UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 001-39418

1847 GOEDEKER INC.

(Exact name of registrant as specified in its charter)

Delaware		83-3713938
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

3817 Millstone Parkway, St. Charles, MO		63301
(Address of principal executive offices)		(Zip Code)

888-768-1710

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	GOED	NYSE American LLC
Warrants to Purchase Common Stock	GOED WS	NYSE American LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☒	Smaller reporting company ☒
		Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 12, 2021, there were 106,387,332 shares of the registrant’s common stock issued and outstanding.

1847 GOEDEKER INC.

Quarterly Report on Form 10-Q

Period Ended September 30, 2021

TABLE OF CONTENTS

	PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37

	PART II OTHER INFORMATION

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

1847 GOEDEKER INC.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		Page

Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020		2
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)		3
Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)		4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited)		5
Notes to Condensed Consolidated Financial Statements (unaudited)		6

1847 GOEDEKER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	September 30, 2021			December 31, 2020
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	27,175		$	935
Restricted cash		8,011			8,977
Receivables		24,018			1,998
Vendor deposits		12,134			548
Merchandise inventory, net		37,779			5,147
Prepaid expenses and other current assets		6,058			635
Total Current Assets		115,175			18,240
Property and equipment, net		2,520			246
Operating lease right-of-use assets, net		12,319			1,578
Goodwill		183,768			4,726
Intangible assets, net		47,858			1,382
Other long-term assets		344			45
TOTAL ASSETS	$	361,984		$	26,217

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses	$	68,013		$	12,702
Customer deposits		18,382			21,879
Current portion of notes payable, net		6,425			663
Current portion finance lease liability		41			-
Current portion of operating lease liabilities		2,127			451
Contingent note payable		188			-
Total Current Liabilities		95,176			35,695
Notes payable, net of current portion		49,940			2,522
Finance lease liability, net of current portion		153			-
Operating lease liabilities, net of current portion		11,628			1,128
Deferred income taxes payable, net		3,042			-
Contingent note payable		-			188
TOTAL LIABILITIES		159,939			39,533
Stockholders’ Equity (Deficit)
Preferred stock, $0.0001 par value, 20,000,000 shares authorized; none issued and outstanding as of September 30, 2021 or December 31, 2020		-			-
Common stock, $0.0001 par value, 200,000,000 shares authorized; 106,387,332 and 6,111,200 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		11			1
Additional paid-in capital		224,904			13,409
Accumulated deficit		(22,870	)		(26,726	)
Total Stockholders’ Equity (Deficit)		202,045			(13,316	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	361,984		$	26,217

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

1847 GOEDEKER INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Product sales, net	$	141,867		$	13,435		$	219,637		$	38,397
Cost of goods sold		110,495			11,265			172,581			32,061
Gross profit		31,372			2,170			47,056			6,336

Operating Expenses
Personnel		8,547			2,162			15,300			4,514
Advertising		3,715			1,433			7,730			2,991
Bank and credit card fees		4,918			575			7,546			1,274
Depreciation and amortization		3,610			93			3,908			277
Acquisition expenses		62			-			865			-
Loss on abandonment of right of use asset		-			-			1,437			-
General and administrative		4,018			1,451			8,311			4,400
Total Operating Expenses		24,870			5,714			45,097			13,456

INCOME (LOSS) FROM OPERATIONS		6,502			(3,544	)		1,959			(7,120	)

Other Income (Expense)
Interest income		34			1			57			2
Financing costs		(200	)		(488	)		(280	)		(758	)
Interest expense		(899	)		(229	)		(2,070	)		(787	)
Loss on extinguishment of debt		-			(807	)		(1,748	)		(1,756	)
Write-off of acquisition receivable		-			-			-			(809	)
Change in fair value of warrant liability		-			-			-			(2,128	)
Other income (expense)		8			2			19			7
Total Other Income (Expense)		(1,057	)		(1,521	)		(4,022	)		(6,229	)

NET INCOME (LOSS) BEFORE INCOME TAXES		5,445			(5,065	)		(2,063	)		(13,349	)

INCOME TAX (EXPENSE) BENEFIT		(2,129	)		838			5,919			1,962

NET INCOME (LOSS)	$	3,316		$	(4,227	)	$	3,856		$	(11,387	)

NET INCOME (LOSS) PER COMMON SHARE	$	0.03		$	(0.74	)	$	0.08		$	(2.17	)
DILUTED NET INCOME (LOSS) PER COMMON SHARE	$	0.03		$	(0.74	)	$	0.06		$	(2.17	)

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING –
BASIC		106,387,331			5,736,774			50,047,045			5,247,384
DILUTED		131,787,293			5,736,774			61,816,085			5,247,384

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

1847 GOEDEKER INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

(in thousands)

For the Three and Nine Months Ended September 30, 2021

	Common Stock				Additional Paid-in		Accumulated			Total Stockholders’ Equity
	Shares		Amount		Capital		Deficit			(Deficit)
Balance, January 1, 2021		6,111	$	1	$	13,409	$	(26,726	)	$	(13,316	)
Stock-based compensation expense		-		-		125		-			125
Issuance of warrants in connection with notes payable		-		-		1,340		-			1,340
Net loss		-		-		-		(3,493	)		(3,493	)
Balance, March 31, 2021		6,111	$	1	$	14,874	$	(30,219	)	$	(15,344	)
Issuance of common stock in connection with acquisition		5,896		1		12,263		-			12,264
Issuance of common stock in connection with public offering		93,111		9		194,588		-			194,597
Issuance of stock grants		217		-		555		-			555
Exercise of warrants		1,039		-		2,338		-			2,338
Stock-based compensation expense		-		-		125		-			125
Net income		-		-		-		4,033			4,033
Balance, June 30, 2021		106,374	$	11	$	224,743	$	(26,186	)	$	198,568
Exercise of warrants		13		-		29		-			29
Stock-based compensation expense		-		-		132		-			132
Net income		-		-		-		3,316			3,316
Balance, September 30, 2021		106,387	$	11	$	224,904	$	(22,870	)	$	202,045

For the Three and Nine Months Ended September 30, 2020

	Common Stock				Additional Paid-in		Accumulated			Total Stockholders’
	Shares		Amount		Capital		Deficit			Deficit
Balance, January 1, 2020		4,750	$	-	$	1,079	$	(5,158	)	$	(4,079	)
Net loss		-		-		-		(2,207	)		(2,207	)
Balance, March 31, 2020		4,750	$	-	$	1,079	$	(7,365	)	$	(6,286	)
Issuance of 1847 Holdings warrants in connection with notes payable		-		-		567		-			567
Forgiveness of related party debt		-		-		138		-			138
Issuance of 1847 Holdings shares in connection with conversion of notes payable		-		-		275		-			275
Net loss		-		-		-		(4,952	)		(4,952	)
Balance, June 30, 2020		4,750	$	-	$	2,059	$	(12,317	)	$	(10,258	)
Issuance of common stock for cash		1,111		-		8,602		-			8,602
Issuance of common stock in connection with exercise of warrant		250		-		2,250		-			2,250
Issuance of options		-		-		281		-			281
Issuance of 1847 Holdings shares in connection with conversion of notes payable		-		-		100		-			100
Net loss		-		-		-		(4,227	)		(4,227	)
Balance, September 30, 2020		6,111	$	1	$	13,292	$	(16,544	)	$	(3,252	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

