secured Party one or more lockbox agreements relating to the establishment and functioning of the lockboxes required by Secured Party under this paragraph.

 

(c) Verification and Notification. The Secured Party may verify Accounts, Chattel Paper, rights to payment and contract rights in any reasonable manner, and the Debtor shall assist the Secured Party in so doing. Following the occurrence and during the continuance of any Event of Default, in addition to all of the rights and remedies available to Secured Party, Secured Party shall have the right at any and all times to enforce Debtor’s rights against Account Debtors and other Persons obligated on Collateral, including, but not limited to, the right to notify, or require Debtor to notify, any or all Account Debtors and other Persons obligated on Collateral to make payments directly to Secured Party, and to take any or all action with respect to Collateral as Secured Party shall determine in its sole discretion, including, without limitation, the right to demand, collect, sue for and receive any money or property at any time due, payable or receivable on account thereof, compromise and settle with any Person liable thereon, and extend the time of payment or otherwise change the terms thereof, without incurring liability or responsibility to Debtor. Secured Party’s collection and enforcement of Collateral against Account Debtors and other Persons obligated on Collateral shall be deemed to be commercially reasonable if Secured Party exercises the care and follows the procedures that Secured Party generally applies to the collection of obligations owed to Secured Party. All cash and non-cash proceeds of the Collateral may be applied by Secured Party upon Secured Party’s actual receipt of cash proceeds against such of the Obligations, matured or unmatured, as Secured Party shall determine in Secured Party’s sole discretion. Until such Account Debtor is otherwise notified, the Debtor, as agent of the Secured Party, shall make collections on its Collateral.

 

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5. Debtor’s Covenants.

 

(a) Maintenance of Collateral. The Debtor shall: maintain the Collateral in good condition and repair, ordinary wear and tear excepted, and not permit its value to be materially impaired; keep the Collateral free from all liens, encumbrances and security interests (other than the Permitted Liens); defend the Collateral against all claims and legal proceedings by persons other than the Secured Party; pay and discharge when due all taxes, license fees, levies and other charges upon the Collateral; not sell, lease or otherwise dispose of the Collateral or permit the Collateral to become a fixture or an accession to other goods, except for sales of Inventory in the ordinary course of business and, upon prior notice to and consent of (which consent will not be unreasonably withheld) the Secured Party, the sale or other disposition of Equipment which has become obsolete or which is no longer necessary for the operation of the Debtor’s business; not permit the Collateral to be manufactured, produced, operated, used, sold or disposed of in violation of any applicable requirement of law or policy of insurance; and, as to Collateral consisting of Instruments and Chattel Paper, preserve rights in the Collateral against prior parties. Loss of or damage to the Collateral shall not release the Debtor from any of the Obligations or any of the agreements and requirements set forth herein.

 

(b) Property and Business Insurance. The Debtor shall keep the Collateral and the Secured Party’s interest in such Collateral and Secured Party’s business operations insured under insurance policies with such provisions, for such amounts and by such insurers as shall be reasonably satisfactory to the Secured Party from time to time, and with such endorsements as Secured Party requires. Without limitation of the foregoing, Debtor shall at all times maintain the following insurance:

 

(i) Property insurance, in amounts equal to the lesser of the insurable value of the Collateral or the maximum limit of coverage available, under a business owner’s policy or other policy acceptable to the Secured Party. If so required by Secured Party, the Debtor shall obtain business interruption insurance as part of its business owner’s or property policy. All property insurance policies shall require losses be payable directly to the Secured Party or jointly to the Debtor and the Secured Party, as their respective interests may appear under a standard non-contributory lender loss payee clause, providing that the Secured Party’s interest under the policy will not be invalidated by any act or omission of, or any breach of warranty by, the insured, or by any change in the title, ownership or possession of the insured property, or by the use of the property for purposes more hazardous than is permitted by the policy.

 

(ii) At any time construction of any improvements has commenced and is continuing for any premises in which Debtor occupies or operates or intends to occupy or operate, builder’s risk insurance on a special perils basis, for 100% of the insurable value of all construction work in place or in progress from time to time insuring the property and materials in storage and while in transit. Insurance shall include replacement cost, agreed amount coverage.

