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
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. OnFebruary 9, 2023 , our subsidiary 1847 ICU acquired ICU Eyewear. Headquartered inHollister, California and founded in 1956, ICU Eyewear specializes in the sale and distribution of reading eyewear and sunglasses, blue light blocking eyewear, sun readers, and other outdoor specialty sunglasses, as well as select health and personal care items, including face masks. Through our structure, we offer investors an opportunity to participate in the ownership and growth of a portfolio of businesses that traditionally have been owned and managed by private equity firms, private individuals or families, financial institutions or large conglomerates. We believe that our management and acquisition strategies will allow us to achieve our goals 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. Recent Developments Warrant Dividend OnJanuary 3, 2023 , we issued warrants for the purchase of 407,872 common shares as a dividend to our common shareholders of record as ofDecember 23, 2022 pursuant to a warrant agent agreement, datedJanuary 3, 2023 , withVStock Transfer, LLC . Each holder of common shares received a warrant to purchase one (1) common share for every ten (10) common shares owned as of the record date (with the number of shares underlying the warrant received rounded down to the nearest whole number). Each warrant represents the right to purchase common shares at an initial exercise price of$4.20 per share (subject to certain adjustments as set forth in the warrants). At any time we may, at our option, voluntarily reduce the then-current exercise price to such amount and for such period or periods of time which may be through the expiration date as may be deemed appropriate by our board of directors. Cashless exercises of the warrants are not permitted. 90
The warrants will generally be exercisable in whole or in part beginning on the later of (i)January 3, 2024 or (ii) the date that a registration statement on Form S-3 with respect to the issuance and registration of the common shares underlying the warrants has been filed with and declared effective by theSEC , and thereafter untilJanuary 3, 2026 . We may redeem the warrants at any time in whole or in part at$0.001 per warrant (subject to equitable adjustment to reflect share splits, share dividends, share combinations, recapitalizations and like occurrences) upon not less than 30 days' prior written notice to the registered holders of the warrants. Private Placements OnFebruary 3, 2023 , we entered into securities purchase agreements with two accredited investors, pursuant to which we issued to such investors (i) promissory notes in the aggregate principal amount of$604,000 , which include an original issue discount in the amount of$60,400 , (ii) five-year warrants for the purchase of an aggregate of 125,833 common shares at an exercise price of$4.20 per share (subject to adjustment) and (iii) an aggregate of 125,833 common shares for an aggregate purchase price of$543,600 . OnFebruary 9, 2023 , we entered into securities purchase agreements with the same two accredited investors, pursuant to which we issued to such investors (i) promissory notes in the aggregate principal amount of$2,557,575 , which include an original issue discount in the amount of$139,091 , and (ii) five-year warrants for the purchase of an aggregate of 532,827 common shares at an exercise price of$4.20 per share (subject to adjustment). We also issued 289,772 common shares to one investor and issued to the other investor a five-year warrant for the purchase of 243,055 common shares at an exercise price of 0.01 per share (subject to adjustment). The aggregate purchase price was$2,301,818 . OnFebruary 22, 2023 , we entered into another securities purchase agreement with one of the investors pursuant to which we issued to such investor (i) a promissory note in the principal amount of$878,000 , which includes an original issue discount in the amount of$87,800 , (ii) a five-year warrant for the purchase of 182,917 common shares at an exercise price of$4.20 per share (subject to adjustment) and (iii) a five-year warrant for the purchase of 198,343 common shares at an exercise price of$0.01 per share (subject to adjustment) for a total purchase price of$790,200 . In the aggregate, we issued promissory notes in the aggregate principal amount of$4,039,575 , warrants for the purchase of an aggregate of 1,282,975 common shares and 415,605 common shares for gross proceeds of$3,635,618 and net proceeds of approximately$3,553,118 . The notes bear interest at a rate of 12% per annum and mature on the first anniversary