1847 GOEDEKER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	3,856		$	(11,387	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		3,908			277
Amortization of debt discount		854			677
Stock-based compensation expense		936			281
Loss on extinguishment of debt		1,748			1,756
Loss on abandonment of right of use asset		1,437
Write-off of acquisition receivable		-			809
Change in fair value of warrant liability		-			2,128
Deferred tax expense		(6,464	)		(1,962	)
Non-cash lease expense		845			314
Changes in operating assets and liabilities:
Receivables		(2,616	)		521
Vendor deposits		(1,586	)		(253	)
Merchandise inventory		(11,665	)		(1,707	)
Prepaid expenses and other assets		(3,709	)		(989	)
Accounts payable and accrued expenses		11,796			4,306
Customer deposits		(16,891	)		12,926
Operating lease liabilities		(765	)		(314	)
Net cash provided by (used in) provided by operating activities		(18,316	)		7,383

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(693	)		(51	)
Cash paid to sellers in acquisition of Appliances Connection, net of cash acquired		(201,515	)		-
Cash paid to seller in acquisition of Appliance Gallery		(1,420	)		-
Net cash used in investing activities		(203,628	)		(51	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from equity offering		194,598			8,602
Cash received from warrant exercise		2,368			-
Proceeds from term note payable, net		55,217			643
Repayment on notes payable		(4,944	)		(2,047	)
Payments on convertible notes payable		-			(771	)
Payments on finance leases		(21	)		-
Net payments on lines of credit		-			(1,339	)
Cash paid for financing costs		-			(105	)
Net cash provided by financing activities		247,218			4,983

NET CHANGE IN CASH AND RESTRICTED CASH		25,274			12,315
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD		9,912			64
CASH AND RESTRICTED CASH, END OF PERIOD	$	35,186		$	12,379

Cash, cash equivalents, and restricted cash consist of the following:
End of period
Cash and cash equivalents	$	27,175		$	3,467
Restricted cash		8,011			8,912
	$	35,186		$	12,379
Cash, cash equivalents, and restricted cash consist of the following
Beginning of period
Cash and cash equivalents	$	935		$	64
Restricted cash		8,977			-
	$	9,912		$	64
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	1,623		$	820
Cash paid for taxes	$	2,480		$	-

NON-CASH INVESTING AND FINANCING ACTIVITIES
Right of use assets acquired and liabilities assumed	$	11,108		$	-
Debt discount on notes payable from OID	$	2,310		$	-
Debt discount, warrants on short-term note payable	$	1,340		$	-
Stock issued in the acquisition of Appliances Connection	$	12,264		$	-
Debt paid off through issuance of new note	$	5,616		$	-
Due to Seller (consideration) settled by vendor deposits	$	5,000		$	-
Conversion of debt through issuance of 1847 Holdings common shares	$	-		$	375
Exercise of warrant liability through issuance of 1847 Holdings non-controlling interest	$	-		$	119
Derecognition of related party debt	$	-		$	138
Adjustment to fair value of goodwill based on final purchase price allocation	$	-		$	122
Conversion of warrant liability into common stock	$	-		$	2,250
Issuance of note payable to repay Seller note	$	-		$	3,500

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

NOTE 1—ORGANIZATION AND NATURE OF BUSINESS

1847 Goedeker Inc. (“1847 Goedeker”) was formed under the laws of the State of Delaware on January 10, 2019 for the sole purpose of acquiring the business of Goedeker Television Co. Prior to the acquisition, 1847 Goedeker did not have any operations other than operations relating to its incorporation and organization.

On April 5, 2019, 1847 Goedeker 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, 1847 Goedeker acquired the former business of Goedeker and continues to operate this business.

On October 20, 2020, 1847 Goedeker formed Appliances Connection Inc. (“ACI”) as a wholly owned subsidiary in the State of Delaware.

On June 2, 2021, ACI acquired all of the issued and outstanding capital stock or other equity securities of 1 Stop Electronics Center, Inc., a New York corporation (“1 Stop”), Gold Coast Appliances, Inc., a New York corporation (“Gold Coast”), Superior Deals Inc., a New York corporation (“Superior Deals”), Joe’s Appliances LLC, a New York limited liability company (“Joe’s Appliances”) and YF Logistics LLC, a New Jersey limited liability company (“YF Logistics,” and collectively with 1 Stop, Gold Coast, Superior Deals, and Joe’s Appliances, “Appliances Connection”). See Note 9.

On July 6, 2021, 1847 Goedeker formed AC Gallery Inc. (“AC Gallery”) as a wholly owned subsidiary in the State of Delaware.

On July 29, 2021, AC Gallery acquired substantially all the assets and assumed substantially all the liabilities of Appliance Gallery, Inc., a retail appliance store in Largo, FL (“Appliance Gallery”). As a result of this transaction, AC Gallery acquired the former business of Appliance Gallery and continues to operate this business. See Note 9.

1847 Goedeker and its consolidated subsidiaries (collectively, the “Company”) operate an industry leading e-commerce destination for appliances, furniture, and home goods. Through its June 2021 acquisition of Appliances Connection, the Company created one of the largest pure-play online retailers of household appliances in the United States. With warehouse fulfillment centers in the Northeast and Midwest, as well as showrooms in Brooklyn, New York, St. Louis, Missouri, and Largo, Florida the Company offers one-stop shopping for national and global brands. The Company carries many household name-brands, including Bosch, Cafe, Frigidaire Pro, Whirlpool, LG, and Samsung, and also carries many major luxury appliance brands such as Miele, Thermador, La Cornue, Dacor, Ilve, Jenn-Air and Viking, among others. The Company also sells furniture, fitness equipment, plumbing fixtures, televisions, outdoor appliances, and patio furniture, as well as commercial appliances for builder and business clients.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and 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 nine months ended September 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.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of 1847 Goedeker and its consolidated subsidiaries, ACI, 1 Stop, Gold Coast, Superior Deals, Joe’s Appliances, YF Logistics and AC Gallery. All significant intercompany balances and transactions have been eliminated in consolidation. The Company does not have a majority or minority interest in any other company, either consolidated or unconsolidated.

Use of Estimates

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

Cash and Cash Equivalents

Cash and equivalents include: (1) currency on hand, (2) demand deposits with banks or financial institutions, (3) other kinds of accounts that have the general characteristics of demand deposits, and (4) short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. The majority of payments due from financial institutions for the settlement of credit card and debit card transactions process within two business days and are, therefore, classified as cash and cash equivalents. Other payment methods that take more time to settle are classified as receivables.

At September 30, 2021, restricted cash includes approximately $0.2 million to secure vendor letters of credit and $7.8 million withheld by credit card processors as security for the Company’s customer refund claims and credit card chargebacks. Cash pledged to secure the letter of credit will be released when the vendor offers the Company credit terms, and the cash held by credit card processors will be released at the discretion of the credit card companies.

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.

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 trucks 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.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

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

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 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Appliance sales	$	130,837	$	8,992	$	197,416	$	28,327
Furniture sales		5,880		3,555		14,393		7,605
Other sales		5,150		888		7,828		2,465
Total	$	141,867	$	13,435	$	219,637	$	38,397

The Company also sells extended warranty contracts. The Company is an agent for the warranty company and earns a commission on the warranty contracts purchased by customers; therefore, the cost of the warranty contracts is netted against warranty revenue in the accompanying consolidated statement of operations. The Company assumes no liability for repairs to products on which it has sold a warranty contract.

Receivables

Receivables 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 condensed consolidated financial statements. Uncollectible balances are expensed in the period it is determined to be uncollectible. The Company had no significant concentrations of receivables balances as of September 30, 2021 and December 31, 2020.

Merchandise Inventory

Inventory consists of finished products acquired for resale and is valued at the 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.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

Property and Equipment

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

Category		Useful Life (Years)
Furniture and fixtures		7
Machinery and equipment		5-7
Office equipment		5-7
Transportation equipment		5

Goodwill

The Company tests its goodwill for impairment at least annually on December 31 and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and the Company’s consolidated financial results.

