UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended:
or
For the transition period from ____________ to _____________
Commission
File Number:
| (Exact name of registrant as specified in its charter) |
| (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 | ||
| 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.
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).
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 ☐ |
| 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 ☐
As of August
10, 2021, there were
1847 GOEDEKER INC.
Quarterly Report on Form 10-Q
Period Ended June 30, 2021
TABLE OF CONTENTS
i
PART
I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
1847 GOEDEKER INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
1847 GOEDEKER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Receivables | ||||||||
| Vendor deposits | ||||||||
| Merchandise inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax asset | ||||||||
| Other long-term assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Due to Sellers | - | |||||||
| Customer deposits | ||||||||
| Current portion of notes payable, net | ||||||||
| Current portion finance lease liability | - | |||||||
| Current portion of operating lease liabilities | ||||||||
| Contingent note payable | - | |||||||
| Total Current Liabilities | ||||||||
| Notes payable, net of current portion, net | ||||||||
| Finance lease liability, net of current portion | - | |||||||
| Operating lease liabilities, net of current portion | ||||||||
| Contingent note payable | - | |||||||
| TOTAL LIABILITIES | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
2
1847 GOEDEKER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Personnel | ||||||||||||||||
| Advertising | ||||||||||||||||
| Bank and credit card fees | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Acquisition expenses | - | - | ||||||||||||||
| Loss on abandonment of right of use asset | - | - | ||||||||||||||
| General and administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Write-off of acquisition receivable | - | ( | ) | - | ( | ) | ||||||||||
| Change in fair value of warrant liability | - | ( | ) | - | ( | ) | ||||||||||
| Other income (expense) | ||||||||||||||||
| Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME TAX (EXPENSE) BENEFIT | ||||||||||||||||
| NET INCOME (LOSS) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| NET INCOME (LOSS) PER COMMON SHARE | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| DILUTED NET INCOME (LOSS) PER COMMON SHARE | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – | ||||||||||||||||
| BASIC | ||||||||||||||||
| DILUTED | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
1847 GOEDEKER INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
For the Three and Six Months Ended June 30, 2021
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Issuance of warrants in connection with notes payable | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Issuance of common stock in connection with acquisition | ||||||||||||||||||||
| Issuance of common stock in connection with public offering | ||||||||||||||||||||
| Issuance of stock grants | ||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
For the Three and Six Months Ended June 30, 2020
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Issuance of 1847 Holdings warrants in connection with notes payable | - | |||||||||||||||||||
| Forgiveness of related party debt | - | |||||||||||||||||||
| Issuance of 1847 Holdings shares in connection with exercise of warrant | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
1847 GOEDEKER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended June 30, | |||||||
| 2021 | 2020 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
| Net income (loss) | $ | $ | ( | ) | |||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||
| Depreciation and amortization | |||||||
| Amortization of debt discount | |||||||
| Stock-based compensation expense | - | ||||||
| Loss on extinguishment of debt | |||||||
| Loss on abandonment of right of use asset | - | ||||||
| Write-off of acquisition receivable | - | ||||||
| Change in fair value of warrant liability | - | ||||||
| Deferred tax asset | ( | ) | ( | ) | |||
| Non-cash lease expense | |||||||
| Changes in operating assets and liabilities: | |||||||
| Receivables | ( | ) | |||||
| Vendor deposits | ( | ) | ( | ) | |||
| Merchandise inventory | ( | ) | |||||
| Prepaid expenses and other assets | ( | ) | ( | ) | |||
| Accounts payable and accrued expenses | ( | ) | |||||
| Customer deposits | ( | ) | |||||
| Operating lease liabilities | ( | ) | ( | ) | |||
| Net cash provided by (used in) provided by operating activities | ( | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
| Purchase of property and equipment | ( | ) | ( | ) | |||
| Cash paid to Sellers in acquisition, net of cash acquired | ( | ) | - | ||||
| Net cash used in investing activities | ( | ) | ( | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
| Proceeds from equity offering | - | ||||||
| Cash received from warrant exercise | - | ||||||
| Proceeds from term note payable | |||||||
| Repayment on notes payable | ( | ) | ( | ) | |||
| Payments on finance leases | ( | ) | - | ||||
| Net payments on lines of credit | ( | ) | |||||
| Net cash provided by (used in) financing activities | ( | ) | |||||
| NET CHANGE IN CASH AND RESTRICTED CASH | |||||||
| CASH AND RESTRICTED CASH, BEGINNING OF PERIOD | |||||||
| CASH AND RESTRICTED CASH, END OF PERIOD | $ | $ | |||||
| Cash, cash equivalents, and restricted cash consist of the following: | |||||||
| End of period | |||||||
| Cash and cash equivalents | $ | $ | |||||
| Restricted cash | |||||||
| $ | $ | ||||||
| Cash, cash equivalents, and restricted cash consist of the following | |||||||
| Beginning of period | |||||||
| Cash and cash equivalents | $ | $ | |||||
| Restricted cash | - | ||||||
| $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | |||||||
| Cash paid for interest | $ | $ | |||||
| Cash paid for taxes | $ | $ | |||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | |||||||
| Right of use assets acquired | $ | $ | |||||
| Right of use liabilities assumed | $ | $ | |||||
| Debt discount on notes payable from OID | $ | $ | - | ||||
| Debt discount, warrants on short-term note payable | $ | $ | |||||
| Stock issued in the acquisition of Appliances Connection | $ | $ | - | ||||
| Debt paid off through issuance of new note | $ | $ | - | ||||
| Due to Seller (consideration) settled by vendor deposits | $ | $ | - | ||||
| Conversion of debt through issuance of 1847 Holdings common shares | $ | - | $ | ||||
| Exercise of warrant liability through issuance of 1847 Holdings non-controlling interest | $ | - | $ | ||||
| Derecognition of related party debt | $ | - | $ | ||||
| Adjustment to fair value of goodwill based on final purchase price allocation | $ | $ | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
5
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
NOTE 1—ORGANIZATION AND NATURE OF BUSINESS
1847 Goedeker Inc. (the “Company”) was formed under the laws of the State of Delaware on January 10, 2019 for the sole purpose of acquiring the business of Goedeker Television Co. Prior to the acquisition, the Company did not have any operations other than operations relating to its incorporation and organization.
On April 5, 2019, the Company acquired substantially all the assets and assumed substantially all the liabilities of Goedeker Television Co., a Missouri corporation (“Goedeker”). As a result of this transaction, the Company acquired the former business of Goedeker and continues to operate this business.
On October 20, 2020, the Company 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.
