1847 HOLDINGS LLC The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in the sections titled "Risk Factors" and "Special Note Regarding Forward-Looking Statements." 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 inNorth America . As ofSeptember 30, 2021 , we have completed five acquisitions and subsequently spun off two of the acquired companies. OnMay 28, 2020 , our subsidiary 1847 Asien acquired Asien's. Asien's has been in business since 1948 serving theNorth Bay area ofSonoma 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. OnSeptember 30, 2020 , our subsidiary 1847Cabinet acquired Kyle's. Kyle's is a leading custom cabinetry maker servicing contractors and homeowners since 1976 inBoise, Idaho and the surrounding area. Kyle's focuses on designing, building, and installing custom cabinetry primarily for custom and semi-custom builders. OnMarch 30, 2021 , our subsidiary 1847 Wolo acquired Wolo. Headquartered inDeer Park, New York and founded in 1965, Wolo designs and sells horn and safety products (electric, air, truck, marine, motorcycle and industrial equipment), and offers vehicle emergency and safety warning lights for cars, trucks, industrial equipment and emergency vehicles. OnOctober 8, 2021 , our subsidiary 1847Cabinet acquiredHigh Mountain and Innovative Cabinets. Headquartered inReno, Nevada and founded in 2014,High Mountain specializes in all aspects of finished carpentry products and services, including doors, door frames, base boards, crown molding, cabinetry, bathroom sinks and cabinets, bookcases, built-in closets, and fireplace mantles, among others, working primarily with large homebuilders of single-family homes and commercial and multi-family developers. Innovative Cabinets is headquartered inReno, Nevada and was founded in 2008. It specializes in custom cabinetry and countertops for a client base consisting of single-family homeowners, builders of multi-family homes, as well as commercial clients. Our first acquisition was onMarch 3, 2017 , pursuant to which our subsidiary 1847 Neese acquired Neese, a business specializing in providing a wide range of land application services and selling equipment and parts inGrand Junction, Iowa . OnApril 19, 2021 , we sold 1847 Neese back to the original owners. OnApril 5, 2019 , our subsidiary 1847 Goedeker acquired substantially all of the assets ofGoedeker Television , a one-stop e-commerce destination for home furnishings, including appliances, furniture, home goods and related products. OnOctober 23, 2020 , we distributed all of the shares of 1847 Goedeker that we held to our shareholders, so we no longer own 1847 Goedeker. 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 of 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 make these businesses our majority-owned subsidiaries and actively manage and grow such businesses. We expect to improve our businesses over the long term through organic growth opportunities, add-on acquisitions and operational improvements. 78 Recent Developments Unit Offering OnFebruary 24, 2022 , we entered into securities purchase agreements with several accredited investors, pursuant to which we sold an aggregate of 320,333 units, at a price of$3.00 per unit, to such investors for aggregate gross proceeds of$961,000 . OnMarch 24, 2022 , we entered into securities purchase agreements with additional accredited investors, pursuant to which we sold an additional 106,666 units to such investors for aggregate gross proceeds of$320,000 . Each unit consists of one (1) series B senior convertible preferred share and a three-year warrant to purchase one (1) common share at an exercise price of$3.00 per share (subject to adjustment), which may be exercised on a cashless basis under certain circumstances. Pursuant to the securities purchase agreements, we are required to file a registration statement with theSEC under the Securities Act covering the resale of all shares issuable upon conversion of the series B senior convertible preferred shares and exercise of the warrants with thirty (30) days after the closing and use our commercially reasonable efforts to have the registration statement declared effective by theSEC as soon as practicable, but in no event later than (i) ninety (90) days after the closing in the event that theSEC does not review the registration statement, or (ii) one hundred fifty (150) days after the closing in the event that theSEC reviews the registration statement (but in any event, no later than two (2) business days from theSEC indicating that it has no further comments on the registration statement).
In addition to registration rights described above, the securities purchase agreements provide several other covenants in favor of the investors, including information rights for significant shareholders, most favored nations provisions, and other covenants customary for similar transactions. The securities purchase agreements also contain customary representations, warranties closing conditions and indemnities.
Dividend
OnJanuary 14, 2022 , we paid our first quarterly dividend in the amount of$0.05 per share to the holders of common shares as ofDecember 31, 2021 . The total dividend paid was$242,160 .
Impact of Coronavirus Pandemic
Starting in late 2019, a novel strain of the coronavirus, or COVID-19, began to rapidly spread around the world and every state inthe United States . Most states and cities have at various times instituted quarantines, restrictions on travel, "stay at home" rules, social distancing measures and restrictions on the types of businesses that could continue to operate, as well as guidance in response to the pandemic and the need to contain it. At this time, there continues to be significant volatility and uncertainty relating to the full extent to which the COVID-19 pandemic and the various responses to it will impact our business, operations and financial results. Asien's was qualified as an essential business and remained open during the pandemic, with certain occupancy restrictions at times, so it did not experience any meaningful business interruption. However, Asien's is dependent upon suppliers to provide it with all of the products that its sells. The pandemic has impacted and may continue to impact suppliers and manufacturers of certain of its products. As a result, Asien's has faced and may continue to face delays or difficulty sourcing certain products, which could negatively affect its business and financial results. Even if Asien's is able to find alternate sources for such products, they may cost more, which could adversely impact Asien's profitability and financial condition. Kyle's was also qualified as an essential business and remained open during the pandemic, with certain occupancy restrictions at times, so it did not experience any meaningful business interruption. However, certain key customers of Kyle's elected to either temporarily stop building homes or delayed their building process, particularly during the second quarter of 2020, which adversely affected Kyle's sales. Further, early on during the pandemic, several of Kyle's employees had taken time off because of medical issues, and some of them did not return to employment. Kyle's has been hiring and training new employees to replace lost productivity because of the aforementioned loss of employees. Kyle's did not experience any meaningful business interruption related to any of its key suppliers; although recently, potentially as a result of the pandemic and resulting impact, Kyle's has seen price increases in certain key raw materials such as wood products and hardware. These increases may negatively affect Kyle's profitability and financial condition. If the pace of the pandemic does not continue to slow, it may continue to negatively affect Kyle's ability to generate sales opportunities and to hire productive employees, as well as impact the cost of raw materials. Therefore, Kyle's business operations may experience further delays and experience lost sales opportunities and increased costs, which could further adversely impact Kyle's profitability and financial condition. 79High Mountain was qualified as an essential business and remained open during the pandemic. As it followed both federal andNevada state guidelines regarding occupancy restrictions, it did not experience significant business disruptions, although it did experience some loss of productivity due to employee absences.High Mountain continues to comply withNevada state and CDC guidelines regarding workplace safety. Innovative Cabinets was also qualified as an essential business and thus remained open during the pandemic, while complying with federal andNevada state guidelines regarding occupancy restrictions. However, since a substantive amount of its materials come fromAsia , where its manufacturing network is located, Innovative Cabinets did experience longer supply chain lead-times and higher logistics costs. It has been exploring alternative sourcing opportunities. Given the prevailing market conditions for building supplies and materials, it may continue to experience supply chain issues and higher supply costs, which could adversely impact its profitability and financial condition. Wolo qualified as an essential business and remained open during the pandemic. At no time during the pandemic did it experience an internal contamination forcing it to stop its business. The pandemic has had a dramatic impact on Wolo's supply chain as it has on others in the automotive aftermarket. Approximately 90% of Wolo's vendor base is located inChina . The pandemic issues impacting ports in theU.S. due to lack of personnel has had a ripple effect on Chinese suppliers. Containers are slow to be emptied in theU.S. , causing a backlog of ships waiting to get into ports and limiting containers and ships returning toChina . The lack of containers and available space on ships has escalated shipping costs by over 300% from 2020. Costs for raw materials have also started to increase due to availability. Wolo cannot absorb these increases and began passing on a price increase to customers startingJune 1, 2021 , although the effective date may be later for some customers. We believe that this is an industry-wide issue and that it should not put Wolo in an unfavorable pricing position.