The Company tests goodwill by estimating fair value using a Discounted Cash Flow (“DCF”) model. The key assumptions used in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit margins based on internal forecasts, terminal value and an estimate of a market participant’s weighted-average cost of capital used to discount future cash flows to their present value. There were no impairment charges during three and nine months ended September 30, 2021 and 2020.

Intangible Assets

As of September 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.

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. The fair values of intangible assets are compared against their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value. Impairments for the nine months ended September 30, 2021 were $1.4 million due to an abandonment of certain right of use assets. There were no impairments for the nine months ended September 30, 2020.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

Long-Lived Assets

The Company reviews its property and equipment and any identifiable intangibles (including right of use assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management upon triggering events. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. There were no impairments for the nine months ended September 30, 2021 and 2020.

Lease Liabilities

Lease liabilities and their corresponding right of use assets are recorded based on the present value of lease payments over the expected lease term at the lease commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate (“IBR”) based on the information available at the commencement date of the respective lease to determine the present value of future payments. The determination of the IBR requires judgment and is primarily based on publicly available information for companies within the same industry and with similar credit profiles. The Company adjusts the rate for the impact of collateralization, the lease term and other specific terms included in each lease arrangement. The IBR is determined at the lease commencement and is subsequently reassessed upon a modification to the lease arrangement.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company reviews the right of use asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the right of use asset may not be recoverable. When such events occur, the Company compares the carrying amount of the right of use asset to the undiscounted expected future cash flows related to the right of use asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated as the difference between the excess of the carrying amount over the fair value of the right of use asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the right of use asset.

Fair Value of Financial Instruments

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

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

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

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

Customer Deposits

Customer deposits represent the amount collected from customers when an order is placed. The deposits are transferred to revenue when the order ships to the customer or returned to customer if the order is subsequently cancelled.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

Income Taxes

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

In the second quarter of 2021, the Company acquired Appliances Connection. Appliances Connection has a history of profitable operations. As such, the Company determined that it was more likely than not that it would have profitable operations in the future and therefore be able to realize the deferred tax assets and accordingly reversed the allowance for deferred tax assets at June 30, 2021.

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 September 30, 2021 and December 31, 2020, the amount of such accrual was $18.2 million and $5.8 million, respectively. The amount of sales tax liability acquired in the Appliances Connection transaction was $11.0 million plus accrued interest of $1.0 million, which are included in accounts payable and accrued expenses.

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 nine months ended September 30, 2021, the potentially dilutive securities were warrants for the purchase of 92,514,423 shares of common stock and options for the purchase of 705,000 shares of common stock. At September 30, 2020 there were warrants for the purchase of 55,560 shares of common stock and options for the purchase of 483,158 shares of common stock. These potentially dilutive securities were excluded from diluted loss per share. For the three and nine months ended September 30, 2021, 25,413,437 and 11,773,834 of shares from the above option and warrants were included in the dilutive earnings per share, respectively.

Reclassifications

Certain accounts have been reclassified to conform with classifications adopted in the period ended September 30, 2021. Such reclassifications had no effect on net earnings or financial position.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

Impact of COVID-19

In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in China. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The extent of the COVID-19 pandemic’s continued effect on the Company’s operational and financial performance and those of third parties on which the Company relies will depend on future developments, including the effectiveness of vaccines and other treatments for COVID-19, and other new information that may emerge concerning the severity of the pandemic and steps taken to contain the pandemic or treat its impact, among others. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. The Company does not yet know the full extent of potential impacts on its business and financing. However, these effects could have a material impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which the Company relies.

Going Concern Assessment

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

For the nine months ended September 30, 2021, the Company had operating profit of $2.0 million, $18.3 million of cash flow used in operations, and working capital of $20.0 million. Additionally, the Company had $27.2 million of unrestricted cash at September 30, 2021. On June 2, 2021, the Company completed the acquisition of Appliances Connection. Appliances Connection has historically been profitable; however, less than 4 months of their operations are included in results for the nine months ended September 30, 2021.

Management has prepared estimates of operations for fiscal 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 at least one year from the date of the filing of these unaudited condensed consolidated financial statements.

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.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 September 30, 2021 and December 31, 2020, receivables consisted of the following (in thousands):

	September 30, 2021		December 31, 2020
Trade receivables from customers	$	12,551	$	-
Vendor rebates receivable		7,499		1,338
Credit cards in process of collection		135		660
Other receivables		3,833		-
Total receivables	$	24,018	$	1,998

NOTE 4—MERCHANDISE INVENTORY

At September 30, 2021 and December 31, 2020, the inventory balances are composed of the following (in thousands):

	September 30, 2021			December 31, 2020
Appliances	$	34,317		$	5,286
Furniture		1,903			195
Other		1,984			91
Total merchandise inventory		38,204			5,572
Allowance for inventory obsolescence		(425	)		(425	)
Merchandise inventory, net	$	37,779		$	5,147

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

NOTE 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.

Vendor deposits as of September 30, 2021 and December 31, 2020 were $12.1 million and $0.5 million, respectively.

NOTE 6—PROPERTY AND EQUIPMENT

Property and equipment consist of the following at September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021			December 31, 2020
Equipment	$	88		$	69
Warehouse equipment		374			61
Furniture and fixtures		8			1
Transportation equipment		1,418			64
Leasehold improvements		216			137
Construction in progress		693			-
Total property and equipment		2,797			332
Accumulated depreciation		(277	)		(86	)
Property and equipment, net	$	2,520		$	246

Depreciation expense for the nine months ended September 30, 2021 and 2020 was $0.2 million and $0.03 million, respectively.

All property and equipment are pledged to secure the Loans described below (See Note 10).

On June 30, 2021, the Company closed its old warehouse and retail showroom in anticipation of relocating to a new facility. Accordingly, the Company wrote the remaining right of use asset and related leasehold improvements as of that date.

NOTE 7—INTANGIBLE ASSETS AND GOODWILL

The following provides a breakdown of identifiable intangible assets as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021			December 31, 2020
Customer relationships	$	26,549		$	749
Marketing related - tradename		25,704			1,368
Total intangible assets		52,253			2,117
Accumulated amortization		(4,395	)		(735	)
Intangible assets, net	$	47,858		$	1,382

In connection with the acquisition of Goedeker, the Company identified intangible assets of $2.1 million, representing trade names and customer relationships. For the Appliances Connection acquisition, the Company preliminarily identified intangible assets of trade names and customer relationships. These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 5.0 years. Amortization expense for the three months ended September 30, 2021 and 2020 was $3.4 million and $0.08 million, respectively. For the nine months ended September 30, 2021 and 2020, amortization expense was $3.7 million and $0.2 million, respectively.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

At September 30, 2021, estimated annual amortization expense for each of the next five years is as follows (in thousands):

2021 (remainder of year)	$	2,613
2022		10,451
2023		10,451
2024		10,139
2025		10,027
Thereafter		4,177
Total	$	47,858

Following is a summary of goodwill (in thousands):

Balance December 31, 2020	$	4,726
Preliminary goodwill from acquisition of Appliances Connection		177,875
Preliminary goodwill from acquisition of Appliances Gallery		1,167
Balance September 30, 2021	$	183,768

NOTE 8—ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The following is schedule of accounts payable and accrued expenses at September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021		December 31, 2020
Trade accounts payable	$	37,845	$	5,975
Sales tax		23,836		5,804
Accrued payroll liabilities		1,527		493
Accrued interest		210		10
Accrued liability for sales returns		200		200
Other accrued liabilities		4,395		220
Total accounts payable and accrued expenses	$	68,013	$	12,702

NOTE 9—BUSINESS COMBINATIONS

Appliances Connection

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 “AC 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 “AC Acquisition”). The AC Acquisition was completed on June 2, 2021.

