UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q/AQ
(Amendment No. 1)
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 20202021
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 001-39418
| 1847 GOEDEKER INC. |
| (Exact name of registrant as specified in its charter) |
| Delaware | 83-3713938 | |
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
| 888-768-1710 |
| (Registrant’s telephone number, including area code) |
| (Former name or former address, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.0001 per share | GOED | NYSE American LLC | ||
| Warrants to Purchase Common Stock | GOED WS | NYSE American LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☒ | Smaller reporting company ☒ | |
| Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 13, 2020,12, 2021, there were 6,111,200106,387,332 shares of the registrant’s common stock issued and outstanding.
EXPLANATORY NOTE
1847 Goedeker Inc. (the “Company”) is filing this amended Form 10-Q/A (this “Amendment”) to amend its GOEDEKER INC.
Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 that was originally filed with the Securities and Exchange Commission (the “SEC”) on November 16, 2020 (“Original Filing”) to restate its unaudited financial statements as of September 30, 2020 and December 31, 2019 (successor), for the three and nine months ended September 30, 2020 (successor), for the three months ended September 30, 2019 (successor), for the period from April 6, 2019 to September 30, 2019 (successor) and the period from January 1, 2019 to April 5, 2019 (predecessor). As described in Item 4.02 of the Company’s Current Report on Form 8-K filed with the SEC on March 29, 2021, the previously filed unaudited financial statements for these periods should no longer be relied upon. This Amendment also amends certain other items in the Original Filing, as listed below.
As further discussed in Note 3 to the Company’s unaudited financial statements in Part I, Item 1, “Financial Statements” of this Amendment, the Company concluded that it would restate the previously issued financial statements included in the Original Filing in connection with the modification of a sales tax liability and certain purchase accounting adjustments.
In connection with the restatement and this Amendment, management determined that the Company’s disclosure controls and procedures were ineffective during the non–reliance periods. For more information, please see “Item 4. Controls and Procedures” contained herein.
For the convenience of the reader, this Amendment sets forth the Original Filing in its entirety, as modified and superseded as necessary to reflect the restatement and other immaterial changes described above. Accordingly, the Amendment does not reflect events occurring after the filing of the Original Filing or modify or update those disclosures affected by subsequent events and should be read in conjunction with the Original Filing and the Company’s other filings with the SEC. Information not affected by the restatement and other immaterial changes is unchanged and reflects disclosures made at the time of the filing of the Original Filing. The disclosures impacted by the restatement include, but are not limited to, those related to goodwill, accounts payable and accrued expenses, additional paid-in capital, accumulated deficit, general and administrative expenses and net loss. The following items in the Original Filing have been amended as a result of, and to reflect, the restatement:
Part I, Item 1. Financial Statements
Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Part I, Item 4. Controls and Procedures
Part II, Item 6. Exhibits
In accordance with applicable SEC rules, this Amendment includes new certifications required by Rule 13a-14 under the Securities Exchange Act of 1934, as amended, from the Company’s Chief Executive Officer and Chief Financial Officer dated as of the date of filing of this Amendment.
1847 GOEDEKER INC.
Quarterly Report on Form 10-Q
Period Ended September 30, 20202021
TABLE OF CONTENTS
| PART I | ||||
FINANCIAL INFORMATION | ||||
| Item 1. | Financial Statements | 1 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 37 | ||
| Item 4. | Controls and Procedures | 37 | ||
OTHER INFORMATION | ||||
| Item 1. | Legal Proceedings | 38 | ||
| Item 1A. | Risk Factors | 38 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 38 | ||
| Item 3. | Defaults Upon Senior Securities | 38 | ||
| Item 4. | Mine Safety Disclosures | 38 | ||
| Item 5. | Other Information | 38 | ||
| Item 6. | Exhibits | 39 | ||
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. |
1847 GOEDEKER INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| September, 2020 (As Restated) | December 31, 2019 (As Restated) | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 3,466,981 | $ | 64,470 | ||||
| Restricted cash | 8,912,367 | - | ||||||
| Receivables | 1,219,455 | 1,862,086 | ||||||
| Vendor deposits | 547,648 | 294,960 | ||||||
| Merchandise inventory, net | 3,086,873 | 1,380,090 | ||||||
| Prepaid expenses and other current assets | 1,073,253 | 892,796 | ||||||
| Total Current Assets | 18,306,577 | 4,494,402 | ||||||
| Property and equipment, net | 202,402 | 185,606 | ||||||
| Operating lease right-of-use assets | 1,686,423 | 2,000,755 | ||||||
| Goodwill | 4,725,689 | 4,603,953 | ||||||
| Intangible assets, net | 1,636,195 | 1,878,844 | ||||||
| Deferred tax assets | 2,660,432 | 698,303 | ||||||
| Other long-term assets | 45,000 | 45,000 | ||||||
| TOTAL ASSETS | $ | 29,262,718 | $ | 13,906,863 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 9,703,104 | $ | 5,375,420 | ||||
| Customer deposits | 17,089,826 | 4,164,296 | ||||||
| Advances, related party | - | 137,500 | ||||||
| Lines of credit | - | 1,250,930 | ||||||
| Current portion of notes payable, related parties | - | 1,068,075 | ||||||
| Current portion of notes payable | 1,300,579 | 999,200 | ||||||
| Convertible notes payable | - | 584,943 | ||||||
| Warrant liability | - | 122,344 | ||||||
| Current portion of operating lease liabilities | 443,469 | 422,520 | ||||||
| Total Current Liabilities | 28,536,978 | 14,125,228 | ||||||
| Notes payable, related parties, net of current portion | - | 2,232,369 | ||||||
| Notes payable, net of current portion | 2,684,623 | - | ||||||
| Operating lease liabilities, net of current portion | 1,242,954 | 1,578,235 | ||||||
| Contingent note payable | 49,248 | 49,248 | ||||||
| TOTAL LIABILITIES | 32,513,803 | 17,985,080 | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, $.0001 par value, 20,000,000 shares authorized; none issued and outstanding at September 30, 2020 or December 31, 2019 | - | - | ||||||
| Common stock, $.0001 par value, 200,000,000 shares authorized; 6,111,200 and 4,750,000 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 611 | 475 | ||||||
| Additional paid-in capital | 13,291,614 | 1,079,179 | ||||||
| Accumulated deficit | (16,543,310 | ) | (5,157,871 | ) | ||||
| Total Stockholders’ Deficit | (3,251,085 | ) | (4,078,217 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 29,262,718 | $ | 13,906,863 | ||||
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 27,175 | $ | 935 | ||||
| Restricted cash | 8,011 | 8,977 | ||||||
| Receivables | 24,018 | 1,998 | ||||||
| Vendor deposits | 12,134 | 548 | ||||||
| Merchandise inventory, net | 37,779 | 5,147 | ||||||
| Prepaid expenses and other current assets | 6,058 | 635 | ||||||
| Total Current Assets | 115,175 | 18,240 | ||||||
| Property and equipment, net | 2,520 | 246 | ||||||
| Operating lease right-of-use assets, net | 12,319 | 1,578 | ||||||
| Goodwill | 183,768 | 4,726 | ||||||
| Intangible assets, net | 47,858 | 1,382 | ||||||
| Other long-term assets | 344 | 45 | ||||||
| TOTAL ASSETS | $ | 361,984 | $ | 26,217 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 68,013 | $ | 12,702 | ||||
| Customer deposits | 18,382 | 21,879 | ||||||
| Current portion of notes payable, net | 6,425 | 663 | ||||||
| Current portion finance lease liability | 41 | - | ||||||
| Current portion of operating lease liabilities | 2,127 | 451 | ||||||
| Contingent note payable | 188 | - | ||||||
| Total Current Liabilities | 95,176 | 35,695 | ||||||
| Notes payable, net of current portion | 49,940 | 2,522 | ||||||
| Finance lease liability, net of current portion | 153 | - | ||||||
| Operating lease liabilities, net of current portion | 11,628 | 1,128 | ||||||
| Deferred income taxes payable, net | 3,042 | - | ||||||
| Contingent note payable | - | 188 | ||||||
| TOTAL LIABILITIES | 159,939 | 39,533 | ||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Preferred stock, $0.0001 par value, 20,000,000 shares authorized; none issued and outstanding as of September 30, 2021 or December 31, 2020 | - | - | ||||||
| Common stock, $0.0001 par value, 200,000,000 shares authorized; 106,387,332 and 6,111,200 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 11 | 1 | ||||||
| Additional paid-in capital | 224,904 | 13,409 | ||||||
| Accumulated deficit | (22,870 | ) | (26,726 | ) | ||||
| Total Stockholders’ Equity (Deficit) | 202,045 | (13,316 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 361,984 | $ | 26,217 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
2
1847 GOEDEKER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
| Successor | Predecessor | |||||||||||||||||||
| Three Months Ended September 30, 2020 (As Restated) | Three Months Ended September 30, 2019 (As Restated) | Nine Months Ended September 30, 2020 (As Restated) | Period from April 6, 2019 through September 30, 2019 (As Restated) | Period from January 1, 2019 through April 5, 2019 | ||||||||||||||||
| Product sales, net | $ | 13,435,095 | $ | 12,202,271 | $ | 38,397,304 | $ | 22,748,151 | $ | 12,946,901 | ||||||||||
| Cost of goods sold | 11,264,569 | 10,183,711 | 32,060,897 | 18,886,117 | 11,004,842 | |||||||||||||||
| Gross profit | 2,170,526 | 2,018,560 | 6,336,407 | 3,862,034 | 1,942,059 | |||||||||||||||
| Operating Expenses | ||||||||||||||||||||
| Personnel | 2,161,929 | 989,318 | 4,513,602 | 1,875,543 | 913,919 | |||||||||||||||
| Advertising | 1,432,834 | 696,771 | 2,991,177 | 1,221,993 | 714,276 | |||||||||||||||
| Bank and credit card fees | 574,808 | 279,412 | 1,274,117 | 511,685 | 329,247 | |||||||||||||||
| Depreciation and amortization | 93,283 | 11,044 | 276,914 | 98,481 | 9,675 | |||||||||||||||
| General and administrative | 1,450,603 | 1,215,716 | 4,399,860 | 3,167,957 | 451,214 | |||||||||||||||
| Total Operating Expenses | 5,713,457 | 3,192,261 | 13,455,670 | 6,875,659 | 2,418,331 | |||||||||||||||
| LOSS FROM OPERATIONS | (3,542,931 | ) | (1,173,701 | ) | (7,119,263 | ) | (3,013,625 | ) | (476,272 | ) | ||||||||||
| Other Income (Expense) | ||||||||||||||||||||
| Interest income | 1,418 | - | 2,480 | - | 23,807 | |||||||||||||||
| Financing costs | (488,460 | ) | (165,097 | ) | (757,646 | ) | (324,352 | ) | - | |||||||||||
| Interest expense | (229,312 | ) | (210,572 | ) | (787,308 | ) | (444,294 | ) | - | |||||||||||
| Loss on extinguishment of debt | (807,239 | ) | - | (1,756,095 | ) | - | - | |||||||||||||
| Write-off of acquisition receivable | - | - | (809,000 | ) | - | - | ||||||||||||||
| Change in fair value of warrant liability | - | 54,500 | (2,127,656 | ) | 57,100 | - | ||||||||||||||
| Other income (expense) | 1,657 | (35,388 | ) | 6,920 | 9,830 | 7,200 | ||||||||||||||
| Total Other Income (Expense) | (1,521,936 | ) | (356,557 | ) | (6,228,305 | ) | (701,716 | ) | 31,007 | |||||||||||
| NET LOSS BEFORE INCOME TAXES | (5,064,867 | ) | (1,530,258 | ) | (13,347,568 | ) | (3,715,341 | ) | (445,265 | ) | ||||||||||
| INCOME TAX BENEFIT | 838,176 | - | 1,962,129 | - | - | |||||||||||||||
| NET LOSS | $ | (4,226,691 | ) | $ | (1,530,258 | ) | $ | (11,385,439 | ) | $ | (3,715,341 | ) | $ | (445,265 | ) | |||||
| LOSS PER COMMON SHARE – BASIC AND DILUTED | $ | (0.74 | ) | $ | (0.31 | ) | $ | (2.17 | ) | $ | (0.74 | ) | $ | (63.61 | ) | |||||
| WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED | 5,736,774 | 5,000,000 | 5,247,384 | 5,000,000 | 7,000 | |||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Product sales, net | $ | 141,867 | $ | 13,435 | $ | 219,637 | $ | 38,397 | ||||||||
| Cost of goods sold | 110,495 | 11,265 | 172,581 | 32,061 | ||||||||||||
| Gross profit | 31,372 | 2,170 | 47,056 | 6,336 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Personnel | 8,547 | 2,162 | 15,300 | 4,514 | ||||||||||||
| Advertising | 3,715 | 1,433 | 7,730 | 2,991 | ||||||||||||
| Bank and credit card fees | 4,918 | 575 | 7,546 | 1,274 | ||||||||||||
| Depreciation and amortization | 3,610 | 93 | 3,908 | 277 | ||||||||||||
| Acquisition expenses | 62 | - | 865 | - | ||||||||||||
| Loss on abandonment of right of use asset | - | - | 1,437 | - | ||||||||||||
| General and administrative | 4,018 | 1,451 | 8,311 | 4,400 | ||||||||||||
| Total Operating Expenses | 24,870 | 5,714 | 45,097 | 13,456 | ||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 6,502 | (3,544 | ) | 1,959 | (7,120 | ) | ||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest income | 34 | 1 | 57 | 2 | ||||||||||||
| Financing costs | (200 | ) | (488 | ) | (280 | ) | (758 | ) | ||||||||
| Interest expense | (899 | ) | (229 | ) | (2,070 | ) | (787 | ) | ||||||||
| Loss on extinguishment of debt | - | (807 | ) | (1,748 | ) | (1,756 | ) | |||||||||
| Write-off of acquisition receivable | - | - | - | (809 | ) | |||||||||||
| Change in fair value of warrant liability | - | - | - | (2,128 | ) | |||||||||||
| Other income (expense) | 8 | 2 | 19 | 7 | ||||||||||||
| Total Other Income (Expense) | (1,057 | ) | (1,521 | ) | (4,022 | ) | (6,229 | ) | ||||||||
| NET INCOME (LOSS) BEFORE INCOME TAXES | 5,445 | (5,065 | ) | (2,063 | ) | (13,349 | ) | |||||||||
| INCOME TAX (EXPENSE) BENEFIT | (2,129 | ) | 838 | 5,919 | 1,962 | |||||||||||
| NET INCOME (LOSS) | $ | 3,316 | $ | (4,227 | ) | $ | 3,856 | $ | (11,387 | ) | ||||||
| NET INCOME (LOSS) PER COMMON SHARE | $ | 0.03 | $ | (0.74 | ) | $ | 0.08 | $ | (2.17 | ) | ||||||
| DILUTED NET INCOME (LOSS) PER COMMON SHARE | $ | 0.03 | $ | (0.74 | ) | $ | 0.06 | $ | (2.17 | ) | ||||||
| WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – | ||||||||||||||||
| BASIC | 106,387,331 | 5,736,774 | 50,047,045 | 5,247,384 | ||||||||||||
| DILUTED | 131,787,293 | 5,736,774 | 61,816,085 | 5,247,384 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (PREDECESSOR)(DEFICIT)
(UNAUDITED)
(in thousands)
For the Three and Nine Months Ended September 30, 2021
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance, January 1, 2021 | 6,111 | $ | 1 | $ | 13,409 | $ | (26,726 | ) | $ | (13,316 | ) | |||||||||
| Stock-based compensation expense | - | - | 125 | - | 125 | |||||||||||||||
| Issuance of warrants in connection with notes payable | - | - | 1,340 | - | 1,340 | |||||||||||||||
| Net loss | - | - | - | (3,493 | ) | (3,493 | ) | |||||||||||||
| Balance, March 31, 2021 | 6,111 | $ | 1 | $ | 14,874 | $ | (30,219 | ) | $ | (15,344 | ) | |||||||||
| Issuance of common stock in connection with acquisition | 5,896 | 1 | 12,263 | - | 12,264 | |||||||||||||||
| Issuance of common stock in connection with public offering | 93,111 | 9 | 194,588 | - | 194,597 | |||||||||||||||
| Issuance of stock grants | 217 | - | 555 | - | 555 | |||||||||||||||
| Exercise of warrants | 1,039 | - | 2,338 | - | 2,338 | |||||||||||||||
| Stock-based compensation expense | - | - | 125 | - | 125 | |||||||||||||||
| Net income | - | - | - | 4,033 | 4,033 | |||||||||||||||
| Balance, June 30, 2021 | 106,374 | $ | 11 | $ | 224,743 | $ | (26,186 | ) | $ | 198,568 | ||||||||||
| Exercise of warrants | 13 | - | 29 | - | 29 | |||||||||||||||
| Stock-based compensation expense | - | - | 132 | - | 132 | |||||||||||||||
| Net income | - | - | - | 3,316 | 3,316 | |||||||||||||||
| Balance, September 30, 2021 | 106,387 | $ | 11 | $ | 224,904 | $ | (22,870 | ) | $ | 202,045 | ||||||||||
For the Three and Nine Months Ended September 30, 2020
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, January 1, 2020 | 4,750 | $ | - | $ | 1,079 | $ | (5,158 | ) | $ | (4,079 | ) | |||||||||
| Net loss | - | - | - | (2,207 | ) | (2,207 | ) | |||||||||||||
| Balance, March 31, 2020 | 4,750 | $ | - | $ | 1,079 | $ | (7,365 | ) | $ | (6,286 | ) | |||||||||
| Issuance of 1847 Holdings warrants in connection with notes payable | - | - | 567 | - | 567 | |||||||||||||||
| Forgiveness of related party debt | - | - | 138 | - | 138 | |||||||||||||||
| Issuance of 1847 Holdings shares in connection with conversion of notes payable | - | - | 275 | - | 275 | |||||||||||||||
| Net loss | - | - | - | (4,952 | ) | (4,952 | ) | |||||||||||||
| Balance, June 30, 2020 | 4,750 | $ | - | $ | 2,059 | $ | (12,317 | ) | $ | (10,258 | ) | |||||||||
| Issuance of common stock for cash | 1,111 | - | 8,602 | - | 8,602 | |||||||||||||||
| Issuance of common stock in connection with exercise of warrant | 250 | - | 2,250 | - | 2,250 | |||||||||||||||
| Issuance of options | - | - | 281 | - | 281 | |||||||||||||||
| Issuance of 1847 Holdings shares in connection with conversion of notes payable | - | - | 100 | - | 100 | |||||||||||||||
| Net loss | - | - | - | (4,227 | ) | (4,227 | ) | |||||||||||||
| Balance, September 30, 2020 | 6,111 | $ | 1 | $ | 13,292 | $ | (16,544 | ) | $ | (3,252 | ) | |||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Retained | Stockholder’s | |||||||||||||||||
| 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 | $ | 2,239,363 | $ | 2,953,412 | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (SUCCESSOR)CASH FLOWS
(UNAUDITED)
(in thousands)
For the Period from April 6, 2019 through September 30, 2019 (As Restated)
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | 3,856 | $ | (11,387 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 3,908 | 277 | ||||||
| Amortization of debt discount | 854 | 677 | ||||||
| Stock-based compensation expense | 936 | 281 | ||||||
| Loss on extinguishment of debt | 1,748 | 1,756 | ||||||
| Loss on abandonment of right of use asset | 1,437 | |||||||
| Write-off of acquisition receivable | - | 809 | ||||||
| Change in fair value of warrant liability | - | 2,128 | ||||||
| Deferred tax expense | (6,464 | ) | (1,962 | ) | ||||
| Non-cash lease expense | 845 | 314 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | (2,616 | ) | 521 | |||||
| Vendor deposits | (1,586 | ) | (253 | ) | ||||
| Merchandise inventory | (11,665 | ) | (1,707 | ) | ||||
| Prepaid expenses and other assets | (3,709 | ) | (989 | ) | ||||
| Accounts payable and accrued expenses | 11,796 | 4,306 | ||||||
| Customer deposits | (16,891 | ) | 12,926 | |||||
| Operating lease liabilities | (765 | ) | (314 | ) | ||||
| Net cash provided by (used in) provided by operating activities | (18,316 | ) | 7,383 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | (693 | ) | (51 | ) | ||||
| Cash paid to sellers in acquisition of Appliances Connection, net of cash acquired | (201,515 | ) | - | |||||
| Cash paid to seller in acquisition of Appliance Gallery | (1,420 | ) | - | |||||
| Net cash used in investing activities | (203,628 | ) | (51 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from equity offering | 194,598 | 8,602 | ||||||
| Cash received from warrant exercise | 2,368 | - | ||||||
| Proceeds from term note payable, net | 55,217 | 643 | ||||||
| Repayment on notes payable | (4,944 | ) | (2,047 | ) | ||||
| Payments on convertible notes payable | - | (771 | ) | |||||
| Payments on finance leases | (21 | ) | - | |||||
| Net payments on lines of credit | - | (1,339 | ) | |||||
| Cash paid for financing costs | - | (105 | ) | |||||
| Net cash provided by financing activities | 247,218 | 4,983 | ||||||
| NET CHANGE IN CASH AND RESTRICTED CASH | 25,274 | 12,315 | ||||||
| CASH AND RESTRICTED CASH, BEGINNING OF PERIOD | 9,912 | 64 | ||||||
| CASH AND RESTRICTED CASH, END OF PERIOD | $ | 35,186 | $ | 12,379 | ||||
| Cash, cash equivalents, and restricted cash consist of the following: | ||||||||
| End of period | ||||||||
| Cash and cash equivalents | $ | 27,175 | $ | 3,467 | ||||
| Restricted cash | 8,011 | 8,912 | ||||||
| $ | 35,186 | $ | 12,379 | |||||
| Cash, cash equivalents, and restricted cash consist of the following | ||||||||
| Beginning of period | ||||||||
| Cash and cash equivalents | $ | 935 | $ | 64 | ||||
| Restricted cash | 8,977 | - | ||||||
| $ | 9,912 | $ | 64 | |||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | 1,623 | $ | 820 | ||||
| Cash paid for taxes | $ | 2,480 | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Right of use assets acquired and liabilities assumed | $ | 11,108 | $ | - | ||||
| Debt discount on notes payable from OID | $ | 2,310 | $ | - | ||||
| Debt discount, warrants on short-term note payable | $ | 1,340 | $ | - | ||||
| Stock issued in the acquisition of Appliances Connection | $ | 12,264 | $ | - | ||||
| Debt paid off through issuance of new note | $ | 5,616 | $ | - | ||||
| Due to Seller (consideration) settled by vendor deposits | $ | 5,000 | $ | - | ||||
| Conversion of debt through issuance of 1847 Holdings common shares | $ | - | $ | 375 | ||||
| Exercise of warrant liability through issuance of 1847 Holdings non-controlling interest | $ | - | $ | 119 | ||||
| Derecognition of related party debt | $ | - | $ | 138 | ||||
| Adjustment to fair value of goodwill based on final purchase price allocation | $ | - | $ | 122 | ||||
| Conversion of warrant liability into common stock | $ | - | $ | 2,250 | ||||
| Issuance of note payable to repay Seller note | $ | - | $ | 3,500 | ||||
| Additional | Total Stockholder’s | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance, April 6, 2019 | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Capital contribution by Holdco for the acquisition of Goedeker Television Co. | 4,750,000 | 475 | 786,506 | - | 786,981 | |||||||||||||||
| 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 | - | - | - | (2,185,083 | ) | (2,185,083 | ) | |||||||||||||
| Balance, June 30, 2019 | 4,750,000 | $ | 475 | $ | 1,079,179 | $ | (2,185,083 | ) | $ | (1,105,429 | ) | |||||||||
| Net loss | - | - | - | (1,530,258 | ) | (1,530,258 | ) | |||||||||||||
| Balance, September 30, 2019 | 4,750,000 | $ | 475 | $ | 1,079,179 | $ | (3,715,341 | ) | $ | (2,635,687 | ) | |||||||||
For the Nine Months Ended September 30, 2020 (As Restated)
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholder’s | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, January 1, 2020 | 4,750,000 | $ | 475 | $ | 1,079,179 | $ | (5,157,871 | ) | $ | (4,078,217 | ) | |||||||||
| Net loss | - | - | - | (2,206,920 | ) | (2,206,920 | ) | |||||||||||||
| Balance, March 31, 2020 | 4,750,000 | $ | 475 | $ | 1,079,179 | $ | (7,364,791 | ) | $ | (6,285,137 | ) | |||||||||
| 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 conversion of notes payable | - | - | 275,000 | - | 275,000 | |||||||||||||||
| Net loss | - | - | - | (4,951,828 | ) | (4,951,828 | ) | |||||||||||||
| Balance, June 30, 2020 | 4,750,000 | $ | 475 | $ | 2,058,390 | $ | (12,316,619 | ) | $ | (10,257,754 | ) | |||||||||
| Issuance of common stock for cash | 1,111,200 | 111 | 8,602,055 | - | 8,602,166 | |||||||||||||||
| Issuance of common stock in connection with exercise of warrant | 250,000 | 25 | 2,249,975 | - | 2,250,000 | |||||||||||||||
| Issuance of options | - | - | 281,194 | - | 281,194 | |||||||||||||||
| Issuance of 1847 Holdings shares in connection with conversion of notes payable | - | - | 100,000 | - | 100,000 | |||||||||||||||
| Net loss | - | - | - | (4,226,691 | ) | (4,226,691 | ) | |||||||||||||
| Balance, September 30, 2020 | 6,111,200 | $ | 611 | $ | 13,291,614 | $ | (16,543,310 | ) | $ | (3,251,085 | ) | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
5
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Successor | Predecessor | |||||||||||
| Nine Months Ended September 30, 2020 (As Restated) | Period from April 6, 2019 through September 30, 2019 (As Restated) | Period from January 1, 2019 through April 5, 2019 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | (11,385,439 | ) | $ | (3,715,341 | ) | $ | (445,265 | ) | |||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation and amortization | 276,912 | 98,481 | 9,675 | |||||||||
| Amortization of finance costs | 676,711 | 324,351 | - | |||||||||
| Loss on extinguishment of debt | 1,756,095 | - | - | |||||||||
| Write-off of acquisition receivable | 809,000 | - | - | |||||||||
| Stock-based compensation | 281,194 | - | - | |||||||||
| Change in fair value of warrant liability | 2,127,656 | (57,100 | ) | - | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Receivables | 520,895 | (778,536 | ) | 1,730,079 | ||||||||
| Vendor deposits | (252,689 | ) | - | (73,770 | ) | |||||||
| Merchandise inventory | (1,706,783 | ) | 190,569 | 595,466 | ||||||||
| Prepaid expenses and other assets | (989,455 | ) | (105,397 | ) | 2,784 | |||||||
| Change in operating lease right-of-use assets | 314,332 | 197,936 | - | |||||||||
| Deferred tax assets | (1,962,129 | ) | - | - | ||||||||
| Accounts payable and accrued expenses | 4,306,481 | 2,005,370 | 196,565 | |||||||||
| Customer deposits | 12,925,530 | 742,922 | (1,404,266 | ) | ||||||||
| Operating lease liabilities | (314,332 | ) | (197,936 | ) | - | |||||||
| Net cash provided by (used in) operating activities | 7,383,979 | (1,294,681 | ) | 611,268 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Acquisition of Goedeker Television Co. | - | (1,232,132 | ) | - | ||||||||
| Purchases of property and equipment | (51,060 | ) | (11,874 | ) | - | |||||||
| Net cash used in investing activities | (51,060 | ) | (1,244,006 | ) | - | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from initial public offering, net | 8,602,166 | - | - | |||||||||
| Proceeds from note payable | 642,600 | 1,500,000 | - | |||||||||
| Payments on notes payable | (2,046,667 | ) | (263,457 | ) | - | |||||||
| Proceeds from convertible notes payable | - | 650,000 | - | |||||||||
| Payments on convertible notes payable | (771,431 | ) | - | |||||||||
| Net borrowings (payments) on lines of credit | (1,339,430 | ) | 1,412,082 | - | ||||||||
| Cash paid for financing costs | (105,279 | ) | (575,000 | ) | - | |||||||
| Net cash provided by financing activities | 4,981,959 | 2,723,625 | - | |||||||||
| NET CHANGE IN CASH AND RESTRICTED CASH | 12,314,878 | 184,938 | 611,268 | |||||||||
| CASH AND RESTRICTED CASH, BEGINNING OF PERIOD | 64,470 | - | 1,525,693 | |||||||||
| CASH AND RESTRICTED CASH, END OF PERIOD | $ | 12,379,348 | $ | 184,938 | $ | 2,136,961 | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||
| Cash paid for interest | $ | 819,737 | $ | 291,386 | $ | - | ||||||
| Cash paid for taxes | $ | - | $ | - | $ | - | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||||||
| Operating lease right-of-use asset | $ | - | $ | 2,200,000 | $ | - | ||||||
| Debt discounts on notes payable | $ | - | $ | 64,286 | $ | - | ||||||
| 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 | $ | - | ||||||
| Conversion of debt through issuance of 1847 Holdings common shares | $ | 375,000 | $ | - | $ | - | ||||||
| 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 | $ | - | $ | - | ||||||
| Conversion of warrant liability into common stock | $ | 2,250,000 | $ | - | $ | - | ||||||
| Issuance of note payable to repay Seller note | $ | 3,500,000 | $ | - | $ | - | ||||||
The accompanying notes are an integral part of these condensed financial statements
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20202021 AND 20192020
(UNAUDITED)
NOTE 1—ORGANIZATION AND NATURE OF BUSINESS
1847 Goedeker Inc. (the “Company”(“1847 Goedeker”) 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 the acquisition, the Company1847 Goedeker did not have any operations other than operations relating to its incorporation and organization.