The spread of COVID-19 has also adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The pandemic has resulted, and may continue to result, in a significant disruption of global financial markets, which may reduce our ability to access capital in the future, which could negatively affect our liquidity. 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 the effectiveness of vaccines and other treatments for COVID-19, and other 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. See also "Risk Factors" for more information. Management Fees OnApril 15, 2013 , we and our manager entered into a management services agreement, pursuant to which we are required to pay our manager a quarterly management fee equal to 0.5% of our adjusted net assets for services performed (which we refer to as the parent management fee). The amount of the parent management fee with respect to any fiscal quarter is (i) reduced by the aggregate amount of any management fees received by our manager under any offsetting management services agreements with respect to such fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid (or under-paid) parent management fees received by (or owed to) our manager as of the end of such fiscal quarter, and (iii) increased by the amount of any outstanding accrued and unpaid parent management fees. We did not expense any parent management fees for the years endedDecember 31, 2021 and 2020. 1847 Neese entered into an offsetting management services agreement with our manager onMarch 3, 2017 , which is included in discontinued operations, 1847 Goedeker entered into an offsetting management services agreement with our manager onApril 5, 2019 , which is included in discontinued operations, 1847 Asien entered into an offsetting management services agreement with our manager onMay 28, 2020 , 1847Cabinet entered into an offsetting management services agreement with our manager onAugust 21, 2020 (which was amended and restated onOctober 8, 2021 ) and 1847 Wolo entered into an offsetting management services agreement with our manager onMarch 30, 2021 . Pursuant to the offsetting management services agreements, 1847 Neese appointed our manager to provide certain services to it for a quarterly management fee equal to$62,500 , 1847 Goedeker appointed our manager to provide certain services to it for a quarterly management fee equal to$62,500 , 1847 Asien appointed our manager to provide certain services to it for a quarterly management fee equal to the greater of$75,000 or 2% of adjusted net assets (as defined in the management services agreement), 1847Cabinet appointed our manager to provide certain services to it for a quarterly management fee equal to the greater of$75,000 or 2% of adjusted net assets (as defined in the management services agreement), which was increased to$125,000 or 2% of adjusted net assets onOctober 8, 2021 , and 1847 Wolo appointed our manager to provide certain services to it for a quarterly management fee equal to the greater of$75,000 or 2% of adjusted net assets (as defined in the management services agreement); provided, however, in each case that if the aggregate amount of management fees paid or to be paid by such entities, together with all other management fees paid or to be paid to our manager under other offsetting management services agreements, exceeds, or is expected to exceed, 9.5% of our gross income in any fiscal year or the parent management fee in any fiscal quarter, then the management fee to be paid by such entities shall be reduced, on a pro rata basis determined by reference to the other management fees to be paid to our manager under other offsetting management services agreements. 80 Each of these entities shall also reimburse our manager for all of their costs and expenses which are specifically approved by their board of directors, including all out-of-pocket costs and expenses, which are actually incurred by our manager or its affiliates on behalf of these entities in connection with performing services under the offsetting management services agreements.
1847 Asien expensed management fees of
1847
1847 Wolo expensed management fees of$225,833 for the year endedDecember 31, 2021 . In conjunction with acquisition of Wolo, our manager also received a
fee of$110,000 .
On a consolidated basis, we expensed total management fees of
Segments TheFinancial Accounting Standards Board , or FASB, Accounting Standard Codification, or ASC, Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its shareholders. As ofDecember 31, 2021 , we have three reportable segments - the retail and appliances segment, which is operated by Asien's, the construction segment, which is operated by Kyle's,High Mountain and Innovative Cabinets, and the automotive supplies segment, which is operated by Wolo. The retail and appliances segment is comprised of the business of Asien's, which is based inSanta Rosa, California , and provides a wide variety of appliance services including sales, delivery, installation, service and repair, extended warranties, and financing. The construction segment is comprised of the businesses of Kyle's,High Mountain and Innovative Cabinets. Kyle's, which is based inBoise, Idaho , provides a wide variety of construction services including custom design and build of kitchen and bathroom cabinetry, delivery, installation, service and repair, extended warranties, and financing.High Mountain , which is based inReno, Nevada , specializes in all aspects of finished carpentry products and services, including doors, door frames, base boards, crown molding, cabinetry, bathroom sinks and cabinets, bookcases, built-in closets, and fireplace mantles, among others, as well as window installation. Innovative Cabinets, also based inReno, Nevada , specializes in custom cabinetry and countertops. The automotive supplies segment is comprised of the business of Wolo, which is based inDeer Park, New York , and designs and sells horn and safety products (electric, air, truck, marine, motorcycle and industrial equipment), and offers vehicle emergency and safety warning lights for cars, trucks, industrial equipment and emergency vehicles. We provide general corporate services to our segments; however, these services are not considered when making operating decisions and assessing segment performance. These services are reported under "Corporate Services" below and these include costs associated with executive management, financing activities and public company compliance. Discontinued Operations
OnOctober 23, 2020 , we distributed all of the shares of 1847 Goedeker that we held to our shareholders. As a result of this distribution, 1847 Goedeker is no longer a subsidiary of our company. All financial information of 1847 Goedeker previously presented as part of retail and appliance services operations are classified as discontinued operations and not presented as part of continuing operations for the year endedDecember 31, 2020 . OnApril 19, 2021 , we entered into a stock purchase agreement with the original owners of Neese, pursuant to which they purchased our 55% ownership interest in 1847 Neese for a purchase price of$325,000 in cash. As a result of this transaction, 1847 Neese is no longer a subsidiary of our company. All financial information of 1847 Neese previously presented as part of land management services operations are classified as discontinued operations and not presented as part of continuing operations for the years endedDecember 31, 2021 and
2020.
