424B3 1 ea128538-424b3_1847goedeker.htm PROSPECTUS

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-248510

 

PROSPECTUS

 

 

3,325,000 Shares of Common Stock

 

 

 

This prospectus relates to the distribution of 3,325,000 shares of the common stock, par value $0.0001 per share, of 1847 Goedeker Inc., a Delaware corporation (“we,” “us, “our” or “our company”), by our parent company, 1847 Holdings LLC, a Delaware limited liability company (“1847 Holdings”). 1847 Holdings will distribute approximately 2,660,000 of these shares to the holders of its common shares and approximately 665,000 of these shares to 1847 Partners LLC, the manager of 1847 Holdings (the “Manager”), who is the sole owner of its outstanding allocation shares.

 

We will not receive any proceeds from the distribution of our common stock to the shareholders of 1847 Holdings.

 

Our common stock is traded on NYSE American under the symbol “GOED.” On October 15, 2020, the last reported sale price for our common stock was $5.00 per share.

 

Our company is currently a majority-owned subsidiary of 1847 Holdings. 1847 Holdings is reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Its common shares are quoted on the OTCQB Market operated by OTC Markets Group Inc. under the symbol “EFSH.”

 

This prospectus is being furnished in connection with the distribution of our common stock by 1847 Holdings to its shareholders, which will occur as soon as practicable after the registration statement of which this prospectus forms a part has been declared effective by the Securities and Exchange Commission (the “SEC”).  Following the distribution, each of our company and 1847 Holdings will be an independent, publicly traded reporting company under the Exchange Act.  

 

1847 Holdings is effectuating the distribution pursuant to the terms of the resolutions adopted by its board of directors on September 10, 2020. As of the date of this prospectus, there were 6,111,200 shares of our common stock issued and outstanding, 3,325,000 of which were held by 1847 Holdings. 1847 Holdings intends to distribute all of these shares, or approximately 54.41% of our issued and outstanding common stock, to the holders of its common shares and allocation shares. The common shareholders will receive approximately 2,660,000 of these shares and the Manager, as the holder of all of the allocation shares, will receive approximately 665,000 of these shares. The board of directors of 1847 Holdings set the record date for this distribution as October 15, 2020.  As of the record date, 1847 Holdings had 3,744,013 common shares and 1,000 allocation shares issued and outstanding. Holders of 1847 Holdings’ common shares at the close of business on the record date are entitled to receive the shares distributed on a pro rata basis and the Manager will receive all of the shares being distributed to holders of the allocation shares. Consequently, the common shareholders will receive shares of our common stock at a ratio of 0.710467618568632 shares of our common stock for each common share of 1847 Holdings that they held on the record date. The shares of our common stock being distributed to the common and allocation shareholders of 1847 Holdings will be registered in book entry form and no stock certificates representing those shares will be delivered to any shareholders of 1847 Holdings. 1847 Holdings is subject to a lock-up agreement, dated July 10, 2020, with the underwriter for our initial public offering. Accordingly, all of our stock that is held by 1847 Holdings cannot be transferred, except in very limited circumstances, until 180 days after the date of the underwriting agreement relating to such initial public offering, or January 26, 2021. Notwithstanding this lock-up agreement, 1847 Holdings is permitted under the underwriting agreement to make the distribution of our stock to its shareholders provided that the shareholders of 1847 Holdings are subject to the same restrictions provided for in such lock-up agreement. The shares of our common stock being distributed to the shareholders of 1847 Holdings, therefore, will be restricted under the lock-up agreement to the same extent as such shares were restricted when owned by 1847 Holdings and our transfer agent will notate such restriction in its records and place stop transfer orders against the shares being distributed to ensure compliance with the lock-up agreement.  

 

We are furnishing this prospectus to provide information to the shareholders of 1847 Holdings who will receive shares of our common stock in the distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any of our securities or those of 1847 Holdings.  The Manager has informed us that it will further distribute the shares of our common stock that it receives from the distribution to its sole member, who will also immediately distribute the shares of our common stock that it receives from the distribution to three of its members who are entitled to receive such shares.

 

No approval by the shareholders of either our company or 1847 Holdings is required for distribution, and none is being sought.  Neither our company nor 1847 Holdings is asking you for a proxy.

 

We are an “emerging growth company,” as that term is used in the Jumpstart Our Business Startups Act of 2012, and as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company” and “Risk Factors—Risks Related to Ownership of Our Common Stock.”

 

Investing in our common stock is highly speculative and involves a significant degree of risk. See “Risk Factors” beginning on page 12 of this prospectus for a discussion of information that should be considered before making a decision to purchase our common stock.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is October 16, 2020

 

 

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 12
Cautionary Statement Regarding Forward-Looking Statements 30
Industry and Market Data 31
Use of Proceeds 32
Market Price of Common Equity and Related Shareholder Matters 33
Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
Business 53
Management 66
Executive Compensation 71
Current Relationships and Related Party Transactions 75
Principal and Selling Stockholders 76
Description of Securities 77
Shares Eligible for Future Sale 79
The Distribution 80
Plan of Distribution 82
Material U.S. Federal Tax Consequences of the Distribution 83
Legal Matters 84
Experts 84
Interests of Named Experts and Counsel 84
Where You Can Find More Information 84
Financial Statements F-1

 

Please read this prospectus carefully. It describes our business, financial condition, results of operations and prospects, among other things. We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information and we take no responsibility for any other information others may give you. The information contained in this prospectus is accurate only as of the date on the front of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding whether to invest in our common stock. You should carefully read the entire prospectus, including the risks associated with an investment in our company discussed in the “Risk Factors” section of this prospectus, before making an investment decision. Some of the statements in this prospectus are forward-looking statements. See the section titled “Cautionary Statement Regarding Forward-Looking Statements.”

 

Our Company

 

Overview

 

Our company is a one-stop e-commerce destination for home furnishings, including appliances, furniture, home goods and related products. Since our founding in 1951, we have evolved from a local brick and mortar operation serving the St. Louis metro area to a large nationwide omnichannel retailer that offers one-stop shopping for the leading brands. While we still maintain our St. Louis showroom, over 90% of our sales are placed through our website at www.goedekers.com. We offer over 185,000 SKUs organized by category and product features, providing visitors to the site an easy to navigate shopping experience.

 

Through our e-commerce business model, we offer an online marketplace for consumers looking for variety, style, service and value when shopping for nearly any home product needed. We are focused on bringing our customers an experience that is at the forefront of shopping online for the home. We have built a large online selection of appliances, furniture, home goods and related products. We are able to offer this vast selection of products because our model requires minimal inventory. We specialize in the home category and this has enabled us to build a shopping experience and logistics infrastructure that is tailored to the unique characteristics of our market.

 

Our shopping experience allows for online chat and the ability to speak with an expert by phone seven days a week. We believe that we are a national leader in customer value and price. We enjoy strong relationships with most national and global appliance companies and we believe that we have a technologically advanced online sales and infrastructure platform.

 

The delivery experience and overall customer service that we offer our shoppers are central to our business. We purchase inventory only after a sale has been made through our website. This allows us to tightly manage our inventory and warehouse space while still providing customers quick delivery times and control over the entire process. About 75% of appliances flow through our warehouse while almost all furniture is drop shipped to the customer. All inventory is managed with a barcode system and is automatically tracked through our Microsoft Dynamics GP ERP system.

 

Our Corporate History and Structure

 

Our company was incorporated in the State of Delaware on January 10, 2019 for the sole purpose of acquiring substantially all of the assets of Goedeker Television Co. (“Goedeker Television”). On April 5, 2019, we acquired substantially all of the assets of Goedeker Television. As a result of this transaction, we acquired the former business of Goedeker Television, which was established in 1951, and continue to operate this business.  All discussions in this prospectus regarding our business prior to the acquisition reflect the business of Goedeker Television, our predecessor company. Prior to our acquisition of substantially all of the assets of Goedeker Television, we had no operations other than operations relating to our incorporation and organization.

 

As of the date of this prospectus, we have no subsidiaries.

 

On April 5, 2019, we entered into an offsetting management services agreement with the Manager, which also serves as the manager for 1847 Holdings. This agreement was amended on April 21, 2020 with the amendment becoming effective on August 4, 2020. Pursuant to the offsetting management services agreement, as amended, we appointed the Manager to provide certain services to us, including administrative supervision and oversight of our day-to-day business operations for a quarterly management fee equal to $62,500. Under certain circumstances specified in the offsetting management services agreement, our quarterly fee may be reduced if similar fees payable to the Manager by other subsidiaries of 1847 Holdings exceed a threshold amount.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations—Offsetting Management Services Agreement” and “Risks Related to Ownership of Our Common Stock—Certain of our directors could be in a position of conflict of interest.”

 

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

 

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

 

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

 

Our Opportunity

 

According to eMarketer, U.S. retail sales reached over $5 trillion in 2019 and are expected to grow by nearly $700 billion by 2023. U.S. e-commerce retail sales reached over $590 billion in 2019 and are expected to increase to over $960 billion by 2023.

 

According to Statista, the U.S. household appliance market reached $18.3 billion in revenue in 2019. Revenue is expected to increase at an annual growth rate of 13.7% from 2020 to 2024. The U.S. appliance market in general is highly fragmented with big box retailers, large online retailers, and thousands of local and regional retailers competing for share in what has historically been a high touch sale process with manufacturers’ strict showroom requirements. However, the landscape has been shifting to online sales, providing a significant market share capture and positioning opportunity for companies. We are continuing to capitalize on this market shift.

 

According to Statista, the U.S. furniture and homeware market reached $44 billion in revenue in 2019. Revenue is expected to increase at an annual growth rate of 4.3% from 2020 to 2024. Although consolidation in the U.S. furniture and homeware market continues to progress, the industry is still relatively fragmented compared to other retail subsectors of similar market value. Much like the U.S. household appliance market, a shifting landscape to online sales in the segment is providing a significant market share capture and positioning opportunity for companies, led by giants such as Wayfair and Amazon. We are continuing to capitalize on this market shift.

 

To our knowledge, the projections above for future periods do not take into account the effects of the worldwide coronavirus pandemic. Accordingly, those projections may be overstated and should not be given undue weight.

 

At this time, we cannot predict the exact effects of the pandemic. However, we do anticipate that that the shift to online sales will be accelerated, as at least some of the retail stores that have closed during the pandemic may not re-open.

 

Our Products

 

The appliance category is our largest revenue source. We have a long history of selling these products and serving the distinct needs of consumers looking to replace or add to their home appliances. We offer roughly 22,000 appliance SKUs from all mainline original equipment manufacturers, including Bosch, Whirlpool, GE, Maytag, LG, Samsung, Sharp, and Kitchen Aid, among others. We sell all major home appliances, including refrigerators, ranges, ovens, dishwashers, microwaves, freezers, washers and dryers. Sales of appliances accounted for approximately 80% and 76% of our revenues for the years ended December 31, 2019 and 2018, respectively, and for approximately 78% for the six months ended June 30, 2020 and 2019.

 

We began selling furniture online in 2015 and currently offer approximately 157,000 SKUs from over 300 furniture vendors. Furniture is the second largest product category. The organization of product by type and characteristics makes for a complete shopping experience in a complicated product category. Sales of furniture accounted for approximately 15% and 19% of our revenues for the years ended December 31, 2019 and 2018, respectively, and for approximately 16% and 17% for the six months ended June 30, 2020 and 2019, respectively.

 

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We also offer a broad assortment of products in the décor, bed & bath, lighting, outdoor living and electronics categories. While these are not individually high-volume categories, they complement the appliance and furniture categories to produce a one-stop home goods offering for customers. We also offer customers the opportunity to purchase warranties that protect their appliances beyond the manufacturers’ warranty period. These warranties are offered through third party vendors. Other sales accounted for approximately 5% of our revenues for the years ended December 31, 2019 and 2018, and for approximately 6% and 5% for the six months ended June 30, 2020 and 2019, respectively.

 

Our Competitive Strengths

 

Based on management’s belief and experience in the industry, we believe that the following competitive strengths enable us to compete effectively.

 

Name and reputation. We believe that we enjoy a long-standing (50+ years) reputation with vendors and customers for our focus on offering a full line of appliances and other home furnishings with competitive pricing and superior customer service.

 

Strong customer relationships. We cater to the committed shopper who is interested in purchasing top-of-the-line appliances, furniture and other home goods at low prices. We believe that these customers value our dedication to providing outstanding customer service and repeatedly use us for their home product needs.

 

Highly trained and professional staff. We believe that our personnel are our most important asset. We have an internal sales support team of nine personnel who are trained to educate and support customers when selecting and buying products. Approximately 34% of customer orders consist of a phone conversation with a sales team member, which becomes a differentiator when competing with online only companies and with brick and with mortar outlets.  

 

Product pricing. We believe that our pricing model creates a competitive advantage as we strive to sell at the lowest allowed price in the market. Our team tracks pricing daily on more than 22,000 appliance SKUs, comparing prices with all major resellers. Adjustments are made daily to ensure this strategy.

 

Online sales expertise. We believe that our ability to transact online, big ticket, home delivery gives us strategic positioning and capability to sell more products to our current customer base, as well as to add new big ticket product categories.

 

Best in class customer service and marketing technology. We believe that the investments we have made in our call center tools and the latest version of our shopping platform, combined with digital marketing optimization, should put us in position to offer a scalable, repeatable quality process that is second to none in the retail appliance industry.

 

Our Growth Strategies

 

We will strive to grow our business by pursuing the following growth strategies.

 

Significantly increase marketing spend. We plan to partner with nationally accredited advertising and marketing agencies to more efficiently utilize our advertising dollars and to increase sales through our website and our call center.

 

Expand in the commercial market. To date, we have directed all marketing efforts toward the consumer. With remodels and new home construction, there is opportunity to market to home builders, contractors and interior designers who are making or influencing the purchasing decision for many consumers. We believe that our low price business model would be received well by this market, creating substantial revenue opportunities and more repeat business. Evidence of unmet demand and market need is ongoing with large commercial sales occurring organically each week through our web site and contact center.

 

Expand category management. We have expanded from online appliances to furniture and other categories while maintaining management headcount. Management feels that committing dedicated resources to each category and building them out in business unit fashion will not only drive revenue but increase and improve margins.

 

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Warehouse and shipping optimization. We plan to implement a series of initiatives with key vendors to increase shipping speed to customers, cut costs and increase margins. We plan to pick up product from manufacturers’ warehouses and selectively use inventory buys to reduce costs. With access to vendor warehouse operations, we expect to take advantage of buying opportunities and capture time-sensitive customers more frequently.

 

Expanded operating hours. Our customer support and sales hours were expanded during 2019 and we expect to expand sales hours by 20 hours per week as we move through 2020.

 

Ride the wave of online retail.  Big ticket online retail continues to grow significantly as product offerings and shopping experiences start to become superior to most brick and mortar shopping. We are making key investments in people, processes and systems that we believe will grow our customer base. We believe that we are well positioned to benefit from the growth in online retail.

 

Impact of Coronavirus Pandemic

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The virus has since spread to over 150 countries and every state in the United States. On March 11, 2020, the World Health Organization declared the outbreak a pandemic, and on March 13, 2020, the United States declared a national emergency.

 

Most states and cities have reacted by instituting quarantines, restrictions on travel, “stay at home” rules and restrictions on the types of businesses that may continue to operate, as well as guidance in response to the pandemic and the need to contain it. Effective April 6, 2020, the Governor of Missouri announced a stay at home order that was in effect until May 3, 2020. Pursuant to this order, non-essential businesses, such as our showroom, were forced to close. However, our call center and warehouse continued to operate. According to Missouri’s re-opening plan, retail stores, such as our showroom, may re-open effective May 4, 2020 but with limitations on the number of individuals allowed in the showroom. On June 16, 2020, our showroom re-opened to the public, with restrictions that masks be worn by customers and employees, in compliance with St. Louis County mandates. Since over 90% of our sales are completed online and our call center and warehouse and distribution operations continued to operate, the restrictions put in place have not yet had a negative impact on our operations.

 

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

 

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

 

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

 

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

 

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Our Risks and Challenges

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks summarized below. These risks are discussed more fully in the “Risk Factors” section immediately following this Prospectus Summary. These risks include, but are not limited to, the following:

 

The coronavirus pandemic may cause a material adverse effect on our business.

 

If we fail to acquire new customers or retain existing customers, or fail to do so in a cost-effective manner, we may not be able to achieve profitability.

 

Our success depends in part on our ability to increase our net revenue per active customer. If our efforts to increase customer loyalty and repeat purchasing as well as maintain high levels of customer engagement are not successful, our growth prospects and revenue will be materially adversely affected.

 

Our business depends on our ability to build and maintain strong brands. We may not be able to maintain and enhance our brands if we receive unfavorable customer complaints, negative publicity or otherwise fail to live up to consumers’ expectations, which could materially adversely affect our business, results of operations and growth prospects.

 

Our efforts to expand our business into new brands, products, services, technologies, and geographic regions will subject us to additional business, legal, financial, and competitive risks and may not be successful.

 

Our ability to obtain continued financing is critical to the growth of our business. We will need additional financing to fund operations, which additional financing may not be available on reasonable terms or at all.

 

Our third-party loans contain certain terms that could materially adversely affect our financial condition.

 

Our business is highly competitive. Competition presents an ongoing threat to the success of our business.

 

We depend on our relationships with third parties, and changes in our relationships with these parties could adversely impact our revenue and profits.

 

Uncertainties in economic conditions and their impact on consumer spending patterns, particularly in the home goods segment, could adversely impact our operating results.

 

Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we will be permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

 

have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and

 

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

 

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In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

 

Corporate Information

 

Our principal executive offices are located at 13850 Manchester Rd., Ballwin, MO 63011, and our telephone number is 888-768-1710. We maintain a website at www.goedekers.com. Information available on our website is not incorporated by reference in and is not deemed a part of this prospectus.

 

Stock Split

 

On July 30, 2020, we completed 4,750-for-1 forward stock split of our outstanding common stock. As a result of this stock split, our issued and outstanding common stock was increased from 1,000 shares to 4,750,000 shares. Accordingly, all share and per share information contained in this prospectus has been restated to retroactively show the effect of this stock split.

 

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The Offering

 

Shares outstanding:(1)   6,111,200 shares.
     
Shares to be distributed:   3,325,000 shares.
     
Use of proceeds:   We will not receive any proceeds from the distribution of our shares by 1847 Holdings.
     
The distribution:  

1847 Holdings will distribute an aggregate of 3,325,000 shares of our common stock to its shareholders. Its common shareholders will receive approximately 2,660,000 of these shares and the Manager, as the holder of all of 1847 Holdings’ allocation shares, will receive approximately 665,000 of these shares. The Manager has informed us that it will further distribute the shares of our common stock that it receives from the distribution to its sole member, who will also immediately distribute the shares of our common stock that it receives from the distribution to three of its members who are entitled to receive such shares. These shares represent approximately 54.41% of our issued and outstanding common stock.

 

Immediately following the distribution, 1847 Holdings will not own any shares of our common stock. Of the 3,325,000 shares of our common stock to be distributed, it is estimated that a total of 2,391,338 shares, or 39.13% of our issued and outstanding common stock, will be received by our directors and executive officers by virtue of their ownership of common shares of 1847 Holdings and their indirect equity interest in the Manager. See “Principal and Selling Stockholders” for additional information.

     
Record date:  

The record date for the distribution is October 15, 2020.

     
Distribution date:   We currently anticipate that the distribution will occur as soon as practicable after the date that the registration statement of which this prospectus forms a part is declared effective by the SEC.
     
Distribution ratio:  

If you owned common shares of 1847 Holdings on the record date, you will receive 0.710467618568632 shares of our common stock for each common share of 1847 Holdings that you held on the record date. The Manager, as the sole owner of the allocation shares of 1847 Holdings, will receive approximately 665,000 shares of our common stock, which will immediately be distributed to its sole member for further distribution to such sole member’s four members, who are entitled to receive distributions on allocation shares.

     
Distribution agent:   VStock Transfer, LLC, which serves as the transfer agent for our common stock and for 1847 Holdings’ common shares, will serve as distribution agent to distribute the shares.
     
Distribution of shares:   On the distribution date, the distribution agent will distribute the shares representing our common stock to the holders of common shares of 1847 Holdings on the record date and to the four members of the member of the Manager that is entitled to distributions on allocation shares of 1847 Holdings. The shareholders of 1847 Holdings will not be required to make any payment or take any other action to receive their shares of our common stock.

 

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Lock-up Agreement:  

The shares of our common stock being distributed to the shareholders of 1847 Holdings will be registered in book entry form and no stock certificates representing those shares will be delivered to any shareholders of 1847 Holdings.  

 

1847 Holdings is subject to a lock-up agreement, dated July 10, 2020, with the Representative.  Accordingly, all of our stock that is held by 1847 Holdings cannot be transferred, except in very limited circumstances, until 180 days after the date of the underwriting agreement relating to the IPO, or January 26, 2021. Notwithstanding this lock-up agreement, 1847 Holdings is permitted under the underwriting agreement to make the distribution of our stock to its shareholders provided that the shareholders of 1847 Holdings are subject to the same restrictions provided for in such lock-up agreement.  The shares of our common stock being distributed to the shareholders of 1847 Holdings, therefore, will be restricted under the lock-up agreement to the same extent as such shares were restricted when owned by 1847 Holdings and our transfer agent will notate such restriction in its records and place stop transfer orders against the shares being distributed to ensure compliance with the lock-up agreement.

 

You will not be able to sell, pledge, hypothecate or otherwise transfer the shares of our common stock that you receive from the distribution until January 26, 2021.  At such time, the shares will become freely tradeable unless you are an affiliate of our company.  

     
Certain U.S. Federal income tax consequences:   The distribution may be taxable to the recipient, as with any dividend.
     
Appraisal rights:   Neither the shareholders of our company nor of 1847 Holdings have any appraisal rights in connection with the distribution.
     
NYSE American symbol:   GOED  

 

The number of shares of common stock outstanding is based on 6,111,200 shares outstanding as of October 15, 2020 and excludes:

 

483,158 shares of common stock issuable upon the exercise of outstanding options to purchase common stock at an exercise price of $9.00 per share;

 

71,842 shares of common stock that are reserved for issuance under our 2020 Equity Incentive Plan; and

 

55,560 shares of common stock issuable upon exercise of outstanding warrants to purchase common stock at an exercise price of $11.25 per share.

 

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Questions And Answers Concerning The Distribution

 

Will every shareholder share in proportion to their holdings in 1847 Holdings?

 

Yes, each common shareholder of 1847 Holdings will receive shares of our common stock at a ratio of 0.710467618568632 shares of our common stock for each common share of 1847 Holdings that they held on the record date. Any fractional shares will be rounded up to the nearest whole share.

 

What is the connection between 1847 Holdings and our company?

 

We are presently a majority-owned subsidiary of 1847 Holdings. 1847 Holdings is a reporting company under the Exchange Act. Its common shares are quoted on the OTCQB Market operated by OTC Markets Group Inc. under the symbol “EFSH.”

 

Following the distribution, each of our company and 1847 Holdings will be an independent, publicly traded reporting company under the Exchange Act and 1847 Holdings will no longer own any of our common stock.  

 

Why are we engaging in the distribution?

 

We are engaging in the distribution principally because management of both our company and 1847 Holdings believe that the distribution will benefit the shareholders of 1847 Holdings since distributing the shares of our common stock will enable the shareholders of 1847 Holdings to increase or decrease their level of participation in our business by varying their level of investment in us separate from 1847 Holdings, and will benefit our shareholders by increasing the number of holders of our common stock, which our management believes could enhance the liquidity of our shares.

 

The distribution will allow management of each company to focus solely on the business of that business. 1847 Holdings is an acquisition holding company focused on acquiring and managing a group of small businesses. Our company is a one-stop e-commerce destination for home furnishings, including appliances, furniture, home goods and related products. The distribution will allow us to pursue our business plan independently. It also allows 1847 Holdings to focus on its other businesses and future acquisitions. The distribution will allow investors greater choice and flexibility in their investment decisions. It may also enhance access to financing by allowing the financial community to focus separately on each company.

 

Can I sell my shares?

 

The shares of our common stock being distributed to the shareholders of 1847 Holdings will be registered in book entry form and no stock certificates representing those shares will be delivered to any shareholders of 1847 Holdings.  

 

1847 Holdings is subject to a lock-up agreement, dated July 10, 2020, with the Representative.  Accordingly, all of our stock that is held by 1847 Holdings cannot be transferred, except in very limited circumstances, until 180 days after the date of the underwriting agreement relating to the IPO, or January 26, 2021.  The shares of our common stock being distributed to the shareholders of 1847 Holdings, therefore, will be restricted under the lock-up agreement to the same extent as such shares were restricted when owned by 1847 Holdings and our transfer agent will notate such restriction in its records and place stop transfer orders against the shares being distributed to ensure compliance with the lock-up agreement.

 

You will not be able to sell, pledge, hypothecate or otherwise transfer the shares of our common stock that you receive from the distribution until January 26, 2021.  At such time, however, the shares of our common stock issuable to shareholders of 1847 Holdings will be freely transferable without restriction or further registration under the Securities Act, except for shares received by persons who may be deemed to be our “affiliates,” as such term is defined under the Securities Act. Persons who may be deemed to be our affiliates after the distribution include individuals or entities that control, are controlled by or under common control with our company, and include our directors and principal executive officers, as well as any stockholder owning 10% or more of our issued and outstanding common stock. Shares of our common stock held by affiliates may not be sold even after the expiration of the lock-up period unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, including an exemption contained in Rule 144 under the Securities Act. See “Shares Eligible for Future Sale” for additional information.

 

Where will our common stock trade?

 

Our common stock is traded on NYSE American under the symbol “GOED.”

 

9

 

 

What are shares of our company worth?

 

The value of our shares will be determined by their trading price after the distribution is effected. We do not know what the trading price will be and we can provide no assurances as to the value of such shares, if any.

 

What are the tax consequences to me of the distribution?

 

1847 Holdings has not requested, nor does it intend to request, a ruling from the Internal Revenue Service or an opinion of tax counsel as to the federal income tax consequences of the distribution. However, based on the facts of the proposed transaction, it is the opinion of the management of 1847 Holdings that the distribution of our shares of common stock will be treated as a distribution of property to a partner pursuant to Treasury Regulation 1.731-2. As such, 1847 Holdings will recognize no gain or loss on the distribution.

 

Assuming 1847 Holdings reports no gain or loss under Section 731, the amount of the distribution for purposes of Section 301 of the Internal Revenue Code of 1986, as amended (the “Code”), will be equal to 1847 Holding’s basis in the shares on the date of the distribution. However, each shareholder’s individual circumstances may affect the tax consequences of the distribution to such shareholder. We strongly urge all shareholders of 1847 Holdings to consult with their own tax, financial, or investment advisor or legal counsel experienced in these matters. See “Material U.S. Federal Tax Consequences of the Distribution” for more information.

 

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Summary Financial Information

 

The following tables summarize certain financial data regarding our business and should be read in conjunction with our financial statements and related notes contained elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Our summary financial data as of December 31, 2019 and 2018, for the year ended December 31, 2018, for the period from January 1, 2019 through April 5, 2019 and for the period from April 6, 2019 through December 31, 2019 are derived from our audited financial statements included elsewhere in this prospectus. We derived our summary financial data as of June 30, 2020, for the six months ended June 30, 2020 and for the period from April 6, 2019 through June 30, 2019 from our unaudited financial statements included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that our management considers necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods presented.

 

All financial statements included in this prospectus are prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). The summary financial information is only a summary and should be read in conjunction with the historical financial statements and related notes contained elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.

   Successor   Predecessor 
   Six Months Ended
June 30,
2020
   Period from
April 6,
2019
through
June 30,
2019
   Period from
April 6,
2019
through
December 31,
2019
   Period from
January 1, 2019
through
April 5,
2019
   Year Ended
December 31,
2018
 
   (unaudited)   (unaudited)             
Statements of Operations Data                    
Products sales, net  $24,962,209   $10,545,880   $34,668,112   $12,946,901   $56,307,960 
Cost of goods sold   20,796,328    8,702,406    28,596,129    11,004,842    45,406,884 
Gross profit   4,165,881    1,843,474    6,071,983    1,942,059    10,898,076 
Total operating expenses   5,995,813    2,270,277    7,789,221    2,418,331    9,008,684 
Net income (loss) from operations   (1,829,932)   (426,803)   (1,717,238)   (476,272)   1,889,392 
Total other income (expense)   (4,595,969)   (316,459)   (1,049,215)   31,007    115,986 
Net income (loss) before income taxes   (6,425,901)   (743,262)   (2,766,453)   (445,265)   2,005,378 
Income tax benefit   1,123,953    -    698,303    -    - 
Net income (loss)  $(5,301,948)  $(743,262)  $(2,068,150)  $(445,265)  $2,005,378 

 

   Successor   Predecessor 
   As of
June 30,
2020
   As of
December 31,
2019
   As of
December 31,
2018
 
   (unaudited)         
Balance Sheet Data            
Cash and cash equivalents  $3,555,946   $64,470   $1,525,693 
Total current assets   9,579,096    4,494,402    9,542,818 
Total assets   20,224,795    14,278,926    9,759,104 
Total current liabilities   21,363,400    11,215,028    6,360,427 
Total liabilities   25,343,486    15,074,880    6,360,427 
Total stockholders’ equity (deficit)   (5,118,691)   (795,954)   3,398,677 
Total liabilities and stockholders’ equity (deficit)  $20,224,795   $14,278,926   $9,759,104 

 

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RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors, together with the other information contained in this prospectus, before purchasing our common stock. We have listed below (not necessarily in order of importance or probability of occurrence) what we believe to be the most significant risk factors applicable to us, but they do not constitute all of the risks that may be applicable to us. Any of the following factors could harm our business, financial condition, results of operations or prospects, and could result in a partial or complete loss of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section titled “Cautionary Statement Regarding Forward-Looking Statements”.

 

Risks Related to Our Business and Industry

 

The coronavirus pandemic may cause a material adverse effect on our business.

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The virus has since spread to over 150 countries and every state in the United States. On March 11, 2020, the World Health Organization declared the outbreak a pandemic, and on March 13, 2020, the United States declared a national emergency.

 

The spread of the virus in many countries continues to adversely impact global economic activity and has contributed to significant volatility and negative pressure in financial markets and supply chains. The pandemic has had, and could have a significantly greater, material adverse effect on the U.S. economy as a whole, as well as the local economy where we conduct our operations. The pandemic has resulted, and may continue to result for an extended period, in significant disruption of global financial markets, which may reduce our ability to access capital in the future, which could negatively affect our liquidity.

 

Most states and cities have reacted by instituting quarantines, restrictions on travel, “stay at home” rules and restrictions on the types of businesses that may continue to operate, as well as guidance in response to the pandemic and the need to contain it. Effective April 6, 2020, the Governor of Missouri announced a stay at home order that was in effect until May 3, 2020. Pursuant to this order, non-essential businesses, such as our showroom, were forced to close. However, our call center and warehouse continued to operate. According to Missouri’s re-opening plan, retail stores, such as our showroom, may re-open effective May 4, 2020 but with limitations on the number of individuals allowed in the showroom. On June 16, 2020, our showroom re-opened to the public, with restrictions that masks be worn by customers and employees, in compliance with St. Louis County mandates. Since over 90% of our sales are completed online and our call center and warehouse and distribution operations continued to operate, the restrictions put in place have not yet had a negative impact on our operations.

 

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

 

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

 

Further, our customers’ financial condition may be adversely impacted as a result of the impacts of the coronavirus and efforts taken to prevent its spread, which could result in reduced demand for our products.

 

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

 

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If we fail to acquire new customers or retain existing customers, or fail to do so in a cost-effective manner, we may not be able to achieve profitability.

 

Our success depends on our ability to acquire and retain customers in a cost-effective manner. In order to expand our customer base, we must appeal to and acquire customers who have historically used other means of commerce to purchase home goods and may prefer alternatives to our offerings, such as the websites of our competitors or our suppliers’ own websites. We have made significant investments related to customer acquisition and expect to continue to spend significant amounts to acquire additional customers. Our advertising efforts consist primarily of email marketing, affiliate marketing, and to a lesser extent, social media. These efforts are expensive and may not result in the cost-effective acquisition of customers. We cannot assure you that the net profit from new customers we acquire will ultimately exceed the cost of acquiring those customers. If we fail to deliver a quality shopping experience, or if consumers do not perceive the products we offer to be of high value and quality, we may not be able to acquire new customers. If we are unable to acquire new customers who purchase products in numbers sufficient to grow our business, we may not be able to generate the scale necessary to drive beneficial network effects with our suppliers or efficiencies in our logistics network, our net revenue may decrease, and our business, financial condition and operating results may be materially adversely affected.

 

We believe that many of our new customers originate from word-of-mouth and other non-paid referrals from existing customers. Therefore, we must ensure that our existing customers remain loyal to us in order to continue receiving those referrals. If our efforts to satisfy our existing customers are not successful, we may not be able to acquire new customers in sufficient numbers to continue to grow our business, or we may be required to incur significantly higher marketing expenses in order to acquire new customers.

 

Our success depends in part on our ability to increase our net revenue per active customer. If our efforts to increase customer loyalty and repeat purchasing as well as maintain high levels of customer engagement are not successful, our growth prospects and revenue will be materially adversely affected.

 

Our ability to grow our business depends on our ability to retain our existing customer base and generate increased revenue and repeat purchases from this customer base, and maintain high levels of customer engagement. To do this, we must continue to provide our customers and potential customers with a unified, convenient, efficient and differentiated shopping experience by:

 

providing imagery, tools and technology that attract customers who historically would have bought elsewhere;

 

maintaining a high-quality and diverse portfolio of products;

 

delivering products on time and without damage; and

 

maintaining and further developing our online platforms.

 

If we fail to increase net revenue per active customer, generate repeat purchases or maintain high levels of customer engagement, our growth prospects, operating results and financial condition could be materially adversely affected.

 

Our business depends on our ability to build and maintain strong brands. We may not be able to maintain and enhance our brands if we receive unfavorable customer complaints, negative publicity or otherwise fail to live up to consumers’ expectations, which could materially adversely affect our business, results of operations and growth prospects.

 

Maintaining and enhancing our brands is critical to expanding our base of customers and suppliers. Our ability to maintain and enhance our brand depends largely on our ability to maintain customer confidence in our product and service offerings, including by delivering products on time and without damage. If customers do not have a satisfactory shopping experience, they may seek out alternative offerings from our competitors and may not return to our sites as often in the future, or at all. In addition, unfavorable publicity regarding, for example, our practices relating to privacy and data protection, product quality, delivery problems, competitive pressures, litigation or regulatory activity, could seriously harm our reputation. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our customer base and result in decreased revenue, which could adversely affect our business and financial results. A significant portion of our customers’ brand experience also depends on third parties outside of our control, including suppliers and logistics providers such as R+L Carriers, AM Home Delivery and other third-party delivery agents. If these third parties do not meet our or our customers’ expectations, our brands may suffer irreparable damage.

 

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In addition, maintaining and enhancing these brands may require us to make substantial investments, and these investments may not be successful. If we fail to promote and maintain our brands, or if we incur excessive expenses in this effort, our business, operating results and financial condition may be materially adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brands may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to provide high quality products to our customers and a reliable, trustworthy and profitable sales channel to our suppliers, which we may not be able to do successfully.

 

Customer complaints or negative publicity about our sites, products, delivery times, customer data handling and security practices or customer support, especially on blogs, social media websites and our sites, could rapidly and severely diminish consumer use of our sites and consumer and supplier confidence in us and result in harm to our brands.

 

Our efforts to expand our business into new brands, products, services, technologies, and geographic regions will subject us to additional business, legal, financial, and competitive risks and may not be successful.