On April 5, 2019, the Company executed an asset purchase agreement with1847 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.Goedeker Television Co., a Missouri corporation (“Goedeker”). As a result of this transaction, 1847 Goedeker acquired the former business of Goedeker and continues to operate this business.
On October 20, 2020, 1847 Goedeker formed Appliances Connection Inc. (“ACI”) as a wholly owned subsidiary in the State of Delaware.
On June 2, 2021, ACI acquired all of the issued and outstanding capital stock or other equity securities of 1 Stop Electronics Center, Inc., a New York corporation (“1 Stop”), Gold Coast Appliances, Inc., a New York corporation (“Gold Coast”), Superior Deals Inc., a New York corporation (“Superior Deals”), Joe’s Appliances LLC, a New York limited liability company (“Joe’s Appliances”) and YF Logistics LLC, a New Jersey limited liability company (“YF Logistics,” and collectively with 1 Stop, Gold Coast, Superior Deals, and Joe’s Appliances, “Appliances Connection”). See Note 9.
On July 6, 2021, 1847 Goedeker formed AC Gallery Inc. (“AC Gallery”) as a wholly owned subsidiary in the State of Delaware.
On July 29, 2021, AC Gallery acquired substantially all the assets and assumed substantially all the liabilities of Appliance Gallery, Inc., a retail appliance store in Largo, FL (“Appliance Gallery”). As a result of this transaction, AC Gallery acquired the former business of Appliance Gallery and continues to operate this business. See Note 9.
1847 Goedeker and its consolidated subsidiaries (collectively, the “Company”) operate an industry leading e-commerce destination for appliances, furniture, and home goods. Through its June 2021 acquisition of Appliances Connection, the Company created one of the largest pure-play online retailers of household appliances in the United States. With warehouse fulfillment centers in the Northeast and Midwest, as well as showrooms in Brooklyn, New York, St. Louis, Missouri, and Largo, Florida the Company offers one-stop shopping for national and global brands. The Company carries many household name-brands, including Bosch, Cafe, Frigidaire Pro, Whirlpool, LG, and Samsung, and also carries many major luxury appliance brands such as Miele, Thermador, La Cornue, Dacor, Ilve, Jenn-Air and Viking, among others. The Company also sells furniture, fitness equipment, plumbing fixtures, televisions, outdoor appliances, and patio furniture, as well as commercial appliances for builder and business clients.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated 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.with the instructions to Article 8 of Regulation S-X.
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 nine months ended September 30, 20202021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021.
Management has analyzed the impact of the Coronavirus pandemic (“COVID-19”) on its financial statements as of September 30, 2020 and has determined that the changes to its significant judgments and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets.
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained elsewhere in this report.the Company’s annual report on Form 10-K for the year ended December 31, 2020.
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.
7
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20202021 AND 20192020
(UNAUDITED)
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of 1847 Goedeker and its consolidated subsidiaries, ACI, 1 Stop, Gold Coast, Superior Deals, Joe’s Appliances, YF Logistics and AC Gallery. All significant intercompany balances and transactions have been eliminated in consolidation. The Company does not have a majority or minority interest in any other company, either consolidated or unconsolidated.
Use of Estimates
The preparation of these unaudited condensed consolidated 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 unaudited condensed consolidated 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. The majority of payments due from financial institutions for the settlement of credit card and debit card transactions process within two business days and are, therefore, classified as cash and cash equivalents. Other payment methods that take more time to settle are classified as receivables.
RestrictedAt September 30, 2021, restricted cash includes $3,500,000 pledgedapproximately $0.2 million to secure a note, $100,000 to secure a vendor letterletters of credit and $5,312,367$7.8 million withheld by credit card processors as security for the Company’s customer refund claims and credit card chargebacks. The cash pledged to secure the note payable will be released as the note is repaid, the cashCash pledged to secure the letter of credit will be released when the vendor offers the Company credit terms, and the cash held by credit card processors will be released at the discretion of the credit card companies ($2,208,712 was released on October 5).companies.
Revenue Recognition and Cost of Revenue
On January 1, 2018, theThe Company adoptedrecords revenue in accordance with Financial Accounting Standards UpdateBoard (“ASU”FASB”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting StandardStandards Codification (“ASC”) Topic 605, 606. 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 ASUASC 606 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant judgments. 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, which is recorded as customer deposits on the accompanying condensed balance sheet. 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 underobligation is to deliver the customer’s order. Each 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.delivered, at which time revenue is recognized.
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 trucktrucks 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.
8
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20202021 AND 20192020
(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 nine months ended September 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.consumers (homeowners), builders and designers.
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 contractproduct 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 salesproduct type is as follows:follows (in thousands):
| Successor | Predecessor | |||||||||||||||||||
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2020 | Period from April 6, 2019 through September 30, 2019 | Period from January 1, 2019 through April 5, 2019 | ||||||||||||||||
| Appliance sales | $ | 8,991,853 | $ | 10,086,490 | $ | 28,326,963 | $ | 18,535,800 | $ | 9,784,525 | ||||||||||
| Furniture sales | 3,554,704 | 1,398,843 | 7,604,867 | 2,969,389 | 2,456,085 | |||||||||||||||
| Other sales | 888,538 | 716,938 | 2,465,474 | 1,242,962 | 706,291 | |||||||||||||||
| Total | $ | 13,435,095 | $ | 12,202,271 | $ | 38,397,304 | $ | 22,748,151 | $ | 12,946,901 | ||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Appliance sales | $ | 130,837 | $ | 8,992 | $ | 197,416 | $ | 28,327 | ||||||||
| Furniture sales | 5,880 | 3,555 | 14,393 | 7,605 | ||||||||||||
| Other sales | 5,150 | 888 | 7,828 | 2,465 | ||||||||||||
| Total | $ | 141,867 | $ | 13,435 | $ | 219,637 | $ | 38,397 | ||||||||
The Company also sells extended warranty contracts. The Company is an agent for the warranty company and earns a commission on the warranty contracts purchased by customers; therefore, the cost of the warranty contracts is netted against warranty revenue in the accompanying consolidated statement of operations. The Company assumes no liability for repairs to products on which it has sold a warranty contract.
Receivables
Receivables consistconsists of customer’s balance payments for which the Company extends credit card transactions in the process of settlement.to certain homebuilders and designers based on prior business relationship, and vendor rebate receivables. Vendor rebates receivable represent amounts due from manufacturersmanufactures 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.(vendors). 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.trade receivables from customers and bad debt expense has been historically immaterial to the condensed consolidated financial statements. Uncollectible balances are expensed in the period it is determined to be uncollectible. The Company had no significant concentrations of receivables balances as of September 30, 2021 and December 31, 2020.
Merchandise Inventory
Inventory consists of finished products acquired for resale and is valued at the low-of-cost-or-marketlower-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 September 30, 2020 and December 31, 2019.
9
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20202021 AND 20192020
(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) | |
| Furniture and fixtures | 7 | |
| Machinery and equipment | ||
| Office equipment | ||
| 5 |
Goodwill
The Company tests its goodwill for impairment at least annually on December 31 and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and the Company’s consolidated financial results.
The Company tests goodwill by estimating fair value using a Discounted Cash Flow (“DCF”) model. The key assumptions used in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit margins based on internal forecasts, terminal value and an estimate of a market participant’s weighted-average cost of capital used to discount future cash flows to their present value. There were no impairment charges during the three and nine months ended September 30, 20202021 and 2019.2020.
Intangible Assets
AtAs of September 30, 20202021 and December 31, 2019,2020, definite-lived intangible assets primarily consisted of tradenames and customer relationships which are being amortized over their estimated useful lives, ranging fromor 5 to 15 years.
The Company periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. The Company has no intangibles with indefinite lives.
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. Impairments for the nine months ended September 30, 2021 were $1.4 million due to an abandonment of certain right of use assets. There were no impairments for the nine months ended September 30, 2020.
10
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20202021 AND 20192020
(UNAUDITED)
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles (including right of use assets) 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.upon triggering events. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted 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. There were no impairments for the nine months ended September 30, 2021 and 2020.
Lease Liabilities
Lease liabilities and their corresponding right of use assets are recorded based on the present value of lease payments over the expected lease term at the lease commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate (“IBR”) based on the information available at the commencement date of the respective lease to determine the present value of future payments. The determination of the IBR requires judgment and is primarily based on publicly available information for companies within the same industry and with similar credit profiles. The Company adjusts the rate for the impact of collateralization, the lease term and other specific terms included in each lease arrangement. The IBR is determined at the lease commencement and is subsequently reassessed upon a modification to the lease arrangement.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company reviews the right of use asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the right of use asset may not be recoverable. When such events occur, the Company compares the carrying amount of the right of use asset to the undiscounted expected future cash flows related to the right of use asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated as the difference between the excess of the carrying amount over the fair value of the right of use asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the right of use asset.
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. Cash, restricted cash, receivables, inventory, and prepaid expenses approximate fair value, due to their short-term nature. 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.
Customer Deposits
Derivative Instrument Liability
Customer deposits represent the amount collected from customers when an order is placed. The deposits are transferred to revenue when the order ships to the customer or returned to customer if the order is subsequently cancelled.
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 11).
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
Income Taxes
Under the Company’s accounting policies, the Company initially recognizes a tax position in its unaudited condensed consolidated 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.
In the second quarter of 2021, the Company acquired Appliances Connection. Appliances Connection has a history of profitable operations. As such, the Company determined that it was more likely than not that it would have profitable operations in the future and therefore be able to realize the deferred tax assets and accordingly reversed the allowance for deferred tax assets at June 30, 2021.
11
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
Sales Tax Liability
On June 21, 2018, the U.S. Supreme Court issued an opinion in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), whereby the longstanding Quill Corp v. North Dakotasales tax case was overruled, and states may now require remote sellers to collect sales tax under certain circumstances. In 2020, the Company began collecting sales tax in nearly all states that have sales tax. The Company accrued sales taxes in the states with sales tax. The Company accrued the potential liability from the effective date of a state’s adoption of the Wayfair decision up to the date the Company began collecting and filing sales taxes in the various states. At September 30, 20202021 and December 31, 2019,2020, the amount of such accrual was $5,331,900$18.2 million and $2,910,200, respectively,$5.8 million, respectively. The amount of sales tax liability acquired in the Appliances Connection transaction was $11.0 million plus accrued interest of $1.0 million, which isare included in accounts payable and accrued expenses.
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 forsecurities. For the three and nine months ended September 30, 2020,2021, the potentially dilutive securities were (i)warrants for the purchase of 92,514,423 shares of common stock and options for the purchase of 705,000 shares of common stock. At September 30, 2020 there were warrants for the purchase of 55,560 shares of common stock issued to affiliates of the underwriter in its initial public offering described below and (ii) options for the purchase of 483,158 shares of common stock. These potentially dilutive securities were excluded from diluted loss per share. For the periods during the year ended December 31, 2019 and the three and six month periodsnine months ended JuneSeptember 30, 20202021, 25,413,437 and 11,773,834 of shares from the potentially dilutive securities were pennyabove option and warrants for the purchase of 250,000 shares of common stock, which were included in basic lossthe dilutive earnings per share, but excluded from diluted loss per share.respectively.
Reclassifications
Certain accounts have been reclassified to conform with classifications adopted in the period ended September 30, 2021. Such reclassifications had no effect on net earnings or financial position.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
Impact of COVID-19
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in China. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The extent of the COVID-19 pandemic’s continued effect on the Company’s operational and financial performance and those of third parties on which the Company relies will depend on future developments, including the effectiveness of vaccines and other treatments for COVID-19, and other new information that may emerge concerning the severity of the pandemic and steps taken to contain the pandemic or treat its impact, among others. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. The Company does not yet know the full extent of potential impacts on its business and financing. However, these effects could have a material impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which the Company relies.
Going Concern Assessment
Management assesses going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, management makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable those implementations can be achieved and management has the proper authority to execute them within the look-forward period.
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 nine months ended September 30, 2020,2021, the Company incurredhad operating lossesprofit of $11,385,439,$2.0 million, $18.3 million of cash flows fromflow used in operations, of $7,383,978, and negative working capital of $10,230,401.$20.0 million. Additionally, the Company had $27.2 million of unrestricted cash at September 30, 2021. On June 2, 2021, the Company completed the acquisition of Appliances Connection. Appliances Connection has historically been profitable; however, less than 4 months of their operations are included in results for the nine months ended September 30, 2021.
Management has prepared estimates of operations for fiscal year 2020years 2021 and 2022 and believes that sufficient funds will be generated from operations to fund its operations, and to service its debt obligations for at least one year from the date of the filing of thethese unaudited condensed consolidated financial statements in the Company’s 10-Q.statements.
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. $8,602,166. 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.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.
Management believes that based on relevant conditions and events that are known and reasonably knowable that its forecasts, for one year from the date of the filing of these unaudited condensed consolidated 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.
12
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20202021 AND 20192020
(UNAUDITED)
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 14 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.
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.
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 adopted ASU 2018-13 on January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
13
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrumentswhich 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 unaudited condensed consolidated financial statements.
NOTE 3—RECEIVABLES
Reclassifications
Certain accounts have been reclassified to conform with classifications adopted in the period endedAt September 30, 2020. Such reclassifications had no effect on net earnings or financial position.