The Company operates a technology-driven e-commerce platform for appliances, furniture, home goods and related products. Since its founding in 1951, the Company has evolved from a local brick and mortar operation serving the St. Louis metro area to a nationwide omni-channel retailer offering the largest online selection of household appliances across all major appliance brands with competitive pricing.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements of the Company and its consolidated subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and with the instructions to Article 8 of Regulation S-X.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2020.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries, ACI, 1 Stop, Gold Coast, Superior Deals, Joe’s Appliances and YF Logistics. 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.
Stock Split
On
July 30, 2020,
6
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
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.
At
June 30, 2021,
Revenue Recognition and Cost of Revenue
The Company records revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606. Revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant judgments.
7
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
The Company’s performance obligation is to deliver the customer’s order. Each customer order generally contains only one performance obligation based on the merchandise sale to be 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 truck and delivers and installs the product at the customer’s location. When a product is delivered through a Local Delivery, risk of loss passes to the customer at the time of installation and revenue is recognized upon installation at the customer’s location. In the case of a Company Shipment and a Drop Shipment, the delivery to the customer is made free on board, or FOB, shipping point (whether from the Company’s warehouse or a third party’s warehouse). Therefore, risk of loss and title transfers to the customer once the products are shipped (i.e., leaves the Company’s warehouse or a third-party’s warehouse). After shipment and prior to delivery, the customer is able to redirect the product to a different destination, which demonstrates the customer’s control over the product once shipped. Once the risk of loss has shifted to the customer, the Company has satisfied its performance obligation and the Company recognizes revenue.
The Company agrees with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales price. In the Company’s contracts with customers, it allocates the entire transaction price to the sales price, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Any sales tax, value added tax, and other tax the Company collects concurrently with revenue-producing activities are excluded from revenue.
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 (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 product 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 product type is as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Appliance sales | $ | $ | $ | $ | ||||||||||||
| Furniture sales | ||||||||||||||||
| Other sales | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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.
8
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
Receivables
Receivables consists of customer’s balance payments for which the Company extends credit to certain homebuilders and designers based on prior business relationship, and vendor rebate receivables. Vendor rebates receivable represent amounts due from manufactures from whom the Company purchases products. Rebates receivable are stated at the amount that management expects to collect from manufacturers (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 its trade receivables from customers and bad debt expense has been historically immaterial to the combined 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 June 30, 2021
Merchandise Inventory
Inventory consists of finished products acquired for resale and is valued at the lower-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:
Category | Useful Life (Years) | |
| Furniture and fixtures | ||
| Machinery and equipment | ||
| Office equipment | ||
| Transportation equipment |
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 three and six months ended June 30, 2021 and 2020.
Intangible Assets
As of June 30, 2021 and December 31, 2020, definite-lived intangible assets primarily consisted of tradenames and customer relationships which are being amortized over their estimated useful lives, or 5 years.
9
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
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 three and six months ended June 30, 2021 were $
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 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. Impairments for the three and six months ended June
30, 2021 were $
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.
10
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
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
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 the customer if the order is subsequently cancelled.
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.
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 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 June 30,
2021 and December 31, 2020, the amount of such accrual was $
As
of June 30, 2021, only one state has notified the Company of a potential sales tax liability of approximately $
11
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
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 securities. For the three and six months ended June 30, 2021, the potentially dilutive securities were warrants for the purchase
of
Reclassifications
Certain accounts have been reclassified to conform with classifications adopted in the period ended June 30, 2021. Such reclassifications had no effect on net earnings or financial position.
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.
For the six months ended June 30, 2021, the Company
incurred operating losses of approximately $
Management has prepared estimates of operations for fiscal years 2021 and 2022 and believes that sufficient funds will be generated from operations to fund its operations, and to service its debt obligations for one year from the date of the filing of these unaudited condensed consolidated financial statements. Additionally, only one month of operations for Appliances Connection, which has operated profitably, are included in the results of operations for the six months ended June 30, 2021.
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.
12
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
Recent Accounting Pronouncements
Recently Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company 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.
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 unaudited condensed consolidated financial statements.
NOTE 3—RECEIVABLES
At June 30, 2021 and December 31, 2020, receivables consisted of the following:
| June 30, 2021 | December 31, 2020 | |||||||
| Trade receivables from customers | $ | $ | ||||||
| Vendor rebates receivable | ||||||||
| Credit cards in process of collection | ||||||||
| Other receivables | ||||||||
| Total receivables | $ | $ | ||||||
13
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
NOTE 4—MERCHANDISE INVENTORY
At June 30, 2021 and December 31, 2020, the inventory balances are composed of:
| June 30, 2021 | December 31, 2020 | |||||||
| Appliances | $ | $ | ||||||
| Furniture | ||||||||
| Other | ||||||||
| Total merchandise inventory | ||||||||
| Allowance for inventory obsolescence | ( | ) | ( | ) | ||||
| Merchandise inventory, net | $ | $ | ||||||
NOTE 5—VENDOR DEPOSITS
Deposits with vendors represent cash on deposit with one vendor arising from accumulated rebates paid by the vendor. The deposits are used by the vendor to seek to secure the Company’s purchases. The deposit can be withdrawn at any time up to the amount of the Company’s credit line with the vendor. Alternatively, the Company could secure their credit line with a floor plan line from a lender and withdraw all its deposits. The Company has elected to leave the deposits with the vendor on which it earns interest income.
Prior
to obtaining an open line of credit with a major vendor, the Company paid in advance for its purchases. The vendor did not ship product
to the Company until an order was complete. As a result, the vendor held Company funds. A second vendor uses the Company’s vendor
deposit account as collateral. Orders from this vendor exceeded the deposit account and the Company prepaid for some orders. Vendor deposits
as of June 30, 2021 and December 31, 2020 were $
NOTE 6—PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2021 and December 31, 2020:
| June 30, 2021 | December 31, 2020 | |||||||
| Equipment | $ | $ | ||||||
| Warehouse equipment | ||||||||
| Furniture and fixtures | ||||||||
| Transportation equipment | ||||||||
| Leasehold improvements | ||||||||
| Construction in progress | - | |||||||
| Total property and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense for the six months ended June 30, 2021 and 2020 was $
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.
