1847 HOLDINGS LLC 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 to1847 Holdings LLC , aDelaware limited liability company, and its consolidated subsidiaries. References to the "Manager" refer to 1847Partners LLC , aDelaware limited liability company.
Special Note Regarding Forward Looking Statements
This report contains forward-looking statements that are based on our
management's beliefs and assumptions and on information currently available to
us. All statements other than statements of historical facts are forward-looking
statements. These statements relate to future events or to our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
? our ability to effectively integrate and operate the businesses that we
acquire;
? our ability to successfully identify and acquire additional businesses;
? our organizational structure, which may limit our ability to meet our dividend
and distribution policy;
? our ability to service and comply with the terms of indebtedness;
? our cash flow available for distribution and our ability to make distributions
to our common shareholders;
? our ability to pay the management fee, profit allocation and put price to the
Manager when due;
? labor disputes, strikes or other employee disputes or grievances;
? the regulatory environment in which our businesses operate under;
? trends in the industries in which our businesses operate;
? the competitive environment in which our businesses operate;
? changes in general economic or business conditions or economic or demographic
trends in
? our and the Manager's ability to retain or replace qualified employees of our
businesses and the Manager;
? casualties, condemnation or catastrophic failures with respect to any of our
business' facilities;
? costs and effects of legal and administrative proceedings, settlements,
investigations and claims; and
? extraordinary or force majeure events affecting the business or operations of
our businesses.
In some cases, you can identify forward-looking statements by terms such as "may," "could," "will," "should," "would," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "project" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A "Risk Factors" included in our annual report on Form 10-K for the year endedDecember 31, 2021 . If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. 25 In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
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
OnMay 28, 2020 , our subsidiary 1847Asien Inc. ("1847 Asien") acquired Asien'sAppliance, Inc. , aCalifornia corporation ("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 Inc. ("1847Cabinet ") acquired Kyle'sCustom Wood Shop, Inc. , anIdaho corporation ("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 1847Wolo Inc. ("1847 Wolo") acquiredWolo Mfg. Corp. , aNew York corporation, andWolo Industrial Horn & Signal, Inc. , aNew York corporation (together, "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 Door & Trim Inc. , aNevada corporation ("High Mountain"), andSierra Homes, LLC d/b/a Innovative Cabinets & Design, aNevada limited liability company ("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. 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 grow 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. Recent Developments OnOctober 20, 2022 , 1847 Asien andJoerg Christian Wilhelmsen andSusan Kay Wilhelmsen , as trustees of theWilhelmsen Family Trust , U/D/T DatedMay 1, 1992 (the "Asien's Seller") entered into a letter agreement to amend the terms of that certain 6% amortizing promissory note in the aggregate principal amount of$1,037,500 described below. Pursuant to the letter agreement, the parties agreed to extend the maturity date of this note toFebruary 28, 2023 and revised the repayment terms so that the outstanding principal amount and all accrued interest thereon shall be payable monthly, beginning onNovember 30, 2022 , in accordance with the payment schedule set forth on Exhibit A to the letter agreement. As additional consideration for entering into the letter agreement, 1847 Asien also agreed to pay the Asien's Seller$87,707 as an amendment fee. 26
Impact of Coronavirus Pandemic
InDecember 2019 , a novel coronavirus disease, or COVID-19, was initially reported and onMarch 11, 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. COVID-19 has had a widespread and detrimental effect on the global economy as a result of the continued increase in the number of cases and affected countries and actions by public health and governmental authorities, businesses, other organizations, and individuals to address the outbreak, including travel bans and restrictions, quarantines, shelter in place, stay at home or total lock-down orders and business limitations and shutdowns. Despite recent developments of vaccines, the duration and severity of COVID-19, mutations and possible additional mutations and the degree of their impact on our business is uncertain and difficult to predict. The continued spread of the outbreak could result in one or more of the following conditions that could have a material adverse impact on our business operations and financial condition: delays or difficulty sourcing certain products and raw materials; increased costs for such products and raw materials; and loss of productivity due to employee absences. Notably, 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. Our inability to respond to and manage the potential impact of such events effectively could have a material adverse effect on our business, financial condition, and results of operations. Our efforts to help mitigate the negative impact of the