NOTE 3—RESTATEMENT OF FINANCIAL STATEMENTS
The Company restated its previously issued financial statements as of September 30, 20202021 and December 31, 2019 and for the period April 6 to September 30, 2019 and the three and nine months ended September 30, 2020, to reflect the modification of a sales tax liability and purchase accounting adjustments:
14
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
The following tables summarize the effect of the restatement on the specific items presented in our previously reported financial statements:
1847 GOEDEKER INC.
BALANCE SHEET
September 30, 2020
| September 30, 2020 (As Filed) | Adjustments | September 30, 2020 (As Restated) | ||||||||||||
| ASSETS | ||||||||||||||
| Total Current Assets | $ | 18,306,577 | $ | - | $ | 18,306,577 | ||||||||
| Goodwill | 5,097,752 | (2 | ) | (372,063 | ) | 4,725,689 | ||||||||
| TOTAL ASSETS | $ | 29,634,781 | $ | (372,063 | ) | $ | 29,262,718 | |||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||||
| Current Liabilities | ||||||||||||||
| Accounts payable and accrued expenses | $ | 4,371,204 | (1 | ) | $ | 5,331,900 | $ | 9,703,104 | ||||||
| Total Current Liabilities | 23,205,078 | 5,331,900 | 28,536,978 | |||||||||||
| TOTAL LIABILITIES | 27,181,903 | 5,331,900 | 32,513,803 | |||||||||||
| Stockholders’ Deficit | ||||||||||||||
| Additional paid-in capital | 13,484,156 | (2 | ) | (192,542 | ) | 13,291,614 | ||||||||
| Accumulated deficit | (11,031,889 | ) | (1 | ) | (5,331,900 | ) | (16,543,310 | ) | ||||||
| (2 | ) | (179,521 | ) | |||||||||||
| Total Stockholders’ Deficit | 2,452,878 | (5,703,963 | ) | (3,251,085 | ) | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | 29,634,781 | $ | (372,063 | ) | $ | 29,262,718 | ||||||||
1847 GOEDEKER INC.
BALANCE SHEET
December 31, 2019
| December 31, 2019 (As Filed) | Adjustments | December 31, 2019 (As Restated) | ||||||||||||
| ASSETS | ||||||||||||||
| Total Current Assets | $ | 4,494,402 | $ | - | $ | 4,494,402 | ||||||||
| Goodwill | 4,976,016 | (2 | ) | (372,063 | ) | 4,603,953 | ||||||||
| TOTAL ASSETS | $ | 14,278,926 | $ | (372,063 | ) | $ | 13,906,863 | |||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||||
| Current Liabilities | ||||||||||||||
| Accounts payable and accrued expenses | $ | 2,465,220 | (1 | ) | $ | 2,910,200 | $ | 5,375,420 | ||||||
| Total Current Liabilities | 11,215,028 | 2,910,200 | 14,125,228 | |||||||||||
| TOTAL LIABILITIES | 15,074,880 | 2,910,200 | 17,985,080 | |||||||||||
| Stockholders’ Deficit | ||||||||||||||
| Additional paid-in capital | 1,271,721 | (2 | ) | (192,542 | ) | 1,079,179 | ||||||||
| Accumulated deficit | (2,068,150 | ) | (1 | ) | (2,910,200 | ) | (5,157,871 | ) | ||||||
| (2 | ) | (179,521 | ) | |||||||||||
| Total Stockholders’ Deficit | (795,954 | ) | (3,282,263 | ) | (4,078,217 | ) | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 14,278,926 | $ | (372,063 | ) | $ | 13,906,863 | |||||||
15
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
1847 GOEDEKER INC.
STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2020
| Three Months Ended September 30, 2020 (As Filed) | Adjustments | Three Months Ended September 30, 2020 (As Restated) | ||||||||||||
| Gross profit | $ | 2,170,527 | $ | - | $ | 2,170,527 | ||||||||
| Operating Expenses | ||||||||||||||
| General and administrative | 957,703 | (1 | ) | 492,900 | 1,450,603 | |||||||||
| Total Operating Expenses | 5,220,557 | 492,900 | 5,713,457 | |||||||||||
| LOSS FROM OPERATIONS | (3,050,030 | ) | (492,900 | ) | (3,542,930 | ) | ||||||||
| Total Other Income (Expense) | (1,449,936 | ) | (72,000 | ) | (1,521,937 | ) | ||||||||
| NET LOSS BEFORE INCOME TAXES | (4,499,966 | ) | (564,900 | ) | (5,064,867 | ) | ||||||||
| INCOME TAX BENEFIT (EXPENSE) | 838,176 | - | 838,176 | |||||||||||
| NET LOSS | $ | (3,661,790 | ) | $ | (564,900 | ) | $ | (4,226,691 | ) | |||||
| LOSS PER COMMON SHARE – BASIC AND DILUTED | $ | (0.64 | ) | $ | (0.74 | ) | ||||||||
| WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED | 5,736,774 | 5,736,774 | ||||||||||||
1847 GOEDEKER INC.
STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2019
| Three Months Ended September 30, 2019 (As Filed) | Adjustments | Three Months Ended September 30, 2019 (As Restated) | ||||||||||||
| Gross profit | $ | 2,018,560 | $ | - | $ | 2,018,560 | ||||||||
| Operating Expenses | ||||||||||||||
| General and administrative | 594,916 | (1 | ) | 620,800 | 1,215,716 | |||||||||
| Total Operating Expenses | 2,571,461 | 620,800 | 3,192,261 | |||||||||||
| LOSS FROM OPERATIONS | (552,901 | ) | (620,800 | ) | (1,173,701 | ) | ||||||||
| Total Other Income (Expense) | (328,757 | ) | (27,800 | ) | (356,557 | ) | ||||||||
| NET LOSS BEFORE INCOME TAXES | (881,658 | ) | (648,600 | ) | (1,530,258 | ) | ||||||||
| INCOME TAX BENEFIT (EXPENSE) | - | - | - | |||||||||||
| NET LOSS | $ | (881,658 | ) | $ | (648,600 | ) | $ | (1,530,258 | ) | |||||
| LOSS PER COMMON SHARE – BASIC AND DILUTED | $ | (0.18 | ) | $ | (0.31 | ) | ||||||||
| WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED | 5,000,000 | 5,000,000 | ||||||||||||
16
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
1847 GOEDEKER INC.
STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2020
| Nine Months Ended September 30, 2020 (As Filed) | Adjustments | Nine Months 2020 | ||||||||||||
| Gross profit | $ | 6,336,407 | $ | - | $ | 6,336,407 | ||||||||
| Operating Expenses | ||||||||||||||
| General and administrative | 2,160,560 | (1 | ) | 2,239,300 | 4,399,860 | |||||||||
| Total Operating Expenses | 11,216,370 | 2,239,300 | 13,455,670 | |||||||||||
| LOSS FROM OPERATIONS | (4,879,963 | ) | (2,239,300 | ) | (7,119,263 | ) | ||||||||
| Total Other Income (Expense) | (6,045,905 | ) | (182,400 | ) | (6,228,305 | ) | ||||||||
| NET LOSS BEFORE INCOME TAXES | (10,925,868 | ) | (2,421,700 | ) | (13,347,568 | ) | ||||||||
| INCOME TAX BENEFIT (EXPENSE) | 1,962,129 | - | 1,962,129 | |||||||||||
| NET LOSS | $ | (8,963,739 | ) | $ | (2,421,700 | ) | $ | (11,385,439 | ) | |||||
| LOSS PER COMMON SHARE – BASIC AND DILUTED | $ | (1.71 | ) | $ | (2.17 | ) | ||||||||
| WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED | 5,247,384 | 5,247,384 | ||||||||||||
1847 GOEDEKER INC.
STATEMENTS OF OPERATIONS
Period from April 6, 2019 through September 30, 2019
| Period from April 6, 2019 through September 30, 2019 (As Filed) | Adjustments | Period from April 6, 2019 through September 30, 2019 (As Restated) | ||||||||||||
| Gross profit | $ | 3,862,034 | $ | - | $ | 3,862,034 | ||||||||
| Operating Expenses | ||||||||||||||
| General and administrative | 1,134,036 | (1 | ) | 1,854,400 | 3,167,957 | |||||||||
| (2 | ) | 179,521 | ||||||||||||
| Total Operating Expenses | 4,841,738 | 2,033,921 | 6,875,659 | |||||||||||
| LOSS FROM OPERATIONS | (979,704 | ) | (2,033,921 | ) | (3,013,625 | ) | ||||||||
| Total Other Income (Expense) | (645,216 | ) | (56,500 | ) | (701,716 | ) | ||||||||
| NET LOSS BEFORE INCOME TAXES | (1,624,920 | ) | (2,090,421 | ) | (3,715,341 | ) | ||||||||
| INCOME TAX BENEFIT (EXPENSE) | - | - | - | |||||||||||
| NET LOSS | $ | (1,624,920 | ) | $ | (2,090,421 | ) | $ | (3,715,341 | ) | |||||
| LOSS PER COMMON SHARE – BASIC AND DILUTED | $ | (0.32 | ) | $ | (0.74 | ) | ||||||||
| WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED | 5,000,000 | 5,000,000 | ||||||||||||
17
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
1847 GOEDEKER INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
Three and Nine Months Ended September 30, 2020
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| As Filed: | ||||||||||||||||||||
| 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 | ) | |||||||||
| 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 | ) | |||||||||
| Net loss | - | - | - | (3,661,791 | ) | (3,661,791 | ) | |||||||||||||
| Balance, September 30, 2020 | 6,111,200 | $ | 611 | $ | 13,484,156 | $ | (11,031,889 | ) | $ | 2,452,878 | ||||||||||
| As Restated: | ||||||||||||||||||||
| Balance, January 1, 2020 | 4,750,000 | $ | 475 | $ | 1,079,179 | $ | (5,157,871 | ) | $ | (4,078,217 | ) | |||||||||
| Net loss | - | - | - | (2,206,920 | ) | (2,206,920 | ) | |||||||||||||
| Balance, March 31, 2020 | 4,750,000 | $ | 475 | $ | 1,079,179 | $ | (7,364,791 | ) | $ | (6,285,137 | ) | |||||||||
| Net loss | - | - | - | (4,951,828 | ) | (4,951,828 | ) | |||||||||||||
| Balance, June 30, 2020 | 4,750,000 | $ | 475 | $ | 2,058,390 | $ | (12,316,619 | ) | $ | (10,257,754 | ) | |||||||||
| Net loss | - | - | - | (4,226,691 | ) | (4,226,691 | ) | |||||||||||||
| Balance, September 30, 2020 | 6,111,200 | $ | 611 | $ | 13,291,614 | $ | (16,543,310 | ) | $ | (3,251,085 | ) | |||||||||
1847 GOEDEKER INC.
STATEMENTS OF STOCKHOLDER’S EQUITY (DEFICIT)
Period from April 6, 2019 through September 30, 2019
| Additional | Total Stockholders’ | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| As Filed: | ||||||||||||||||||||
| Capital contribution by Holdco for the acquisition of Goedeker Television Co. | 4,750,000 | $ | 475 | $ | 979,048 | - | $ | 979,523 | ||||||||||||
| 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 | ||||||||||
| Net loss | - | - | - | $ | (881,658 | ) | (881,658 | ) | ||||||||||||
| Balance, September 30, 2019 | 4,750,000 | $ | 475 | $ | 1,271,721 | $ | (1,624,920 | ) | $ | (352,724 | ) | |||||||||
| As Restated: | ||||||||||||||||||||
| Capital contribution by Holdco for the acquisition of Goedeker Television Co. | 4,750,000 | $ | 475 | $ | 786,506 | $ | - | $ | 786,981 | |||||||||||
| Net loss for the period from April 6, 2019 through June 30, 2019 | - | - | - | (2,185,083 | ) | (2,185,083 | ) | |||||||||||||
| Balance, June 30, 2019 | 4,750,000 | $ | 475 | $ | 1,079,179 | $ | (2,185,083 | ) | $ | (1,105,429 | ) | |||||||||
| Net loss | - | - | - | $ | (1,530,258 | ) | (1,530,258 | ) | ||||||||||||
| Balance, September 30, 2019 | 4,750,000 | $ | 475 | $ | 1,079,179 | $ | (3,715,341 | ) | $ | (2,635,687 | ) | |||||||||
18
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
1847 GOEDEKER INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2020
| Nine Months Ended September 30, 2020 (As Filed) | Adjustments | Nine Months 2020 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | (8,963,739 | )(1) | $ | (2,421,700 | ) | $ | (11,385,439 | ) | |||
| Accounts payable and accrued expenses | 1,884,781 | (1) | 2,421,700 | 4,306,481 | ||||||||
| Net cash provided by (used in) operating activities | 7,383,978 | - | 7,383,979 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Net cash used in investing activities | (51,060 | ) | - | (51,060 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Net cash provided by financing activities | 4,981,959 | - | 4,981,959 | |||||||||
| NET CHANGE IN CASH AND RESTRICTED CASH | 12,314,878 | - | 12,314,878 | |||||||||
| CASH AND RESTRICTED CASH, BEGINNING OF PERIOD | 64,470 | - | 64,470 | |||||||||
| CASH AND RESTRICTED CASH, END OF PERIOD | $ | 12,379,348 | $ | - | $ | 12,379,348 | ||||||
1847 GOEDEKER INC.
STATEMENTS OF CASH FLOWS
Period from April 6, 2019 through September 30, 2019
Period from 2019 | Adjustments | Period from 2019 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | (1,624,920 | )(1) | $ | (1,910,900 | ) | $ | (3,715,341 | ) | |||
| (2) | (179,521 | ) | ||||||||||
| Accounts payable and accrued expenses | (85,051 | )(1) | 1,910,900 | |||||||||
| (2) | 179,521 | 2,005,370 | ||||||||||
| Net cash provided by (used in) operating activities | (1,294,681 | ) | - | (1,294,681 | ) | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Net cash used in investing activities | (1,244,006 | - | (1,244,006 | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Net cash provided by financing activities | 2,723,625 | - | 2,723,625 | |||||||||
| NET CHANGE IN CASH | 184,938 | - | 184,938 | |||||||||
| CASH, BEGINNING OF PERIOD | - | - | - | |||||||||
| CASH, END OF PERIOD | $ | 184,938 | $ | - | $ | 184,938 | ||||||
19
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
NOTE 4—RECEIVABLES
At September 30, 2020 and December 31, 2019, receivables consisted of the following:following (in thousands):
September 30, | December 31, 2019 | |||||||
| Credit card payments in process of settlement | $ | 274,179 | $ | 406,838 | ||||
| Vendor rebates receivable | 945,276 | 1,455,248 | ||||||
| Total | $ | 1,219,455 | $ | 1,862,086 | ||||
| September 30, 2021 | December 31, 2020 | |||||||
| Trade receivables from customers | $ | 12,551 | $ | - | ||||
| Vendor rebates receivable | 7,499 | 1,338 | ||||||
| Credit cards in process of collection | 135 | 660 | ||||||
| Other receivables | 3,833 | - | ||||||
| Total receivables | $ | 24,018 | $ | 1,998 | ||||
NOTE 5—4—MERCHANDISE INVENTORY
At September 30, 20202021 and December 31, 2019,2020, the inventory balances are composed of:of the following (in thousands):
September 30, | December 31, 2019 | |||||||
| Appliances | $ | 3,205,699 | $ | 1,538,552 | ||||
| Furniture | 191,310 | 184,755 | ||||||
| Other | 114,864 | 81,783 | ||||||
| Total merchandise inventory | 3,511,873 | 1,805,090 | ||||||
| Allowance for inventory obsolescence | (425,000 | ) | (425,000 | ) | ||||
| Merchandise inventory, net | $ | 3,086,873 | $ | 1,380,090 | ||||
| September 30, 2021 | December 31, 2020 | |||||||
| Appliances | $ | 34,317 | $ | 5,286 | ||||
| Furniture | 1,903 | 195 | ||||||
| Other | 1,984 | 91 | ||||||
| Total merchandise inventory | 38,204 | 5,572 | ||||||
| Allowance for inventory obsolescence | (425 | ) | (425 | ) | ||||
| Merchandise inventory, net | $ | 37,779 | $ | 5,147 | ||||
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
NOTE 6—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.
20
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
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 September 30, 20202021 and December 31, 20192020 were $547,648$12.1 million and $294,960,$0.5 million, respectively.
NOTE 7—6—PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 20202021 and December 31, 2019:2020 (in thousands):
September 30, | December 31, 2019 | |||||||
| Equipment | $ | 14,976 | $ | 7,376 | ||||
| Warehouse equipment | 61,070 | 29,188 | ||||||
| Furniture and fixtures | 512 | 512 | ||||||
| Transportation equipment | 63,784 | 63,784 | ||||||
| Leasehold improvements | 129,203 | 117,626 | ||||||
| Total property and equipment | 269,545 | 218,486 | ||||||
| Accumulated depreciation | (67,143 | ) | (32,880 | ) | ||||
| Property and equipment, net | $ | 202,402 | $ | 185,606 | ||||
| September 30, 2021 | December 31, 2020 | |||||||
| Equipment | $ | 88 | $ | 69 | ||||
| Warehouse equipment | 374 | 61 | ||||||
| Furniture and fixtures | 8 | 1 | ||||||
| Transportation equipment | 1,418 | 64 | ||||||
| Leasehold improvements | 216 | 137 | ||||||
| Construction in progress | 693 | - | ||||||
| Total property and equipment | 2,797 | 332 | ||||||
| Accumulated depreciation | (277 | ) | (86 | ) | ||||
| Property and equipment, net | $ | 2,520 | $ | 246 | ||||
Depreciation expense for the nine months ended September 30, 2021 and 2020 the period April 6, 2019 to September 30, 2019was $0.2 million and the period January 1, 2019 to April 5, 2019 was $34,264, $22,578, and $9,675,$0.03 million, respectively.
All property and equipment are pledged to secure the Loans described below (See Note 10).
On June 30, 2021, the Company closed its old warehouse and retail showroom in anticipation of relocating to a new facility. Accordingly, the Company wrote the remaining right of use asset and related leasehold improvements as of that date.
NOTE 8—7—INTANGIBLE ASSETS AND GOODWILL
The following provides a breakdown of identifiable intangible assets as of September 30, 20202021 and December 31, 2019:2020 (in thousands):
September 30, | 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 | (480,805 | ) | (238,156 | ) | ||||
| Intangible assets, net | $ | 1,636,195 | $ | 1,878,844 | ||||
| September 30, 2021 | December 31, 2020 | |||||||
| Customer relationships | $ | 26,549 | $ | 749 | ||||
| Marketing related - tradename | 25,704 | 1,368 | ||||||
| Total intangible assets | 52,253 | 2,117 | ||||||
| Accumulated amortization | (4,395 | ) | (735 | ) | ||||
| Intangible assets, net | $ | 47,858 | $ | 1,382 | ||||
In connection with the acquisition of Goedeker, the Company identified intangible assets of $2,117,000,$2.1 million, representing trade names and customer relationships. For the Appliances Connection acquisition, the Company preliminarily identified intangible assets of trade names and customer relationships. These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 8.55.0 years. Amortization expense for the three months ended September 30, 2021 and 2020 was $3.4 million and $0.08 million, respectively. For the nine months ended September 30, 2021 and 2020, the period April 6, 2019 toamortization expense was $3.7 million and $0.2 million, respectively.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
At September 30, 2019 and the period January 1, 2019 to April 5, 2019 was $242,649, $76,390 and $-0-, respectively.
As of September 30, 2020, the2021, estimated annual amortization expense for each of the next five years is as follows:follows (in thousands):
| 2020 (remainder of year) | $ | 80,883 | ||
| 2021 | 323,532 | |||
| 2022 | 323,532 | |||
| 2023 | 323,532 | |||
| 2024 | 122,132 | |||
| Thereafter | 462,584 | |||
| Total | $ | 1,636,195 |
| 2021 (remainder of year) | $ | 2,613 | ||
| 2022 | 10,451 | |||
| 2023 | 10,451 | |||
| 2024 | 10,139 | |||
| 2025 | 10,027 | |||
| Thereafter | 4,177 | |||
| Total | $ | 47,858 |
21
Following is a summary of goodwill (in thousands):
| Balance December 31, 2020 | $ | 4,726 | ||
| Preliminary goodwill from acquisition of Appliances Connection | 177,875 | |||
| Preliminary goodwill from acquisition of Appliances Gallery | 1,167 | |||
| Balance September 30, 2021 | $ | 183,768 |
NOTE 8—ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1847 GOEDEKER INC.The following is schedule of accounts payable and accrued expenses at September 30, 2021 and December 31, 2020 (in thousands):
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
| September 30, 2021 | December 31, 2020 | |||||||
| Trade accounts payable | $ | 37,845 | $ | 5,975 | ||||
| Sales tax | 23,836 | 5,804 | ||||||
| Accrued payroll liabilities | 1,527 | 493 | ||||||
| Accrued interest | 210 | 10 | ||||||
| Accrued liability for sales returns | 200 | 200 | ||||||
| Other accrued liabilities | 4,395 | 220 | ||||||
| Total accounts payable and accrued expenses | $ | 68,013 | $ | 12,702 | ||||
(UNAUDITED)
NOTE 9—BUSINESS COMBINATIONCOMBINATIONS
Appliances Connection
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 $4,175,373 consisting of: (i) the issuance of a promissory note in the principal amount of $4,100,000 and a deemed fair value of $3,637,898; (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 $786,981.
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,October 20, 2020, the Company entered into a settlementsecurities purchase agreement, which was amended on December 8, 2020 and April 6, 2021 (as amended, the “AC Purchase Agreement”), with Goedeker, Steve Goedeker, Mike GoedekerACI, Appliances Connection and 1847 Holdings LLC, the Company’s parent company at such time (“1847 Holdings”sellers set forth on Exhibit A thereto (the “Sellers”), pursuant to which ACI agreed to acquire all of the issued and outstanding capital stock or other equity securities of Appliances Connection from the Sellers (the “AC Acquisition”). The settlement agreement and the related transaction documents that are exhibits to the settlement agreement were all signedAC Acquisition was completed on June 2, 2020 only became effective upon2021.
The aggregate purchase price is $222.0 million (subject to adjustment), consisting of (i) $180.0 million in cash (subject to adjustment), (ii) 2,333,333 shares of the Company’s common stock having a stated value that is equal to $21.0 million and (iii) 3,562,640 shares of the Company’s common stock, which is equal to (A) $21.0 million divided by (B) the average of the closing price of the IPOCompany’s common stock (as reported on August 4, 2020. PursuantNYSE American) for the 20 trading days immediately preceding the 3rd trading day prior to the settlement agreement, the parties entered into an amendment and restatementclosing date of the 9% subordinated promissory note described below (see Note 12). In addition, the parties agreed that the arbitration action described above would be settled effective upon theAC Acquisition.
The purchase price was subject to a 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 $809,000net working capital adjustment amount, which resulted inprovision and a loss on write-offpost-closing net working capital adjustment provision. As a result of acquisition receivable duringthese adjustments, the nine months ended September 30, 2020.
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:
To the extent the EBITDAcash portion 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 orpurchase price 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.$212.6 million.
22
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20202021 AND 20192020
(UNAUDITED)
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
The Company accounted for the actual numberAC Acquisition using the acquisition method of days elapsed.
Theaccounting in accordance with FASB ASC Topic 805 “Business Combinations”. In accordance with ASC 805, the Company determined theused its best estimates and assumptions to assign fair value ofto the earnout ontangible and intangible assets acquired and liabilities assumed at 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 September 30, 2020 and does not believe any adjustments are required at September 30, 2020 or for the nine months then ended.date.
The fair value of the purchase consideration issued to GoedekerAppliances Connection was allocated to the net tangible assets acquired. The Company accounted for the acquisitionAC 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 preliminary fair value of the net liabilities assumed was approximately $614,337.assets to be acquired is $47.0 million. The excess of the aggregate estimated fair value of the net tangible assets, $177.9 million, has been allocated to provisional goodwill. Provisional goodwill was
The table below represents the estimated at $4,603,953 at December 31, 2019 duepreliminary purchase price allocation to the preliminary valuation. Duringnet assets acquired, as well as the period ending Septemberassociated estimated useful lives of the acquired intangible assets.
| Provisional purchase consideration at preliminary fair value (in thousands): | ||||
| Cash consideration | $ | 180,000 | ||
| Share issuance | 12,264 | |||
| Working capital adjustment paid to sellers | 27,597 | |||
| Working capital adjustment due to sellers | 5,000 | |||
| Amount of consideration | $ | 224,861 | ||
| Assets acquired and liabilities assumed at preliminary fair value | ||||
| Cash | $ | 5,897 | ||
| Accounts receivable | 19,403 | |||
| Inventories | 20,484 | |||
| Vendor deposits | 15,000 | |||
| Other assets | 2,194 | |||
| Property and equipment | 1,891 | |||
| Right of use operating lease assets | 1,834 | |||
| Customer relationships | 25,800 | |||
| Marketing related - tradename | 24,336 | |||
| Accounts payable and accrued expenses | (43,633 | ) | ||
| Customer deposits | (13,138 | ) | ||
| Finance lease obligation | (215 | ) | ||
| Net deferred tax liabilities | (9,506 | ) | ||
| Operating lease liability | (1,834 | ) | ||
| Notes payable | (1,527 | ) | ||
| Total net assets acquired | $ | 46,986 | ||
| Consideration paid | 224,861 | |||
| Preliminary goodwill | $ | 177,875 | ||
Appliance Gallery
On July 6, 2021, AC Gallery entered into an asset purchase agreement, which was amended on July 21, 2021 and July 29, 2021 (as amended, the “Gallery Purchase Agreement”), with Appliance Gallery, pursuant to which AC Gallery agreed to acquire substantially all the assets and assumed substantially all the liabilities of Appliance Gallery (the “Gallery Acquisition”). The Gallery Acquisition was completed on July 29, 2021.
Pursuant to the Gallery Purchase Agreement, the total purchase price is $1.7 million in cash, subject to certain adjustments at closing. As a result of these adjustments, the purchase price paid at closing was $1.4 million.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
The Company accounted for the Gallery Acquisition using the acquisition method of accounting in accordance with FASB ASC Topic 805 “Business Combinations”. In accordance with ASC 805, the Company subsequently adjustedused its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.