 

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(iii) Commercial general liability insurance against bodily injury and property damage, written on an occurrence form equivalent or better than the occurrence form (CG0001) as published by the ISO with minimum limits of at least $1,000,000.00 each occurrence and $2,000,000.00 general aggregate, naming Secured Party as an additional insured.

 

(iv) If the Collateral or any portion thereof is now or hereafter located in an area which has been identified as a flood hazard area and in which flood insurance has been made available under the National Flood Insurance Act of 1968, as amended, Debtor shall keep the premises on which any Collateral is stored and the Collateral insured by flood insurance in an amount not less than the maximum limit of coverage available under such Act or any successor thereto.

 

(v) Worker’s compensation insurance covering all persons employed by Debtor death, injury and/or property damage occurring on or about Debtor’s premises or resulting from activity therefrom, with liability insurance limits for death of or injury to persons and/or damage to property in the amounts from time to time required by statute.

 

Debtor must pay promptly, when due, any premium on the insurance required hereunder. All such insurance policies and renewals thereof shall be written in companies having a Best’s rating of “A” or better. All such policies and renewals thereof (or certificates or binders evidencing the same) shall be delivered to Secured Party at least thirty (30) days before the expiration of the existing policies. Each of the policies required hereunder shall provide that no cancellation thereof shall be effective without thirty (30) days’ prior written notice to Secured Party. The Debtor assigns to the Secured Party the proceeds of all such insurance including any premium refund, acknowledges that all such insurance proceeds shall be paid directly to Secured Party (or, if paid to Debtor, the same shall be held in trust by Debtor for the benefit of Secured Party, and immediately remitted to Secured Party) and authorizes the Secured Party to endorse in the name of the Debtor any instrument for such proceeds or refunds and, at the option of the Secured Party, to apply such proceeds and refunds to any unpaid balance of the Obligations, whether or not due, and/or to restoration of the Collateral, returning any excess to the Debtor. The Secured Party is authorized, in the name of the Debtor or otherwise, to make, adjust or settle claims under any insurance on the Collateral, and all other insurance following any Event of Default. The Debtor will immediately notify Secured Party in writing of any loss or damage to any Collateral.

 

The following notice is provided pursuant to Section 427.120, R.S.Mo. As used herein, the terms “you” and “your” shall refer to Debtor, and the terms “we” and “us” shall refer to Secured Party: UNLESS YOU PROVIDE EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY YOUR AGREEMENT WITH US, WE MAY PURCHASE INSURANCE AT YOUR EXPENSE TO PROTECT OUR INTERESTS IN YOUR COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT YOUR INTERESTS. THE COVERAGE THAT WE PURCHASE MAY NOT PAY ANY CLAIM THAT YOU MAKE OR ANY CLAIM THAT IS MADE AGAINST YOU IN CONNECTION WITH THE COLLATERAL. YOU MAY LATER CANCEL ANY INSURANCE PURCHASED BY US, BUT ONLY AFTER PROVIDING EVIDENCE THAT YOU HAVE OBTAINED INSURANCE AS REQUIRED BY OUR AGREEMENT. IF WE PURCHASE INSURANCE FOR THE COLLATERAL, YOU WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING THE INSURANCE PREMIUM, INTEREST AND ANY OTHER CHARGES WE MAY IMPOSE IN CONNECTION WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO YOUR TOTAL OUTSTANDING BALANCE OR OBLIGATION. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF INSURANCE YOU MAY BE ABLE TO OBTAIN ON YOUR OWN.