outbreak on our business may not be effective, and we may be affected by a protracted economic downturn. Furthermore, while many governmental authorities around the world have and continue to enact legislation to address the impact of COVID-19, including measures intended to mitigate some of the more severe anticipated economic effects of the virus, we may not benefit from such legislation, or such legislation may prove to be ineffective in addressing COVID-19's impact on our and our customer's businesses and operations. Even after the COVID-19 outbreak has subsided, we may continue to experience impacts to our business as a result of COVID-19's global economic impact and any recession that has occurred or may occur in the future. Further, as the COVID-19 situation is unprecedented and continuously evolving, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or in a manner that we currently do not consider that may present significant risks to our operations. The extent to which the COVID-19 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. 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. Management Fees OnApril 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 nine months endedSeptember 30, 2022 and 2021. 1847 Asien entered into an offsetting management services agreement with the Manager onMay 28, 2020 , 1847Cabinet entered into an offsetting management services agreement with the Manager onAugust 21, 2020 (which was amended and restated onOctober 8, 2021 ) and 1847 Wolo entered into an offsetting management services agreement with the Manager onMarch 30, 2021 . Pursuant to the offsetting management services agreements, 1847 Neese appointed the Manager to provide certain services to it for a quarterly management fee equal to$62,500 , 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), 1847Cabinet appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of$75,000 or 2% of adjusted net assets (as defined in the management services agreement), which was increased to$125,000 or 2% of adjusted net assets onOctober 8, 2021 , and 1847 Wolo appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of$75,000 or 2% of adjusted net assets (as defined in the management services agreement); provided, however, in each case that if the aggregate amount of management fees paid or to be paid by such entities, together with all other management fees paid or to be paid to the Manager under other offsetting management services agreements, exceeds, or is expected to exceed, 9.5% of our gross income in any fiscal year or the Parent Management Fee in any fiscal quarter, then the management fee to be paid by such entities shall be reduced, on a pro rata basis determined by reference to the other management fees to be paid to the Manager under other offsetting management services agreements.
27
Each of these subsidiaries shall also reimburse the Manager for all of their
costs and expenses which are specifically approved by their board of directors,
including all out-of-pocket costs and expenses, which are actually incurred by
the Manager or its affiliates on behalf of these subsidiaries in connection with
performing services under the offsetting management services agreements.
1847 Asien expensed management fees of $75,000 and $225,000 for the three and
nine months ended September 30, 2022 , respectively, and $75,000 and $225,000 for
the three and nine months ended September 30, 2021 , respectively.
1847 Cabinet expensed management fees of $125,000 and $375,000 for the three and
nine months ended September 30, 2022 , respectively, and $75,000 and $225,000 for
the three and nine months ended September 30, 2021 , respectively.
1847 Wolo expensed management fees of $75,000 and $225,000 for the three and
nine months ended September 30, 2022 , respectively, and $75,000 and $150,000 for
the three and nine months ended September 30, 2021 , respectively.
On a consolidated basis, the Company expensed total management fees of
Segments The Financial Accounting Standards Board Accounting Standard Codification Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its shareholders. As ofSeptember 30, 2022 , 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 OnApril 19, 2021 , we entered into a stock purchase agreement withAlan Neese andKatherine Neese , pursuant to which they purchased our 55% ownership interest in 1847Neese Inc. ("1847 Neese"), a company that we originally acquired inMarch 2017 , for a purchase price of$325,000 in cash. As a result of this transaction, 1847 Neese is no longer a subsidiary of the 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 nine months endedSeptember 30, 2021 . 28 Results of Operations
Comparison of the Three Months Ended
The following table sets forth key components of our results of operations
during the three months ended
Three Months Ended September 30,
2022 2021
% of % of
Amount Revenues Amount Revenues
Revenues $ 14,472,361 100.0 % $ 6,735,028 100.0 %
Operating Expenses
Cost of sales 9,596,387 66.3 % 4,573,123 67.9 %
Personnel 3,182,286 22.0 % 876,991 13.0 %Depreciation and amortization 516,414 3.6 % 299,477 4.4 % General and administrative 2,688,877 18.6 % 1,844,979 27.4 % Total Operating Expenses 15,983,964 110.4 % 7,594,570 112.8 % Loss From Operations (1,511,603 ) (10.4 )% (859,542 ) (12.8 )% Other Income (Expenses) Other income 2,756 0.0 % 3,539 0.1 % Interest expense (1,875,757 ) (13.0 )% (128,199 ) (1.9 )% Gain on sale of property and equipment 15,614 0.1 % 10,885 0.2 % Loss on extinguishment of debt (2,039,815 ) (14.1 )% - -
Loss on write-down of contingent note payable (158,817 ) (1.1 )%
- -
Total Other Income (Expense) (4,056,019 ) (28.0 )% (113,775 ) (1.7 )%