 

Our business success depends to some extent on our ability to expand our customer offerings by launching new brands and services and by expanding our existing offerings into new geographies. Launching new brands and services or expanding geographically requires significant upfront investments, including investments in marketing, information technology, and additional personnel. We may not be able to generate satisfactory revenue from these efforts to offset these costs. Any lack of market acceptance of our efforts to launch new brands and services or to expand our existing offerings could have a material adverse effect on our business, prospects, financial condition and results of operations. Further, as we continue to expand our fulfillment capability or add new businesses with different requirements, our logistics networks become increasingly complex and operating them becomes more challenging. There can be no assurance that we will be able to operate our networks effectively.

 

We have also entered and may continue to enter into new markets in which we have limited or no experience, which may not be successful or appealing to our customers. These activities may present new and difficult technological and logistical challenges, and resulting service disruptions, failures or other quality issues may cause customer dissatisfaction and harm our reputation and brand. Further, our current and potential competitors in new market segments may have greater brand recognition, financial resources, longer operating histories and larger customer bases than we do in these areas. As a result, we may not be successful enough in these newer areas to recoup our investments in them. If this occurs, our business, financial condition and operating results may be materially adversely affected.

 

If we fail to manage our growth effectively, our business, financial condition and operating results could be harmed.

 

To manage our growth effectively, we must continue to implement our operational plans and strategies, improve and expand our infrastructure of people and information systems and expand, train and manage our employee base. We have rapidly increased employee headcount since our inception to support the growth in our business. To support continued growth, we must effectively integrate, develop and motivate a large number of new employees. We face significant competition for personnel. Failure to manage our hiring needs effectively or successfully integrate our new hires may have a material adverse effect on our business, financial condition and operating results.

 

Additionally, the growth of our business places significant demands on our operations, as well as our management and other employees. For example, we typically launch hundreds of promotional events across thousands of products each month on our sites via emails and personalized displays. These events require us to produce updates of our sites and emails to our customers on a daily basis with different products, photos and text. Any surge in online traffic and orders associated with such promotional activities places increased strain on our operations, including our logistics network, and may cause or exacerbate slowdowns or interruptions. The growth of our business may require significant additional resources to meet these daily requirements, which may not scale in a cost-effective manner or may negatively affect the quality of our sites and customer experience. We are also required to manage relationships with a growing number of suppliers, customers and other third parties. Our information technology systems and our internal controls and procedures may not be adequate to support future growth of our supplier and employee base. If we are unable to manage the growth of our organization effectively, our business, financial condition and operating results may be materially adversely affected.

 

14

 

 

Our ability to obtain continued financing is critical to the growth of our business. We will need additional financing to fund operations, which additional financing may not be available on reasonable terms or at all.

 

Our future growth, including the potential for future market expansion will require additional capital. We will consider raising additional funds through various financing sources, including the procurement of additional commercial debt financing. However, there can be no assurance that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to execute our growth strategy, and operating results may be adversely affected. Any additional debt financing will increase expenses and must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility.

 

Our ability to obtain financing may be impaired by such factors as the capital markets, both generally and specifically in our industry, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, are not sufficient to satisfy our capital needs, we may be required to decrease the pace of, or eliminate, our future product offerings and market expansion opportunities and potentially curtail operations.

 

Our third-party loan contains certain terms that could materially adversely affect our financial condition.

 

We are party to a loan with Arvest Bank, which is secured by all financial assets credited to our securities account held by Arvest Investments, Inc. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a description of this loan.  The loan agreement contains customary representations, warranties and affirmative and negative financial and other covenants.  If an event of default were to occur under this loan, the lender thereto may pursue all remedies available to it, including declaring the obligations under its loan immediately due and payable, which could materially adversely affect our financial condition. 

 

Our business is highly competitive. Competition presents an ongoing threat to the success of our business.

 

Our business is rapidly evolving and intensely competitive, and we have many competitors in different industries. Our competition includes furniture stores, big box retailers, department stores, specialty retailers, and online retailers and marketplaces in the U.S., including:

 

Furniture Stores: Ashley Furniture, Bob’s Discount Furniture, Havertys, Raymour & Flanagan and Rooms To Go;

 

Big Box Retailers: Bed Bath & Beyond, Home Depot, IKEA, Lowe’s, Target, Best Buy and Walmart;

 

Department Stores: JCPenney and Macy’s;

 

Specialty Retailers: Crate and Barrel, Ethan Allen, TJX, At Home, Williams Sonoma, Restoration Hardware, Arhaus, Horchow, Room & Board and Mitchell Gold + Bob Williams;

 

Online Retailers and Marketplaces: Amazon, Wayfair, Houzz and eBay; and

 

Other: AJ Madison, Appliance Connection and US Appliance.

 

We expect competition in e-commerce generally to continue to increase. We believe that our ability to compete successfully depends upon many factors both within and beyond our control, including:

 

the size and composition of our customer base;

 

the number of suppliers and products we feature on our sites;

 

our selling and marketing efforts;

 

the quality, price and reliability of products we offer;

 

the convenience of the shopping experience that we provide;

 

our ability to distribute our products and manage our operations; and

 

our reputation and brand strength.

 

15

 

 

Many of our current competitors have, and potential competitors may have, longer operating histories, greater brand recognition, larger fulfillment infrastructures, greater technical capabilities, faster and less costly shipping, significantly greater financial, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to derive greater net revenue and profits from their existing customer base, acquire customers at lower costs or respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to build larger customer bases or generate net revenue from their customer bases more effectively than we do.

 

Our success depends, in substantial part, on our continued ability to market our products through search engines and social media platforms.

 

The marketing of our products depends on our ability to cultivate and maintain cost-effective and otherwise satisfactory relationships with search engines and social media platforms, including those operated by Google, Facebook, Bing and Yahoo! These platforms could decide to change their terms and conditions of use at any time (and without notice) and/or significantly increase their fees. No assurances can be provided that we will be able to maintain cost-effective and otherwise satisfactory relationships with these platforms and our inability to do so in the case of one or more of these platforms could have a material adverse effect on our business, financial condition and results of operations.

 

We obtain a significant number of visits via search engines such as Google, Bing and Yahoo! Search engines frequently change the algorithms that determine the ranking and display of results of a user’s search and may make other changes to the way results are displayed, which can negatively affect the placement of links and, therefore, reduce the number of visits to our website. The growing use of online ad-blocking software may also impact the success of our marketing efforts because we may reach a smaller audience and fail to bring more customers to our website, which could have a material adverse effect on our business, financial condition and results of operations.

 

System interruptions that impair customer access to our sites or other performance failures or incidents involving our logistics network, our technology infrastructure or our critical technology partners could damage our business, reputation and brand and substantially harm our business and results of operations.

 

The satisfactory performance, reliability and availability of our sites, transaction processing systems, logistics network, and technology infrastructure are critical to our reputation and our ability to acquire and retain customers, as well as maintain adequate customer service levels.

 

For example, if one of our data centers fails or suffers an interruption or degradation of services, we could lose customer data and miss order fulfillment deadlines, which could harm our business. Our systems and operations, including our ability to fulfill customer orders through our logistics network, are also vulnerable to damage or interruption from inclement weather, fire, flood, power loss, telecommunications failure, terrorist attacks, labor disputes, cyber-attacks, data loss, acts of war, break-ins, earthquake and similar events. In the event of a data center failure, the failover to a back-up could take substantial time, during which time our sites could be completely shut down. Further, our back-up services may not effectively process spikes in demand, may process transactions more slowly and may not support all of our site’s functionality.

 

We use complex proprietary software in our technology infrastructure, which we seek to continually update and improve. We may not always be successful in executing these upgrades and improvements, and the operation of our systems may be subject to failure. In particular, we have in the past and may in the future experience slowdowns or interruptions on some or all of our sites when we are updating them, and new technologies or infrastructures may not be fully integrated with existing systems on a timely basis, or at all. Additionally, if we expand our use of third-party services, including cloud-based services, our technology infrastructure may be subject to increased risk of slowdown or interruption as a result of integration with such services and/or failures by such third parties, which are out of our control. Our net revenue depends on the number of visitors who shop on our sites and the volume of orders we can handle. Unavailability of our sites or reduced order fulfillment performance would reduce the volume of goods sold and could also materially adversely affect consumer perception of our brand.

 

16

 

 

We may experience periodic system interruptions from time to time. In addition, continued growth in our transaction volume, as well as surges in online traffic and orders associated with promotional activities or seasonal trends in our business, place additional demands on our technology platform and could cause or exacerbate slowdowns or interruptions. If there is a substantial increase in the volume of traffic on our sites or the number of orders placed by customers, we may be required to further expand and upgrade our technology, logistics network, transaction processing systems and network infrastructure. There can be no assurance that we will be able to accurately project the rate or timing of increases, if any, in the use of our sites or expand and upgrade our systems and infrastructure to accommodate such increases on a timely basis. In order to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our sites, which is particularly challenging given the rapid rate at which new technologies, customer preferences and expectations and industry standards and practices are evolving in the e-commerce industry. Accordingly, we redesign and enhance various functions on our sites on a regular basis, and we may experience instability and performance issues as a result of these changes.

 

Any slowdown, interruption or performance failure of our sites and the underlying technology and logistics infrastructure could harm our business, reputation and our ability to acquire, retain and serve our customers, which could materially adversely affect our results of operations.

 

Our failure or the failure of third-party service providers to protect our sites, networks and systems against security breaches, or otherwise to protect our confidential information, could damage our reputation and brand and substantially harm our business and operating results.

 

We collect, maintain, transmit and store data about our customers, employees, contractors, suppliers, vendors and others, including credit card information and personally identifiable information, as well as other confidential and proprietary information. We also employ third-party service providers that store, process and transmit certain proprietary, personal and confidential information on our behalf. We rely on encryption and authentication technology licensed from third parties in an effort to securely transmit, encrypt, anonymize or pseudonymize certain confidential and sensitive information, including credit card numbers. Advances in computer capabilities, new technological discoveries or other developments may result in the whole or partial failure of this technology to protect transaction and personal data or other confidential and sensitive information from being breached or compromised. Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by our sites, networks and systems or that we or our third-party service providers otherwise maintain, including payment card systems and human resources management platforms. We and our service providers may not anticipate or prevent all types of attacks until after they have already been launched, and techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers. In addition, security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breaches by our employees or by persons with whom we have commercial relationships.

 

Breaches of our security measures or those of our third-party service providers or cyber security incidents could result in unauthorized access to our sites, networks and systems; unauthorized access to and misappropriation of personal information, including consumers’ and employees’ personally identifiable information, or other confidential or proprietary information of ourselves or third parties; limited or terminated access to certain payment methods or fines or higher transaction fees to use such methods; viruses, worms, spyware or other malware being served from our sites, networks or systems; deletion or modification of content or the display of unauthorized content on our sites; interruption, disruption or malfunction of operations; costs relating to breach remediation, deployment or training of additional personnel and protection technologies, responses to governmental investigations and media inquiries and coverage; engagement of third party experts and consultants; litigation, regulatory action and other potential liabilities. If any of these breaches of security occur, our reputation and brand could be damaged, our business may suffer, we could be required to expend significant capital and other resources to alleviate problems caused by such breaches and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. In addition, any party who is able to illicitly obtain a customer’s password could access that customer’s transaction data or personal information. Any compromise or breach of our security measures, or those of our third-party service providers, could violate applicable privacy, data security and other laws, and cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, which could have a material adverse effect on our business, financial condition and operating results. We may need to devote significant resources to protect against security breaches or to address problems caused by breaches, diverting resources from the growth and expansion of our business.

 

17

 

 

We may be subject to product liability and other similar claims if people or property are harmed by the products we sell.

 

Some of the products we sell may expose us to product liability and other claims and litigation (including class actions) or regulatory action relating to safety, personal injury, death or environmental or property damage. Some of our agreements with members of our supply chain may not indemnify us from product liability for a particular product, and some members of our supply chain may not have sufficient resources or insurance to satisfy their indemnity and defense obligations. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.

 

Risks associated with the suppliers from whom our products are sourced could materially adversely affect our financial performance as well as our reputation and brand.

 

We depend on our ability to provide our customers with a wide range of products from qualified suppliers in a timely and efficient manner. Political and economic instability, the financial stability of suppliers, suppliers’ ability to meet our standards, labor problems experienced by suppliers, the availability or cost of raw materials, merchandise quality issues, currency exchange rates, trade tariff developments, transport availability and cost, transport security, inflation, and other factors relating to our suppliers are beyond our control.

 

Our agreements with most of our suppliers do not provide for the long-term availability of merchandise or the continuation of particular pricing practices, nor do they usually restrict such suppliers from selling products to other buyers. There can be no assurance that our current suppliers will continue to seek to sell us products on current terms or that we will be able to establish new or otherwise extend current supply relationships to ensure product acquisitions in a timely and efficient manner and on acceptable commercial terms. Our ability to develop and maintain relationships with reputable suppliers and offer high quality merchandise to our customers is critical to our success. If we are unable to develop and maintain relationships with suppliers that would allow us to offer a sufficient amount and variety of quality merchandise on acceptable commercial terms, our ability to satisfy our customers’ needs, and therefore our long-term growth prospects, would be materially adversely affected.

 

Further, we rely on our suppliers’ representations of product quality, safety and compliance with applicable laws and standards. If our suppliers or other vendors violate applicable laws, regulations or our supplier code of conduct, or implement practices regarded as unethical, unsafe, or hazardous to the environment, it could damage our reputation and negatively affect our operating results. Further, concerns regarding the safety and quality of products provided by our suppliers could cause our customers to avoid purchasing those products from us, or avoid purchasing products from us altogether, even if the basis for the concern is outside of our control. As such, any issue, or perceived issue, regarding the quality and safety of any items we sell, regardless of the cause, could adversely affect our brand, reputation, operations and financial results. 

 

We also are unable to predict whether any of the countries in which our suppliers’ products are currently manufactured or may be manufactured in the future will be subject to new, different, or additional trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from suppliers with international manufacturing operations, including the imposition of additional import restrictions, restrictions on the transfer of funds or increased tariffs or quotas, could increase the cost or reduce the supply of merchandise available to our customers and materially adversely affect our financial performance as well as our reputation and brand. Furthermore, some or all of our suppliers’ foreign operations may be adversely affected by political and financial instability, resulting in the disruption of trade from exporting countries, restrictions on the transfer of funds or other trade disruptions.

 

In addition, our business with foreign suppliers may be affected by changes in the value of the U.S. dollar relative to other foreign currencies. For example, any movement by any other foreign currency against the U.S. dollar may result in higher costs to us for those goods. Declines in foreign currencies and currency exchange rates might negatively affect the profitability and business prospects of one or more of our foreign suppliers. This, in turn, might cause such foreign suppliers to demand higher prices for merchandise in their effort to offset any lost profits associated with any currency devaluation, delay merchandise shipments, or discontinue selling to us altogether, any of which could ultimately reduce our sales or increase our costs.    

 

Our suppliers have imposed conditions in our business arrangements with them.  If we are unable to continue satisfying these conditions, or such suppliers impose additional restrictions with which we cannot comply, it could have a material adverse effect on our business, financial condition and operating results.

 

Our suppliers have strict conditions for doing business with them. Several are sizeable such as General Electric, Whirlpool and DMI.  If we cannot satisfy these conditions or if they impose additional or more restrictive conditions that we cannot satisfy, our business would be materially adversely affected.  It would be materially detrimental to our business if these suppliers decided to no longer do business with us, increased the pricing at which they allow us to purchase their goods or impose other restrictions or conditions that make it more difficult for us to work with them.  Any of these events could have a material adverse effect on our business, financial condition and operating results.

 

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Our dependence on one supplier for a substantial portion of our purchases makes us vulnerable to a disruption in the supply of its products.

 

We rely on Whirlpool for a substantial portion of product purchases. For the years ended December 31, 2019 and 2018, approximately 44.1% and 34.7%, respectively, of our total purchases were from Whirlpool. As a result, any of the following could have a material adverse effect on our business, financial condition and results of operations:

 

termination of the supply agreement;

 

an adverse change in the financial condition of Whirlpool; or

 

an adverse change in the Whirlpool’s ability to manufacture and/or deliver desired products on a timely basis.

 

Our agreement with Whirlpool is terminable at will by either party upon short notice, so does it not provide for the long-term availability of products, nor does it provide for the continuation of particular pricing practices. There can be no assurance that Whirlpool will continue to sell us products or that we will be able to establish new supply relationships to ensure similar product acquisitions in a timely and efficient manner and on acceptable commercial terms.

 

Successful performance of this supply agreement is critical to our success. If the supply relationship is affected adversely, we may be unable to replace quickly or effectively the products sold to us by Whirlpool. Significant disruptions could have a dramatic effect on our performance.

 

We may be unable to source new suppliers or strengthen our relationships with current suppliers.

 

We have relationships with over 400 suppliers. Our agreements with suppliers are generally terminable at will by either party upon short notice. If we do not maintain our existing relationships or build new relationships with suppliers on acceptable commercial terms, we may not be able to maintain a broad selection of merchandise, and our business and prospects would suffer severely.

 

In order to attract quality suppliers, we must:

 

demonstrate our ability to help our suppliers increase their sales;

 

offer suppliers a high quality, cost-effective fulfillment process; and

 

continue to provide suppliers with a dynamic and real-time view of our demand and inventory needs.

 

If we are unable to provide our suppliers with a compelling return on investment and an ability to increase their sales, we may be unable to maintain and/or expand our supplier network, which would negatively impact our business.

 

We depend on our suppliers to perform certain services regarding the products that we offer.

 

As part of offering our suppliers’ products for sale on our sites, suppliers are often responsible for conducting a number of traditional retail operations with respect to their respective products, including maintaining inventory and preparing merchandise for shipment to our customers. In these instances, we may be unable to ensure that suppliers will perform these services to our or our customers’ satisfaction in a manner that provides our customer with a unified brand experience or on commercially reasonable terms. If our customers become dissatisfied with the services provided by our suppliers, our business, reputation and brands could suffer.

 

We depend on our relationships with third parties, and changes in our relationships with these parties could adversely impact our revenue and profits.

 

We rely on third parties to operate certain elements of our business. For example, we primarily use R+L Carriers for most of our larger shipping services and AM Home Delivery for furniture deliveries, as well as carriers such as FedEx, UPS, DHL and the U.S. Postal Service to deliver small parcel products. As a result, we may be subject to shipping delays or disruptions caused by inclement weather, natural disasters, system interruptions and technology failures, labor activism, health epidemics or bioterrorism. We are also subject to risks of breakage or other damage during delivery by any of these third parties. We also use and rely on other services from third parties, such as retail partner services, telecommunications services, customs, consolidation and shipping services, as well as warranty, installation and design services.  

 

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We may be unable to maintain these relationships, and these services may also be subject to outages and interruptions that are not within our control. For example, failures by our telecommunications providers have in the past and may in the future interrupt our ability to provide phone support to our customers. Third parties may in the future determine they no longer wish to do business with us or may decide to take other actions or make changes to their practices that could harm our business. We may also determine that we no longer want to do business with them. If products are not delivered in a timely fashion or are damaged during the delivery process, or if we are not able to provide adequate customer support or other services or offerings, our customers could become dissatisfied and cease buying products through our sites, which would adversely affect our operating results.

 

The seasonal trends in our business create variability in our financial and operating results and place increased strain on our operations.

 

We experience surges in orders associated with promotional activities and seasonal trends. This activity may place additional demands on our technology systems and logistics network and could cause or exacerbate slowdowns or interruptions. Any such system, site or service interruptions could prevent us from efficiently receiving or fulfilling orders, which may reduce the volume or quality of goods or services we sell and may cause customer dissatisfaction and harm our reputation and brand.

 

Our business may be adversely affected if we are unable to provide our customers a cost-effective shopping platform that is able to respond and adapt to rapid changes in technology.

 

The number of people who access the Internet through devices other than personal computers, including mobile phones, smartphones, handheld computers such as notebooks and tablets, video game consoles, and television set-top devices, has increased dramatically in the past few years. We continually upgrade existing technologies and business applications to keep pace with these rapidly changing and continuously evolving technologies, and we may be required to implement new technologies or business applications in the future. The implementation of these upgrades and changes requires significant investments and as new devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for these alternative devices and platforms. Additionally, we may need to devote significant resources to the support and maintenance of such applications once created. Our results of operations may be affected by the timing, effectiveness and costs associated with the successful implementation of any upgrades or changes to our systems and infrastructure to accommodate such alternative devices and platforms. Further, in the event that it is more difficult or less compelling for our customers to buy products from us on their mobile or other devices, or if our customers choose not to buy products from us on such devices or to use mobile or other products that do not offer access to our sites, our customer growth could be harmed and our business, financial condition and operating results may be materially adversely affected.

 

Significant merchandise returns could harm our business.

 

We allow our customers to return products, subject to our return policy. If merchandise returns are significant, our business, prospects, financial condition and results of operations could be harmed. Further, we modify our policies relating to returns from time to time, which may result in customer dissatisfaction or an increase in the number of product returns. Many of our products are large and require special handling and delivery. From time to time our products are damaged in transit, which can increase return rates and harm our brand.

 

Uncertainties in economic conditions and their impact on consumer spending patterns, particularly in the home goods segment, could adversely impact our operating results.

 

Consumers may view a substantial portion of the products we offer as discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macro-economic conditions that impact consumer spending, including discretionary spending. Some of the factors adversely affecting consumer spending include levels of unemployment; consumer debt levels; changes in net worth based on market changes and uncertainty; home foreclosures and changes in home values or the overall housing, residential construction or home improvement markets; fluctuating interest rates; credit availability, including mortgages, home equity loans and consumer credit; government actions; fluctuating fuel and other energy costs; fluctuating commodity prices and general uncertainty regarding the overall future economic environment. Adverse economic changes in any of the regions in which we sell our products could reduce consumer confidence and could negatively affect net revenue and have a material adverse effect on our operating results.

 

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Our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or an inability to timely deliver such communications could materially adversely affect our net revenue and business.

 

Our business is highly dependent upon email and other messaging services for promoting our sites and products. Daily promotions offered through emails and other messages sent by us, or on our behalf by our vendors, generate a significant portion of our net revenue. We provide daily emails to customers and other visitors informing them of what is available for purchase on our sites that day, and we believe these messages are an important part of our customer experience and help generate a substantial portion of our net revenue. If we are unable to successfully deliver emails or other messages to our subscribers, or if subscribers decline to open our emails or other messages, our net revenue and profitability would be materially adversely affected. Changes in how webmail applications organize and prioritize email may also reduce the number of subscribers opening our emails. For example, in 2013 Google Inc.’s Gmail service began offering a feature that organizes incoming emails into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may result in our emails being delivered in a less prominent location in a subscriber’s inbox or viewed as “spam” by our subscribers and may reduce the likelihood of that subscriber opening our emails. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also adversely impact our business. From time to time, Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to third parties. Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications would also materially adversely impact our business. Our use of email and other messaging services to send communications about our sites or other matters may also result in legal claims against us, which may cause us increased expenses, and if successful might result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send emails or other messages. We also rely on social networking messaging services to send communications and to encourage customers to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by customers and potential customers could materially adversely affect our business, financial condition and operating results.

 

We are subject to risks related to online payment methods.

 

We accept payments using a variety of methods, including credit card, debit card, PayPal, credit accounts and gift cards. As we offer new payment options to consumers, we may be subject to additional regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We are also subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. As our business changes, we may also be subject to different rules under existing standards, which may require new assessments that involve costs above what we currently pay for compliance. If we fail to comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our transactions limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to our payment systems, we may, among other things, be subject to fines or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit card and debit card payments from consumers or to facilitate other types of online payments. If any of these events were to occur, our business, financial condition and operating results could be materially adversely affected.

 

We occasionally receive orders placed with fraudulent credit card data. We may suffer losses as a result of orders placed with fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card fraud, our liability for these transactions could harm our business, financial condition and results of operations.

 

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Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

 

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future regulations and laws could impede the growth of the Internet, e- commerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, consumer protection, Internet neutrality and gift cards. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet or e-commerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our sites by consumers and suppliers and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations. Adverse legal or regulatory developments could substantially harm our business. Further, if we enter into new market segments or geographical areas and expand the products and services we offer, we may be subject to additional laws and regulatory requirements or prohibited from conducting our business, or certain aspects of it, in certain jurisdictions. We will incur additional costs complying with these additional obligations and any failure or perceived failure to comply would adversely affect our business and reputation.

 

Failure to comply with applicable laws and regulations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could adversely affect our business and our financial condition.

 

A variety of laws and regulations govern the collection, use, retention, sharing, export and security of personal information. Laws and regulations relating to privacy, data protection and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not comply, or may not comply in the future with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any applicable privacy or consumer protection- related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities or require us to change our operations and/or cease using certain data sets. Any such claim, proceeding or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and suppliers and may result in the imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.

 

Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of proprietary or third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. U.S. and foreign governments have enacted, have considered or are considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could if widely adopted significantly reduce the effectiveness of such practices and technologies. The regulation of the use of cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and consequently, materially adversely affect our business, financial condition and operating results.

 

In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and consumer protection. Any such changes may force us to incur substantial costs or require us to change our business practices. This could compromise our ability to pursue our growth strategy effectively and may adversely affect our ability to acquire customers or otherwise harm our business, financial condition and operating results.

 

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Changes in tax treatment of companies engaged in e-commerce may adversely affect the commercial use of our sites and our financial results.

 

Due to the global nature of the Internet, it is possible that various states or foreign countries might attempt to impose additional or new regulation on our business or levy additional or new sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in e-commerce. New or revised international, federal, state or local tax regulations or court decisions may subject us or our customers to additional sales, income and other taxes. For example, on June 21, 2018, the U.S. Supreme Court rendered a 5-4 majority decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) where the Court held, among other things, that a state may require an out-of-state seller with no physical presence in the state to collect and remit sales taxes on goods the seller ships to consumers in the state, overturning existing court precedent.  Other new or revised taxes and, in particular, sales taxes, value added tax and similar taxes could increase the cost of doing business online and decrease the attractiveness of selling products over the Internet. New taxes and rulings could also create significant increases in internal costs necessary to capture data and collect and remit taxes. In addition, we may charge sales taxes in jurisdictions where our competitors do not, resulting in our product prices potentially being higher than those of our competitors. As a result, we may lose sales to our competitors in these jurisdictions. Any of these events could have a material adverse effect on our business, financial condition and operating results.

 

We rely on the performance of members of management and highly skilled personnel, and if we are unable to attract, develop, motivate and retain well-qualified employees, our business could be harmed.

 

We believe our success has depended, and continues to depend, on the members of our senior management team. The loss of any of our senior management or other key employees could materially harm our business. Our future success also depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees, particularly mid-level managers and merchandising and technology personnel. The market for such positions is competitive. Qualified individuals are in high demand, and we may incur significant costs to attract them. Our inability to recruit and develop mid-level managers could materially adversely affect our ability to execute our business plan, and we may not be able to find adequate replacements. All of our officers and other U.S. employees are at-will employees, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business, financial condition and operating results may be materially adversely affected.

 

We may not be able to adequately protect our intellectual property rights.

 

We regard our customer lists, domain names, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trade secret protection, agreements and other methods with our employees and others to protect our proprietary rights. We might not be able to obtain broad protection for all of our intellectual property. For example, we are the registrant of the Internet domain name for our website of www.goedekers.com, as well as various related domain names. However, we might not be able to prevent third parties from registering, using or retaining domain names that interfere with our consumer communications or infringe or otherwise decrease the value of our marks, domain names and other proprietary rights.

 

The protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. We may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights or proprietary rights or to establish the validity of such rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may materially adversely affect our business, financial condition and operating results. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights, and we may not be able to broadly enforce all of our intellectual property rights. Any of our intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Additionally, the process of obtaining intellectual property protections is expensive and time-consuming, and we may not be able to pursue all necessary or desirable actions at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these protections will adequately safeguard our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or intellectual property rights. We may also be exposed to claims from third parties claiming infringement of their intellectual property rights, or demanding the release or license of open source software or derivative works that we developed using such software (which could include our proprietary code) or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license, publicly release the affected portions of our source code, be limited in or cease using the implicated software unless and until we can re-engineer such software to avoid infringement or change the use of the implicated open source software.

 

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We may be accused of infringing intellectual property rights of third parties.

 

The e-commerce industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. We may be subject to claims and litigation by third parties that we infringe their intellectual property rights. The costs of supporting such litigation and disputes are considerable, and there can be no assurances that favorable outcomes will be obtained. As our business expands and the number of competitors in our market increases and overlaps occur, we expect that infringement claims may increase in number and significance. Any claims or proceedings against us, whether meritorious or not, could be time-consuming, result in considerable litigation costs, require significant amounts of management time or result in the diversion of significant operational resources, any of which could materially adversely affect our business, financial condition and operating results.

 

We have received in the past, and we may receive in the future, communications alleging that certain items posted on or sold through our sites violate third-party copyrights, designs, marks and trade names or other intellectual property rights or other proprietary rights. Brand and content owners and other proprietary rights owners have actively asserted their purported rights against online companies. In addition to litigation from rights owners, we may be subject to regulatory, civil or criminal proceedings and penalties if governmental authorities believe we have aided and abetted in the sale of counterfeit or infringing products.

 

Such claims, whether or not meritorious, may result in the expenditure of significant financial, managerial and operational resources, injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege that we have violated their rights, but such licenses may not be available on terms acceptable to us, or at all. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.

 

We are engaged in legal proceedings that could cause us to incur unforeseen expenses and could occupy a significant amount of our management’s time and attention.

 

From time to time, we are subject to litigation or claims that could negatively affect our business operations and financial position. Litigation disputes could cause us to incur unforeseen expenses, result in site unavailability, service disruptions, and otherwise occupy a significant amount of our management’s time and attention, any of which could negatively affect our business operations and financial position. We also from time to time receive inquiries and subpoenas and other types of information requests from government authorities and we may become subject to related claims and other actions related to our business activities. While the ultimate outcome of investigations, inquiries, information requests and related legal proceedings is difficult to predict, such matters can be expensive, time-consuming and distracting, and adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices, reputational harm or costs and significant payments, any of which could negatively affect our business operations and financial position.

 

The obligations associated with being a public company will require significant resources and management attention, and we will incur increased costs as a result of becoming a public company.

 

As a new public company, we will face increased legal, accounting, administrative and other costs and expenses that we have not incurred as a private company, and we expect to incur additional costs related to operating as a public company. We are subject to the reporting requirements of the Exchange Act, which requires that we file annual, quarterly and current reports with respect to our business and financial condition, and proxy and other information statements, as well as the rules and regulations implemented by the Securities and Exchange Commission (the “SEC”), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Public Company Accounting Oversight Board, and the listing requirements of NYSE American, each of which imposes additional reporting and other obligations on public companies. As a public company, we will be required to, among other things:

 

prepare and distribute periodic reports, proxy statements and other stockholder communications in compliance with the federal securities laws and rules and NYSE American rules;

 

expand the roles and duties of our board of directors and committees thereof and management;

 

hire additional financial and accounting personnel and other experienced accounting and finance staff with the expertise to address complex accounting matters applicable to public companies;

 

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institute more comprehensive financial reporting and disclosure compliance procedures;

 

involve and retain, to a greater degree, outside counsel and accountants to assist us with the activities listed above;

 

build and maintain an investor relations function;

 

establish new internal policies, including those relating to trading in our securities and disclosure controls and procedures;

 

comply with the maintenance requirements of NYSE American; and

 

comply with the Sarbanes-Oxley Act.

 

We expect these rules and regulations, and any future changes in laws, regulations and standards relating to corporate governance and public disclosure, which have created uncertainty for public companies, to increase legal and financial compliance costs and make some activities more time consuming and costly. These laws, regulations and standards are subject to varying interpretations, in many cases, due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on our business, financial condition and results of operations.

 

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These increased costs may require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives.

 

We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective.

 

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report we file with the SEC. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. However, our auditors will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer a non-accelerated filer or no longer an emerging growth company if we take advantage of the exemptions available to us through the JOBS Act.

 

We are in the very early stages of the costly and challenging process of compiling the system and process documentation necessary to perform the evaluation needed to comply with Section 404. In this regard, we will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. As we transition to the requirements of reporting as a public company, we may need to add additional finance staff. We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls when they are required to issue such opinion, investors could lose confidence in the accuracy and completeness of our financial reports, which could harm our stock price.

 

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Risks Related to Ownership of Our Common Stock

 

The market price, trading volume and marketability of our common stock may, from time to time, be significantly affected by numerous factors beyond our control, which may materially adversely affect the market price of your common stock, the marketability of your common stock and our ability to raise capital through future equity financings.

 

The market price and trading volume of our common stock may fluctuate significantly. Many factors that are beyond our control may materially adversely affect the market price of your common stock, the marketability of your common stock and our ability to raise capital through equity financings. These factors include the following

 

actual or anticipated variations in our periodic operating results;

 

increases in market interest rates that lead investors of our common stock to demand a higher investment return;

 

changes in earnings estimates;

 

changes in market valuations of similar companies;

 

actions or announcements by our competitors;

 

adverse market reaction to any increased indebtedness we may incur in the future;

 

additions or departures of key personnel;

 

actions by stockholders;

 

speculation in the media, online forums, or investment community; and

 

our ability to maintain the listing of our common stock on NYSE American.

 

We may not be able to maintain the listing of our common stock on NYSE American.

 

We must meet certain financial and liquidity criteria to maintain the listing of our common stock on NYSE American. If we violate NYSE American listing requirements, our common stock may be delisted. If we fail to meet any of NYSE American’s listing standards, our common stock may be delisted. In addition, our board of directors may determine that the cost of maintaining our listing on a national securities exchange outweighs the benefits of such listing. A delisting of our common stock from NYSE American may materially impair our stockholders’ ability to buy and sell our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock. The delisting of our common stock could significantly impair our ability to raise capital and the value of your investment.

 

The shares that the shareholders of 1847 Holdings receive in the distribution will be subject to a lock-up agreement.

 

1847 Holdings is subject to a lock-up agreement, dated July 10, 2020, with the Representative. Accordingly, all of our stock that is held by 1847 Holdings cannot be transferred, except in very limited circumstances, until 180 days after the date of the underwriting agreement relating to the IPO, or January 26, 2021. Notwithstanding this lock-up agreement, 1847 Holdings is permitted under the underwriting agreement to make the distribution of our stock to its shareholders provided that the shareholders of 1847 Holdings are subject to the same restrictions provided for in such lock-up agreement. The shares of our common stock being distributed to the shareholders of 1847 Holdings, therefore, will be restricted under the lock-up agreement to the same extent as such shares were restricted when owned by 1847 Holdings and our transfer agent will notate such restriction in its records and place stop transfer orders against the shares being distributed to ensure compliance with the lock-up agreement.

 

You will not be able to sell, pledge, hypothecate or otherwise transfer the shares of our common stock that you receive from the distribution until January 26, 2021. At such time, the shares will become freely tradeable unless you are an affiliate of our company.

 

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Certain of our directors could be in a position of conflict of interest.

 

Our Chairman, Ellery W. Roberts, is the controlling principal of the Manager, which is a party to a management services agreement with our company pursuant to which it provides certain services to us, including administrative supervision and oversight of our day-to-day business operations for a quarterly management fee equal to $62,500. He may obtain compensation and other benefits in transactions relating to us that involve the Manager. Consequently, there exists the possibility for Mr. Roberts to be in a position of conflict. These conflicts may not be resolved in our favor. Such conflicts of interest could have a material adverse effect on our business and operations. Further, the appearance of conflicts of interest created by related party transactions could impair the confidence of our investors. In the case of transactions with these affiliates, there may be an absence of arms’ length negotiations with respect to the terms, conditions and consideration with respect to goods and services provided to or by us.

 

We do not expect to declare or pay dividends in the foreseeable future.

 

We do not expect to declare or pay dividends in the foreseeable future, as we anticipate that we will invest future earnings in the development and growth of our business. Therefore, holders of our common stock will not receive any return on their investment unless they sell their securities, and holders may be unable to sell their securities on favorable terms or at all.

 

If securities industry analysts do not publish research reports on us, or publish unfavorable reports on us, then the market price and market trading volume of our common stock could be negatively affected.