of the date of issuance; provided that any principal amount or interest which is not paid when due shall bear interest at a rate of the lesser of 16% per annum or the maximum amount permitted by law from the due date thereof until the same is paid. The notes require monthly payments of principal and interest commencing inMay 2023 . We may voluntarily prepay the outstanding principal amount and accrued interest of each note in whole upon payment of certain prepayment fees. In addition, if at any time we receive cash proceeds from any source or series of related or unrelated sources, including, but not limited to, the issuance of equity or debt, the exercise of outstanding warrants, the issuance of securities pursuant to an equity line of credit (as defined in the notes) or the sale of assets outside of the ordinary course of business, each holder shall have the right in its sole discretion to require us to immediately apply up to 50% of such proceeds to repay all or any portion of the outstanding principal amount and interest then due under the notes. The notes are unsecured and have priority over all other unsecured indebtedness. The notes contain customary affirmative and negative covenants and events of default for a loan of this type. The notes are convertible into common shares at the option of the holders at any time on or following the date that an event of default (as defined in the notes) occurs under the notes at a conversion price equal the lower of (i)$4.20 (subject to adjustments) and (ii) 80% of the lowest volume weighted average price of our common shares on any trading day during the five (5) trading days prior to the conversion date; provided that such conversion price shall not be less than$0.03 (subject to adjustments). 91 The conversion price of the notes and the exercise price of the warrants are subject to standard adjustments, including a price-based adjustment in the event that we issue any common shares or other securities convertible into or exercisable for common shares at an effective price per share that is lower than the conversion or exercise price, subject to certain exceptions. In addition, the notes and the warrants contain an ownership limitation, such that we shall not effect any conversion or exercise, and the holders shall not have the right to convert or exercise, any portion of the notes or the warrants to the extent that after giving effect to the issuance of common shares upon conversion or exercise, such holder, together with its affiliates and any other persons acting as a group together with such holder or any of its affiliates, would beneficially own in excess of 4.99% of the number of common shares outstanding immediately after giving effect to the issuance of common shares upon conversion or exercise. Acquisition of ICU Eyewear OnDecember 21, 2022 , our newly formed wholly owned subsidiaries 1847 ICU and 1847ICU Acquisition Sub Inc. entered into an agreement and plan of merger, or the merger agreement, withICU Eyewear Holdings Inc. andSan Francisco Equity Partners , as the stockholder representative, which was amended on February
9, 2023.
OnFebruary 9, 2023 , closing of the transactions contemplated by the merger agreement was completed. Pursuant to the merger agreement, 1847ICU Acquisition Sub Inc. merged with and intoICU Eyewear Holdings Inc. , withICU Eyewear Holdings Inc. surviving the merger as a wholly owned subsidiary of 1847 ICU. The merger consideration paid by 1847 ICU to the stockholders ofICU Eyewear Holdings Inc. consists of (i)$4,000,000 in cash, minus any unpaid debt of ICU Eyewear and certain transaction expenses, and (ii) 6% subordinated promissory notes in the aggregate principal amount of$500,000 . The notes bear interest at the rate of 6% per annum with all principal and accrued interest being due and payable in one lump sum onFebruary 9, 2024 ; provided that upon an event of default (as defined in the notes), such interest rate shall increase to 10%. 1847 ICU may prepay all or any portion of the notes at any time prior to the maturity date without premium or penalty of any kind. The notes contain customary events of default, including, without limitation, in the event of (i) non-payment, (ii) a default by 1847 ICU of any of its covenants in the notes, the merger agreement or any other agreement entered into in connection with the merger agreement, or a breach of any of the representations or warranties under such documents, (iii) the insolvency or bankruptcy of 1847 ICU or ICU Eyewear or (iv) a change of control (as defined in the notes) of 1847 ICU or ICU Eyewear. The notes are unsecured and subordinated to all senior indebtedness (as defined in the notes).