Net Loss Before Income Taxes (5,567,622 ) (38.5 )% (973,317 ) (14.5 )%
Income tax benefit 1,095,000 7.6 % - -
Net Loss From Continuing Operations $ (4,472,622 ) (30.9)%$ (973,317 ) (14.5 )%
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 decreased by$211,250 , or 6.7%, to$2,934,705 for the three months endedSeptember 30, 2022 from$3,145,955 for the three months endedSeptember 30, 2021 . Such decrease was primarily due to ongoing supply chain delays and cost increases with appliance manufacturers, increased time it takes to receive products, and decreased customer demand. The construction segment generates revenue through the sale of finished carpentry products and services, including doors, door frames, base boards, crown molding, cabinetry, bathroom sinks and cabinets, bookcases, built-in closets, and fireplace mantles, among others, as well as kitchen countertops. Revenues from the construction segment increased by$8,709,518 , or 650.7%, to$10,047,946 for the three months endedSeptember 30, 2022 from$1,338,428 for the three months endedSeptember 30, 2021 . Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, revenues from the construction segment increased by$409,929 , or 30.6%. Such increase was primarily due to increases in the average customer contract in the construction segment. The automotive supplies segment generates revenue through the design and sale of horn and safety products (electric, air, truck, marine, motorcycle and industrial equipment), including vehicle emergency and safety warning lights for cars, trucks, industrial equipment and emergency vehicles. Revenues from the automotive supplies segment decreased by$760,935 , or 33.8%, to$1,489,710 for the three months endedSeptember 30, 2022 from$2,250,645 for the three months endedSeptember 30, 2021 . Such decrease was primarily due to ongoing supply chain delays and cost increases, increased time it takes to receive products, and decreased customer demand.
Cost of sales. Our total cost of sales was
29
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 decreased by$116,691 , or 5.1%, to$2,183,972 for the three months endedSeptember 30, 2022 from$2,300,663 for the three months endedSeptember 30, 2021 . Such decrease was primarily due to the corresponding decrease in revenues from the retail and appliance segment. As a percentage of retail and appliances revenues, cost of sales for the retail and appliances segment was 74.4% and 73.1% for the three months endedSeptember 30, 2022 and 2021, respectively. 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 increased by$5,739,330 , or 712.5%, to$6,544,843 for the three months endedSeptember 30, 2022 from$805,513 for the three months endedSeptember 30, 2021 . Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, cost of sales for the construction segment increased by$101,508 , or 12.6%. Such increase was primarily due to corresponding the increase in revenues from the construction segment, offset by increased product and delivery costs. As a percentage of construction revenues, cost of sales for the construction segment was 65.1% and 60.2% for the three months endedSeptember 30, 2022 and 2021, respectively. 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 decreased by$599,375 , or 40.9%, to$867,572 for the three months endedSeptember 30, 2022 from$1,466,947 for the three months endedSeptember 30, 2021 . Such decrease was primarily due to the corresponding decrease in revenues from the automotive segment. As a percentage of automotive supplies revenues, cost of sales for the automotive supplies segment was 58.2% and 65.2% for the three months endedSeptember 30, 2022 and 2021, respectively. Personnel costs. Personnel costs include employee salaries and bonuses plus related payroll taxes. It also includes health insurance premiums, 401(k) contributions, and training costs. Our total personnel costs were$3,182,286 for the three months endedSeptember 30, 2022 , as compared to$876,991 for the three months endedSeptember 30, 2021 . Personnel costs for the retail and appliances segment increased by$5,851 , or 3.0%, to$202,443 for the three months endedSeptember 30, 2022 from$196,592 for the three months endedSeptember 30, 2021 . Such increase was primarily due to increased employee headcount as a result of previous staffing shortages in the retail and appliances segment. As a percentage of retail and appliances revenue, personnel costs for the retail and appliances segment were 6.9% and 6.2% for the three months endedSeptember 30, 2022 and 2021, respectively. Personnel costs for the construction segment increased by$2,132,829 , or 780.2%, to$2,406,195 for the three months endedSeptember 30, 2022 from$273,366 for the three months endedSeptember 30, 2021 . Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, personnel costs for the construction segment increased by$44,380 , or 16.2%. Such increase was primarily due to increased operations in the construction segment. As a percentage of construction revenue, personnel costs for the construction segment were 23.9% and 20.4% for the three months endedSeptember 30, 2022 and 2021, respectively. 30
Personnel costs for the automotive supplies segment decreased by$129,636 , or 31.8%, to$277,398 for the three months endedSeptember 30, 2022 from$407,034 for the three months endedSeptember 30, 2021 . Such decrease was primarily due to decreased employee headcount and officer compensation. As a percentage of automotive supplies revenue, personnel costs for the automotive supplies segment were 18.6% and 18.1% for the three months endedSeptember 30, 2022 and 2021, respectively.