81
Results of Operations
The following table sets forth key components of our results of operations
during the years ended
Years Ended December 31,
2021 2020
% of % of
Amount Revenues Amount Revenues
RevenuesFurniture and appliances$ 12,741,064 41.6 %
$ 7,625,222 87.2 % Construction 12,203,890 39.8 % 1,120,224 12.8 % Automotive supplies 5,716,030 18.6 % - - Total revenues 30,660,984 100.0 % 8,745,446 100.0 % Operating expenses Cost of sales 20,311,724 66.2 % 6,531,435 74.7 % Personnel costs 3,247,441 10.6 % 734,867 8.4 %
Depreciation and amortization 908,982 3.0 % 176,612 2.0 % General and administrative 7,296,736 23.8 % 2,652,429 30.3 % Total operating expenses 31,764,883 103.6 % 10,095,343 115.4 % Net loss from operations (1,103,899 ) (3.6 )% (1,349,897 ) (15.4 )% Other income (expense) Gain on forgiveness of debt 360,302 1.2 % - - Loss on write-down of vesting note payable - related party (602,204 ) (2.0 )% - - Loss on extinguishment of debt (137,692 ) (0.4 )% (286,350 ) (3.3 )% Loss on redemption of preferred shares (4,017,553 ) (13.1 )% - - Gain on disposition of subsidiary 3,282,804 10.7 % - - Gain on sale of property and equipment 10,885 - - - Other income and (expense) 876 - (18,196 ) (0.2 )% Interest expense (1,296,537 ) (4.2 )% (249,626 ) (2.9 )% Total other income (expense) (2,399,119 ) (7.8 )% (554,172 ) (6.3 )% Net loss before income taxes (3,503,018 ) (11.4 )% (1,904,069 ) (21.8 )% Income tax benefit (expense) (218,139 ) (0.7 )% 83,931 1.0 %
Net loss from continuing operations
Total revenues. Our total revenues were
The retail and appliances segment generates revenue through the sales of home furnishings, including appliances and related products. Revenues from the retail and appliances segment were$12,741,064 for the year endedDecember 31, 2021 and$7,625,222 for the period fromMay 29, 2020 toDecember 31, 2020 following
the acquisition of Asien's. The construction segment generates revenue through the sale of finished carpentry products and services, including doors, door frames, base boards, crown molding, cabinetry, bathroom sinks and cabinets, bookcases, built-in closets, and fireplace mantles, among others, as well as kitchen countertops. Revenues from the construction segment were$12,203,890 for the year endedDecember 31, 2021 , including revenue from the acquisitions ofHigh Mountain and Innovative Cabinets of$6,766,540 for the period ofOctober 9, 2021 toDecember 31, 2021 , and$1,120,224 for the period fromOctober 1, 2020 toDecember 31, 2020 following the acquisition of Kyle's. The automotive supplies segment generates revenue through the design and sale of horn and safety products (electric, air, truck, marine, motorcycle and industrial equipment), including vehicle emergency and safety warning lights for cars, trucks, industrial equipment and emergency vehicles. Revenues from the automotive supplies segment were$5,716,030 for the period fromApril 1, 2021 toDecember 31, 2021 following the acquisition of Wolo. 82
Cost of sales. Our total cost of sales was
Cost of sales for the retail and appliances segment consists of the cost of purchased merchandise plus the cost of delivering merchandise and where applicable installation, net of promotional rebates and other incentives received from vendors. Cost of sales for the retail and appliances segment was$9,773,371 for the year endedDecember 31, 2021 and$5,866,413 for the period fromMay 29, 2020 toDecember 31, 2020 following the acquisition of Asien's. As a percentage of retail and appliances revenues, cost of sales for the retail and appliances segment was 76.7% for the year endedDecember 31, 2021 and 76.9% for the period fromMay 29, 2020 toDecember 31, 2020 . Cost of sales for the construction segment consists of finished goods, lumber, hardware and materials and plus direct labor and related costs, net of any material discounts from vendors. Cost of sales for the construction segment was$6,966,064 for the year endedDecember 31, 2021 , including costs from the acquisitions ofHigh Mountain and Innovative Cabinets of$3,899,268 for the period ofOctober 9, 2021 toDecember 31, 2021 , and$665,022 for the period fromOctober 1, 2020 toDecember 31, 2020 . As a percentage of construction revenues, cost of sales for the construction segment was 57.1% for the year endedDecember 31, 2021 and 59.4% for the period fromOctober 1, 2020 toDecember 31, 2020 following the acquisition of Kyle's. Cost of sales for the automotive supplies segment consists of the costs of purchased finished goods plus freight and tariff costs. Cost of sales for the automotive supplies segment was$3,572,289 for the period fromApril 1, 2021 toDecember 31, 2021 following the acquisition of Wolo. As a percentage of automotive supplies revenues, cost of sales for the automotive supplies segment was 62.5% for the period fromApril 1, 2021 toSeptember 30, 2021 . Personnel costs. Personnel costs include employee salaries and bonuses plus related payroll taxes. It also includes health insurance premiums, 401(k) contributions, and training costs. Our total personnel costs were$3,247,442 for the year endedDecember 31, 2021 , as compared to$734,867 for the year endedDecember 31, 2020 . Personnel costs for the retail and appliances segment were$1,013,992 for the year endedDecember 31, 2021 and$525,346 for the period fromMay 29, 2020 toDecember 31, 2020 following the acquisition of Asien's. As a percentage of retail and appliances revenue, personnel costs for the retail and appliances segment were 8.0% for the year endedDecember 31, 2021 and 6.9% for the period fromMay 29, 2020 toDecember 31, 2020 . Personnel costs for the construction segment were$1,518,643 for the year endedDecember 31, 2021 , including costs from the acquisitions ofHigh Mountain and Innovative Cabinets of$522,560 for the period ofOctober 9, 2021 toDecember 31, 2021 , and$209,521 for the period fromOctober 1, 2020 toDecember 31, 2020 following the acquisition of Kyle's. As a percentage of construction revenue, personnel costs for the construction segment were 12.4% for the year endedDecember 31, 2021 and 18.7% for the period fromOctober 1, 2020 to December
31, 2020. Personnel costs for the automotive supplies segment were$714,807 for the period fromApril 1, 2021 toDecember 31, 2021 following the acquisition of Wolo. As a percentage of automotive supplies revenue, personnel costs for the automotive supplies segment were 12.5% for the period fromApril 1, 2021 toDecember 31, 2021 . Depreciation and amortization. Our total depreciation and amortization expense was$908,982 for the year endedDecember 31, 2021 , as compared to$176,612 for the year endedDecember 31, 2020 . General and administrative expenses. Our general and administrative expenses consist primarily of professional advisor fees, stock-based compensation, bad debts reserve, rent expense, advertising, bank fees, and other expenses incurred in connection with general operations. Our total general and administrative expenses were$7,296,736 for the year endedDecember 31, 2021 , as compared to$2,652,429 for the year endedDecember 31, 2020 . General and administrative expenses for the retail and appliances segment were$1,696,267 for the year endedDecember 31, 2021 and$1,362,169 for the period fromMay 29, 2020 toDecember 31, 2020 following the acquisition of Asien's. As a percentage of retail and appliances revenue, general and administrative expenses for the retail and appliances segment were 13.3% for the year endedDecember 31, 2021 and 17.9% for the period fromMay 29, 2020 toDecember 31, 2020 . 83 General and administrative expenses for the construction segment were$2,064,918 for the year endedDecember 31, 2021 , including costs from the acquisitions ofHigh Mountain and Innovative Cabinets of$1,133,747 for the period ofOctober 9, 2021 toDecember 31, 2021 , and$394,168 for the period fromOctober 1, 2020 toDecember 31, 2020 following the acquisition of Kyle's. As a percentage of construction revenue, general and administrative expenses for the construction segment were 16.9% for the year endedDecember 31, 2021 and 22.9% for the period fromOctober 1, 2020 toDecember 31, 2020 . General and administrative expenses for the automotive supplies segment were$2,248,738 for the period fromApril 1, 2021 toDecember 31, 2021 following the acquisition of Wolo. As a percentage of automotive supplies revenue, general and administrative expenses for the automotive supplies segment were 39.3% for the period fromApril 1, 2021 toDecember 31, 2021 .