Loan and Security Agreement
OnFebruary 9, 2023 , 1847 ICU and ICU Eyewear entered into a loan and security agreement, or the loan agreement, withIndustrial Funding Group, Inc. for a revolving loan of up to$5,000,000 , which is evidenced by a secured promissory note in the principal amount of up to$5,000,000 . OnFebruary 9, 2023 , we received an advance of$2,063,182 under the note, of which$1,963,182 was used to repay certain debt of ICU Eyewear in connection with the merger agreement, with the remaining$100,000 used to pay lender fees. OnFebruary 11, 2023 , theIndustrial Funding Group, Inc. sold and assigned the loan agreement, the note and related loan documents toGemCap Solutions, LLC . The note matures onFebruary 9, 2025 with all advances bearing interest at an annual rate equal to the greater of (i) the sum of (a) the "Prime Rate" as reported in the "Money Rates" column of The Wall Street Journal, adjusted as and when such prime rate changes, plus (b) eight percent (8.00%), and (ii) fifteen percent (15.00%); provided that following and during the continuation of an event of default (as defined in the loan agreement), interest on the unpaid principal balance of the advances shall accrue at an annual rate equal to such rate plus three percent (3.00%). Interest accrued on the advances shall be payable monthly commencing onMarch 7, 2023 . We may voluntarily prepay the entire unpaid principal amount of the note without premium or penalty; provided that in the event that we make such prepayment on or beforeFebruary 9, 2024 , then we must pay certain fees set forth in the note. The note is secured by all of the assets of 1847 ICU and ICU Eyewear. The loan agreement contains customary representations, warranties and affirmative and negative financial and other covenants for loans of this type. The loan agreement contains customary events of default, including, among others: (i) for failure to pay principal and interest on the note when due, or to pay any fees due under the loan agreement; (ii) for failure to perform any covenant or agreement contained in the loan agreement or any document delivered in connection therewith; (iii) if any statement, representation or warranty in the loan agreement or any document delivered in connection therewith is at any time found to have been false in any material respect at the time such representation or warranty was made; (iv) if we default under any agreement or contract with a third party which default would result in a liability to us in excess of$25,000 ; (v) for any voluntary or involuntary bankruptcy, insolvency, or dissolution or assignment to creditors; (vi) if any judgments or attachments aggregating in excess of$10,000 at any given time are obtained against us which remain unstayed for a period of ten (10) days or are enforced or if there is an indictment under an criminal statute or proceeding pursuant to which remedies sought may include the forfeiture of any property; (vii) if a material adverse effect or change of control (each as defined in the loan agreement) shall have occurred; (viii) for certain environmental claims; and (ix) for failure to notify the lender of certain events or failure to deliver certain documentation required by the loan agreement. 92
Amendment to Conversion Agreement
On
Amendment to 6% Amortizing Promissory Note
OnApril 6, 2023 , we entered into an amendment to the 6% amortizing promissory note described in in "-Liquidity and Capital Resources-Debt-6% Amortizing Promissory Note" below, effective retroactively toOctober 20, 2022 . Pursuant to the amendment, the parties agreed to extend the maturity date of the note toJuly 30, 2023 and revised the repayment terms so that the outstanding principal amount and all accrued interest thereon shall be payable in three payments onApril 6, 2023 ,June 30, 2023 andJuly 30, 2023 . As additional consideration for entering into the amendment, we also agreed to pay an amendment fee of$84,362 on the maturity date.
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. See also Item 1A "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, 2022 and 2021. 93 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 ), 1847 Wolo entered into an offsetting management services agreement with our manager onMarch 30, 2021 and 1847 ICU entered into an offsetting management services agreement with our manager onFebruary 9, 2023 . Pursuant to the offsetting management services agreements, each of 1847 Asien, 1847 Wolo and 1847 ICU appointed our manager to provide certain services to it for a quarterly management fee equal to the greater of$75,000 or 2% of adjusted net assets (as defined in the management services agreement) and 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 ; provided, however, in each case that if the aggregate amount of management fees paid or to be paid by such entities, together with all other management fees paid or to be paid to our manager under other offsetting management services agreements, exceeds, or is expected to exceed, 9.5% of our gross income in any fiscal year or the parent management fee in any fiscal quarter, then the management fee to be paid by such entities shall be reduced, on a pro rata basis determined by reference to the other management fees to be paid to our manager under other offsetting management services agreements. Each of these entities shall also reimburse our manager for all of their costs and expenses which are specifically approved by their board of directors, including all out-of-pocket costs and expenses, which are actually incurred by our manager or its affiliates on behalf of these entities in connection with performing services under the offsetting management services agreements.