Personnel costs for our holding company were$296,250 for the three months endedSeptember 30, 2022 , as compared to$0 for the three months endedSeptember 30, 2021 . Such increase was primarily due to accrued management bonuses during
the period. Depreciation and amortization. Our total depreciation and amortization expense increased by$216,937 , or 72.4%, to$516,414 for the three months endedSeptember 30, 2022 from$299,477 for the three months endedSeptember 30, 2021 . Such increase was primarily as a result of the intangible assets and property and equipment acquired in the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. 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$2,688,877 for the three months endedSeptember 30, 2022 , as compared to$1,844,979 for the three months endedSeptember 30, 2021 . General and administrative expenses for the retail and appliances segment increased by$55,305 , or 12.6%, to$494,719 for the three months endedSeptember 30, 2022 from$439,414 for the three months endedSeptember 30, 2021 . Such increase was primarily due to increased marketing and professional fees. As a percentage of retail and appliances revenue, general and administrative expenses for the retail and appliances segment were 16.9% and 14.0% for the three months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses for the construction segment increased by$989,266 , or 385.8%, to$1,245,668 for the three months endedSeptember 30, 2022 from$256,402 for the three months endedSeptember 30, 2021 . Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, general and administrative expenses for the construction segment increased by$55,517 , or 21.7%. Such increase was primarily due to increased rent from new facility leases, as well as increased professional fees in the construction segment. As a percentage of construction revenue, general and administrative expenses for the construction segment were 12.4% and 19.2% for the three months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses for the automotive supplies segment decreased by$288,614 , or 42.9%, to$384,870 for the three months endedSeptember 30, 2022 from$673,484 for the three months endedSeptember 30, 2021 . Such decrease was primarily due to decreased operations from the automotive supplies segment. As a percentage of automotive supplies revenue, general and administrative expenses for the automotive supplies segment were 25.8% and 29.9% for the three months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses for our holding company increased by$87,941 , or 18.5%, to$563,620 for the three months endedSeptember 30, 2022 from$475,679 for the three months endedSeptember 30, 2021 . Such increase was primarily due to increased professional fees during the period. Total other income (expense). We had$4,056,019 in total other expense, net, for the three months endedSeptember 30, 2022 , as compared to other expense net, of$113,775 for the three months endedSeptember 30, 2021 . Other expense, net, for the three months endedSeptember 30, 2022 consisted of$1,875,757 of interest expense,$2,039,815 of loss on extinguishment of debt,$158,817 of loss on write-down of contingent note payable, offset by other income of$2,756 and$15,614 gain on disposal of property and equipment, while other expense, net, for the three months endedSeptember 30, 2021 consisted of interest expense of$128,199 , offset by other income of$3,539 and gain on disposal of property and equipment of$10,885 . The loss on extinguishment of debt was a result of partially settling debt through the issuance of common shares and the significant increase in interest expense was primarily a result of note issuances during the period and convertible debt issuances during the fourth quarter of 2021 in order to help finance the acquisitions of High Mountain
and
Innovative Cabinets.
31
Income tax benefit. We had an income tax benefit of $1,095,000 for the three
months ended September 30, 2022 , as compared to $0 for the three months ended
September 30, 2021 .
Net loss from continuing operations. As a result of the cumulative effect of the
factors described above, our net loss from continuing operations was $4,472,622
for the three months ended September 30, 2022 , as compared to $973,317 for the
three months ended September 30, 2021 .