The fair value of goodwillthe purchase consideration issued to Appliances Gallery was allocated to the net tangible assets acquired. The Company accounted for the Gallery 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 preliminary fair value of the net assets to be acquired was $0.3 million. The excess of the aggregate estimated fair value of the net tangible assets, plus $0.02 million of seller expenses paid by $121,736the Company, of $1.2 million has been allocated to $4,725,689 based on the finalized purchase price allocation.
provisional goodwill.
The table below showsrepresents the analysisestimated preliminary purchase price allocation to the net assets acquired, as well as the associated estimated useful lives of the Goedeker asset purchase:acquired intangible assets.
| Provisional purchase consideration at fair value (in thousands): | ||||
| Cash consideration | $ | 1,420 | ||
| Amount of consideration | $ | 1,420 | ||
| Assets acquired and liabilities assumed at preliminary fair value | ||||
| Inventory | 483 | |||
| Prepaid assets | 6 | |||
| Property and equipment | 19 | |||
| Customer deposits | (255 | ) | ||
| Net tangible assets acquired | $ | 253 | ||
| Total net assets acquired | $ | 253 | ||
| Consideration paid | 1,420 | |||
| Preliminary goodwill | $ | 1,167 | ||
| Purchase consideration at fair value: | ||||
| Note payable, net of $462,102 debt discount and $215,500 of capitalized financing costs | $ | 3,637,898 | ||
| Cash to seller at closing | 478,000 | |||
| working capital adjustment | (809,000 | ) | ||
| Contingent note payable | 81,494 | |||
| Fair value of ownership interest in Holdco transferred to seller | 786,981 | |||
| Amount of consideration | $ | 4,175,373 | ||
| Assets acquired and liabilities assumed at fair value | ||||
| Accounts receivable | $ | 456,183 | ||
| Inventories | 1,851,251 | |||
| Other assets | 295,863 | |||
| Property and equipment | 216,286 | |||
| Customer related intangibles | 749,000 | |||
| Marketing related intangibles | 1,368,000 | |||
| Accounts payable and accrued expenses | (3,056,855 | ) | ||
| Customer deposits | (2,430,044 | ) | ||
| Net tangible assets acquired (liabilities assumed) | $ | (550,316 | ) | |
| Total net assets acquired (liabilities assumed) | $ | (550,316 | ) | |
| Consideration paid | 4,175,373 | |||
| Goodwill | $ | 4,725,689 | ||
Pro forma
The following unaudited proforma results of operations are presented for information purposes only. The unaudited proforma results of operations are not intended to present actual results that would have been attained had the AC Acquisition been completed as of January 1, 2020, or to project potential operating results as of any future date or for any future periods. Appliances Connection revenue and net income in the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 was $129.3 million and $15.1 million and $177.1 million and $20.0 million, respectively.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (in thousands, except share and per share data) | ||||||||||||||||
| Product sales, net | $ | 141,867 | $ | 102,201 | $ | 404,953 | $ | 260,443 | ||||||||
| Net income (loss) | $ | 3,946 | $ | (657 | ) | $ | 31,128 | $ | (3,196 | ) | ||||||
| Amortization of intangibles included in net income (loss) (b) | $ | 2,507 | $ | 2,507 | $ | 7,520 | $ | 7,520 | ||||||||
| Basic earnings per share | $ | 0.04 | $ | (0.01 | ) | $ | 0.31 | $ | (0.03 | ) | ||||||
| Diluted earnings per share (a) | $ | 0.03 | $ | (0.01 | ) | $ | 0.31 | $ | (0.03 | ) | ||||||
| Basic number of shares | 106,387,331 | 105,335,084 | 105,335,084 | 105,335,084 | ||||||||||||
| Diluted number of shares | 131,787,293 | 105,335,084 | 105,335,084 | 105,335,084 | ||||||||||||
| (a) | Assumes shares outstanding at offering were outstanding for all periods and that warrant price is equal to the offering price resulting in no diluted shares. |
| (b) | Represents amortization of the identified intangible assets acquired in the Appliances Connection acquisition. |
| (c) | Appliance Gallery pro forma is not included in the table above as it was determined to be immaterial. |
23
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20202021 AND 20192020
(UNAUDITED)
The Company believes that as a result of the Appliances Connection acquisition, it acquired identified intangible assets which will reduce goodwill. The nature and amount of intangible assets acquired will be determined by a valuation report, but the amount of any intangible assets will create an additional deferred tax liability increasing the amount of goodwill as there is no tax basis in goodwill or intangible assets. The Company estimates that goodwill will increase by approximately $9.5 million for the tax effect of net assets acquired.
NOTE 10—NOTES PAYABLE
NOTE 10—LINES OF CREDIT
Credit Facilities
Burnley Capital LLC
On April 5, 2019,June 2, 2021, the Company and ACI, as borrower, and Holdcoborrowers, entered into a credit and guaranty agreement (the “Credit Agreement”) with Appliances Connection and certain other subsidiaries of the Company party thereto from time to time as guarantors (the “Guarantors”), the financial institutions party thereto from time to time (“Lenders”), and Manufacturers and Traders Trust Company, as sole lead arranger, sole book runner, administrative agent and collateral agent (“M&T), pursuant to which the Lenders have agreed to make available to the Company and ACI senior secured credit facilities in the aggregate initial amount of $70.0 million, including (i) a $60.0 million term loan (the “Term Loan”) and security agreement(ii) a $10.0 million revolving credit facility (the “Revolving Loan”), which revolving credit facility includes a $2.0 million swingline subfacility (the “Swing Line Loan” and together with Burnley Capital LLC (“Burnley”the Term Loan and the Revolving Loan, the “Loans”) for revolving loansand a $2.0 million letter of credit subfacility, in aneach case, on the terms and conditions contained in the Credit Agreement. On June 2, 2021, the Company borrowed the entire amount of the Term Loan and issued term loan notes to the Lenders in the aggregate principal amount thatof $60.0 million. As of September 30, 2021, the Company has not made any loans under the Revolving Loan. As of September 30, 2021, the outstanding balance of the Term Loan is $55.0 million, comprised of principal of $58.5 million, net of unamortized loan costs of $3.5 million. Loan costs before amortization included $3.5 million of lender and placement agent fees and $0.3 million of legal other fees. The Company classified $6.0 million as a current liability and the balance as a long-term liability.
Each of the Loans matures on June 2, 2026. The Loans will not exceedbear interest on the lesser ofunpaid principal amount thereof as follows: (i) if it is a Loan bearing interest at a rate determined by the borrowing baseBase Rate (as defined in the loanCredit Agreement), then at the Base Rate plus the Applicable Margin (as defined in the Credit Agreement) for such Loan; (ii) if it is a Loan bearing interest at a rate determined by the LIBOR Rate (as defined in the Credit Agreement), then at the LIBOR Rate plus the Applicable Margin for such Loan; and security agreement)(iii) if it is a Swing Line Loan, then at the rate applicable to Loans bearing interest at a rate determined by the Base Rate. The Term Loan initially bears interest at the LIBOR Rate plus Applicable Margin (3.9%), with an initial interest period of six months. The Company may elect to continue or (ii) $1,500,000 minus reserves established Burnleyconvert the existing interest rate benchmark for the Term Loan from LIBOR Rate to Base Rate, and may elect the interest rate benchmark for future Revolving Loans as either LIBOR Rate or Base Rate (and, with respect to any Loan made at the LIBOR Rate, may also select the interest period applicable to any such Loan), by notifying M&T and Lenders from time to time in accordance with the loan and security agreement. In connection with the closingprovisions of the acquisitionCredit Agreement. Notwithstanding the foregoing, following an event of Goedeker on April 5, 2019,default, the Loans will bear interest at a rate that is 2% per annum higher than the interest rate then in effect for the applicable Loan.
The Company borrowed $744,000 under the loan and security agreement and issued a revolving note to Burnley inmust repay the principal amount of the Term Loan in quarterly installments of $1.5 million each, payable on the last business day of each March, June, September and December, commencing on September 30, 2021. The remaining unpaid principal amount of the Term Loan must be repaid on the maturity date, unless payment is sooner required by the Credit Agreement. Mandatory repayments of amounts borrowed under the Revolving Loan facility are required only if the amount borrowed at any time exceeds the commitment amount. Amounts borrowed under Revolving Loans may be repaid and reborrowed at any time until the maturity date.
The Company may voluntarily prepay the Loans from time to time in accordance with the provisions of the Credit Agreement, and will be required to prepay the Loans under certain limited circumstances as set forth in the Credit Agreement, including upon receipt of cash proceeds in connection with certain specified asset sales, receipt of insurance or condemnation proceeds or other cash proceeds received other than in the ordinary course of business or upon receipt of cash proceeds from the incurrence of indebtedness that is not permitted under the Credit Agreement, all as more specifically set forth in the Credit Agreement.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
Under the Credit Agreement, the Company is required to pay certain fees to M&T, including a commitment fee of up to $1,500,000. As of December 31, 2019,0.5% per annum with respect to the balance of the line of credit was $571,997.
On August 4, 2020, the Company used aunused portion of the proceeds fromLenders’ revolving loan commitments, determined as set forth in the IPO to repayCredit Agreement, and certain fees in connection with the revolving noteissuance of any letters of credit under the Credit Agreement.
The Credit Agreement contains customary representations, warranties, affirmative and negative financial and other covenants, including leverage ratio and fixed charge coverage ratios, and events of default for loans of this type. The Loans are guaranteed by the Guarantors and are secured by a first priority security interest in fullsubstantially all of the assets of the Company, ACI and the loan and security agreement was terminated. The total payoff amount was $118,194, consistingGuarantors.
Maturities of principal of $32,350, interest of $42 and prepayment, legal, and other fees of $85,802.the Term Loan are as follows (in thousands):
| For the years ended December 31, | Amount | |||
| 2021 (remainder of year) | $ | 1,500 | ||
| 2022 | 6,000 | |||
| 2023 | 6,000 | |||
| 2024 | 6,000 | |||
| 2025 | 6,000 | |||
| Thereafter | 33,000 | |||
| Total | 58,500 | |||
| Less: Loan costs | (3,501 | ) | ||
| Total | $ | 54,999 | ||
| Amount classified as a current liability | $ | 6,000 | ||
| Amount classified as long-term liability | $ | 48,999 | ||
Northpoint Commercial Finance LLCLoan
On June 24, 2019,3, 2021, the Company as borrower, entered into a loan and security agreement with Northpoint Commercial Finance LLC (“Northpoint”), pursuant to which was amended on August 2, 2019, for revolving loans upNorthpoint may from time to an aggregate maximum loan amount of $1,000,000time advance funds for the acquisition, financing and/or refinancing by the Company of inventory at an interest rate of LIBOR plus 7.99%. As of December 31, 2019, the balance of the line of credit was $678,993.purchased from Samsung Electronics America, Inc. and/or affiliates and for such other purposes as are acceptable Northpoint. The Company terminated the loan and security agreement on May 18, 2020provides that Northpoint may establish a credit limit and there is no outstanding balance asmay adjust such credit limit from time to time; provided that such credit limit does not constitute a commitment or committed line of credit Northpoint. As of September 30, 2020.2021, such credit limit is $1.0 million and the Company has not borrowed any funds.
NOTE 11—NOTES PAYABLE AND WARRANT LIABILITYThe applicable per annum interest rates for a loan, including any default rates, will be determined at the time of the loan. The loan and security agreement contains customary events of default and is secured by a security interest in all of the Company’s inventory (i) that is manufactured, distributed, or sold by Samsung Electronics America, Inc. and/or its affiliates and/or (ii) that bears any trade names, trademarks, or logos of Samsung Electronics America, Inc. and/or its affiliates; all returns, repossessions, exchanges, substitutions, replacements, attachments, parts, accessories and accessions of any of the foregoing; all price protection payments, discounts, rebates, credits, factory holdbacks and incentive payments related to any of the foregoing; supporting obligations to any of the foregoing; and products and proceeds in whatever form of any of the foregoing.
Arvest Loan
On August 25, 2020, the Company entered into a promissory note and security agreement with Arvest Bank for a loan in the principal amount of $3,500,000.$3.5 million. As of September 30,December 31, 2020, the outstanding balance of this loan is $3,340,602,$3.2 million, comprised of principal of $3,446,126,$3.3 million, net of unamortized loan costs of $103,524. The$0.1 million. On May 10, 2021, the Company classified $657,979 as a current liabilityrepaid this loan by transferring principal and accrued interest from the balance as a long-term liability.restricted cash account.
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 loan agreement, the Company is required to make monthly payments of $63,353 beginning on September 25, 2020 and until the maturity date, at which time all unpaid principal and interest will be due. The Company may prepay the loan in full or in part at any time without penalty. The loan agreement contains customary events of default and affirmative and negative covenants for a loan of this type. The loan is secured by all financial assets credited to the Company’s securities account held by Arvest Investments, Inc.
Maturities of the debt are as follows:
| For the years ended December 31, | ||||
| 2020 (remainder of year) | $ | 162,498 | ||
| 2021 | 663,339 | |||
| 2022 | 685,222 | |||
| 2023 | 707,826 | |||
| 2024 | 731,177 | |||
| 2025 | 496,064 | |||
| Total | $ | 3,446,126 | ||
| Less: Loan costs | (103,524 | ) | ||
| Total | $ | 3,342,602 | ||
24
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20202021 AND 20192020
(UNAUDITED)
10% OID Senior Promissory Notes
PPP Loan
On April 8, 2020,March 19, 2021, the Company received a $642,600 Paycheck Protection Program (the “PPP”) loan from the United States Small Business Administration under provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP loan has an 18-month 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 balance of the PPP loan was $642,600 as of September 30, 2020 and was classified as a current liability in the accompanying balance sheet. On November 2, 2020, the Company repaid the PPP loan.
Small Business Community Capital II, L.P.
On April 5, 2019, the Company, as borrower, and Holdco entered into a loan and securitysecurities purchase agreement with Small Business Community Capital II, L.P. (“SBCC”) for a term loan in the principal amount of $1,500,000,two institutional investors, pursuant to which the Company issued to SBCCeach investor (i) a term note in the principal amount of up to $1,500,000 and a ten-year warrant to purchase shares of the most10% OID 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. As of December 31, 2019, the balance of the note was $999,201.
On August 4, 2020, the Company used a portion of the proceeds from the IPO to repay the term note 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.
The Company classified the warrant as a derivative liability on the balance sheet at June 30, 2020 of $2,250,000 based on the estimated value of the warrant in the IPO. The increase in the value of the warrant from the estimated value of $122,344 at December 31, 2019 resulted in a charge of $2,127,656 during the nine months ended September 30, 2020. Immediately prior to the closing of the IPO on August 4, 2020, SBCC converted the warrant into 250,000 shares of common stock.
NOTE 12—NOTES PAYABLE, RELATED PARTIES
As noted in Note 9, 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% subordinatedsecured promissory note in the principal amount of $4,100,000. As of December 31, 2019, the balance of the note was $3,300,444.
Pursuant to the settlement agreement described above (see Note 8), the parties entered into an amendment$2.8 million 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%. In accordance with the terms of the amended and restated note, 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.
The Company refinanced this note payable with proceeds from the Arvest Loan. In connection with the refinance, the Company recorded a $757,239 loss on extinguishment of debt consisting of a $250,000 forbearance fee, write-off of unamortized loan discount of $338,873, and write-off of unamortized debt costs of $168,366.
NOTE 13—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-yearfour-year warrant to purchase 200,000 shares of the Company’s common sharesstock at an exercise price of $1.25 per share$12.00 (subject to adjustment)adjustments), which may be exercised on a cashless basis, for a purchase price of $2.5 million each, or $5.0 million in the aggregate, the relative fair value of which is $1.3 million and (iii) Holdco issued to Leonite shareswas recorded as debt discount. After deducting a placement fee and other expenses, the Company received net proceeds of common stock equal to a 7.5% non-dilutable$4.6 million. The original issue discount and warrant expense were amortized as interest expense. On June 2, 2021, the Company repaid these notes in Holdco. Asfull from the proceeds of December 31, 2019,the Term Loan. At the time of repayment, the Company wrote off the balance of the note was $584,943.
25
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
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 transactiondebt discount, $1.7 million, as a loss on early extinguishment of debt.
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. Vehicle Loans
The Company accounted forhas financed purchases of transportation vehicles with notes payable which are secured by the issuancevehicles purchased. These notes have five-year terms and interest rates ranging from 3.59% to 5.74%. As 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.
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 nine months ended September 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 of2021, the outstanding balance of these notes is $1.4 million.
Following is a summary of payments due for the note into 100,000 common shares of 1847 Holdings. succeeding five years (in thousands):
| For the years ended December 31, | Amount | |||
| 2021 (remainder of year) | $ | 124 | ||
| 2022 | 397 | |||
| 2023 | 364 | |||
| 2024 | 312 | |||
| 2025 | 169 | |||
| Total | $ | 1,366 | ||
| Amount classified as a current liability | $ | 425 | ||
| Amount classified as a long-term liability | $ | 941 | ||
NOTE 11—LEASES
Financing Leases
The Company accountedhas three finance leases for this transaction as a $100,000 reduction in the principalacquisition of forklifts. At September 30, 2021, the total amount of the debt, a $175,000 lossdue 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.these leases was $0.2 million.
On July 24, 2020, Leonite converted $50,000The Following is a summary of payments due on financing leases for the outstanding balance of the note into 50,000 common shares of 1847 Holdings. The Company accounted for this transaction as a $50,000 reduction in the principal amount of the debt, a $50,000 loss on extinguishment of debt, and a $100,000 increase in additional paid-in-capital representing the fair value of the 1847 Holdings common shares on the conversion date.succeeding five years (in thousands):
| For the years ended December 31, | Amount | |||
| 2021 (remainder of year) | $ | 26 | ||
| 2022 | 66 | |||
| 2023 | 53 | |||
| 2024 | 36 | |||
| 2025 and thereafter | 49 | |||
| Total payments | 230 | |||
| Less: amount representing interest | (36 | ) | ||
| Present value of minimum lease payments | $ | 194 | ||
As a result of the activity on this note, $50,000 and $998,856 were recorded as loss on extinguishment of debt for the three and nine months ended September 30, 2020, respectively.
Operating Leases
On August 4, 2020, the Company 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.
On September 2, 2020, 1847 Holdings and Leonite entered into an amendment to the warrant issued on April 5, 2019, pursuant to which the warrant was amended to allow for the exercise of the warrant for 180,000 common shares of 1847 Holdings in exchange for Leonite’s surrender of the remaining 20,000 common shares underlying that warrant, as well as all 200,000 common shares underlying the second warrant issued to Leonite on May 11, 2020. On September 18, 2020, Leonite exercised the warrant in accordance with the foregoing for 180,000 common shares of 1847 Holdings. As a result, both warrants have terminated.
26
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
NOTE 14—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.L.L.C for its prior principal office in Ballwin, Missouri. 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)default.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
On January 13, 2021, the Company shall failentered into a lease agreement with Westgate 200, LLC, which was amended on March 31, 2021, for its new principal office and showroom in St. Charles, Missouri. The lease terminates on April 30, 2027, with two (2) options to renew for additional five (5) year periods. The base rent is $20,977 per month until September 30, 2021, and increases to $31,465 per month until April 30, 2022, after which time the base rent increases at approximately 2.5% per year thereafter. The Company must also pay its 43.4% pro rata portion of the property taxes, operating expenses and insurance costs and is also responsible to pay rent within five (5) days afterfor the due date; (ii) any insurance required to be maintained byutilities used on the premises. The lease contains customary events of default. In connection with the new lease, the Company pursuantrecorded a right of use asset and liability of $2.0 million representing the initial present value of future lease payments.
On June 2, 2021, 1 Stop entered into a new lease agreement with 1870 Bath Ave. LLC, a related party, for the premises located at 1870 Bath Avenue, Brooklyn, NY. The lease is for a term of ten (10) years and provides for a base rent of $74,263 per month during the first year with annual increases to $96,896 during the last year of the term. 1 Stop is also responsible for all property taxes, insurance costs and the utilities used on the premises. The lease shall be canceled, terminated, expire, reduced,contains customary events of default. This lease replaces the prior lease entered into between the parties on September 1, 2018. The initial right of use asset and liability associated with this lease is $8.4 million.
On June 2, 2021, Joe’s Appliances entered into a new lease agreement with 812 5th Ave Realty LLC, a related party, for the premises located at 7812 5th Avenue, Brooklyn, NY. The lease is for a term of ten (10) years and provides for a base rent of $6,365 per month during the first year with annual increases to $8,305 during the last year of the term. Joe’s Appliances is also responsible for all property taxes, insurance costs and the utilities used on the premises. The lease contains customary events of default. This lease replaces the prior lease entered into between the parties on September 1, 2018. The initial right of use asset and liability associated with this lease is $0.7 million.
On May 31, 2019, YF Logistics entered into a sublease agreement with Dynamic Marketing, Inc. (“DMI”) for its warehouse space in Hamilton, NJ. The initial term of the sublease was for a period commencing on June 1, 2019 and terminating on April 30, 2020, with automatic renewals for successive one year terms until the earlier of (i) termination by either upon thirty (30) days’ prior written notice or materially changed; (iii)(ii) April 30, 2024. The sublease provides for a base rent equal to 71.43% of the base rent paid by DMI under its lease for the premises, plus 71.43% of any taxes, operating expenses, additional charges or any other amounts due by DMI, for a total of $56,250 per month. The initial right of use asset and liability associated with this lease is $3.0 million.
On July 29, 2021, AC Gallery entered into a lease agreement with Tom’s Flooring, LLC for the showroom and warehouse located in Largo, Florida. The lease is for a term of four (4) months commencing on September 1, 2021 and ending on December 31, 2021 and provides for a case rent of $6,500 per month. AC Gallery must also pay its one-third (1/3) pro rata portion of the common area maintenance charges, utilities and sales taxes. The lease contains customary events of default. The lease is short term and therefore not recorded as a right of use asset and liability.
During the three and nine months ended September 30, 2021, the Company shall fail to comply with any term, provision, or covenanthad rent expense of the lease$0.6 million 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.
$0.1 million, respectively. During the three and nine months ended September 30, 2020, the Company paidhad rent expense of $0.1 million and expensed rent payments of $135,000 and $405,000,$0.4 million, respectively.
