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on the vested portion of principal amount at the rate of eight percent ( 8 %) per annum. To the extent vested, the vested portion of the |
principal and all accrued but unpaid interest on such vested portion of the principal shall be paid in one lump sum on the last day of |
the thirty-sixth (36th) month following the date of the note. F- 32 1847 HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020 The vested principal of the note due at the maturity |
date shall be calculated each year based on the average annual consolidated EBITDA (as defined in the note) of 1847 Cabinet for each |
of the years ended December 31, 2020, 2021 and 2022. The EBITDA for each year shall be divided by $1.4 million multiplied by 100 to obtain |
the vested percentage. The vested principal for each year shall be equal to the vested percentage for that year multiplied by $350,000. |
To the extent that the vested percentage for the subject year is less than 80%, no portion of the note for that year shall vest. To the |
extent that the vested percentage for the subject year is equal to or greater than 120%, the vested principal shall be equal to $420,000 |
for that year and no more. For the year ended December 31, 2020, EBITDA of 1847 Cabinet was approximately $1,531,000, resulting in a |
vested amount of approximately $415,000. For the year ended December 31, 2021, EBITDA of 1847 Cabinet was approximately $427,504, resulting |
in an additional vested amount of approximately $602,204. As of December 31, 2021, the fair value of the outstanding balance expected |
to be paid on this note was $1,001,183. 1847 Cabinet will have the right to redeem all |
but no less than all of the note at any time prior to the maturity date. If 1847 Cabinet elects to redeem the note, the redemption price |
will be payable in cash and is equal to the then outstanding vested portion of the principal plus any remaining unvested principal amount |
plus accrued but unpaid interest thereon (calculated over 36 months). For purposes of this redemption calculation, the “unvested |
principal amount” shall be $ 350,000 per year. The note contains customary events of default. |
The right of the Kyle’s Sellers to receive payments under the note is subordinated to all indebtedness of 1847 Cabinet, whether |
outstanding as of the closing date or thereafter created, to banks, insurance companies and other financial institutions or funds, and |
federal or state taxation authorities. NOTE 13—CONVERTIBLE PROMISSORY NOTE S Secured Convertible |
Promissory Notes On October 8, 2021, the Company and each of its |
subsidiaries 1847 Asien, 1847 Wolo, 1847 Cabinet, Asien’s, Wolo Mfg, Wolo H&S, Kyle’s, High Mountain and Innovative Cabinets, |
entered into a note purchase agreement with two institutional investors, pursuant to which the Company issued to these purchasers secured |
convertible promissory notes in the aggregate principal amount of $ 24,860,000 . The notes contain an aggregate original issue discount |
of $ 497,200 . As a result, the total purchase price was $ 24,362,800 . After payment of expenses of $ 617,825 , the Company received net proceeds |
of $ 23,744,975 , of which $ 10,687,500 was used to fund the cash portion of the purchase price for the acquisition of High Mountain |
and Innovative Cabinets. In addition, as consideration for the financing, the Company granted the financing agent 750,000 warrants with |
a fair value of $956,526 and 7.5% interest in High Mountain and Innovative Cabinets acquisition which had a fair value of $1,146,803 . |
The agent fees were reflected as a discount against the convertible note payable with the warrants being included in additional paid in |
capital and the equity interest being including within noncontrolling interest on the consolidated balance sheet. The remaining principal |
balance of the notes at December 31, 2021 is $ 23,787,936 , net of debt discounts of $ 3,072,064 , and they have accrued interest of $ 467,689 . The notes bear interest |
at a rate per annum equal to the greater of (i) 4.75% plus the U.S. Prime Rate that appears in The Wall Street Journal from time |
to time or (ii) 8%; provided that, upon an event of default (as defined in the notes), such rate shall increase to 24% or the maximum |
legal rate. Payments of interest only, computed at such rate on the outstanding principal amount, will be due and payable quarterly in |
arrears commencing on January 1, 2022 and continuing on the first day of each calendar quarter thereafter through and including the maturity |
date, October 8, 2026. The Company may voluntarily |
prepay the notes in whole or in part upon payment of a prepayment fee in an amount equal to 10 % of the principal and interest paid in |
connection with such prepayment. In addition, immediately upon receipt by the Company or any subsidiary of any proceeds from any issuance |
of indebtedness (other than certain permitted indebtedness), any proceeds of any sale or disposition by the Company or any subsidiary |
of any of the collateral or any of its respective assets (other than asset sales or dispositions in the ordinary course of business which |
are permitted by the note purchase agreement), or any proceeds from any casualty insurance policies or eminent domain, condemnation or |
similar proceedings, the Company must prepay the notes in an amount equal to all such proceeds, net of reasonable and customary transaction |
costs, fees and expenses properly attributable to such transaction and payable by the Company or a subsidiary in connection therewith |
(in each case, paid to non-affiliates). F- 33 1847 HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020 The holders of the notes |
may, in their sole discretion, elect to convert any outstanding and unpaid principal portion of the notes, and any accrued but unpaid |