General and administrative expenses for our holding company increased by
Total other income (expense). We had$2,399,119 in total other expense, net, for the year endedDecember 31, 2021 , as compared to other expense, net, of$554,172 for the year endedDecember 31, 2020 . Other expense, net, for the year endedDecember 31, 2021 consisted of a loss on redemption of preferred shares of$4,017,553 , interest expense of$1,296,537 , a loss on write-down of vesting note payable of$602,204 and a loss on extinguishment of debt of$137,692 , offset by a gain on disposition of subsidiary of$3,282,804 related to the disposition of Neese, a gain on forgiveness of debt of$360,302 , a gain on sale of property and equipment of$10,885 and other income of$876 , while total other expense, net, for the year endedDecember 31, 2020 consisted of a loss on extinguishment of debt of$286,350 , interest expense of$249,626 and other expense of$18,196 . Income tax benefit (expense). We had an income tax expense of$218,139 for the year endedDecember 31, 2021 , as compared to an income tax benefit of$83,931 for the year endedDecember 31, 2020 . Net loss from continuing operations. As a result of the cumulative effect of the factors described above, our net loss from continuing operations was$3,721,157 for the year endedDecember 31, 2021 , as compared to$1,820,138 for the year endedDecember 31, 2020 .
Liquidity and Capital Resources
As of
Although we do not believe that we will require additional cash to continue our operations over the next twelve months, 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 equity 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 equity 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 our manager pursuant to the management services agreement, potential payment of profit allocation to our manager and potential put price to our manager in respect of the allocation shares it owns. The management fee, expenses, potential profit allocation and potential put price are paid before distributions to shareholders and may be significant and exceed the funds we hold, which may require us to dispose of assets or incur debt to fund such expenditures. Item 1 "Business-Our Manager" for more information concerning the management fee, the profit allocation and put price. The amount of management fee paid to our manager by us is reduced by the aggregate amount of any offsetting management fees, if any, received by our manager from any of our businesses. As a result, the management fee paid to our manager may fluctuate from quarter to quarter. The amount of management fee paid to our manager may represent a significant cash obligation. In this respect, the payment of the management fee will reduce the amount of cash available for distribution to shareholders. 84 Our manager, as holder of 100% of our allocation shares, is entitled to receive a twenty percent (20%) profit allocation as a form of preferred equity distribution, subject to an annual hurdle rate of eight percent (8%), as follows. Upon the sale of a subsidiary, our manager will be paid a profit allocation if the sum of (i) the excess of the gain on the sale of such subsidiary over a high-water mark plus (ii) the subsidiary's net income since its acquisition by us exceeds the 8% hurdle rate. The 8% hurdle rate is the product of (i) a 2% rate per quarter, multiplied by (ii) the number of quarters such subsidiary was held by us, multiplied by (iii) the subsidiary's average share (determined based on gross assets, generally) of our consolidated net equity (determined according to GAAP with certain adjustments). In certain circumstances, after a subsidiary has been held for at least 5 years, our manager may also trigger a profit allocation with respect to such subsidiary (determined based solely on the subsidiary's net income since its acquisition). The amount of profit allocation may represent a significant cash payment and is senior in right to payments of distributions to our shareholders. Therefore, the amount of profit allocation paid, when paid, will reduce the amount of cash available to us for our operating and investing activities, including future acquisitions. See Item 1 "Business-Our Manager-Our Manager as an Equity Holder-Manager's Profit Allocation" for more information on the calculation
of
the profit allocation.
Our operating agreement also contains a supplemental put provision, which gives
our manager the right, subject to certain conditions, to cause us to purchase
the allocation shares then owned by our manager upon termination of the
management services agreement. The amount of put price under the supplemental
put provision is determined by assuming all of our subsidiaries are sold at that
time for their fair market value and then calculating the amount of profit
allocation would be payable in such a case. If the management services agreement
is terminated for any reason other than our manager's resignation, the payment
to our manager could be as much as twice the amount of such hypothetical profit
allocation. As is the case with profit allocation, the calculation of the put
price is complex and based on many factors that cannot be predicted with any
certainty at this time. See Item 1 "Business-Our Manager-Our Manager as an
Equity Holder-Supplemental Put Provision" for more information on the
calculation of the put price. The put price obligation, if our manager exercises
its put right, will represent a significant cash payment and is senior in right
to payments of distributions to our shareholders. Therefore, the amount of put
price will reduce the amount of cash available to us for our operating and
investing activities, including future acquisitions.
Summary of Cash Flow
The following table provides detailed information about our net cash flow for
the period indicated:
Cash Flow
Years Ended December 31,
2021 2020Net cash provided by (used in) operating activities from continuing operations
$
(897,566 )
(15,684,770 ) 1,060,872 Net cash provided by financing activities from continuing operations
16,585,520 181,977 Net increase in cash and cash equivalents from continuing operations
3,184 1,380,349
Cash and cash equivalents at beginning of year 1,380,349 -
Cash and cash equivalent at end of year $ 1,383,533 $ 1,380,349
Net cash used in operating activities from continuing operations was $897,566
for the year ended December 31, 2021 , as compared to net cash provided by
operating activities from continuing operations of $137,500 for the year ended
December 31, 2020 . For the year ended December 31, 2021 , the net loss of
$3,588,934 , a gain of disposition of subsidiary of $3,282,804 , a change in
contract liabilities of $950,640 and a gain on forgiveness of debt of $360,302 ,
offset by a loss on redemption of series A senior convertible preferred shares
of $4,017,553 , non-cash depreciation and amortization of $908,982 , an increase
in accounts payable and accrued expenses of $719,890 , a loss on write-down of
contingent notes payable of $602,204 , a decrease in inventory of $389,110 and a
change in debt discounts of $382,565 , were the primary drivers of the net cash
used in operating activities. For the year ended December 31, 2020 , the net loss
of $9,658,769 , a decrease in prepaids and other costs of $495,831 and an
increase in inventory of $565,264 , offset by a gain from discontinued operations
of $7,838,631 , an increase in accounts payable and accrued expenses of $962,464
and an increase in customer deposits of $965,254 , were the primary drivers of
the net cash provided by operating activities.