 

Any trading market for our common stock may be influenced in part by any research reports that securities industry analysts publish about us. We do not currently have and may never obtain research coverage by securities industry analysts. If no securities industry analysts commence coverage of us, the market price and market trading volume of our common stock could be negatively affected. In the event we are covered by analysts, and one or more of such analysts downgrade our securities, or otherwise reports on us unfavorably, or discontinues coverage of us, the market price and market trading volume of our common stock could be negatively affected.

 

Future issuances of our common stock or securities convertible into, or exercisable or exchangeable for, our common stock, or the expiration of lock-up agreements that restrict the issuance of new common stock or the trading of outstanding common stock, could cause the market price of our common stock to decline and would result in the dilution of your holdings.

 

Future issuances of our common stock or securities convertible into, or exercisable or exchangeable for, our common stock, or the expiration of lock-up agreements that restrict the issuance of new common stock or the trading of outstanding common stock, could cause the market price of our common stock to decline. We cannot predict the effect, if any, of future issuances of our securities, or the future expirations of lock-up agreements, on the price of our common stock. In all events, future issuances of our common stock would result in the dilution of your holdings. In addition, the perception that new issuances of our securities could occur, or the perception that locked-up parties will sell their securities when the lock-ups expire, could adversely affect the market price of our common stock. In connection with the IPO, we, all of our directors and officers and all of our stockholders agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our common stock or securities convertible into or exercisable or exchangeable for our common stock for a period of (i) 180 days after the closing of the IPO in the case of our company, or until January 31, 2021, (ii) 365 days after the date of the underwriting agreement related to the IPO in the case of our directors and officers, or until July 30, 2021, and (iii) 180 days after the date of the underwriting agreement related to the IPO in the case of our stockholders, or until January 26, 2021. As discussed above, the shares of our common stock being distributed to the shareholders of 1847 Holdings will be restricted under the lock-up agreement to the same extent as such shares were restricted when owned by 1847 Holdings. In addition to any adverse effects that may arise upon the expiration of these lock-up agreements, the lock-up provisions in these agreements may be waived, at any time and without notice. If the restrictions under the lock-up agreements are waived, our common stock may become available for resale, subject to applicable law, including without notice, which could reduce the market price for our common stock.

 

Future issuances of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future issuances of preferred stock, which could rank senior to our common stock for the purposes of dividends and liquidating distributions, may adversely affect the level of return you may be able to achieve from an investment in our common stock.

 

In the future, we may attempt to increase our capital resources by offering debt securities. Upon bankruptcy or liquidation, holders of our debt securities, and lenders with respect to other borrowings we may make, would receive distributions of our available assets prior to any distributions being made to holders of our common stock. Moreover, if we issue preferred stock, the holders of such preferred stock could be entitled to preferences over holders of common stock in respect of the payment of dividends and the payment of liquidating distributions. Because our decision to issue debt or preferred stock in any future offering, or borrow money from lenders, will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any such future offerings or borrowings. Holders of our common stock must bear the risk that any future offerings we conduct or borrowings we make may adversely affect the level of return, if any, they may be able to achieve from an investment in our common stock.

 

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If our shares of common stock become subject to the penny stock rules, it would become more difficult to trade our shares.

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on NYSE American or another national securities exchange and if the price of our common stock is less than $5.00, our common stock could be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.

 

We are subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not emerging growth companies and our stockholders could receive less information than they might expect to receive from more mature public companies.

 

We are required to publicly report on an ongoing basis as an “emerging growth company” (as defined in the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not emerging growth companies, including but not limited to:

 

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

being permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

being exempt from the requirement to hold a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

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We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We would remain an emerging growth company for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

 

Because we will be subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not emerging growth companies, our stockholders could receive less information than they might expect to receive from more mature public companies. We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our common stock.

 

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, and limit attempts by our stockholders to replace or remove our current management.

 

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our certificate of incorporation and bylaws include provisions that:

 

permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships;

 

provide that directors may only be removed by the majority of the shares of voting stock then outstanding; and

 

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

 

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus 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. The forward-looking statements are contained principally in, but not limited to, the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” 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 goals and strategies;

 

our future business development, financial condition and results of operations;

 

expected changes in our revenue, costs or expenditures;

 

growth of and competition trends in our industry;

 

our expectations regarding demand for, and market acceptance of, our products;

 

our expectations regarding our relationships with investors, institutional funding partners and other parties we collaborate with;

 

fluctuations in general economic and business conditions in the markets in which we operate; and

 

relevant government policies and regulations relating to our industry.

 

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 the heading “Risk Factors” and elsewhere in this prospectus. 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.

 

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

 

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INDUSTRY AND MARKET DATA

 

Certain market and industry data included in this prospectus is derived from information provided by third-party market research firms, third-party financial or analytics firms, or public sources that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications and third-party forecasts in conjunction with our assumptions about our market. We have not independently verified such third-party information. The market data used in this prospectus involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us. To our knowledge, certain third-party industry data that includes projections for future periods does not take into account the effects of the worldwide coronavirus pandemic. Accordingly, those third-party projections may be overstated and should not be given undue weight.

 

Certain data are also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus. Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.

 

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USE OF PROCEEDS

 

This prospectus relates to shares of our common stock that will distributed by 1847 Holdings to its shareholders.  We will not receive any proceeds from the distribution of shares of our common stock by 1847 Holdings to its shareholders.

 

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MARKET PRICE OF COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

Market Information

 

Our common stock began trading on NYSE American under the symbol “GOED” on July 31, 2020.  

 

Number of Holders of our Common Stock

 

As of October 15, 2020, there were approximately 6 registered holders of our common stock. This number excludes the shares owned by stockholders holding shares under nominee security position listings.

 

Dividend Policy

 

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends on our common stock in the near future. We may also enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our common stock. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. See also “Risk Factors—Risks Related to Ownership of Our Common Stock—We do not expect to declare or pay dividends in the foreseeable future.”

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

As of December 31, 2019, we did not have in effect any compensation plans under which our equity securities were authorized for issuance and we did not have any outstanding stock options. On July 30, 2020, we adopted our 2020 Equity Incentive Plan. See Executive Compensation—2020 Equity Incentive Plan” for a description of this plan.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows of our company 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 prospectus. 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, our 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 prospectus, particularly in the sections titled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements”.

 

All periods presented on or prior to April 5, 2019 represent the operations of Goedeker Television, our predecessor. Unless otherwise specified, all results of operations information for the year ended December 31, 2019 reflects the full year.

 

References to “Successor” refer to the financial position and results of operations of our company subsequent to April 5, 2019. References to “Predecessor” refer to the financial position and results of operations of Goedeker Television on and before April 5, 2019.

 

Overview

 

Our company is a one-stop e-commerce destination for home furnishings, including appliances, furniture, home goods and related products. Since our founding in 1951, we have evolved from a local brick and mortar operation serving the St. Louis metro area to a large nationwide omnichannel retailer that offers one-stop shopping for the leading brands. While we still maintain our St. Louis showroom, over 90% of our sales are placed through our website at www.goedekers.com. We offer over 185,000 SKUs organized by category and product features, providing visitors to the site an easy to navigate shopping experience.

 

Through our e-commerce business model, we offer an online marketplace for consumers looking for variety, style, service and value when shopping for nearly any home product needed. We are focused on bringing our customers an experience that is at the forefront of shopping online for the home. We have built a large online selection of appliances, furniture, home goods and related products. We are able to offer this vast selection of products because our model requires minimal inventory. We specialize in the home category and this has enabled us to build a shopping experience and logistics infrastructure that is tailored to the unique characteristics of our market.

 

Recent Developments

 

Impact of Coronavirus Pandemic

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The virus has since spread to over 150 countries and every state in the United States. On March 11, 2020, the World Health Organization declared the outbreak a pandemic, and on March 13, 2020, the United States declared a national emergency.

 

Most states and cities have reacted by instituting quarantines, restrictions on travel, “stay at home” rules and restrictions on the types of businesses that may continue to operate, as well as guidance in response to the pandemic and the need to contain it. Effective April 6, 2020, the Governor of Missouri announced a stay at home order that was in effect until May 3, 2020. Pursuant to this order, non-essential businesses, such as our showroom, were forced to close. However, our call center and warehouse continued to operate. According to Missouri’s re-opening plan, retail stores, such as our showroom, may re-open effective May 4, 2020 but with limitations on the number of individuals allowed in the showroom. On June 16, 2020, our showroom re-opened to the public, with restrictions that masks be worn by customers and employees, in compliance with St. Louis County mandates. Since over 90% of our sales are completed online and our call center and warehouse and distribution operations continued to operate, the restrictions put in place have not yet had a negative impact on our operations.

 

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

 

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

 

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

 

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

 

Closing of IPO

 

On July 30, 2020, we entered into the underwriting agreement with Representative relating to the IPO. Under the underwriting agreement, we agreed to sell 1,111,200 shares of common stock to the underwriters, and also agreed to grant the underwriters’ a 45-day over-allotment option to purchase an additional 166,577 shares of common stock, at a purchase price per share of $8.325 (the offering price to the public of $9.00 per share minus the underwriters’ discount).

 

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

 

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

 

Loan Agreement

 

On August 25, 2020, we entered into a promissory note and security agreement with Arvest Bank for a loan in the principal amount of $3,500,000.

 

The loan matures on August 25, 2025 and bears interest at 3.250% per annum; provided that, upon an event of default, the interest rate shall increase by 6% until paid in full. Pursuant to the terms of the promissory note and security agreement, we are required to make monthly payments of $63,352.85 beginning on September 25, 2020 and until the maturity date, at which time all unpaid principal and interest will be due.

 

The promissory note and security agreement contains customary representations, warranties, affirmative and negative covenants and events of default for a loan of this type. The loan is secured by all financial assets credited to our securities account held by Arvest Investments, Inc. We may prepare the loan in full or in part at any time without penalty.

 

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The proceeds of the loan were used to repay the 9% subordinated promissory note described below.

 

Principal Factors Affecting Our Financial Performance

 

Our operating results are primarily affected by the following factors:

 

our ability to acquire new customers or retain existing customers;
our ability to offer competitive product pricing;
our ability to broaden product offerings;
industry demand and competition; and
market conditions and our market position.

 

Key Financial Operating Metrics

   Six Months Ended June 30, 
   2020   2019 
Site Sessions (in millions)   4.5    3.3 
Order History  $45,017,000   $29,484,000 

 

Days from Order to Shipment  2020   2019 
January   29.36    24.31 
February   37.56    20.97 
March   30.52    19.26 
April   30.78    17.82 
May   23.43    18.75 
June   24.53    20.94 

 

A site session occurs when a person visits our website. An order occurs when a customer has visited our website and ordered one or more items and has paid for them. The days from order to shipment is a measure, in the case of orders shipped from our warehouse, of the time from the order until the product ordered is loaded onto the shipper’s truck for delivery, and in the case of drop shipments, the time between the order and the date that we are invoiced (assuming that the vendor invoices us on the day that shipment to the customer is made).

 

Total revenues and total orders for any given month may not be equal for two primary reasons: (1) normal customer cancellations and (2) the time required to ship an order and recognize revenue. The time from order to shipping is between 20 and 25 days. Thus, an order made after the 10th of the current month will become revenue in the succeeding month, distorting the comparison between a months’ orders and its sales.

 

Our site sessions increased from approximately 3.3 million in the six months ended June 30, 2019 to approximately 4.5 million in the six months ended June 30, 2020. These increased site sessions were achieved at a lower cost per session beginning in February of 2020 and have continued through the date of this prospectus.

 

These increased site sessions resulted in three-year highs for orders in the six months ended June 30, 2020. An order is paid for by our customer when the order is placed and booked as revenue by us when the order is shipped.

 

Higher orders have positively impacted our working capital as orders yield cash in advance of shipment. Improvements in our working capital as a result of higher orders have positively impacted our delivery times during the second quarter of 2020, thereby reducing the time from order to shipment. A reduction in days from order to shipment results in fewer cancelled orders and, as a result, higher revenues.

 

Given what we believe to be the linear relationship between advertising, site visits, orders, and days from order to shipment impacting cancellations, we believe that the increase in working capital provided by the IPO will have a dramatically positive impact on accelerating our growth rate and profitability.

 

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Emerging Growth Company

 

We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

 

have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

 

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and

 

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

 

Results of Operations

 

Comparison of Six Months Ended June 30, 2020 and 2019

 

The following table sets forth key components of our results of operations for the six months ended June 30, 2020 (Successor), the period from April 6, 2020 to June 30, 2019 (Successor), and the period from April 1, 2019 to April 5, 2019 (Predecessor), in dollars and as a percentage of our revenue.

 

   Successor   Predecessor 
   Six Months Ended June 30, 2020   Period April 6 to June 30, 2019   Period January 1 to April 5, 2019 
   Amount   % of Net Sales   Amount   % of Net Sales   Amount   % of Net Sales 
Product sales, net  $24,962,209    100.0%  $10,545,880    100.0%  $12,946,901    100.0%
Cost of goods sold   20,976,328    83.3%   8,702,406    82.5%   11,004,842    85.0%
Gross profit   4,165,881    16.7%   1,843,474    17.5%   1,942,059    15.0%
Operating expenses                              
Personnel   2,351,673    9.4%   886,225    8.4%   913,919    7.1%
Advertising   1,558,343    6.2%   525,222    5.0%   714,276    5.5%
Bank and credit card fees   699,309    2.8%   232,273    2.2%   329,247    2.5%
Depreciation and amortization   183,361    0.7%   87,437    0.8%   9,675    0.1%
General and administrative   1,202,857    4.8%   539,120    5.1%   451,214    3.5%
Total operating expenses   5,995,813    24.0%   2,270,277    21.5%   2,418,331    18.7%
Loss from operations   (1,829,932)   (7.3)%   (426,803)   (4.0)%   (476,272)   (3.7)%
Other income (expense)                              
Interest income   1,062    -    -    -    23,807    0.2%
Financing costs   (269,186)   (1.1)%   (159,255)   (1.5)%   -    - 
Interest expense   (447,596)   (1.8)%   (205,022)   (1.9)%   -    - 
Loss on extinguishment of debt   (948,856)   (3.8)%   -    -    -    - 
Write-off of acquisition receivable   (809,000)   (3.2)%   -    -    -    - 
Change in fair value of warrant liability   (2,127,656)   (8.5)%   2,600    -    -    - 
Other income (expense)   5,263    -    45,218    0.4%   7,200    - 
Total other income (expense)   (4,595,969)   (18.4)%   (316,459)   (3.0)%   31,007    0.2%
Net loss before income taxes   (6,425,901)   (25.7)%   (743,262)   (7.0)%   (445,265)   (3.4)%
Income tax benefit   1,123,953    4.5%   -    -    -    - 
Net loss  $(5,301,948)   (21.2)%  $(743,262)   (7.0)%  $(445,265)   (3.4)%

 

37

 

 

We believe that reviewing our operating results for the six months ended June 30, 2019 by combining the results of the 2019 successor period (April 6, 2019 through June 30, 2019) and 2019 predecessor period (January 1, 2019 through April 5, 2019) with the pro forma adjustments related to the acquisition is more useful in discussing our overall operating performance compared to the results of the six months ended June 30, 2020 (successor). We do not see any potential risks associated with utilizing this pro forma presentation.

 

Following are the combined periods 2020 and for 2019:

 

  

Six Months
Ended
June 30,

2020

Successor

  

Period
April 6
to
June 30,
2019

Successor

  

Period
January 1
to
April 5,
2019

Predecessor

   Pro Forma
Adjustments
  

Pro Forma
Combined
Six Months
Ended
June 30,

2019

   Increase
(Decrease)
 
Product sales, net  $24,962,209   $10,545,880   $12,946,901    -   $23,492,781   $1,469,428 
Cost of goods sold   20,796,328    8,702,406    11,004,842    -    19,707,248    1,089,080 
Gross profit   4,165,881    1,843,474    1,942,059    -    3,785,533    380,348 
Operating expenses                              
Personnel   2,351,673    886,225    913,919    -    1,800,144    551,529 
Advertising   1,558,343    525,222    714,276    -    1,239,498    318,845 
Bank and credit card fees   699,309    232,273    329,247    -    561,520    137,789 
Depreciation and amortization   183,361    87,437    9,675    -    97,112    86,519 
General and administrative   1,202,857    539,120    451,214    -    990,334    212,523 
Total operating expenses   5,995,813    2,270,277    2,418,331    -    4,688,608    1,307,205 
Loss from operations   (1,829,932)   (426,803)   (476,272)   -    (903,075)   (926,857)
Other income (expense)                              
Interest income   1,062    -    23,807    -    23,807    (22,745)
Financing costs   (269,186)   (159,255)   -(a)   (116,639)   (275,894)   6,708 
Interest expense   (447,596)   (205,022)   -(b)   (15,403)   (220,425)   (227,171)
Loss on extinguishment of debt   (948,856)   -    -    -    -    (948,856)
Write-off of acquisition receivable   (809,000)   -    -    -    -    (809,000)
Change in fair value of warrant   (2,127,656)   2,600    -    -    2,600    (2,130,256)
Other income   5,263    45,218    7,200    -    52,418    (47,155)
Total other income (expense)   (4,595,969)   (316,459)   31,007    (129,442)   (325,768)   (4,178,475)
Net loss before income taxes   (6,425,901)   (743,262)   (445,265)   (205,832)   (1,381,711)   (5,105,332)
Income tax benefit   1,123,953    -    -    -         1,123,953 
Net loss  $(5,301,948)  $(743,262)  $(445,265)  $(205,832)  $(1,381,711)  $3,981,953)

 

38

 

 

Notes

 

(a)   Reflects amortization of costs associated with acquisition debt as follows:    
    Amortization of the cost of shares issued in acquisition  $34,375 
    Amortization of the cost of warrants issued in acquisition   82,264 
    Total  $116,639 
          
(b)   Amortization of discount on note to seller  $15,403 

 

Product sales, net. We generate revenue from the retail sale of home furnishings, including appliances, furniture, home goods and related products. Our product sales were $24,962,209 for the six months ended June 30, 2020, as compared to $23,492,781 for the six months ended June 30, 2019, an increase of $1,469,428, or 6.3%, which included $10,545,880 for our successor from April 6, 2019 to June 30, 2019 and $12,946,901 for our predecessor from January 1, 2019 to April 5, 2019. The increase is due to increased sales volume to meet appliance and furniture demand resulting from increased advertising, which has a direct impact on customer orders and shipped sales. In the first three months, sales were affected by working capital issues, which delayed the timing of ordering product to fulfill customer orders resulting in increased order cancellations. Late in the second quarter of 2020, we suffered delays in getting products from manufacturers whose production facilities were closed because of the coronavirus pandemic. The lack of available products resulted in some cancellations of customer orders.

 

Our past performance is generally indicative of future performance to the extent that there are seasonal factors such as Black Friday, Cyber Monday, and other shopping days when sales spike.

 

Our revenue by sales type is as follows:

 

   Six Months Ended June 30, 
   2020 Successor   2019 Successor   2019 Predecessor  

2019

Total

 
Appliance sales  $19,335,110   $8,395,603   $9,838,232   $18,233,835 
Furniture sales   4,050,163    1,557,813    2,468,818    4,026,631 
Other sales   1,576,936    592,464    639,851    1,232,315 
Total  $24,962,209   $10,545,880   $12,946,901   $23,492,781 

 

Cost of goods sold. Our cost of goods sold 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. Our cost of goods sold was $20,796,328 for the six months ended June 30, 2020, as compared to $19,707,248 for the six months ended June 30, 2019, an increase of $1,089,080, or 5.5%, which included $8,702,406 for our successor from April 6, 2019 to June 30, 2019 and $11,004,842 for our predecessor from January 1, 2019 to April 5, 2019. As a percentage of net sales, cost of sales declined from 83.9% in the 2019 period to 83.3% in the 2020 period. Prior to the acquisition in April 2019, we made adjustments to cost of sales in March 2019 that related to 2018. Had the adjustments been made in 2018, cost of sales would have been 82.6% in the 2019 period. The remaining difference is attributable to product mix and other normal variables.

 

Personnel expenses. Personnel expenses include employee salaries and bonuses plus related payroll taxes. It also includes health insurance premiums, 401(k) contributions, and training costs. Our personnel expenses were $2,351,673 for the six months ended June 30, 2020, as compared to $1,800,144 for the six months ended June 30, 2019, an increase of $551,529, or 31%, which included $886,225 for our successor from April 6, 2019 to June 30, 2019 and $913,919 for our predecessor from January 1, 2019 to April 5, 2019. The increase is the result of hiring additional senior management and other staff needed for increased customer demand for our products, and the accrual of $359,216 as the present value of a severance contract payable to our former president.

 

Advertising expenses. Advertising expenses include the cost of marketing our products and primarily include online search engine expenses. Our advertising expenses were $1,558,343 for the six months ended June 30, 2020, as compared to $1,239,498 for the six months ended June 30, 2019, an increase of $318,845, or 26%, which included $525,222 for our successor from April 6, 2019 to June 30, 2019 and $714,276 for our predecessor from January 1, 2019 to April 5, 2019. The increase relates to an increase in advertising spending to drive traffic to our website.

 

Bank and credit card fees. Bank and credit card fees are primarily the fees we pay credit card processors for processing credit card payments made by customers. Our bank and credit card fees were $699,309 for the six months ended June 30, 2020, as compared to $561,520 for the six months ended June 30, 2019, an increase of $137,789, or 25%, which included $232,273 for our successor from April 6, 2019 to June 30, 2019 and $329,247 for our predecessor from January 1, 2019 to April 5, 2019. These fees are based on sales, so the increase was due to the increase in revenue.

 

39

 

 

General and administrative expenses. Our general and administrative expenses consist primarily of professional advisor fees, bad debts, rent expense, insurance, and other expenses incurred in connection with general operations. Our general and administrative expenses were $1,202,857 for the six months ended June 30, 2020, as compared to $990,334 for the six months ended June 30, 2019, an increase of 212,523, or 22%, which included $539,120 for our successor from April 6, 2019 to June 30, 2019 and $416,448 for our predecessor from January 1, 2019 to April 5, 2019. The primary increases are professional fees for audits, consulting fees to upgrade our online shopping cart, fees to the Manager under the offsetting management services agreement described below, and other consulting fees.

 

Total other income (expense). We had $4,595,969 in total other expense, net, for the six months ended June 30, 2020, as compared to total other expense, net, of $285,452 for the six months ended June 30, 2019, which included expenses of $316,459 for our successor from April 6, 2019 to June 30, 2019 and income of $31,007 for our predecessor from January 1, 2019 to April 5, 2019. Total other expense, net, for the six months ended June 30, 2020 consisted of interest expense of $447,596, financing costs of $269,186, loss on debt modification and extinguishment of $948,856, loss on acquisition working capital receivable of $809,000, and change in the warrant liability of $2,127,656, offset by interest income of $1,062 and other income of $5,263, while other expense for the six months ended June 30, 2019 consisted of financing costs of $275,894 and interest expense, net, of $220,425, offset by a change in warrant liability of $2,600, interest income of $23,807 and other income of $52,418.

 

Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $5,301,948 for the six months ended June 30, 2020, as compared to $1,188,527 for the six months ended June 30, 2019, an increase of $4,113,421, or 346%, which included $743,262 for our successor from April 6, 2019 to June 30, 2019 and $445,265 for our predecessor from January 1, 2019 to April 5, 2019. The net loss for the six months ended June 30, 2020 was affected by (i) a loss on early extinguishment of debt of $948,856, (ii) a write-off of acquisition receivable of $809,000 and (iii) a non-cash charge to change in warrant liability expense of $2,127,656. These three non-cash charges equal $3,885,512, in the aggregate. Excluding these three non-cash charges, the non-GAAP net loss before income taxes for the six months ended June 30, 2020 was $2,540,389, as compared to the reported net loss before income taxes of $6,425,901.

 

Comparison of Years Ended December 31, 2019 and 2018

 

The following table sets forth key components of our results of operations for the period from April 6 to December 31, 2019 (Successor), the period from January 1 to April 5, 2019 (Predecessor) and the year ended December 31, 2018 (Predecessor), in dollars and as a percentage of our revenue.

 

   Successor   Predecessor 
   For the Period April 6 to December 31, 2019   For the Period January 1 to April 5, 2019   For the Year-Ended December 31, 2018 
   Amount   % of Net Sales   Amount   % of Net Sales   Amount   % of Net Sales 
Product sales, net  $34,668,112    100.0%  $12,946,901    100.0%  $56,306,960    100.0%
Cost of goods sold   28,596,129    82.5%   11,004,842    85.0%   45,409,884    80.6%
Gross profit   6,071,983    17.5%   1,942,059    15.0%   10,898,076    19.4%
Operating expenses                  %          
Personnel   2,909,751    8.4%   913,919    7.1%   3,627,883    6.4%
Advertising   1,996,507    5.8%   714,276    5.5%   2,640,958    4.7%
Bank and credit card fees   870,877    2.5%   329,247    2.5%   1,369,557    2.4%
Depreciation and amortization   271,036    0.8%   9,675    0.1%   39,639    0.1%
General and administrative   1,741,050    5.0%   451,214    3.5%   1,330,647    2.4%
Total operating expenses   7,789,221    22.5%   2,418,331    18.7%   9,008,684    16.0%
Income (loss) from operations   (1,717,238)   (5.0)%   (476,272)   (3.7)%   1,889,392    3.4%
Other income (expense)                              
Financing costs   (520,160)   (1.5%   -    -    -    - 
Gain on write-down of contingency   32,246    0.1%   -    -    -    - 
Interest expense   (683,211)   (1.9)%   -    -    (149)   - 
Change in fair value of warrant liability   106,900    0.3%   -    -    -    - 
Other   15,010    -    31,007    0.3%   116,135    0.2%
Total other income (expense)   (1,049,215)   (3.0)%   31,007    0.3%   115,986    0.2%
Net income (loss) before income taxes   (2,766,453)   (8.0)%   (445,265)   (3.4)%   2,005,378    3.6%
Provision for income taxes   (698,303)   (2.0)%   -    -    -    - 
Net income (loss)  $(2,068,150)   (6.0)%  $(445,265)   (3.4)%  $2,005,378    3.6%

 

40

 

 

We believe that reviewing our operating results for the year ended December 31, 2019 by combining the results of the 2019 successor period (April 6, 2019 through December 31, 2019) and 2019 predecessor period (January 1, 2019 through April 5, 2019) with the pro forma adjustments related to the acquisition is more useful in discussing our overall operating performance compared to the results of the year ended December 31, 2018 (predecessor). We do not see any potential risks associated with utilizing this pro forma presentation.

 

Following are the combined periods for 2019:

 

  

Period
April 6
to
December 31,
2019

Successor

  

Period
January 1
to
April 5,
2019

Predecessor

   Pro Forma
Adjustments
   Pro Forma
Combined
Year Ended
December 31,
2109
  

Year Ended
December 31,
2018

Predecessor

   Increase
(Decrease)
 
Product sales, net  $34,668,112   $12,946,901    -   $47,615,013   $56,307,960   $(8,692,947)
Cost of goods sold   28,596,129    11,004,842    -    39,600,971    45,409,884    (5,808,913)
Gross profit   6,071,983    1,942,059    -    8,014,042    10,898,076    (2,884,034)
Operating expenses                              
Personnel   2,909,751    913,919    -    3,823,670    3,627,883    195,787 
Advertising   1,996,507    714,276    -    2,710,783    2,640,958    69,825 
Bank and credit card fees   870,877    329,247    -    1,200,124    1,369,557    (169,433)
Depreciation and amortization   -    9,675(a)   271,036    280,711    39,639    241,072 
General and administrative   1,557,260    451,214(b)   183,790    2,192,264    1,330,647    861,617 
Total operating expenses   7,334,395    2,418,331    454,826    10,207,552    9,008,684    1,198,868 
Income (loss) from operations   (1,262,412)   (476,272)   (454,826)   (2,193,510)   1,889,392    (4,082,902)
Other income (expense)                              
Financing costs   -    -(c)   (520,160)   (520,160)   -    (520,160)
Gain on write-down of contingency   -    -(d)   32,246    32,246    -    32,246 
Interest expense   -    -(e)   (683,211)   (683,211)   (149)   (683,062)
Change in fair value of warrant   -    -(f)   106,900    106,900    -    106,900 
Other income   15,010    31,007    -    46,017    116,135    (70,118)
Total other income (expense)   15,010    31,007    (1,064,225)   (1,018,208)   115,986    (1,134,194)
Net income (loss) before income taxes   (1,247,402)   (445,265)   (1,529,051)   (3,211,718)   2,005,378    (5,217,096)
Provision before income taxes   -    -(g)   (698,303)   (698,303)   -    (698,303)
Net income (loss)  $(1,247,402)  $(445,265)  $(830,748)  $(2,513,415)  $2,005,378   $(4,518,793)

 

41

 

 

Notes

 

(a)   Record deprecation on property and equipment and intangible assets acquired in transaction as follows:    
    Depreciation of property and equipment  $32,880 
    Amortization of customer relationships   36,756 
    Amortization of marketing related intangible asset   201,400 
    Total  $271,036 
          
(b)   Represents management fee to the Manager  $183,790 
          
(c)   Reflects amortization of costs associated with acquisition debt as follows:     
    Amortization of loan costs  $447,420 
    Amortization of warrant   72,740 
    Total  $520,160 
          
(d)   Gain from write-down of acquisition date estimated value of contingent note payable  $32,246 
          
(e)   Interest expense on acquisition debt as follows:     
    Burnley  $83,370 
    Northpoint   18,549 
    SBCC   136,085 
    Leonite   112,144 
    Contingent note payable   11,250 
    Acquisition note payable-related party   321,813 
    Total  $683,211 
          
(f)   Increase in estimated acquisition date value of warrant  $106,900 
          
(g)   Represents the income tax benefit of post-acquisition operations (prior to acquisition, our company was a Subchapter S corporation and income taxes were paid by the stockholders)  $698,303 

 

Product sales, net. Our product sales were $47,615,013 for the year ended December 31, 2019, which included $12,946,901 for our predecessor from January 1, 2019 to April 5, 2019 and $34,668,112 for our successor from April 6, 2019 to December 31, 2019, as compared to $56,307,960 for the year ended December 31, 2018, a decrease of $8,692,947, or 15.4%. The decline in revenue is partially attributable to the transition in ownership and shipping delays that resulted in increased customer order cancellations. The shipping delays are primarily the result of working capital issues. For the year ended December 31, 2019, we estimate that cancellations caused by shipping delays approximated $6,200,000.

 

Our revenue by sales type is as follows:

   Periods Ended December 31, 
   2019
Successor
   2019
Predecessor
  

2019

Total

   2018
Predecessor
 
Appliance sales  $28,487,053   $9,784,525   $38,271,578   $42,871,864 
Furniture sales   4,405,866    2,456,085    6,861,951    10,813,453 
Other sales   1,775,193    706,291    2,481,484    2,622,643 
Total  $34,668,112   $12,946,901   $47,615,013   $56,307,960 

 

Cost of goods sold. Our total cost of goods sold was $39,600,971 for the year ended December 31, 2019, which included $11,004,842 for our predecessor from January 1, 2019 to April 5, 2019 and $28,596,129 for our successor from April 6, 2019 to December 31, 2019, as compared to $45,806,884 for the year ended December 31, 2018. Cost of goods sold declined by $5,805,913 from 2018 to 2019, however as a percentage of net sales, cost of goods sold increased from 80.6% to 83.2%. The increase in cost of goods sold as a percentage of net sales results from the loss of a 2.0% purchase discount from our largest vender and the inability to take advantage of vendor promotional offers because of our working capital constraints. 

 

Personnel expenses. Our total personnel costs were $3,823,670 for the year ended December 31, 2019, which included $913,919 for our predecessor from January 1, 2019 to April 5, 2019 and $2,909,751 for our successor from April 6, 2019 to December 31, 2019, as compared to $3,627,833 for the year ended December 31, 2018, an increase of $195,787, or 5.4%. The increase is partially attributable to the hiring of new chief executive and chief financial officers.

 

42

 

 

Advertising expenses. Our total advertising costs were $2,710,783 for the year ended December 31, 2019, which included $714,276 for our predecessor from January 1, 2019 to April 5, 2019 and $1,996,507 for our successor from April 6, 2019 to December 31, 2019, as compared to $2,640,958 for the year ended December 31, 2018, an increase of $69,825, or 2.6%.

 

Bank and credit card fees. Our bank and credit card fees were $1,200,124 for the year ended December 31, 2019, which included $329,247 for our predecessor from January 1, 2019 to April 5, 2019 and $870,877 for our successor from April 6, 2019 to December 31, 2019, as compared to $1,369,557 for the year ended December 31, 2018, a decrease of $169,433, or 12.4%. These fees are based on sales, so the decline was primarily due to the decrease in sales, although this was offset somewhat by an increase in the fees charged by credit card processors.

 

General and administrative expenses. Our total general and administrative expenses were $2,192,264 for the year ended December 31, 2019, which included $451,214 for our predecessor from January 1, 2019 to April 5, 2019 and $1,741,050 for our successor from April 6, 2019 to December 31, 2019, as compared to $1,330,647 for the year ended December 31, 2018, an increase of $861,617, or 64.8%. The primary increases are professional fees for audits, consulting fees to upgrade our online shopping cart, fees due or paid to the Manager under the offsetting management services agreement described below, fees to comply with the requirement to collect sales taxes in all states, and other consulting fees.

 

Total other income (expense). We had $1,018,208 in total other expense, net, for the year ended December 31, 2019, which included income of $31,007 for our predecessor from January 1, 2019 to April 5, 2019 and expenses of $1,049,215 for our successor from April 6, 2019 to December 31, 2019, as compared to total other income, net, of $115,986 for the year ended December 31, 2018. Total other expense, net, for the year ended December 31, 2019 consisted of financing costs of $520,160 and interest expense of $683,211, offset by a gain on write-down of contingency of $32,246, a change in fair value of warrant liability of $106,900 and other income of $46,017, while other income, net, for the year ended December 31, 2018 consisted of other income of $116,135 (which includes interest income of $79,084 and miscellaneous other income of $37,051), offset by interest expense of $149.

 

Net income (loss). As a result of the cumulative effect of the factors described above, we had a net loss of $2,513,415 for the year ended December 31, 2019, which included $445,265 for our predecessor from January 1, 2019 to April 5, 2019 and $2,068,150 for our successor from April 6, 2019 to December 31, 2019, as compared to a net income of $2,005,378 for the year ended December 31, 2018.

 

Non-GAAP to GAAP Reconciliation

 

This prospectus contains financial measures that are not calculated in accordance with GAAP. The non-GAAP financial measures are net loss before taxes excluding the following non-cash charges (i) a loss on extinguishment of debt of $948,856, (ii) a write-off of acquisition receivable of $809,000 and (iii) a non-cash charge to change in warrant liability expense of $2,127,656.

 

The non-GAAP financial information should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Management, however, believes that these non-GAAP financial measures, when used in conjunction with the results presented in accordance with GAAP, may provide a more complete understanding of our results and may facilitate a fuller analysis of our results, particularly in evaluating performance from one period to another. Management has chosen to provide this supplemental information to investors, analysts, and other interested parties to enable them to perform additional analyses of results and to illustrate the results giving effect to the non-GAAP adjustments shown in the reconciliation described in the next paragraph. Furthermore, the economic substance behind our decision to use such non-GAAP measures is that such measures approximate our controllable operating performance more closely than the most directly comparable GAAP financial measures. Management strongly encourages investors to review our financial statements and publicly filed reports in their entirety and cautions investors that the non-GAAP measures used by us may differ from similar measures used by other companies, even when similar terms are used to identify such measures.

 

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The following table provides a reconciliation of the non-GAAP measures disclosed above to the comparable GAAP measure.