1847 Asien expensed management fees of
1847
1847 Wolo expensed management fees of
On a consolidated basis, our company 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, 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. 94 Discontinued Operations 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$325,000 in cash. As a result of this transaction, 1847 Neese is no longer a subsidiary of our company. All financial information of 1847 Neese previously presented as part of land management services operations are classified as discontinued operations and not presented as part of continuing operations for the year endedDecember 31, 2021 . Results of Operations The following table sets forth key components of our results of operations during the years endedDecember 31, 2022 and 2021, both in dollars and as a percentage of our revenues. Years Ended December 31, 2022 2021 % of % of Amount Revenues Amount Revenues Revenues$ 48,929,124 100.00 %$ 30,660,984 100.0 % Operating Expenses Cost of revenues 33,227,730 67.9 % 20,100,906 65.6 % Personnel 9,531,101 19.5 % 3,803,497 12.4 % Depreciation and amortization 2,037,112 4.2 % 908,982 3.0 % General and administrative 9,872,689 20.2 % 6,951,498 22.7 % Total Operating Expenses 54,668,632 111.7 % 31,764,883 103.6 % Loss From Operations (5,739,508 ) (11.7 )% (1,103,899 ) (3.6 )% Other Income (Expenses) Other income (expense) (11,450 ) (0.0 )% 876 0.0 % Interest expense (4,594,740 ) (9.4 )% (1,296,537 ) (4.2 )% Gain on forgiveness of debt - - 360,302 1.2 % Gain on disposal of property and equipment 65,417 0.1 % 10,885 0.0 % Gain on disposition of subsidiary - - 3,282,804 10.7 % Loss on extinguishment of debt (2,039,815 ) (4.2 )% (137,692 ) (0.4 )% Loss on redemption of preferred shares - - (4,017,553 ) (13.1 )% Loss on write-down of contingent note payable (158,817 ) (0.3 )% (602,204 ) (2.0 )% Total Other Income (Expense) (6,739,405 ) (13.8 )% (2,399,119 ) (7.8 )% Net Loss Before Income Taxes (12,478,913 ) (25.5 )% (3,503,018 ) (11.4 )% Income tax benefit (expense) 1,677,000 3.4 % (218,139 ) (0.7 )% Net Loss From Continuing Operations$ (10,801,913 ) (22.1 )%$ (3,721,157 ) (12.1 )%
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 decreased by$2,069,934 , or 16.2%, to$10,671,129 for the year endedDecember 31, 2022 from$12,741,063 for the year endedDecember 31, 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$19,565,017 , or 160.3%, to$31,768,907 for the year endedDecember 31, 2022 from$12,203,890 for the year endedDecember 31, 2021 . Such increase was primarily due to the acquisitions ofHigh Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, revenues from the construction segment increased by$514,545 , or 9.5%. 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 increased by$773,057 , or 13.5%, to$6,489,088 for the year endedDecember 31, 2022 from$5,716,031 for the year endedDecember 31, 2021 . Such increase was primarily due to the acquisition of Wolo, which was
acquired onMarch 31, 2021 . 95 Cost of revenues. Our total cost of revenues was$33,227,730 for the year endedDecember 31, 2022 , as compared to$20,100,906 for the year endedDecember 31, 2021 .
Cost of revenues for the retail and appliances segment consists of the cost of purchased merchandise plus the cost of delivering merchandise and where applicable installation, net of promotional rebates and other incentives received from vendors. Cost of revenues for the retail and appliances segment decreased by$1,579,436 , or 16.1%, to$8,203,401 for the year endedDecember 31, 2022 from$9,782,837 for the year endedDecember 31, 2021 . Such decrease primarily due to the decrease in revenues from the retail and appliance segment. As a percentage of retail and appliances revenues, cost of revenues for the retail and appliances segment was 76.9% and 76.8% for the years endedDecember 31, 2022 and 2021, respectively. Cost of revenues for the construction segment consists of finished goods, lumber, hardware and materials and plus direct labor and related costs, net of any material discounts from vendors. Cost of revenues for the construction segment increased by$14,270,276 , or 212.7%, to$20,980,103 for the year endedDecember 31, 2022 from$6,709,827 for the year endedDecember 31, 2021 . Such increase was primarily due to the acquisitions ofHigh Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, cost of revenues for the construction segment increased by$544,095 , or 18.4%. 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 revenues for the construction segment was 66.0% and 55.0% for the years endedDecember 31, 2022 and 2021, respectively. Cost of revenues for the automotive supplies segment consists of the costs of purchased finished goods plus freight and tariff costs. Cost of revenues for the automotive supplies segment increased by$435,984 , or 12.1%, to$4,044,226 for the year endedDecember 31, 2022 from$3,608,242 for the year endedDecember 31, 2021 . Such increase was primarily due to the acquisition of Wolo, which was acquired onMarch 31, 2021 . As a percentage of automotive supplies revenues, cost of revenues for the automotive supplies segment was 62.3% and 63.1% for the years endedDecember 31, 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$9,531,101 for the year endedDecember 31, 2021 , as compared to$3,803,497 for the year endedDecember 31, 2021 .