Supplemental balance sheet information related to leases at September 30, 2021 was as follows:follows (in thousands):
| Operating lease right-of-use asset | $ | 2,300,000 | ||
| Accumulated amortization | (613,577 | ) | ||
| Net balance | $ | 1,686,423 | ||
| Lease liability, current portion | $ | 443,469 | ||
| Lease liability, long-term | 1,242,954 | |||
| Total operating lease liability | $ | 1,686,423 | ||
| Weighted average remaining lease term (months) | 42 | |||
| Weighted average discount rate | 6.5 | % |
| Operating lease right-of-use assets | $ | 12,319 | ||
| Lease liabilities, current portion | $ | 2,127 | ||
| Lease liabilities, long-term | 11,628 | |||
| Total operating lease liabilities | $ | 13,755 | ||
| Weighted average remaining lease term (months) | 91 | |||
| Weighted average discount rate | 4.4 | % |
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
Maturities of the lease liabilityliabilities for each of the next five years is as follows:follows (in thousands):
| 2020 (remainder of year) | $ | 135,000 | ||
| 2021 | 540,000 | |||
| 2022 | 540,000 | |||
| 2023 | 540,000 | |||
| 2024 | 135,000 | |||
| Total lease payments | $ | 1,890,000 | ||
| Less imputed interest | (203,577 | ) | ||
| Total lease liability | $ | 1,686,423 |
| 2021 (remainder of year) | $ | 559 | ||
| 2022 | 2,581 | |||
| 2023 | 2,620 | |||
| 2024 | 1,805 | |||
| 2025 | 1,487 | |||
| Thereafter | 7,065 | |||
| Total lease payments | 16,117 | |||
| Less imputed interest | (2,362 | ) | ||
| Total lease liability | $ | 13,755 |
On June 30, 2021, the Company closed an old warehouse and retail showroom in anticipation of relocating to a new facility. Accordingly, the Company wrote-off $1.4 million representing the remaining right of use asset and related leasehold improvements as of that date.
On September 9, 2021, the Company entered into a warehouse agreement for a new warehouse in Somerset, NJ. The warehouse agreement is for a term of 26 months commencing on October 1, 2021 and ending November 29, 2023, unless the master lease for the premises is terminated earlier. The monthly storage fee is $136,274 for the first year, $140,274 for the second year, and $144,573 for the last two months. The Company also paid a security deposit of $272,549. The right of use asset and liability associated with this operating lease are $3.5 million.
NOTE 15—12—SUPPLIER CONCENTRATION
Significant customers and suppliers are those that account for greater than 10 percent of the Company’s revenues and purchases.
For the three and nine months ended September 30, 2021, the Company purchased a substantial portion of finished goods from DMI, 79% and 66%, respectively.
The Company believes there are numerous other suppliers that could be substituted should the supplier become unavailable or non-competitive.
NOTE 13—RELATED PARTIES
Offsetting Management Services Agreement
On April 5, 2019, the Company entered into an offsettinga 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. This agreementprior significant stockholder, which was amended on April 21, 2020 with the amendment becoming effective at the closing of IPO on August 4, 2020.
27
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
Pursuant to the offsetting management services agreement, as amended, the Company appointed the Manager to provide certain services to it for a quarterly management fee equal to $62,500; provided, however, that (i) pro-rated payments shall be madeunder certain circumstances specified in the first quarter andmanagement services agreement, 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 managementquarterly fee to be paid by the Company for any remaining fiscal quarters in such fiscal year shallmay be reduced on a pro rata basis determined by reference to the managementif similar fees to be paidpayable to the Manager by allsubsidiaries of the subsidiaries ofCompany’s former parent company, 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 notLLC, 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.threshold amount.
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 Goedekerthe Company in connection with performing services under the offsetting management services agreement. The Company did not pay any expenses for the three and nine months ended September 30, 2021 and 2020.
The Company expensed $187,500management fees of $0.06 million for the three months ended September 30, 2021 and $121,290 in management fees2020 and $0.2 million for the nine months ended September 30, 20202021 and 2019, respectively.
Advances2020.
As discussed
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
DMI
The Company is a member of DMI, an appliance purchasing cooperative. DMI purchases consumer electronics and appliances at wholesale prices from various vendors, and then makes such products available to its members, including the Company, who sell such products to end consumers. DMI’s purchasing group arrangement provides its members, including the Company, with leverage and purchasing power with appliance vendors, and increases the Company’s ability to compete with competitors, including big box appliance and electronics retailers. The Company owns an approximate 5% interest in Note 13, on April 5, 2019, 1847 Holdings issued 50,000 common sharesDMI. Additionally, Albert Fouerti, the Company’s Chief Executive Officer, director and 200,000 warrants to Leonite in order to induce Leonite to extend credita former significant stockholder of Appliances Connection prior to the Company. The common sharesAcquisition, is on the board of 1847 Holdings were valued at $137,500.DMI. As part of the modificationsuch, DMI is deemed to this convertible note payable, 1847 Holdings also granted an additional 200,000 warrants to purchase 1847 Holdings’ common shares to Leonite.
be a related party.
NOTE 16—STOCKHOLDERS’ DEFICITAt September 30, 2021, vendor rebate deposits due from DMI were $3.7 million. During the three and nine months ended September 30, 2021, total purchases from DMI, net of holdbacks, were $63.4 million and $91.4 million respectively. At September 30, 2021, deposits at DMI totaled $12.1 million.
Lease Agreements
As described above, 1 Stop, Joe’s Appliances and Gold Coast have entered into lease agreements with 1870 Bath Ave. LLC, 812 5th Ave Realty LLC and 54 Glen Cove Realty, LLC, respectively. Each of these entities is owned by Albert Fouerti and Elie Fouerti (the vice president of 1 Stop, Joe’s Appliances and Gold Coast and former significant stockholder of each prior to the Acquisition). In addition, YF Logistics has entered into a sublease agreement with DMI. The total rent expense under these related party leases was $0.6 million for the period of June 2, 2021 to September 30, 2021.
NOTE 14—STOCKHOLDERS’ EQUITY (DEFICIT)
As of September 30, 2020,2021, the Company was authorized to issue 200,000,000 shares of common stock, $0.0001$0.0001 par value per share, and 20,000,000 shares of “blank check” preferred stock, 0.0001 par value per share. To date, the Company has not designated or issued any shares of preferred stock.
Common Stock
As of September 30, 20202021 and December 31, 2019,2020, the Company had 6,111,200106,387,332 and 4,750,0006,111,200 shares of common stock issued and outstanding, respectively. Each share entitles the holder thereof to one vote per share on all matters coming before the stockholders of the Company for a vote.
Upon the Company’s inception on January 10, 2019,On May 27, 2021, the Company issued 4,750,000entered into an underwriting agreement with ThinkEquity, a division of Fordham Financial Management, Inc. (the “Underwriter”), relating to a public offering of units, each unit consisting of one share of common stock and a warrant to purchase one share of common stock. Under the underwriting agreement, the Company agreed to sell 91,111,111 units to the Underwriter, at a purchase price per unit of $2.0925 (the offering price to the public of $2.25 per unit minus the Underwriter’s discount), and also agreed to grant to the Underwriter a 30-day option to purchase up to 2,000,000 additional shares of common stock, forat a total purchase price of $1.00.$2.0832 per share, and/or warrants to purchase up to 2,000,000 additional shares of common stock, at a purchase price of $0.0093 per warrant, in any combination thereof, solely to cover over-allotments, if any. The Underwriter exercised its option to purchase 2,000,000 additional warrants on May 28, 2021 and exercised its option to purchase 2,000,000 additional shares on June 3, 2021. The shares of common stock and warrants contained in the units were immediately separable and were issued separately.
On June 2, 2021, the Company sold 91,111,111 shares of common stock and warrants to purchase 93,111,111 shares of common stock to the Underwriter for total gross proceeds of $205.0 million. After deducting the underwriting commission and expenses, the Company received net proceeds of approximately $194.6 million. The Company used the proceeds of the offering to fund a portion of the purchase price for the Acquisition.
On June 7, 2021, the Company sold 2,000,000 shares of common stock to the Underwriter for total gross proceeds of $4.5 million. After deducting the underwriting commission and expenses, the Company received net proceeds of approximately $4.2 million.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
During June 2021, 1,039,148 shares of common stock were issued as a result of the exercise of 1,039,148 warrants with proceeds of $2.3 million.
During the three months ended September 30, 2021, 13,100 shares of common stock were issued as a result of the exercise of warrants with proceeds of $0.03 million.
On June 2, 2021, the Company issued 5,895,973 shares of common stock to the Sellers in connection with the Acquisition (See Note 9).
On June 3, 2021, the Company granted restricted stock awards under the Plan described below to certain directors and officers of the Company for an aggregate of 216,800 shares of common stock valued at $0.6 million, the value of the stock on the date of grant. All shares were immediately vested.
On August 4, 2020, the Company sold 1,111,200 shares of common stock for total gross proceeds of $10,000,800.$10.0 million. After deducting the underwriting commission and expenses, the Company received net proceeds of $8,602,166.$8.6 million.
On August 4, 2020, the Company issued 250,000 shares of common stock to SBCCSmall Business Community Capital II, L.P. upon conversion of its warrant (see Note 17).a warrant.
28
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
Equity Incentive Plan
Effective as of July 30, 2020, the Company established the 1847 Goedeker Inc. 2020 Equity Incentive Plan (“Plan”(the “Plan”). and reserved 555,000 shares of common stock for issuance under the Plan. The Plan was approved by the Company’s board of directors and stockholders on April 21, 2020. On April 9, 2021, the board of directors approved an amendment to the Plan to increase the number of shares of common Stock reserved for issuance under the Plan from 555,000 to 1,000,000 shares. Such increase was approved by the Company’s stockholders effective as of May 13, 2021.
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 numberOn July 28, 2021, the Company issued an option for the purchase of 150,000 shares of common stock that may be issued pursuant to awards granted under the Plan is 555,000 shares.with a total fair value of $0.3 million. As of September 30, 2020, there were 483,1582021, no shares granted and 71,842 shares remainingof common stock available for issuance under the Plan.
During the three months ended September 30,third and fourth quarters of 2020, the Company issued options for the purchase of 483,158555,000 shares of common stock with a total compensation expensefair value of $1,601,064.$1.8 million. The Company recorded stock option expense related to these options of $281,194$0.1 million and $0.9 million for the three and nine months ended September 30, 2021, respectively, and $0.3 million for the three and nine months ended September 30, 2020. The remaining compensation expense of $1,319,870$1.0 million will be recognized over the remaining vesting periods.
The following table presents activity relating to stock options forperiod of 24 months. During the nine months ended September 30, 2020:2021, the Company issued 216,800 shares of restricted stock to directors and officers valued at $0.6 million.
| Shares | Weighted Average Exercise Price | Weighted Average Contractual Term in Years | ||||||||||
| Outstanding at December 31, 2019 | - | $ | - | - | ||||||||
| Granted | 483,158 | 9.00 | 6.25 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited / Cancelled / Expired | - | - | - | |||||||||
| Outstanding at September 30, 2020 | 483,158 | $ | 9.00 | 6.25 | ||||||||
| Exercisable at September 30, 2020 | 65,790 | $ | 9.00 | 6.25 | ||||||||
As of September 30, 2020, vested outstanding stock options had no intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock.
The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period. The following assumptions were used to calculate stock-based compensation expense for options granted during the nine monthsthree and nine-months ended September 30, 2020:2021:
| Volatility | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Expected term |
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
The following table sets forth stock-based compensation expensepresents activity relating to stock options for the threenine months ended September 30, 2020, the remainder of 2020, and the four succeeding years:2021:
| Three months ended September 30, 2020 | $ | 281,194 | ||
| Remainder of 2020 | 117,714 | |||
| 2021 | 483,185 | |||
| 2022 | 462,024 | |||
| 2023 | 367,198 | |||
| 2024 | 136,742 | |||
| Total stock-based compensation | $ | 1,848,056 |
| Shares | Weighted Average Exercise Price | Weighted Average Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2021 | 555,000 | $ | 9.00 | 9 | ||||||||
| Granted | 150,000 | 3.10 | 10 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited / Cancelled / Expired | (131,579 | ) | - | - | ||||||||
| Outstanding at September 30, 2021 | 573,421 | $ | 7.74 | 8.85 | ||||||||
| Exercisable at September 30, 2021 | 204,540 | $ | 9.00 | 8.85 | ||||||||
As of September 30, 2021, vested outstanding stock options had no intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock.
The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period.
Warrants
On August 4, 2020, the Company issued warrants for the purchase of 55,560 shares of common stock to affiliates of the representative in the IPO. The warrants are 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. The warrants will result in a total compensation expense of $168,736 to be recognized over the vesting period. As of the period ended September 30, 2020, the Company had recognized compensation expense of $54,960. The remaining compensation expense of $113,774 will be recognized over the remaining vesting period.
On April 5, 2019, the Company issued to SBCC Small Business Community Capital II, L.P. 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. SBCC Small Business Community Capital II, L.P. exercised this warrant for the purchase of 250,000 shares of common stock on August 4, 2020.
On August 4, 2020, the Company issued warrants for the purchase of 55,560 shares of common stock to affiliates of the representative in its initial public offering. These warrants are exercisable at any time and from time to time, in whole or in part, beginning on January 26, 2021 until July 30, 2025, an exercise price of $11.25 per share (subject to customary adjustments), and may also be exercised on a cashless basis if at any time during the term of the warrants the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement.
29
On March 19, 2021, the Company issued four-year warrants to purchase an aggregate of 400,000 shares of common stock to two investors. These warrants are exercisable at any time and from time to time, in whole or in part, at an exercise price of $12.00 per share (subject to customary adjustments), and may also be exercised on a cashless basis if at any time during the term of the warrants the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement.
On June 2, 2021, the Company issued warrants to purchase 93,111,111 shares of common stock in the public offering. These warrants are exercisable immediately and expire five years from the date of issuance. The warrants have an exercise price of $2.25 per share, subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock or upon any distributions of assets, including cash, stock or other property to stockholders, and may also be exercised on a cashless basis if at any time during the term of the warrants the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement.
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
The following table presents activity relating to the warrants for the nine months ended September 30, 2020:2021:
| Shares | Weighted Average Exercise Price | Weighted Average Contractual Term in Years | ||||||||||
| Outstanding at December 31, 2019 | - | $ | - | - | ||||||||
| Granted | 55,560 | 11.25 | 4.83 | |||||||||
| Exercised | - | - | - | |||||||||
| Cancelled / Expired | - | - | - | |||||||||
| Outstanding at September 30, 2020 | 55,560 | $ | 11.25 | 4.83 | ||||||||
| Exercisable at September 30, 2020 | - | $ | - | - | ||||||||
| Shares | Weighted Average Exercise Price | Weighted Average Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2021 | 55,560 | $ | 11.25 | 5.00 | ||||||||
| Granted | 93,511,111 | 25.29 | 5.00 | |||||||||
| Exercised | (1,052,248 | ) | 2.25 | - | ||||||||
| Cancelled / Expired | - | - | - | |||||||||
| Outstanding at September 30, 2021 | 92,514,423 | $ | 2.30 | 4.67 | ||||||||
NOTE 15—COMMITMENTS AND CONTINGENCIES
The Company recognizes stock issuance expense for the warrants on a straight-line basis over the term of the warrants. The service period is generally the vesting period. The following assumptions were used to calculate stock issuance expense for the nine months ended September 30, 2020:
NOTE 17—SUBSEQUENT EVENTS
In accordance with ASC 855-10, the Company has analyzed its operations subsequent to September 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.
Securities Purchase Agreement
On October 20, 2020,January 18, 2019, the Company entered into a securitiesan asset purchase agreement with Appliances Connection Inc., a newly-formed wholly owned subsidiary of the Company (the “Buyer”), 1 Stop Electronics Center, Inc., Gold Coast Appliances, Inc., Superior Deals Inc., Joe’s Appliances LLCGoedeker, Steve Goedeker and YF Logistics LLC (collectively, the “Companies”) and the other parties signatory thereto (the “Sellers”),Mike Goedeker, pursuant to which on April 5, 2019 the Buyer agreed to acquireCompany acquired substantially all of the issuedassets of Goedeker used in its retail appliance and outstanding capital stock or other equity securitiesfurniture business (the “Goedeker Business”).
Pursuant to the asset purchase agreement, Goedeker entitled to receive an earn out payment of $0.2 million if the EBITDA (as defined in the asset purchase agreement) of the CompaniesGoedeker Business for the trailing twelve (12) month period from April 5, 2022 is $2.5 million or greater, and may be entitled to receive a partial earn out payment if the Sellers for an aggregate purchase price of $210,000,000, subject to adjustment as described below. The purchase price consists of (i) $168,000,000 in cash, (ii) 1,222,239 sharesEBITDA of the Company’s common stock,Goedeker Business is less than $2.5 million but greater than $1.5 million. The Company expects to meet this target and 1,111,094 sharesadjusted the contingent note payable in the condensed consolidated balance sheet to the present value of the Company’s series A preferred stock, collectively having a stated value that is equal to $21,000,000, and (iii) a number of shares of the Company’s series A-1 preferred stock that is equal to (A) $21,000,000 divided by (B) the average of the closing price of the shares of the Company’s common stock (as reported on NYSE American) for the 20 trading days immediately preceding the 3rd trading day prior to the closing date of the securities purchase agreement. The terms of the series A preferred stock and series A-1 preferred stock have not yet been determined.amount due.
The purchase price is subject to a closing net working capital adjustment provision. Under this provision, the Sellers shall deliver to the Buyer at least one day prior to the closing of the securities purchase agreement a statement setting forth their good faith estimate of the net working capital of the Companies. If such estimated net working capital exceeds a target net working capital of -$15,476,941, then within five (5) days the Buyer shall make a cash payment to the Sellers that is equal to such excess. If such target net working capital exceeds such estimated net working capital, then either (i) if finally determined at the closing, the cash portion of the purchase price shall be decreased by such excess or (ii) within 5 days of the closing, the Sellers shall make a cash payment to the Buyer that is equal to such excess.
30
1847 GOEDEKER INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
The purchase price is also subject to a post-closing net working capital adjustment provision. On or before the 75th day following the closing of the securities purchase agreement, the Buyer shall deliver to the Sellers a statement setting forth its calculation of the net working capital. If such net working capital exceeds the estimated net working capital referred to above, then within five (5) days after the final determination of such net working capital the Buyer shall send payment by wire transfer of immediately available funds to the Sellers in an amount equal to such excess. If the estimated net working capital exceeds such net working capital, then within five (5) days the Sellers shall pay to the Buyer in cash an amount equal to such excess.
The cash portion of the purchase price will also be (i) decreased by (A) the amount of any outstanding unpaid indebtedness of the Companies (other than trade debt) existing as of the closing date and (B) any transaction expenses, and (ii) increased by the amount of cash or cash equivalents held by, or on the books of, the Companies as of the closing date, if any, that is in excess of $850,000.
Upon execution of the securities purchase agreement, the Buyer paid a deposit in the amount of $100,000, which will be credited towards the cash portion of the purchase price at closing.
The securities purchase agreement contains customary representations, warranties and covenants, including a covenant that the Sellers will not compete with the business of 1 Stop Electronics Center, Inc. as of the closing date for a period of two (2) years following closing, as well as customary closing conditions, including, without limitation, the expiration or termination of any waiting period applicable to the consummation of the transaction under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended; the receipt of all authorizations, consents and approvals of all governmental authorities or agencies; the release of any security interests; the Buyer obtaining the requisite acquisition financing; and delivery of all opinions and documents required for the transfer of the securities of the Companies to the Buyer.
Repayment of PPP Loan
On November 2, 2020, the Company repaid the balance of the PPP loan (see Note 11).
31
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition. The following financial information is derived from our condensed consolidated financial statements and should be read in conjunction with such condensed consolidated financial statements and notes thereto set forth elsewhere herein.
All periods presented on or prior to April 5, 2019 representUse of Terms
Except as otherwise indicated by the operations of Goedeker (as defined below), our predecessor. Unless otherwise specified, all results of operations informationcontext and for the threepurposes of this report only, references in this report to “we,” “us,” “our” and nine months ended September 30, 2019 reflects the full periods.
References“Company” are to “Successor” refer1847 Goedeker Inc., a Delaware corporation, and its consolidated subsidiaries, Appliances Connection Inc., a Delaware corporation (“ACI”), AC Gallery Inc., a Delaware corporation (“AC Gallery”), 1 Stop Electronics Center, Inc., a New York corporation (“1 Stop”), Gold Coast Appliances, Inc., a New York corporation (“Gold Coast”), Superior Deals Inc., a New York corporation (“Superior Deals”), Joe’s Appliances LLC, a New York limited liability company (“Joe’s Appliances”), and YF Logistics LLC, a New Jersey limited liability company (“YF Logistics”). 1 Stop, Gold Coast, Superior Deals, Joe’s Appliances and YF Logistics are sometimes referred to the financial position and results of operations of the Company subsequent to April 5, 2019. References to “Predecessor” refer to the financial position and results of operations of Goedeker on and before April 5, 2019.herein as “Appliances Connection.”
Special Note Regarding Forward Looking Statements
This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| ● | the impact of the coronavirus pandemic on our | |
| ● | 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 headingItem 1A “Risk Factors” included in our Registration StatementAnnual Report on Form S-1, originally filed with10-K for the Securities and Exchange Commission on Augustyear ended December 31, 2020 as amended, and elsewhere in this report. 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 report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Overview
1847 Goedeker Inc. (“we,” “us,” “our” or the “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”). On April 5, 2019, we acquired substantially all of the assets of Goedeker. As a result of this transaction, we acquired the former business of Goedeker and continue to operate this business. All discussions in this report regarding our business prior to the acquisition reflect the business of Goedeker, our predecessor company. Prior to our acquisition of substantially all of the assets of Goedeker, we had no operations other than operations relating to our incorporation and organization.
32
The Company is a one-stopOverview
We operate an industry leading e-commerce destination for home furnishings, including appliances, furniture, and home goodsgoods. Through our June 2021 acquisition of Appliances Connection, we created one of the largest pure-play online retailers of household appliances in the United States. With warehouse fulfillment centers in the Northeast and related products. Since our foundingMidwest, as well as showrooms in 1951, we have evolved from a local brick and mortar operation serving theBrooklyn, New York, St. Louis, metro area to a large nationwide omnichannel retailer that offersMissouri and Largo, Florida, we offer one-stop shopping for the leadingnational and global 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 categorycarry many household name-brands, including Bosch, Cafe, Frigidaire Pro, Whirlpool, LG, and product features, providing visitors to the site an easy to navigate shopping experience.Samsung, and also carry many major luxury appliance brands such as Miele, Thermador, La Cornue, Dacor, Ilve, Jenn-Air and Viking, among others. We also sell furniture, fitness equipment, plumbing fixtures, televisions, outdoor appliances, and patio furniture, as well as commercial appliances for builder and business clients.
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 DecemberStarting in late 2019, a novel strain of the coronavirus, was reportedor COVID-19, began to have surfaced in Wuhan, China. The virus has sincerapidly spread to over 150 countriesaround the world 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 institutingat various times instituted quarantines, restrictions on travel, “stay at home” rules, social distancing measures and restrictions on the types of businesses that maycould 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 asrestrictions in Missouri, our showroom were forced to close. However,was closed from April through June of 2020, but 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. Since over 90%most of our sales are completed online and our call center and warehouse and distribution operations continued to operate, the restrictions put in place havein response to the pandemic did not yet had a materially negative impact on our operations. 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.
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, andHowever, 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.