Net cash used in investing activities from continuing operations was $15,684,770
for the year ended December 31, 2021 , as compared to net cash provided by
investing activities from continuing operations of $1,060,872 for the year ended
December 31, 2020 . Net cash used in investing activities for the year ended
December 31, 2021 consisted of net cash acquired in (paid for) acquisitions
(Wolo, High Mountain and Innovative Cabinets) of $15,857,295 and purchase of
equipment and vehicles of $177,475 , offset by proceeds from disposition of
subsidiary of $325,000 and proceeds from the sale of property and equipment of
$25,000 , while net cash provided by investing activities for the year ended
December 31, 2020 consisted of net cash acquired in (paid for) acquisitions
(Asien's and Kyle's) of $1,409,936 , offset by investments in certificates of
deposits of $276,270 and purchases of equipment in the amount of $72,794 .
85
Net cash provided by financing activities from continuing operations was
$16,585,520 for the year ended December 31, 2021 , as compared to $181,977 for
the year ended December 31, 2020 . Net cash provided by financing activities for
the year ended December 31, 2021 consisted of net proceeds on convertible notes
payable of $23,744,975 , proceeds on notes payable of $3,550,000 and proceeds of
$3,000,000 from the sale of units described below, offset by redemption of
preferred shares of $6,054,241 , net payments on notes payable of $5,021,511 ,
payments of preferred dividends of $1,032,806 , net payments due to the Wolo and
Asien's sellers of $977,686 , net repayment on lines of credit of $301,081 ,
financing fees of $165,230 , payment of vesting note payable of $100,000 and
repayment of grid note of $56,900 . Net cash provided by financing activities for
the year ended December 31, 2020 consisted of net proceeds of $4,921,315 from
the sale of units described below, proceeds from line of credit of $301,081 ,
proceeds from the exercise of stock options and warrants of $212,500 and
proceeds from vehicle loans of $21,968 , offset by the payment to Kyle's seller
of $4,356,162 , repayment of notes payable of $856,225 and grid note payments of
$62,500 .
Unit Offering
OnSeptember 30, 2020 , we sold an aggregate of 2,189,835 units, at a price of$1.90 per unit, for aggregate gross proceeds of$4,160,684 . OnOctober 26, 2020 , we sold an additional 442,443 units for an aggregate purchase price of$840,640 . OnMarch 26, 2021 , we sold an aggregate of 1,818,182 units, at a price of$1.65 per unit, for aggregate gross proceeds of$3,000,000 . As described in further detail below, we contributed to 1847 Wolo the$3,000,000 raised in this offering in exchange for 1,000 shares of 1847 Wolo's series A preferred stock, at a price of$3,000 per share, to fund, in part, the planned acquisition of Wolo by 1847 Wolo.
Each unit consists of one (1) series A senior convertible preferred share and a
three-year warrant to purchase one (1) common share at an exercise price of
In exchange for the consent of the holders of the series A senior convertible preferred shares issued in 2020 to the issuance of the units onMarch 26, 2021 at a lower purchase price than such holders paid for their shares, we issued an aggregate of 398,838 common shares to such holders. OnOctober 12, 2021 , we redeemed 2,632,278 series A senior convertible preferred shares for a total redemption price, including dividends through such date,
of$6,395,645 . Subscription Agreement
OnMarch 29, 2021 , we entered into a subscription agreement with 1847 Wolo, pursuant to which 1847 Wolo issued to us 1,000 shares of its series A preferred stock, for gross proceeds to 1847 Wolo of$3,000,000 . The series A preferred stock has no voting rights and is not convertible into the common stock or any other securities of 1847 Wolo. Dividends at the rate per annum of 16.0% of the stated value of$3,000 per share shall accrue on the series A preferred stock (subject to adjustment) and shall accrue from day to day, whether or not declared, and shall be cumulative. Accruing dividends are payable quarterly in arrears on each of the following dividend payment dates:January 15 ,April 15 ,July 15 andOctober 15 beginning onApril 15, 2021 . Upon any liquidation, dissolution or winding up of 1847 Wolo, before any payment shall be made to the holders of 1847 Wolo's common stock, the series A preferred stock then outstanding shall be entitled to be paid out of the funds and assets available for distribution to 1847 Wolo's stockholders an amount per share equal to the stated value of$3,000 per share, plus any accrued, but unpaid dividends. 86
Second Amended and Restated Intercompany Secured Promissory Note
In connection with the acquisition of Kyle's, we provided 1847Cabinet with the funds necessary to pay the cash portion of the purchase price and cover acquisition expenses. In connection therewith, onSeptember 30, 2020 , 1847Cabinet issued a secured promissory note to our company in the principal amount of$4,525,000 , which was amended and restated onDecember 11, 2020 and onOctober 8, 2021 to increase the principal amount of up to$15,955,325 . The note bears interest at the rate of 16% per annum. Interest on the note is cumulative and any unpaid accrued interest will compound on each anniversary date of the note. Interest is due and payable in arrears to us onDecember 1 ,March 1 ,June 1 andOctober 1 , commencing onDecember 1, 2021 . In the event payment of principal or interest due under the note is not made when due, giving effect to any grace period which may be applicable, or in the event of any other default (as defined in the note), the outstanding principal balance shall from the date of default immediately bear interest at the rate of 5% above the then applicable interest rate for so long as such default continues. We may demand payment in full of the note at any time, even if 1847Cabinet has complied with all of the terms of the note, and the note shall be due in full, without demand, upon the third-party sale of all or substantially all the assets and business of 1847Cabinet or the third-party sale or other disposition of any capital stock of 1847Cabinet . 1847Cabinet may prepay the note at any time without penalty. If and to the extent any amounts are owing under the secured convertible promissory notes described below due to a default thereunder, in addition to payment obligations due under the note, 1847Cabinet is required to immediately make payments to us so that we may make payments in compliance with the terms of the secured convertible promissory notes. The note contains customary covenants and events of default, is guaranteed by Kyle's,High Mountain and Innovative Cabinets and is secured by a security interest in all of the assets of 1847Cabinet , Kyle's,High Mountain and Innovative Cabinets; provided that our rights to receive payments under the note are subordinated to the rights of the purchasers under secured convertible promissory notes described below. The remaining principal balance of the note atDecember 31, 2021 was$6,549,073 and it had accrued interest of$35,416 . Debt