The aggregate purchase price is $222.0 million (subject to adjustment), consisting of (i) $180.0 million in cash (subject to adjustment), (ii) 2,333,333 shares of the Company’s common stock having a stated value that is equal to $21.0 million and (iii) 3,562,640 shares of the Company’s common stock, which is equal to (A) $21.0 million divided by (B) the average of the closing price of the 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 AC Acquisition.

The purchase price was subject to a closing net working capital adjustment provision and a post-closing net working capital adjustment provision. As a result of these adjustments, the cash portion of the purchase price paid was $212.6 million.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

The Company accounted for the AC Acquisition using the acquisition method of accounting in accordance with FASB ASC Topic 805 “Business Combinations”. In accordance with ASC 805, the Company used its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.

The fair value of the purchase consideration issued to Appliances Connection was allocated to the net tangible assets acquired. The Company accounted for the AC 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 $47.0 million. The excess of the aggregate estimated fair value of the net tangible assets, $177.9 million, has been allocated to provisional goodwill.

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.

Provisional purchase consideration at preliminary fair value (in thousands):
Cash consideration	$	180,000
Share issuance		12,264
Working capital adjustment paid to sellers		27,597
Working capital adjustment due to sellers		5,000
Amount of consideration	$	224,861

Assets acquired and liabilities assumed at preliminary fair value
Cash	$	5,897
Accounts receivable		19,403
Inventories		20,484
Vendor deposits		15,000
Other assets		2,194
Property and equipment		1,891
Right of use operating lease assets		1,834
Customer relationships		25,800
Marketing related - tradename		24,336
Accounts payable and accrued expenses		(43,633	)
Customer deposits		(13,138	)
Finance lease obligation		(215	)
Net deferred tax liabilities		(9,506	)
Operating lease liability		(1,834	)
Notes payable		(1,527	)
Total net assets acquired	$	46,986
Consideration paid		224,861
Preliminary goodwill	$	177,875

Appliance Gallery

On July 6, 2021, AC Gallery entered into an asset purchase agreement, which was amended on July 21, 2021 and July 29, 2021 (as amended, the “Gallery Purchase Agreement”), with Appliance Gallery, pursuant to which AC Gallery agreed to acquire substantially all the assets and assumed substantially all the liabilities of Appliance Gallery (the “Gallery Acquisition”). The Gallery Acquisition was completed on July 29, 2021.

Pursuant to the Gallery Purchase Agreement, the total purchase price is $1.7 million in cash, subject to certain adjustments at closing. As a result of these adjustments, the purchase price paid at closing was $1.4 million.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

The Company accounted for the Gallery Acquisition using the acquisition method of accounting in accordance with FASB ASC Topic 805 “Business Combinations”. In accordance with ASC 805, the Company used its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.

The fair value of the purchase consideration issued to Appliances Gallery was allocated to the net tangible assets acquired. The Company accounted for the Gallery Acquisition as the purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The preliminary fair value of the net assets to be acquired was $0.3 million. The excess of the aggregate estimated fair value of the net tangible assets, plus $0.02 million of seller expenses paid by the Company, of $1.2 million has been allocated to provisional goodwill.

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.

Provisional purchase consideration at fair value (in thousands):
Cash consideration	$	1,420
Amount of consideration	$	1,420
Assets acquired and liabilities assumed at preliminary fair value
Inventory		483
Prepaid assets		6
Property and equipment		19
Customer deposits		(255	)
Net tangible assets acquired	$	253

Total net assets acquired	$	253
Consideration paid		1,420
Preliminary goodwill	$	1,167

Pro forma

The following unaudited proforma results of operations are presented for information purposes only. The unaudited proforma results of operations are not intended to present actual results that would have been attained had the AC Acquisition been completed as of January 1, 2020, or to project potential operating results as of any future date or for any future periods. Appliances Connection revenue and net income in the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 was $129.3 million and $15.1 million and $177.1 million and $20.0 million, respectively.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021		2020			2021		2020
	(in thousands, except share and per share data)
Product sales, net	$	141,867	$	102,201		$	404,953	$	260,443
Net income (loss)	$	3,946	$	(657	)	$	31,128	$	(3,196	)
Amortization of intangibles included in net income (loss) (b)	$	2,507	$	2,507		$	7,520	$	7,520
Basic earnings per share	$	0.04	$	(0.01	)	$	0.31	$	(0.03	)
Diluted earnings per share (a)	$	0.03	$	(0.01	)	$	0.31	$	(0.03	)

Basic number of shares		106,387,331		105,335,084			105,335,084		105,335,084
Diluted number of shares		131,787,293		105,335,084			105,335,084		105,335,084

(a)

Assumes shares outstanding at offering were outstanding for all periods and that warrant price is equal to the offering price resulting in no diluted shares.

(b)

Represents amortization of the identified intangible assets acquired in the Appliances Connection acquisition.

(c)

Appliance Gallery pro forma is not included in the table above as it was determined to be immaterial.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

The Company believes that as a result of the Appliances Connection acquisition, it acquired identified intangible assets which will reduce goodwill. The nature and amount of intangible assets acquired will be determined by a valuation report, but the amount of any intangible assets will create an additional deferred tax liability increasing the amount of goodwill as there is no tax basis in goodwill or intangible assets. The Company estimates that goodwill will increase by approximately $9.5 million for the tax effect of net assets acquired.

NOTE 10—NOTES PAYABLE

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), pursuant to which the Lenders have agreed to make available to the Company and ACI senior secured credit facilities in the aggregate initial amount of $70.0 million, including (i) a $60.0 million term loan (the “Term Loan”) and (ii) a $10.0 million revolving credit facility (the “Revolving Loan”), which revolving credit facility includes a $2.0 million swingline subfacility (the “Swing Line Loan” and together with the Term Loan and the Revolving Loan, the “Loans”) and a $2.0 million letter of credit subfacility, in each case, on the terms and conditions contained in the Credit Agreement. On June 2, 2021, the Company borrowed the entire amount of the Term Loan and issued term loan notes to the Lenders in the aggregate principal amount of $60.0 million. As of September 30, 2021, the Company has not made any loans under the Revolving Loan. As of September 30, 2021, the outstanding balance of the Term Loan is $55.0 million, comprised of principal of $58.5 million, net of unamortized loan costs of $3.5 million. Loan costs before amortization included $3.5 million of lender and placement agent fees and $0.3 million of legal other fees. The Company classified $6.0 million as a current liability and the balance as a long-term liability.

Each of the Loans matures on June 2, 2026. The Loans will 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 (3.9%), with an initial interest period of six months. The Company 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 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.

The Company must repay the principal amount of the Term Loan in quarterly installments of $1.5 million each, payable on the last business day of each March, June, September and December, commencing on September 30, 2021. The remaining unpaid principal amount of the Term Loan must be repaid on the maturity date, unless payment is sooner required by the Credit Agreement. Mandatory repayments of amounts borrowed under the Revolving Loan facility are required only if the amount borrowed at any time exceeds the commitment amount. Amounts borrowed under Revolving Loans may be repaid and reborrowed at any time until the maturity date.

The Company may voluntarily prepay the Loans from time to time in accordance with the provisions of the Credit Agreement, and will be required to prepay the Loans under certain limited circumstances as set forth in the Credit Agreement, including upon receipt of cash proceeds in connection with certain specified asset sales, receipt of insurance or condemnation proceeds or other cash proceeds received other than in the ordinary course of business or upon receipt of cash proceeds from the incurrence of indebtedness that is not permitted under the Credit Agreement, all as more specifically set forth in the Credit Agreement.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

Under the Credit Agreement, the Company is required to pay certain fees to M&T, including a commitment fee of up to 0.5% per annum with respect to the unused portion of the Lenders’ revolving loan commitments, determined as set forth in the Credit Agreement, and certain fees in connection with the issuance of any letters of credit under the Credit Agreement.