14
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
NOTE 7—INTANGIBLE ASSETS AND GOODWILL
The following provides a breakdown of identifiable intangible assets as of June 30, 2021 and December 31, 2020:
| June 30, 2021 | December 31, 2020 | |||||||
| Customer relationships | $ | $ | ||||||
| Marketing related - tradename | ||||||||
| Total intangible assets | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
In
connection with the acquisition of Goedeker, the Company identified intangible assets of $
As of June 30, 2021, the estimated annual amortization expense for each of the next five years is as follows:
| 2021 (remainder of year) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total | $ |
Following is a summary of goodwill:
| Balance December 31, 2020 | $ | |||
| Preliminary goodwill from acquisition of Appliances Connection | ||||
| Balance June 30, 2021 | $ |
NOTE 8—ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is schedule of accounts payable and accrued expenses at June 30, 2021 and December 31, 2020:
| June 30, 2021 | December 31, 2020 | |||||||
| Trade accounts payable | $ | $ | ||||||
| Sales tax | ||||||||
| Accrued payroll liabilities | ||||||||
| Accrued interest | ||||||||
| Accrued liability for sales returns | ||||||||
| Other accrued liabilities | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
15
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
NOTE 9—BUSINESS COMBINATION
On October 20, 2020, the Company entered into a securities purchase agreement, which was amended on December 8, 2020 and April 6, 2021 (as amended, the “Purchase Agreement”), with ACI, Appliances Connection and the 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 “Acquisition”). The Acquisition was completed on June 2, 2021.
The aggregate purchase price is $222,000,000 (subject to adjustment), consisting of (i) $180,000,000 in cash (subject to adjustment), (ii) 2,333,333 shares of the Company’s common stock having a stated value that is equal to $21,000,000 and (iii) 3,562,640 shares of the Company’s common stock, which is equal to (A) $21,000,000 divided by (B) the average of the closing price of the Company’s common stock (as reported on NYSE American) for the 20 trading days immediately preceding the 3rd trading day prior to the closing date of the Acquisition.
The
purchase price was subject to a closing net working capital adjustment provision. Under this provision, the Sellers delivered to
ACI a statement setting forth their good faith estimate of the net working capital of Appliances Connection (which excludes accruals
for sales tax liabilities). If such estimated net working capital exceeded a target net working capital of ($
Upon
execution of the Purchase Agreement, ACI paid a deposit in the amount of $
As
a result of these adjustments, the cash portion of the purchase price paid was $
The Company accounted for the Acquisition using the acquisition method of accounting in accordance with FASB ASC Topic 805 “Business Combinations”. In accordance with ASC 805, we used our 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 the purchase consideration issued
to Appliances Connection was allocated to the net tangible assets acquired. The Company accounted for the Acquisition as the purchase
of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded as of the acquisition
date, at their respective fair values and consolidated with those of the Company. The
preliminary fair value of the net assets to be acquired is $
The table below represents the estimated preliminary purchase price allocation to the net assets acquired, as well as the associated estimated useful lives of the acquired intangible assets.
16
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
| Provisional purchase consideration at preliminary fair value: | ||||
| Cash consideration | $ | |||
| Share issuance | ||||
| Working capital adjustment paid to sellers | ||||
| Working capital adjustment payable to sellers | ||||
| Amount of consideration | $ | |||
| Assets acquired and liabilities assumed at preliminary fair value | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventories | ||||
| Vendor deposits | ||||
| Other assets | ||||
| Property and equipment | ||||
| Right of use operating lease assets | ||||
| Accounts payable and accrued expenses | ( | ) | ||
| Customer deposits | ( | ) | ||
| Finance lease obligation | ( | ) | ||
| Operating lease liability | ( | ) | ||
| Current portion of notes payable | ( | ) | ||
| Long term portion of notes payable | ( | ) | ||
| Net tangible assets acquired | $ | |||
| Total net assets acquired | $ | |||
| Consideration paid | ||||
| Preliminary goodwill | $ | |||
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 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’s revenue and net
income for the three and six months ended June 30, 2021 included in the consolidated statement of operations amounted to approximately
$
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per share (a) | $ | $ | $ | $ | ||||||||||||
| Basic number of shares | ||||||||||||||||
| Diluted number of shares | ||||||||||||||||
| (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. |
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.
17
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
NOTE 10—NOTES PAYABLE
Credit Facilities
On
June 2, 2021, the Company and ACI, as borrowers, 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),
Each
of the Loans matures on June 2, 2026. The Loans will bear interest on the unpaid 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 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 (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 (
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.
Under the Credit Agreement, the Company is required to pay certain fees to M&T, including a commitment fee of up to
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 substantially all of the assets of the Company, ACI and the Guarantors.
18
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
Maturities of the Term Loan are as follows:
| For the years ended December 31, | Amount | |||
| 2021 (remainder of year) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | ||||
| Less: Loan costs | ( | ) | ||
| Total | $ | |||
| Amount classified as a current liability | $ | |||
| Amount classified as long-term liability | $ | |||
Northpoint Loan
On
June 3, 2021, the Company entered into a loan and security agreement with Northpoint Commercial Finance LLC (“Northpoint”),
pursuant to which Northpoint may from time to time advance funds for the acquisition, financing and/or refinancing by the Company of
inventory purchased from Samsung Electronics America, Inc. and/or affiliates and for such other purposes as are acceptable Northpoint.
The loan and security agreement provides that Northpoint may establish a credit limit and may 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 June 30, 2021, such credit
limit is $
The 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 $
10% OID Senior Promissory Notes
On
March 19, 2021,
19
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
Vehicle Loans
Appliances
Connection has financed purchases of transportation vehicles with notes payable which are secured by the vehicles purchased. These notes
have five-year terms and interest rates ranging from
Following is a summary of payments due for the succeeding five years:
| For the years ended December 31, | Amount | |||
| 2021 (remainder of year) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ | |||
| Amount classified as a current liability | $ | |||
| Amount classified as a long-term liability | $ | |||
NOTE 11—LEASES
Financing Leases
Appliances
connection has three finance leases for the acquisition of forklifts. At June 30, 2021, the total amount due on these leases was $
The Following is a summary of payments due on financing leases for the succeeding five years:
| For the years ended December 31, | Amount | |||
| 2021 (remainder of year) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 and thereafter | ||||
| Total payments | ||||
| Less: amount representing interest | ( | ) | ||
| Present value of minimum lease payments | $ | |||
Operating 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 $
On January 13, 2021,
20
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
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
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 $
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 (ii) April 30, 2024. The sublease provides for a base rent equal to
During
the three and six months ended June 20, 2021, the Company accrued rent expense of $
Supplemental balance sheet information related to leases at June 30, 2021 was as follows:
| Operating lease right-of-use assets | $ | |||
| Lease liabilities, current portion | $ | |||
| Lease liabilities, long-term | ||||
| Total operating lease liabilities | $ | |||
| Weighted average remaining lease term (months) | ||||
| Weighted average discount rate | % |
Maturities of the lease liabilities for each of the next five years is as follows:
| 2021 (remainder of year) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less imputed interest | ( | ) | ||
| Total lease liability | $ |
21
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
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-off the remaining right of use asset and related leasehold improvements as of that date.
NOTE 12—SUPPLIER CONCENTRATION
Significant
customers and suppliers are those that account for greater than
For
the three and six months ended June 30, 2021, the Company purchased a substantial portion of finished goods from DMI,
The Company believes there are numerous other suppliers that could be substituted should the supplier become unavailable or non-competitive.