IfThe global deterioration in economic conditions, which may have an adverse impact on discretionary consumer spending, could also impact our business. For instance, consumer spending may be negatively impacted by general macroeconomic conditions, including a rise in unemployment, and decreased consumer confidence resulting from the current pacepandemic. Changing consumer behaviors as a result of the pandemic cannot be slowed andmay also have a material impact on revenue.
Furthermore, the spread of the virus is not contained, our business operations could be further delayed or interrupted. We expect that governmentCOVID-19 has adversely impacted global economic activity and health authoritieshas contributed to significant volatility and negative pressure in financial markets. The pandemic has resulted, and may announce new or extend existing restrictions,continue to result, in a significant disruption of global financial markets, 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 affectreduce our ability to operate our business and resultaccess capital in additional costs.the future, which could negatively affect liquidity.
The extent to which the pandemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted as of the date of this report, including the effectiveness of vaccines and other treatments for COVID-19, and other new information that may emerge concerning the severity of the pandemic and steps taken to contain the pandemic or treat its impact, among others. Nevertheless, the pandemic and the current financial, economic and capital markets environment, and future developments in the global supply chain and other areas present material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
33
Securities Purchase Agreement
On October 20, 2020, the Company entered into a securities purchase agreement with Appliances Connection Inc., a newly-formed wholly owned subsidiary of the Company (the “Buyer”), 1 Stop Electronics Center, Inc., Gold Coast Appliances, Inc., Superior Deals Inc., Joe’s Appliances LLC and YF Logistics LLC (collectively, the “Companies”) and the other parties signatory thereto (the “Sellers”), pursuant to which the Buyer agreed to acquire all of the issued and outstanding capital stock or other equity securities of the Companies from the Sellers for an aggregate purchase price of $210,000,000, subject to adjustment as described below. The purchase price consists of (i) $168,000,000 in cash, (ii) 1,222,239 shares of the Company’s common stock, and 1,111,094 shares of the Company’s series A preferred stock, collectively having a stated value that is equal to $21,000,000, and (iii) a number of shares of the Company’s series A-1 preferred stock that is equal to (A) $21,000,000 divided by (B) the average of the closing price of the shares of the Company’s common stock (as reported on NYSE American) for the 20 trading days immediately preceding the 3rd trading day prior to the closing date of the securities purchase agreement.
The purchase price is subject to a closing net working capital adjustment provision. Under this provision, the Sellers shall deliver to the Buyer at least one day prior to the closing of the securities purchase agreement a statement setting forth their good faith estimate of the net working capital of the Companies. If such estimated net working capital exceeds a target net working capital of -$15,476,941, then within five (5) days the Buyer shall make a cash payment to the Sellers that is equal to such excess. If such target net working capital exceeds such estimated net working capital, then either (i) if finally determined at the closing, the cash portion of the purchase price shall be decreased by such excess or (ii) within 5 days of the closing, the Sellers shall make a cash payment to the Buyer that is equal to such excess.
The purchase price is also subject to a post-closing net working capital adjustment provision. On or before the 75th day following the closing of the securities purchase agreement, the Buyer shall deliver to the Sellers a statement setting forth its calculation of the net working capital. If such net working capital exceeds the estimated net working capital referred to above, then within five (5) days after the final determination of such net working capital the Buyer shall send payment by wire transfer of immediately available funds to the Sellers in an amount equal to such excess. If the estimated net working capital exceeds such net working capital, then within five (5) days the Sellers shall pay to the Buyer in cash an amount equal to such excess.
The cash portion of the purchase price will also be (i) decreased by (A) the amount of any outstanding unpaid indebtedness of the Companies (other than trade debt) existing as of the closing date and (B) any transaction expenses, and (ii) increased by the amount of cash or cash equivalents held by, or on the books of, the Companies as of the closing date, if any, that is in excess of $850,000.
Upon execution of the securities purchase agreement, the Buyer paid a deposit in the amount of $100,000, which will be credited towards the cash portion of the purchase price at closing.
The securities purchase agreement contains customary representations, warranties and covenants, including a covenant that the Sellers will not compete with the business of 1 Stop Electronics Center, Inc. as of the closing date for a period of two (2) years following closing, as well as customary closing conditions, including, without limitation, the expiration or termination of any waiting period applicable to the consummation of the transaction under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended; the receipt of all authorizations, consents and approvals of all governmental authorities or agencies; the release of any security interests; the Buyer obtaining the requisite acquisition financing; and delivery of all opinions and documents required for the transfer of the securities of the Companies to the Buyer.
Repayment of PPP Loan
On November 2, 2020, the Company repaid the balance of the Paycheck Protection Program loan described below.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following factors:
34
Key Financial Operating Metrics
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Site Sessions (in millions) | 2.7 | 1.5 | 7.3 | 4.8 | ||||||||||||
| Order History | $ | 36,963,583 | $ | 15,236,006 | $ | 82,095,491 | $ | 44,989,811 | ||||||||
| Days from Order to Shipment (Average) | 40 | 24 | 33 | 22 | ||||||||||||
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 to approximately 2.7 million in the quarter ended September 30, 2020, as compared to approximately 1.5 million in the quarter ended September 30, 2019. In addition, our site sessions increased to approximately 7.3 million in the nine months ended September 30, 2020, as compared to approximately 4.8 million in the nine months ended September 30, 2019. 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 report.
These increased site sessions resulted in three-year highs for orders in the quarter ended September 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 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 (as defined below) will have a dramatically positive impact on accelerating our growth rate and profitability.
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 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 of 1933, as amended, 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.
35
We will remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the fiscal year following the fifth anniversary of our initial public offering, (ii) the last day of the first fiscal year in which our total annual gross revenues exceed $1are $1.07 billion or more, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (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)(iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
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; | |
| ● | market conditions and our market position; and | |
| ● | our ability to successfully integrate the operations of Appliances Connection with our business. |
Notably, due to the impact of the global pandemic and associated supply chain crisis, our freight costs have increased materially as a proportion of sales, putting downward pressure on our gross margins. Over the course of 2021, our freight costs as percentage of sales increased from 7.4% to 8.9%, or 150 bps, on a consolidated proforma basis, and from 13.7% to 16.6%, or 290 bps, excluding Appliance Connection. Management believes that this situation is temporary in nature and will revert once the supply chain situation improves.
Results of Operations
Comparison of Three Months Ended September 30, 20202021 and 20192020
The following table sets forth key components of our results of operations for the three months ended September 30, 20202021 and 2019,2020, in dollars and as a percentage of our net sales.
Three Months Ended September 30, 2020 (As Restated) | Three Months Ended September 30, 2019 (As Restated) | |||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||
| Products sales, net | $ | 13,435,095 | 100.0 | % | $ | 12,202,271 | 100.0 | % | ||||||||
| Cost of goods sold | 11,264,569 | 83.8 | % | 10,183,711 | 83.5 | % | ||||||||||
| Gross profit | 2,170,526 | 16.2 | % | 2,018,560 | 16.5 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| Personnel | 2,161,929 | 16.1 | % | 989,318 | 8.1 | % | ||||||||||
| Advertising | 1,432,834 | 10.7 | % | 696,771 | 5.7 | % | ||||||||||
| Bank and credit card fees | 574,808 | 4.3 | % | 279,412 | 2.3 | % | ||||||||||
| Depreciation and amortization | 93,283 | 0.7 | % | 11,044 | 0.1 | % | ||||||||||
| General and administrative | 1,450,603 | 10.8 | % | 1,215,716 | 10.0 | % | ||||||||||
| Total operating expenses | 5,713,457 | 42.5 | % | 3,192,261 | 26.2 | % | ||||||||||
| Loss from operations | (3,542,931 | ) | (26.4 | )% | (1,173,701 | ) | (9.6 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | 1,418 | 0.0 | % | - | - | |||||||||||
| Financing costs | (488,460 | ) | (3.6 | )% | (165,097 | ) | (1.4 | )% | ||||||||
| Interest expense | (229,312 | ) | (1.7 | )% | (210,572 | ) | (1.7 | )% | ||||||||
| Loss on extinguishment of debt | (807,239 | ) | (6.0 | )% | - | - | ||||||||||
| Change in fair value of warrant liability | - | - | 54,500 | 0.4 | % | |||||||||||
| Other income (expense) | 1,657 | 0.0 | % | (35,388 | ) | (0.3 | )% | |||||||||
| Total other income (expense) | (1,521,936 | ) | (11.3 | )% | (356,557 | ) | (2.9 | )% | ||||||||
| Net loss before income taxes | (5,064,867 | ) | (37.7 | )% | (1,530,258 | ) | (12.5 | )% | ||||||||
| Income tax benefit | 838,176 | 6.2 | % | - | - | |||||||||||
| Net loss | $ | (4,226,691 | ) | (31.5 | )% | $ | (1,530,258 | ) | (12.5 | )% | ||||||
Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | |||||||||||||||
Amount (in thousands) | % of Net Sales | Amount (in thousands) | % of Net Sales | |||||||||||||
| Products sales, net | $ | 141,867 | 100.0 | % | $ | 13,435 | 100.0 | % | ||||||||
| Cost of goods sold | 110,495 | 77.9 | % | 11,265 | 83.8 | % | ||||||||||
| Gross profit | 31,372 | 22.1 | % | 2,170 | 16.2 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| Personnel | 8,547 | 6.0 | % | 2,162 | 16.1 | % | ||||||||||
| Advertising | 3,715 | 2.6 | % | 1,433 | 10.7 | % | ||||||||||
| Bank and credit card fees | 4,918 | 3.5 | % | 575 | 4.3 | % | ||||||||||
| Depreciation and amortization | 3,610 | 2.5 | % | 93 | 0.7 | % | ||||||||||
| Acquisition expenses | 62 | - | - | - | ||||||||||||
| General and administrative | 4,018 | 2.8 | % | 1,451 | 10.8 | % | ||||||||||
| Total operating expenses | 24,870 | 17.5 | % | 5,714 | 42.5 | % | ||||||||||
| Income (loss) from operations | 6,502 | 4.6 | % | (3,544 | ) | (26.4 | )% | |||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | 34 | - | 1 | - | ||||||||||||
| Financing costs | (200 | ) | (0.1 | )% | (488 | ) | (3.6 | )% | ||||||||
| Interest expense | (899 | ) | (0.6 | )% | (229 | ) | (1.7 | )% | ||||||||
| Loss on extinguishment of debt | - | - | (807 | ) | (6.0 | )% | ||||||||||
| Other income | 8 | - | 2 | - | ||||||||||||
| Total other income (expense) | (1,057 | ) | (0.7 | )% | (1,521 | ) | (11.3 | )% | ||||||||
| Net income (loss) before income taxes | 5,445 | 3.8 | % | (5,065 | ) | (37.7 | )% | |||||||||
| Income tax benefit (expense) | (2,129 | ) | (1.5 | )% | 838 | 6.2 | % | |||||||||
| Net income (loss) | $ | 3,316 | 2.3 | % | $ | (4,227 | ) | (31.5 | )% | |||||||
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 $13,435,095$141.9 million for the three months ended September 30, 2021, as compared to $13.4 million for the three months ended September 30, 2020, as compared to $12,202,271 for the three months ended September 30, 2019, an increase of $1,232,824,$128.4 million, or 10.1%956.0%. The increase is primarily due to increasedour June 2021 acquisition of Appliances Connection. Excluding Appliances Connection, our product sales volumedecreased by $0.9 million, or 6.7%. This decrease is the result of reduced advertising spend to meet appliance and furniture demand resulting from increaseddrive traffic to the Goedeker website as we develop a company-wide advertising which has a direct impact on customer orders and shipped sales.program.
During the three months ended September 30, 2020,2021, we experienced delays in getting products from manufacturers whose production facilities were closed or operating at reduced capacity because ofdue to continued supply chain issues related to the coronavirusCOVID-19 pandemic, which resulted in some cancellations of some customer orders. For the three months ended September 30, 2020, we estimate that cancellations caused by shipping delays approximated $15.9 million based on the historical ratio of shipped sales to customer orders of approximately 79% to the actual ratio of approximately 37% in the three months ended September 30, 2020.
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.
36
Our revenue by sales type is as follows:follows (in thousands):
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Appliance sales | $ | 8,991,853 | 66.9 | % | $ | 10,086,490 | 82.7 | % | ||||||||
| Furniture sales | 3,554,704 | 26.5 | % | 1,398,843 | 11.5 | % | ||||||||||
| Other sales | 888,538 | 6.6 | % | 716,938 | 5.9 | % | ||||||||||
| Total | $ | 13,435,095 | 100.0 | % | $ | 12,202,271 | 100.0 | % | ||||||||
Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Appliance sales | $ | 130,837 | 92.2 | % | $ | 8,992 | 66.9 | % | ||||||||
| Furniture sales | 5,880 | 4.2 | % | 3,555 | 26.5 | % | ||||||||||
| Other sales | 5,150 | 3.6 | % | 888 | 6.6 | % | ||||||||||
| Total | $ | 141,867 | 100.0 | % | $ | 13,435 | 100.0 | % | ||||||||
The percentage of furniture sales declined in the 2021 period as compared to the 2020 period as furniture sales comprised a lower percentage of Appliances Connection’s sales (2.9%) as compared to the total Company’s (4.1%).
Cost of goods sold. Our costcosts of goods sold consistsare comprised of product costs and freight costs. Product costs represent the costamount we pay the manufacturer for their product. We negotiate special terms and pricing with the manufacturer, which are generally based on the amount of purchased merchandise plusproducts we purchase. Periodically, manufacturers offer special pricing for purchasing a certain volume of products at one time. Funding might also be offered to support our marketing and advertising efforts. Freight is the cost of delivering merchandise and, where applicable, installation, net of promotional rebates and other incentives received from vendors.products to customers.. Our cost of goods sold was $11,264,569$110.5 million for the three months ended September 30, 2021, as compared to $11.3 million for the three months ended September 30, 2020, as compared to $10,183,711 for the three months ended September 30, 2019, an increase of $1,080,858,$99.2 million, or 10.6%880.9%. Such increase was due to theExcluding Appliances Connection, our cost of goods sold increased by $0.2 million, or 1.8%, driven by a $0.2 million, or 12.5%, increase in sales volume.freight costs as the result of the nationwide shortage of shipping capacity, resulting in higher rates. As a percentage of net sales, cost of goods sold was 77.9% and 83.8% for the three months ended September 30, 2021 and 2020, respectively. Such decrease was due to impact of the acquisition of Appliances Connection, which has a lower cost of goods sold as a percentage of revenue than the Company. Excluding Appliances Connection, our cost of goods sold as a percentage of net sales increased from 83.5% in83.8% to 91.4%. Product costs as a percentage of net sales for the 2019 periodthree months ended September 30, 2021 was 74.8% compared to 83.8% in70.1% for the 2020 period.three months ended September 30, 2020. The increase in product cost is attributablethe result of reduced vendor rebates because of reduced volume. Freight costs as a percentage of net sales was 16.6% for the three months ended September 30, 2021 compared to product mix13.8% for the three months ended September 30, 2020.
Gross profit and other normal variables.gross margin. As a result of the foregoing, our gross profit was $31.4 million for the three months ended September 30, 2021, as compared to $2.2 million for the three months ended September 30, 2020, an increase of $29.2 million, or 1,345.7%. Our gross margin (gross profit as a percentage of net sales) was 22.1% and 16.2% for the three months ended September 30, 2021 and 2020, respectively. Such increases were primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, our gross profit decreased by $1.1 million, or 50.4%, and our gross margin declined 16.2% to 8.6%, or 760 bps, driven by a reduced vendor rebates and a significant increase in shipping costs.
Personnel expenses. Personnel expenses include employee salaries and bonuses plus related payroll taxes. It also includes health insurance premiums, 401(k) contributions, training costs and in 2020 stock compensation expense. Our personnel expenses were $2,161,929$8.5 million for the three months ended September 30, 2021, as compared to $2.2 million for the three months ended September 30, 2020, as compared to $989,318an increase of $6.4 million, or 295.3%. As a percentage of net sales, personnel expenses were 6.0% and 16.1% for the three months ended September 30, 2019, an increase2021 and 2020, respectively. Such increases were primarily due to the impact of $1,172,611,the acquisition of Appliances Connection. Excluding Appliances Connection, our personnel expenses increased by $1.6 million, or 118.5%71.9%, and our personnel expenses as a percentage of net sales increased to 29.6%. TheSuch increase is the result of hiring additional senioraccruing the severance payments due a former officer and accruals for a management and support staff needed because of increased customer demand for our products. During the quarter, we also incurred stock compensation expenses of $281,194. Beginning in the second quarter of 2020, we had a dramatic increase in cancellations of customer orders, which were primarily related to the lack of product availability. We hired a number of temporary employees to process cancellations and address the related customer service issues. We are reducing the number of temporary employees but expect we will have a number of them through the fourth quarter.bonus.
Advertising expenses. Advertising expenses include the cost of marketing our products and primarily include online search engine expenses. Our advertising expenses were $1,432,834$3.7 million for the three months ended September 30, 2021, as compared to $1.4 million for the three months ended September 30, 2020, as compared to $696,771an increase of $2.3 million, or 159.2%. As a percentage of net sales, advertising expenses were 2.6% and 10.7% for the three months ended September 30, 2019, an increase2021 and 2020, respectively. Such increases were primarily due to the impact of $736,062,the acquisition of Appliances Connection. Excluding Appliances Connection, our advertising expenses decreased by $0.6 million, or 105.6%.40.8%, and our advertising expenses as a percentage of net sales decreased from 10.7% in the 2020 period to 6.8% in the 2021 period. The increasedecrease relates to an increase inour efforts at improving the efficiency of our company-wide advertising spending to drive traffic to our website.program.
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.customers and to third party sellers on whose websites we sell parts and other small items. Our bank and credit card fees were $574,808$4.9 million for the three months ended September 30, 2021, as compared to $0.6 million for the three months ended September 30, 2020, as compared to $279,412an increase of $4.3 million, or 755.3%. As a percentage of net sales, bank and credit card fees were 3.5% and 4.3% for the three months ended September 30, 2019, an increase of $295,396 or 105.7%.2021 and 2020, respectively. These fees are based on customer orders that are paid with a credit card (substantially all orders), so the increase was largely due to the increase in customer orders. We pay a credit card fee for each order, regardless of whether that order is shipped or cancelled by customer. Excluding Appliances Connection, our bank and credit card fees decreased by $0.5 million, or 87.1%, and our bank and credit card fees as a percentage of net sales decreased to 0.6%. On July 29, 2021, we adopted an authorization model for charging customer credit cards rather than charging at the time of purchase. This change resulted in lower credit fees.
Acquisition Expenses. During the three months ended September 30, 2021, we incurred expenses related to the acquisitions of Appliances Connection and Appliance Gallery in the amount of $0.06 million.
Depreciation and amortization. Depreciation and amortization was $3.6 million, or 2.5% of net sales, for the three months ended September 30, 2021, as compared to $0.09 million, or 0.7% of net sales, for the three months ended September 30, 2020. The increase is the result of amortizing the preliminary estimate of intangible assets acquired in the Appliances Connection acquisition.
General and administrative expenses. Our general and administrative expenses consist primarily of professional advisor fees, bad debts, rent expense, insurance, unremitted sales tax, and other expenses incurred in connection with general operations. Our general and administrative expenses were $1,450,603$4.0 million for the three months ended September 30, 2021, as compared to $1.5 million for the three months ended September 30, 2020, as compared to $1,215,716an increase of $2.6 million, or 176.9%. As a percentage of net sales, general and administrative expenses were 2.8% and 10.8% for the three months ended September 30, 2019,2021 and 2020, respectively. Such increases were primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, our general and administrative expenses increased by $0.8 million, or 55.6%. The increase was largely due to increased directors and officers insurance expenses, fees to our independent directors, and legal, audit and other professional fees in connection with becoming a public company in August 2020.
Total other income (expense). We had $1.1 million in total other expense, net, for the three months ended September 30, 2021, as compared to total other expense, net, of $1.5 million for the three months ended September 30, 2020. Total other expense, net, for the three months ended September 30, 2021 consisted primarily of interest expense of $0.9 million and financing costs of $0.2 million. Total other expense, net, for the three months ended September 30, 2020 consisted primarily of financing costs of $0.5 million, interest expense of $0.2 million and loss on extinguishment of debt of $0.8 million.
Income tax benefit (expense). We had an income tax expense of $2.1 million for the three months ended September 30, 2021, as compared to an income tax benefit $0.8 million for the three months ended September 30, 2020.
Net income (loss). As a result of the cumulative effect of the factors described above, we had net income of $3.3 million for the three months ended September 30, 2021, as compared to a net loss of $4.2 million for the three months ended September 30, 2020, a net increase of $7.5 million. Such increase was primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, net loss increased by $7.6 million, or 180.2%.
Comparison of Nine Months Ended September 30, 2021 and 2020
The following table sets forth key components of our results of operations for the nine months ended September 30, 2021 and 2020, in dollars and as a percentage of our net sales.
Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | |||||||||||||||
Amount (in thousands) | % of Net Sales | Amount (in thousands) | % of Net Sales | |||||||||||||
| Products sales, net | $ | 219,637 | 100.0 | % | $ | 38,397 | 100.0 | % | ||||||||
| Cost of goods sold | 172,581 | 78.6 | % | 32,061 | 83.5 | % | ||||||||||
| Gross profit | 47,056 | 21.4 | % | 6,336 | 16.5 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| Personnel | 15,300 | 7.0 | % | 4,514 | 11.8 | % | ||||||||||
| Advertising | 7,730 | 3.5 | % | 2,991 | 7.8 | % | ||||||||||
| Bank and credit card fees | 7,546 | 3.4 | % | 1,274 | 3.3 | % | ||||||||||
| Depreciation and amortization | 3,908 | 1.8 | % | 277 | 0.7 | % | ||||||||||
| Acquisition expenses | 865 | 0.4 | % | - | - | |||||||||||
| Loss on abandonment of right of use asset | 1,437 | 0.7 | % | - | - | |||||||||||
| General and administrative | 8,311 | 3.8 | % | 4,400 | 11.5 | % | ||||||||||
| Total operating expenses | 45,097 | 20.5 | % | 13,456 | 35.0 | % | ||||||||||
| Income (loss) from operations | 1,959 | 0.9 | % | (7,120 | ) | (18.5 | )% | |||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | 57 | - | 2 | - | ||||||||||||
| Financing costs | (280 | ) | (0.1 | )% | (758 | ) | (0.2 | )% | ||||||||
| Interest expense | (2,070 | ) | (0.9 | )% | (787 | ) | (2.0 | )% | ||||||||
| Loss on extinguishment of debt | (1,748 | ) | (0.8 | )% | (1,756 | ) | (4.6 | )% | ||||||||
| Write-off of acquisition receivable | - | - | (809 | ) | (2.1 | )% | ||||||||||
| Change in fair value of warrant liability | - | - | (2,128 | ) | (5.5 | )% | ||||||||||
| Other income | 19 | - | 7 | - | ||||||||||||
| Total other income (expense) | (4,022 | ) | (1.8 | )% | (6,229 | ) | (16.2 | )% | ||||||||
| Net loss before income taxes | (2,063 | ) | (0.9 | )% | (13,349 | ) | (34.8 | )% | ||||||||
| Income tax benefit | 5,919 | 2.7 | % | 1,962 | 5.1 | % | ||||||||||
| Net income (loss) | $ | 3,856 | 1.8 | % | $ | (11,387 | ) | (29.7 | )% | |||||||
Product sales, net. Our product sales were $219.6 million for the nine months ended September 30, 2021, which included $177.1 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to $38.4 million for the nine months ended September 30, 2020, an increase of $234,887,$181.2 million, or 19.3%472.0%. Excluding Appliances Connection, our product sales increased by $4.1 million, or 10.8%. This increase is due to increased advertising is the first six months that drove traffic to our website.