Comparison of the Nine Months Ended
The following table sets forth key components of our results of operations during the nine months endedSeptember 30, 2022 and 2021, both in dollars and as a percentage of our revenues. Nine Months Ended September 30, 2022 2021 % of % of Amount Revenues Amount Revenues Revenues$ 39,437482 100.0 %$ 18,163,257 100.0 % Operating Expenses Cost of sales 25,109,863 63.7 % 12,348,594 68.0 % Personnel 6,446,145 16.3 % 2,198,231 12.1 %
Depreciation and amortization 1,526,759 3.9 % 547,655 3.0 % General and administrative 7,451,079 18.9
% 4,519,504 24.9 % Total Operating Expenses 40,533,846 102.8 % 19,613,984 108.0 % Loss From Operations (1,096,364 ) (2.8 )% (1,450,727 ) (8.0 )% Other Income (Expenses) Other income (expense) 3,431 0.0 % - - Interest expense (3,714,623 ) (9.4 )% (309,832 ) (1.7 )%
Gain on forgiveness of debt - - 360,302 2.0 % Gain on sale of property and equipment 47,690 0.1 % 10,885 0.1 % Gain on disposition of subsidiary - - 3,282,804 18.1 % Loss on extinguishment of debt (2,039,815 ) (5.2 )% - - Loss on adjustment shares - -
(757,792 ) (4.2 )% Loss on write-down of contingent note payable (158,817 ) (0.4 )%
- -
Total Other Income (Expense) (5,862,134 ) (14.9 )% 2,586,367 14.2 %
Net Income (Loss) Before Income Taxes (6,958,498 ) (17.6 )% 1,135,640 6.3 %
Income tax benefit 1,411,000 3.6 % 21,900 0.1 %
Net Income (Loss) From Continuing Operations
6.4 %
Revenues. Our total revenues were
Revenues from the retail and appliances segment decreased by
Revenues from the construction segment increased by$21,830,922 , or 523.6%, to$26,000,227 for the nine months endedSeptember 30, 2022 from$4,169,305 for the nine months endedSeptember 30, 2021 . Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, revenues from the construction segment increased by$781,392 , or 18.7%. Such increase was primarily due to increases in the average customer contract in the construction segment. Revenues from the automotive supplies segment increased by$883,742 , or 20.9%, to$5,114,755 for the nine months endedSeptember 30, 2022 from$4,231,013 for the nine months endedSeptember 30, 2021 . Such increase was primarily due to the acquisition of Wolo, which was acquired onMarch 31, 2021 . 32
Cost of sales. Our total cost of sales was
Cost of sales for the retail and appliances segment decreased by$1,163,920 , or 15.7%, to$6,245,993 for the nine months endedSeptember 30, 2022 from$7,409,913 for the nine months endedSeptember 30, 2021 . Such decrease was primarily due to the corresponding decrease in revenues from the retail and appliance segment, offset by increased product and delivery costs. As a percentage of retail and appliances revenues, cost of sales for the retail and appliances segment was 75.0% and 75.9% for the nine months ended September
30, 2022 and 2021, respectively. Cost of sales for the construction segment increased by$13,555,821 , or 594.6%, to$15,835,830 for the nine months endedSeptember 30, 2022 from$2,280,009 for the nine months endedSeptember 30, 2021 . Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, cost of sales for the construction segment increased by$511,796 , or 22.4%. Such increase was primarily due to the corresponding increase in revenues from the construction segment, as well as increased product and delivery costs. As a percentage of construction revenues, cost of sales for the construction segment was 60.9% and 54.7% for the nine months endedSeptember 30, 2022 and 2021, respectively.
Cost of sales for the automotive supplies segment increased by
Personnel costs. Our total personnel costs were$6,446,145 for the nine months endedSeptember 30, 2022 , as compared to$2,198,231 for the nine months endedSeptember 30, 2021 . Personnel costs for the retail and appliances segment decreased by$101,769 , or 14.8%, to$587,073 for the nine months endedSeptember 30, 2022 from$688,842 for the nine months endedSeptember 30, 2021 . Such decrease was primarily due to decreased employee headcount as a result of staffing shortages in the retail and appliances segment. As a percentage of retail and appliances revenue, personnel costs for the retail and appliances segment were 7.1% and 7.1% for the nine months endedSeptember 30, 2022 and 2021, respectively. Personnel costs for the construction segment increased by$3,975,708 , or 537.5%, to$4,715,419 for the nine months endedSeptember 30, 2022 from$739,711 for the nine months endedSeptember 30, 2021 . Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, personnel costs for the construction segment decreased by$4,232 , or 0.6%. Such decrease was primarily due to decreased office personnel headcount in the construction segment. As a percentage of construction revenue, personnel costs for the construction segment were 18.1% and 17.7% for the nine months endedSeptember 30, 2022 and 2021, respectively. Personnel costs for the automotive supplies segment increased by$77,725 , or 10.1%, to$847,403 for the nine months endedSeptember 30, 2022 from$769,678 for the nine months endedSeptember 30, 2021 . Such increase was primarily due to the acquisition of Wolo, which was acquired onMarch 31, 2021 . As a percentage of automotive supplies revenues, personnel costs for the automotive supplies segment was 16.6% and 18.2% for the nine months endedSeptember 30, 2022 and 2021, respectively. Personnel costs for our holding company were$296,250 for the nine months endedSeptember 30, 2022 , as compared to$0 for the nine months endedSeptember 30, 2021 . Such increase was primarily due to accrued management bonuses during
the
period.