 

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(c) Maintenance and Perfection of Security Interest. The Debtor shall pay all costs, fees, and expenses (including without limitation attorneys’ fees) and, upon request, take any action reasonably deemed advisable by the Secured Party to preserve the Collateral or to establish, determine priority of, perfect, continue to perfect, terminate and/or enforce the Secured Party’s interest in the Collateral or the Secured Party’s rights under this Agreement. The Debtor authorizes the Secured Party to file from time to time where permitted by law, such financing statements against the Collateral (including filings describing the Collateral as “all assets” or “all personal property” or similar) as the Secured Party deems necessary or useful to perfect its security interest. The Debtor will not amend, modify or terminate any financing statements in favor of the Secured Party except as permitted by law. The Debtor hereby authorizes the Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Debtor. The Debtor agrees that a carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed as a financing statement or fixture filing in any jurisdiction, should Secured Party so choose. The Debtor shall (i) promptly notify Secured Party in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Deposit Accounts, Investment Property, Letter- of-credit rights or electronic Chattel Paper and, upon the request of Secured Party, will promptly execute such other documents, and do such other acts or things deemed appropriate by Secured Party to deliver to Secured Party control with respect to such Collateral; (ii) with respect to Collateral in the possession of a third party, other than Certificated Securities and goods covered by a Document, obtain an acknowledgment from the third party that it is holding the Collateral for the benefit of Secured Party; and (iii) not change its legal name, state of organization or type of organization or organization identification number (if any), without Secured Party’s prior written consent in each instance.

 

(d) Collateral Records and Statements. The Debtor shall keep accurate and complete records respecting the Collateral, including all warehouse receipts, bills of lading and other documents of title now or hereafter covering any Collateral or received in connection with the purchase of any Collateral. In addition, at such times as the Secured Party may reasonably require, the Debtor shall furnish to the Secured Party a statement certified by the Debtor and in such form and containing such information as may be prescribed by the Secured Party, showing the current status, location and value of such Collateral, including aging and collection reports with regard to Accounts. Each such statement shall identify individual units of Collateral by their respective description, make and model (and, with respect to items with a unit value of $5,000 or more, the schedule shall include a serial number, VIN number or other identifying description).

 

(e) Inspection of Collateral. At any time upon not less than two (2) days prior written notice (provided, however, that no such notice shall be required following the occurrence and during the continuance of any Event of Default), the Secured Party may examine and inspect the Collateral and the Debtor’s records pertaining to it, including all warehouse receipts, bills of lading and other documents of title now or hereafter covering any Collateral or received in connection with the purchase of any Collateral, wherever located, and make copies thereof. The foregoing includes audits and/or valuations of the Collateral deemed necessary by Secured Party. The Debtor shall assist the Secured Party in so doing. The Debtor shall pay the Secured Party’s reasonable out- of-pocket expenses for any inspection, servicing, auditing and/or valuation in connection with this Agreement.

 

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(f) Chattel Paper; Instruments; Letters of Credit. Upon request of the Secured Party, Chattel Paper constituting Collateral shall be on forms approved by the Secured Party. The Debtor shall promptly mark all Chattel Paper, Instruments and Letters of credit, and all copies thereof, to indicate conspicuously the Secured Party’s interest and, upon request, deliver the same to the Secured Party, duly endorsed or assigned by the Debtor.

 

(g) Modifications. The Debtor shall neither agree to any material modification or amendment nor agree to any forbearance, extension, release or cancellation of any right to payment, Instrument, Account, Document or Chattel Paper constituting Collateral. The Debtor shall not subordinate any such right to payment to claims of other creditors of such Account Debtor or other obligor.

 

(h) Returns and Repossessions. The Debtor shall promptly notify the Secured Party of the return to or repossession by the Debtor of Goods underlying any Collateral and, upon request of the Secured Party, the Debtor shall hold and dispose of such Goods only as the Secured Party directs.

 

(i) United States of America Contracts. If any Accounts or contract rights constituting Collateral arise out of contracts with the United States of America or any of its departments, agencies or instrumentalities, the Debtor will so notify the Secured Party and upon request of the Secured Party execute writings required by the Secured Party in order that all money due or to become due under such contracts shall be assigned to the Secured Party and proper notice of the assignment is given under the Federal Assignment of Claims Act.

 

(j) Commercial Tort Claims. Promptly upon knowledge thereof, the Debtor will deliver to the Secured Party notice of any commercial tort claims it may bring against any Person, including the name and address of each defendant, a summary of the facts, an estimate of the Debtor’s damages, copies of any complaint or demand letter submitted by the Debtor, and such other information as the Secured Party may request. Upon request by the Secured Party, the Debtor will grant the Secured Party a security interest in all commercial tort claims it may have against any Person.