Personnel costs for the retail and appliances segment increased by$38,626 , or 4.9%, to$822,539 for the year endedDecember 31, 2022 from$783,913 for the year endedDecember 31, 2021 . Such increase was primarily 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 7.7% and 6.2% for the years endedDecember 31, 2022 and 2021, respectively. Personnel costs for the construction segment increased by$4,636,931 , or 316.9%, to$6,100,374 for the year endedDecember 31, 2022 from$1,463,443 for the year endedDecember 31, 2021 . Such increase was primarily due to the acquisitions ofHigh Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, personnel costs for the construction segment decreased by$47,132 , or 4.9%. 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 19.2% and 12.0% for the years endedDecember 31, 2022 and 2021, respectively. Personnel costs for the automotive supplies segment increased by$79,466 , or 12.1%, to$1,094,361 for the year endedDecember 31, 2022 from$1,014,895 for the year endedDecember 31, 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 16.9% and 17.8% for the years endedDecember 31, 2022 and 2021, respectively. Personnel costs for our holding company increased by$972,581 , or 179.7%, to$1,513,827 for the year endedDecember 31, 2022 from$541,246 for the year endedDecember 31, 2021 . Such increase was primarily due to increased headcount and management bonuses. Depreciation and amortization. Our total depreciation and amortization expense increased by$1,128,130 , or 124.1%, to$2,037,112 for the year endedDecember 31, 2022 from$908,982 for the year endedDecember 31, 2021 . Such increase was primarily as a result of the intangible assets and property and equipment acquired in the acquisitions ofHigh Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. 96 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$9,872,689 for the year endedDecember 31, 2022 , as compared to$6,951,498 for the year endedDecember 31, 2021 . General and administrative expenses for the retail and appliances segment decreased by$267,180 , or 13.9%, to$1,649,702 for the year endedDecember 31, 2022 from$1,916,882 for the year endedDecember 31, 2021 . Such decrease was primarily due to the decrease in revenues from the retail and appliance segment. As a percentage of retail and appliances revenue, general and administrative expenses for the retail and appliances segment were 15.5% and 15.0% for the years endedDecember 31, 2022 and 2021, respectively. General and administrative expenses for the construction segment increased by$2,780,074 , or 117.0%, to$5,156,425 for the year endedDecember 31, 2022 from$2,376,351 for the year endedDecember 31, 2021 . Such increase was primarily due to the acquisitions ofHigh Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, general and administrative expenses for the construction segment decreased by$26,926 , or 2.5%. Such decrease was primarily attributable to a decrease in management fees as a result of the acquisitions ofHigh Mountain and Innovative Cabinets, offset by increased rent from a new facility lease in the construction segment. As a percentage of construction revenue, general and administrative expenses for the construction segment were 16.2% and 19.5% for the years endedDecember 31, 2022 and 2021, respectively. General and administrative expenses for the automotive supplies segment decreased by$637,326 , or 33.3%, to$1,275,369 for the year endedDecember 31, 2022 from$1,912,695 for the year endedDecember 31, 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 19.7% and 33.5% for the years endedDecember 31, 2022 and 2021, respectively. General and administrative expenses for our holding company increased by$1,045,623 , or 140.2%, to$1,791,193 for the year endedDecember 31, 2022 from$745,570 for the year endedDecember 31, 2021 . Such increase was primarily due to increased professional fees and corporate insurance. Total other income (expense). We had$6,739,405 in total other expense, net, for the year endedDecember 31, 2022 , as compared to other expense, net, of$2,399,119 for the year endedDecember 31, 2021 . Other expense, net, for the year endedDecember 31, 2022 consisted of interest expense of$4,594,740 , a loss on extinguishment of debt of$2,039,815 , a loss on write-down of contingent note payable of$158,817 and other expense of$11,450 , offset by a gain on disposal of property and equipment of$65,417 , while 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 contingent 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 . 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 ofHigh Mountain and Innovative Cabinets. Income tax benefit (expense). We had an income tax benefit of$1,677,000 for the year endedDecember 31, 2022 , as compared to an income tax expense of$218,139 for the year endedDecember 31, 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$10,801,913 for the year endedDecember 31, 2022 , as compared to$3,721,157 for the year endedDecember 31, 2021 , an increase of$7,080,756 , or 190.3%.