 

   Six Months Ended June 30, 2020 
   GAAP   Elimination of Non-Cash Charges   Non-GAAP 
Loss from operations  $(1,829,932)  $-   $(1,829,932)
Other income (expense)               
Interest income   1,062    -    1,062 
Financing costs   (269,186)   -    (269,186)
Interest expense   (447,596)   -    (447,596)
Loss on extinguishment of debt   (948,856)   (948,856)   - 
Write-off of acquisition receivable   (809,000)   (809,000)   - 
Change in fair value of warrant liability   (2,127,656)   (2,127,656)   - 
Other income (expense)   5,263    -    5,263 
Total other income (expense)   (4,595,969)   3,885,512    (710,457)
Net loss before income taxes  $(6,425,901)  $   $(2,540,389)

 

Liquidity and Capital Resources

 

As of June 30, 2020, we had cash and cash equivalents of $3,555,946. To date, we have financed our operations primarily through revenue generated from operations, bank borrowings and equity contributions by our stockholders.

 

We believe that our current levels of cash will be sufficient to meet our anticipated cash needs for our operations for at least the next 12 months. We may, however, in the future require additional cash resources due to changing business conditions, implementation of our strategy to expand our business, or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

 

At June 30, 2020, we did not meet certain loan covenants under the loan and security agreements with Burnley and SBCC described below. The agreements require compliance with the following ratios of earnings before interest, taxes, depreciation, and amortization to outstanding debt amounts for the twelve-month period ended June 30, 2020. The table below shows the required ratio and actual ratio for such period.

 

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

 

In addition, we were not in compliance with a requirement with respect to the liquidity ratio, which is the ratio of cash and available borrowings to customer deposits. At June 30, 2020, the actual ratio was 0.36x compared to a requirement of 1.0x.

 

Accordingly, at June 30, 2020, we were in default on these loan and security agreements (though we remained current in our payments) and have classified such debt as a current liability.

 

There are no cross-default provisions that would require any other long-term liabilities to be classified as current. Although we have defaulted under the 9% subordinated promissory note described below as the result of our failure to make payments thereunder from and after August 27, 2019, the date that Burnley notified us that we are in technical default under its loan and security agreement, Burnley’s notice also stated that pursuant to the subordination agreement, dated April 5, 2019, between Burnley and Goedeker Television, no payment can be made under the note so long as our default relating to Burnley’s loan continues. Therefore, notwithstanding the default, Goedeker Television has no right to accelerate the note because, in addition to the subordination agreement which otherwise would have permitted acceleration, the note itself also has specific subordination provisions that prohibit such acceleration. Since Goedeker Television does not currently have the right to accelerate the note, we have classified all amounts other than the currently due portion of the note as long-term liabilities.

 

Upon closing of the IPO on August 4, 2020, we repaid the loans from Burnley and SBCC in full.

 

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Summary of Cash Flow

 

The following table provides detailed information about our net cash flow for all financial statement periods presented in this prospectus.

 

   Year Ended December 31,   Six Months Ended June 30, 
  

2019 Successor

(April 6 –
December 31,

2019)

  

2019 Predecessor

(January 1 –
April 5,
2019)

  

2019

Total

   2018 Predecessor  

2020

Successor

  

2019

Successor
(April 6 –
June 30,
2019)

  

2020

Predecessor (January 1 –
April 5,
2019)

  

2019

Total

 
Net cash provided by (used in) operating activities  $(2,706,053)  $611,268   $(2,094,785)  $442,074   $3,852,042   $(2,117,345)  $611,268   $(1,506,077)
Net cash used in investing activities   (2,200)   -    (2,200)   -    (7,000)   -    -    - 
Net cash provided by (used in) financing activities   2,772,723    -    2,772,723    (713,800)   (353,566)   2,288,065    -    2,288,065 
Net change in cash   64,470    611,268    675,738    (271,726)   3,491,476    170,270    611,268    781,988 

 

Our net cash provided by operating activities was $3,852,042 for the six months ended June 30, 2020, as compared to net cash used in operating activities of $1,506,077 for the six months ended June 30, 2019, which included net cash used in operating activities of $2,117,345 for our successor from April 6, 2019 to June 30, 2019 and net cash provided by operating activities of $611,268 for our predecessor from January 1, 2019 to April 5, 2019. The increase in net cash used in operating activities is primarily due the increase in our net loss and a decrease in vendor deposits.

 

Our net cash used in operating activities was $2,094,785 for the year ended December 31, 2019, including $2,706,053 from April 6, 2019 to December 31, 2019, as compared $442,074 net cash provided by operating activities for the year ended December 31, 2018. The increase in net cash used in operating activities is primarily due to the increase in net loss.

 

Our net cash used in investing activities was $7,000 for the six months ended June 30, 2020, which consisted entirely of purchases of property and equipment. We had no investing activities for the six months ended June 30, 2019.

 

Our net cash used in investing activities was $2,200 for the year ended December 31, 2019, all of which was during the period from April 6, 2019 to December 31, 2019 and was for the purchases of property and equipment. We had no investing activities during the year ended December 31, 2018.

 

Our net cash used in financing activities was $353,566 for the six months ended June 30, 2020, as compared to net cash used by financing activities of $2,288,065 for the six months ended June 30, 2019, all of which was during the period from April 6, 2019 to June 30, 2019. Net cash used in financing activities for the six months ended June 30, 2020 consisted of net payments on lines of credit of $814,492 and repayment on notes payable of $187,500, offset by proceeds from the PPP loan described below of $642,600, while net cash provided financing activities for the six months ended June 30, 2019 consisted of net borrowings from lines of credit of $591,315, proceeds from notes payable of $1,500,000, and proceeds from convertible notes payable of $650,000, offset by repayments on notes payable of $93,750 and cash paid for financing costs of $359,500.

 

Our net cash provided by financing activities was $2,772,723 for the year ended December 31, 2019, all of which was during the period from April 6, 2019 to December 31, 2019, and consisted of proceeds from note payable of $1,500,000, net borrowings from lines of credit of $1,339,430 and proceeds from convertible notes payable of $650,000, offset by repayments on notes payable $357,207 and cash paid for financing costs of $359,500. We had $713,800 net cash used in financing activities during the year ended December 31, 2018, all of which consisted of distributions to stockholders.

 

Revolving Loan - Burnley

 

On April 5, 2019, our company, as borrower, and our parent company at such time, 1847 Goedeker Holdco Inc. (“Holdco”), entered into a loan and security agreement with Burnley Capital LLC (“Burnley”) for revolving loans in an aggregate principal amount that will not exceed the lesser of (i) the borrowing base (as defined in the loan and security agreement) or (ii) $1,500,000 (provided that such amount may be increased to $3,000,000 in Burnley’s sole discretion) minus reserves established Burnley at any time in accordance with the loan and security agreement. In connection with the closing of the acquisition of Goedeker Television on April 5, 2019, we borrowed $744,000 under the loan and security agreement and issued a revolving note to Burnley in the principal amount of up to $1,500,000. As of June 30, 2020, there was $232,000 available for borrowing and the balance of the line of credit was $456,104, comprised of principal of $524,938 and net of unamortized debt issuance costs of $68,834.

 

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As noted above, as of June 30, 2020, we were in technical, not payment default, on this loan and security agreement and classified such debt as a current liability.

 

On August 4, 2020, we used a portion of the proceeds from the IPO to repay the loan in full and the loan and security agreement was terminated. The total payoff amount was $118,194, consisting of principal of $32,350 interest of $42 and prepayment, legal, and other fees of $85,802.

 

Revolving Loan - Northpoint

 

On June 24, 2019, we entered into a loan and security agreement with Northpoint Commercial Finance LLC (“Northpoint”), which was amended on August 2, 2019, for revolving loans up to an aggregate maximum loan amount of $1,000,000 for the acquisition, financing or refinancing by us of inventory at an interest rate of LIBOR plus 7.99%. We terminated the loan and security agreement on May 18, 2020 and there is no outstanding balance as of June 30, 2020.

 

Term Loan - SBCC

 

On April 5, 2019, our company, as borrower, and Holdco entered into a loan and security agreement with Small Business Community Capital II, L.P. (“SBCC”) for a term loan in the principal amount of $1,500,000, pursuant to which we issued to SBCC a term note in the principal amount of up to $1,500,000 and a ten-year warrant to purchase shares of our most senior capital stock equal to 5.0% of our outstanding equity securities on a fully-diluted basis for an aggregate price equal to $100. We classified the warrant as a derivative liability on the balance sheet of $2,250,000 based on the estimated value of the warrants in the IPO. The increase in the value of the warrant from the estimated value of $122,344 at March 31, 2020 resulted in a charge of $2,127,656. The balance of the note amounts to $877,603 as of June 30, 2020, comprised of principal of $1,130,826, capitalized PIK interest of $27,476 and net of unamortized warrant feature of $158,321 and unamortized debt discount of $122,375.

 

As noted above, as of June 30, 2020, we were in technical, not payment default, on this loan and security agreement and classified such debt as a current liability.

 

On August 4, 2020, we used a portion of the proceeds from the IPO to repay the loan in full and the loan and security agreement was terminated. The total payoff amount was $1,122,412 consisting of principal of $1,066,640, interest of $11,773 and prepayment, legal, and other fees of $43,999. In addition, SBCC converted the warrant into 250,000 shares of our common stock.

 

Secured Convertible Promissory Note

 

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

 

On May 11, 2020, 1847 and Leonite entered into a first amendment to secured convertible promissory note, pursuant to which the parties agreed (i) to extend the maturity date of the note to October 5, 2020, (ii) that 1847’s failure to repay the note on the original maturity date of April 5, 2020 shall not constitute and event of default under the note and (iii) to increase the principal amount of the note by $207,145, as a forbearance fee.

 

In connection with the amendment, (i) 1847 Holdings issued to Leonite another five-year warrant to purchase 200,000 common shares at an exercise price of $1.25 per share (subject to adjustment), which may be exercised on a cashless basis and (ii) upon closing of 1847 Holdings’ acquisition of Asien’s Appliance, Inc., 1847 Holdings’ wholly owned subsidiary 1847 Asien Inc. issued to Leonite shares of common stock equal to a 5% interest in 1847 Asien Inc.

 

The note carries an original issue discount of $64,286 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred in connection with the purchase of the note. Furthermore, 1847 Holdings issued 50,000 common shares valued at $137,500 and a debt-discount related to the warrants valued at $292,673. In the second quarter of 2020, the $137,500 value of the shares was transferred from a liability to 1847 Holdings to additional paid-in-capital. We amortized $129,343 of financing costs related to the shares and warrants in the six months ended June 30, 2020.

 

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Under the note, Leonite has the right at any time at its option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the note into fully paid and non-assessable common shares or any shares of capital stock or other securities of 1847 Holdings into which such common shares may be changed or reclassified. On May 4, 2020, Leonite converted $100,000 of the outstanding balance of the note into 100,000 common shares of 1847 Holdings. On July 24, 2020, Leonite converted $50,000 of the outstanding balance of the note into 50,000 common shares of 1847 Holdings.

 

The remaining net balance of the note at June 30, 2020 is $821,431. As a result of the activity on this note, $948,856 was recorded as loss on extinguishment of debt.

 

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

 

9% Subordinated Promissory Note

 

A portion of the purchase price for the acquisition of the assets of Goedeker Television was paid by our issuance to Steve Goedeker, as representative of Goedeker Television, of a 9% subordinated promissory note in the principal amount of $4,100,000. The note will accrue interest at 9% per annum, amortized on a five-year straight-line basis and payable quarterly in accordance with the amortization schedule attached thereto, and mature on April 5, 2024. The remaining balance of the note at June 30, 2020 is $3,416,226 comprised of principal of $3,930,293, net of unamortized debt discount of $354,276 and loan costs of $159,791.

 

On June 2, 2020, the parties entered into an amendment and restatement of the note that became effective as of the closing of the IPO on August 4, 2020, pursuant to which (i) the principal amount of the existing note was increased by $250,000, (ii) upon the closing of the IPO, we agreed to make all payments of principal and interest due under the note through the date of the closing, and (iii) from and after the closing, the interest rate of the note was increased from 9% to 12%. We also agreed to grant to the sellers, Goedeker Television, Steve Goedeker and Mike Goedeker, a security interest in all of our assets to secure our obligations under the amended and restated note and entered into a security agreement with them that became effective upon the closing of the IPO.

 

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

 

As stated above, although we have defaulted under this note, Goedeker Television has no right to accelerate the note because the note has specific subordination provisions that prohibit such acceleration.

 

In accordance with the terms of the amended and restated note that became effective upon closing of the IPO on August 4, 2020, we used a portion of the proceeds from the IPO to pay $1,083,842 of the balance of the note representing a $696,204 reduction in the principal balance and interest accrued through August 4, 2020 of $387,638.

 

On August 26, 2020, we used the proceeds of the loan from Arvest Bank described above to repay this the note in full.

 

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Paycheck Protection Program Loan

 

On April 8, 2020, we received a $642,600 Paycheck Protection Program (the “PPP”) loan from the United States Small Business Administration (the “SBA”) under provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. The PPP loan contains events of default and other provisions customary for a loan of this type. The PPP provides that the loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. We intend to use the proceeds from the PPP loan for qualifying expenses and to apply for forgiveness of the PPP loan in accordance with the terms of the CARES Act. We have classified $284,411 of the PPP loan as a current liability and $358,189 as a long-term liability pending classification of the final loan terms by the SBA.

 

Contractual Obligations

 

Offsetting Management Services Agreement

 

On April 5, 2019, we entered into an offsetting management services agreement with the Manager, which also serves as the manager for 1847 Holdings. This agreement was amended on April 21, 2020 with the amendment becoming effective at the closing of IPO on August 4, 2020. Pursuant to the offsetting management services agreement, as amended, we appointed the Manager to provide certain services to us for a quarterly management fee equal to $62,500. Under certain circumstances specified in the offsetting management services agreement, our quarterly fee may be reduced if similar fees payable to the Manager by other subsidiaries of 1847 Holdings exceed a threshold amount.

 

Pursuant to the offsetting management services agreement, we must also reimburse the Manager for all costs and expenses which are specifically approved by our board of directors, including all out-of-pocket costs and expenses, that are actually incurred by the Manager or its affiliates on our behalf in connection with performing services under the offsetting management services agreement.

 

The services provided by the Manager include: conducting general and administrative supervision and oversight of our day-to-day business and operations, including, but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses and permits that become necessary, participation in risk management policies and procedures; and overseeing and consulting with respect to our business and operational strategies, the implementation of such strategies and the evaluation of such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions or dispositions and product or service lines.

 

We expensed $125,000 and $58,790 in management fees for the six months ended June 30, 2020 and 2019, respectively, and $183,790 for the year ended December 31, 2019. Payment of the management fee is subordinated to the payment of interest on the 9% subordinated promissory note, such that no payment of the management fee may be made if we are in default under the note with regard to interest payments and, for the avoidance of doubt, such payment of the management fee will be contingent on our company being in good standing on all associated loan covenants. In addition, during the period that that any amounts are owed under the 9% subordinated promissory note or the earn out payments described below, the annual management fee shall be capped at $250,000. The rights of the Manager to receive payments under the offsetting management services agreement were also subordinate to the rights of Burnley and SBCC under separate subordination agreements that the Manager entered into with Burnley and SBCC on April 5, 2019. Accordingly, $188,653 due the Manager is classified as an accrued liability as of June 30, 2020.

 

Earn Out Payments

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Revenue Recognition and Cost of Revenue 

 

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

 

We collect the full sales price 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 of our contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized.

 

The revenue that we recognize arises from orders we receive from our 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 risk of loss shifts to the customer at different times depending on the method of delivery. We deliver products to our customers in three possible ways. The first way is through a shipment of the products through a third-party carrier from our warehouse to the customer (a “Company Shipment”). The second way is through a shipment of the products through a third-party carrier from a warehouse other than our warehouse to the customer (a “Drop Shipment”) and the third way is where we deliver the products to the customer and often also install the product (a “Local Delivery”). In the case of a Local Delivery, we load the product on to our own truck and deliver and install the product at the customer’s location. When a product is delivered through a Local Delivery, risk of loss passes to the customer at the time of installation and revenue is recognized upon installation at the customer’s location. In the case of a Company Shipment and a Drop Shipment, the delivery to the customer is made free on board, or FOB, shipping point (whether from our warehouse or a third party’s warehouse). Therefore, risk of loss and title transfers to the customer once the products are shipped (i.e., leaves our warehouse or a third-party’s warehouse). After shipment and prior to delivery, the customer is able to redirect the product to a different destination, which demonstrates the customer’s control over the product once shipped. Once the risk of loss has shifted to the customer, we have satisfied our performance obligation and we recognizes revenue.

 

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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, value added tax, and other tax we collect concurrently with revenue-producing activities are excluded from revenue.

 

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

 

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

 

Substantially all our sales are to individual retail consumers.

 

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

 

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

 

Receivables

 

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

 

Merchandise Inventory

 

Inventory consists of finished products acquired for resale and is valued at the low-of-cost-or-market with cost determined on an average item basis. We periodically evaluate the value of items in inventory and provides write-downs to inventory based on our estimate of market conditions.

 

Property and Equipment

 

Property and equipment is stated at the historical cost. Maintenance and repairs of property and equipment are charged to operations as incurred. Leasehold improvements are amortized over the lesser of the base term of the lease or estimated life of the leasehold improvements. Depreciation is computed using the straight-line method over estimated useful lives as follows:

 

 

Category

  Useful Life (Years) 
Machinery and equipment   5 
Office equipment   5 
Vehicles   5 

 

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Goodwill and Intangible Assets

 

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

 

Acquired identifiable intangible assets are amortized over the following periods:

 

Acquired Intangible Asset  Amortization Basis  Expected Life
(Years)
 
Customer related  Straight-line  15 
Marketing related  Straight-line  5 

 

Long-Lived Assets 

 

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

 

Derivative Instrument Liability

 

We account for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged.

 

Recent Accounting Pronouncements

 

Recently Adopted

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which requires lessees to recognize right-of-use (“ROU”) assets and related lease liabilities on the balance sheet for all leases greater than one year in duration. We adopted ASC 842 on January 1, 2019 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach did not require any transition accounting for leases that expired before the earliest comparative period presented. The adoption of this standard resulted in the recording of ROU assets and lease liabilities for all of our lease agreements with original terms of greater than one year. The adoption of ASC 842 did not have a significant impact on our statements of operations or cash flows.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard became effective for our company on January 1, 2019. The adoption of this standard did not have a material impact on our financial statements.

 

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In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was enacted in December 2017. ASU 2018-02 became effective for our company on January 1, 2019 and resulted in a decrease of approximately $748,000 to retained earnings due to the reclassification from AOCI of the effect of the corporate income tax rate change on our cash flow hedges. The adoption of this standard did not have a material impact on our financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 became effective for our company on January 1, 2019. The adoption of this standard did not have a material impact on our financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We adopted ASU 2018-15 on January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on our financial statements.

 

Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We will modify our disclosures beginning in the first quarter of 2020 to conform to this guidance. We do not expect the adoption of this standard and the associated changes to our disclosures to have a material impact to our financial statements.

 

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

 

We currently believe that all other issued and not yet effective accounting standards are not relevant to our financial statements.

 

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BUSINESS

 

Overview

 

Our company is a one-stop e-commerce destination for home furnishings, including appliances, furniture, home goods and related products. Since our founding in 1951, we have evolved from a local brick and mortar operation serving the St. Louis metro area to a large nationwide omnichannel retailer that offers one-stop shopping for the leading brands. While we still maintain our St. Louis showroom, over 90% of our sales are placed through our website at www.goedekers.com. We offer over 185,000 SKUs organized by category and product features, providing visitors to the site an easy to navigate shopping experience.

 

Through our e-commerce business model, we offer an online marketplace for consumers looking for variety, style, service and value when shopping for nearly any home product needed. We are focused on bringing our customers an experience that is at the forefront of shopping online for the home. We have built a large online selection of appliances, furniture, home goods and related products. We are able to offer this vast selection of products because our model requires minimal inventory. We specialize in the home category and this has enabled us to build a shopping experience and logistics infrastructure that is tailored to the unique characteristics of our market.

 

Our shopping experience allows for online chat and the ability to speak with an expert by phone seven days a week. We believe that we are a national leader in customer value and price. We enjoy strong relationships with most national and global appliance companies and we believe that we have a technologically advanced online sales and infrastructure platform.

 

The delivery experience and overall customer service that we offer our shoppers are central to our business. We purchase inventory only after a sale has been made through our website. This allows us to tightly manage our inventory and warehouse space while still providing customers quick delivery times and control over the entire process. About 75% of appliances flow through our warehouse while almost all furniture is drop shipped to the customer. All inventory is managed with a barcode system and is automatically tracked through our Microsoft Dynamics GP ERP system.

 

Corporate History and Structure

 

Our company was incorporated in the State of Delaware on January 10, 2019 for the sole purpose of acquiring substantially all of the assets of Goedeker Television. On April 5, 2019, we acquired substantially all of the assets of Goedeker Television for an aggregate purchase price of $6,200,000 consisting of: (i) $1,500,000 in cash, subject to adjustment; (ii) the issuance of a promissory note in the principal amount of $4,100,000; and (iii) up to $600,000 in earn out payments. As additional consideration, our parent company at the time, 1847 Holdco, agreed to issue to each of the stockholders of Goedeker Television a number of shares of its common stock equal to a 11.25% interest in all of the issued and outstanding stock of 1847 Holdco as of the closing date. As a result of this transaction, we acquired the former business of Goedeker Television and continue to operate this business. Prior to our acquisition of substantially all of the assets of Goedeker Television, we had no operations other than operations relating to our incorporation and organization.

 

As of the date of this prospectus, we have no subsidiaries.

 

On April 5, 2019, we entered into an offsetting management services agreement with the Manager, which also serves as the manager for 1847 Holdings. This agreement was amended on April 21, 2020 with the amendment becoming effective on August 4, 2020. Pursuant to the offsetting management services agreement, as amended, we appointed the Manager to provide certain services to us, including administrative supervision and oversight of our day-to-day business operations for a quarterly management fee equal to $62,500. Under certain circumstances specified in the offsetting management services agreement, our quarterly fee may be reduced if similar fees payable to the Manager by other subsidiaries of 1847 Holdings exceed a threshold amount. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations—Offsetting Management Services Agreement” and “Risks Related to Ownership of Our Common Stock—Certain of our directors could be in a position of conflict of interest.”

 

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Industry

 

Overview

 

According to eMarketer, global retail sales reached over $25 trillion in 2019 and are expected to increase to $30 trillion by 2023. U.S. retail sales reached over $5 trillion in 2019 and are expected to grow by nearly $700 billion by 2023.

 

 

 

Global retail e-commerce sales reached over $3 trillion in 2019 and are expected to increase to over $6 trillion by 2023. U.S. e-commerce retail sales reached over $590 billion in 2019 and are expected to increase to over $960 billion by 2023.

 

 

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Household Appliance Market

 

According to Statista, the U.S. household appliance market reached $18.3 billion in revenue in 2019. Revenue is expected to increase at an annual growth rate of 13.7% from 2020 to 2024.

 

 

 

Source: Statista, January 2020

 

The U.S. appliance market in general is highly fragmented with big box retailers, large online retailers, and thousands of local and regional retailers competing for share in what has historically been a high touch sale process with manufacturers’ strict showroom requirements. However, the landscape has been shifting to online sales, as demonstrated by the chart below.

 

 

Source: Statista, January 2020

 

This shifting landscape to online sales is providing a significant market share capture and positioning opportunity for companies. We are continuing to capitalize on this market shift. According to Consumer Reports, more than 80% of customers research and compare appliances online.

 

Furniture and Homeware Market

 

According to Statista, the U.S. furniture and homeware market reached $44 billion in revenue in 2019. Revenue is expected to increase at an annual growth rate of 4.3% from 2020 to 2024.

 

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Source: Statista, January 2020

 

Although consolidation in the U.S. furniture and homeware market continues to progress, the industry is still relatively fragmented compared to other retail subsectors of similar market value. As with the U.S. household appliance market, the landscape has been shifting to online sales, as demonstrated by the chart below.

 

 

Source: Statista, January 2020

 

Much like the U.S. household appliance market, the shifting landscape to online sales in the segment is providing a significant market share capture and positioning opportunity for companies, led by giants such as Wayfair and Amazon. We are continuing to capitalize on this market shift.

 

Impact of Coronavirus Pandemic

 

To our knowledge, the projections above for future periods do not take into account the effects of the worldwide coronavirus pandemic. Accordingly, those projections may be overstated and should not be given undue weight.

 

At this time, we cannot predict the exact effects of the pandemic. However, we do anticipate that that the shift to online sales will be accelerated, as at least some of the retail stores that have closed during the pandemic may not re-open.

 

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Products

 

Appliances

 

The appliance category is our largest revenue source. We have a long history of selling these products and serving the distinct needs of consumers looking to replace or add to their home appliances. We offer roughly 22,000 appliance SKUs from all mainline original equipment manufacturers, including Bosch, Whirlpool, GE, Maytag, LG, Samsung, Sharp, and Kitchen Aid, among others. We sell all major home appliances, including refrigerators, ranges, ovens, dishwashers, microwaves, freezers, washers and dryers.

 

 

Sales of appliances accounted for approximately 80% and 76% of our revenues for the years ended December 31, 2019 and 2018, respectively, and for approximately 78% for the six months ended June 30, 2020 and 2019.

 

Furniture

 

We began selling furniture online in 2015 and currently offer approximately 157,000 SKUs from over 300 furniture vendors. Furniture is the second largest product category. The organization of product by type and characteristics makes for a complete shopping experience in a complicated product category.

 

 

Sales of furniture accounted for approximately 15% and 19% of our revenues for the years ended December 31, 2019 and 2018, respectively, and for approximately 15% and 17% for the six months ended June 30, 2020 and 2019, respectively.

 

Other Products

 

We also offer a broad assortment of products in the décor, bed & bath, lighting, outdoor living and electronics categories. While these are not individually high-volume categories, they complement the appliance and furniture categories to produce a one-stop home goods offering for customers.

 

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We also offer customers the opportunity to purchase warranties that protect their appliances beyond the manufacturers’ warranty period. These warranties are offered through third party vendors. We remit the cost of the warranty to the warranty company, net of our commission. The warranty company assumes all costs of the warrantied product.

 

Other sales accounted for approximately 5% of our revenues for the years ended December 31, 2019 and 2018, and for approximately 6% and 5% for the six months ended June 30, 2020 and 2019, respectively.

 

Pricing

 

We believe that our pricing model creates a competitive advantage as we strive to sell at the lowest possible price in the market. Our team tracks pricing daily on more than 22,000 appliance SKUs, comparing prices with all major resellers. Adjustments are made daily to ensure the success this strategy. Our business model emphasizes value added products up to and including super premium products. As a result, we believe that our average selling price by product category is higher than industry norms.

 

Vendor/Supplier Relationships

 

We offer more than 400 vendors and over 185,000 SKUs available for purchase through our website. This depth of vendor relationships gives consumers numerous options in all product categories resulting in a true one-stop shopping destination. Our vendors and suppliers are listed in the table below.

 

Supplier  Total Purchases (2018)   Total Purchases (2019)   Percent of Purchases (2019) 
Whirlpool  $15,710,764   $17,337,900    44.1%
General Electric   4,635,287    2,528,000    6.4%
Bosch   2,959,734    2,479,800    6.3%
Electrolux   2,076,985    2,081,600    5.3%
LG   1,622,237    1,980,200    5.0%
Samsung   2,442,788    1,481,400    3.8%

 

We are substantially dependent on Whirlpool for a large portion of our product purchases. Products are purchased from all suppliers, including Whirlpool, on an at-will basis. We have no long-term purchase agreements with Whirlpool or any other supplier. Relationships with suppliers are subject to change from time to time. Changes in our relationships with suppliers occur periodically and could positively or negatively impact our net sales and operating profits. We believe that we can be successful in mitigating negative effects resulting from unfavorable changes in the relationships with suppliers through, among other things, the development of new or expanded supplier relationships. Please see “Risk Factors” for a description of the risks related to our supplier relationships, including our dependence on Whirlpool.

 

Marketing

 

We market our products through a variety of methods, including through paid shopping and paid searches, display marketing, affiliate marketing, organic marketing, paid social media marketing and email marketing. The diagram below sets forth some of our key marketing statistics for 2019.

 

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Paid Shopping and Paid Search

 

Our most effective channel is paid shopping and paid search. We utilize multiple search platforms (primarily Google) to put our products in front of consumers that are searching for products online. We have engaged a “best in class” agency and continually monitor and optimize campaigns in order to create more efficient and profitable campaign results. We specialize in a “bottom of the funnel” approach, meaning our campaigns are designed to spend more liberally with those at the end of the purchase cycle, and more conservatively with those in the beginning of the purchase journey.

 

Display Marketing

 

The majority of our display efforts are in the form of remarketing across the Google ad network. At this time, we are not focused on major branding efforts as much as we are on capitalizing on consumers who have begun their buying journey. With high average order values, we find that remarketing works effectively at bringing consumers back on the website or the phone to place an order.

 

Affiliate Marketing

 

Keeping a keen eye on nexus laws, we have scaled back our affiliate marketing in order to protect the interests of our company. We have found that the administrative burden and tax impact or revenue generated by many of the affiliates outweighed the benefits. As of the date of this prospectus, we have only one affiliate marketing relationship remaining with 200 affiliate partners.

 

Organic Marketing

 

Organic marketing continues to be a strong channel for our company. While we are not heavily invested in organic at this time, the channel resulted in approximately 300,000 users coming to our website in the last quarter of 2019 alone. We understand best practices in technology, programming, copywriting, link acquisition as well as many other strategies to ensure we are in a strong position with the largest search engines.

 

Paid Social Media

 

Social media is utilized sparingly to drive traffic and manage brand perception. It is our goal to not look irrelevant to consumers viewing us on social media, while at the same time minimizing spending on these channels. We have found awareness campaigns on social media to be ineffective with products at our price point. We do take advantage of the remarketing opportunities on Facebook, which work well for us by driving highly qualified traffic back to our website where that traffic is converted to customers.

 

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Email

 

Using email marketing, we put relevant products and offers in front our of a growing email database of approximately 200,000 opted-in consumers multiple times per week. Our marketing team produces email content by utilizing in-house design, copy and programming resources. Messages are sent using an enterprise-level email service provider and metrics such as deliverability, open rates and click rates are constantly monitored. Messages are targeted to individuals based on numerous factors including what time they are most likely to read emails, past purchase behavior and frequency of interaction.

 

Additionally, we utilize a multitude of triggered email programs, such as cart and browse abandonment, to entice customers back into the funnel. We continue to pursue best practices such as offer modals and scraping the checkout in order to facilitate continued list growth. Below is a diagram representing key performance metrics for 2019.

 

 

Customers and Markets

 

Based on a study that we commissioned in 2019, our average shopper is between 35 and 64 years old and lives in a single-family home, which they own. Most of our customers are not reluctant to buy at a premium price for top quality as long as we and our products provide good value. Our most popular brands tend to be middle to upper market brands that are not found in the stores of many large retailers. A significant percentage of our customers have household income above $100,000.

 

Our physical store presence and warehouse is located in St Louis, Missouri, and third-party distribution, delivery and installation agreements allow us to serve, sell and ship to customers nationwide. Further efforts are underway to expand our agreements directly with manufacturers to pick up and deliver from their warehouse to reach more customers, more quickly at reduced costs. In fact, while we started many years ago as a brick and mortar only business, about 77% of our sales originate from outside the Midwest market. The diagram below represents our sales by region for 2019:

 

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Customer Support

 

Our customer support team exists to sell and service customers at all parts of the buying and ownership cycle. We believe that by integrating phone support with marketing efforts, we differentiate ourselves from big box and independent retailers. Leading edge contact center technology and management is in early stage deployment and promises to increase sales close rates, decrease cancellations, increase average ticket size and create customers that purchase within the next twelve months. Current repeat purchasing is roughly 20% within a year, which demonstrates a reasonable satisfaction with the current model. We have a customer service team of nine members and call center sales team of nine members.

 

Our call center is now available to field inbound customer calls from 8:00 am to 6:00 pm CT, Monday through Saturday and Sunday from 12:00pm to 6:00 pm CT. Approximately 34% of all sales involve an order that was placed with a sales representative. This percentage should increase in 2020 as chat becomes a more deployed resource for our shoppers and customers.

 

Logistics

 

Purchasing and Inventory Management

 

We purchase inventory only after a sale has been made through our website. This allows us to tightly manage inventory and warehouse space while still providing customers quick delivery times and control over the entire process. About 75% of appliances flow through our warehouse while almost all furniture is drop shipped to the customer. All inventory is managed with a barcode system and is automatically tracked through our Microsoft Dynamics GP ERP system. As described above, initiatives are underway that will allow us to pick up products closer and more quickly directly from our manufacturers’ warehouses.

 

Shipping and Delivery

 

We take ownership of inventory when it is delivered to our warehouse. At this point, warehouse staff unloads the product, determines the delivery location, picks a carrier and ultimately ships the product. We primarily use R+L Carriers for most of our larger shipping services. We also use AM Home Delivery for furniture deliveries. If a customer is outside of their service zones or requires faster delivery times, we will use one of our three or four specialty carriers to get the job done.

 

Returns and Exchanges

 

Our return and exchange policy is designed to be as worry-free and customer-friendly as possible. We offer a 30-day money back, 100% satisfaction guarantee. If a customer is not satisfied with his or her order, we will exchange or refund the full purchase price, minus all shipping costs, within 30 days of delivery. We do not charge a restocking fee when items are returned or exchanged, which we believe differentiates us from other retailers.

 

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Technology

 

Technology utilization, along with the capture and analysis of data, have been cornerstones of our strategy since moving to the online marketplace. Management streamlines much of the decision-making process around operations, purchasing decisions, marketing efforts and customer experience by leveraging our customized ERP systems and sales reports.

 

 

Competition

 

We compete with big box retailers, independent appliance and furniture retailers, hybrid retail and direct-to-consumer companies and web only companies. As a hybrid retail and direct-to-consumer company, we have the ability to navigate the competitive offerings of each competitor, utilizing online marketing, our customer service expertise and large curated assortments to attract and retain new customers.

 

Appliances

 

The U.S. appliance market in general is highly fragmented with thousands of local and regional retailers competing for share. Our primary competitors in the appliance market include:

 

Big Box Retailers:  Home Depot, Lowe’s, Best Buy and Walmart;

 

Online Retailers and Marketplaces: Amazon and Houzz; and

 

Specialty Retailers: AJ Madison, Appliance Connection and US Appliance.

 

The shifting landscape to online sales in the segment is providing a significant market share capture and positioning opportunity for companies. We are continuing to capitalize on this market shift.

 

Furniture and Homewares

 

Although consolidation in the U.S. furniture and homeware market continues to progress, the industry is still relatively fragmented compared to other retail subsectors of similar market value. Our main competitors in the furniture and homewares market include:

 

Furniture Stores: Ashley Furniture, Bob’s Discount Furniture, Havertys, Raymour & Flanagan and Rooms To Go;

 

Big Box Retailers: Bed Bath & Beyond, IKEA, Target and Walmart;

 

Department Stores: JCPenney and Macy’s;

 

Specialty Retailers: Crate and Barrel, Ethan Allen, TJX, At Home, Williams Sonoma, Restoration Hardware, Arhaus, Horchow, Room & Board and Mitchell Gold + Bob Williams; and

 

Online Retailers and Marketplaces: Amazon, Wayfair and eBay.

 

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Much like the appliance market, the shifting landscape to online sales in the segment is providing a significant market share capture and positioning opportunity for companies, led by giants such as Wayfair and Amazon. We are continuing to capitalize on this market shift. We believe there may be opportunities for nationally distributed niche products, like sleeper sofas, where we could benefit from not inventorying product but marketing and then ordering on demand after payment. Similar opportunities are even more broadly available in the appliance market.

 

Competitive Strengths

 

Based on management’s belief and experience in the industry, we believe that the following competitive strengths enable us to compete effectively.

 

Name and reputation. We believe that we enjoy a long-standing (50+ years) reputation with vendors and customers for our focus on offering a full line of appliances and other home furnishings with competitive pricing and superior customer service.