NOTE 13—RELATED PARTIES
Management Services Agreement
On
April 5, 2019, the Company entered into a management services agreement with 1847 Partners LLC (the “Manager”), a company
owned and controlled by Ellery W. Roberts, the Company’s chairman and prior significant stockholder, which was amended effective
on August 4, 2020. 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 $
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 the Company in connection with performing services under the management services agreement. The Company did not pay any expenses for the three and six months ended June 30, 2021 and 2020.
The
Company expensed management fees of $
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
At June 30, 2021, vendor rebate deposits due
from DMI were $
22
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
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 $
NOTE 14—STOCKHOLDERS’ DEFICIT
As
of June 30, 2021, the Company was authorized to issue
Common Stock
As
of June 30, 2021 and December 31, 2020, the Company had
On
May 27, 2021, the Company entered 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.
On
June 2, 2021, the Company sold
On
June 7, 2021, the Company sold
During
June 2021,
On
June 2, 2021, the Company issued
23
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
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
The Company did not issue any shares of common stock during the three and six months ended June 20, 2020.
Equity Incentive Plan
Effective
as of July 30, 2020, the Company established the 1847 Goedeker Inc. 2020 Equity Incentive Plan (the “Plan”) and reserved
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. As of June 30, 2021,
a total of
During the third and fourth quarters of 2020, the
Company issued options for the purchase of
The following table presents activity relating to stock options for the six months ended June 30, 2021:
| Shares | Weighted Average Exercise Price | Weighted Average Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited / Cancelled / Expired | ||||||||||||
| Outstanding at June 30, 2021 | $ | |||||||||||
| Exercisable at June 30, 2021 | $ | |||||||||||
As of June 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
On
March 19, 2021, the Company issued four-year warrants to purchase an aggregate of
24
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(UNAUDITED)
On
June 2, 2021, the Company issued warrants to purchase
All
of the foregoing warrants contain an exercise limitation,
The following table presents activity relating to the warrants for the six months ended June 30, 2021:
| Shares | Weighted Average Exercise Price | Weighted Average Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Cancelled / Expired | ||||||||||||
| Outstanding at June 30, 2021 | $ | |||||||||||
NOTE 15—COMMITMENTS AND CONTINGENCIES
On January 18, 2019, the Company entered into an asset purchase agreement with Goedeker, Steve Goedeker and Mike Goedeker, pursuant to which on April 5, 2019 the Company acquired substantially all of the assets of Goedeker used in its retail appliance and furniture business (the “Goedeker Business”).
NOTE 16—SUBSEQUENT EVENTS
In accordance with ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2021 to the date these unaudited condensed consolidated financial statements were issued and has determined that it does not have any material subsequent events to disclose in these unaudited condensed consolidated financial statements, except as set forth below.
On
July 28, 2021, the Company issued an option under the Plan for the purchase of
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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.
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and the “Company” are to 1847 Goedeker Inc., a Delaware corporation, and its consolidated subsidiaries, Appliances Connection Inc., a Delaware corporation (“ACI”), 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 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 operations and financial condition; |
| ● | 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 Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2020 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
We operate a technology-driven e-commerce platform for appliances, furniture, home goods and related products. Since our founding in 1951, we have evolved from a local brick and mortar operation serving the St. Louis metro area to a nationwide omni-channel retailer offering the largest online selection of household appliances across all major appliance brands with competitive pricing. While we still maintain showrooms in the St. Louis area and, following the acquisition described below, in Brooklyn, New York, over 95% of our sales are placed through our websites at www.goedekers.com and www.appliancesconnection.com. Our relentless focus on customer experience encompasses our easy to navigate websites, highly trained call center representatives and sophisticated fulfillment ecosystem.
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Our customers span a wide range of demographics, style and budget, which we attract with our efficient digital marketing capabilities and match with our broad product selection. We have invested considerably in our scalable logistics infrastructure, purpose built for the unique demands of the appliance market and see it as a competitive advantage, strengthening as we grow. Our tightly-integrated vendor relationships and order management tools allow us to offer our vast selection of products while holding limited inventory, contributing to strong and improving operating metrics.
On June 2, 2021, we acquired Appliances Connection, a leading retailer of household appliances based in Brooklyn, New York. Appliances Connection has built powerful home-grown logistics technology that can help reduce cycle time and efficiencies for our operations. Appliances Connection brings the relationships, network, and technology necessary to continue economies of scale for our business throughout the United States e-commerce market. We intend to leverage Appliances Connection’s powerful platform to increase speed, reduce costs and increase margins across our entire business.
Impact of Coronavirus Pandemic
Starting in late 2019, a novel strain of the coronavirus, or COVID-19, began to rapidly spread around the world and every state in the United States. Most states and cities have at various times instituted quarantines, restrictions on travel, “stay at home” rules, social distancing measures and restrictions on the types of businesses that could continue to operate, as well as guidance in response to the pandemic and the need to contain it. Pursuant to restrictions in Missouri, our showroom was closed from April through June of 2020, but our call center and warehouse continued to operate. Since most of our sales are completed online and our call center and warehouse and distribution operations continued to operate, the restrictions put in place in response to the pandemic did not had a materially negative impact on our operations.
However, 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 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.
The 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 pandemic. Changing consumer behaviors as a result of the pandemic may also have a material impact on revenue.
Furthermore, the spread of COVID-19 has adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The pandemic has resulted, and may continue to result, in a significant disruption of global financial markets, which may reduce our ability to access capital in the future, which could negatively affect 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.
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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.
We will remain an emerging growth company 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 are $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 (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 without business. |
Key Financial Operating Metrics
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Site Sessions (in millions) | 5.3 | 3.1 | 7.8 | 4.5 | ||||||||||||
| Order History (in millions) | $ | 105.1 | $ | 29.8 | $ | 105.7 | $ | 45.2 | ||||||||
A site session occurs when a person visits our websites. An order occurs when a customer has visited our websites and ordered one or more items and has paid for them. An order is paid for by our customer when the order is placed and booked as revenue by us when the order is shipped.
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. When there are no supply chain issues, 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. COVID-19 significantly increased the time between order and shipment, which increased customer cancellations.
Our site sessions increased to approximately 5.3 million in the three months ended June 30, 2021, which included approximately 2.7 million site sessions attributable to Appliances Connection from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to approximately 3.1 million in the three months ended June 30, 2020. These increased site sessions resulted in three-year highs for orders in the three months ended June 30, 2021.
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Results of Operations
Comparison of Three Months Ended June 30, 2021 and 2020
The following table sets forth key components of our results of operations for the three months ended June 30, 2021 and 2020, in dollars and as a percentage of our net sales.