The Credit Agreement contains customary representations, warranties, affirmative and negative financial and other covenants, including leverage ratio and fixed charge coverage ratios, and events of default for loans of this type. The Loans are guaranteed by the Guarantors and are secured by a first priority security interest in substantially all of the assets of the Company, ACI and the Guarantors.

Maturities of the Term Loan are as follows (in thousands):

For the years ended December 31,	Amount
2021 (remainder of year)	$	1,500
2022		6,000
2023		6,000
2024		6,000
2025		6,000
Thereafter		33,000
Total		58,500
Less: Loan costs		(3,501	)
Total	$	54,999
Amount classified as a current liability	$	6,000
Amount classified as long-term liability	$	48,999

Northpoint 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 September 30, 2021, such credit limit is $1.0 million and the Company has not borrowed any funds.

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 $3.5 million. As of December 31, 2020, the outstanding balance of this loan is $3.2 million, comprised of principal of $3.3 million, net of unamortized loan costs of $0.1 million. On May 10, 2021, the Company repaid this loan by transferring principal and accrued interest from the restricted cash account.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

10% OID Senior Promissory Notes

On March 19, 2021, the Company entered into a securities purchase agreement with two institutional investors, pursuant to which the Company issued to each investor (i) a 10% OID senior secured promissory note in the principal amount of $2.8 million and (ii) a four-year warrant to purchase 200,000 shares of the Company’s 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 $2.5 million each, or $5.0 million in the aggregate, the relative fair value of which is $1.3 million and was recorded as debt discount. After deducting a placement fee and other expenses, the Company received net proceeds of $4.6 million. The original issue discount and warrant expense were amortized as interest expense. On June 2, 2021, the Company repaid these notes in full from the proceeds of the Term Loan. At the time of repayment, the Company wrote off the balance of the debt discount, $1.7 million, as a loss on early extinguishment of debt.

Vehicle Loans

The Company 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 September 30, 2021, the outstanding balance of these notes is $1.4 million.

Following is a summary of payments due for the succeeding five years (in thousands):

For the years ended December 31,	Amount
2021 (remainder of year)	$	124
2022		397
2023		364
2024		312
2025		169
Total	$	1,366
Amount classified as a current liability	$	425
Amount classified as a long-term liability	$	941

NOTE 11—LEASES

Financing Leases

The Company has three finance leases for the acquisition of forklifts. At September 30, 2021, the total amount due on these leases was $0.2 million.

The Following is a summary of payments due on financing leases for the succeeding five years (in thousands):

For the years ended December 31,	Amount
2021 (remainder of year)	$	26
2022		66
2023		53
2024		36
2025 and thereafter		49
Total payments		230
Less: amount representing interest		(36	)
Present value of minimum lease payments	$	194

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 $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.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

On January 13, 2021, the Company entered into a lease agreement with Westgate 200, LLC, which was amended on March 31, 2021, for its new principal office and showroom in St. Charles, Missouri. The lease terminates on April 30, 2027, with two (2) options to renew for additional five (5) year periods. The base rent is $20,977 per month until September 30, 2021, and increases to $31,465 per month until April 30, 2022, after which time the base rent increases at approximately 2.5% per year thereafter. The Company must also pay its 43.4% pro rata portion 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. In connection with the new lease, the Company recorded a right of use asset and liability of $2.0 million representing the initial present value of future lease payments.

On June 2, 2021, 1 Stop entered into a new lease agreement with 1870 Bath Ave. LLC, a related party, for the premises located at 1870 Bath Avenue, Brooklyn, NY. The lease is for a term of ten (10) years and provides for a base rent of $74,263 per month during the first year with annual increases to $96,896 during the last year of the term. 1 Stop is also responsible for all property taxes, insurance costs and the utilities used on the premises. The lease contains customary events of default. This lease replaces the prior lease entered into between the parties on September 1, 2018. The initial right of use asset and liability associated with this lease is $8.4 million.

On June 2, 2021, Joe’s Appliances entered into a new lease agreement with 812 5th Ave Realty LLC, a related party, for the premises located at 7812 5th Avenue, Brooklyn, NY. The lease is for a term of ten (10) years and provides for a base rent of $6,365 per month during the first year with annual increases to $8,305 during the last year of the term. Joe’s Appliances is also responsible for all property taxes, insurance costs and the utilities used on the premises. The lease contains customary events of default. This lease replaces the prior lease entered into between the parties on September 1, 2018. The initial right of use asset and liability associated with this lease is $0.7 million.

On May 31, 2019, YF Logistics entered into a sublease agreement with Dynamic Marketing, Inc. (“DMI”) for its warehouse space in Hamilton, NJ. The initial term of the sublease was for a period commencing on June 1, 2019 and terminating on April 30, 2020, with automatic renewals for successive one year terms until the earlier of (i) termination by either upon thirty (30) days’ prior written notice or (ii) April 30, 2024. The sublease provides for a base rent equal to 71.43% of the base rent paid by DMI under its lease for the premises, plus 71.43% of any taxes, operating expenses, additional charges or any other amounts due by DMI, for a total of $56,250 per month. The initial right of use asset and liability associated with this lease is $3.0 million.

On July 29, 2021, AC Gallery entered into a lease agreement with Tom’s Flooring, LLC for the showroom and warehouse located in Largo, Florida. The lease is for a term of four (4) months commencing on September 1, 2021 and ending on December 31, 2021 and provides for a case rent of $6,500 per month. AC Gallery must also pay its one-third (1/3) pro rata portion of the common area maintenance charges, utilities and sales taxes. The lease contains customary events of default. The lease is short term and therefore not recorded as a right of use asset and liability.

During the three and nine months ended September 30, 2021, the Company had rent expense of $0.6 million and $0.1 million, respectively. During the three and nine months ended September 30, 2020, the Company had rent expense of $0.1 million and $0.4 million, respectively.

Supplemental balance sheet information related to leases at September 30, 2021 was as follows (in thousands):

Operating lease right-of-use assets	$	12,319

Lease liabilities, current portion	$	2,127
Lease liabilities, long-term		11,628
Total operating lease liabilities	$	13,755

Weighted average remaining lease term (months)		91

Weighted average discount rate		4.4	%

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

Maturities of the lease liabilities for each of the next five years is as follows (in thousands):

2021 (remainder of year)	$	559
2022		2,581
2023		2,620
2024		1,805
2025		1,487
Thereafter		7,065
Total lease payments		16,117
Less imputed interest		(2,362	)
Total lease liability	$	13,755

On June 30, 2021, the Company closed an old warehouse and retail showroom in anticipation of relocating to a new facility. Accordingly, the Company wrote-off $1.4 million representing the remaining right of use asset and related leasehold improvements as of that date.

On September 9, 2021, the Company entered into a warehouse agreement for a new warehouse in Somerset, NJ. The warehouse agreement is for a term of 26 months commencing on October 1, 2021 and ending November 29, 2023, unless the master lease for the premises is terminated earlier. The monthly storage fee is $136,274 for the first year, $140,274 for the second year, and $144,573 for the last two months. The Company also paid a security deposit of $272,549. The right of use asset and liability associated with this operating lease are $3.5 million.

NOTE 12—SUPPLIER CONCENTRATION

Significant customers and suppliers are those that account for greater than ten percent of the Company’s revenues and purchases.

For the three and nine months ended September 30, 2021, the Company purchased a substantial portion of finished goods from DMI, 79% and 66%, respectively.