 

Strong customer relationships. We cater to the committed shopper who is interested in purchasing top-of-the-line appliances, furniture and other home goods at low prices. We believe that these customers value our dedication to providing outstanding customer service and repeatedly use us for their home product needs.

 

Highly trained and professional staff. We believe that our personnel are our most important asset. We have an internal sales support team of nine personnel who are trained to educate and support customers when selecting and buying products. Approximately 34% of customer orders consist of a phone conversation with a sales team member, which becomes a differentiator when competing with online only companies and with brick and with mortar outlets.

 

Product pricing. We believe that our pricing model creates a competitive advantage as we strive to sell at the lowest allowed price in the market. Our team tracks pricing daily on more than 22,000 appliance SKUs, comparing prices with all major resellers. Adjustments are made daily to ensure this strategy.

 

Online sales expertise. We believe that our ability to transact online, big ticket, home delivery gives us strategic positioning and capability to sell more products to our current customer base, as well as to add new big ticket product categories.

 

Best in class customer service and marketing technology. We believe that the investments we have made in our call center tools and the latest version of our shopping platform, combined with digital marketing optimization, should put us in position to offer a scalable, repeatable quality process that is second to none in the retail appliance industry.

 

Growth Strategies

 

We will strive to grow our business by pursuing the following growth strategies.

 

Significantly increase marketing spend. We plan to partner with nationally accredited advertising and marketing agencies to more efficiently utilize our advertising dollars and to increase sales through our website and our call center.

 

Expand in the commercial market. To date, we have directed all marketing efforts toward the consumer. With remodels and new home construction, there is opportunity to market to home builders, contractors and interior designers who are making or influencing the purchasing decision for many consumers. We believe that our low price business model would be received well by this market, creating substantial revenue opportunities and more repeat business. Evidence of unmet demand and market need is ongoing with large commercial sales occurring organically each week through our web site and contact center.

 

Expand category management. We have expanded from online appliances to furniture and other categories while maintaining management headcount. Management feels that committing dedicated resources to each category and building them out in business unit fashion will not only drive revenue but increase and improve margins.

 

Warehouse and shipping optimization. We plan to implement a series of initiatives with key vendors to increase shipping speed to customers, cut costs and increase margins. We plan to pick up product from manufacturers’ warehouses and selectively use inventory buys to reduce costs. With access to vendor warehouse operations, we expect to take advantage of buying opportunities and capture time-sensitive customers more frequently.

 

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Expanded operating hours. Our customer support and sales hours were expanded during 2019 and we expect to expand sales hours by 20 hours per week as we move through 2020.

 

Ride the wave of online retail. Big ticket online retail continues to grow significantly as product offerings and shopping experiences start to become superior to most brick and mortar shopping. We are making key investments in people, processes and systems that we believe will grow our customer base. We believe that we are well positioned to benefit from the growth in online retail.

 

Intellectual Property

 

We own several domain names, including for our www.goedekers.com website. The agreements with our suppliers generally provide us with a limited, non-exclusive license to use the supplier’s trademarks, service marks and trade names for the sole purpose of promoting and selling their products.

 

To protect our intellectual property, we rely on a combination of laws and regulations, as well as contractual restrictions. We rely on the protection of laws regarding unregistered copyrights for certain content we create. We also rely on trade secret laws to protect our proprietary technology and other intellectual property. To further protect our intellectual property, we enter into confidentiality agreements with our executive officers and directors.

 

Facilities

 

We are headquartered at 13850 Manchester Rd., St. Louis, Missouri 63011. We operate from one facility totaling 50,000 square feet, which houses our corporate headquarters, warehouse and showroom. We lease this facility pursuant to a lease agreement entered into with S.H.J., L.L.C., a Missouri limited liability company and affiliate of Goedeker Television, on April 5, 2019. The lease is for a term of five (5) years and provides for a base rent of $45,000 per month. In addition, we are responsible for all taxes and insurance premiums during the lease term. In the event of late payment, interest shall accrue on the unpaid amount at the rate of eighteen percent (18%) per annum. The lease contains customary events of default, including if: (i) we shall fail to pay rent within five (5) days after the due date; (ii) any insurance required to be maintained by us pursuant to the lease shall be canceled, terminated, expire, reduced, or materially changed; (iii) we shall fail to comply with any term, provision, or covenant of the lease and shall not begin and pursue with reasonable diligence the cure of such failure within fifteen (15) days after written notice thereof to us; (iv) we shall become insolvent, make an assignment for the benefit of creditors, or file a petition under any section or chapter of the Bankruptcy Code, or under any similar law or statute of the United States of America or any State thereof; or (v) a receiver or trustee shall be appointed for the leased premises or for all or substantially all of our assets.

 

We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our businesses.

 

Employees

 

As of June 30, 2020, we employed 73 full-time employees.

 

Department/Function  Employees
Accounting/Finance  12
Sales and Marketing  12
Customer Service  15
Human Resources  1
Information Technology  6
Merchandising  11
Purchasing  5
Warehouse  7
Administrative  4
TOTALS  73

 

None of our employees are represented by labor unions, and we believe that we have an excellent relationship with our employees.

 

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Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

Regulation

 

Our business is subject a variety of laws and regulations applicable to companies conducting business on the Internet. Jurisdictions vary as to how, or whether, existing laws governing areas such as personal privacy and data security, consumer protection or sales and other taxes, among other areas, apply to the Internet and e-commerce, and these laws are continually evolving. For example, certain applicable privacy laws and regulations require us to provide customers with our policies on sharing information with third parties, and advance notice of any changes to these policies. Related laws may govern the manner in which we store or transfer sensitive information or impose obligations on us in the event of a security breach or inadvertent disclosure of such information. Additionally, tax regulations in jurisdictions where we do not currently collect state or local taxes may subject us to the obligation to collect and remit such taxes, or to additional taxes, or to requirements intended to assist jurisdictions with their tax collection efforts. New legislation or regulation, the application of laws from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and e-commerce generally could result in significant additional taxes on our business. Further, we could be subject to fines or other payments for any past failures to comply with these requirements. The continued growth and demand for e-commerce is likely to result in more laws and regulations that impose additional compliance burdens on e-commerce companies.

 

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MANAGEMENT

 

Directors and Executive Officers

 

Set forth below is information regarding our directors and executive officers as of the date of this prospectus.

 

Name   Age   Position
Douglas T. Moore   63   Chief Executive Officer and Director
Robert D. Barry   76   Chief Financial Officer
Ellery W. Roberts   50   Chairman of the Board
Edward J. Tobin   63   Director
Ellette A. Anderson   43   Director
Clark R. Crosnoe   51   Director
Paul A. Froning   49   Director
Glyn C. Milburn   49   Director

 

Douglas T. Moore. Mr. Moore has served as our Chief Executive Officer since August 2019 and as a director since April 2020. Through his more than 25 years of retail experience, Mr. Moore has developed an understanding of strategic and tactical business issues that include store operations, merchandising, supply chain, sourcing and human resource planning. He also possesses senior management, marketing, risk assessment and retail knowledge. Prior to joining us, Mr. Moore was President and Chief Executive Officer of Med-Air Homecare, a home healthcare equipment and service provider, from November 2013 until May 2019, Principal of First Street Consulting, LLC, a retail consulting firm, from January 2011 until October 2017, and Senior Vice President of FirstSTREET for Boomers and Beyond, Inc., a leading direct marketer of products for baby boomers, from October 2017 until August 2019. From February 2012 through June 2012, Mr. Moore served as the Chief Merchandising and Marketing Officer at hhgregg, Inc., a consumer electronics retail chain. Mr. Moore has served on the board of directors of Lumber Liquidators Holdings, Inc. (NYSE:LL), one of the leading specialty retailers of hard-surface flooring in North America, since April 2006. Mr. Moore received his undergraduate degree and M.B.A. from the University of Virginia. Mr. Moore was selected to serve on our board of directors due to his extensive experience in the retail industry and public company board experience.

 

Robert D. Barry. Mr. Barry has served as our Chief Financial Officer since our inception and as a director from inception until April 2020. He has served on the board of directors of 1847 Holdings since January 2014 and has served as Controller of 1847 Holdings’ subsidiary Neese, Inc., since July 2017. From April 2013 until August 2016, Mr. Barry was Chief Executive Officer and Chief Financial Officer of Pawn Plus Inc., a chain of five retail pawn stores in suburban Philadelphia and one pawn store in northeastern Ohio. Prior to that, Mr. Barry served as Executive Vice President and Chief Financial Officer of Regional Management Corp. (NYSE:RM), a consumer loan company based in Greenville, South Carolina, from March 2007 to January 2013. Prior to joining Regional Management Corp., Mr. Barry was the Managing Member of AccessOne Mortgage Company, LLC in Raleigh, North Carolina, from 1997 to 2007. During this time, he also served as part-time Chief Financial Officer for Patriot State Bank, in Fuquay-Varina, North Carolina, from March 2006 to March 2007 and Nuestro Banco, Raleigh, North Carolina, from July 2006 to March 2007. Prior to his time at AccessOne, Mr. Barry was Executive Vice President and Chief Financial Officer for Regional Acceptance Corporation (NASDAQ:REGA), a consumer finance company based in Greenville, North Carolina and prior to that he was a financial institutions partner in the Raleigh, North Carolina office of KPMG LLP. Mr. Barry is a Certified Public Accountant licensed in North Carolina and Georgia. Mr. Barry was selected to serve on our board of directors due to his years of relevant financial and business expertise.

 

Ellery W. Roberts.  Mr. Roberts has served as the Chairman of our board of directors since our inception. Mr. Roberts brings over 20 years of private equity investing experience to our company. Mr. Roberts has been the Chairman, Chief Executive Officer, President and Chief Financial Officer of 1847 Holdings since its inception on January 22, 2013 and is also the sole manager of the Manager. Mr. Roberts has also been a director of Western Capital Resources, Inc., a public company (WCRS), since May 2010.  In July 2011, Mr. Roberts formed The 1847 Companies LLC, a company that is no longer active, where he began investing his own personal capital and capital of high net worth individuals in select transactions.  Prior to forming The 1847 Companies LLC, Mr. Roberts was the co-founder and was co-managing principal from October 2009 to June 2011 of RW Capital Partners LLC, the recipient of a “Green Light” letter from the U.S. Small Business Administration permitting RW Capital Partners LLC to raise capital in pursuit of the Small Business Investment Company license with the preliminary support of the Small Business Administration. Mr. Roberts was a founding member of Parallel Investment Partners, LP (formerly SKM Growth Investors, LP), a Dallas-based private equity fund focused on re-capitalizations, buyouts and growth capital investments in lower middle market companies throughout the United States. Previously, Mr. Roberts served as Principal with Lazard Group LLC (NYSE: LAZ), a Senior Financial Analyst at Colony Capital, Inc., and a Financial Analyst with the Corporate Finance Division of Smith Barney Inc. (now known as Morgan Stanley Smith Barney LLC).  Mr. Roberts received his B.A. degree in English from Stanford University. Mr. Roberts was selected to serve on our board of directors due to his extensive investment experience.

 

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Edward J. Tobin. Mr. Tobin has served on our board of directors since April 2020. Mr. Tobin has served as Managing Director of the Manager since January 2014. From 1997 until November 2014, Mr. Tobin was a Director of Global Emerging Markets North America, Inc., where he managed Special Situations and Venture investing. In this role, he oversaw structured finance transactions in industries such as clean tech, media, telecommunications, manufacturing, real estate and life sciences. Prior to that, Mr. Tobin was Managing Director of Lincklaen Partners, a private family investment office. Previously, he had been a portfolio manager with Neuberger and Berman and a Vice President of Nordberg Capital, Inc. Mr. Tobin received his MBA from the Wharton School, as well as a Master of Science in Engineering and a Bachelor of Science in Economics (cum laude) from the University of Pennsylvania. Mr. Tobin was selected to serve on our board of directors due to his extensive investment experience.

 

Ellette A. Anderson. Ms. Anderson has served on our board of directors since July 2020. In 2013, Ms. Anderson founded Griffin Archer LLC, a full-service advertising agency that offers a comprehensive range of services addressing both the traditional and digital marking aspects of business. As the Chief Executive Officer of Griffin Archer, Ms. Anderson is responsible for overseeing new business acquisitions, strategic planning, and creative direction for their entire client portfolio. From April 2004 to August 2013, she served as a Writer and Associate Creative Director at Carmichael Lynch Advertising in Minneapolis where she received multiple industry awards for her creative work on some of the world’s most iconic brands. She holds a B.A. degree in English Literature from the University of Kansas. Ms. Anderson was selected to serve on our board of directors due to her deep experience in the advertising and marketing industry.

 

Clark R. Crosnoe. Mr. Crosnoe has served on our board of directors since July 2020. In 2009, Mr. Crosnoe founded CRC Capital LLC, a registered investment advisor and manager of the CRC Investment Fund LP, a private investment partnership focused on publicly-traded equity securities. As managing member of CRC Capital LLC, Mr. Crosnoe is responsible for strategy, oversight and the day-to-day investment decisions of the fund. The portfolio typically includes investments in the consumer, financial, healthcare, industrial and energy sectors. In 1999, Mr. Crosnoe was a founding employee of Parallel Investment Partners where he was named partner in 2003. As a partner, he was responsible for sourcing, evaluating, structuring, executing and monitoring investments, and also dedicated a substantial portion of his time to marketing activities for the firm. Mr. Crosnoe began his career in investment banking at Wasserstein Perella & Co. and also gained valuable experience at multi-billion dollar hedge fund HBK Investments. Mr. Crosnoe holds undergraduate degrees from the University of Texas at Austin and earned an MBA from Harvard Business School in 1996. He was selected to serve on our board due to his approximately 22 years of private and public investment and advisory experience.

 

Paul A. Froning. Mr. Froning has served on our board of directors since July 2020. He has served on the board of directors of 1847 Holdings since April 2013. In 2009, Mr. Froning co-founded Focus Healthcare Partners LLC, a Chicago-based private equity investment, advisory and asset management firm targeting the senior housing and healthcare sectors. Prior to that, from February 2008 to October 2009, Mr. Froning was a Managing Director in the private equity department of Fortress Investment Group LLC (NYSE: FIG), a publicly-traded New York-based private investment firm.  Prior to that, Mr. Froning was the Chief Investment Officer and Executive Vice President of Brookdale Senior Living Inc. (NYSE: BKD), a publicly-traded affiliate of Fortress Investment Group LLC, from 2005 to 2008.  Previously, Mr. Froning held senior investment positions at the private equity investment arms of Lazard Group LLC (NYSE: LAZ) and Security Capital Group, prior to its acquisition by GE Capital Corp., in addition to investment banking experience at Salomon Brothers, prior to its acquisition by Travelers Group, and the securities subsidiary of Principal Financial Group (NYSE: PSG).  Mr. Froning has a B.A. degree from the University of Notre Dame. Mr. Froning was selected to serve on our board of directors due to his twenty years of private equity, investment and advisory experience.

 

Glyn C. Milburn.  Mr. Milburn has served on our board of directors since July 2020.  Since February 2016, Mr. Milburn has served as a Partner at Jimmy Blackman & Associates, a full-service Government and Public Affairs firm, where he is responsible for business strategy, client management, communications and campaign management for a client portfolio comprised of large public safety labor unions, banking/finance companies, and hotel operators across the State of California. From April 2013 to January 2016, Mr. Milburn served as a Special Assistant in the City of Los Angeles where he held two positions in the City of Los Angeles, one in the Office of Los Angeles Mayor Eric Garcetti’s Office of Economic Development and another in the Office of Los Angeles Councilman Dennis Zine.  From August 2012 to March 2013, Mr. Milburn co-Founded Provident Investment Advisors LLC, a special investment vehicle for energy, technology and healthcare ventures, where he served as Managing Member.  Mr. Milburn holds a B.A. degree in Public Policy from Stanford University.  Mr. Milburn was selected to serve on our board of directors due to his valuable background in policy development, regulatory and strategic planning experience.

 

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Our directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and qualify, subject to their prior death, resignation or removal. Officers serve at the discretion of the board of directors. There is no arrangement or understanding between any director or executive officer and any other person pursuant to which he was or is to be selected as a director, nominee or officer.

 

Family Relationships

 

There are no family relationships among any of our officers or directors.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, except as described below, none of our directors or executive officers has, during the past ten years:

 

been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

 

had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;

 

been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;

 

been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

 

been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Corporate Governance

 

Governance Structure

 

We chose to appoint a separate Chairman of the Board who is not our Chief Executive Officer. Our board of directors has made this decision based on their belief that an independent Chairman of the Board can act as a balance to the Chief Executive Officer, who also serves as a non-independent director.

 

The Board’s Role in Risk Oversight

 

The board of directors oversees that the assets of our company are properly safeguarded, that the appropriate financial and other controls are maintained, and that our business is conducted wisely and in compliance with applicable laws and regulations and proper governance. Included in these responsibilities is the board’s oversight of the various risks facing our company. In this regard, our board seeks to understand and oversee critical business risks. Our board does not view risk in isolation. Risks are considered in virtually every business decision and as part of our business strategy. Our board recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for our company to be competitive on a global basis and to achieve its objectives.

 

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While the board oversees risk management, company management is charged with managing risk. Management communicates routinely with the board and individual directors on the significant risks identified and how they are being managed. Directors are free to, and indeed often do, communicate directly with senior management.

 

Our board administers its risk oversight function as a whole by making risk oversight a matter of collective consideration. Much of this work has been delegated to committees, which will meet regularly and report back to the full board. The audit committee oversees risks related to our financial statements, the financial reporting process, accounting and legal matters, the compensation committee evaluates the risks and rewards associated with our compensation philosophy and programs, and the nominating and corporate governance committee evaluates risk associated with management decisions and strategic direction.

 

Independent Directors

 

NYSE American’s rules generally require that a majority of an issuer’s board of directors must consist of independent directors. Our board of directors currently consists of seven (7) directors, four (4) of whom, Ellette A. Anderson, Clark R. Crosnoe, Paul A. Froning and Glyn C. Milburn, are independent within the meaning of the NYSE American’s rules.

 

Committees of the Board of Directors

 

Our board has established an audit committee, a compensation and nominating and corporate governance committee, each with its own charter approved by the board. Each committee’s charter is available on our website at www.goedekers.com.

 

In addition, our board of directors may, from time to time, designate one or more additional committees, which shall have the duties and powers granted to it by our board of directors.

 

Audit Committee

 

Paul A. Froning, Clark R. Crosnoe and Glyn C. Milburn, each of whom satisfies the “independence” requirements of Rule 10A-3 under the Exchange Act and NYSE American’s rules, serve on our audit committee, with Mr. Froning serving as the chairman. Our board has determined that Messrs. Froning and Crosnoe qualify as “audit committee financial experts.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company.

 

The audit committee is responsible for, among other things: (i) retaining and overseeing our independent accountants; (ii) assisting the board in its oversight of the integrity of our financial statements, the qualifications, independence and performance of our independent auditors and our compliance with legal and regulatory requirements; (iii) reviewing and approving the plan and scope of the internal and external audit; (iv) pre-approving any audit and non-audit services provided by our independent auditors; (v) approving the fees to be paid to our independent auditors; (vi) reviewing with our chief executive officer and chief financial officer and independent auditors the adequacy and effectiveness of our internal controls; (vii) reviewing hedging transactions; and (viii) reviewing and assessing annually the audit committee’s performance and the adequacy of its charter.

 

Compensation Committee

 

Paul A. Froning, Clark R. Crosnoe and Ellette A. Anderson, each of whom satisfies the “independence” requirements of Rule 10A-3 under the Exchange Act and NYSE American’s rules, serve on our compensation committee, with Mr. Crosnoe serving as the chairman. The members of the compensation committee are also “outside directors” as defined in Section 162(m) of the Code, and “non-employee directors” within the meaning of Section 16 of the Exchange Act. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers.

 

The compensation committee is responsible for, among other things: (i) reviewing and approving the remuneration of our executive officers; (ii) making recommendations to the board regarding the compensation of our independent directors; (iii) making recommendations to the board regarding equity-based and incentive compensation plans, policies and programs; and (iv) reviewing and assessing annually the compensation committee’s performance and the adequacy of its charter.

 

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Nominating and Corporate Governance Committee

 

Paul A. Froning, Clark R. Crosnoe and Glyn C. Milburn, each of whom satisfies the “independence” requirements of Rule 10A-3 under the Exchange Act and NYSE American’s rules, serve on our nominating and corporate governance committee, with Mr. Milburn serving as the chairman. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees.

 

The nominating and corporate governance committee will be responsible for, among other things: (i) identifying and evaluating individuals qualified to become members of the board by reviewing nominees for election to the board submitted by stockholders and recommending to the board director nominees for each annual meeting of stockholders and for election to fill any vacancies on the board; (ii) advising the board with respect to board organization, desired qualifications of board members, the membership, function, operation, structure and composition of committees (including any committee authority to delegate to subcommittees), and self-evaluation and policies; (iii) advising on matters relating to corporate governance and monitoring developments in the law and practice of corporate governance; (iv) overseeing compliance with the our code of ethics; and (v) approving any related party transactions.

 

The nominating and corporate governance committee’s methods for identifying candidates for election to our board of directors (other than those proposed by our stockholders, as discussed below) will include the solicitation of ideas for possible candidates from a number of sources - members of our board of directors, our executives, individuals personally known to the members of our board of directors, and other research. The nominating and corporate governance committee may also, from time-to-time, retain one or more third-party search firms to identify suitable candidates.

 

In making director recommendations, the nominating and corporate governance committee may consider some or all of the following factors: (i) the candidate’s judgment, skill, experience with other organizations of comparable purpose, complexity and size, and subject to similar legal restrictions and oversight; (ii) the interplay of the candidate’s experience with the experience of other board members; (iii) the extent to which the candidate would be a desirable addition to the board and any committee thereof; (iv) whether or not the person has any relationships that might impair his or her independence; and (v) the candidate’s ability to contribute to the effective management of our company, taking into account the needs of our company and such factors as the individual’s experience, perspective, skills and knowledge of the industry in which we operate.

 

A stockholder may nominate one or more persons for election as a director at an annual meeting of stockholders if the stockholder complies with the notice and information provisions contained in our bylaws. Such notice must be in writing to our company not less than 120 days and not more than 150 days prior to the anniversary date of the preceding year’s annual meeting of stockholders or as otherwise required by requirements of the Exchange Act. In addition, stockholders furnishing such notice must be a holder of record on both (i) the date of delivering such notice and (ii) the record date for the determination of stockholders entitled to vote at such meeting.

 

Code of Ethics

 

We have adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Such code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, and reporting of violations of the code.

 

We are required to disclose any amendment to, or waiver from, a provision of our code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. We intend to use our website as a method of disseminating this disclosure, as permitted by applicable SEC rules. Any such disclosure will be posted to our website within four (4) business days following the date of any such amendment to, or waiver from, a provision of our code of ethics.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table - Years Ended December 31, 2019 and 2018

 

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officers received total annual salary and bonus compensation in excess of $100,000.

 

Name and Principal Position  Year  Salary
($)
   Bonus
($)
   All Other Compensation
($)
   Total
($)
 
Douglas T. Moore,  2019   133,727    35,000    9,465    178,192 
Chief Executive Officer(1)  2018   -    -    -    - 
Michael Goedeker,  2019   167,709    -    3,396    171,105 
former President and Chief Operating Officer(2)  2018   150,000    -    -    150,000 
Ellery W. Roberts,  2019   -    -    -    - 
former Chief Executive Officer(3)  2018   -    -    -    - 

 

(1)Douglas T. Moore was appointed as our Chief Executive Officer on August 15, 2019. The amounts included in “All Other Compensation” for Mr. Moore include reimbursement for accommodations in the amount of $6,955, reimbursement for airline tickets in the amount of $1,640, and reimbursement for car rental expenses in the amount of $870.

 

(2)Mr. Goedeker served as our President and Chief Operating Officer from April 5, 2019 to March 2, 2020. The compensation in the table above includes the compensation that Mr. Goedeker received from our predecessor company, Goedeker Television, prior to our acquisition on April 5, 2019. The amounts included in “All Other Compensation” for Mr. Goedeker include his automobile allowance.

 

(3)Mr. Roberts served as our Chief Executive Officer from our inception on January 10, 2019 to April 5, 2019.

 

Employment Agreements

 

On August 15, 2019, we entered into an employment letter agreement with Mr. Moore setting forth the terms of the compensation for his services as Chief Executive Officer of our company. On April 21, 2020 we amended the employment letter agreement, which became effective upon closing of the IPO on August 4, 2020.  Pursuant to the employment letter agreement, as amended, Mr. Moore is entitled to an annual base salary of $400,000 and an annual incentive bonus of up to 100% of base to the extent that we achieve certain annual EBITDA objectives.  On August 19, 2020, we also granted Mr. Moore a special bonus of up to $125,000 to the extent that we achieve certain milestones. We also agreed to grant to Mr. Moore an option to purchase 263,158 shares of our common stock immediately following the closing of the IPO with an exercise price of $9.00, equal to the public offering price per share paid in the IPO. Vesting of the options will occur annually over a 4-year period in increments of 25% per year beginning on August 15, 2020.  Mr. Moore also received or will receive relocation compensation, including a signing bonus of $35,000, reimbursement of living and accommodations in the St. Louis area for up to six months, car rental expenses for up to two months, and reimbursement of once monthly round trip airline tickets to St. Louis for either Mr. Moore or his spouse until April 2020. Mr. Moore is also entitled to a 15% discount on all purchases from our company. He is also eligible to participate in all employee benefit plans, including health insurance, commensurate with his position.  Mr. Moore’s employment is at-will and may be terminated by us at any time. Mr. Moore may terminate his employment upon 90 days’ notice. If we terminate Mr. Moore’s employment without cause, he is entitled to six months of base compensation, which will be paid in a lump sum upon termination. The employment letter agreement contains restrictive covenants prohibiting Mr. Moore from (i) owning or operating a business that competes with our company during the term of his employment and for a period of one year following the termination of his employment or (ii) soliciting our employees for a period of two years following the termination of his employment.

 

On April 21, 2020, we entered into an employment letter agreement with Robert D. Barry, our Chief Financial Officer, setting forth the terms of the compensation for his services as Chief Financial Officer of our company.  This employment letter agreement became effective upon closing of the IPO on August 4, 2020.  Pursuant to the employment letter agreement, Mr. Barry is entitled to an annual base salary of $250,000 and an annual incentive bonus of up to 50% of base to the extent that we achieve certain annual EBITDA objectives.  Mr. Barry is also entitled to a 15% discount on all purchases from our company. He is also eligible to participate in all employee benefit plans, including health insurance, commensurate with his position.  Mr. Barry’s employment is at-will and may be terminated by us at any time. Mr. Barry may terminate his employment upon 90 days’ notice. If we terminate Mr. Barry’s employment without cause, he is entitled to six months of base compensation, which will be paid in a lump sum upon termination. The employment letter agreement contains restrictive covenants prohibiting Mr. Barry from (i) owning or operating a business that competes with our company during the term of his employment and for a period of one year following the termination of his employment or (ii) soliciting our employees for a period of two years following the termination of his employment.

 

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On April 5, 2019, we entered into an employment agreement with Michael Goedeker setting forth the terms of the compensation for his services as President and Chief Operating Officer of our company. Pursuant to the employment agreement, Mr. Goedeker was entitled to an annual base salary of $175,000 and an annual incentive bonus to the extent that we achieved certain annual EBITDA objectives. Mr. Goedeker was also entitled an automobile allowance not to exceed $500 per month and to participate in all employee benefit plans, including health insurance, commensurate with his position. The term of the employment agreement was for three years and could be terminated by us for any reason upon thirty (30) days’ notice. On March 2, 2020, we terminated the employment agreement without cause. Pursuant to the employment agreement, Mr. Goedeker is entitled to severance, including: (i) base salary for the remainder of the term of the employment agreement, (ii) benefits under group health and life insurance plans in which he participated prior to termination for the remainder of the term of the employment agreement, (iii) all previously earned, accrued, and unpaid benefits under employee benefit plans, including any such benefits under any pension, disability, and life insurance plans, policies, and programs, and (iv) so long as we achieve our budgeted EBITDA level for the period commencing with the end of our immediately previous fiscal year through the termination date, an amount equal to the product of the bonus paid in respect of the immediately preceding fiscal year, times the quotient obtained by dividing (x) the number of full calendar months occurring since the end of the immediately previous fiscal year through the termination date, by (y) 12. Since we did not achieve our budgeted EBITDA level for 2019, no bonus was paid. The employment agreement contains restrictive covenants prohibiting Mr. Goedeker from owning or operating a business that competes with our company or soliciting our customers or employees for the remainder of the term of the employment agreement.

 

Outstanding Equity Awards at Fiscal Year-End

 

No executive officer named above had any unexercised options, stock that has not vested or equity incentive plan awards outstanding as of December 31, 2019.

 

Director Compensation

 

No member of our board of directors received any compensation for his services as a director during the fiscal year ended December 31, 2019, nor do they currently receive any compensation for such services.

 

2020 Equity Incentive Plan

 

On July 30, 2020, we established the 1847 Goedeker Inc. 2020 Equity Incentive Plan (the “Plan”). The purpose of the Plan is to grant restricted stock, stock options and other forms of incentive compensation to our officers, employees, directors and consultants. The maximum number of shares of common stock that may be issued pursuant to awards granted under the Plan is 555,000 shares. Cancelled and forfeited stock options and stock awards may again become available for grant under the Plan. As of the date of this prospectus, 71,842 shares remain available for issuance under the Plan.

 

The following summary briefly describes the principal features of the Plan and is qualified in its entirety by reference to the full text of the Plan.

 

Awards that may be granted include: (a) Incentive Stock Options, (b) Non-qualified Stock Options, (c) Stock Appreciation Rights, (d) Restricted Awards, (e) Performance Share Awards, and (f) Performance Compensation Awards. These awards offer our officers, employees, consultants and directors the possibility of future value, depending on the long-term price appreciation of our Common Stock and the award holder’s continuing service with our company.

 

Stock options give the option holder the right to acquire from us a designated number of shares of Common Stock at a purchase price that is fixed upon the grant of the option. The exercise price will not be less than the market price of the Common Stock on the date of grant. Stock options granted may be either tax-qualified stock options (so-called “incentive stock options”) or non-qualified stock options.

 

Stock appreciation rights, or SARs, which may be granted alone or in tandem with options, have an economic value similar to that of options. When a SAR for a particular number of shares is exercised, the holder receives a payment equal to the difference between the market price of the shares on the date of exercise and the exercise price of the shares under the SAR. Again, the exercise price for SARs normally is the market price of the shares on the date the SAR is granted. Under the Plan, holders of SARs may receive this payment – the appreciation value – either in cash or shares of Common Stock valued at the fair market value on the date of exercise. The form of payment will be determined by us.

 

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Restricted shares are shares of Common Stock awarded to participants at no cost. Restricted shares can take the form of awards of restricted stock, which represent issued and outstanding shares of our Common Stock subject to vesting criteria, or restricted stock units, which represent the right to receive shares of our Common Stock subject to satisfaction of the vesting criteria. Restricted shares are forfeitable and non-transferable until the shares vest. The vesting date or dates and other conditions for vesting are established when the shares are awarded.

 

The Plan also provides for performance compensation awards, representing the right to receive a payment, which may be in the form of cash, shares of Common Stock, or a combination, based on the attainment of pre-established goals.

 

All of the permissible types of awards under the Plan are described in more detail as follows:

 

Purposes of Plan: The purposes of the Plan are to attract and retain officers, employees and directors for our company and its subsidiaries; motivate them by means of appropriate incentives to achieve long-range goals; provide incentive compensation opportunities; and further align their interests with those of our stockholders through compensation that is based on our Common Stock.

 

Administration of the Plan: The Plan is currently administered by our board of directors and will be administered by our compensation committee once it is established (which we refer to as the administrator). Among other things, the administrator has the authority to select persons who will receive awards, determine the types of awards and the number of shares to be covered by awards, and to establish the terms, conditions, performance criteria, restrictions and other provisions of awards. The administrator has authority to establish, amend and rescind rules and regulations relating to the Plan.

 

Eligible Recipients: Persons eligible to receive awards under the Plan will be those officers, employees, consultants, and directors of our company and its subsidiaries who are selected by the administrator.

 

Shares Available Under the Plan: The maximum number of shares of our Common Stock that may be delivered to participants under the Plan is 555,000, subject to adjustment for certain corporate changes affecting the shares, such as stock splits. Shares subject to an award under the Plan for which the award is canceled, forfeited or expires again become available for grants under the Plan. Shares subject to an award that is settled in cash will not again be made available for grants under the Plan.

 

Stock Options:

 

General. Subject to the provisions of the Plan, the administrator has the authority to determine all grants of stock options. That determination will include: (i) the number of shares subject to any option; (ii) the exercise price per share; (iii) the expiration date of the option; (iv) the manner, time and date of permitted exercise; (v) other restrictions, if any, on the option or the shares underlying the option; and (vi) any other terms and conditions as the administrator may determine.

 

Option Price. The exercise price for stock options will be determined at the time of grant. Normally, the exercise price will not be less than the fair market value on the date of grant. As a matter of tax law, the exercise price for any incentive stock option awarded may not be less than the fair market value of the shares on the date of grant. However, incentive stock option grants to any person owning more than 10% of our voting stock must have an exercise price of not less than 110% of the fair market value on the grant date.

 

Exercise of Options. An option may be exercised only in accordance with the terms and conditions for the option agreement as established by the administrator at the time of the grant. The option must be exercised by notice to us, accompanied by payment of the exercise price. Payments may be made in cash or, at the option of the administrator, by actual or constructive delivery of shares of Common Stock to the holder of the option based upon the fair market value of the shares on the date of exercise.

 

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Expiration or Termination. Options, if not previously exercised, will expire on the expiration date established by the administrator at the time of grant. In the case of incentive stock options, such term cannot exceed ten years provided that in the case of holders of more than 10% of our voting stock, such term cannot exceed five years. Options will terminate before their expiration date if the holder’s service with our company or a subsidiary terminates before the expiration date. The option may remain exercisable for specified periods after certain terminations of employment, including terminations as a result of death, disability or retirement, with the precise period during which the option may be exercised to be established by the administrator and reflected in the grant evidencing the award.

 

Incentive and Non-Qualified Options. As described elsewhere in this summary, an incentive stock option is an option that is intended to qualify under certain provisions of the Code, for more favorable tax treatment than applies to non-qualified stock options. Any option that does not qualify as an incentive stock option will be a non-qualified stock option. Under the Code, certain restrictions apply to incentive stock options. For example, the exercise price for incentive stock options may not be less than the fair market value of the shares on the grant date and the term of the option may not exceed ten years. In addition, an incentive stock option may not be transferred, other than by will or the laws of descent and distribution, and is exercisable during the holder’s lifetime only by the holder. In addition, no incentive stock options may be granted to a holder that is first exercisable in a single year if that option, together with all incentive stock options previously granted to the holder that also first become exercisable in that year, relate to shares having an aggregate market value in excess of $100,000, measured at the grant date.

 

Stock Appreciation Rights: Awards of SARs may be granted alone or in tandem with stock options. SARs provide the holder with the right, upon exercise, to receive a payment, in cash or shares of stock, having a value equal to the excess of the fair market value on the exercise date of the shares covered by the award over the exercise price of those shares. Essentially, a holder of a SAR benefits when the market price of the Common Stock increases, to the same extent that the holder of an option does, but, unlike an option holder, the SAR holder need not pay an exercise price upon exercise of the award.

 

Stock Awards: Stock awards can also be granted under the Plan. A stock award is a grant of shares of Common Stock or of a right to receive shares in the future. These awards will be subject to such conditions, restrictions and contingencies as the administrator shall determine at the date of grant. Those may include requirements for continuous service and/or the achievement of specified performance goals.

 

Cash Awards: A cash award is an award that may be in the form of cash or shares of Common Stock or a combination, based on the attainment of pre-established performance goals and other conditions, restrictions and contingencies identified by the administrator.