Secured Convertible Promissory Notes
OnOctober 8, 2021 , we and each of our subsidiaries 1847 Asien, 1847 Wolo, 1847Cabinet , Asien's, Wolo, Kyle's,High Mountain and Innovative Cabinets, entered into a note purchase agreement with two institutional investors, including Leonite, pursuant to which we issued to these purchasers secured convertible promissory notes in the aggregate principal amount of$24,860,000 . The notes contain an aggregate original issue discount of$497,200 . As a result, the total purchase price was$24,362,800 . After payment of expenses of$617,825 , we received net proceeds of$23,744,975 , of which$10,687,500 was used to fund the cash portion of the purchase price for the acquisition ofHigh Mountain and Innovative Cabinets. In addition, as consideration for the financing, we granted the financing agent 750,000 warrants with a fair value of$956,526 and 7.5% interest inHigh Mountain and Innovative Cabinets which had a fair value of$1,146,803 . The agent fees were reflected as a discount against the convertible note payable with the warrants being included in additional paid in capital and the equity interest being including within noncontrolling interest on the consolidated balance sheet. The remaining principal balance of the notes atDecember 31, 2021 is$23,787,936 , net of debt discounts of$3,072,064 , and they have accrued interest of$467,689 . The notes bear interest at a rate per annum equal to the greater of (i) 4.75% plus theU.S. Prime Rate that appears inThe Wall Street Journal from time to time or (ii) 8%; provided that, upon an event of default (as defined in the notes), such rate shall increase to 24% or the maximum legal rate. Payments of interest only, computed at such rate on the outstanding principal amount, will be due and payable quarterly in arrears commencing onJanuary 1, 2022 and continuing on the first day of each calendar quarter thereafter through and including the maturity date,October 8, 2026 . We may voluntarily prepay the notes in whole or in part upon payment of a prepayment fee in an amount equal to 10% of the principal and interest paid in connection with such prepayment. In addition, immediately upon receipt by our company or any subsidiary of any proceeds from any issuance of indebtedness (other than certain permitted indebtedness), any proceeds of any sale or disposition by our company or any subsidiary of any of the collateral or any of its respective assets (other than asset sales or dispositions in the ordinary course of business which are permitted by the note purchase agreement), or any proceeds from any casualty insurance policies or eminent domain, condemnation or similar proceedings, we must prepay the notes in an amount equal to all such proceeds, net of reasonable and customary transaction costs, fees and expenses properly attributable to such transaction and payable by our company or a subsidiary in connection therewith (in each case, paid to non-affiliates). The holders of the notes may, in their sole discretion, elect to convert any outstanding and unpaid principal portion of the notes, and any accrued but unpaid interest on such portion, into our common shares at a conversion price equal to$2.50 (subject to standard adjustments, including a full ratchet antidilution adjustment); provided that the notes contain certain beneficial ownership limitations. Pursuant to the terms of the notes, until the date that is eighteen (18) months after the issuance date of the notes, the holders shall have the right, but not the obligation, to participate in any securities offering other than a permitted issuance (as defined in the note purchase agreement) in an amount of up to the original principal amount of the notes. In addition, the holders shall have the right of first refusal to participate in any issuance of indebtedness until the notes have been terminated; provided, however, that this right of first refusal shall not apply to permitted issuances. The note purchase agreement and the notes contain customary representations, warranties, affirmative and negative financial and other covenants and events of default for loans of this type. The notes are guaranteed by each subsidiary and are secured by a first priority security interest in all of the assets of our company and its subsidiaries.
6% Subordinated Convertible Promissory Notes
A portion of the purchase price for the acquisition ofHigh Mountain and Innovative Cabinets onOctober 8, 2021 was paid by the issuance of 6% subordinated convertible promissory notes in the aggregate principal amount of$5,880,345 by 1847Cabinet to the sellers ofHigh Mountain and Innovative Cabinets. The remaining principal balance of the notes atDecember 31, 2021 is$4,838,997 , net of debt discount at$1,041,348 , and they have accrued interest of$108,262 . 87
The notes bear interest at a rate of six percent (6%) per annum and are due and payable onOctober 8, 2024 ; provided that upon an event of default (as defined in the notes), such interest rate shall increase to ten percent (10%) per annum. 1847Cabinet may prepay the notes in whole or in part, without penalty or premium, upon ten (10) business days prior written notice to the holders of
the notes. At any time prior toOctober 8, 2022 , the holders may, in their sole discretion, elect to convert up to twenty percent (20%) of the original principal amount of the notes and all accrued, but unpaid, interest into such number of shares of the common stock of 1847Cabinet determined by dividing the amount to be converted by a conversion price determined by dividing (i) the fair market value of 1847Cabinet (determined in accordance with the notes) by (ii) the number of shares of 1847Cabinet outstanding on a fully diluted basis. In addition, onOctober 8, 2021 , we entered into an exchange agreement with the holders, pursuant to which we granted them the right to exchange all of the principal amount and accrued but unpaid interest under the notes or any portion thereof for a number of our common shares to be determined by dividing the amount to be converted by an exchange price equal to the higher of (i) the 30-day volume weighted average price for our common shares on the primary national securities exchange or over-the-counter market on which our common shares are traded over the thirty (30) trading days immediately prior to the applicable exchange date or (ii)$2.50 (subject to equitable adjustments for stock splits, stock combinations, recapitalizations and similar transactions).
The notes contain customary events of default, including in the event of a default under the secured convertible promissory notes described above. The rights of the holders to receive payments under the notes are subordinated to the rights of the purchasers under secured convertible promissory notes described above.