The Company believes there are numerous other suppliers that could be substituted should the supplier become unavailable or non-competitive.

NOTE 13—RELATED PARTIES

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 $62,500; provided, however, that under certain circumstances specified in the management services agreement, the quarterly fee may be reduced if similar fees payable to the Manager by subsidiaries of the Company’s former parent company, 1847 Holdings LLC, exceed a threshold amount.

The Company shall also reimburse the Manager for all costs and expenses of the Company which are specifically approved by the board of directors of the Company, including all out-of-pocket costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of the Company in connection with performing services under the management services agreement. The Company did not pay any expenses for the three and nine months ended September 30, 2021 and 2020.

The Company expensed management fees of $0.06 million for the three months ended September 30, 2021 and 2020 and $0.2 million for the nine months ended September 30, 2021 and 2020.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

DMI

The Company is a member of DMI, an appliance purchasing cooperative. DMI purchases consumer electronics and appliances at wholesale prices from various vendors, and then makes such products available to its members, including the Company, who sell such products to end consumers. DMI’s purchasing group arrangement provides its members, including the Company, with leverage and purchasing power with appliance vendors, and increases the Company’s ability to compete with competitors, including big box appliance and electronics retailers. The Company owns an approximate 5% interest in DMI. Additionally, Albert Fouerti, the Company’s Chief Executive Officer, director and a former significant stockholder of Appliances Connection prior to the Acquisition, is on the board of DMI. As such, DMI is deemed to be a related party.

At September 30, 2021, vendor rebate deposits due from DMI were $3.7 million. During the three and nine months ended September 30, 2021, total purchases from DMI, net of holdbacks, were $63.4 million and $91.4 million respectively. At September 30, 2021, deposits at DMI totaled $12.1 million.

Lease Agreements

As described above, 1 Stop, Joe’s Appliances and Gold Coast have entered into lease agreements with 1870 Bath Ave. LLC, 812 5th Ave Realty LLC and 54 Glen Cove Realty, LLC, respectively. Each of these entities is owned by Albert Fouerti and Elie Fouerti (the vice president of 1 Stop, Joe’s Appliances and Gold Coast and former significant stockholder of each prior to the Acquisition). In addition, YF Logistics has entered into a sublease agreement with DMI. The total rent expense under these related party leases was $0.6 million for the period of June 2, 2021 to September 30, 2021.

NOTE 14—STOCKHOLDERS’ EQUITY (DEFICIT)

As of September 30, 2021, the Company was authorized to issue 200,000,000 shares of common stock, $0.0001 par value per share, and 20,000,000 shares of “blank check” preferred stock, 0.0001 par value per share. To date, the Company has not designated or issued any shares of preferred stock.

Common Stock

As of September 30, 2021 and December 31, 2020, the Company had 106,387,332 and 6,111,200 shares of common stock issued and outstanding, respectively. Each share entitles the holder thereof to one vote per share on all matters coming before the stockholders of the Company for a vote.

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. Under the underwriting agreement, the Company agreed to sell 91,111,111 units to the Underwriter, at a purchase price per unit of $2.0925 (the offering price to the public of $2.25 per unit minus the Underwriter’s discount), and also agreed to grant to the Underwriter a 30-day option to purchase up to 2,000,000 additional shares of common stock, 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, the Company sold 91,111,111 shares of common stock and warrants to purchase 93,111,111 shares of common stock to the Underwriter for total gross proceeds of $205.0 million. After deducting the underwriting commission and expenses, the Company received net proceeds of approximately $194.6 million. The Company used the proceeds of the offering to fund a portion of the purchase price for the Acquisition.

On June 7, 2021, the Company sold 2,000,000 shares of common stock to the Underwriter for total gross proceeds of $4.5 million. After deducting the underwriting commission and expenses, the Company received net proceeds of approximately $4.2 million.

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

During June 2021, 1,039,148 shares of common stock were issued as a result of the exercise of 1,039,148 warrants with proceeds of $2.3 million.

During the three months ended September 30, 2021, 13,100 shares of common stock were issued as a result of the exercise of warrants with proceeds of $0.03 million.

On June 2, 2021, the Company issued 5,895,973 shares of common stock to the Sellers in connection with the Acquisition (See Note 9).

On June 3, 2021, the Company granted restricted stock awards under the Plan described below to certain directors and officers of the Company for an aggregate of 216,800 shares of common stock valued at $0.6 million, the value of the stock on the date of grant. All shares were immediately vested.

On August 4, 2020, the Company sold 1,111,200 shares of common stock for total gross proceeds of $10.0 million. After deducting the underwriting commission and expenses, the Company received net proceeds of $8.6 million.

On August 4, 2020, the Company issued 250,000 shares of common stock to Small Business Community Capital II, L.P. upon conversion of a warrant.

Equity Incentive Plan

Effective as of July 30, 2020, the Company established the 1847 Goedeker Inc. 2020 Equity Incentive Plan (the “Plan”) and reserved 555,000 shares of common stock for issuance under the Plan. The Plan was approved by the Company’s board of directors and stockholders on April 21, 2020. On April 9, 2021, the board of directors approved an amendment to the Plan to increase the number of shares of common Stock reserved for issuance under the Plan from 555,000 to 1,000,000 shares. Such increase was approved by the Company’s stockholders effective as of May 13, 2021.

The Plan is administered by compensation committee of the board of directors. The Plan permits the grant of restricted stock, stock options and other forms of incentive compensation to the Company’s officers, employees, directors and consultants. On July 28, 2021, the Company issued an option for the purchase of 150,000 shares of common stock with a total fair value of $0.3 million. As of September 30, 2021, no shares of common stock available for issuance under the Plan. During the third and fourth quarters of 2020, the Company issued options for the purchase of 555,000 shares of common stock with a total fair value of $1.8 million. The Company recorded stock option expense related to these options of $0.1 million and $0.9 million for the three and nine months ended September 30, 2021, respectively, and $0.3 million for the three and nine months ended September 30, 2020. The remaining compensation expense of $1.0 million will be recognized over the remaining vesting period of 24 months. During the nine months ended September 30, 2021, the Company issued 216,800 shares of restricted stock to directors and officers valued at $0.6 million.

The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period. The following assumptions were used to calculate stock-based compensation expense for options granted during the three and nine-months ended September 30, 2021:

Volatility	77.65	%
Risk-free interest rate	1.00	%
Dividend yield	0.00	%
Expected term	6.25 Years

1847 GOEDEKER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

The following table presents activity relating to stock options for the nine months ended September 30, 2021:

	Shares			Weighted Average Exercise Price		Weighted Average Contractual Term in Years
Outstanding at January 1, 2021		555,000		$	9.00		9
Granted		150,000			3.10		10
Exercised		-			-		-
Forfeited / Cancelled / Expired		(131,579	)		-		-
Outstanding at September 30, 2021		573,421		$	7.74		8.85

Exercisable at September 30, 2021		204,540		$	9.00		8.85

As of September 30, 2021, vested outstanding stock options had no intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock.

The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period.

Warrants

On April 5, 2019, the Company issued to Small Business Community Capital II, L.P. a ten-year warrant to purchase shares of the most senior capital stock of the Company equal to 5.0% of the outstanding equity securities of the Company on a fully-diluted basis for an aggregate price equal to $100. Small Business Community Capital II, L.P. exercised this warrant for the purchase of 250,000 shares of common stock on August 4, 2020.

On August 4, 2020, the Company issued warrants for the purchase of 55,560 shares of common stock to affiliates of the representative in its initial public offering. These warrants are exercisable at any time and from time to time, in whole or in part, beginning on January 26, 2021 until July 30, 2025, an exercise price of $11.25 per share (subject to customary adjustments), and may also be exercised on a cashless basis if at any time during the term of the warrants the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement.