During the nine months ended September 30, 2021, we experienced delays in getting products from manufacturers due to continued supply chain issues related to the COVID-19 pandemic, which resulted in cancellations of some customer orders.
Our revenue by sales type is as follows (in thousands):
Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Appliance sales | $ | 197,416 | 89.9 | % | $ | 28,327 | 73.8 | % | ||||||||
| Furniture sales | 14,393 | 6.5 | % | 7,605 | 19.8 | % | ||||||||||
| Other sales | 7,828 | 3.6 | % | 2,465 | 6.4 | % | ||||||||||
| Total | $ | 219,637 | 100.00 | % | $ | 38,397 | 100.00 | % | ||||||||
The primary increasespercentage of furniture sales declined in the 2021 period as compared to the 2020 period as furniture sales comprised a lower percentage of Appliances Connection’s sales (3.0%) compared to the Company’s (6.6%).
Cost of goods sold. Our cost of goods sold was $172.6 million for the nine months ended September 30, 2021, which included $136.7 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to $32.1 million for the nine months ended September 30, 2020, an increase of $140.5 million, or 438.3%. Excluding Appliances Connection, our cost of goods sold increased by $3.8 million, or 11.9%, as a result of an increase in product costs of $2.0 million, or 7.4%, and an increase in freight costs of $1.8 million, or 38.9%. As a percentage of net sales, cost of goods sold was 78.6% and 83.5% for the nine months ended September 30, 2021 and 2020, respectively. Such decrease was due to impact of the acquisition of Appliances Connection, which has a lower cost of goods sold than the Company. Excluding Appliances Connection, our cost of goods sold as a percentage of net sales increased from 83.5% to 84.4%. Product cost as a percentage of net sales for the for the nine months ended September 30, 2021 was 69.3% compared to 71.5% for the nine months ended September 30, 2020. Freight costs as a percentage of net sales were 15.0% for the for the nine months ended September 30, 2021 compared to 12.0% for the for the nine months ended September 30, 2020. The increase in freight costs is the result of the aforementioned nationwide shortage of shipping capacity.
Gross profit and gross margin. As a result of the foregoing, our gross profit was $47.1 million for the nine months ended September 30, 2021, which included $40.4 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to $6.3 million for the nine months ended September 30, 2020, an increase of $40.7 million, or 642.7%. Our gross margin (gross profit as a percentage of net sales) was 21.4% (or 15.6% excluding Appliances Connection) and 16.5% for the nine months ended September 30, 2021 and 2020, respectively. Such increase was primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, our gross profit increased by $0.3 million, or 4.8%, and our gross margin declined from 16.5% to 15.6% or 90 bps driven by an increase in shipping costs.
Personnel expenses. Our personnel expenses were $15.3 million for the nine months ended September 30, 2021, which included $6.8 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to $4.5 million for the nine months ended September 30, 2020, an increase of $10.8 million, or 238.9%. Excluding Appliances Connection, our personnel expenses increased by $4.0 million, or 88.7%. As a percentage of net sales, personnel expenses were 7.0% (or 20.0% excluding Appliances Connection) and 11.8% for the nine months ended September 30, 2021 and 2020, respectively. Such increase is the result of accruing the severance payments due a former officer and accruals for a management bonus plan. Additionally, during the 2021 period, we incurred stock compensation expenses of $0.9 million as compared to $0.3 million in the 2020 period.
Advertising expenses. Our advertising expenses were $7.7 million for the nine months ended September 30, 2021, which included $3.8 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to $3.0 million for the nine months ended September 30, 2020, an increase of $4.7 million, or 158.4%. Excluding Appliances Connection, our advertising expenses increased by $1.0 million, or 32.1%. As a percentage of net sales, advertising expenses were 3.5% (or 9.3% excluding Appliances Connection) and 7.8% for the nine months ended September 30, 2021 and 2020, respectively. The increase relates to an increase in advertising spending to drive traffic to our website during the first six months of the period, which declined in the three months ended September 30, 2021 as we reduced the Goedeker only advertising as part of our efforts at improving the efficiency of our company-wide advertising program.
Bank and credit card fees. Our bank and credit card fees were $7.5 million for the nine months ended September 30, 2021, which included $6.4 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to $1.3 million for the nine months ended September 30, 2020, an increase of $6.3 million, or 492.3%. Excluding Appliances Connection, our bank and credit card fees decreased by $0.1 million, or 11.4%. As a percentage of net sales, bank and credit card fees were 3.4% (or 2.7% excluding Appliances Connection) and 3.3% for the nine months ended September 30, 2021 and 2020, respectively. These fees are based on customer orders that are paid with a credit card (substantially all orders), so the increase was largely due to the increase in customer orders. We pay a credit card fee for each order, regardless of whether that order is shipped or cancelled by customer.
Depreciation and amortization. Depreciation and amortization was $3.9 million, or 1.8% of net sales, for the nine months ended September 30, 2021, which included $0.2 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to $0.3 million, or 0.7% of net sales, for the nine months ended September 30, 2020. The increase is the result of amortizing the preliminary estimate of intangible assets acquired in the Appliances Connection acquisition.
Acquisition expenses. During the nine months ended September 30, 2021, we incurred expenses related to the acquisitions of Appliances Connection and Appliance Gallery in the amount of $0.9 million.
Loss on abandonment of right of use asset. During the nine months ended September 30, 2021, we incurred a loss in the amount of $1.4 million related to the closure of our old warehouse and showroom and write-off of related leasehold improvements.
General and administrative expenses. Our general and administrative expenses were $8.3 million for the nine months ended September 30, 2021, which included $2.5 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to $4.4 million for the nine months ended September 30, 2020, an increase of $3.9 million, or 88.9%. Excluding Appliances Connection, our general and administrative expenses increased by $1.4 million, or 32.9%. As a percentage of net sales, general and administrative expenses were 3.8% (or 13.8% excluding Appliances Connection) and 11.5% for the nine months ended September 30, 2021 and 2020, respectively. The increase was largely due to increased directors and officers insurance expenses, fees to our independent directors, and legal, audit and other professional fees for audits,in connection with becoming a public company in August 2020, as well as consulting fees to upgrade our online shopping cart, fees for our Electronic Data Interchange initiative, and other consulting fees.
Total other income (expense). We had $1,521,936$4.0 million in total other expense, net, for the threenine months ended September 30, 2020,2021, which included other expense, net, of $0.2 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to total other expense, net, of $1,530,258$6.2 million for the threenine months ended September 30, 2019.2020. Total other expense, net, for the threenine months ended September 30, 2021 consisted primarily of interest expense of $2.1 million, financing costs of $0.3 million and a loss on extinguishment of debt of $1.7 million. Total other expense, net, for the nine months ended September 30, 2020 consisted primarily of financing costs of $488,460, interest expense of $229,312 and$0.8 million, loss on debt modification and extinguishment of debt$1.8 million, loss on acquisition working capital receivable of $807,239, offset by interest$0.8 million and change in the warrant liability of $2.1 million.
Income tax benefit. We had an income tax net benefit of $1,418 and other income of $1,657, while other expense, net,$5.9 million for the threenine months ended September 30, 2019 consisted2021, as compared to $2.0 million for the nine months ended September 30, 2020. The increase primarily arose from the elimination of financing coststhe allowance for the deferred tax asset. The acquisition of $165,097, interest expense of $210,572Appliances Connection on June 2, 2021 makes it more likely than not that the Company will be profitable, and other expense of $35,388, offset by a change in warrant liability of $54,500.will be able to utilize previously derived net operating losses.
Net lossincome (loss). As a result of the cumulative effect of the factors described above, we had net income of $3.9 million for the nine months ended September 30, 2021, which include a net income of $20.0 million from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to a net loss of $4,226,691 for the three months ended September 30, 2020, as compared to $1,530,258 for the three months ended September 30, 2019, an increase of $2,696,433, or 176.2%.
37
Comparison of Nine Months September 30, 2020 and 2019
The following table sets forth key components of our results of operations$11.4 million for the nine months ended September 30, 2020, (Successor), the period from April 6, 2020 toan increase of $15.2 million, or 133.9%. Excluding Appliances Connection, net loss increased by $4.8 million, or 41.9%.
Liquidity and Capital Resources
As of September 30, 2019 (Successor),2021, we had cash and cash equivalents of $27.2 million and restricted cash of $8.0 million. We have relied on cash on hand, external bank lines of credit, proceeds from our public offerings described below, issuance of third party and related party debt and the periodissuance of notes to support cashflow from April 1, 2019 to April 5, 2019 (Predecessor),operations.
For the nine months ended September 30, 2021, we had operating profit of $2.0 million, $18.3 million of cash flow used in dollarsoperations, and as a percentageworking capital of our net sales.
| Successor | Predecessor | |||||||||||||||||||||||
Nine Months Ended September 30, 2020 (As Restated) | Period April 6 to (As Restated) | Period January 1 to April 5, 2019 | ||||||||||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||||||||
| Product sales, net | $ | 38,397,304 | 100.0 | % | $ | 22,748,151 | 100.0 | % | $ | 12,946,901 | 100.0 | % | ||||||||||||
| Cost of goods sold | 32,060,897 | 83.5 | % | 18,886,117 | 83.0 | % | 11,004,842 | 85.0 | % | |||||||||||||||
| Gross profit | 6,336,407 | 16.5 | % | 3,862,034 | 17.0 | % | 1,942,059 | 15.0 | % | |||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Personnel | 4,513,602 | 11.8 | % | 1,875,543 | 8.2 | % | 913,919 | 7.1 | % | |||||||||||||||
| Advertising | 2,991,177 | 7.8 | % | 1,221,993 | 5.4 | % | 714,276 | 5.5 | % | |||||||||||||||
| Bank and credit card fees | 1,274,117 | 3.3 | % | 511,685 | 2.2 | % | 329,247 | 2.5 | % | |||||||||||||||
| Depreciation and amortization | 276,914 | 0.7 | % | 98,481 | 0.4 | % | 9,675 | 0.1 | % | |||||||||||||||
| General and administrative | 4,399,860 | 11.5 | % | 3,167,957 | 13.9 | % | 451,214 | 3.5 | % | |||||||||||||||
| Total operating expenses | 13,455,670 | 35.0 | % | 6,875,659 | 30.2 | % | 2,418,331 | 18.7 | % | |||||||||||||||
| Loss from operations | (7,119,263 | ) | (18.5 | )% | (3,013,625 | ) | (13.2 | )% | (476,272 | ) | (3.7 | )% | ||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Interest income | 2,480 | 0.0 | % | - | - | 23,807 | 0.2 | % | ||||||||||||||||
| Financing costs | (757,646 | ) | (2.0 | )% | (324,352 | ) | (1.4 | )% | - | - | ||||||||||||||
| Interest expense | (787,308 | ) | (2.1 | )% | (444,294 | ) | (2.0 | )% | - | - | ||||||||||||||
| Loss on extinguishment of debt | (1,756,095 | ) | (4.6 | )% | - | - | - | - | ||||||||||||||||
| Write-off of acquisition receivable | (809,000 | ) | (2.1 | )% | - | - | - | - | ||||||||||||||||
| Change in fair value of warrant liability | (2,127,656 | ) | (5.5 | )% | 57,100 | 0.3 | % | - | - | |||||||||||||||
| Other income (expense) | 6,920 | 0.0 | % | 9,830 | 0.0 | % | 7,200 | 0.1 | % | |||||||||||||||
| Total other income (expense) | (6,228,305 | ) | (16.2 | )% | (701,716 | ) | (3.1 | )% | 31,007 | 0.2 | % | |||||||||||||
| Net loss before income taxes | (13,347,568 | ) | (34.8 | )% | (3,715,341 | ) | (16.3 | )% | (445,265 | ) | (3.4 | )% | ||||||||||||
| Income tax benefit | 1,962,129 | 5.1 | % | - | - | - | - | |||||||||||||||||
| Net loss | $ | (11,385,439 | ) | (29.7 | )% | $ | (3,715,341 | ) | (16.3 | )% | $ | (445,265 | ) | (3.4 | )% | |||||||||
We believe that reviewing our operating$20.0 million. Additionally, we had $27.2 million of unrestricted cash at September 30, 2021. On June 2, 2021, we completed the acquisition of Appliances Connection. Appliances Connection has historically been profitable; however, less than 4 months of their operations are included in results for the nine months ended September 30, 2019 by combining the results of the 2019 successor period (April 6, 2019 through September 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 nine months ended September 30, 2020 (successor). We do not see any potential risks associated with utilizing this pro forma presentation.
2021.
38
Following are the combined periodsManagement has prepared estimates of operations for 2020fiscal years 2021 and 2019:
Nine Months Ended September 30, 2020 Successor (As Restated) | Period April 6 to September 30, 2019 Successor (As Restated) | Period January 1 to April 5, 2019 Predecessor | Pro Forma Adjustments | Pro Forma Combined Nine Months Ended September 30, 2019 | Increase (Decrease) | |||||||||||||||||||
| Product sales, net | $ | 38,397,304 | $ | 22,748,151 | $ | 12,946,901 | $ | - | $ | 35,695,052 | $ | 2,702,252 | ||||||||||||
| Cost of goods sold | 32,060,897 | 18,886,117 | 11,004,842 | - | 29,890,959 | 2,169,938 | ||||||||||||||||||
| Gross profit | 6,336,407 | 3,862,034 | 1,942,059 | - | 5,804,093 | 532,314 | ||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Personnel | 4,513,602 | 1,875,543 | 913,919 | - | 2,789,462 | 1,724,140 | ||||||||||||||||||
| Advertising | 2,991,177 | 1,221,993 | 714,276 | - | 1,936,269 | 1,054,908 | ||||||||||||||||||
| Bank and credit card fees | 1,274,117 | 511,685 | 329,247 | - | 840,932 | 433,185 | ||||||||||||||||||
| Depreciation and amortization | 276,914 | 98,481 | 9,675 | (a) | 157,273 | 265,429 | 11,485 | |||||||||||||||||
| General and administrative | 4,399,860 | 3,167,957 | 451,214 | - | 3,619,171 | 780,689 | ||||||||||||||||||
| Total operating expenses | 13,455,670 | 6,875,659 | 2,418,331 | 157,273 | 9,451,263 | 4,004,407 | ||||||||||||||||||
| Loss from operations | (7,119,263 | ) | (3,013,625 | ) | (476,272 | ) | (157,273 | ) | (3,647,170 | ) | 3,472,093 | |||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Interest income | 2,480 | - | 23,807 | - | 23,807 | (21,327 | ) | |||||||||||||||||
| Financing costs | (757,646 | ) | (324,352 | ) | - | (b) | (239,018 | ) | (563,370 | ) | 194,276 | |||||||||||||
| Interest expense | (787,308 | ) | (444,294 | ) | - | (c) | (38,509 | ) | (482,803 | ) | 304,505 | |||||||||||||
| Loss on extinguishment of debt | (1,756,095 | ) | - | - | - | - | (1,756,095 | ) | ||||||||||||||||
| Write-off of acquisition receivable | (809,000 | ) | - | - | - | - | (809,000 | ) | ||||||||||||||||
| Change in fair value of warrant | (2,127,656 | ) | 57,100 | - | - | 57,100 | (2,184,756 | ) | ||||||||||||||||
| Other income | 6,920 | 9,830 | 7,200 | - | 17,030 | (10,110 | ) | |||||||||||||||||
| Total other income (expense) | (6,228,305 | ) | (701,716 | ) | 31,007 | (277,527 | ) | (948,236 | ) | (5,280,069 | ) | |||||||||||||
| Net loss before income taxes | (13,347,568 | ) | (3,715,341 | ) | (445,265 | ) | (434,800 | ) | (4,595,406 | ) | 8,752,162 | |||||||||||||
| Income tax benefit | 1,962,129 | - | - | - | - | 1,962,129 | ||||||||||||||||||
| Net loss | $ | (11,385,439 | ) | $ | (3,715,341 | ) | $ | (445,265 | ) | $ | (434,800 | ) | $ | (4,595,406 | ) | $ | 6,790,033 | |||||||
Notes
| (a) | Amortization of intangible assets acquired in acquisition | $ | 157,273 | |||
| (b) | Reflects amortization of costs associated with acquisition debt as follows: | |||||
| Amortization of the cost of shares issued in acquisition | $ | 68,750 | ||||
| Amortization of the cost of warrants issued in acquisition | 170,268 | |||||
| Total | $ | 239,018 | ||||
| (c) | Amortization of discount on note to seller | $ | 38,509 |
39
Product sales, net. Our product sales were $38,397,304 for the nine months ended September 30, 2020, as compared to $35,695,052 for the nine months ended September 30, 2019, an increase of $2,702,252, or 7.6%, which included $22,748,151 for our successor from April 6, 2019 to September 30, 20192022 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 and into the third quarter of 2020, we experienced delays in getting products from manufacturers whose production facilities were closed or operating at reduced capacity because of the coronavirus pandemic, which resulted in some cancellations of customer orders. We estimate that cancellations caused by shipping delays approximated $26.4 million in the nine months ended September 30, 2020, based on the historical ratio of shipped sales to customer orders of approximately 79% to the actual ratio of approximately 47% in the nine months ended September 30, 2020.
Our revenue by sales type is as follows:
| Nine Months Ended September 30, | ||||||||||||||||
| 2020 Successor | 2019 Successor | 2019 Predecessor | 2019 Total | |||||||||||||
| Appliance sales | $ | 28,326,963 | $ | 18,535,800 | $ | 9,784,525 | $ | 28,320,325 | ||||||||
| Furniture sales | 7,604,867 | 2,969,389 | 2,456,085 | 5,425,474 | ||||||||||||
| Other sales | 2,465,474 | 1,242,962 | 706,291 | 1,949,253 | ||||||||||||
| Total | $ | 38,397,304 | $ | 22,748,151 | $ | 12,946,901 | $ | 35,695,052 | ||||||||
Cost of goods sold. Our cost of goods sold was $32,060,897 for the nine months ended September 30, 2020, as compared to $29,890,959 for the nine months ended September 30, 2019, an increase of $2,169,938, or 7.3%, which included $18,886,117 for our successor from April 6, 2019 to September 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 83.7% in the 2019 period to 83.5% 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 82.8% in the 2019 period. The remaining difference is attributable to product mix and other normal variables.
Personnel expenses. Our personnel expenses were $4,513,602 for the nine months ended September 30, 2020, as compared to $2,789,462 for the nine months ended September 30, 2019, an increase of $1,724,140, or 61.8%, which included $1,875,543 for our successor from April 6, 2019 to September 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, the accrual of $359,216 as the present value of a severance contract payable to our former president, and $281,194 in stock compensation expense. During the second and third quarters, there was a dramatic increase in cancellations of customer orders, which were primarily related to the lack of product availability. We hired a number of temporary employees to process cancellations and address the related customer service issues. We are reducing the number of temporary employees but expect we will have a number of them through the fourth quarter.
40
Advertising expenses. Our advertising expenses were $2,991,177 for the nine months ended September 30, 2020, as compared to $1,936,269 for the nine months ended September 30, 2019, an increase of $1,054,908, or 54.5%, which included $1,221,993 for our successor from April 6, 2019 to September 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. Our bank and credit card fees were $1,274,177 for the nine months ended September 30, 2020, as compared to $840,932 for the nine months ended September 30, 2019, an increase of $433,185, or 51.5%, which included $511,685 for our successor from April 6, 2019 to September 30, 2019 and $329,247 for our predecessor from January 1, 2019 to April 5, 2019. These fees are based on customer orders that are paid with a credit card (substantially all orders) so the increase was due to the increase in customer orders.
General and administrative expenses. Our general and administrative expenses were $4,399,860 for the nine months ended September 30, 2020, as compared to $3,619,171 for the nine months ended September 30, 2019, an increase of $780,689, or 21.6%, which included $3,167,957 for our successor from April 6, 2019 to September 30, 2019 and $451,214 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, fees for our Electronic Data Interchange initiative, and other consulting fees.
Total other income (expense). We had $6,228,305 in total other expense, net, for the nine months ended September 30, 2020, as compared to total other expense, net, of $948,236 for the nine months ended September 30, 2019, which included expenses of $701,716 for our successor from April 6, 2019 to September 30, 2019, income of $31,007 for our predecessor from January 1, 2019 to April 5, 2019 and adjustments of $277,527. Total other expense, net, for the nine months ended September 30, 2020 consisted of financing costs of $757,646, interest expense of $787,308, loss on debt modification and extinguishment of $1,756,095, loss on acquisition working capital receivable of $809,000, and change in the warrant liability of $2,127,656, offset by interest income of $2,480 and other income of $6,920, while other expense for the nine months ended September 30, 2019 consisted of financing costs of $324,352 and interest expense, net, of $482,803, offset by a change in warrant liability of $57,100, interest income of $23,807 and other income of $17,030.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $11,385,439, which is net of a $1,962,129 income tax benefit for the nine months ended September 30, 2020, as compared to $4,595,406 for the nine months ended September 30, 2019, an increase of $6,790,033, or 147.8%, which included $3,715,341 for our successor from April 6, 2019 to September 30, 2019, $445,265 for our predecessor from January 1, 2019 to April 5, 2019 and adjustments of $434,800. The net loss for the nine months ended September 30, 2020 was affected by three non-cash charges equal to $4,692,751 in the aggregate.
Non-GAAP to GAAP Reconciliation
This report contains financial measures that are not calculated in accordance with U.S. generally accepted accounting principles (“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 $1,756,095, (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.
41
The following tables provide a reconciliation of the non-GAAP measures disclosed above to the comparable GAAP measure.
Nine Months Ended September 30, 2020 (As Restated) | ||||||||||||
| GAAP | Elimination of Non-Cash Charges | Non-GAAP | ||||||||||
| Loss from operations | $ | (7,119,263 | ) | $ | - | $ | (7,119,263 | ) | ||||
| Other income (expense) | ||||||||||||
| Interest income | 2,480 | - | 2,480 | |||||||||
| Financing costs | (757,646 | ) | - | (757,646 | ) | |||||||
| Interest expense | (787,308 | ) | - | (787,308 | ) | |||||||
| Loss on extinguishment of debt | (1,756,095 | ) | (1,756,095 | ) | - | |||||||
| 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) | 6,920 | - | 6,920 | |||||||||
| Total other income (expense) | (6,228,305 | ) | (4,692,751 | ) | (1,535,554 | ) | ||||||
| Net loss before income taxes | $ | (13,347,568 | ) | $ | (8,654,817 | ) | ||||||
Liquidity and Capital Resources
As of September 30, 2020, we had cash and cash equivalents of $3,466,981 and restricted cash of $8,912,367. To date, we have financed our operations primarily through revenuesufficient funds will be generated from operations bank borrowingsto fund its operations, and proceeds from our initial public offering.