 

Section 162(m) of the Code: Section 162(m) of the Code limits publicly-held companies to an annual deduction for U.S. federal income tax purposes of $1.0 million for compensation paid to each of their chief executive officer and their three highest compensated executive officers (other than the chief executive officer) determined at the end of each year, referred to as covered employees.

 

Performance Criteria: Under the Plan, one or more performance criteria will be used by the administrator in establishing performance goals. Any one or more of the performance criteria may be used on an absolute or relative basis to measure the performance of our company, as the administrator may deem appropriate, or as compared to the performance of a group of comparable companies, or published or special index that the administrator deems appropriate. In determining the actual size of an individual performance compensation award, the administrator may reduce or eliminate the amount of the award through the use of negative discretion if, in its sole judgment, such reduction or elimination is appropriate. The administrator shall not have the discretion to (i) grant or provide payment in respect of performance compensation awards if the performance goals have not been attained or (ii) increase a performance compensation award above the maximum amount payable under the Plan.

 

Other Material Provisions: Awards will be evidenced by a written agreement, in such form as may be approved by the administrator. In the event of various changes to the capitalization of our company, such as stock splits, stock dividends and similar re-capitalizations, an appropriate adjustment will be made by the administrator to the number of shares covered by outstanding awards or to the exercise price of such awards. The administrator is also permitted to include in the written agreement provisions that provide for certain changes in the award in the event of a change of control of our company, including acceleration of vesting. Except as otherwise determined by the administrator at the date of grant, awards will not be transferable, other than by will or the laws of descent and distribution. Prior to any award distribution, we are permitted to deduct or withhold amounts sufficient to satisfy any employee withholding tax requirements. Our board also has the authority, at any time, to discontinue the granting of awards. The board also has the authority to alter or amend the Plan or any outstanding award or may terminate the Plan as to further grants, provided that no amendment will, without the approval of our stockholders, to the extent that such approval is required by law or the rules of an applicable exchange, increase the number of shares available under the Plan, change the persons eligible for awards under the Plan, extend the time within which awards may be made, or amend the provisions of the Plan related to amendments. No amendment that would adversely affect any outstanding award made under the Plan can be made without the consent of the holder of such award.

 

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CURRENT RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Transactions with Related Persons

 

The following includes a summary of transactions since the beginning of our 2018 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation” above). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.

 

On April 5, 2019, we entered into an offsetting management services agreement with the Manager, which is owned and controlled by Ellery W. Roberts, our Chairman. On April 21, 2020, we entered into an amendment to this agreement. Pursuant to the offsetting management services agreement, we expensed $183,790 in management fees for the year ended December 31, 2019 and $62,500 and $58,790 for the six months ended June 30, 2020 and 2019, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” for a description of this agreement. See also “Risks Related to Ownership of Our Common Stock—Certain of our directors could be in a position of conflict of interest.”

 

As of June 30, 2020 and December 31, 2019, the Manager had funded $78,959 and $33,738, respectively, to us in related party advances. These advances are unsecured, bear no interest, and do not have formal repayment terms or arrangements.

 

On April 5, 2019, 1847 Holdings issued 50,000 common shares and 200,000 warrants to Leonite in order to induce Leonite to extend credit to us. The common shares were valued at $137,500. As part of the modification to this convertible note payable, on May 11, 2020, 1847 Holdings issued an additional 200,000 warrants to Leonite.

 

Promoters and Certain Control Persons

 

Each of Ellery W. Roberts, our Chairman and Robert D. Barry, our Chief Financial Officer, may be deemed a “promoter” as defined by Rule 405 of the Securities Act. For information regarding compensation, including items of value, that have been provided or that may be provided to these individuals, please refer to “Executive Compensation” above. 

 

Parent Company

 

As of the date of this prospectus, 1847 Holdings holds 54.41% of our issued and outstanding common stock. Following the distribution of our shares as contemplated by this prospectus, 1847 Holdings will no longer hold any of our capital stock.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

 

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of October 15, 2020, and as adjusted to reflect distribution of common stock offered by 1847 Holdings, for:

 

each of our named executive officers and directors;

 

all of our named executive officers and directors as a group; and

 

each other stockholder known by us to be the beneficial owner of more than 5% of our outstanding common stock.

 

We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares that they beneficially own, subject to applicable community property laws. Based on the information provided to us by or on behalf of 1847 Holdings, it is not a broker-dealer or an affiliate of a broker-dealer.

 

Applicable percentage ownership is based on 6,111,200 shares of common stock outstanding at October 15, 2020. For purposes of computing percentage ownership after this offering, we have also assumed that all shares offered by 1847 Holdings will be distributed in this offering. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares subject to options or other convertible securities held by that person or entity that are currently exercisable or releasable or that will become exercisable or releasable within 60 days of October 15, 2020. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o our company, 13850 Manchester Rd., Ballwin, MO 63011.

 

   Common Stock Beneficially Owned Prior to this Offering   Number of
Shares Being
   Common Stock
Beneficially Owned After this Offering
 
Name of Beneficial Owner  Shares   %   Offered   Shares   % 
Douglas T. Moore, CEO and Director(1)   65,790    1.07%   0    65,790    1.07%
Robert D. Barry, CFO   0    *    0    12,433    * 
Ellery W. Roberts, Chairman of the Board(2)   3,325,000    54.41%   3,325,000    1,375,597    22.51%
Edward J. Tobin, Director   0    *    0    960,680    15.72%
Ellette A. Anderson, Director   0    *    0    0    * 
Clark R. Crosnoe. Director   0    *    0    0    * 
Paul A. Froning, Director   0    *    0    42,628    * 
Glyn C. Milburn, Director   0    *    0    0    * 
All executive officers and directors (8 persons)   3,390,790    55.47%   3,325,000    2,457,128    40.20%
Mike Goedeker(3)   534,375    8.74%   0    534,375    8.74%
Steve Goedeker(4)   534,375    8.74%   0    534,375    8.74%
Avi Geller(5)   356,250    5.83%   0    503,369    8.24%

 

*Less than 1%

 

(1)Consists of 65,790 shares of common stock which Mr. Moore has the right to acquire within 60 days through the exercise of vested options.

 

(2)Includes 3,325,000 shares of common stock held by 1847 Holdings prior to the distribution. Mr. Roberts is the Chief Executive Officer of 1847 Holdings and has voting and investment power over the securities held by it. Mr. Roberts disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein, if any.

 

(3)The address of Mike Goedeker is 10511 Windswept Drive, St. Louis, MO 63128.

 

(4)The address of Steve Goedeker is 9013 Pilot Avenue, Afton, MO 63123.

 

(5)Represents shares of common stock held by Leonite. Avi Geller is the Chief Investment Officer of Leonite and has voting and investment power over the securities held by it. Mr. Geller disclaims beneficial ownership of the shares held by Leonite except to the extent of his pecuniary interest, if any, in such shares. The address of Leonite is 1 Hillcrest Center Dr, Suite 232, Spring Valley, NY 10977.

 

We do not currently have any arrangements which if consummated may result in a change of control of our company.

 

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DESCRIPTION OF SECURITIES

 

General

 

Our authorized capital stock currently consists of 200,000,000 shares of common stock, par value $0.0001 per share, and 20,000,000 shares of preferred stock, par value $0.0001 per share.

 

The following description summarizes important terms of the classes of our capital stock. This summary does not purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and our bylaws which have been filed as exhibits to the registration statement of which this prospectus is a part.

 

As of the date of this prospectus, there were 6,111,200 shares of common stock and no shares of preferred stock issued and outstanding.

 

Common Stock

 

Voting Rights. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Under our amended and restated certificate of incorporation and bylaws, any corporate action to be taken by vote of stockholders other than for election of directors shall be authorized by the affirmative vote of the majority of votes cast. Directors are elected by a plurality of votes. Stockholders do not have cumulative voting rights.

 

Dividend Rights. Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the board of directors out of legally available funds.

 

Liquidation Rights. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then-outstanding shares of preferred stock.

 

Other Rights. Holders of common stock have no preemptive, conversion or subscription rights and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock.

 

Preferred Stock

 

Our amended and restated certificate of incorporation authorizes our board to issue up to 20,000,000 shares of preferred stock in one or more series, to determine the designations and the powers, preferences and rights and the qualifications, limitations and restrictions thereof, including the dividend rights, conversion or exchange rights, voting rights (including the number of votes per share), redemption rights and terms, liquidation preferences, sinking fund provisions and the number of shares constituting the series. Our board of directors could, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of common stock and which could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock.

 

Warrants

 

In connection with the IPO, we issued warrants for the purchase of 55,560 shares of common stock to affiliates of the Representative. The warrants will be exercisable at any time and from time to time, in whole or in part, beginning on January 26, 2021 until July 30, 2025, at a per share exercise price equal to $11.25 (125% of the public offering price per share).

 

Options

 

As of the date of this prospectus, we have issued options to purchase an aggregate of 483,158 shares of common stock under our 2020 Equity Incentive Plan, each at an exercise price of $9.00 per share.

 

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Anti-takeover Effects of Delaware Law and Charter Provisions

 

We have elected not to be governed by Section 203 of the General Corporation Law of the State of Delaware, which prohibits a publicly-held Delaware corporation from engaging in a business combination, except under certain circumstances, with an interested stockholder.

 

Our amended and restated certificate of incorporation and bylaws contain certain provisions that may have anti-takeover effects, making it more difficult for or preventing a third party from acquiring control of our company or changing our board of directors and management.

 

Our amended and restated certificate of incorporation authorizes our board of directors to issue up to 20,000,000 shares of preferred stock without further stockholder approval. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.

 

Our bylaws permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships. These provisions will prevent a stockholder from increasing the size of our board of directors and gaining control of our board of directors by filling the resulting vacancies with its own nominees. In addition, our bylaws provide that no member of our board of directors may be removed from office by our stockholders without cause and, in addition to any other vote required by law, upon the approval of not less than the majority of the total voting power of all of our outstanding voting stock then entitled to vote in the election of directors.

 

Our bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at an annual meeting will only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given us timely written notice, in proper form, of the stockholder’s intention to bring that business before the meeting. Although our bylaws do not give the board of directors the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, our bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of our company.

 

Furthermore, neither the holders of our common stock nor the holders of our preferred stock have cumulative voting rights in the election of our directors. The combination of the present ownership by a few stockholders of a significant portion of our issued and outstanding common stock and lack of cumulative voting makes it more difficult for other stockholders to replace our board of directors or for a third party to obtain control of our company by replacing its board of directors.

 

Transfer Agent and Registrar

 

VStock Transfer, LLC, 18 Lafayette Place, Woodmere, NY 11598, telephone 212-828-8436, is the transfer agent for our common stock.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Future sales of substantial amounts of shares of our common stock, including shares issued upon the conversion of convertible notes, the exercise of outstanding options and warrants, in the public market, or the possibility of these sales occurring, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future.

 

The shares that you will receive as part of the distribution contemplated by this prospectus will be subject to the terms and conditions of a lock-up agreement until January 26, 2021. Our transfer agent will notate such restriction in its records and place stop transfer orders against the shares being distributed to ensure compliance with the lock-up agreement.

 

You will not be able to sell, pledge, hypothecate or otherwise transfer the shares of our common stock that you receive from the distribution until January 26, 2021. At such time, the 3,325,000 shares of our common stock distributed to the shareholders of 1847 Holdings will be freely transferable without restriction or further registration under the Securities Act, except for shares received by persons who may be deemed to be our “affiliates,” as such term is defined under the Securities Act. Persons who may be deemed to be our affiliates after the distribution include individuals or entities that control, are controlled by or under common control with our company, and include our directors and principal executive officers, as well as any stockholder owning 10% or more of our issued and outstanding common stock. Shares of our common stock held by affiliates may not be sold unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, including an exemption contained in Rule 144 under the Securities Act.

 

Previously issued shares of common stock, as well as shares issuable upon the exercise of warrants and subject to employee stock options, are or will be upon issuance, “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if such public resale is registered under the Securities Act or if the resale qualifies for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.

 

Rule 144

 

In general, a person who has beneficially owned restricted shares of our common stock for at least twelve months, or at least six months in the event we have been a reporting company under the Exchange Act for at least ninety (90) days before the sale, would be entitled to sell such securities, provided that such person is not deemed to be an affiliate of ours at the time of sale or to have been an affiliate of ours at any time during the ninety (90) days preceding the sale. A person who is an affiliate of ours at such time would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of shares that does not exceed the greater of the following:

 

1% of the number of shares of our common stock then outstanding; or

 

1% of the average weekly trading volume of our common stock during the four calendar weeks preceding the filing by such person of a notice on Form 144 with respect to the sale;

 

provided that, in each case, we are subject to the periodic reporting requirements of the Exchange Act for at least 90 days before the sale. Rule 144 trades must also comply with the manner of sale, notice and other provisions of Rule 144, to the extent applicable.

 

Rule 701

 

In general, Rule 701 allows a stockholder who purchased shares of our capital stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of ours during the immediately preceding 90 days to sell those shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares, however, are required to wait until ninety (90) days after the date of this prospectus before selling shares pursuant to Rule 701.

 

Lock-Up Agreements

 

In connection with the IPO, we, all of our directors and officers and all of our stockholders agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our common stock or securities convertible into or exercisable or exchangeable for our common stock for a period of (i) 180 days after the closing of the IPO in the case of our company, or until January 31, 2021, (ii) 365 days after the date of the underwriting agreement related to the IPO in the case of our directors and officers, or until July 30, 2021, and (iii) 180 days after the date of the underwriting agreement related to the IPO in the case of our stockholders, or until January 26, 2021. As discussed above, the shares of our common stock being distributed to the shareholders of 1847 Holdings will be restricted under the lock-up agreement to the same extent as such shares were restricted when owned by 1847 Holdings.

 

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THE DISTRIBUTION

 

Description of the Distribution

 

1847 Holdings is effectuating the distribution pursuant to the terms of the resolutions adopted by its board of directors on September 10, 2020. As of the date of this prospectus, there were 6,111,200 shares of our common stock issued and outstanding, 3,325,000 of which were held by 1847 Holdings. 1847 Holdings intends to distribute all of these shares, or approximately 54.41% of our issued and outstanding common stock, to the holders of its common shares and allocation shares. The common shareholders will receive approximately 2,660,000 of these shares and the Manager, as the holder of all of the allocation shares, will receive approximately 665,000 of these shares. The board of directors of 1847 Holdings set the record date for this distribution as October 15, 2020.  As of the record date, 1847 Holdings had 3,744,013 common shares and 1,000 allocation shares issued and outstanding. Holders of 1847 Holdings’ common shares at the close of business on the record date are entitled to receive the shares distributed on a pro rata basis and the Manager will receive all of the shares being distributed to holders of the allocation shares. Consequently, the common shareholders will receive shares of our common stock at a ratio of 0.710467618568632 shares of our common stock for each common share of 1847 Holdings that they held on the record date. The shares of our common stock being distributed to the common and allocation shareholders of 1847 Holdings will be registered in book entry form and no stock certificates representing those shares will be delivered to any shareholders of 1847 Holdings. 1847 Holdings is subject to a lock-up agreement, dated July 10, 2020, with the underwriter for our initial public offering. Accordingly, all of our stock that is held by 1847 Holdings cannot be transferred, except in very limited circumstances, until 180 days after the date of the underwriting agreement relating to such initial public offering, or January 26, 2021. Notwithstanding this lock-up agreement, 1847 Holdings is permitted under the underwriting agreement to make the distribution of our stock to its shareholders provided that the shareholders of 1847 Holdings are subject to the same restrictions provided for in such lock-up agreement. The shares of our common stock being distributed to the shareholders of 1847 Holdings, therefore, will be restricted under the lock-up agreement to the same extent as such shares were restricted when owned by 1847 Holdings and our transfer agent will notate such restriction in its records and place stop transfer orders against the shares being distributed to ensure compliance with the lock-up agreement.

 

Reasons for the Distribution

 

We are engaging in the distribution principally because management of both our company and 1847 Holdings believe that the distribution will benefit the shareholders of 1847 Holdings since distributing the shares of our common stock will enable the shareholders of 1847 Holdings to increase or decrease their level of participation in our business by varying their level of investment in us separate from 1847 Holdings, and will benefit our shareholders by increasing the number of holders of our common stock, which our management believes could enhance the liquidity of our shares.

 

The distribution will allow management of each company to focus solely on the business of that business. 1847 Holdings is an acquisition holding company focused on acquiring and managing a group of small businesses. Our company is a one-stop e-commerce destination for home furnishings, including appliances, furniture, home goods and related products. The distribution will allow us to pursue our business plan independently. It also allows 1847 Holdings to focus on its other businesses and future acquisitions. The distribution will allow investors greater choice and flexibility in their investment decisions. It may also enhance access to financing by allowing the financial community to focus separately on each company.

 

Tax Considerations

 

1847 Holdings has not requested, nor does it intend to request, a ruling from the Internal Revenue Service or an opinion of tax counsel as to the federal income tax consequences of the distribution. However, based on the facts of the proposed transaction, it is the opinion of the management of 1847 Holdings that the distribution of our shares of common stock will be treated as a distribution of property to a partner pursuant to Treasury Regulation 1.731-2. As such, 1847 Holdings will recognize no gain or loss on the distribution.

 

Assuming 1847 Holdings reports no gain or loss under Section 731, the amount of the distribution for purposes of Section 301 of the Code will be equal to 1847 Holding’s basis in the shares on the date of the distribution. However, each shareholder’s individual circumstances may affect the tax consequences of the distribution to such shareholder. We strongly urge all shareholders of 1847 Holdings to consult with their own tax, financial, or investment advisor or legal counsel experienced in these matters. See “Material U.S. Federal Tax Consequences of the Distribution” for more information.

 

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Tradability of Our Shares

 

Following the effectiveness of the registration statement of which this prospectus forms a part, the shares of our common stock distributed to shareholders of 1847 Holdings will be freely transferable without restriction or further registration under the Securities Act, except for shares received by persons who may be deemed to be our “affiliates,” as such term is defined under the Securities Act. Persons who may be deemed to be our affiliates after the distribution include individuals or entities that control, are controlled by or under common control with our company, and include our directors and principal executive officers, as well as any stockholder owning 10% or more of our issued and outstanding common stock. Shares of our common stock held by affiliates may not be sold unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, including an exemption contained in Rule 144 under the Securities Act. See “Shares Eligible for Future Sale” for additional information.

 

Shareholder Approval; Appraisal Rights

 

No approval by the shareholders of either our company or 1847 Holdings is required for distribution, and none is being sought.  Neither the shareholders of our company nor of 1847 Holdings have any appraisal rights in connection with the distribution.

 

Effect of the Distribution

 

Following the distribution, each of our company and 1847 Holdings will be an independent, publicly traded reporting company under the Exchange Act. 1847 Holdings will no longer own any of our outstanding common stock.  

 

Reason for Furnishing this Prospectus

 

We are furnishing this prospectus to provide information to shareholders of 1847 Holdings who will receive our shares in the distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any of our securities or those of 1847 Holdings. The information contained in this prospectus is believed by us to be accurate as of the date set forth on its cover. Changes may occur after that date, and neither our company nor 1847 Holdings is required to update the information except in the normal course of their public disclosure obligations and practices.

 

81

 

 

PLAN OF DISTRIBUTION

 

This prospectus relates to the distribution by 1847 Holdings of 3,325,000 shares of our common stock to its shareholders. These shares represent approximately 54.41% of our issued and outstanding common stock. 1847 Holdings intends to distribute approximately 2,660,000 of these shares to the holders of its common shares and approximately 665,000 of these shares to the Manager, who is the sole owner of the outstanding allocation shares of 1847 Holdings. The board of directors of 1847 Holdings set the record date for this distribution as October 15, 2020.  As of the record date, 1847 Holdings had 3,744,013 common shares issued and outstanding.

 

Our common stock will be distributed by VStock Transfer, LLC, the distribution agent. Holders of 1847 Holdings’ common shares at the close of business on the record date are entitled to receive the shares distributed on a pro rata basis and the Manager will receive all of the shares being distributed to holders of the allocation shares. Consequently, the common shareholders will receive shares of our common stock at a ratio of 0.710467618568632 shares of our common stock for each common share of 1847 Holdings that they held on the record date. 1847 Holdings has agreed to pay the distribution agent customary fees plus certain expenses in connection with facilitating the distribution. We will bear all other costs of the distribution.

 

We have not employed any brokers, dealers or underwriters in connection with the distribution of the common stock. Except as described in this section, we are not paying any other commissions, underwriting fees or discounts in connection with this distribution. We will not receive any proceeds from the resale of common stock by the shareholders of 1847 Holdings.

 

The shareholders of 1847 Holdings who will be receiving our common stock will receive the shares as soon as practicable after the registration statement of which this prospectus forms a part has been declared effective by the SEC. Unless such shareholders request a stock certificate, our shares will be issued in book-entry form. No shareholder of 1847 Holdings is required to make any payment or exchange any shares in order to receive shares of our common stock in the distribution.

 

1847 Holdings and any brokers, dealers or agents, upon effecting the sale of any of the shares offered by this prospectus, may be deemed “underwriters” as that term is defined under the Securities Act or the Exchange Act, or the rules and regulations under those statutes. In that event, any commissions received by the broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

 

1847 Holdings and any other persons participating in the sale or distribution of the share offered by this prospectus will be subject to applicable provisions of the Exchange Act and the rules and regulations under the Exchange Act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by persons who purchase shares from the shareholders of 1847 Holdings who receive the shares of our common stock in the distribution. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to the same securities for a specified period of time prior to the commencement of the distribution, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.

 

82

 

 

MATERIAL U.S. FEDERAL TAX CONSEQUENCES OF THE DISTRIBUTION

 

The following discussion is a summary of the material U.S. federal income tax consequences of the distribution of our shares. However, it is not intended to be a complete discussion of all potential tax effects that might be relevant to the distribution. It also is limited to domestic non-corporate shareholders. It may not be applicable to certain classes of taxpayers, including, without limitation, corporations, nonresident aliens, insurance companies, tax-exempt organizations, financial institutions, securities dealers, broker-dealers, persons who are not citizens or residents of the United States or who are otherwise subject to special treatment under the Code. Additionally, each shareholder’s individual circumstances may affect the tax consequences of the distribution to such shareholder. Finally, no information is provided with respect to tax consequences under any applicable foreign, state or local laws. All classes of taxpayer shareholders should consult their own tax advisors regarding the tax consequences of the distribution.

 

The following summary is based on laws, regulations, rulings, practice, and judicial decisions in effect at the date of this prospectus, and does not take into account possible changes to such laws or such interpretations, if any, any of which may be applied retroactively. Additionally, legislative, regulatory, or interpretive changes or future court decisions may significantly modify the statements made in this description. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences described herein.

 

YOU ARE URGED TO CONSULT WITH YOUR OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE DISTRIBUTION OF OUR SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS, AND OF CHANGE IN THE APPLICABLE LAWS.

 

1847 Holdings has not requested, nor does it intend to request, a ruling from the Internal Revenue Service or an opinion of tax counsel as to the federal income tax consequences of the distribution. However, based on the facts of the proposed transaction, it is the opinion of the management of 1847 Holdings that the distribution of our shares of common stock will be treated as a distribution of property to a partner pursuant to Treasury Regulation 1.731-2. As such, 1847 Holdings will recognize no gain or loss on the distribution.

 

Assuming 1847 Holdings reports no gain or loss under Section 731, the amount of the distribution for purposes of Section 301 of the Code will be equal to 1847 Holding’s basis in the shares on the date of the distribution. However, each shareholder’s individual circumstances may affect the tax consequences of the distribution to such shareholder. Shareholders who are not citizens or residents of the United States, are corporations, or who are otherwise subject to special treatment under applicable tax codes, may have other consequences as a result of the distribution. We strongly urge all shareholders of 1847 Holdings to consult with their own tax, financial, or investment advisor or legal counsel experienced in these matters.

 

The foregoing sets forth the opinion of the management of 1847 Holdings. 1847 Holdings will likely report the amount of the distribution to the Internal Revenue Service based on our net book value on the date of distribution, which has not been determined to date. The Internal Revenue Service is not bound thereby, and no assurance exists that it will concur with the position of management regarding the value of the shares or other tax matters herein discussed. Specifically, it is possible that the Internal Revenue Service may assert that the distribution is taxable. If the Internal Revenue Service were to successfully assert this, the taxation of the transaction to 1847 Holdings and its shareholders would be based on the value of the shares received. In such event, the tax impact would increase significantly and would not be minimal. You would be taxed on the amount the value of the disturbed stock exceeded your adjusted basis in our shares owned by you.

 

YOU ARE URGED TO CONSULT WITH YOUR OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE DISTRIBUTION OF OUR SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF CHANGE IN THE APPLICABLE LAWS.

 

83

 

 

LEGAL MATTERS

 

The validity of the shares of common stock covered by this prospectus will be passed upon by Bevilacqua PLLC.

 

EXPERTS

 

The financial statements of our company appearing elsewhere in this prospectus have been included herein in reliance upon the report of Sadler, Gibb & Associates, LLC, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

 

INTERESTS OF NAMED EXPERTS AND COUNSEL

 

As of the date of this prospectus, Louis A. Bevilacqua, the managing member of our legal counsel, Bevilacqua PLLC, beneficially owns approximately 9.01% of the outstanding common shares of 1847 Holdings and indirectly owns approximately 10% of the Manager, which equity securities were received as partial consideration for legal services previously provided to 1847 Holdings and the Manager. Mr. Bevilacqua will receive 298,427 shares of our common stock in the distribution, representing approximately 4.88% of our outstanding common stock.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. You may obtain copies of this information by mail from the public reference room of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1(800) SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.

 

We file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referred to above. Additionally, we will make these filings available, free of charge, on our website at www.goedekers.com as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. The information on our website, other than these filings, is not, and should not be, considered part of this prospectus and is not incorporated by reference into this document.

 

84

 

 

FINANCIAL STATEMENTS

 

  Page
Unaudited Financial Statements as of and for the Six Months Ended June 30, 2020 and 2019 F-2
Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019 F-3
Statements of Operations for the Three and Six Months Ended June 30, 2020 and the Period from April 6, 2019 to June 30, 2019 (Successor), and for the Period from April 1, 2019 to April 5, 2019 and the Period from January 1, 2019 to April 5, 2019 (Predecessor) (unaudited) F-4
Statement of Stockholders’ Equity for Predecessor for the Period from January 1, 2019 to April 5, 2019 (unaudited) F-5
Statement of Stockholder’s Deficit for Successor for the Period from April 6, 2019 to June 30, 2019 and for Six Months Ended June 30, 2020 (unaudited) F-6
Statements of Cash Flows for the Six Months Ended June 30, 2020 and the Period from April 6, 2019 to June 30, 2019 (Successor) and for the Period from January 1, 2019 to April 5, 2019 (Predecessor) (unaudited) F-7
Notes to Financial Statements F-8
Audited Financial Statements as of and for the Years Ended December 31, 2019 and 2018 F-26
Report of Independent Registered Public Accounting Firm F-27
Balance Sheets as of December 31, 2019 (Successor) and 2018 (Predecessor) F-28
Statements of Operations for the Period from April 6, 2019 to December 31, 2019 (Successor) and for the Period from January 1, 2019 to April 5, 2019 and the Year Ended December 31, 2018 (Predecessor) F-29
Statement of Stockholders’ Equity for Predecessor for Year Ended December 31, 2018 and for Period from January 1, 2019 to April 5, 2019 F-30
Statement of Stockholder’s Deficit for Successor for Period from April 5, 2019 to December 31, 2019 F-31
Statements of Cash Flows for the Period from April 6, 2019 to December 31, 2019 (Successor) and for the Period from January 1, 2019 to April 5, 2019 and the Year Ended December 31, 2018 (Predecessor) F-32
Notes to Financial Statements F-33

 

F-1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1847 GOEDEKER INC.

 

UNAUDITED FINANCIAL STATEMENTS

 

JUNE 30, 2020 AND 2019

 

 

 

 

 

F-2

 

 

1847 GOEDEKER INC.

BALANCE SHEETS

 

  

June 30,

2020

  

December 31,

2019

 
   (unaudited)     
ASSETS        
Current Assets        
Cash and cash equivalents  $3,555,946   $64,470 
Receivables   1,955,076    1,862,086 
Vendor deposits   345,503    294,960 
Merchandise inventory, net   1,724,725    1,380,090 
Other assets   1,997,846    892,796 
Total Current Assets   9,579,096    4,494,402 
Property and equipment, net   170,741    185,606 
Operating lease right-of-use assets, net   1,792,872    2,000,755 
Goodwill   5,097,752    4,976,016 
Intangible assets, net   1,717,078    1,878,844 
Deferred tax assets   1,822,256    698,303 
Other long-term assets   45,000    45,000 
TOTAL ASSETS  $20,224,795   $14,278,926 
           
LIABILITIES AND STOCKHOLDER’S DEFICIT          
Current Liabilities          
Accounts payable and accrued expenses  $2,605,793   $2,465,220 
Customer deposits   12,431,608    4,164,296 
Advances, related party   -    137,500 
Lines of credit   456,105    1,250,930 
Current portion of notes payable, related parties   1,260,564    1,068,075 
Current portion of notes payable   1,162,014    999,200 
Convertible notes payable   821,431    584,943 
Warrant liability   2,250,000    122,344 
Current portion of operating lease liabilities   375,885    422,520 
Total Current Liabilities   21,363,400    11,215,028 
Notes payable, related parties, net of current portion   2,155,662    2,232,369 
Notes payable, net of current portion   358,189    - 
Operating lease liabilities, net of current portion   1,416,987    1,578,235 
Contingent note payable   49,248    49,248 
TOTAL LIABILITIES   25,343,486    15,074,880 
Stockholder’s Deficit          
Common stock, $.0001 par value, 200,000,000 shares authorized and 4,750,000 shares issued and outstanding as of June 30, 2020 and December 31, 2019   475    475 
Additional paid-in capital   2,250,932    1,271,721 
Accumulated deficit   (7,370,098)   (2,068,150)
Total Stockholder’s Deficit   (5,118,691)   (795,954)
TOTAL LIABILITIES AND STOCKHOLDER’S DEFICIT  $20,224,795   $14,278,926 

 

The accompanying notes are an integral part of these financial statements

F-3

 

 

1847 GOEDEKER INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   Successor   Predecessor 
   Three Months Ended
June 30, 2020
   Six Months Ended
June 30, 2020
   Period from April 6, 2019 through
June 30, 2019
  

Period from April 1, 2019
through
April 5, 2019

   Period from January 1, 2019
through
April 5, 2019
 
Product sales, net  $15,285,031   $24,962,209   $10,545,880   $999,855   $12,946,901 
Cost of goods sold   12,685,158    20,796,328    8,702,406    735,186    11,004,842 
Gross profit   2,599,873    4,165,881    1,843,474    264,669    1,942,059 
                          
Operating Expenses                         
Personnel   1,040,189    2,351,673    886,225    31,198    913,919 
Advertising   891,907    1,558,343    525,222    113,477    714,276 
Bank and credit card fees   454,569    699,309    232,273    72,130    329,247 
Depreciation and amortization   91,790    183,631    87,437    -    9,675 
General and administrative   636,217    1,202,857    539,120    34,767    451,214 
Total Operating Expenses   3,114,672    5,995,813    2,270,277    251,572    2,418,331 
                          
INCOME (LOSS) FROM OPERATIONS   (514,799)   (1,829,932)   (426,803)   13,097    (476,272)
                          
Other Income (Expense)                         
Interest income   1,062    1,062    -    -    23,807 
Financing costs   (74,504)   (269,186)   (159,255)   -    - 
Interest expense   (234,908)   (447,596)   (205,022)   -    - 
Loss on extinguishment of debt   (948,856)   (948,856)   -    -    - 
Write-off of acquisition receivable   (809,000)   (809,000)   -    -    - 
Change in fair value of warrant liability   (2,127,656)   (2,127,656)   2,600    -    - 
Other income (expense)   2,880    5,263    45,218    160    7,200 
Total Other Income (Expense)   (4,190,982)   (4,595,969)   (316,459)   160    31,007 
                          
NET INCOME (LOSS) BEFORE INCOME TAXES   (4,705,781)   (6,425,901)   (743,262)   13,257    (445,265)
                          
INCOME TAX BENEFIT   688,953    1,123,953    -    -    - 
                          
NET INCOME (LOSS)  $(4,016,828)  $(5,301,948)  $(743,262)  $13,257   $(445,265)
                          
INCOME (LOSS) PER COMMON SHARE – BASIC AND DILUTED  $(0.85)  $(1.12)  $(0.16)  $1.89   $(63.61)
                          
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED   4,750,000    4,750,000    4,750,000    7,000    7,000 

 

The accompanying notes are an integral part of these financial statements

F-4

 

 

1847 GOEDEKER INC.

STATEMENT OF STOCKHOLDERS’ EQUITY (PREDECESSOR)

(UNAUDITED)

 

   Common Stock   Additional Paid-in   Retained   Total

Stockholders

 
   Shares   Amount  

Capital

  

Earnings

  

Equity

 
Balance, December 31, 2018   7,000   $7,000   $707,049   $2,684,628   $3,398,677 
                          
Net loss for the period from January 1, 2019 through April 5, 2019   -    -    -    (445,265)   (445,265)
Balance, April 5, 2019   7,000   $7,000   $707,049   $2,239,263   $2,953,412 

 

The accompanying notes are an integral part of these financial statements

 

F-5

 

 

1847 GOEDEKER INC.

STATEMENT OF STOCKHOLDERS’ EQUITY (SUCCESSOR)

(UNAUDITED)

 

For the Period from April 6, 2019 through June 30, 2019

 

   Common Stock   Additional Paid-in   Accumulated 

Total Stockholders’

 
   Shares   Amount  

Capital

   Deficit  

Deficit

 
Balance, April 6, 2019   -   $-   $-   $-   $- 
                          
Capital contribution by Holdco for the acquisition of Goedeker Television Co.   4,750,000    475    979,048    -    979,523 
Issuance of warrants in connection with notes payable   -    -    292,673    -    292,673 
Net loss for the period from April 6, 2019 through June 30, 2019   -    -    -   $(743,262)   (743,262)
Balance, June 30, 2019   4,750,000   $475   $1,271,721   $(743,262)  $528,934 

 

For the Three and Six Months Ended June 30, 2020

 

   Common Stock   Additional Paid-in   Accumulated   Total Stockholders’ 
   Shares   Amount  

Capital

   Deficit  

Deficit

 
Balance, January 1, 2020   4,750,000   $475   $1,271,721   $(2,068,150)  $(795,954)
                          
Net loss   -    -    -    (1,285,120)   (1,285,120)
Balance, March 31, 2020   4,750,000   $475   $1,271,721   $(3,353,270)  $(2,081,074)
Issuance of 1847 Holdings warrants in connection with notes payable   -    -    566,711    -    566,711 
Forgiveness of related party debt   -    -    137,500    -    137,500 
Issuance of 1847 Holdings shares in connection with exercise of warrant   -    -    275,000    -    275,000 
Net loss   -    -    -    (4,016,828)   (4,016,828)
Balance, June 30, 2020   4,750,000   $475   $2,250,932   $(7,370,098)  $(5,118,691)

 

The accompanying notes are an integral part of these financial statements

F-6

 

 

1847 GOEDEKER INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Successor   Predecessor 
  

Six Months Ended

June 30, 2020

  

Period from April 6,
2019 through

June 30, 2019

  

Period from January 1, 2019

through

April 5, 2019

 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net loss  $(5,301,945)  $(743,262)  $(445,265)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:               
Depreciation and amortization   183,631    97,113    9,675 
Amortization of finance costs   318,599    157,502    - 
Gain on write-down of contingent liability   -    -    - 
Loss on extinguishment of debt   948,856    -    - 
Write-off of acquisition receivable   809,000    -    - 
Change in fair value of warrant liability   2,127,656    2,600    - 
Changes in operating assets and liabilities:               
Receivables   (214,726)   (1,812,486)   1,730,079 
Vendor deposits   (50,543)   -    (73,770)
Merchandise inventory   (344,635)   (608,073)   595,466 
Prepaid expenses and other assets   (1,105,049)   505,727    2,784 
Change in operating lease right-of-use assets   207,883    98,166    - 
Deferred tax assets   (1,123,953)   -    - 
Accounts payable and accrued expenses   146,839    (707,008)   196,565 
Customer deposits   8,267,312    995,742    (1,404,266)
Operating lease liabilities   (207,883)   (98,166)   - 
Net cash provided by (used in) operating activities   3,852,042    (2,117,345)   611,268 
CASH FLOWS FROM INVESTING ACTIVITIES               
Purchases of property and equipment   (7,000)   -    - 
Net cash used in investing activities   (7,000)   -    - 
CASH FLOWS FROM FINANCING ACTIVITIES               
Proceeds from note payable   642,600    1,500,000    - 
Repayment on notes payable   (187,500)   (93,750)   - 
Proceeds from convertible notes payable   -    650,000    - 
Net borrowings (payments) on lines of credit   (814,492)   591,315    - 
Cash paid for financing costs   -    (359,500)   - 
Net cash provided by (used in) financing activities   (353,566)   2,288,065    - 
NET CHANGE IN CASH   3,491,476    (170,720)   (611,268)
CASH, BEGINNING OF PERIOD   64,470    -    1,525,693 
CASH, END OF PERIOD  $3,555,946   $170,270   $2,136,961 
                
SUPPLEMENTAL CASH FLOW INFORMATION               
Cash paid for interest  $170,385   $77,185   $- 
Cash paid for taxes  $-   $-   $- 
                
NON-CASH INVESTING AND FINANCING ACTIVITIES               
Operating lease right-of-use asset  $-   $2,300,000   $- 
Debt discounts on notes payable  $-   $66,286   $- 
Warrants in 1847 Holdings contributed on notes payable  $-   $229,244   $- 
Warrants in 1847 Holdings contributed on convertible notes payable  $-   $292,673   $- 
1847 Holdings common shares contributed on note payable  $-   $137,500   $- 
Acquisition of Goedeker Television Co.  $-   $492,601   $- 
Conversion of debt through issuance of 1847 Holdings common shares  $275,000   $-   $- 
Exercise of warrant liability through issuance of 1847 Holdings non-controlling interest  $118,500   $-   $- 
Derecognition of related party debt  $137,500   $-   $- 
Adjustment to fair value of goodwill based on final purchase price allocation  $121,736   $-   $- 

 

The accompanying notes are an integral part of these financial statements

 

F-7

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 1—ORGANIZATION AND NATURE OF BUSINESS

 

1847 Goedeker Inc. (the “Company”) was formed under the laws of the State of Delaware on January 10, 2019 for the sole purpose of acquiring the business of Goedeker Television Co. Prior to August 4, 2020, the Company was a wholly owned subsidiary of 1847 Goedeker Holdco Inc. (“Holdco”), which was formed in State of Delaware on March 20, 2019. Neither the Company nor Holdco had any operations other than operations relating to their incorporation and organization prior to the acquisition of the business of Goedeker Television Co.