Liquidity and Capital Resources
As of
97
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. 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. 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. 98 Summary of Cash Flow The following table provides detailed information about our net cash flow for the period indicated: Cash Flow Years EndedDecember 31, 2022 2021 Net cash used in operating activities from continuing operations $ (4,131,477
)
(160,418
) (15,684,770 ) Net cash provided by financing activities from continuing operations
3,987,717
16,585,520
Net increase (decrease) in cash and cash equivalents from continuing operations
(304,178 ) 3,184 Cash and cash equivalents at beginning of year 1,383,533
1,380,349
Cash and cash equivalent at end of year$ 1,079,355
$ 1,383,533 Net cash used in operating activities from continuing operations was$4,131,477 for the year endedDecember 31, 2022 , as compared to$897,566 for the year endedDecember 31, 2021 . The increase in cash used from operating activities was primarily a result of the increased net loss, decreased receivables, and increased deferred tax liability, offset by increased inventories and increased accounts payable and accrued expenses. Net cash used in investing activities from continuing operations was$160,418 for the year endedDecember 31, 2022 , as compared to$15,684,770 for the year endedDecember 31, 2021 . The decrease in cash used in investing activities was primarily a result of the cash paid in acquisitions during the prior year. Net cash provided by financing activities from continuing operations was$3,987,717 for the year endedDecember 31, 2022 , as compared to$16,585,520 for the year endedDecember 31, 2021 . The decrease in cash provided by investing activities was primarily a result of decreased proceeds from preferred shares and notes payable issuances and increased dividend payments, offset by an equity offering and decreased notes payable payments. Series A Unit Offering 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 . 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$10.00 per common share (subject to adjustment), which such exercise price was adjusted to$4.20 following the adjustments described below, which may be exercised on a cashless basis under certain circumstances. 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. In exchange for the consent of the holders of our outstanding series A senior convertible preferred shares to the issuance of these units at a lower purchase price than such holders paid for their shares, we issued an aggregate of 99,710 common shares to such holders. Series B Unit Offering FromFebruary 24, 2022 toMarch 24, 2022 , we sold an aggregate of 426,999 units, at a price of$3.00 per unit, for aggregate gross proceeds of$1,281,000 . FromApril 20, 2022 toMay 19, 2022 , we sold an aggregate of 54,567 units to our Chief Executive Officer,Ellery W. Roberts , for aggregate gross proceeds of$163,700 . We had total issuance costs relating to these offerings of approximately$15,000 , resulting in net proceeds of$1,429,700 . Each unit consists of one (1) series B senior convertible preferred share and a three-year warrant to purchase one (1) common share at an exercise price of$12.00 per share (subject to adjustment), which such exercise price was adjusted to$4.20 following the down round warrant adjustments described below, which may be exercised on a cashless basis under certain circumstances. Private Placement
OnJuly 8, 2022 , we entered into a securities purchase agreement withMast Hill Fund, L.P. , pursuant to which we issued to it a promissory note in the principal amount of$600,000 and a five-year warrant for the purchase of 100,000 common shares at an exercise price of$6.00 per share (subject to adjustment), which such exercise price was adjusted to$4.20 following the adjustments described below, which may be exercised on a cashless basis if the market price of our common shares is greater than the exercise price, for total net proceeds of$499,600 . Additionally, we issued a three-year warrant toJ.H. Darbie & Co (the broker) for the purchase of 3,600 common shares at an exercise price of$7.50 (subject to adjustment), which such exercise price was adjusted to$4.20 following the adjustments described below, which may be exercised on a cashless basis if the market price of our common shares is greater than the exercise price. Accordingly, a portion of the proceeds were allocated to the warrants based on its relative fair value using the Geometric Brownian Motion Stock Path Monte Carlo Simulation. OnAugust 10, 2022 , the promissory note was repaid
in full. 99 Public Offering OnAugust 2, 2022 , we entered into an underwriting agreement withCraft Capital Management LLC andR.F. Lafferty & Co. Inc. , as representatives of the underwriters named on Schedule 1 thereto, relating to our public offering of common shares. Under the underwriting agreement, we agreed to sell 1,428,572 common shares to the underwriters, at a gross purchase price per share of$4.20 per share, pursuant to our registration statement on Form S-1 (File No. 333-259011) under the Securities Act. OnAugust 5, 2022 , the closing of the public offering was completed and we sold 1,428,572 common shares for total gross proceeds of$6 million . After deducting underwriting commissions and expenses, we received net proceeds of approximately$5.15 million . Dividends
During the year endedDecember 31, 2022 , we accrued dividends attributable to the series A senior convertible preferred shares in the amount of$590,162 and paid prior period accrued dividends of$615,593 . During the year endedDecember 31, 2022 , we accrued dividends attributable to the series B senior convertible preferred shares in the amount of$162,268 and paid prior period accrued dividends of$129,103 . OnNovember 10, 2021 , we declared a common share dividend of$0.05 per share, or an aggregate of$242,160 , to shareholders of record as ofDecember 31, 2021 . The dividend paid was paid onJanuary 14, 2022 .