 

(k) Intellectual Property Rights. If Debtor acquires additional Intellectual Property Rights beyond those set forth on Exhibit 1.1 hereof, the Debtor will deliver to the Secured Party notice of such Intellectual Property Rights, including a summary of the such Intellectual Property and the use thereof in Debtor’s business, any patent or trademark filings or similar filings made by Debtor, and such other information as the Secured Party may request.

 

(l) Permits and Licenses. Debtor shall maintain all permits, licenses, waivers, exemptions, consents, certificates, authorizations, approvals and entitlements required for the ownership, possession and use of the Collateral by Debtor.

 

(m) Compliance with Laws. Debtor shall comply with all laws, statutes, treaties, rules, regulations, and determinations, orders or rulings of any arbitrator or a court or other governmental authority applicable to it and its properties.

 

(n) Litigation. Debtor shall notify Secured Party of any litigation, arbitration or other proceeding that is filed or threatened to be filed in writing against Debtor. Debtor shall cause any litigation, arbitration or other proceeding to be contested in good faith, by all appropriate action, with counsel reasonably acceptable to the Secured Party. Debtor shall indemnify, defend and hold Secured Party harmless from and against any litigation, arbitration or other proceeding filed against Secured Party due to its extension of credit to Debtor. All such proceedings, including without limitation, all of the Secured Party’s costs, and fees and disbursements of Secured Party’s counsel in connection with any such proceedings, whether or not the Secured Party is a party thereto, shall be at Debtor’s expense. To the extent that the Secured Party incurs any such expenses, including attorneys’ fees and fees and charges for court costs, bonds and the like, Debtor shall reimburse the Secured Party for all such expenses upon demand and the amount due to the Secured Party shall bear interest from the date so incurred by the Secured Party until repaid to the Secured Party at the rate of interest specified in the Note.

 

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(o) Fixtures. No Collateral shall at any time constitute “fixtures” or be attached or affixed to any real estate, without Secured Party’s prior written consent in each instance.

 

(p) Subsidiaries. Make, create or allow the creation of any subsidiary.

 

(q) Change in Name. Change the legal name of Debtor, or change the state of incorporation of Debtor or its principal place of business.

 

6. Rights of Secured Party.

 

(a) Authority to Perform for the Debtor. If the Debtor fails to act as required by this Agreement or the Obligations, and such failure constitutes, or would constitute upon the giving of notice, an Event of Default, the Secured Party is authorized, in the Debtor’s name or otherwise, to take any such action including, without limitation, signing the Debtor’s name or paying any amount so required, and the cost shall be one of the Obligations secured hereby and shall be payable by the Debtor upon demand with interest from the date of payment by the Secured Party at the interest rate provided for under the Note.

 

(b) Charging the Debtor’s Credit Balance. The Debtor grants the Secured Party, as further security for the Obligations, a security interest and lien in any credit balance and other money now or hereafter owed the Debtor by the Secured Party and, in addition, agrees that following the occurrence and during the continuance of any Event of Default, the Secured Party may charge against any such credit balance or other money any amount due and owing upon the Obligations.

 

(c) Non-liability of the Secured Party. The Secured Party has no duty to determine the validity of any invoice or compliance with any order of the Debtor. The Secured Party has no duty to protect, insure, collect or realize upon the Collateral or preserve rights in it against prior parties. The Debtor releases the Secured Party from any liability for any act or omission relating to the Obligations, the Collateral or this Agreement, except for Secured Party’s willful misconduct or gross negligence.

 

(d) Power of Attorney. Following the occurrence and during the continuance of any Event of Default, the Debtor irrevocably appoints any officer of the Secured Party as the Debtor’s attorney, with power, to (i) receive, open and dispose of all mail addressed to the Debtor, (ii) notify the Post Office authorities to change the address for delivery of all mail addressed to the Debtor to such address as the Secured Party may designate and (iii) endorse the name of the Debtor upon any Instruments which may come into the Secured Party’s possession. This power of attorney is coupled with an interest and is not revocable by the Debtor. The use of the foregoing power of attorney by Secured Party shall not subject Secured Party to liability, except for its willful misconduct or gross negligence.