 

Upon its formation, Holdco was a wholly owned subsidiary of 1847 Holdings LLC (“1847 Holdings”), which was formed under the laws of the State of Delaware on January 22, 2013. 1847 Holdings is in the business of acquiring small businesses in a variety of different industries.

 

On April 5, 2019, the Company executed an asset purchase agreement with Goedeker Television Co., a Missouri corporation (“Goedeker”), pursuant to which the Company acquired substantially all the assets and assumed substantially all the liabilities of Goedeker. As partial consideration for the acquisition, the sellers of Goedeker acquired 22.5% of Holdco and Leonite Capital LLC, a lender involved with financing the acquisition of the Goedeker by the Company, acquired 7.5% of Holdco, as a result of which, 1847 Holdings held 70% of Holdco.

 

On August 4, 2020, Holdco distributed all of its shares in the Company to its stockholders. On the same date, the Company completed an initial public offering of its common stock, pursuant to which the Company issued 1,111,200 shares of its common stock. As a result of these transactions, the Company is a majority owned (53.59%) subsidiary of 1847 Holdings.

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and are presented in US dollars.

 

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

 

These unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained elsewhere in this report.

 

Accounting Basis

 

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

 

Stock Split

 

On July 30, 2020, the Company completed a 4,750-for-1 forward stock split of its outstanding common stock. As a result of this stock split, the Company’s issued and outstanding common stock increased from 1,000 to 4,750,000 shares. Accordingly, all share and per share information has been restated to retroactively show the effect of this stock split.

 

Predecessor and Successor Reporting

 

The acquisition of Goedeker as described in Note 1 was accounted for under the acquisition method of accounting in accordance with GAAP. For the purpose of financial reporting, Goedeker was deemed to be the predecessor company and the Company is deemed to be the successor company in accordance with the rules and regulations issued by the Securities and Exchange Commission. The assets and liabilities of Goedeker were recorded at their respective fair values as of the acquisition date. Fair value adjustments related to the transaction are reflected in the books of the Company, resulting in assets and liabilities of the Company being recorded at fair value at April 6, 2019. Therefore, the Company’s financial information prior to the transaction is not comparable to its financial information subsequent to the transaction.

 

As a result of the impact of pushdown accounting, the financial statements and certain note presentations separate the Company’s presentations into two distinct periods, the period before the consummation of the transaction (labeled “Predecessor”) and the period after that date (labeled “Successor”), to indicate the application of a different basis of accounting between the periods presented.

 

F-8

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

Use of Estimates

 

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

 

Cash and Cash Equivalents

 

Cash and equivalents include: (1) currency on hand, (2) demand deposits with banks or financial institutions, (3) other kinds of accounts that have the general characteristics of demand deposits, and (4) short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.

 

Revenue Recognition and Cost of Revenue 

 

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

 

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

 

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

 

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

 

F-9

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

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

 

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

 

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

 

Substantially all the Company’s sales are to individual retail consumers.

 

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

 

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

 

The Company’s disaggregated revenue by sales type is as follows:

 

   Successor   Predecessor 
   Three Months Ended
June 30, 2020
   Six Months Ended
June 30, 2020
   Period from April 6, 2019 through
June 30, 2019
   Period from January 1, 2019
through
April 5, 2019
 
Appliance sales  $11,533,006   $19,335,110   $8,449,312   $9,784,525 
Furniture sales   2,768,327    4,050,163    1,570,546    2,456,085 
Other sales   983,698    1,576,936    526,023    706,291 
Total  $15,285,031   $24,962,209   $10,545,881   $12,946,901 

 

Receivables

 

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

 

Merchandise Inventory

 

Inventory consists of finished products acquired for resale and is valued at the low-of-cost-or-market with cost determined on an average item basis. The Company periodically evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. Reserves for slow-moving and potentially obsolete inventories was $425,000 as of June 30, 2020 and December 31, 2019.

 

F-10

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

Property and Equipment

 

Property and equipment is stated at the historical cost. Maintenance and repairs of property and equipment are charged to operations as incurred. Leasehold improvements are amortized over the lesser of the base term of the lease or estimated life of the leasehold improvements. Depreciation is computed using the straight-line method over estimated useful lives as follows:

 

Category  Useful Life (Years) 
Machinery and equipment   5 
Office equipment   5 
Vehicles   5 

 

Goodwill and Intangible Assets

 

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

 

Acquired identifiable intangible assets are amortized over the following periods:

 

Acquired Intangible Asset  Amortization Basis  Expected Life (Years) 
Customer related  Straight-line   15 
Marketing related  Straight-line   5 

 

Long-Lived Assets 

 

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

 

Fair Value of Financial Instruments

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined in the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

F-11

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

Derivative Instrument Liability

 

The Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At June 30, 2020 and December 31, 2019, the Company classified a warrant issued in conjunction with a term loan as a derivative instrument (see Note 10).

 

Income Taxes

 

Under the Company’s accounting policies, the Company initially recognizes a tax position in its financial statements when it becomes more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax positions that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities assuming full knowledge of the position and all relevant facts. Although the Company believes its provisions for unrecognized tax positions are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which the Company has reflected in its income tax provisions and accruals. The tax law is subject to varied interpretations, and the Company has taken positions related to certain matters where the law is subject to interpretation. Such differences could have a material impact on the Company’s income tax provisions and operating results in the period(s) in which the Company makes such determination.

 

Basic Income (Loss) Per Share

 

Basic income (loss) per share is calculated by dividing the net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. As the Company had a net loss for the three and six months ended June 30, 2020, the potentially dilutive securities were 250,000 warrants to purchase common stock of the Company issued to a lender. These potentially dilutive securities were excluded from diluted loss per share.

 

Going Concern Assessment

 

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

 

The Company has generated losses since its acquisition and has relied on cash on hand, external bank lines of credit, issuance of third party and related party debt and the sale of a note to support cashflow from operations.

 

For the six months ended June 30, 2020, the Company incurred operating losses of $426,803, cash flows from operations of $3,852,042 and negative working capital of $11,784,304.

 

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

 

F-12

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

On August 4, 2020, the Company completed an initial public offering of its common stock, pursuant to which the Company sold 1,111,200 shares of its common stock, at a purchase price of $9.00 per share, for total gross proceeds of $10,000,800 (the “IPO”). After deducting the underwriting commission and offering expenses, the Company received net proceeds of approximately $8,992,000. The Company used a portion of the proceeds from this offering to pay off certain debt.

 

The impact of COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing on a return to more normal operations. Further, the recently enacted stimulus bill provides for economic assistance loans through the United States Small Business Administration. On April 8, 2020, the Company received a $642,600 Paycheck Protection Program (the “PPP”) loan from the United States Small Business Administration (the “SBA”) under provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act provides that all or a portion of the PPP loan may be forgiven. The terms of such forgiveness and repayment terms for the portion, if any, that is not forgiven have not been announced by the SBA.

 

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

 

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

 

Recent Accounting Pronouncements

 

Recently Adopted

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which requires lessees to recognize right-of-use (“ROU”) assets and related lease liabilities on the balance sheet for all leases greater than one year in duration. The Company adopted ASC 842 on January 1, 2019 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach did not require any transition accounting for leases that expired before the earliest comparative period presented. The adoption of this standard resulted in the recording of ROU assets and lease liabilities for all of the Company’s lease agreements with original terms of greater than one year. The adoption of ASC 842 did not have a significant impact on the Company’s statements of income or cash flows. See Note 13 for the required disclosures relating to the Company’s lease agreements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was enacted in December 2017. ASU 2018-02 became effective for the Company on January 1, 2019 and resulted in a decrease of approximately $748,000 to retained earnings due to the reclassification from AOCI of the effect of the corporate income tax rate change on our cash flow hedges. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

F-13

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. The Company adopted ASU 2018-15 on January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company will modify its disclosures beginning in the first quarter of 2020 to conform to this guidance. The Company does not expect the adoption of this standard and the associated changes to its disclosures to have a material impact to the Company’s financial statements.

 

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

 

The Company currently believes that all other issued and not yet effective accounting standards are not relevant to the Company’s financial statements.

 

Reclassifications

 

Certain accounts have been reclassified to conform with classifications adopted in the period ended June 30, 2020. Such reclassifications had no effect on net earnings or financial position.

 

F-14

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 3—RECEIVABLES

 

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

 

   June 30,
2020
  

December 31,

2019

 
Credit card payments in process of settlement  $904,658   $406,838 
Vendor rebates receivable   1,050,477    1,455,248 
Total  $1,955,076   $1,862,086 

 

NOTE 4—MERCHANDISE INVENTORY

 

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

 

   June 30,
2020
  

December 31,

2019

 
Appliances  $1,917,128   $1,538,552 
Furniture   148,368    184,755 
Other   84,229    81,783 
Total merchandise inventory   2,149,725    1,805,090 
           
Allowance for inventory obsolescence   (425,000)   (425,000)
Merchandise inventory, net  $1,724,725   $1,380,090 

 

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

 

NOTE 5—VENDOR DEPOSITS

 

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

 

Prior to obtaining an open line of credit with a major vendor, the Company paid in advance for its purchases. The vendor did not ship product to the Company until an order was complete. As a result, the vendor held Company funds. A second vendor uses the Company’s vendor deposit account as collateral. Orders from this vendor exceeded the deposit account and the Company prepaid for some orders. Vendor deposits as of June 30, 2020 and December 31, 2019 were $345,503 and $294,960, respectively.

 

NOTE 6—PROPERTY AND EQUIPMENT

 

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

 

   June 30,
2020
   December 31, 2019 
Equipment  $14,375   $7,376 
Warehouse equipment   29,188    29,188 
Furniture and fixtures   512    512 
Transportation equipment   63,784    63,784 
Leasehold improvements   117,626    117,626 
Total property and equipment   225,485    218,486 
Accumulated depreciation   (54,744)   (32,880)
Property and equipment, net  $170,741   $185,606 

 

Depreciation expense for the six months ended June 30, 2020, the period April 6, 2019 to June 30, 2019 and the period January 1, 2019 to April 5, 2019 was $21,864, $11,533, and $9,675, respectively.

 

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

 

F-15

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 7—INTANGIBLE ASSETS

 

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

 

   June 30,
2020
  

December 31,

2019

 
Customer relationships  $749,000   $749,000 
Marketing related   1,368,000    1,368,000 
Total intangible assets   2,117,000    2,117,000 
Accumulated amortization   (399,922)   (238,156)
Intangible assets, net  $1,717,078   $1,878,844 

 

In connection with the acquisition of Goedeker, the Company identified intangible assets of $2,117,000, representing trade names and customer relationships. These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 8.5 years. Amortization expense for the six months ended June 30, 2020, the period April 6, 2019 to June 30, 2019 and the period January 1, 2019 to April 5, 2019 was $161,766, $76,390, and $-0-, respectively.

 

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

 

2020 (remainder of year)  $161,766 
2021   323,532 
2022   323,532 
2023   323,532 
2024   122,132 
Thereafter   462,584 
Total  $1,717,078 

 

NOTE 8—BUSINESS COMBINATION

 

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

 

On April 5, 2019, the Company, Goedeker and the Stockholders entered into an amendment to the asset purchase agreement and closing of the acquisition of substantially all of the assets of Goedeker was completed.

 

The aggregate purchase price, recorded as a capital contribution from Holdco, was $4,483,418 consisting of: (i) the issuance of a promissory note in the principal amount of $4,100,000 and a deemed fair value of $3,422,398; (ii) up to $600,000 in earn out payments (as described below) with a deemed fair value of $81,494; and (iii) a 22.5% ownership interest in Holdco transferred to the sellers with a deemed fair value of $979,523.

 

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

 

On June 2, 2020, the Company entered into a settlement agreement with Goedeker, Steve Goedeker, Mike Goedeker and 1847 Holdings. The settlement agreement and the related transaction documents that are exhibits to the settlement agreement were all signed on June 2, 2020 only became effective upon the closing of the IPO on August 4, 2020. Pursuant to the settlement agreement, the parties entered into an amendment and restatement of the 9% subordinated promissory note described below (see Note 11). In addition, the parties agreed that the arbitration action described above would be settled effective upon the closing of the IPO and that each party to such arbitration action would release all claims that it has against the other parties to such action. As part of the settlement of the arbitration action, the Company agreed that the sellers will not have to pay the $809,000 working capital adjustment amount, which resulted in a loss on write-off of acquisition receivable during the six months ended June 30, 2020.

 

F-16

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company determined the fair value of the earnout on the date of acquisition was $81,494. Such amount was recorded as a contingent consideration liability within the accounts payable and accrued expense line item on the balance sheet and is revalued to fair value each reporting period until settled. The year 1 contingent liability of $32,246 was written-off in the year ending December 31, 2019 as the target was not met and the balance of the liability at December 31, 2019 is $49,248. Management reviewed the contingent consideration due at June 30, 2020 and does not believe any adjustments are required at June 30, 2020 or for the six months then ended.

 

The fair value of the purchase consideration issued to Goedeker was allocated to the net tangible assets acquired. The Company accounted for the acquisition as the purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value of the net liabilities assumed was approximately $614,337. The excess of the aggregate fair value of the net tangible assets has been allocated to goodwill. Provisional goodwill was estimated at $4,976,106 at December 31, 2019 due to the preliminary valuation. During the period ending June 30, 2020, the Company subsequently adjusted the value of goodwill by $121,736 to $5,097,752 based on the finalized purchase price allocation.

 

F-17

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

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

 

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

 

NOTE 9—LINES OF CREDIT

 

Burnley Capital LLC

 

On April 5, 2019, the Company, as borrower, and Holdco entered into a loan and security agreement with Burnley Capital LLC (“Burnley”) for revolving loans in an aggregate principal amount that will not exceed the lesser of (i) the borrowing base (as defined in the loan and security agreement) or (ii) $1,500,000 (provided that such amount may be increased to $3,000,000 in Burnley’s sole discretion) minus reserves established Burnley at any time in accordance with the loan and security agreement. In connection with the closing of the acquisition of Goedeker on April 5, 2019, the Company borrowed $744,000 under the loan and security agreement and issued a revolving note to Burnley in the principal amount of up to $1,500,000. As of June 30, 2020, there was $232,000 available for borrowing and the balance of the line of credit was $456,104, comprised of principal of $524,938 and net of unamortized debt issuance costs of $68,834.

 

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

 

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

 

In addition, the Company was not in compliance with a requirement with respect to the liquidity ratio, which is the ratio of cash and available borrowings to customer deposits. At June 30, 2020, the actual ratio was 0.36x compared to a requirement of 1.00x.

 

The loan and security agreement with SBCC described below contains the same covenants and a cross default provision, whereby a default under the Burnley loan and security agreement triggers a default under the SBCC loan and security agreement. Accordingly, at June 30, 2020, the Company was in technical, not payment default, on these loan and security agreements and classified such debt as a current liability.

 

F-18

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

There are no cross-default provisions that would require any other long-term liabilities to be classified as current. Although the Company has defaulted under the 9% subordinated promissory note described below as the result of its failure to make payments thereunder from and after August 27, 2019, the date that Burnley notified the Company that it is in technical default under Burnley’s loan and security agreement, Burnley’s notice also stated that pursuant to the subordination agreement, dated April 5, 2019, between Burnley and Goedeker, no payment can be made under the note so long as the Company’s default relating to Burnley’s loan continues. Therefore, notwithstanding the default, Goedeker has no right to accelerate the note because, in addition to the subordination agreement which otherwise would have permitted acceleration, the note itself also has specific subordination provisions that prohibit such acceleration. Since Goedeker does not currently have the right to accelerate the note, the Company has classified all amounts other than the currently due portion of the note as long-term liabilities.

 

Upon closing of the IPO on August 4, 2020, the Company repaid the revolving note in full and the loan and security agreement was terminated (see Note 16).

 

Northpoint Commercial Finance LLC

 

On June 24, 2019, the Company, as borrower, entered into a loan and security agreement with Northpoint Commercial Finance LLC, which was amended on August 2, 2019, for revolving loans up to an aggregate maximum loan amount of $1,000,000 for the acquisition, financing or refinancing by the Company of inventory at an interest rate of LIBOR plus 7.99%. The Company terminated the loan and security agreement on May 18, 2020 and there is no outstanding balance as of June 30, 2020.

 

NOTE 10—NOTES PAYABLE AND WARRANT LIABILITY

 

Small Business Community Capital II, L.P.

 

On April 5, 2019, the Company, as borrower, and Holdco entered into a loan and security agreement with Small Business Community Capital II, L.P. (“SBCC”) for a term loan in the principal amount of $1,500,000, pursuant to which the Company issued to SBCC a term note in the principal amount of up to $1,500,000 and a ten-year warrant to purchase shares of the most senior capital stock of the Company equal to 5.0% of the outstanding equity securities of the Company on a fully-diluted basis for an aggregate price equal to $100. The Company classified the warrant as a derivative liability on the balance sheet of $2,250,000 based on the estimated value of the warrants in the IPO (see Note 16). The increase in the value of the warrant from the estimated value of $122,344 at March 31, 2020 resulted in a charge of $2,127,656. The warrant is subject to remeasurement at every reporting period, however, by agreement between the Company and SBCC the warrant will convert into shares of the Company immediately upon closing of the IPO, thus, no further valuation will be necessary.

 

The balance of the note amounts to $877,603 as of June 30, 2020, comprised of principal of $1,130,826, capitalized PIK interest of $27,476 and net of unamortized warrant feature of $158,321 and unamortized debt discount of $122,375.

 

As noted above, as of June 30, 2020, the Company was in technical, not payment default, on this loan and security agreement and classified such debt as a current liability.

 

Upon closing of the IPO on August 4, 2020, the Company repaid the term note in full and the loan and security agreement was terminated (see Note 16).

 

PPP Loan

 

On April 8, 2020, the Company received a $642,600 PPP loan from the SBA under provisions of the CARES Act. The PPP loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. The PPP loan contains events of default and other provisions customary for a loan of this type. The PPP provides that the loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company intends to use the proceeds from the PPP loan for qualifying expenses and to apply for forgiveness of the PPP loan in accordance with the terms of the CARES Act. The Company has classified $284,411 of the PPP loan as a current liability and $358,189 as a long-term liability pending classification of the final loan terms by the SBA.

 

F-19

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 11—NOTES PAYABLE, RELATED PARTIES

 

As noted above, a portion of the purchase price for the acquisition was paid by the issuance by the Company to Steve Goedeker, as representative of Goedeker, of a 9% subordinated promissory note in the principal amount of $4,100,000. The note will accrue interest at 9% per annum, amortized on a five-year straight-line basis and payable quarterly in accordance with the amortization schedule attached thereto, and mature on April 5, 2024. The remaining balance of the note at June 30, 2020 is $3,416,226 comprised of principal of $3,930,293, net of unamortized debt discount of $354,276 and loan costs of $159,791.

 

Pursuant to the settlement agreement described above (see Note 8), the parties entered into an amendment and restatement of the note that became effective as of the closing of the IPO on August 4, 2020, pursuant to which (i) the principal amount of the existing note was increased by $250,000, (ii) upon the closing of the IPO, the Company agreed to make all payments of principal and interest due under the note through the date of the closing, and (iii) from and after the closing, the interest rate of the note was increased from 9% to 12%. The Company also agreed to grant to the sellers, Goedeker, Steve Goedeker and Mike Goedeker, a security interest in all of the assets of the Company to secure its obligations under the amended and restated note and entered into a security agreement with them that became effective upon the closing of the IPO.

 

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

 

As stated above, although the Company has defaulted under this note, Goedeker has no right to accelerate the note because the note has specific subordination provisions that prohibit such acceleration.

 

Maturities of debt are as follows:

 

For the years ended December 31,    
2020 (remainder of year)  $1,068,243 
2021   795,639 
2022   869,700 
2023   950,655 
2024   246,056 
Total   3,930,293 
Less:  loan costs   (159,791)
          Discounts   (354,276)
Total  $3,416,226 

 

NOTE 12—CONVERTIBLE PROMISSORY NOTE

 

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

 

On May 11, 2020, 1847 and Leonite entered into a first amendment to secured convertible promissory note, pursuant to which the parties agreed (i) to extend the maturity date of the note to October 5, 2020, (ii) that 1847’s failure to repay the note on the original maturity date of April 5, 2020 shall not constitute and event of default under the note and (iii) to increase the principal amount of the note by $207,145, as a forbearance fee. The Company accounted for this transaction as a loss on extinguishment of debt.

 

F-20

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

In connection with the amendment, (i) 1847 Holdings issued to Leonite another five-year warrant to purchase 200,000 common shares at an exercise price of $1.25 per share (subject to adjustment), which may be exercised on a cashless basis and (ii) upon closing of 1847 Holdings’ acquisition of Asien’s Appliance, Inc., 1847 Holdings’ wholly owned subsidiary 1847 Asien Inc. issued to Leonite shares of common stock equal to a 5% interest in 1847 Asien Inc. The Company accounted for the issuance of the 200,000 additional warrants as a $566,711 loss on debt restructuring and an increase in additional paid-in-capital, representing the estimated fair value of the 200,000 additional warrants for a five-year period.

 

The note carries an original issue discount of $64,286 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred in connection with the purchase of the note. Furthermore, 1847 Holdings issued 50,000 common shares valued at $137,500 and a debt-discount related to the warrants valued at $292,673. In the second quarter of 2020, the $137,500 value of the shares was transferred from a liability to 1847 Holdings to additional paid-in-capital. The Company amortized $129,343 of financing costs related to the shares and warrants in the six months ended June 30, 2020.

 

Under the note, Leonite has the right at any time at its option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the note into fully paid and non-assessable common shares or any shares of capital stock or other securities of 1847 Holdings into which such common shares may be changed or reclassified.

 

On May 4, 2020, Leonite converted $100,000 of the outstanding balance of the note into 100,000 common shares of 1847 Holdings. The Company accounted for this transaction as a $100,000 reduction in the principal amount of the debt, a $175,000 loss on extinguishment of debt, and a $275,000 increase in additional paid-in-capital representing the fair value of the 1847 Holdings common shares on the conversion date. The remaining net balance of the note at June 30, 2020 is $821,431. As a result of the activity on this note, $948,856 was recorded as loss on extinguishment of debt.

 

Upon closing of the IPO on August 4, 2020, the Company repaid the term note in full (see Note 16).

 

NOTE 13—OPERATING LEASE

 

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

 

F-21

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

Supplemental balance sheet information related to leases was as follows: 

 

Operating lease right-of-use asset  $2,300,000 
Accumulated amortization   (507,128)
Net balance  $1,792,872 
      
Lease liability, current portion  $436,342 
Lease liability, long-term   1,356,530 
Total operating lease liability  $1,792,872 
      
Weighted average remaining lease term (months)   45 
      
Weighted average discount rate   6.5%

 

Maturities of the lease liability for each of the next five years is as follows:

 

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

 

NOTE 14—RELATED PARTIES

 

Offsetting Management Services Agreement

 

On April 5, 2019, the Company entered into an offsetting management services agreement with 1847 Partners LLC (the “Manager”), a company owned and controlled by Ellery W. Roberts, the Company’s chairman and controlling shareholder of 1847 Holdings.

 

Pursuant to the offsetting management services agreement, the Company appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of $62,500 or 2% of adjusted net assets (as defined in the offsetting management services agreement); provided, however, that, (i) pro-rated payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate amount of management fees paid or to be paid by the Company, together with all other management fees paid or to be paid by all other subsidiaries of 1847 Holdings to the Manager, in each case, with respect to any fiscal year exceeds, or is expected to exceed, 9.5% of 1847 Holdings’ gross income with respect to such fiscal year, then the management fee to be paid by the Company for any remaining fiscal quarters in such fiscal year shall be reduced, on a pro rata basis determined by reference to the management fees to be paid to the Manager by all of the subsidiaries of 1847 Holdings, until the aggregate amount of the management fee paid or to be paid by the Company, together with all other management fees paid or to be paid by all other subsidiaries of 1847 Holdings to the Manager, in each case, with respect to such fiscal year, does not exceed 9.5% of 1847 Holdings’ gross income with respect to such fiscal year, and (iii) if the aggregate amount the management fee paid or to be paid by the Company, together with all other management fees paid or to be paid by all other subsidiaries of 1847 Holdings to the Manager, in each case, with respect to any fiscal quarter exceeds, or is expected to exceed, the aggregate amount of the parent management fee (as defined in the offsetting management services agreement) with respect to such fiscal quarter, then the management fee to be paid by the Company for such fiscal quarter shall be reduced, on a pro rata basis, until the aggregate amount of the management fee paid or to be paid by the Company, together with all other management fees paid or to be paid by all other subsidiaries of 1847 Holdings to the Manager, in each case, with respect to such fiscal quarter, does not exceed the parent management fee calculated and payable with respect to such fiscal quarter.

 

F-22

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

On April 21, 2020, the Company entered into an amendment to the offsetting management services agreement, pursuant to which the quarterly management fee was amended to provide for a flat fee of $62,500, as opposed to the greater of $62,500 or 2% of adjusted net assets, which amendment will became effective upon closing of the IPO on August 4, 2020.

 

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

 

The Company expensed $62,500 and $58,790 in management fees for the six months ended June 30, 2020 and 2019, respectively. Payment of the management fee is subordinated to the payment of interest on the 9% subordinated promissory note (see Note 11), such that no payment of the management fee may be made if the Company is in default under the note with regard to interest payments and, for the avoidance of doubt, such payment of the management fee will be contingent on the Company being in good standing on all associated loan covenants. In addition, during the period that that any amounts are owed under the 9% subordinated promissory note or the earn out payments, the annual management fee shall be capped at $250,000. The rights of the Manager to receive payments under the offsetting management services agreement were also subordinate to the rights of Burnley and SBCC under separate subordination agreements that the Manager entered into with Burnley and SBCC on April 5, 2019. Accordingly, $188,653 due the Manager is classified as an accrued liability as of June 30, 2020.

 

Advances

 

As of June 30, 2020, the Manager had funded the Company $78,959 in related party advances. These advances are unsecured, bear no interest, and do not have formal repayment terms or arrangements.

 

As discussed in Note 12, on April 5, 2019, 1847 Holdings issued 50,000 common shares and 200,000 warrants to Leonite in order to induce Leonite to extend credit to the Company. The common shares of 1847 Holdings were valued at $137,500. As part of the modification to this convertible note payable, 1847 Holdings also granted an additional 200,000 warrants to purchase 1847 Holdings’ common shares to Leonite.

 

NOTE 15—STOCKHOLDERS’ DEFICIT

 

Common Stock

 

As of June 30, 2020 and December 31, 2019, the Company was authorized to issue 5,000 shares of common stock, par value $0.001 per share. On July 30, 2020, the Company amended its certificate of incorporation to (i) increase the authorized common stock from 5,000 shares to 200,000,000 shares, (ii) change the par value of the Company’s common stock from $0.001 to $0.0001, and (iii) authorize 20,000,000 shares of preferred stock, 0.0001 par value per share.

 

As of June 30, 2020 and December 31, 2019, the Company had 4,750,000 shares of common stock issued and outstanding. Each share entitles the holder thereof to one vote per share on all matters coming before the stockholders of the Company for a vote.

 

Warrants

 

On April 5, 2019, the Company issued to SBCC a ten-year warrant to purchase shares of the most senior capital stock of the Company equal to 5.0% of the outstanding equity securities of the Company on a fully-diluted basis for an aggregate price equal to $100 (see Note 10). SBCC exercised this warrant on August 4, 2020 (see Note 16).

 

NOTE 16—SUBSEQUENT EVENTS

 

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

 

F-23

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

Underwriting Agreement, Representative’s Warrants and Closing of IPO

 

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

 

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

 

On August 4, 2020, the Company sold 1,111,200 shares of its common stock to the Underwriters for total gross proceeds of $10,000,800. After deducting the underwriting commission and expenses, the Company received net proceeds of approximately $8,990,000. The Company also issued warrants for the purchase of 55,560 shares of common stock to affiliates of the Representative.

 

Repayment of Burnley Loan

 

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

 

Repayment of SBCC Loan

 

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

 

Leonite Conversion and Repayment

 

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

 

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

 

Payment on Subordinated Promissory Note

 

In accordance with the terms of the amended and restated note that became effective upon closing of the IPO on August 4, 2020 (Note 11), the Company used a portion of the proceeds from the IPO to pay $1,083,842 of the balance of the note representing a $696,204 reduction in the principal balance and interest accrued through August 4, 2020 of $387,638.

 

Amendment and Restatement of Certificate of Incorporation

 

On July 30, 2020, the Company amended and restated its certificate of incorporation to (i) increase the authorized common stock from 5,000 shares to 200,000,000 shares, (ii) change the par value of the Company’s common stock from $0.001 to $0.0001, and (iii) authorize 20,000,000 shares of preferred stock, 0.0001 par value per share.

 

F-24

 

 

1847 GOEDEKER INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020 AND 2019

(UNAUDITED)

 

Adoption of Equity Incentive Plan

 

Effective as of July 30, 2020, the Company established the 1847 Goedeker Inc. 2020 Equity Incentive Plan (“Plan”). The Plan was approved by the Company’s board of directors and stockholders on April 21, 2020. The Plan is administered by compensation committee of the board of directors. The Plan permits the grant of restricted stock, stock options and other forms of incentive compensation to the Company’s officers, employees, directors and consultants. The maximum number of shares of common stock that may be issued pursuant to awards granted under the Plan is 555,000 shares.

 

Option Grant

 

On August 4, 2020, the Company issued an incentive stock option under the Plan to the Company’s Chief Executive Officer, Douglas T. Moore, for the purchase of 263,158 shares of common stock, at an exercise price of $9.00 per share. The option vests with respect to 25% of the shares on August 15, 2020 and on each of the first, second and third anniversaries thereof, respectively.

 

Conversion of SBCC Warrant

 

Immediately prior to the closing of the IPO on August 4, 2020, SBCC converted its warrant (Note 15) into 250,000 shares of common stock.

 

F-25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1847 GOEDEKER INC.

 

AUDITED FINANCIAL STATEMENTS

 

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-26

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of 1847 Goedeker Inc.:

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheet of 1847 Goedeker Inc. (“the Company” or “Successor”) as of December 31, 2019, the related statements of operations, stockholder’s deficit, and cash flows for the period from April 6, 2019 through December 31, 2019, and the related notes. We have also audited the accompanying balance sheet of Goedeker Television Co. (“Predecessor”) as of December 31, 2018, the related statements of operations, stockholders’ deficit, and cash flows for the year then ended and for the period from January 1, 2019 through April 5, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the Successor financial statements referred to above present fairly, in all material respects, the financial position of 1847 Goedeker Inc. as of December 31, 2019, and the results of its operations and its cash flows for the period from April 6, 2019 through December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor financial statements referred to above present fairly, in all material respects, the financial position of Goedeker Television Co. as of December 31, 2018, and the results of its operations and its cash flows for the year then ended and for the period from January 1, 2019 through April 5, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Sadler, Gibb & Associates, LLC

 

We have served as the Company’s auditor since 2019.