6% Amortizing Promissory Note OnJuly 29, 2020 , 1847 Asien entered into a securities purchase agreement withJoerg Christian Wilhelmsen andSusan Kay Wilhelmsen , as trustees of theWilhelmsen Family Trust , U/D/T DatedMay 1, 1992 , or the Asien's Seller, pursuant to which the Asien's Seller sold 415,000 of our common shares to 1847 Asien a purchase price of$2.50 per share. As consideration, 1847 Asien issued to the Asien's Seller a two-year 6% amortizing promissory note in the aggregate principal amount of$1,037,500 . OnOctober 8, 2021 , 1847 Asien and the Asien's Seller entered into amendment no. 1 to securities purchase agreement to amend certain terms of the securities purchase agreement and the 6% amortizing promissory note. Pursuant to the amendment, the repayment terms of the 6% amortizing promissory note were revised so that one-half (50%) of the outstanding principal amount ($518,750 ) and all accrued interest thereon shall be amortized on a two-year straight-line basis and payable quarterly in accordance with the amortization schedule set forth on Exhibit A to the amendment, except for the payments that were initially scheduled onJanuary 1, 2022 andApril 1, 2022 , which were paid from the proceeds of the senior convertible promissory notes described above, and the second-half (50%) of the outstanding principal amount ($518,750 ) and all accrued, but unpaid interest thereon shall be paid on the second anniversary of the date of the 6% amortizing promissory note, along with any other unpaid principal or accrued interest thereon. The note is unsecured and contains customary events of default. The remaining principal balance of the note atDecember 31, 2021 was$581,963 and it had accrued interest of$21,758 . Vesting Promissory Note
A portion of the purchase price for the acquisition of Kyle's onSeptember 30, 2020 was paid by the issuance of a vesting promissory note by 1847Cabinet toStephen Mallatt , Jr. andRita Mallatt , or the Kyle's Sellers, in the principal amount of$1,050,000 , which increased to a principal amount of up to$1,260,000 pursuant to the vested percentage calculation described below. Payment of the principal and accrued interest on the note is subject to vesting as described below. The note bears interest on the vested portion of principal amount at the rate of eight percent (8%) per annum. To the extent vested, the vested portion of the principal and all accrued but unpaid interest on such vested portion of the principal shall be paid in one lump sum on the last day of the thirty-sixth (36th) month following the date of the note. The vested principal of the note due at the maturity date shall be calculated each year based on the average annual consolidated EBITDA (as defined in the note) of 1847Cabinet for each of the years endedDecember 31, 2020 , 2021 and 2022. The EBITDA for each year shall be divided by$1.4 million multiplied by 100 to obtain the vested percentage. The vested principal for each year shall be equal to the vested percentage for that year multiplied by$350,000 . To the extent that the vested percentage for the subject year is less than 80%, no portion of the note for that year shall vest. To the extent that the vested percentage for the subject year is equal to or greater than 120%, the vested principal shall be equal to$420,000 for that year and no more. For the year endedDecember 31, 2020 , EBITDA of 1847Cabinet was approximately$1,531,000 , resulting in a vested amount of approximately$415,000 . For the year endedDecember 31, 2021 , EBITDA of 1847Cabinet was approximately$427,504 , resulting in an additional vested amount of approximately$602,204 . As ofDecember 31, 2021 , the outstanding balance of this note was$1,001,183 . 88
1847Cabinet will have the right to redeem all but no less than all of the note at any time prior to the maturity date. If 1847Cabinet elects to redeem the note, the redemption price will be payable in cash and is equal to the then outstanding vested portion of the principal plus any remaining unvested principal amount plus accrued but unpaid interest thereon (calculated over 36 months). For purposes of this redemption calculation, the "unvested principal amount" shall be$350,000 per year. The note contains customary events of default. The right of the Kyle's Sellers to receive payments under the note is subordinated to all indebtedness of 1847Cabinet , whether outstanding as of the closing date or thereafter created, to banks, insurance companies and other financial institutions or funds, and federal or state taxation authorities. Financing Leases
On
OnOctober 12, 2021 , Kyle's entered in an equipment financing lease to purchase equipment for$245,375 , maturing onDecember 1, 2027 . The balance payable was$245,375 as ofDecember 31, 2021 . OnFebruary 14, 2019 ,High Mountain entered in an equipment financing lease to purchase a lift truck for$24,337 , maturing onJanuary 19, 2024 . The balance payable was$11,044 as ofDecember 31, 2021 .
On
Vehicle Loans Asien's has entered into seven retail installment sale contracts pursuant to which Asien's agreed to finance its delivery trucks at rates ranging from 3.74% to 8.72% with an aggregate remaining principal amount of$146,043 as ofDecember 31, 2021 . Kyle's has entered into two retail installment sale contracts pursuant to which Kyle's agreed to finance its delivery trucks at rates ranging from 5.90% to 6.54% with an aggregate remaining principal amount of$64,255 as ofDecember 31, 2021 .
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 ofDecember 31, 2021 . See the above disclosures for more details regarding these loans. Short-Term Long-Term Total Debt Secured Convertible Promissory Notes $ -$ 21,791,657 $ 21,791,657 6% Subordinated Convertible Promissory Notes - 4,838,998 4,838,998 6% Amortizing Promissory Note 581,961 - 581,961 Vesting Promissory Note - 1,011,183 1,011,183 Financing Leases 99,384 457,173 556,557 Vehicle Loans 111,829 250,133 361,962 Total$ 793,174 $ 28,349,144 $ 29,142,318 89 Contractual Obligations
Our principal commitments consist mostly of obligations under the loans described above, the operating leases described under Item 2 "Properties" and other contractual commitments described below.
We have engaged our manager to manage our day-to-day operations and affairs. Our relationship with our manager will be governed principally by the following agreements:
? the management services agreement and offsetting management services agreements
relating to the management services our manager will perform for us and the
businesses we own and the management fee to be paid to our manager in respect
thereof; and
? our operating agreement setting forth our manager's rights with respect to the
allocation shares it owns, including the right to receive profit allocations
from us, and the supplemental put provision relating to our manager's right to
cause us to purchase the allocation shares it owns.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Policies 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
OnJanuary 1, 2018 , we adopted Accounting Standards Update, or 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. Our adoption of this ASU resulted in no change to our results of operations or balance sheet.
Retail and Appliances Segment
We collect 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. We do not incur incremental costs obtaining purchase orders from customers, however, if we did, because all contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. Performance Obligations - The revenue that we recognize arises from orders we receive from customers. Our performance obligations under the customer orders correspond to each sale of merchandise that we make 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, our 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, we have satisfied our performance obligation and we recognize revenue. Transaction Price - We agree with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price. In our contracts with customers, we allocate 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 we collect 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 us. Substantially all 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. We have a diverse customer base with no one
client accounting for more than 5% of total revenue.
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Customer deposits - We record customer deposits when payments are received in advance of the delivery of the merchandise. We expect that substantially all of the customer deposits will be recognized within six months as the performance obligations are satisfied. Construction Segment Our construction segment revenues are derived primarily through contracts with customers whereby we specialize in all aspects of products and services relating to finished carpentry, custom cabinetry, and countertops. We recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We account for a contract when we have approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Since most contracts are bundled to include both material and installation services, we combine these items into one performance obligation as the overall promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and, therefore, is not distinct. We do offer assurance-type warranties on certain of its installed products and services that do not represent a separate performance obligation and, as such, do not impact the timing or extent of revenue recognition. For any contracts that are not complete at the reporting date, we recognize revenue over time, because of the continuous transfer of control to the customer as work is performed at the customer's site and, therefore, the customer controls the asset as it is being installed. We utilize the cost-to-cost measure of progress method as we believe this best depicts the transfer of control of assets to the customer, which occurs as costs are incurred. When this method is used, we estimate the costs to complete individual contracts and record as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs. Unforeseen events and circumstances can alter the estimate of the costs associated with a particular contract. Total estimated costs at completion can be impacted by changes in productivity, scheduling, cost of labor, and materials. Additionally, external factors such as weather, and customer delays may affect the progress of a project's completion, and thus the timing and amount of revenue recognition, cash flow, and profitability from a particular contract may be adversely affected.