Three
Months Ended | Three
Months Ended | |||||||||||||||
| Amount | %
of | Amount | %
of | |||||||||||||
| Products sales, net | $ | 64,072,098 | 100.00 | % | $ | 15,285,031 | 100.00 | % | ||||||||
| Cost of goods sold | 51,016,609 | 79.62 | % | 12,685,158 | 82.99 | % | ||||||||||
| Gross profit | 13,055,489 | 20.38 | % | 2,599,873 | 17.01 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| Personnel | 4,821,168 | 7.52 | % | 1,040,189 | 6.81 | % | ||||||||||
| Advertising | 2,931,815 | 4.58 | % | 891,907 | 5.84 | % | ||||||||||
| Bank and credit card fees | 2,095,359 | 3.27 | % | 454,569 | 2.97 | % | ||||||||||
| Depreciation and amortization | 175,143 | 0.27 | % | 91,790 | 0.60 | % | ||||||||||
| Acquisition expenses | 357,411 | 0.56 | % | - | - | |||||||||||
| Loss on abandonment of right of use asset | 1,437,042 | 2.25 | % | - | - | |||||||||||
| General and administrative | 2,500,381 | 3.90 | % | 1,509,417 | 9.88 | % | ||||||||||
| Total operating expenses | 14,318,319 | 22.35 | % | 3,987,872 | 26.09 | % | ||||||||||
| Loss from operations | (1,262,830 | ) | (1.97 | )% | (1,387,999 | ) | (9.08 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | 12,283 | 0.02 | % | 1,062 | 0.01 | % | ||||||||||
| Financing costs | (74,738 | ) | (0.12 | )% | (74,504 | ) | (0.49 | )% | ||||||||
| Interest expense | (943,392 | ) | (1.47 | )% | (296,708 | ) | (1.94 | )% | ||||||||
| Loss on extinguishment of debt | (1,747,901 | ) | (2.73 | )% | (948,856 | ) | (6.21 | )% | ||||||||
| Write-off of acquisition receivable | - | - | (809,000 | ) | (5.29 | )% | ||||||||||
| Change in fair value of warrant liability | - | - | (2,127,656 | ) | (13.92 | )% | ||||||||||
| Other income | 794 | - | 2,880 | 0.02 | % | |||||||||||
| Total other income (expense) | (2,752,954 | ) | (4.30 | )% | (4,252,782 | ) | (27.82 | )% | ||||||||
| Net loss before income taxes | (4,015,784 | ) | (6.27 | )% | (5,640,781 | ) | (36.90 | )% | ||||||||
| Income tax benefit (expense) | 8,048,478 | 12.56 | % | 688,953 | 4.51 | % | ||||||||||
| Net income (loss) | $ | 4,032,694 | 6.29 | % | $ | (4,951,828 | ) | (32.40 | )% | |||||||
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 $64,072,098 for the three months ended June 30, 2021, which included $47,780,835 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $15,285,031 for the three months ended June 30, 2020, an increase of $48,787,067, or 319.18%. Excluding Appliances Connection, our product sales increased by $1,006,232, or 6.58%. This 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.
During the three months ended June 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. For the three months ended June 30, 2021, we estimate that cancellations caused by shipping delays approximated $11.5 million based on the historical ratio of shipped sales to customer orders of approximately 80.7% for the three most recent pre COVID-19 years (2017 to 2019) to the actual ratio of approximately 47.3% in the three months ended June 30, 2021.
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Our revenue by sales type is as follows:
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Appliance sales | $ | 56,202,115 | 87.72 | % | $ | 11,533,006 | 75.45 | % | ||||||||
| Furniture sales | 6,172,784 | 9.63 | % | 2,768,327 | 18.11 | % | ||||||||||
| Other sales | 1,697,199 | 2.65 | % | 983,698 | 6.44 | % | ||||||||||
| Total | $ | 64,072,098 | 100.00 | % | $ | 15,285,031 | 100.00 | % | ||||||||
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 (3.27%) as compared to the Company (28.18%).
Cost of goods sold. Our cost of goods sold consists of the cost of purchased merchandise plus the cost of delivering merchandise and, where applicable, installation, net of promotional rebates and other incentives received from vendors. Our cost of goods sold was $51,016,609 for the three months ended June 30, 2021, which included $37,661,999 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $12,685,158 for the three months ended June 30, 2020, an increase of $38,331,451, or 302.18%. Excluding Appliances Connection, our cost of goods sold increased by $669,452, or 5.28%. As a percentage of net sales, cost of goods sold was 79.62% (or 81.97% excluding Appliances Connection) and 82.99% for the three months ended June 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 decreased slightly due to a change in product mix with furniture sales, which have lower costs, comprising a larger percentage of our net sales in the 2021 period.
Gross profit and gross margin. As a result of the foregoing, our gross profit was $13,055,489 for the three months ended June 30, 2021, which included $10,118,836 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $2,599,873 for the three months ended June 30, 2020, an increase of $10,455,616, or 402.16%. Excluding Appliances Connection, our gross profit increased by $336,780, or 12.95%. Our gross margin (gross profit as a percentage of net sales) was 20.38% (or 18.03% excluding Appliances Connection) and 17.01% for the three months ended June 30, 2021 and 2020, respectively. Such increase was primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, our gross margin increased slightly due to the change in product mix described above.
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 stock compensation expense. Our personnel expenses were $4,821,168 for the three months ended June 30, 2021, which included $1,951,705 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $1,040,189 for the three months ended June 30, 2020, an increase of $3,780,979, or 363.49%. Excluding Appliances Connection, our personnel expenses increased by $1,829,274, or 175.86%. As a percentage of net sales, personnel expenses were 7.52% (or 17.61% excluding Appliances Connection) and 6.81% for the three months ended June 30, 2021 and 2020, respectively. Such increase is the result of hiring the senior management team and support staff needed because of increased customer orders. Additionally, during the 2021 period, we incurred stock compensation expenses of $679,575 that we did not have in the 2020 period.
Advertising expenses. Advertising expenses include the cost of marketing our products and primarily include online search engine expenses. Our advertising expenses were $2,931,815 for the three months ended June 30, 2021, which included $913,533 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $891,907 for the three months ended June 30, 2020, an increase of $2,039,908, or 228.71%. Excluding Appliances Connection, our advertising expenses increased by $1,126,375, or 126.29%. As a percentage of net sales, advertising expenses were 4.58% (or 12.39% excluding Appliances Connection) and 5.84% for the three months ended June 30, 2021 and 2020, respectively. The increase relates to an increase in advertising spending to drive traffic to our website.