 

Salt Lake City, UT

April 22, 2020

 

 

F-27

 

 

1847 GOEDEKER INC.

BALANCE SHEETS

 

   Successor   Predecessor 
   December 31,
2019
   December 31,
2018
 
ASSETS        
Current Assets        
Cash and cash equivalents  $64,470   $1,525,693 
Receivables   1,862,086    2,635,932 
Deposits with vendors   294,960    2,212,181 
Merchandise inventory, net   1,380,090    3,111,594 
Due from officers   -    50,634 
Other assets   892,796    6,784 
Total Current Assets   4,494,402    9,542,818 
Property and equipment, net   185,606    216,286 
Operating lease right-of-use assets   2,000,755    - 
Goodwill   4,976,016    - 
Intangible assets, net   1,878,844    - 
Deferred tax assets   698,303    - 
Other long-term assets   45,000    - 
TOTAL ASSETS  $14,278,926   $9,759,104 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
Current Liabilities          
Accounts payable and accrued expenses  $2,465,220   $2,860,159 
Customer deposits   4,164,296    3,500,268 
Advances, related party   137,500    - 
Lines of credit   1,250,930    - 
Current portion of notes payable, related parties   1,068,075    - 
Notes payable   999,200    - 
Convertible notes payable   584,943    - 
Warrant liability   122,344    - 
Current portion of operating lease liabilities   422,520    - 
Total Current Liabilities   11,215,028    6,360,427 
Notes payable, related parties, net of current portion   2,232,369    - 
Operating lease liabilities, net of current portion   1,578,235    - 
Contingent note payable   49,248    - 
TOTAL LIABILITIES   15,074,880    6,360,427 
Stockholder’s Equity (Deficit)          
Common stock, no par value, 30,000 shares authorized, 7,000 shares issued and outstanding as of December 31, 2018   -    7,000 
Common stock, $0.001 par value, 5,000 shares authorized, 1,000 shares issued and outstanding as of December 31, 2019   1    - 
Additional paid-in capital   1,272,195    707,049 
Retained earnings (accumulated deficit)   (2,068,150)   2,684,628 
Total Stockholder’s Equity (Deficit)   (795,954)   3,398,677 
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)  $14,278,926   $9,759,104 

 

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

 

F-28

 

 

1847 GOEDEKER INC.

STATEMENTS OF OPERATIONS

 

   Successor   Predecessor 
   Period from
April 6,
2019
through
December 31,
2019
   Period from
January 1,
2019
through
April 5,
2019
   Year Ended
December 31,
2018
 
Product sales, net  $34,668,112   $12,946,901   $56,307,960 
Cost of goods sold   28,596,129    11,004,842    45,409,884 
Gross profit   6,071,983    1,942,059    10,898,076 
                
Operating Expenses               
Personnel   2,909,751    913,919    3,627,883 
Advertising   1,996,507    714,276    2,640,958 
Bank and credit card fees   870,877    329,247    1,369,557 
Depreciation and amortization   271,036    9,675    39,639 
General and administrative   1,741,050    451,214    1,330,647 
Total Operating Expenses   7,789,221    2,418,331    9,008,684 
                
INCOME (LOSS) FROM OPERATIONS   (1,717,238)   (476,272)   1,889,392 
                
Other Income (Expense)               
Financing costs   (520,160)   -    - 
Gain on write-down of contingency   32,246    -    - 
Interest expense   (683,211)   -    (149)
Change in fair value of warrant liability   106,900    -    - 
Other income (expense)   15,010    31,007    116,135 
Total Other Income (Expense)   (1,049,215)   31,007    115,986 
                
NET INCOME (LOSS) BEFORE INCOME TAXES   (2,766,453)   (445,265)   2,005,378 
                
PROVISION FOR INCOME TAXES   (698,303)   -    - 
                
NET INCOME (LOSS)  $(2,068,150)  $(445,265)  $2,005,378 
                
EARNINGS (LOSS) PER COMMON SHARE – BASIC AND DILUTED  $(2,068.15)  $(63.61)  $286.48 
                
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED   1,000    7,000    7,000 

 

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

 

F-29

 

 

1847 GOEDEKER INC.

STATEMENT OF STOCKHOLDERS’ EQUITY (PREDECESSOR)

 

   Common Stock   Additional
Paid-in
   Retained   Total
Stockholders’
 
   Shares   Amount   Capital   Earnings   Equity 
Balance, December 31, 2017   7,000   $7,000   $707,049   $1,393,050   $2,107,099 
Distributions to stockholders   -    -    -    (713,800)   (713,800)
Net income for the year ended December 31, 2018   -    -    -    2,005,378    2,005,378 
Balance, December 31, 2018   7,000   $7,000   $707,049   $2,684,628   $3,398,677 
Distributions to stockholders   -    -    -    -    - 
Net loss for the period from January 1, 2019 through April 5, 2019   -    -    -    (445,265)   (445,265)
Balance, April 5, 2019   7,000   $7,000   $707,049   $2,239,363   $2,953,412 

 

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

 

F-30

 

 

1847 GOEDEKER INC.

STATEMENT OF STOCKHOLDER’S DEFICIT (SUCCESSOR)

 

   Common Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Capital   Deficit   Deficit 
Balance, April 6, 2019   -   $-   $-   $-   $- 
Capital contribution by Holdco for the acquisition of Goedeker Television Co.   1,000    1    979,522    -    979,523 
Issuance of warrants in connection with notes payable   -    -    292,673    -    292,673 
Net loss for the period from April 6, 2019 through December 31, 2019   -    -    -   $(2,068,150)   (2,068,150)
Balance, December 31, 2019   1,000   $1   $1,272,195   $(2,068,150)  $(795,954)

 

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

 

F-31

 

 

1847 GOEDEKER INC.

STATEMENTS OF CASH FLOWS

 

   Successor   Predecessor 
   Period from
April 6,
2019
through
December 31,
2019
   Period from
January 1,
2019
through
April 5,
2019
   Year Ended
December 31,
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income (loss)  $(2,068,150)  $(445,265)  $2,005,378 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:               
Depreciation and amortization   271,036    9,675    39,639 
Amortization of debt discounts   599,814    -    - 
Gain on write-down of contingent liability   (32,246)   -    - 
Gain on write-down of warrant liability   (106,900)   -    - 
Changes in operating assets and liabilities:               
Receivables   (1,405,904)   1,730,079    271,776 
Deposits with vendors   (294,960)   (73,770)   (116,281)
Merchandise inventory   471,161    595,466    597,981 
Prepaid expenses and other assets   167,066    2,784    9,716 
Change in operating lease right-of-use assets   299,245    -    - 
Deferred tax assets   (698,303)   -    - 
Accounts payable and accrued expenses   (1,464,657)   196,565    (654,726)
Customer deposits   1,855,990    (1,404,266)   (1,711,409)
Operating lease liabilities   (299,245)   -    - 
Net cash provided by (used in) operating activities   (2,706,053)   611,268    442,074 
                
CASH FLOWS FROM INVESTING ACTIVITIES               
Purchases of property and equipment   (2,200)   -    - 
Net cash used in investing activities   (2,200)   -    - 
                
CASH FLOWS FROM FINANCING ACTIVITIES               
Proceeds from note payable   1,500,000    -    - 
Repayment on notes payable   (357,207)   -    - 
Proceeds from convertible notes payable   650,000    -    - 
Net borrowings from lines of credit   1,339,430    -    - 
Cash paid for financing costs   (359,500)   -    - 
Distributions to stockholders   -    -    (713,800)
Net cash provided by (used in) financing activities   2,772,723    -    (713,800)
                
NET CHANGE IN CASH   64,470    611,268    (271,726)
CASH, BEGINNING OF PERIOD   -    1,525,693    1,797,419 
CASH, END OF PERIOD  $64,470   $2,136,961   $1,525,693 
                
SUPPLEMENTAL CASH FLOW INFORMATION               
Cash paid for interest  $292,890   $-   $- 
Cash paid for taxes  $-   $-   $- 
                
NON-CASH INVESTING AND FINANCING ACTIVITIES               
Operating lease right-of-use asset  $2,300,000   $-   $- 
Debt discount on notes payable  $64,286   $-   $- 
Warrants granted on notes payable  $229,673   $-   $- 
Warrants issued for convertible notes payable  $292,673   $-   $- 
Common stock issued for noted payable  $173,500   $-   $- 
Acquisition of Goedeker Television Co.  $4,483,418   $-   $- 

 

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

F-32

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

NOTE 1—ORGANIZATION AND NATURE OF BUSINESS

 

1847 Goedeker Inc. (the “Company”) was formed under the laws of the State of Delaware on January 10, 2019 for the sole purpose of acquiring the business of Goedeker Television Co. The Company is a wholly owned subsidiary of 1847 Goedeker Holdco Inc. (“Holdco”), which was formed in State of Delaware on March 20, 2019.  Neither the Company nor Holdco had any operations other than operations relating to their incorporation and organization prior to the acquisition of the business of Goedeker Television Co.

 

On April 5, 2019, the Company executed an asset purchase agreement with Goedeker Television Co., a Missouri corporation (“Goedeker”), pursuant to which the Company acquired substantially all the assets and assumed substantially all the liabilities of Goedeker. Holdco is a majority owned (70 percent) subsidiary of 1847 Holdings LLC (“1847 Holdings”). The sellers of Goedeker collectively own 22.5 percent of Holdco and the balance, 7.5 percent, is owned by Leonite Capital LLC, a lender involved with financing the acquisition of the Goedeker by the Company.

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and are presented in US dollars.

 

 Accounting Basis

 

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

 

Predecessor and Successor Reporting

 

The acquisition of Goedeker as described in Note 1 was accounted for under the acquisition method of accounting in accordance with GAAP. For the purpose of financial reporting, Goedeker was deemed to be the predecessor company and the Company is deemed to be the successor company in accordance with the rules and regulations issued by the Securities and Exchange Commission. The assets and liabilities of Goedeker were recorded at their respective fair values as of the acquisition date. Fair value adjustments related to the transaction are reflected in the books of the Company, resulting in assets and liabilities of the Company being recorded at fair value at April 6, 2019. Therefore, the Company’s financial information prior to the transaction is not comparable to its financial information subsequent to the transaction.

 

As a result of the impact of pushdown accounting, the financial statements and certain note presentations separate the Company’s presentations into two distinct periods, the period before the consummation of the transaction (labeled “Predecessor”) and the period after that date (labeled “Successor”), to indicate the application of a different basis of accounting between the periods presented.

 

Use of Estimates

 

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

 

Cash and Cash Equivalents

 

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

 

F-33

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

Revenue Recognition and Cost of Revenue 

 

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

 

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

 

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

 

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

 

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

 

If the Company continued to apply legacy revenue recognition guidance for the year ended December 31, 2019 or 2018, revenues, gross margin, and net loss would not have changed.

 

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

 

Substantially all the Company’s sales are to individual retail consumers.

 

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

 

F-34

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

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

 

The Company’s disaggregated revenue by sales type is as follows:

 

   Successor   Predecessor 
   Period from
April 6,
2019
to
December 31,
2019
   Period from
January 1,
2019
to
April 5,
2019
   Year Ended
December 31,
2018
 
Appliance sales  $28,487,053   $9,784,525   $42,871,864 
Furniture sales   4,405,866    2,456,085    10,813,453 
Other sales   1,775,193    706,291    2,622,643 
Total  $34,668,112   $12,946,901   $56,307,960 

 

Receivables

 

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

 

Merchandise Inventory

 

Inventory consists of finished products acquired for resale and is valued at the low-of-cost-or-market with cost determined on an average item basis. The Company periodically evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. Reserves for slow-moving and potentially obsolete inventories was $425,000 and $-0- as of December 31, 2019 and 2018, respectively.

 

Property and Equipment

 

Property and equipment is stated at the historical cost. Maintenance and repairs of property and equipment are charged to operations as incurred. Leasehold improvements are amortized over the lesser of the base term of the lease or estimated life of the leasehold improvements. Depreciation is computed using the straight-line method over estimated useful lives as follows:

 

Category  Useful Life
(Years)
 
Machinery and equipment  5 
Office equipment  5 
Vehicles  5 

 

F-35

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

Goodwill and Intangible Assets

 

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

 

Acquired identifiable intangible assets are amortized over the following periods:

 

Acquired Intangible Asset  Amortization Basis  Expected  Life
(Years)
Customer related  Straight-line  15
Marketing related  Straight-line  5

 

Long-Lived Assets 

 

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

 

Fair Value of Financial Instruments

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined in the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

Derivative Instrument Liability

 

The Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At December 31, 2019, the Company classified a warrant issued in conjunction with a term loan as a derivative instrument. (see Note 10).

 

F-36

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

Income Taxes

 

Under the Company’s accounting policies, the Company initially recognizes a tax position in its financial statements when it becomes more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax positions that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities assuming full knowledge of the position and all relevant facts. Although the Company believes its provisions for unrecognized tax positions are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which the Company has reflected in its income tax provisions and accruals. The tax law is subject to varied interpretations, and the Company has taken positions related to certain matters where the law is subject to interpretation. Such differences could have a material impact on the Company’s income tax provisions and operating results in the period(s) in which the Company makes such determination.

 

Basic Income (Loss) Per Share

 

Basic income (loss) per share is calculated by dividing the net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. As the Company had a net loss for the year ended December 31, 2019, the following 895,565 potentially dilutive securities were excluded from diluted loss per share: 200,000 for outstanding warrants and 695,565 related to the convertible note payable and accrued interest. There are no such common share equivalents outstanding as of December 31, 2018.

 

Going Concern Assessment

 

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

 

The Company has generated losses since its acquisition and has relied on cash on hand, external bank lines of credit, issuance of third party and related party debt and the sale of a note to support cashflow from operations.

 

For the period April 6, 2019 to December 31, 2019, the Company incurred operating losses of $2,086,150 and incurred negative cash flows from operations of $2,706,053 and negative working capital of $6,720,626. Losses from operations include approximately $673,000 of expenses incurred in connection with the acquisition of the assets of the Company on April 5, 2019. Also, management believes the Company is owed $809,000 related to a working capital adjustment, which is recorded in other assets on the balance sheet and which is being disputed by Goedeker. This matter is being pursued through a legal process (See Note 8).

 

Management has prepared estimates of operations for fiscal year 2020 and believes that sufficient funds will be generated from operations to fund its operations, and to service its debt obligations for one year from the date of the filing of the financial statements in the Company’s Form S-1 indicate improved operations and the Company’s ability to continue operations as a going concern.

 

The impact of COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing on a return to more normal operations. Further, the recently enacted stimulus bill provides for economic assistance loans through the United States Small Business Administration. The Company is actively pursuing the possibility of obtaining such loans.

 

F-37

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

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

 

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

 

Recent Accounting Pronouncements

 

Recently Adopted

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which requires lessees to recognize right-of-use (“ROU”) assets and related lease liabilities on the balance sheet for all leases greater than one year in duration. The Company adopted ASC 842 on January 1, 2019 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach did not require any transition accounting for leases that expired before the earliest comparative period presented. The adoption of this standard resulted in the recording of ROU assets and lease liabilities for all of the Company’s lease agreements with original terms of greater than one year. The adoption of ASC 842 did not have a significant impact on the Company’s statements of income or cash flows. See Note 13 for the required disclosures relating to the Company’s lease agreements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was enacted in December 2017. ASU 2018-02 became effective for the Company on January 1, 2019 and resulted in a decrease of approximately $748,000 to retained earnings due to the reclassification from AOCI of the effect of the corporate income tax rate change on our cash flow hedges. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. The Company adopted ASU 2018-15 on January 1, 2020 on a prospective basis, and does not expect the adoption will result in a material impact for future periods.

 

F-38

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company will modify its disclosures beginning in the first quarter of 2020 to conform to this guidance. The Company does not expect the adoption of this standard and the associated changes to its disclosures to have a material impact to the Company’s financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology for financial assets with a methodology that reflects expected credit losses. The new credit losses model must be applied to loans, accounts receivable, and other financial assets. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. The Company plans to adopt the new standard in the first quarter of 2020 using a modified retrospective approach with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company does not believe this guidance will have a material impact on the Company’s statements of operations or cash flows.

 

The Company currently believes that all other issued and not yet effective accounting standards are not relevant to the Company’s financial statements.

 

Reclassifications

 

Certain accounts have been reclassified to conform with classifications adopted in the period ended December 31, 2019. Such reclassifications had no effect on net earnings or financial position.

 

NOTE 3—RECEIVABLES

 

At December 31, 2019 and 2018, receivables consisted of the following:

 

   Successor   Predecessor 
   December 31,
2019
   December 31,
2018
 
Credit card payments in process of settlement  $406,838   $629,498 
Vendor rebates receivable   1,455,248    2,004,206 
Other   -    2,228 
Total  $1,862,086   $2,635,932 

 

NOTE 4—MERCHANDISE INVENTORY

 

At December 31, 2019 and 2018, the inventory balances are composed of:

 

   Successor   Predecessor 
   December 31,
2019
   December 31,
2018
 
Appliances  $1,538,552   $2,656,386 
Furniture   184,755    327,458 
Other   81,783    127,750 
Total merchandise inventory   1,805,090    3,111,594 
           
Allowance for inventory obsolescence   (425,000)   - 
Merchandise inventory, net  $1,380,090   $3,111,594 

 

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

 

F-39

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

NOTE 5—DEPOSITS WITH VENDORS

 

Deposits with vendors represent cash on deposit with one vendor arising from accumulated rebates paid by the vendor. The deposits are used by the vendor to seek to secure the Company’s purchases. The deposit can be withdrawn at any time up to the amount of the Company’s credit line with the vendor. Alternatively, the Company could secure their credit line with a floor plan line from a lender and withdraw all its deposits. The Company has elected to leave the deposits with the vendor on which it earns interest income. As of December 31, 2019, deposits with vendors totaled $294,960. Vendor deposits at December 31, 2018, totaling $2,212,181, belonged to Goedeker and did not convey to the Company in the April 5, 2019 acquisition.

 

NOTE 6—PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at December 31, 2019 and 2018:

 

   Successor   Predecessor 
   December 31,
2019
   December 31,
2018
 
Equipment  $7,376   $81,242 
Warehouse equipment   29,188    111,787 
Furniture and fixtures   512    78,585 
Transportation equipment   63,784    170,824 
Leasehold improvements   117,626    249,993 
Total property and equipment   218,486    692,431 
           
Accumulated depreciation   (32,880)   (476,145)
Property and equipment, net  $185,606   $216,286 

 

Depreciation expense for the periods April 6, 2019 to December 31, 2019, January 1, 2019 to April 5, 2019, and the year ended December 31, 2018 was $33,366, $9,675, and $39,639, respectively.

 

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

 

NOTE 7—INTANGIBLE ASSETS

 

The following provides a breakdown of identifiable intangible assets as of December 31, 2019 and 2018:

 

   Successor   Predecessor 
   December 31,
2019
   December 31,
2018
 
Customer relationships  $749,000   $        - 
Marketing related   1,368,000    - 
Total intangible assets   2,117,000    - 
           
Accumulated amortization   (238,156)   - 
Intangible assets, net  $1,878,844   $- 

 

In connection with the acquisition of Goedeker, the Company identified intangible assets of $2,117,000, representing trade names and customer relationships. These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 8.5 years.  Amortization expense for the periods April 6, 2019 to December 31, 2019, January 1, 2019 to April 5, 2019, and the year ended December 31, 2018 was $238,156, $-0-, and $-0-, respectively.

 

F-40

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

As of December 31, 2019, the estimated annual amortization expense for each of the next five years is as follows:

 

2020  $249,059 
2021   249,059 
2022   249,059 
2023   249,059 
2024   249,059 
Thereafter   633,549 
Total  $1,878,844 

 

NOTE 8—BUSINESS COMBINATION

 

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

 

On April 5, 2019, the Company, Goedeker and the Stockholders entered into an amendment to the asset purchase agreement and closing of the acquisition of substantially all of the assets of Goedeker was completed.

 

The aggregate purchase price, recorded as a capital contribution from Holdco, was $4,483,418 consisting of: (i) the issuance of a promissory note in the principal amount of $4,100,000 and a deemed fair value of $3,422,398; (ii) up to $600,000 in earn out payments (as described below) with a deemed fair value of $81,494; and (iii) a 22.5% ownership interest in Holdco transferred to the sellers with a deemed fair value of $979,523.

 

The asset purchase agreement provided for an adjustment to the purchase price based on the difference between actual working capital at closing and the seller’s preliminary estimate of closing date working capital.  In accordance with the asset purchase agreement, an independent CPA firm was retained by the Company and Goedeker to resolve differences in the working capital amounts.  The report issued by that CPA firm determined that Goedeker owed the Company $809,000, which to date Goedeker has not paid.  The $809,000 is included in other assets in the accompanying balance sheet as of December 31, 2019. See also Note 17.

 

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

 

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

 

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

 

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

 

To the extent the EBITDA of the Goedeker Business for any applicable period is less than $2,500,000 but greater than $1,500,000, the Company must pay a partial earn out payment to Goedeker in an amount equal to the product determined by multiplying (i) the EBITDA Achievement Percentage by (ii) the applicable earn out payment for such period, where the “Achievement Percentage” is the percentage determined by dividing (A) the amount of (i) the EBITDA of the Goedeker Business for the applicable period less (ii) $1,500,000, by (B) $1,000,000. For avoidance of doubt, no partial earn out payments shall be earned or paid to the extent the EBITDA of the Goedeker Business for any applicable period is equal or less than $1,500,000.

 

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

 

F-41

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

The rights of Goedeker to receive any earn out payment are subordinate to the rights of Burnley and SBCC under separate subordination agreements that Goedeker entered into with them on April 5, 2019 in connection with the Acquisition (see Notes 9 and 10). The Company determined the fair value of the earnout on the date of acquisition was $81,494. Such amount was recorded as a contingent consideration liability within the accounts payable and accrued expense line item on the balance sheet and is revalued to fair value each reporting period until settled. The year 1 contingent liability of $32,246 was written-off in the year ending December 31, 2019 as the target was not met and the balance of the liability at December 31, 2019 is $49,248.

 

The provisional fair value of the purchase consideration issued to Goedeker was allocated to the net tangible assets acquired. The Company accounted for the acquisition as the purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value of the net liabilities assumed was approximately $492,601. The excess of the aggregate fair value of the net tangible assets has been allocated to goodwill.

 

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

 

Provisional purchase consideration at preliminary fair value:    
Note payable, net of $462,102 debt discount and $215,500 of capitalized financing costs  $3,422,398 
Contingent note payable   81,494 
Fair value of ownership interest in Holdco transferred to seller   979,523 
Amount of consideration  $4,483,418 
      
Assets acquired and liabilities assumed at preliminary fair value     
Accounts receivable  $456,182 
Inventories   1,851,251 
Working capital adjustment receivable and other assets   1,104,863 
Property and equipment   216,286 
Customer related intangibles   749,000 
Marketing related intangibles   1,368,000 
Accounts payable and accrued expenses   (3,929,876)
Customer deposits   (2,308,307)
Net tangible assets acquired (liabilities assumed)  $(492,601)
      
Total net assets acquired (liabilities assumed)  $(492,601)
Consideration paid   4,483,415 
Preliminary goodwill  $4,976,015 

 

NOTE 9—LINES OF CREDIT

 

Burnley Capital LLC

 

On April 5, 2019, the Company, as borrower, and Holdco entered into a loan and security agreement with Burnley Capital LLC (“Burnley”) for revolving loans in an aggregate principal amount that will not exceed the lesser of (i) the borrowing base or (ii) $1,500,000 (provided that such amount may be increased to $3,000,000 in Burnley’s sole discretion) minus reserves established Burnley at any time in accordance with the loan and security agreement. The “borrowing base” means an amount equal to the sum of the following: (i) the product of 85% multiplied by the liquidation value of the Company’s inventory (net of all liquidation costs) identified in the most recent inventory appraisal by an appraiser acceptable to Burnley (ii) multiplied by the Company’s eligible inventory (as defined in the loan and security agreement), valued at the lower of cost or market value, determined on a first-in-first-out basis. In connection with the closing of the Acquisition on April 5, 2019, the Company borrowed $744,000 under the loan and security agreement and issued a revolving note to Burnley in the principal amount of up to $1,500,000. There is no available borrowing base and the balance of the line of credit amounts to $571,997 as of December 31, 2019, comprised of principal of $660,497 and net of unamortized debt discount of $88,500.

 

F-42

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

F-43

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

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

 

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

 

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

 

At December 31, 2019, the Company did not meet certain loan covenants under the loan and security agreement. The agreement requires compliance with the following ratios as a percentage of earnings before interest, taxes, depreciation, and amortization for the twelve-month period ended December 31, 2019. The table below shows the required ratio and actual ratio for such period.

 

Covenant  Actual Ratio   Required Ratio 
Total debt ratio   (4.2)x   4.50x
Senior debt ratio   (1.5)x   1.75x
Interest coverage ratio   (1.1)x   1.0x

 

In addition, the Company was not in compliance with a requirement with respect to the liquidity ratio, which is the ratio of cash and available borrowings to customer deposits. At December 31, 2019, the actual ratio was 0.12x compared to a requirement of 0.60x.

 

The loan and security agreement with SBCC described below contains the same covenants and a cross default provision, whereby a default under the Burnley loan and security agreement triggers a default under the SBCC loan and security agreement. Accordingly, the Company is in technical, not payment default, on these loan and security agreements and has classified such debt as a current liability.

 

F-44

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

There are no cross-default provisions that would require any other long-term liabilities to be classified as current. Although the Company has defaulted under the 9% subordinated promissory note described below as the result of its failure to make payments thereunder from and after August 27, 2019, the date that Burnley notified the Company that it is in technical default under Burnley’s loan and security agreement, Burnley’s notice also stated that pursuant to the subordination agreement, dated April 5, 2019, between Burnley and Goedeker, no payment can be made under the note so long as the Company’s default relating to Burnley’s loan continues. Therefore, notwithstanding the default, Goedeker has no right to accelerate the note because, in addition to the subordination agreement which otherwise would have permitted acceleration, the note itself also has specific subordination provisions that prohibit such acceleration. Since Goedeker does not currently have the right to accelerate the note, the Company has classified all amounts other than the currently due portion of the note as long-term liabilities.

 

Northpoint Commercial Finance LLC

 

On June 24, 2019, the Company, as borrower, entered into a loan and security agreement with Northpoint Commercial Finance LLC (“Northpoint”), which was amended on August 2, 2019, for revolving loans up to an aggregate maximum loan amount of $1,000,000 for the acquisition, financing or refinancing by the Company of inventory at an interest rate of LIBOR plus 7.99%. The balance of the line of credit amounts to $678,993 as of December 31, 2019.

 

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

 

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

 

The Northpoint loans are secured by a security interest in all of the inventory of the Company that is manufactured or sold by vendors identified in the loan and security agreement. The loan is guaranteed by Holdco.

 

NOTE 10—NOTES PAYABLE

 

On April 5, 2019, the Company, as borrower, and Holdco entered into a loan and security agreement with Small Business Community Capital II, L.P. (“SBCC”) for a term loan in the principal amount of $1,500,000, pursuant to which the Company issued to SBCC a term note in the principal amount of up to $1,500,000 and a ten-year warrant to purchase shares of the most senior capital stock of the Company equal to 5.0% of the outstanding equity securities of the Company on a fully-diluted basis for an aggregate price equal to $100. The Company classified the warrant as a derivative liability on the balance sheet of $122,344 and subject to remeasurement on every reporting period. The balance of the note amounts to $999,201 as of December 31, 2019, comprised of principal of $1,312,500, capitalized PIK interest of $21,204, and net of unamortized debt discount of $144,625 and unamortized warrant feature of $189,879.

 

F-45

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

F-46

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

NOTE 11—NOTES PAYABLE, RELATED PARTIES

 

As noted above, a portion of the purchase price for the acquisition was paid by the issuance by the Company to Steve Goedeker, as representative of Goedeker, of a 9% subordinated promissory note in the principal amount of $4,100,000. The note will accrue interest at 9% per annum, amortized on a five-year straight-line basis and payable quarterly in accordance with the amortization schedule attached thereto, and mature on April 5, 2023. The remaining balance of the note at December 31, 2019 is $3,300,444, comprised of principal of $3,930,292 and net of unamortized debt discount of $629,848.

 

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

 

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

 

As stated above, although the Company has defaulted under this note, Goedeker has no right to accelerate the note because the note has specific subordination provisions that prohibit such acceleration.

 

Maturities of debt are as follows:

 

For the years ended December 31,    
2020  $1,068,075 
2021   790,651 
2022   869,687 
2023   950,640 
2024   251,239 
Total   3,930,292 
Less:  loan costs   (229,360)
          Discounts   (400,488)
Total  $3,300,444 

 

NOTE 12—CONVERTIBLE PROMISSORY NOTE

 

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

 

F-47

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

The note carries an original issue discount of $64,286 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred in connection with the purchase of the note. Therefore, the purchase price of the note was $650,000. Furthermore, 1847 Holdings issued 50,000 shares of common stock valued at $137,500 and a debt-discount related to the warrants valued at $292,673. The Company amortized $319,031 of financing costs related to the shares and warrants in the year ended December 31, 2019. The remaining net balance of the note at December 31, 2019 is $584,943, comprised of principal of $714,286 and net of unamortized original issuance discount interest of $14,451, financing costs of $38,125 and unamortized debt discount warrant feature of $76,767.

 

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

 

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

 

The note will mature 12 months from the issue date, or April 5, 2020, at which time the principal amount and all accrued and unpaid interest, if any, and other fees relating to the note, will be due and payable. Unless an event of default as set forth in the note has occurred, 1847 has the right to prepay principal amount of, and any accrued and unpaid interest on, the note at any time prior to the maturity date at 115% of the principal amount (the “Premium”), provided, however, that if the prepayment is the result of any of the occurrence of any of the transactions described in subparagraphs (i), (ii) or (iii) above then such prepayment shall be the unpaid principal amount, plus accrued and unpaid interest and other amounts due but without the Premium.

 

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

 

Under the note, Leonite has the right at any time at its option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the note into fully paid and non-assessable common shares or any shares of capital stock or other securities of 1847 Holdings into which such common shares may be changed or reclassified.

 

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

 

F-48

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

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

 

NOTE 13—OPERATING LEASE

 

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

 

Supplemental balance sheet information related to leases was as follows: 

 

Operating lease right-of-use asset  $2,300,000 
Accumulated amortization   (299,245)
Net balance  $2,000,755 
      
Lease liability, current portion  $422,520 
Lease liability, long-term   1,578,235 
Total operating lease liability  $2,000,755 
      
Weighted average remaining lease term (months)   51 
      
Weighted average discount rate   6.5%

 

Maturities of the lease liability are as follows:

 

For the years-ended    
2020  $540,000 
2021   540,000 
2022   540,000 
2023   540,000 
2024   135,000 
Total lease payments   2,295,000 
      
Less imputed interest   (294,245)
Total lease liability  $2,000,755 

 

F-49

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

NOTE 14—RELATED PARTIES

 

Offsetting Management Services Agreement

 

On April 5, 2019, the Company entered into an offsetting management services agreement with 1847 Partners LLC (the “Manager”), a company owned and controlled by Ellery W. Roberts, the Company’s chairman and controlling shareholder of 1847 Holdings.

 

Pursuant to the offsetting management services agreement, the Company appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of $62,500 or 2% of adjusted net assets (as defined in the offsetting management services agreement); provided, however, that (i) pro-rated payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate amount of management fees paid or to be paid by the Company, together with all other management fees paid or to be paid by all other subsidiaries of 1847 Holdings to the Manager, in each case, with respect to any fiscal year exceeds, or is expected to exceed, 9.5% of 1847 Holdings’ gross income with respect to such fiscal year, then the management fee to be paid by the Company for any remaining fiscal quarters in such fiscal year shall be reduced, on a pro rata basis determined by reference to the management fees to be paid to the Manager by all of the subsidiaries of 1847 Holdings, until the aggregate amount of the management fee paid or to be paid by the Company, together with all other management fees paid or to be paid by all other subsidiaries of 1847 Holdings to the Manager, in each case, with respect to such fiscal year, does not exceed 9.5% of 1847 Holdings’ gross income with respect to such fiscal year, and (iii) if the aggregate amount the management fee paid or to be paid by the Company, together with all other management fees paid or to be paid by all other subsidiaries of 1847 Holdings to the Manager, in each case, with respect to any fiscal quarter exceeds, or is expected to exceed, the aggregate amount of the parent management fee (as defined in the offsetting management services agreement) with respect to such fiscal quarter, then the management fee to be paid by the Company for such fiscal quarter shall be reduced, on a pro rata basis, until the aggregate amount of the management fee paid or to be paid by the Company, together with all other management fees paid or to be paid by all other subsidiaries of 1847 Holdings to the Manager, in each case, with respect to such fiscal quarter, does not exceed the parent management fee calculated and payable with respect to such fiscal quarter.

 

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

 

The services provided by the Manager include: conducting general and administrative supervision and oversight of the Company’s day-to-day business and operations, including, but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses and permits that become necessary, participation in risk management policies and procedures; and overseeing and consulting with respect to the Company’s business and operational strategies, the implementation of such strategies and the evaluation of such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions or dispositions and product or service lines.

 

The Company expensed $183,790 in management fees for the year ended December 31, 2019. Payment of the management fee is subordinated to the payment of interest on the 9% subordinated promissory note (see Note 11), such that no payment of the management fee may be made if the Company is in default under the note with regard to interest payments and, for the avoidance of doubt, such payment of the management fee will be contingent on the Company being in good standing on all associated loan covenants. In addition, during the period that that any amounts are owed under the 9% subordinated promissory note or the earn out payments, the annual management fee shall be capped at $250,000. The rights of the Manager to receive payments under the offsetting management services agreement are also subordinate to the rights of Burnley and SBCC under separate subordination agreements that the Manager entered into with Burnley and SBCC on April 5, 2019. Accordingly, $63,653 due the Manager is classified as an accrued liability as of December 31, 2019.

 

F-50

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

Advances

 

As of December 31, 2019, the Manager had funded the Company $33,738 in related party advances. These advances are unsecured, bear no interest, and do not have formal repayment terms or arrangements.

 

As discussed in Note 12, on April 5, 2019, 1847 Holdings issued 50,000 common shares to Leonite in order to induce Leonite to extend credit to the Company. The common shares were valued at $137,500.

 

NOTE 15—STOCKHOLDERS’ DEFICIT

 

Common Shares

 

The Company is authorized to issue 5,000 common shares as of December 31, 2019. As of December 31, 2019, the Company had 1,000 common shares issued and outstanding. Each common share entitles the holder thereof to one vote per share on all matters coming before the shareholders of the Company for a vote.

 

Warrants

 

On April 5, 2019, the Company issued to SBCC a ten-year warrant to purchase shares of the most senior capital stock of the Company equal to 5.0% of the outstanding equity securities of the Company on a fully-diluted basis for an aggregate price equal to $100 (see Note 10).

 

NOTE 16—INCOME TAXES  

 

As of December 31, 2019, the Company had net operating loss carry forwards of approximately $2,068,150 that may be available to reduce future years’ taxable income.

 

The components for the provision of income taxes include:

 

   December 31,
2019
 
Current Federal and State  $- 
Deferred Federal and State   (698,000)
Total (benefit) provision for income taxes  $(698,000)

 

A reconciliation of the statutory US Federal income tax rate to the Company’s effective income tax rate is as follows:

 

   December 31,
2019
 
Federal tax   21.0%
State tax   4.3%
Gain on bargain purchase   0.0%
Permanent items   0.0%
Rate change from TCJA   0.0%
Other   0.0%
Effective income tax rate   25.3%

 

The Tax Cuts and Jobs Act (“TCJA”) reduces the corporate income tax rate from 34% to 21% effective January 1, 2018. All deferred income tax assets and liabilities, including NOL’s have been measured using the new rate under the TCJA and are reflected in the valuation of these assets as of December 31, 2019.

 

F-51

 

 

1847 GOEDEKER INC.

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets and liabilities are as follows:

 

   December 31,
2019
 
Deferred tax assets     
Accrued expenses  $191,000 
163(j) interest limitation   338,000 
Loss carryforward   192,000 
Total deferred tax assets   721,000 
      
Deferred tax liabilities     
Intangibles   (23,000)
Total deferred tax liabilities   (23,000)
      
Total net deferred income tax assets (liabilities)  $698,000 

   

The net deferred interest tax asset of $698,000 has been classified as a long-term asset. Management prepared a projection of operations through 2025.  Based on that projection and recent trends, the Company believes that the deferred tax asset is realizable.

 

The Company did not have prepaid or accrued taxes as of December 31, 2019. The Company has recorded no liability for uncertain tax positions as of December 31, 2019.

 

NOTE 17—SUBSEQUENT EVENTS

 

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to December 31, 2019 to the date these financial statements were issued and has determined that it does not have any material subsequent events to disclose in these financial statements, except as set forth below.  

 

On or about March 23, 2020, the Company submitted a claim for arbitration to the American Arbitration Association relating to Goedeker’s failure to pay the amount owed for the post closing working capital adjustment under the asset purchase agreement (see Note 8). The claim alleges, inter alia, breach of contract, fraud, indemnification and the breach of the covenant of good faith and fair dealing. The Company is alleging damages in the amount of $809,000, plus attorneys’ fees and costs.

 

On April 21, 2020, we entered into an amendment to the offsetting management services agreement with the Manager (see Note 14), pursuant to which the quarterly management fee was amended to provide for a flat fee of $62,500, as opposed to the greater of $62,500 or 2% of adjusted net assets, which amendment will become effective upon closing of the Company’s initial public offering.

 

F-52

 

 

 

 

 

 

 

3,325,000 Shares of Common Stock

 

 

 

 

 

 

1847 Goedeker Inc.

 

 

 

 

PROSPECTUS

 

 

 

 

October 16, 2020