33
Depreciation and amortization. Our total depreciation and amortization expense
increased by $979,104 , or 178.8%, to $1,526,759 for the nine months ended
September 30, 2022 from $547,655 for the nine months ended September 30, 2021 .
Such increase was primarily as a result of the intangible assets and property
and equipment acquired in the acquisitions of High Mountain and Innovative
Cabinets, which were acquired in the fourth quarter of 2021.
General and administrative expenses. Our total general and administrative
expenses were
General and administrative expenses for the retail and appliances segment increased by$209,810 , or 16.5%, to$1,480,465 for the nine months endedSeptember 30, 2022 from$1,270,655 for the nine months endedSeptember 30, 2021 . Such increase was primarily due to increased marketing and professional fees. As a percentage of retail and appliances revenue, general and administrative expenses for the retail and appliances segment were 17.8% and 13.0% for the nine months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses for the construction segment increased by$3,300,962 , or 467.8%, to$4,006,636 for the nine months endedSeptember 30, 2022 from$705,674 for the nine months endedSeptember 30, 2021 . Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, general and administrative expenses for the construction segment increased by$205,527 , or 29.1%. Such increase was primarily due to increased rent from a new facility lease, as well as increased professional fees in the construction segment. As a percentage of construction revenue, general and administrative expenses for the construction segment were 15.4% and 16.9% for the nine months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses for the automotive supplies segment decreased by$381,452 , or 24.3%, to$1,188,618 for the nine months endedSeptember 30, 2022 from$1,570,070 for the nine months endedSeptember 30, 2021 . Such decrease was primarily due to the lack of acquisition related costs during the current period. As a percentage of automotive supplies revenue, general and administrative expenses for the automotive supplies segment were 23.2% and 37.1% for the nine months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses for our holding company decreased by$197,745 , or 20.3%, to$775,360 for the nine months endedSeptember 30, 2022 from$973,105 for the nine months endedSeptember 30, 2021 . Such decrease was primarily due to more corporate expenses relating to the business segments being allocated directly to the subsidiaries and less acquisition-related costs. Total other income (expense). We had$5,862,134 in total other expense, net, for the nine months endedSeptember 30, 2022 , as compared to other income, net, of$2,586,367 for the nine months endedSeptember 30, 2021 . Other expense, net, for the nine months endedSeptember 30, 2022 consisted of$3,714,623 of interest expense,$2,039,815 of loss on extinguishment of debt,$158,817 of loss on write-down of contingent note payable, offset by other income of$3,431 and$47,690 gain on disposal of property and equipment, while other income, net, for the nine months endedSeptember 30, 2021 consisted of a gain on the disposition of 1847 Neese of$3,282,804 , a gain on forgiveness of debt of$360,302 and gain on disposal of property and equipment of$10,885 , offset by a loss on the issuance of adjustment shares of$757,792 and interest expense of$309,832 . The loss on extinguishment of debt was a result of partially settling debt through the issuance of common shares and the significant increase in interest expense was primarily a result of note issuances during the period and convertible debt issuances during the fourth quarter of 2021 in order to help finance the acquisitions of High Mountain and Innovative Cabinets.
Income tax benefit. We had an income tax benefit of
Net income (loss) from continuing operations. As a result of the cumulative effect of the factors described above, our net loss from continuing operations was$5,547,498 for the nine months endedSeptember 30, 2022 , as compared to a net income of$1,157,540 for the nine months endedSeptember 30, 2021 . 34
Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had cash and cash equivalents of$1,584,499 . To date, we have financed our operations primarily through revenue generated from operations, cash proceeds from financing activities, borrowings, and equity contributions by our shareholders. 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 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 endedDecember 31, 2021 for more information concerning the management fee, the profit allocation and put price. 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. 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 toUnited States generally accepted accounting principles 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 endedDecember 31, 2021 for more information on the calculation of the profit allocation. 35 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 endedDecember 31, 2021 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.
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