On
OnJuly 29, 2022 , we declared a common share dividend of$0.13125 per share, or an aggregate of$337,841 , to shareholders of record as ofAugust 4, 2022 . This dividend was paid onAugust 19, 2022 . OnAugust 23, 2022 , we declared a common share dividend of$0.13125 per share, or an aggregate of$505,751 to shareholders of record as ofSeptember 30, 2022 . This dividend was paid onOctober 17, 2022 . Warrant Adjustments
As a result of the issuance of the note toMast Hill Fund, L.P. onJuly 8, 2022 , the exercise price of certain of our outstanding warrants was adjusted to$5.20 pursuant to certain antidilution provisions of such warrants (down round feature). In addition, certain of our outstanding warrants include an "full ratchet" feature, whereby the exercise price was reset to$5.20 and the number of shares underlying the warrants was increased in the same proportion as the exercise price decrease. As a result, we recognized a deemed dividend of approximately$6.4 million , which was calculated using a Black-Scholes pricing model. As a result of the public offering, the exercise price of certain of our outstanding warrants was adjusted to$4.20 pursuant to certain antidilution provisions of such warrants (down round feature). In addition, certain of our outstanding warrants include an "full ratchet" feature, whereby the exercise price was reset to$4.20 and the number of shares underlying the warrants was increased in the same proportion as the exercise price decrease. As a result, we recognized a deemed dividend of approximately$2.6 million , which was calculated using a Black-Scholes pricing model. 100 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 187,500 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 convertible notes atDecember 31, 2022 is$22,432,803 , net of debt discounts of$2,427,197 , and an accrued interest balance of$500,702 . 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$10.00 (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 our assets.
6% Subordinated Convertible Promissory Notes
OnOctober 8, 2021 , 1847Cabinet issued 6% subordinated convertible promissory notes in the aggregate principal amount of$5,880,345 toSteven J. Parkey andJose D. Garcia-Rendon , the sellers ofHigh Mountain and Innovative Cabinets. OnJuly 26, 2022 , we and 1847Cabinet entered into a conversion agreement withSteven J. Parkey andJose D. Garcia-Rendon , pursuant to which they agreed to convert an aggregate of$3,360,000 of the convertible notes into an aggregate of 800,000 common shares at a conversion price of$4.20 per share. As a result, we recognized a loss on extinguishment of debt of$1,280,000 . The remaining principal balance of the notes atDecember 31, 2022 is$2,234,996 , net of debt discounts of$285,350 , and an accrued interest balance of$381,426 . 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)$10.00 (subject to equitable adjustments for stock splits, stock combinations, recapitalizations and similar transactions). 101
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 103,750 of our common shares to 1847 Asien a purchase price of$10.00 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 , the parties 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. OnOctober 20, 2022 , the parties entered into a letter agreement pursuant to which the parties agreed to extend the maturity date of the 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. The note is unsecured and contains customary events of default. The remaining principal and accrued interest balance of the note atDecember 31, 2022 was$465,805 and$94,456 ,
respectively. Related Party Promissory Note
OnSeptember 30, 2020 , a portion of the purchase price for the acquisition of Kyle's was paid by the issuance of a promissory note by 1847Cabinet toStephen Mallatt , Jr. andRita Mallatt , or the Kyle's Sellers, in the principal amount of$1,260,000 . Payment of the principal and accrued interest on the note was subject to vesting. As ofDecember 31, 2021 , the remaining principal and accrued interest balance of the note was$203,291 . OnJuly 26, 2022 , we and 1847Cabinet entered into a conversion agreement with the Kyle's Sellers, pursuant to which they agreed to convert$797,221 of the vesting note into 189,815 common shares at a conversion price of$4.20 per share. As a result, we recognized a loss on extinguishment of debt of$303,706 . Pursuant to the conversion agreement, the note was cancelled, and we agreed to pay$558,734 to the Kyle's Sellers no later thanOctober 1, 2022 . See also "-Recent Developments" above regarding the amendment to the conversion agreement. Financing Leases
On
OnOctober 12, 2021 , Kyle's entered in an equipment financing lease to purchase equipment for$245,376 , which matures inDecember 2027 . The balance payable was$203,169 as ofDecember 31, 2022 . 102
On
OnApril 11, 2022 , Kyle's entered in an equipment financing lease to purchase machinery and equipment for$11,706 , which matures inJune 2027 . The balance payable was$10,237 as ofDecember 31, 2022 . OnJuly 13, 2022 , Kyle's entered in an equipment financing lease to purchase machinery and equipment for$240,260 , which matures inJune 2028 . The balance payable was$223,179 as ofDecember 31, 2022 . Vehicle Loans Asien's has entered into seven retail installment sale contracts pursuant to which it agreed to finance its delivery trucks at rates ranging from 3.74% to 8.72% with an aggregate remaining principal amount of$93,140 as ofDecember 31, 2022 . Kyle's has entered into two retail installment sale contracts pursuant to which it agreed to finance its delivery trucks at rates ranging from 5.90% to 6.54% with an aggregate remaining principal amount of$50,950 as ofDecember 31, 2022 .High Mountain has entered into twelve retail installment sale contracts pursuant to which it agreed to finance delivery trucks and equipment at rates ranging from 3.74% to 6.34% with an aggregate remaining principal amount of$71,723
as ofDecember 31, 2022 .