We believe that our current levels of cash will be sufficient to meet our anticipated cash needs for our operationsservice its debt obligations for at least one year from the next 12 months. We may,date of the filing of these unaudited condensed consolidated financial statements.
The impact of COVID-19 on our 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.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the future require additional cash resources due to changing business conditions, implementationnormal course 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.business.
Summary of Cash Flow
The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.
Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
(As Restated) Successor
(As Restated) 2019 Successor 2019 Predecessor 2019
Total Net cash provided by (used in) operating activities $ 7,383,979 $ (1,294,681 ) $ 611,268 $ (683,413 ) Net cash used in investing activities (51,060 ) (1,244,006 ) - (1,244,006 ) Net cash provided by financing activities 4,981,959 2,723,625 - 2,723,625 Net change in cash $ 12,314,878 $ 184,938 $ 611,268 $ 796,206
the nine months ended September 30, 2021 and 2020 (in thousands).
42
Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by (used in) operating activities | $ | (18,316 | ) | $ | 7,383 | |||
| Net cash used in investing activities | (203,628 | ) | (51 | ) | ||||
| Net cash provided by financing activities | 247,218 | 4,983 | ||||||
| Net change in cash and restricted cash | 25,274 | 12,315 | ||||||
| Cash and restricted cash, beginning of period | 9,912 | 64 | ||||||
| Cash and restricted cash, end of period | $ | 35,186 | $ | 12,379 | ||||
Our net cash provided byused in operating activities was $7,383,979$18.3 million for the nine months ended September 30, 2020,2021, which included $15.5 million in net cash provided by operating activities from Appliances Connection for the period from June 2, 2021 (date of acquisition) to September 30, 2021, as compared to $7.4 million net cash used inprovided by operating activities of $683,413 for the nine months ended September 30, 2019, which included net cash used in operating activities of $1,294,681 for our successor from April 6, 2019 to September 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 provided by operating activities is primarily our net loss and an increase in customer deposits.
Our net cash used in investing activities was $51,060 and $1,2444,006 for2020. For the nine months ended September 30, 20202021, our net income of $3.9 million, an increase in accounts payable and 2019, respectively.accrued expenses of $11.8 million and depreciation and amortization of $3.9 million, offset by a decrease in customer deposits of $16.9 million, a decrease in merchandise inventory of $11.7 million and deferred tax expense of $6.5 million, represent the primary drivers for cash used in operations. For the nine months ended September 30, 2020, our net loss of $11.4 million, deferred tax assets of $2.0 million and a decrease in merchandise inventory of $1.7 million, offset by an increase in customer deposits of $12.9 million, an increase in accounts payable and accrued expenses of $4.3 million, a change in fair value of warrant liability of $2.1 million and a loss on extinguishment of debt of $1.8 million, were the primary drivers of the net cash provided by operating activities.
Our net cash used in investing activities consisted entirely of purchases of property and equipment, while our netwas $203.6 million for the nine months ended September 30, 2021, as compared to $0.05 million for the nine months ended September 30, 2020. Net cash used in investing activities for the nine months ended September 30, 20192021 consisted of cash paid in the acquisition of Appliances Connection, net of cash acquired, of $201.5 million, cash paid in the acquisition of Appliance Gallery of $1.4 million and purchases of property and equipment of $11,874$0.7 million. Net cash used in investing activities for the for the nine months ended September 30, 2020 consisted of entirely purchases of property and $1,232,132 related to our acquisition of Goedeker.equipment. Appliances Connection did not have any investing activities for the nine months ended September 30, 2021.
Our net cash provided by financing activities was $4,981,959 and $2,939,125$247.2 million for the nine months ended September 30, 2020 and 2019, respectively, all of2021, which was duringincluded $0.2 million in net cash used in financing activities from Appliances Connection for the period from April 6, 2019June 2, 2021 (date of acquisition) to September 30, 2019.2021, as compared to $5.0 million for the nine months ended September 30, 2020. Net cash provided by financing activities for the nine months ended September 30, 2021 consisted of proceeds from the public offering described below of $194.6 million, proceeds from the exercise of warrants of $2.4 million and proceeds from the term loan described below of $55.2 million, offset by repayment on notes payable of $4.9 million and payments on finance leases of $0.02 million. Net cash provided by financing activities for the nine months ended September 30, 2020 consisted of net proceeds of $8,602,166$8.6 million from our initial public offering and $642,600$0.6 million in proceeds from our PPPpaycheck protection plan loan, offset by payments of $6,318,098 on our notes payable and lines of credit and payment of $105,279 in loan financing costs. Net cash provided financing activities for the nine months ended September 30, 2019 consisted of net borrowings from lines of credit of $1,339,430, proceeds from notes payable of $4,037,321, and proceeds from convertible notes payable of $650,000, offset by repayments on notes payable of $5,546,667$2.0 million, net payments on lines of credit of $1.3 million, payments on convertible notes payable of $0.8 million and cash paid for financing costs of $359,500.$0.1 million.
Public Offerings
Initial Public Offering
On August 4, 2020, we sold 1,111,200 shares of common stock in connection with our initial public offering (the “IPO”) to the underwriters at a purchase price per share of $8.325 (the offering price to the public of $9.00 per share minus the underwriters’ discount) for total gross proceeds of $10,000,800.$10.0 million. After deducting the underwriting commission and expenses, we received net proceeds of approximately $8,602,166.$8.6 million. We also issued warrants for the purchase of 55,560 shares of common stock to affiliates of the representative of the underwriters. The warrants are 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). We used to the proceeds of this offering repay certain debt.
Term Loan - Arvest Bank
On August 25, 2020, the CompanyMay 27, 2021, we entered into a promissory note and securityan underwriting agreement with Arvest Bank forThinkEquity, a loandivision of Fordham Financial Management, Inc. (the “Underwriter”), relating to a public offering of units, each unit consisting of one share of common stock and a warrant to purchase one share of common stock. Under the underwriting agreement, we agreed to sell 91,111,111 units to the Underwriter, at a purchase price per unit of $2.0925 (the offering price to the public of $2.25 per unit minus the Underwriter’s discount), and also agreed to grant to the Underwriter a 30-day option to purchase up to 2,000,000 additional shares of common stock, at a purchase price of $2.0832 per share, and/or warrants to purchase up to 2,000,000 additional shares of common stock, at a purchase price of $0.0093 per warrant, in any combination thereof, solely to cover over-allotments, if any. The Underwriter exercised its option to purchase 2,000,000 additional warrants on May 28, 2021 and exercised its option to purchase 2,000,000 additional shares on June 3, 2021. The shares of common stock and warrants contained in the principal amountunits were immediately separable and were issued separately.
On June 2, 2021, we sold 91,111,111 shares of $3,500,000. common stock and warrants to purchase 93,111,111 shares of common stock to the Underwriter for total gross proceeds of $205.0 million. After deducting the underwriting commission and expenses, we received net proceeds of approximately $190.5 million.
On June 7, 2021, we sold 2,000,000 shares of common stock to the Underwriter for total gross proceeds of $4.5 million. After deducting the underwriting commission and expenses, we received net proceeds of approximately $4.2 million.
As of September 30, 2020,2021, an aggregate of 1,052,248 warrants were converted to common stock at $2.25 per share, yielding proceeds of $2.4 million.
We used to the outstanding balanceproceeds of this loan is $3,342,602, comprised of principal of $3,446,126, net of unamortized loan costs of $103,524.
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. Pursuantoffering to the terms of the loan agreement, the Company is 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 Company may prepay the loan in full or in part at any time without penalty. The loan agreement contains customary events of default and affirmative and negative covenants forfund a loan of this type. The loan is secured by all financial assets credited to the Company’s securities account held by Arvest Investments, Inc.
Paycheck Protection Program Loan
On April 8, 2020, the Company received a $642,600 Paycheck Protection Program (the “PPP”) loan from the United States Small Business Administration under provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP loan has an 18-month 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 balance of the PPP loan was $642,600 as of September 30, 2020 and was classified as a current liability in the accompanying balance sheet. On November 2, 2020, the Company repaid the PPP loan.
43
Revolving Loan - Burnley Capital LLC
On April 5, 2019, the Company, as borrower, and the Company’s 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 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 December 31, 2019, the balance of the line of credit was $571,997.
On August 4, 2020, the Company used a portion of the proceeds from the IPO to repay the revolving note 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 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%. As of December 31, 2019, the balance of the line of credit was $678,993. The Company terminated the loan and security agreement on May 18, 2020 and there is no outstanding balance as of September 30, 2020.
Term Loan - 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. As of December 31, 2019, the balance of the note was $999,201.
On August 4, 2020, the Company used a portion of the proceeds from the IPO to repay the term note 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.
The Company classified the warrant as a derivative liability on the balance sheet at June 30, 2020 of $2,250,000 based on the estimated value of the warrant 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 during the nine months ended September 30, 2020. Immediately prior to the closing of the IPO on August 4, 2020, SBCC converted the warrant into 250,000 shares of common stock.
Secured Convertible Promissory Note - Leonite Capital LLC
On April 5, 2019, the Company’s parent company, 1847 Holdings LLC (“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. As of December 31, 2019, the balance of the note was $584,943.
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.
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.
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 nine months ended September 30, 2020.
44
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.
On July 24, 2020, Leonite converted $50,000 of the outstanding balance of the note into 50,000 common shares of 1847 Holdings. The Company accounted for this transaction as a $50,000 reduction in the principal amount of the debt, a $50,000 loss on extinguishment of debt, and a $100,000 increase in additional paid-in-capital representing the fair value of the 1847 Holdings common shares on the conversion date.
On August 4, 2020, the Company 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.
On September 2, 2020, 1847 Holdings and Leonite entered into an amendment to the warrant issued on April 5, 2019, pursuant to which the warrant was amended to allow for the exercise of the warrant for 180,000 common shares of 1847 Holdings in exchange for Leonite’s surrender of the remaining 20,000 common shares underlying that warrant, as well as all 200,000 common shares underlying the second warrant issued to Leonite on May 11, 2020. On September 18, 2020, Leonite exercised the warrant in accordance with the foregoing for 180,000 common shares of 1847 Holdings. As a result, both warrants have terminated.
9% Subordinated Promissory Note - Goedeker
A portion of the purchase price for the acquisition of the assets of Goedeker was paid by the issuance byAppliances Connection.
Debt
Credit Facilities
On June 2, 2021, the Company and ACI, as borrowers, entered into a credit and guaranty agreement with Appliances Connection and certain other subsidiaries party thereto from time to Steve Goedeker,time as representative of Goedeker, of a 9% subordinated promissory noteguarantors (the “Guarantors”), the financial institutions party thereto from time to time (“Lenders”), and Manufacturers and Traders Trust Company, as sole lead arranger, sole book runner, administrative agent and collateral agent (“M&T), pursuant to which the Lenders have agreed to make available to the Company and ACI senior secured credit facilities in the aggregate initial amount of $70.0 million, including (i) a $60.0 million term loan (the “Term Loan”) and (ii) a $10.0 million revolving credit facility (the “Revolving Loan”), which revolving credit facility includes a $2.0 million swingline subfacility (the “Swing Line Loan” and together with the Term Loan and the Revolving Loan, the “Loans”) and a $2.0 million letter of credit subfacility, in each case, on the terms and conditions contained in the credit and guaranty agreement. On June 2, 2021, we borrowed the entire amount of the Term Loan and issued term loan notes to the Lenders in the aggregate principal amount of $4,100,000.$60.0 million. As of December 31, 2019,September 30, 2021, we have not made any loans under the Revolving Loan. As of September 30, 2021, the outstanding balance of the note was $3,300,444.Term Loan is $55.0 million, comprised of principal of $58.5 million, net of unamortized loan costs of $3.5 million. Loan costs before amortization included $3.5 million of lender and placement agent fees and $0.3 million of legal other fees. We classified $6.0 million as a current liability and the balance as a long-term liability.
OnEach of the Loans matures on June 2, 2020,2026. The Loans will bear interest on the parties entered intounpaid principal amount thereof as follows: (i) if it is a Loan bearing interest at a rate determined by the base rate (as defined in the credit and guaranty agreement), then at the base rate plus the applicable margin (as defined in the credit and guaranty agreement) for such Loan; (ii) if it is a Loan bearing interest at a rate determined by the LIBOR rate (as defined in the credit and guaranty agreement), then at the LIBOR rate plus the applicable margin for such Loan; and (iii) if it is a Swing Line Loan, then at the rate applicable to Loans bearing interest at a rate determined by the base rate. The Term Loan initially bears interest at the LIBOR rate plus applicable margin (3.9%), with an amendmentinitial interest period of six months. We may elect to continue or convert the existing interest rate benchmark for the Term Loan from LIBOR rate to base rate, and restatementmay elect the interest rate benchmark for future Revolving Loans as either LIBOR rate or base rate (and, with respect to any Loan made at the LIBOR rate, may also select the interest period applicable to any such Loan), by notifying M&T and Lenders from time to time in accordance with the provisions of the notecredit and guaranty agreement. Notwithstanding the foregoing, following an event of default, the Loans will bear interest at a rate that became effective as ofis 2% per annum higher than the closing ofinterest rate then in effect for the IPO on August 4, 2020, pursuant to which (i)applicable Loan.
We must repay the principal amount of the existing note was increased by $250,000, (ii) uponTerm Loan in quarterly installments of $1.5 million each, payable on the closinglast business day of each March, June, September and December, commencing on September 30, 2021. The remaining unpaid principal amount of the IPO,Term Loan must be repaid on the maturity date, unless payment is sooner required by the credit and guaranty agreement. Mandatory repayments of amounts borrowed under the Revolving Loan facility are required only if the amount borrowed at any time exceeds the commitment amount.
The credit and guaranty agreement contains customary representations, warranties, affirmative and negative financial and other covenants and events of default for loans of this type. The Loans are guaranteed by the Guarantors and are secured by a first priority security interest in substantially all of the assets of the Company, agreed to make all paymentsACI and the Guarantors.
Vehicle Loans
We have financed purchases of principaltransportation vehicles with notes payable which are secured by the vehicles purchased. These notes have five-year terms and interest rates ranging from 3.59% to 5.74%. As of September 30, 2021, the outstanding balance of these notes is $1.4 million.
Financing Leases
We have three finance leases for the acquisition of forklifts. At September 30, 2021, the total amount due on these leases was $0.2 million.
Contractual Obligations
Our principal commitments consist mostly of obligations under the note through the date of the closing,loans described above and (iii) from and after the closing, the interest rate of the note was increased from 9% to 12%. In accordance with the terms of the amended and restated note, 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.other contractual commitments described below.
On August 25, 2020, the Company used a portion of the proceeds from loan from Arvest Bank to repay this promissory note in full.
Contractual Obligations
Offsetting Management Services Agreement
On April 5, 2019, we entered into an offsettinga management services agreement with 1847 Partners LLC (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. Pursuantpursuant to the offsetting management services agreement, as amended,which 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 our former parent company, 1847 Holdings LLC, 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 Managerus or itsour affiliates on our behalf in connection with performing services under the offsetting management services agreement.
45
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 $187,500management fees of $0.06 million for the three months ended September 30, 2021 and $121,290 in management fees2020 and $0.2 million for the nine months ended September 30, 20202021 and 2019, respectively.2020.
Earn Out PaymentsPayment
Pursuant to thean asset purchase agreement, withdated January 18, 2019, as amended, among the Company, Goedeker itTelevision Co. (“Goedeker”), Steve Goedeker and Mike Goedeker, Goedeker is also entitled to receive the followingan earn out payments topayment of $0.2 million if the extent that our business achieves the applicable EBITDA (as defined in the asset purchase agreement) targets:
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 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 GoedekerApril 5, 2022 is not$2.5 million or greater, and may be entitled to an earn our payment for that period.
To the extent Goedeker is entitled to all orreceive a portion of anpartial earn out payment if the applicable earn out payment(s) (orEBITDA is less than $2.5 million but greater than $1.5 million.
Leases
On April 5, 2019, the Company entered into a lease agreement with S.H.J., L.L.C for its prior principal office in Ballwin, Missouri. 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. The lease contains customary events of default.
On January 13, 2021, the Company entered into a lease agreement with Westgate 200, LLC, which was amended on March 31, 2021, for its new principal office and showroom in St. Charles, Missouri. The lease terminates on April 30, 2027, with two (2) options to renew for additional five (5) year periods. The base rent is $20,977 per month until September 30, 2021, and increases to $31,465 per month until April 30, 2022, after which time the base rent increases at approximately 2.5% per year thereafter. The Company must also pay its 43.4% pro rata portion thereof) shall be paidof the property taxes, operating expenses and insurance costs and is also responsible to pay for the utilities used on the date thatpremises. The lease contains customary events of default.
On June 2, 2021, 1 Stop entered into a new lease agreement with 1870 Bath Ave. LLC, a related party, for the premises located at 1870 Bath Avenue, Brooklyn, NY. The lease is three (3)for a term of ten (10) years fromand provides for a base rent of $74,263 per month during the closing date,first year with annual increases to $96,896 during the last year of the term. 1 Stop is also responsible for all property taxes, insurance costs and shall accrue interest from the dateutilities used on which itthe premises. The lease contains customary events of default. This lease replaces the prior lease entered into between the parties on September 1, 2018.
On June 2, 2021, Joe’s Appliances entered into a new lease agreement with 812 5th Ave Realty LLC, a related party, for the premises located at 7812 5th Avenue, Brooklyn, NY. The lease is determined Goedekerfor a term of ten (10) years and provides for a base rent of $6,365 per month during the first year with annual increases to $8,305 during the last year of the term. Joe’s Appliances is entitled to such earn out payment (or portion thereof) atalso responsible for all property taxes, insurance costs and the utilities used on the premises. The lease contains customary events of default. This lease replaces the prior lease entered into between the parties on September 1, 2018.
On May 31, 2019, YF Logistics entered into a ratesublease agreement with Dynamic Marketing, Inc. (“DMI”) for its warehouse space in Hamilton, NJ. The initial term of the sublease was for a period commencing on June 1, 2019 and terminating on April 30, 2020, with automatic renewals for successive one year terms until the earlier of (i) termination by either upon thirty (30) days’ prior written notice or (ii) April 30, 2024. The sublease provides for a base rent equal to five percent (5%) per annum, computed on71.43% of the basis of a 360 day yearbase rent paid by DMI under its lease for the actual numberpremises, plus 71.43% of days elapsed.any taxes, operating expenses, additional charges or any other amounts due by DMI, for a total of $56,250 per month.
On July 29, 2021, AC Gallery entered into a lease agreement with Tom’s Flooring, LLC for the showroom and warehouse located in Largo, Florida. The lease is for a term of four (4) months commencing on September 1, 2021 and ending on December 31, 2021 and provides for a case rent of $6,500 per month. AC Gallery must also pay its one-third (1/3) pro rata portion of the common area maintenance charges, utilities and sales taxes. The lease contains customary events of default.
On September 9, 2021, the Company entered into a warehouse agreement for a new warehouse in Somerset, NJ. The warehouse agreement is for a term of 26 months commencing on October 1, 2021 and ending November 29, 2023, unless the master lease for the premises is terminated earlier. The monthly storage fee is $136,274 for the first year, $140,274 for the second year, and $144,573 for the last two months. The Company also paid a security deposit of $272,549.
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 and Estimates
The following discussion relates to critical accounting policies for our company. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires our management to make assumptions, estimates and judgmentsassumptions that affect the reported amounts reported, including the notes thereto,of assets, liabilities, revenues and expenses, and related disclosuresdisclosure of commitmentscontingent assets and contingencies, if any. We have identified certainliabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the 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 requirein 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 policiesopinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates and judgments used in the preparation ofwere made, materially affect our reported financial statements:
46
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’sposition, results of operations, or balance sheet.
The Company collects the full sales price from the customer at the time the order is placed, which is recorded as customer depositscash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on the accompanying condensed balance sheet. 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 basisForm 10-K 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 nine monthsfiscal year ended September 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.
47
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.
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:
Goodwill
The Company tests its goodwill for impairment at least annually on December 31, 2020 filed with the Securities and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impactExchange Commission (the “SEC”) on the recoverability of goodwill and the Company’s consolidated financial results.March 29, 2021.
The Company tests goodwill by estimating fair value using a Discounted Cash Flow (“DCF”) model. The key assumptions used in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit margins based on internal forecasts, terminal value and an estimate of a market participant’s weighted-average cost of capital used to discount future cash flows to their present value. There were no impairment charges duringDuring the three and nine months ended September 30, 2020 and 2019.
Intangible Assets
At September 30, 2020 and December 31, 2019, definite-lived intangible assets primarily consisted of tradenames and customer relationships which are being amortized over their estimated useful lives ranging from 5 to 15 years.
The Company periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or2021, there were no significant changes in circumstances indicateour accounting policies and estimates other than the newly adopted accounting standards that the carrying amount may not be recoverable. If impaired, intangible assets are written downdisclosed in Note 2 to fair value based on discounted cash flows or other valuation techniques. The Company has no intangibles with indefinite lives.
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.
48
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Derivative Instrument Liability
The Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged.
Sales Tax Liability
On June 21, 2018, the U.S. Supreme Court issued an opinion in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), whereby the longstanding Quill Corp v. North Dakota sales tax case was overruled, and states may now require remote sellers to collect sales tax under certain circumstances. In 2020, the Company began collecting sales tax in nearly all states that have sales tax. The Company accrued sales taxes in the states with sales tax. The Company accrued the potential liability from the effective date of a state’s adoption of the Wayfair decision up to the date the Company began collecting and filing sales taxes in the various states. At September 30, 2020 and December 31, 2019, the amount of such accrual was $5,331,900 and $2,910,200, respectively, which is included in accounts payable and accrued expenses.
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’sour unaudited condensed consolidated 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.
49
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.
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 adopted ASU 2018-13 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We have adopted and maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this quarterly report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission (the “SEC”).SEC. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, our management, including our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q, have concluded that, due to deficiencies identified in our preliminary evaluation, our disclosure controls and procedures are ineffective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Subject to receipt of additional financing, we intend to retain additional individuals and resources to remedy the ineffective controls.
Changes in Internal Control Over Financial Reporting
During the three months ended September 30, 2021, the Company hired a new Chief Executive Officer and a new Chief Financial Officer.
There were no other changes in the Company’s internal control over financial reporting or in any other factors that could significantly affect these controls during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
50
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during three months ended September 30, 20202021 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.
We did not repurchase any of shares of our common stock during the three months ended September 30, 2020.2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
We have no information to disclose that was required to be in a report on Form 8-K during the three months ended September 30, 20202021 but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
51
ITEM 6. EXHIBITS.
| * | Filed herewith |
| ** | Furnished herewith |
52
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | 1847 GOEDEKER INC. |
| /s/ | |
| Name: | |
| Title: Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ | |
| Name: | |
| Title: Chief Financial Officer | |
| (Principal Financial |
40
53