On March 19, 2021, the Company issued four-year warrants to purchase an aggregate of 400,000 shares of common stock to two investors. These warrants are exercisable at any time and from time to time, in whole or in part, at an exercise price of $12.00 per share (subject to customary adjustments), and may also be exercised on a cashless basis if at any time during the term of the warrants the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement.

On June 2, 2021, the Company issued warrants to purchase 93,111,111 shares of common stock in the public offering. These warrants are exercisable immediately and expire five years from the date of issuance. The warrants have an exercise price of $2.25 per share, subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock or upon any distributions of assets, including cash, stock or other property to stockholders, and may also be exercised on a cashless basis if at any time during the term of the warrants the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement.

The following table presents activity relating to the warrants for the nine months ended September 30, 2021:

	Shares			Weighted Average Exercise Price		Weighted Average Contractual Term in Years
Outstanding at January 1, 2021		55,560		$	11.25		5.00
Granted		93,511,111			25.29		5.00
Exercised		(1,052,248	)		2.25		-
Cancelled / Expired		-			-		-
Outstanding at September 30, 2021		92,514,423		$	2.30		4.67

NOTE 15—COMMITMENTS AND CONTINGENCIES

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”).

Pursuant to the asset purchase agreement, Goedeker entitled to receive an earn out payment of $0.2 million if the EBITDA (as defined in the asset purchase agreement) of the Goedeker Business for the trailing twelve (12) month period from April 5, 2022 is $2.5 million or greater, and may be entitled to receive a partial earn out payment if the EBITDA of the Goedeker Business is less than $2.5 million but greater than $1.5 million. The Company expects to meet this target and adjusted the contingent note payable in the condensed consolidated balance sheet to the present value of the amount due.

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”), AC Gallery Inc., a Delaware corporation (“AC Gallery”), 1 Stop Electronics Center, Inc., a New York corporation (“1 Stop”), Gold Coast Appliances, Inc., a New York corporation (“Gold Coast”), Superior Deals Inc., a New York corporation (“Superior Deals”), Joe’s Appliances LLC, a New York limited liability company (“Joe’s Appliances”), and YF Logistics LLC, a New Jersey limited liability company (“YF Logistics”). 1 Stop, Gold Coast, Superior Deals, Joe’s Appliances and YF Logistics are sometimes referred to 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 an industry leading e-commerce destination for appliances, furniture, and home goods. Through our June 2021 acquisition of Appliances Connection, we created one of the largest pure-play online retailers of household appliances in the United States. With warehouse fulfillment centers in the Northeast and Midwest, as well as showrooms in Brooklyn, New York, St. Louis, Missouri and Largo, Florida, we offer one-stop shopping for national and global brands. We carry many household name-brands, including Bosch, Cafe, Frigidaire Pro, Whirlpool, LG, and Samsung, and also carry many major luxury appliance brands such as Miele, Thermador, La Cornue, Dacor, Ilve, Jenn-Air and Viking, among others. We also sell furniture, fitness equipment, plumbing fixtures, televisions, outdoor appliances, and patio furniture, as well as commercial appliances for builder and business clients.

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.

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 with our business.

Notably, due to the impact of the global pandemic and associated supply chain crisis, our freight costs have increased materially as a proportion of sales, putting downward pressure on our gross margins. Over the course of 2021, our freight costs as percentage of sales increased from 7.4% to 8.9%, or 150 bps, on a consolidated proforma basis, and from 13.7% to 16.6%, or 290 bps, excluding Appliance Connection. Management believes that this situation is temporary in nature and will revert once the supply chain situation improves.

Results of Operations

Comparison of Three Months Ended September 30, 2021 and 2020

The following table sets forth key components of our results of operations for the three months ended September 30, 2021 and 2020, in dollars and as a percentage of our net sales.

	Three Months Ended September 30, 2021						Three Months Ended September 30, 2020
	Amount (in thousands)			% of Net Sales			Amount (in thousands)			% of Net Sales
Products sales, net	$	141,867			100.0	%	$	13,435			100.0	%
Cost of goods sold		110,495			77.9	%		11,265			83.8	%
Gross profit		31,372			22.1	%		2,170			16.2	%
Operating expenses
Personnel		8,547			6.0	%		2,162			16.1	%
Advertising		3,715			2.6	%		1,433			10.7	%
Bank and credit card fees		4,918			3.5	%		575			4.3	%
Depreciation and amortization		3,610			2.5	%		93			0.7	%
Acquisition expenses		62			-			-			-
General and administrative		4,018			2.8	%		1,451			10.8	%
Total operating expenses		24,870			17.5	%		5,714			42.5	%
Income (loss) from operations		6,502			4.6	%		(3,544	)		(26.4	)%
Other income (expense)
Interest income		34			-			1			-
Financing costs		(200	)		(0.1	)%		(488	)		(3.6	)%
Interest expense		(899	)		(0.6	)%		(229	)		(1.7	)%
Loss on extinguishment of debt		-			-			(807	)		(6.0	)%
Other income		8			-			2			-
Total other income (expense)		(1,057	)		(0.7	)%		(1,521	)		(11.3	)%
Net income (loss) before income taxes		5,445			3.8	%		(5,065	)		(37.7	)%
Income tax benefit (expense)		(2,129	)		(1.5	)%		838			6.2	%
Net income (loss)	$	3,316			2.3	%	$	(4,227	)		(31.5	)%

Product sales, net. We generate revenue from the retail sale of home furnishings, including appliances, furniture, home goods and related products. Our product sales were $141.9 million for the three months ended September 30, 2021, as compared to $13.4 million for the three months ended September 30, 2020, an increase of $128.4 million, or 956.0%. The increase is primarily due to our June 2021 acquisition of Appliances Connection. Excluding Appliances Connection, our product sales decreased by $0.9 million, or 6.7%. This decrease is the result of reduced advertising spend to drive traffic to the Goedeker website as we develop a company-wide advertising program.

During the three months ended September 30, 2021, we experienced delays in getting products from manufacturers due to continued supply chain issues related to the COVID-19 pandemic, which resulted in cancellations of some customer orders.

Our revenue by sales type is as follows (in thousands):

	Three Months Ended September 30, 2021					Three Months Ended September 30, 2020
	Amount		%			Amount		%
Appliance sales	$	130,837		92.2	%	$	8,992		66.9	%
Furniture sales		5,880		4.2	%		3,555		26.5	%
Other sales		5,150		3.6	%		888		6.6	%
Total	$	141,867		100.0	%	$	13,435		100.0	%

The percentage of furniture sales declined in the 2021 period as compared to the 2020 period as furniture sales comprised a lower percentage of Appliances Connection’s sales (2.9%) as compared to the total Company’s (4.1%).

Cost of goods sold. Our costs of goods sold are comprised of product costs and freight costs. Product costs represent the amount we pay the manufacturer for their product. We negotiate special terms and pricing with the manufacturer, which are generally based on the amount of products we purchase. Periodically, manufacturers offer special pricing for purchasing a certain volume of products at one time. Funding might also be offered to support our marketing and advertising efforts. Freight is the cost of delivering products to customers.. Our cost of goods sold was $110.5 million for the three months ended September 30, 2021, as compared to $11.3 million for the three months ended September 30, 2020, an increase of $99.2 million, or 880.9%. Excluding Appliances Connection, our cost of goods sold increased by $0.2 million, or 1.8%, driven by a $0.2 million, or 12.5%, increase in freight costs as the result of the nationwide shortage of shipping capacity, resulting in higher rates. As a percentage of net sales, cost of goods sold was 77.9% and 83.8% for the three months ended September 30, 2021 and 2020, respectively. Such decrease was due to impact of the acquisition of Appliances Connection, which has a lower cost of goods sold as a percentage of revenue than the Company. Excluding Appliances Connection, our cost of goods sold as a percentage of net sales increased from 83.8% to 91.4%. Product costs as a percentage of net sales for the three months ended September 30, 2021 was 74.8% compared to 70.1% for the three months ended September 30, 2020. The increase in product cost is the result of reduced vendor rebates because of reduced volume. Freight costs as a percentage of net sales was 16.6% for the three months ended September 30, 2021 compared to 13.8% for the three months ended September 30, 2020.