Innovative Cabinets has entered into two retail installment sale contracts pursuant to which it agreed to finance delivery trucks and equipment at rates of 3.74% with an aggregate remaining principal amount of$14,422 as ofDecember 31, 2022 . Total Debt The following table shows aggregate figures for the total debt, net of discounts, described above that is coming due in the short and long term as ofDecember 31, 2022 . See the above disclosures for more details regarding these loans. Short-Term Long-Term Total Debt Secured Convertible Promissory Notes $ -$ 22,432,803 $ 24,432,803 6% Subordinated Convertible Promissory Notes - 2,234,996 2,234,996 6% Amortizing Promissory Note 465,805 - 465,805 Related Party Promissory Note 362,779 - 362,779 Financing Leases 185,718 784,148 969,866 Vehicle Loans 85,405 144,830 230,235 Total$ 1,099,707 $ 25,596,777 $ 26,696,484 Contractual Obligations
Our principal commitments consist mostly of obligations under the loans described above and other contractual commitments described below.
We have engaged the Manager to manage our day-to-day operations and affairs. Our relationship with the Manager will be governed principally by the following agreements:
? the management services agreement and offsetting management services agreements
relating to the management services the Manager will perform for us and the
businesses we own and the management fee to be paid to the Manager in respect
thereof; and
? our operating agreement setting forth the Manager's rights with respect to the
allocation shares it owns, including the right to receive profit allocations
from us, and the supplemental put provision relating to the Manager's right to
cause us to purchase the allocation shares it owns. 103
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
We record revenue in accordance with FASB ASC Topic 606, "Revenue from Contracts with Customers." 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. ASC 606 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant judgments. Retail and Appliances Segment We collect payment for special-order models including tax and partial 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 10% of total revenue. 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. 104 Construction Segment 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 our 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 output method to measure progress toward completion for the value of the goods and services transferred to the customer as we believe this best depicts the transfer of control of assets to the customer. 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 as work is performed. 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.
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. Automotive Supplies Segment
We collect 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 it recognizes revenue. 105 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 revenues includes the cost of purchased merchandise plus freight, warehouse salaries, tariffs, and any applicable delivery charges from the vendor to us. We had two major customerswho represent a significant portion of revenue in the automotive segment. These two customers represented 39.4% of total revenue in the automotive segment for the year endedDecember 31, 2022 . 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.Goodwill
Goodwill represents the excess of purchase price over the fair value of the net assets acquired. We evaluate goodwill for impairment annually, or more frequently if an event occurs or circumstances that indicate the goodwill is not recoverable. When impairment indicators are identified, we may elect to perform an optional qualitative assessment to determine whether it is more likely than not that the fair value of our reporting units has fallen below their carrying value. This assessment is based on several factors, including industry and market conditions, overall financial performance, including an assessment of cash flows in comparison to actual and projected results of prior periods. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on our qualitative analysis, or if we elect to skip this step, we perform a Step 1 quantitative analysis to determine the fair value of the reporting unit. AtDecember 31, 2022 and 2021, there
were no impairments of goodwill. Intangible assets These assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. We have no intangibles with indefinite lives. AtDecember 31, 2022 and 2021, there were no impairments of intangible assets.
Long-Lived Assets
We review our property and equipment and right-of-use assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The test for impairment is required to be performed by management upon triggering events. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted 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. AtDecember 31, 2022 and 2021, there were no impairments of long-lived assets. Income Taxes
Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are recorded with respect to temporary differences in the accounting treatment of items for financial reporting purposes and for income tax purposes. Where, based on the weight of available evidence, it is more likely than not that some amount of recorded deferred tax assets will not be realized, a valuation allowance is established for the amount that, in management's judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized. A tax position must meet a minimum probability threshold before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. 106
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