 

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(e) Occupancy.

 

(i) The Debtor hereby irrevocably grants to the Secured Party the right to take exclusive possession of the Premises at any time after an Event of Default has occurred and is continuing. Nothing contained herein shall require the Secured Party to take possession of the Premises.

 

(ii) The Secured Party may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of Goods that are Collateral and for other purposes that the Secured Party may in good faith deem to be related or incidental purposes.

 

(iii) The Secured Party’s right to hold the Premises shall cease and terminate upon the earlier of (A) payment in full and discharge of all Obligations and termination of the Loan Agreement, and (B) final sale or disposition of all Goods constituting Collateral and delivery of all such goods to purchasers.

 

(iv) The Secured Party shall not be obligated to pay or account to the Debtor for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Secured Party does pay or account to any lessor or owner of such Premises for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Debtor shall reimburse the Secured Party promptly for the full amount thereof. In addition, the Debtor will pay, or reimburse the Secured Party for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Secured Party by reason of the execution, delivery, existence, recordation, performance or enforcement of this Security Agreement or the provisions of this Section 6(e).

 

7. Default. Upon the occurrence and during the continuance of an Event of Default, in addition to its rights and remedies provided for under this Agreement and the Note, the Secured Party shall have all rights and remedies for default provided by the UCC, as well as under applicable law and in equity. This includes without limitation acceleration of all or any part of the Indebtedness due and owing. Without limitation of the foregoing, with respect to such rights and remedies:

 

(a) Repossession. The Secured Party may enter into and occupy any premises where any Collateral may be located for a reasonable period in order to effectuate Secured Party’s remedies, without obligation to Debtor in respect of such occupation, and may take possession of Collateral, all in accordance with applicable law.

 

(b) Assembling Collateral. The Secured Party may require the Debtor to assemble the Collateral and make it available to the Secured Party at a place to be designated by the Secured Party, at Debtor’s cost and expense. It is agreed that the Secured Party will not have an adequate remedy at law if this obligation is breached, and accordingly that the Debtor’s obligation to assemble Collateral shall be specifically enforceable by Secured Party.

 

(c) Sale of Collateral. Secured Party may sell the Collateral or any portion thereof at one or more public or private sales, or both, by way of one or more contracts or transactions, for cash, on credit or for future delivery, and upon such other terms as the Secured Party may deem commercially reasonable.

 

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(e) Notice of Disposition. Writtennotice, whenrequiredbylaw, sentto theDebtorinaccordancewith this Agreement at least ten (10) calendar days (counting the day of sending) before the date of a proposed disposition of the Collateral is acknowledged by the Debtor to constitute reasonable notice.

 

(f) Credit Bid. The Secured Party shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold, assigned or licensed at any sale of the Collateral conducted under the UCC or other applicable law, to use and apply any of the Obligations as a credit on account of the purchase price of the Collateral or any part thereof payable at such sale, to the fullest extent provided by law.

 

(g) Expenses and Application of Proceeds. The Debtor shall reimburse the Secured Party for any fees, costs and expenses incurred by the Secured Party in protecting or enforcing its rights under this Agreement including, without limitation, fees of attorneys, legal assistants or paralegals (whether or not litigation is commenced); all expenses of taking possession, holding, preparing for disposition and disposing of the Collateral; and all expenses and costs (including, without limitation, fees of attorneys, legal assistants and paralegals) in connection with any proceeding instituted pursuant to 11 U.S.C. §101 et. seq. or any other state or federal bankruptcy or insolvency law. After deduction of all such fees, costs and expenses, the Secured Party may apply the proceeds of disposition of any Collateral to the Obligations in such order and amounts as Secured Party elects in its sole discretion.

 

(h) Waiver. The Secured Party may permit the Debtor to remedy any default without waiving the default so remedied, and the Secured Party may waive any default without waiving any other subsequent or prior default.

 

(i) Use of Intellectual Property Rights. The Secured Party is hereby granted a nonexclusive, worldwide and royalty free license to use or otherwise exploit all Intellectual Property Rights owned by or licensed to the Debtor that the Secured Party deems necessary or appropriate to the disposition of any Collateral.