Bank and credit card fees. Bank and credit card fees are primarily the fees we pay credit card processors for processing credit card payments made by customers. Our bank and credit card fees were $2,095,359 for the three months ended June 30, 2021, which included $1,573,462 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $454,569 for the three months ended June 30, 2020, an increase of $1,640,790, or 360.96%. Excluding Appliances Connection, our bank and credit card fees increased by $67,328 or 14.81%. As a percentage of net sales, bank and credit card fees were 3.27% (or 3.20% excluding Appliances Connection) and 2.97% for the three months ended June 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 $175,143, or 0.27% of net sales, for the three months ended June 30, 2021, which included $52,812 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $91,790, or 0.60% of net sales, for the three months ended June 30, 2020.
Acquisition expenses. During the three months ended June 30, 2021, we incurred expenses related to the acquisition of Appliances Connection in the amount of $357,411.
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Loss on abandonment of right of use asset. During the three months ended June 30, 2021, we incurred a loss in the amount of $1,437,042 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 consist primarily of professional advisor fees, rent expense, insurance, unremitted sales tax, and other expenses incurred in connection with general operations. Our general and administrative expenses were $2,500,381 for the three months ended June 30, 2021, which included $703,723 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $1,509,417 for the three months ended June 30, 2020, an increase of $990,964, or 65.65%. Excluding Appliances Connection, our general and administrative expenses increased by $287,241, or 19.03%. As a percentage of net sales, general and administrative expenses were 3.90% (or 11.03% excluding Appliances Connection) and 9.88% for the three months ended June 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 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 $2,752,954 in total other expense, net, for the three months ended June 30, 2021, which included other expense, net, of $50,665 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to total other expense, net, of $4,252,782 for the three months ended June 30, 2020. Total other expense, net, for the three months ended June 30, 2021 consisted of interest expense of $943,392, financing costs of $74,738 and a loss on extinguishment of debt of $1,747,901, offset by interest income of $12,283 and other income of $794. Total other expense, net, for the three months ended June 30, 2020 consisted of interest expense of $296,708, financing costs of $74,504, a loss on extinguishment of debt of $948,856, a loss on acquisition working capital receivable of $809,000, and change in the warrant liability of $2,127,656, offset by interest income of $1,062 and other income of $2,880.
Income tax benefit (expense). We had an income tax net benefit of $8,048,478 for the three months ended June 30, 2021, as compared to an income tax benefit of $688,953 for the three months ended June 30, 2020. The tax benefit arose from the elimination of the allowance for the deferred tax asset. The acquisition of Appliances Connection on June 2, 2021 makes it more likely than not that the Company will be profitable, and will be able to utilize previously derived net operating losses.
Net income (loss). As a result of the cumulative effect of the factors described above, we had net income of $4,032,694 for the three months ended June 30, 2021, which include a net income of $4,872,936 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to a net loss of $4,951,828 for the three months ended June 30, 2020, an increase of $8,984,522, or 181.44%. Excluding Appliances Connection, net loss decreased by $4,111,586, or 83.03%.
Comparison of Six Months Ended June 30, 2021 and 2020
The following table sets forth key components of our results of operations for the six months ended June 30, 2021 and 2020, in dollars and as a percentage of our net sales.
Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||
| Products sales, net | $ | 77,769,466 | 100.00 | % | $ | 24,962,209 | 100.00 | % | ||||||||
| Cost of goods sold | 62,085,520 | 79.83 | % | 20,796,328 | 83.31 | % | ||||||||||
| Gross profit | 15,683,946 | 20.17 | % | 4,165,881 | 16.69 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| Personnel | 6,752,492 | 8.68 | % | 2,351,673 | 9.42 | % | ||||||||||
| Advertising | 4,015,063 | 5.16 | % | 1,558,343 | 6.24 | % | ||||||||||
| Bank and credit card fees | 2,628,101 | 3.38 | % | 699,309 | 2.80 | % | ||||||||||
| Depreciation and amortization | 297,475 | 0.38 | % | 183,631 | 0.74 | % | ||||||||||
| Acquisition expenses | 802,899 | 1.03 | % | - | - | |||||||||||
| Loss on abandonment of right of use asset | 1,437,042 | 1.85 | % | - | - | |||||||||||
| General and administrative | 4,294,390 | 5.52 | % | 2,949,257 | 11.81 | % | ||||||||||
| Total operating expenses | 20,227,462 | 26.01 | % | 7,742,213 | 31.02 | % | ||||||||||
| Loss from operations | (4,543,516 | ) | (5.84 | )% | (3,576,332 | ) | (14.33 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | 22,379 | 0.03 | % | 1,062 | - | |||||||||||
| Financing costs | (80,003 | ) | (0.10 | )% | (269,186 | ) | (1.08 | )% | ||||||||
| Interest expense | (1,170,957 | ) | (1.51 | )% | (557,996 | ) | (2.24 | )% | ||||||||
| Loss on extinguishment of debt | (1,747,901 | ) | (2.25 | )% | (948,856 | ) | (3.80 | )% | ||||||||
| Write-off of acquisition receivable | - | - | (809,000 | ) | (3.24 | )% | ||||||||||
| Change in fair value of warrant liability | - | - | (2,127,656 | ) | (8.52 | )% | ||||||||||
| Other income | 10,999 | 0.01 | % | 5,263 | 0.02 | % | ||||||||||
| Total other income (expense) | (2,965,483 | ) | (3.81 | )% | (4,706,369 | ) | (18.85 | )% | ||||||||
| Net loss before income taxes | (7,508,999 | ) | (9.66 | )% | (8,282,701 | ) | (33.18 | )% | ||||||||
| Income tax benefit (expense) | 8,048,478 | 10.35 | % | 1,123,953 | 4.50 | % | ||||||||||
| Net income (loss) | $ | 539,479 | 0.69 | % | $ | (7,158,748 | ) | (28.68 | )% | |||||||
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Product sales, net. Our product sales were $77,769,466 for the six months ended June 30, 2021, which included $47,780,835 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $24,962,209 for the six months ended June 30, 2020, an increase of $52,807,257, or 211.55%. Excluding Appliances Connection, our product sales increased by $5,026,422 or 20.1%. This 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.
During the six months ended June 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. For the six months ended June 30, 2021, we estimate that cancellations caused by shipping delays approximated $22.5 million based on the historical ratio of shipped sales to customer orders of approximately 80.7% for the three most recent pre COVID-19 years (2017 to 2019) to the actual ratio of approximately 46.1% in the six months ended June 30, 2021.
Our revenue by sales type is as follows:
| Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Appliance sales | $ | 66,387,297 | 85.37 | % | $ | 19,335,110 | 77.46 | % | ||||||||
| Furniture sales | 8,487,474 | 10.91 | % | 4,050,163 | 16.23 | % | ||||||||||
| Other sales | 2,894,695 | 3.72 | % | 1,576,936 | 6.32 | % | ||||||||||
| Total | $ | 77,769,466 | 100.00 | % | $ | 24,962,209 | 100.00 | % | ||||||||
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 (3.27%) compared to the Company (23.01%).