An insignificant portion of sales, primarily retail sales, is accounted for on a point-in-time basis when the sale occurs. Sales taxes, when incurred, are recorded as a liability and excluded from revenue on a net basis.
Contracts can be subject to modification to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. All contracts are billed either contractually or as work is performed. Billing on long-term contracts occurs primarily on a monthly basis throughout the contract period whereby we submit progress invoices for customer payment based on actual or estimated costs incurred during the billing period. On some contracts, the customer may withhold payment on an invoice equal to a percentage of the invoice amount, which will be subsequently paid after satisfactory completion of each project. This amount is referred to as retainage and is common practice in the construction industry, as it allows for customers to ensure the quality of the service performed prior to full payment. The retention provisions are not considered a significant financing component.
Cost of revenues earned include all direct material and labor costs and those indirect costs related to contract performance. The cost of significant uninstalled materials, re-work, or scrap is generally excluded from the cost-to-cost measure of progress as it is not proportionate to the entity's progress in satisfying the performance obligation.
Contract Assets and Contract Liabilities
We record a contract asset when we have satisfied our performance obligation
prior to billing and a contract liability when a customer payment is received
prior to the satisfaction of our performance obligation. The difference between
the beginning and ending balances of contract assets and liabilities primarily
results from the timing of our performance and the customer's payment. At times,
we have a right to payment from previous performance that is conditional on
something other than passage of time, such as retainage, which is included in
contract assets or contract liabilities, as determined on a contract-by-contract
basis.
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Automotive Supplies Segment
Our automotive supplies segment designs and sells horn and safety products (electric, air, truck, marine, motorcycle and industrial equipment), and offers vehicle emergency and safety warning lights for cars, trucks, industrial equipment and emergency vehicles. Focused on the automotive and industrial after-market, we sell our products to big-box national retail chains, through specialty and industrial distributors, as well as online/mail order retailers and original equipment manufacturers. We collect 100% of the payment for internet and phone orders, including tax, from the customer at the time the order is shipped. Customers placing orders with a purchase order through the EDI (Electronic Data Interface) are allowed to purchase on credit and make payment after receipt of product on the agreed
upon terms.
Performance Obligations - The revenue that we recognize arises from orders we receive from contracts with customers. Our performance obligations under the customer orders correspond to each sale of merchandise that we make to customers and each order generally contains only one performance obligation based on the merchandise sale to be completed. Control of the delivery transfers to customers when the customer can direct the use of, and obtain substantially all the benefits from, our products, which generally occurs when the customer assumes the risk of loss. The transfer of control generally occurs at the point of shipment of the order. Once this occurs, we have satisfied our performance obligation and we recognize revenue. Transaction Price - We agree with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price. In our contracts with customers, we allocate 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 we collect concurrently with revenue-producing activities are excluded
from revenue.
Cost of sales includes the cost of purchased merchandise plus freight, warehouse salaries, tariffs, and any applicable delivery charges from the vendor to us.
Warranties vary and are typically 90 days to consumers and manufacturing defect warranty to are available to resellers. At times, depending on the product, we can also offer a warranty up to 12 months. Receivables
Receivables consist of trade accounts receivable from customer, credit card transactions in the process of settlement, and vendor rebates receivable. Vendor rebates receivable represent amounts due from manufactures from whom we purchase products. Rebates receivables 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 our assessment of the credit history with manufacturers, we have concluded that there should be no allowance for uncollectible accounts. We historically collect substantially all of our outstanding rebates receivable. Retainage receivables represent the amount retained by customers to ensure the quality of the installation and is received after satisfactory completion of each installation project. Management regularly reviews aging of retainage receivables and changes in payment trends and records an allowance when collection of amounts due are considered at risk. The allowance for doubtful accounts amounted to$359,000 and$0 for the years endedDecember 31, 2021 and 2020, respectively. Uncollectible balances are expensed in the periods they are determined to be uncollectible. Inventory
For Asien's, inventory mainly consists of appliances that are acquired for resale and is valued at the average cost determined on a specific item basis. Inventory also consists of parts that are used in service and repairs and may or may not be charged to the customer depending on warranty and contractual relationship. Kyle's typically orders inventory on a job-by-job basis and those jobs are put into production within hours of being received. The inventory in production is accounted for in the contract assets and liabilities and follows the percentage completion methodology. Inventories consisting of materials and supplies are stated at lower of costs or market.High Mountain and Innovative Cabinets' inventory mainly consists of doors, door frames, baseboards, crown molding, cabinetry, countertops, custom cabinets, closet shelving, and other related products. We value inventory at each balance sheet date to ensure that it is carried at the lower of cost or net realizable value with cost determined based on the average cost basis. Wolo's inventory consists of finished goods acquired for resale and is valued at the weighted-average cost determined on a specific item basis. We periodically evaluate the value of items in inventory and provide write-downs to inventory based on our estimate of market conditions. We estimated an obsolescence allowance of$387,848 and$12,824 at December
31,
2021 and 2020, respectively.
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Property and Equipment
Property and equipment is stated at historical cost less accumulated depreciation. Depreciation of furniture, vehicles and equipment is calculated using the straight-line method over the estimated useful lives as follows:
Useful Life
(Years)
Building and Improvements 4
Machinery and Equipment 3-7
Trucks and Vehicles 3-6
In applying the acquisition method of accounting, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are initially recorded at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment within one year of acquisitions or annually as ofDecember 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:
Expected Life
Acquired intangible Asset Amortization Basis (years)
Customer-Related Straight-line basis 5-15
Marketing-Related Straight-line basis 5
Long-Lived Assets
We review our 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
Our financial instruments consist of cash and cash equivalents, certificates of deposit and amounts due to shareholders. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed. The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three-level hierarchy is as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Observable market-based inputs or inputs that are corroborated by market data.
Level 3 - Unobservable inputs that are not corroborated by market date.
Our held to maturity securities are comprised of certificates of deposit.
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Derivative Instrument Liability
We account 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. Stock-Based Compensation We record 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. Operating Leases ASC 842 requires recognition of leases on the consolidated balance sheets as right-of-use, or ROU, assets and lease liabilities. ROU assets represent our right to use underlying assets for the lease terms and lease liabilities represent our obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we used our estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. A number of the lease agreements contain options to renew and options to terminate the leases early. The lease term used to calculate ROU assets and lease liabilities only includes renewal and termination options that are deemed reasonably certain to be exercised. We recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months. The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related balances of accrued and prepaid rent, and unamortized lease incentives provided by lessors. Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable lease payments are based occur. We have elected not to separate lease and non-lease components for all property leases for the purposes of calculating ROU assets and lease liabilities.
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