 

(j) Receivership. Secured Party shall have the right to have a receiver appointed for the Collateral. Any receiver appointed at the Secured Party’s request for the Collateral shall have the power to protect and preserve the Collateral; to operate, manage, and maintain the Collateral preceding disposition; to sell and dispose of the Collateral; and to collect all proceeds from the Collateral and apply the proceeds, over and above the cost of the receivership, to the Obligations, and to perform any and all other usual powers and duties of receivers in like cases, without notice to the Debtor or any other party. Employment by Secured Party shall not disqualify a Person from serving as a receiver. To the extent permitted by law, such right to appoint a receiver shall exist irrespective of any common law requirements including, but not limited to, notice; bond; insolvency of Debtor; waste; irreparable harm; and/or imminent danger to the Collateral, all of which are hereby waived by Debtor. The appointment of the receiver shall be made by the court as a matter of strict right to Secured Party, and without reference to the solvency or insolvency of Debtor or any party defendant to such suit. To the extent permitted by law, Debtor hereby specifically waives the right to object to the appointment of a receiver as aforesaid and hereby expressly consents that such appointment shall be made as an admitted equity and as a matter of absolute right to Secured Party. In order to maintain and preserve the Collateral and to prevent waste and impairment of its security, Secured Party may, at its option, advance funds to the appointed receiver and all such sums so advanced shall become additional Obligations secured by this Agreement and shall bear interest from the date of such advance at the interest rate provided for under the Note.

 

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8. Waivers of Debtor Relating to Remedies. To the extent permitted by applicable law, Debtor waives all claims, damages and demands it may acquire against the Secured Party arising out of the exercise by it of any rights or remedies hereunder. Debtor hereby further waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling the Collateral and any other security for the Obligations or otherwise. Secured Party shall not be liable for failure to collect or realize upon any or all of the Collateral or for any delay in so doing nor shall it be under any obligation to take any action with regard thereto. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Debtor agrees that it would not be commercially unreasonable for the Secured Party to dispose of the Collateral or any portion thereof by utilizing one or more internet sites that provide for the auction of assets of the type included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets. The Secured Party shall not be obligated to clean-up or otherwise prepare the Pledged Collateral for sale.

 

9. No Waiver by Secured Party; Cumulative Remedies. If the Secured Party fails to exercise, or delays before exercising, any right, remedy, power or privilege hereunder, such failure or delay shall not operate as a waiver thereof. The single or partial exercise of any right, remedy, power or privilege hereunder shall not preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges otherwise provided by law.

 

10. Interpretation. For purposes of this Agreement, (a) the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation”; (b) the word “or” is not exclusive; and (c) the words “herein,” “hereof,” “hereby,” “hereto” and “hereunder” refer to this Agreement as a whole. The definitions given for any defined terms in this Agreement shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. Unless the context otherwise requires, references herein to: (x) Articles, Sections, and Exhibits mean the Articles and Sections of, and Exhibits attached to, this Agreement; (y) an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof; and (z) a statute means such statute as amended from time to time and includes any successor legislation thereto and any regulations promulgated thereunder. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting an instrument or causing any instrument to be drafted. The Exhibits referred to herein shall be construed with, and as an integral part of, this Agreement to the same extent as if they were set forth verbatim herein.

 

11. Persons Bound. This Agreement benefits the Secured Party and its successors and assigns, and binds the Debtor and its successors and permitted assigns.

 

12. Arbitration; Service of Process; Governing Law.

 

(a) Arbitration. Any dispute hereunder or related hereto shall be resolved by arbitration conducted in St. Louis Missouri, in accordance with Chapter 435 of the Missouri Revised Statutes. The provisions of this Section 12(a) shall survive the entry of any judgment, and will not merge, or be deemed to have merged, into any judgment.

 

(b) Service of Process. To the fullest extent permitted by applicable law, Debtor irrevocably consents to the service of process by certified or registered mail sent to the address provided for notices in the Asset Purchase Agreement and agrees that nothing herein will affect the right of Secured Party to serve process in any other manner permitted by applicable law.

 

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(c) Governing Law. This Agreement shall be governed by the internal laws of the State of Missouri, without regard to its conflicts of laws principles.