Cost of goods sold. Our cost of goods sold was $62,085,520 for the six months ended June 30, 2021, which included $37,661,999 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $20,796,328 for the six months ended June 30, 2020, an increase of $41,289,192, or 198.54%. Excluding Appliances Connection, our cost of goods sold increased by $3,627,193, or 17.4%. As a percentage of net sales, cost of goods sold was 79.83% (or 81.44% excluding Appliances Connection) and 83.31% for the six months ended June 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.
Gross profit and gross margin. As a result of the foregoing, our gross profit was $15,683,946 for the six months ended June 30, 2021, which included $10,118,836 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $4,165,881 for the six months ended June 30, 2020, an increase of $11,518,065, or 276.49%. Excluding Appliances Connection, our gross profit increased by $1,399,229, or 33.6%%. Our gross margin (gross profit as a percentage of net sales) was 20.17% (or 18.56% excluding Appliances Connection) and 16.69% for the six months ended June 30, 2021 and 2020, respectively. Such increase was primarily due to the impact of the acquisition of Appliances Connection, as well as a change in product mix with furniture sales, which have higher margins, comprising a larger percentage of our net sales in the 2021 period.
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Personnel expenses. Our personnel expenses were $6,752,492 for the six months ended June 30, 2021, which included $1,951,705 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $2,351,673 for the six months ended June 30, 2020, an increase of $4,400,819, or 187.14%. Excluding Appliances Connection, our personnel expenses increased by $2,449,114, or 104.1%. As a percentage of net sales, personnel expenses were 8.68% (or 16.01% excluding Appliances Connection) and 9.42% for the six months ended June 30, 2021 and 2020, respectively. Such increase is the result of hiring the senior management team and support staff needed because of increased customer orders. Additionally, during the 2021 period, we incurred stock compensation expenses of $804,150 that we did not have in the 2020 period.
Advertising expenses. Our advertising expenses were $4,015,063 for the six months ended June 30, 2021, which included $913,533 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $1,558,343 for the six months ended June 30, 2020, an increase of $2,456,720, or 157.65%. Excluding Appliances Connection, our advertising expenses increased by $1,543,187, or 99.00%. As a percentage of net sales, advertising expenses were 5.16% (or 10.34% excluding Appliances Connection) and 6.24% for the six months ended June 30, 2021 and 2020, respectively. 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 $2,628,101 for the six months ended June 30, 2021, which included $1,573,462 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $699,309 for the six months ended June 30, 2020, an increase of $1,928,792, or 275.81%. Excluding Appliances Connection, our bank and credit card fees increased by $355,330, or 50.81%. As a percentage of net sales, bank and credit card fees were 3.38% (or 3.52% excluding Appliances Connection) and 2.80% for the six months ended June 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 $297,475, or 0.38% of net sales, for the six months ended June 30, 2021, which included $52,812 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $183,631, or 0.74% of net sales, for the six months ended June 30, 2020.
Acquisition expenses. During the six months ended June 30, 2021, we incurred expenses related to the acquisition of Appliances Connection in the amount of $802,899.
Loss on abandonment of right of use asset. During the six months ended June 30, 2021, we incurred a loss in the amount of $1,437,042 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 $4,294,390 for the six months ended June 30, 2021, which included $703,723 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $2,949,257 for the six months ended June 30, 2020, an increase of $1,345,133, or 45.61%. Excluding Appliances Connection, our general and administrative expenses increased by $641,410, or 21.75%. As a percentage of net sales, general and administrative expenses were 5.52% (or 11.97% excluding Appliances Connection) and 11.81% for the six months ended June 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 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 $2,965,483 in total other expense, net, for the six months ended June 30, 2021, which included other expense, net, of $50,665 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to total other expense, net, of $4,706,369 for the six months ended June 30, 2020. Total other expense, net, for the three months ended June 30, 2021 consisted of interest expense of $1,170,957, financing costs of $80,003 and a loss on extinguishment of debt of $1,747,901, offset by interest income of $22,379 and other income of $10,999. Total other expense, net, for the six months ended June 30, 2020 consisted of interest expense of $557,996, financing costs of $269,186, a loss on extinguishment of debt of $948,856, a loss on acquisition working capital receivable of $809,000, and change in the warrant liability of $2,127,656, offset by interest income of $1,062 and other income of $5,263.
Income tax benefit (expense). We had an income tax net benefit of $8,048,478 for the six months ended June 30, 2021, as compared to an income tax benefit of $1,123,953 for the six months ended June 30, 2020. The tax benefit arose from the elimination of the allowance for the deferred tax asset. The acquisition of Appliances Connection on June 2, 2021 makes it more likely than not that the Company will be profitable, and will be able to utilize previously derived net operating losses.
Net income (loss). As a result of the cumulative effect of the factors described above, we had net income of $539,479 for the six months ended June 30, 2021, which include a net income of $4,872,936 from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to a net loss of $7,158,748 for the six months ended June 30, 2020, an increase of $7,698,227, or 107.54%. Excluding Appliances Connection, net loss decreased by $2,828,291, or 39.47%.
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Liquidity and Capital Resources
As of June 30, 2021, we had cash and cash equivalents of $45,234,542 and restricted cash of $8,385,848. 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 issuance of notes to support cashflow from operations.
For the six months ended June 30, 2021, the Company incurred operating losses of approximately $4,543,516 and negative cash flow from operations of $6,985,302, but had working capital of $15,530,879. Additionally, the Company had over $45 million of unrestricted cash at June 30, 2021. On June 2, 2021, the Company closed on the acquisition of Appliances Connection. Appliances Connection has historically been profitable, however, only 29 days of their operations are included in results for the three and six months of 2021.
Management has prepared estimates of operations for fiscal years 2021 and 2022 and believes that sufficient funds will be generated from operations to fund its operations, and to service its debt obligations for one year from the date of the filing of this report. Additionally, only one month of operations for Appliances Connection, which has operated profitably, are included in the results of operations for the six months ended June 30, 2021.
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.
Summary of Cash Flow
The following table provides detailed information about our net cash flow for the six months ended June 30, 2021 and 2020.