Gross profit and gross margin. As a result of the foregoing, our gross profit was $31.4 million for the three months ended September 30, 2021, as compared to $2.2 million for the three months ended September 30, 2020, an increase of $29.2 million, or 1,345.7%. Our gross margin (gross profit as a percentage of net sales) was 22.1% and 16.2% for the three months ended September 30, 2021 and 2020, respectively. Such increases were primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, our gross profit decreased by $1.1 million, or 50.4%, and our gross margin declined 16.2% to 8.6%, or 760 bps, driven by a reduced vendor rebates and a significant increase in shipping costs.

Personnel expenses. Personnel expenses include employee salaries and bonuses plus related payroll taxes. It also includes health insurance premiums, 401(k) contributions, training costs and stock compensation expense. Our personnel expenses were $8.5 million for the three months ended September 30, 2021, as compared to $2.2 million for the three months ended September 30, 2020, an increase of $6.4 million, or 295.3%. As a percentage of net sales, personnel expenses were 6.0% and 16.1% for the three months ended September 30, 2021 and 2020, respectively. Such increases were primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, our personnel expenses increased by $1.6 million, or 71.9%, and our personnel expenses as a percentage of net sales increased to 29.6%. Such increase is the result of accruing the severance payments due a former officer and accruals for a management bonus.

Advertising expenses. Advertising expenses include the cost of marketing our products and primarily include online search engine expenses. Our advertising expenses were $3.7 million for the three months ended September 30, 2021, as compared to $1.4 million for the three months ended September 30, 2020, an increase of $2.3 million, or 159.2%. As a percentage of net sales, advertising expenses were 2.6% and 10.7% for the three months ended September 30, 2021 and 2020, respectively. Such increases were primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, our advertising expenses decreased by $0.6 million, or 40.8%, and our advertising expenses as a percentage of net sales decreased from 10.7% in the 2020 period to 6.8% in the 2021 period. The decrease relates to our efforts at improving the efficiency of our company-wide advertising program.

Bank and credit card fees. Bank and credit card fees are primarily the fees we pay credit card processors for processing credit card payments made by customers and to third party sellers on whose websites we sell parts and other small items. Our bank and credit card fees were $4.9 million for the three months ended September 30, 2021, as compared to $0.6 million for the three months ended September 30, 2020, an increase of $4.3 million, or 755.3%. As a percentage of net sales, bank and credit card fees were 3.5% and 4.3% for the three months ended September 30, 2021 and 2020, respectively. These fees are based on customer orders that are paid with a credit card (substantially all orders), so the increase was largely due to the increase in customer orders. We pay a credit card fee for each order, regardless of whether that order is shipped or cancelled by customer. Excluding Appliances Connection, our bank and credit card fees decreased by $0.5 million, or 87.1%, and our bank and credit card fees as a percentage of net sales decreased to 0.6%. On July 29, 2021, we adopted an authorization model for charging customer credit cards rather than charging at the time of purchase. This change resulted in lower credit fees.

Acquisition Expenses. During the three months ended September 30, 2021, we incurred expenses related to the acquisitions of Appliances Connection and Appliance Gallery in the amount of $0.06 million.

Depreciation and amortization. Depreciation and amortization was $3.6 million, or 2.5% of net sales, for the three months ended September 30, 2021, as compared to $0.09 million, or 0.7% of net sales, for the three months ended September 30, 2020. The increase is the result of amortizing the preliminary estimate of intangible assets acquired in the Appliances Connection acquisition.

General and administrative expenses. Our general and administrative expenses consist primarily of professional advisor fees, rent expense, insurance, unremitted sales tax, and other expenses incurred in connection with general operations. Our general and administrative expenses were $4.0 million for the three months ended September 30, 2021, as compared to $1.5 million for the three months ended September 30, 2020, an increase of $2.6 million, or 176.9%. As a percentage of net sales, general and administrative expenses were 2.8% and 10.8% for the three months ended September 30, 2021 and 2020, respectively. Such increases were primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, our general and administrative expenses increased by $0.8 million, or 55.6%. The increase was largely due to increased directors and officers insurance expenses, fees to our independent directors, and legal, audit and other professional fees in connection with becoming a public company in August 2020.

Total other income (expense). We had $1.1 million in total other expense, net, for the three months ended September 30, 2021, as compared to total other expense, net, of $1.5 million for the three months ended September 30, 2020. Total other expense, net, for the three months ended September 30, 2021 consisted primarily of interest expense of $0.9 million and financing costs of $0.2 million. Total other expense, net, for the three months ended September 30, 2020 consisted primarily of financing costs of $0.5 million, interest expense of $0.2 million and loss on extinguishment of debt of $0.8 million.

Income tax benefit (expense). We had an income tax expense of $2.1 million for the three months ended September 30, 2021, as compared to an income tax benefit $0.8 million for the three months ended September 30, 2020.

Net income (loss). As a result of the cumulative effect of the factors described above, we had net income of $3.3 million for the three months ended September 30, 2021, as compared to a net loss of $4.2 million for the three months ended September 30, 2020, a net increase of $7.5 million. Such increase was primarily due to the impact of the acquisition of Appliances Connection. Excluding Appliances Connection, net loss increased by $7.6 million, or 180.2%.

Comparison of Nine Months Ended September 30, 2021 and 2020

The following table sets forth key components of our results of operations for the nine months ended September 30, 2021 and 2020, in dollars and as a percentage of our net sales.

	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
	Amount (in thousands)			% of Net Sales			Amount (in thousands)			% of Net Sales
Products sales, net	$	219,637			100.0	%	$	38,397			100.0	%
Cost of goods sold		172,581			78.6	%		32,061			83.5	%
Gross profit		47,056			21.4	%		6,336			16.5	%
Operating expenses
Personnel		15,300			7.0	%		4,514			11.8	%
Advertising		7,730			3.5	%		2,991			7.8	%
Bank and credit card fees		7,546			3.4	%		1,274			3.3	%
Depreciation and amortization		3,908			1.8	%		277			0.7	%
Acquisition expenses		865			0.4	%		-			-
Loss on abandonment of right of use asset		1,437			0.7	%		-			-
General and administrative		8,311			3.8	%		4,400			11.5	%
Total operating expenses		45,097			20.5	%		13,456			35.0	%
Income (loss) from operations		1,959			0.9	%		(7,120	)		(18.5	)%
Other income (expense)
Interest income		57			-			2			-
Financing costs		(280	)		(0.1	)%		(758	)		(0.2	)%
Interest expense		(2,070	)		(0.9	)%		(787	)		(2.0	)%
Loss on extinguishment of debt		(1,748	)		(0.8	)%		(1,756	)		(4.6	)%
Write-off of acquisition receivable		-			-			(809	)		(2.1	)%
Change in fair value of warrant liability		-			-			(2,128	)		(5.5	)%
Other income		19			-			7			-
Total other income (expense)		(4,022	)		(1.8	)%		(6,229	)		(16.2	)%

SEC Form 10-Q filed by 1847 Goedeker Inc.