 

13. Severability. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof.

 

14. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

 

15. Amendments; Notices. No modification, amendment or waiver of, or consent to any departure by the Debtor from, any provision of this Agreement will be effective unless made in a writing signed by the Secured Party and the Debtor, which writing shall express the terms and consideration thereof, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Debtor will entitle the Debtor to any other or further notice or demand in the same, similar or other circumstance.

 

16. Electronic Signatures and Records. Notwithstanding any other provision herein, the parties agree that this Agreement, any amendments thereto, and any other information, notice, signature card, agreement or authorization related thereto (each, a “Communication”) may, at Secured Party’s option, be in the form of an electronic record. Any Communication may, at Secured Party’s option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance of a manually signed paper Communication, which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or retention.

 

17. Notices; Requests for Accounting. All notices and other communications hereunder shall be in writing and shall be given in accordance with the provisions of the Note. All requests under Section 9-210 of the UCC: (i) shall be made in a writing signed by an authorized person; (ii) shall be personally delivered, sent by registered or certified mail, return receipt requested, or by overnight courier of national reputation; (iii) shall be deemed to be sent when received by the Secured Party; and (iv) shall otherwise comply with the requirements of Section 9-210. The Debtor requests that the Secured Party respond to all such requests which on their face appear to come from an authorized individual and releases the Secured Party from any liability for so responding. The Debtor shall pay the Secured Party the maximum amount allowed by law for responding to such requests.

 

18. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, all of which together shall constitute one instrument. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or in electronic (“pdf” or “tif”) format shall be effective as delivery of a manually executed counterpart of this Agreement.

 

19. Further Assurances. At any time and from time to time Debtor shall execute and deliver such further instruments and take such further action as may reasonably be requested by Secured Party to effect the purposes of this Agreement, including without limitation, the continued perfection and priority of Secured Party’s security interest in the Collateral.

 

20. Effectiveness of Agreement. This Agreement shall be effective upon the Closing of the IPO.

 

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]

[SIGNATURE PAGES TO FOLLOW.]

 

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COUNTERPART SIGNATURE PAGE

 

to

 

SECURITY AGREEMENT

 

THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

 

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed and delivered as of the date first above written.

 

  1847 GOEDEKER INC.
     
By:  /s/ Douglas T. Moore
  Name:  Douglas T. Moore
  Title: CEO

 

AGREED TO AND ACCEPTED BY:  
   
/s/ Steve Goedeker  
Steve Goedeker, in his capacity as the  
representative of Sellers under the Purchase Agreement  

  

Signature Page to Security Agreement

 

 

 

 

LIST OF EXHIBITS

 

Exhibit 1.1 Schedule of Intellectual Property Rights
   
Exhibit 3(m) Schedule of Chief Executive Office and Collateral Locations

 

 

 

 

EXHIBIT 1.1

 

Intellectual Property Rights

 

None, if none listed.

 

Exhibit 1.1

 

 

EXHIBIT 3(m)

 

Business Addresses/Collateral Locations

 

Debtor’s principal place of business and chief executive office location is leased by Debtor and located at: 13850 Manchester Rd, Ballwin, MO 63011

 

Other business locations and locations where Debtor does business or where Collateral is kept, located or stored: None

 

 

Exhibit 3(m)

 

 

Exhibit 31.1

 

CERTIFICATIONS

 

I, Ellery W. Roberts, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of 1847 Holdings LLC;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.  

 

Date: August 14, 2020

 

 

/s/ Ellery W. Roberts

  Ellery W. Roberts
 

Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)

Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

 

The undersigned Chief Executive Officer and Chief Financial Officer of 1847 HOLDINGS LLC (the “Company”), DOES HEREBY CERTIFY that:

 

1. The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

 

IN WITNESS WHEREOF, the undersigned has executed this statement on August 14, 2020.

 

 

/s/ Ellery W. Roberts

  Ellery W. Roberts
 

Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)

 

A signed original of this written statement required by Section 906 has been provided to 1847 Holdings LLC and will be retained by 1847 Holdings LLC and furnished to the Securities and Exchange Commission or its staff upon request.

 

The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.