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by (used in) operating activities | $ | (6,985,302 | ) | $ | 3,852,042 | |||
| Net cash used in investing activities | (198,132,666 | ) | (7,000 | ) | ||||
| Net cash provided by (used in) financing activities | 248,826,442 | (353,566 | ) | |||||
| Net change in cash and restricted cash | 43,708,474 | 3,491,476 | ||||||
| Cash and restricted cash, beginning of period | 9,911,916 | 64,470 | ||||||
| Cash and restricted cash, end of period | $ | 53,620,390 | $ | 3,555,946 | ||||
Our net cash used in operating activities was $6,985,302 for the six months ended June 30, 2021, which included $8,947,315 in net cash provided by operating activities from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to $3,852,042 net cash provided by operating activities for the six months ended June 30, 2020. For the six months ended June 30, 2021, our net income of $539,479, a decrease in inventory of $2,313,999, non-cash expenses for early extinguishment of debt of $1,747,901 and an impairment loss of $1,437,042, offset by a decrease in accounts payable and accrued expenses of $4,358,830, customer deposits of $1,740,825, prepaid expenses and other current assets of $1,037,508, and an increase in deferred tax asset of $8,049,978, represent the primary drivers for cash used in operations. For the six months ended June 30, 2020, our net loss of $7,158,748, a decrease in prepaid expenses and other assets of $1,914,049 and deferred tax assets of $1,123,953, offset by an in customer deposits of $8,267,312, an increase in accounts payable and accrued expenses of $2,003,642, and a change in fair value of warrant liability of $2,127,656, were the primary drivers of the net cash provided by operating activities.
Our net cash used in investing activities was $198,132,666 for the six months ended June 30, 2021, as compared to $7,000 for the six months ended June 30, 2020. Net cash used in investing activities for the six months ended June 30, 2021 consisted of cash paid in the acquisition of Appliances Connection of $197,623,238 and purchases of property and equipment of $509,428. Net cash used in investing activities for the for the six months ended June 30, 2020 consisted of entirely purchases of property and equipment. Appliances Connection did not have any investing activities for the six months ended June 30, 2021.
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Our net cash provided by financing activities was $248,826,442 for the six months ended June 30, 2021, which included $42,107 in net cash used in financing activities from Appliances Connection for the period from June 2, 2021 (date of acquisition) to June 30, 2021, as compared to net cash used in financing activities of $353,566 for the six months ended June 30, 2020. Net cash provided by financing activities for the six months ended June 30, 2021 consisted of proceeds from the public offering described below of $194,597,500, proceeds from the exercise of warrants of $2,335,083, proceeds from the term loan described below of $55,216,594, offset by repayment on notes payable of $ 3,321,536. Net cash used in financing activities for the six months ended June 30, 2020 consisted of net payments on lines of credit of $814,492 and repayment on notes payable of $181,674, offset by proceeds from a paycheck protection plan loan of $642,600.
Public Offering
On May 27, 2021, we entered 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, 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 units were immediately separable and were issued separately.
On June 2, 2021, we 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 $205,020,000. After deducting the underwriting commission and expenses, we received net proceeds of approximately $190,481,100.
On June 7, 2021, we sold 2,000,000 shares of common stock to the Underwriter for total gross proceeds of $4,480,000. After deducting the underwriting commission and expenses, we received net proceeds of approximately $4,166,400.
As of June 30, 2021, an aggregate of 1,039,148 warrants were converted to common stock at $2.25 per share, yielding proceeds of $2,338,083.
We used to the proceeds of this offering to fund a portion of the purchase price for the acquisition of Appliances Connection.
Private Placement
On March 19, 2021, we entered into a securities purchase agreement with two institutional investors, pursuant to which we issued to each investor (i) a 10% OID senior secured promissory note in the principal amount of $2,750,000 and (ii) a four-year warrant to purchase 200,000 shares of our common stock at an exercise price of $12.00, subject to adjustments, which may be exercised on a cashless basis, for a purchase price of $2,500,000 each, or $5,000,000 in the aggregate. After deducting a placement fee and other expenses, we received net proceeds of $4,590,000. On June 2, 2021, we repaid these notes in full from the proceeds of the term loan described below.
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 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 $70,000,000, including (i) a $60,000,000 term loan (the “Term Loan”) and (ii) a $10,000,000 revolving credit facility (the “Revolving Loan”), which revolving credit facility includes a $2,000,000 swingline subfacility (the “Swing Line Loan” and together with the Term Loan and the Revolving Loan, the “Loans”) and a $2,000,000 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 $60,000,000. As of June 30, 2021, we have not made any loans under the Revolving Loan. As of June 30, 2021, the outstanding balance of the Term Loan is $56,311,521, comprised of principal of $60,000,000 net of unamortized loan costs of $3,688,479. We have classified $6,000,000 as a current liability and the balance as a long-term liability.
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Each of the Loans matures on June 2, 2026. The Loans will bear interest on the unpaid 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 initial 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 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 provisions of the credit and guaranty agreement. Notwithstanding the foregoing, following an event of 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.
We must repay the principal amount of the Term Loan in quarterly installments of $1,500,000 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 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, ACI and the Guarantors.
Vehicle Loans
Appliances Connection has financed purchases of transportation 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 June 30, 2021, the outstanding balance of these notes is $1,488,620.
Financing Leases
Appliances Connection has three finance leases for the acquisition of forklifts. At June 30, 2021, the total amount due on these leases was $210,809.
Contractual Obligations
Our principal commitments consist mostly of obligations under the loans described above and other contractual commitments described below.
Management Services Agreement
On April 5, 2019, we entered into a management services agreement with 1847 Partners LLC (the “Manager”), pursuant to 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 management services agreement, our quarterly fee may be reduced if similar fees payable to the Manager by subsidiaries of our former parent company, 1847 Holdings LLC, exceed a threshold amount.
Pursuant to the 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 us or our affiliates on our behalf in connection with performing services under the management services agreement.
We expensed management fees of $62,500 for the three months ended June 30, 2021 and 2020 and $125,000 for the six months ended June 30, 2021 and 2020.
Earn Out Payment
Pursuant to an asset purchase agreement, dated January 18, 2019, as amended, among the Company, Goedeker Television Co. (“Goedeker”), Steve Goedeker and Mike Goedeker, Goedeker is entitled to receive an earn out payment of $200,000 if the EBITDA (as defined in the asset purchase agreement) of the business acquired from Goedeker for the trailing twelve (12) month period from April 5, 2022 is $2,500,000 or greater, and may be entitled to receive a partial earn out payment if the EBITDA is less than $2,500,000 but greater than $1,500,000.
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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 month every year. 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 for the utilities used on the premises. 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 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 $96,896.37 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 contains customary events of default.
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 $6,365.40 per month during the first year with annual increases to $8,305.40 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.
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 (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.
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 preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. 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, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2021.
During the three and six months ended June 30, 2021, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements.
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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 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
There were no 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 June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 June 30, 2021 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 June 30, 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 June 30, 2021 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.
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ITEM 6. EXHIBITS.
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| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
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: August 12, 2021 | 1847 GOEDEKER INC. |
| /s/ Douglas T. Moore | |
| Name: Douglas T. Moore | |
| Title: Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ Robert D. Barry | |
| Name: Robert D. Barry | |
| Title: Chief Accounting Officer | |
| (Principal Accounting Officer) |
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