interest on such portion, into common shares of the Company at a conversion price equal to $ 2.50 (subject to equitable adjustments for |
stock splits, stock combinations, recapitalizations and similar transactions, as well as for future issuances below the conversion price). |
Notwithstanding the foregoing, the notes contain a beneficial ownership limitation, which provides that the Company shall not effect |
any conversion to the extent that after giving effect to the conversion, the holder, together with its affiliates, would beneficially |
own in excess of 4.99 % of the number of common shares outstanding immediately after giving effect to the issuance of common shares upon |
such conversion. Upon no fewer than 61 days’ prior notice to the Company, a holder may increase or decrease such beneficial |
ownership limitation (up to a maximum of 9.99 %) and any such increase or decrease will not be effective until the 61 st day |
after such notice is delivered to the Company. Pursuant to the terms |
of the notes, until the date that is eighteen (18) months after the issuance date of the notes, the holders shall have the right, but |
not the obligation, to participate in any securities offering of the Company other than a permitted issuance (as defined in the note |
purchase agreement) in an amount of up to the original principal amount of the notes. In addition, the holders shall have the right of |
first refusal to participate in any issuance of indebtedness by the Company until the notes have been terminated; provided, however, |
that this right of first refusal shall not apply to permitted issuances. The note purchase agreement and the notes contain |
customary representations, warranties, affirmative and negative financial and other covenants and events of default for loans of this |
type. The notes are guaranteed by each subsidiary and are secured by a first priority security interest in all of the assets of the Company |
and its subsidiaries. 6% Subordinated |
Convertible Promissory Notes A portion of the purchase |
price for the acquisition of High Mountain and Innovative Cabinets on October 8, |
2021 was paid by the issuance of 6 % subordinated convertible promissory notes in the aggregate principal amount of $ 5,880,345 by 1847 Cabinet to the H&I Sellers. The remaining principal balance of the notes at December 31, 2021 is $ 4,838,997 , net of debt |
discount of $ 1,041,348 , and they have accrued interest of $ 108,262 . The notes bear interest |
at a rate of six percent (6%) per annum and are due and payable on October 8, 2024; provided that upon an event of default (as defined |
in the notes), such interest rate shall increase to ten percent (10%) per annum. 1847 Cabinet may prepay the notes in whole or in part, |
without penalty or premium, upon ten (10) business days prior written notice to the holders of the notes. At any time prior to |
October 8, 2022, the holders may, in their sole discretion, elect to convert up to twenty percent ( 20 %) of the original principal amount |
of the notes and all accrued, but unpaid, interest into such number of shares of the common stock of 1847 Cabinet determined by dividing |
the amount to be converted by a conversion price determined by dividing (i) the fair market value of 1847 Cabinet (determined in accordance |
with the notes) by (ii) the number of shares of 1847 Cabinet outstanding on a fully diluted basis. In |
addition, on October 8, 2021, the Company entered into an exchange agreement with the H&I Sellers, pursuant to which the Company |
granted them the right to exchange all of the principal amount and accrued but unpaid interest under the notes or any portion thereof |
for a number of common shares of the Company to be determined by dividing the amount to be converted by an exchange price equal to the |
higher of (i) the 30-day volume weighted average price for the Company’s common shares on the primary national securities |
exchange or over-the-counter market on which such common shares are traded over the thirty (30) trading days immediately prior to |
the applicable exchange date or (ii) $ 2.50 (subject to equitable adjustments for stock splits, stock combinations, recapitalizations |
and similar transactions). The notes contain customary |
events of default, including in the event of a default under the secured convertible promissory notes described above. The rights of |
the holders to receive payments under the notes are subordinated to the rights of the purchasers under secured convertible promissory |
notes described above. Leonite Capital Note On April 5, 2019, the Company, Holdco and Goedeker |
(collectively, “1847”) entered into a securities purchase agreement with Leonite Capital LLC (“Leonite”), pursuant |
to which 1847 issued to Leonite a secured convertible promissory note in the aggregate principal amount of $ 714,286 due April 5, 2020. As additional consideration for the purchase of the note, (i) the Company issued to Leonite 50,000 common shares, (ii) the Company issued |
to Leonite a five-year warrant to purchase 200,000 common shares at an exercise price of $1.25 per share (subject to adjustment), which |
may be exercised on a cashless basis, and (iii) Holdco issued to Leonite shares of common stock equal to a 7.5% non-dilutable interest |
in Holdco. F- 34 1847 HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020 The note carried an original issue discount of |
$ 64,286 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred in connection |
with the purchase of the note. Furthermore, the Company issued 50,000 common shares valued at $ 137,500 and a debt-discount related to |
the warrants valued at $ 292,673 . The Company amortized $ 292,673 of financing costs related to the shares and warrants in the year ended |
December 31, 2020. On May 11, 2020, 1847 and Leonite entered into |
a first amendment to secured convertible promissory note, pursuant to which the parties agreed (i) to extend the maturity date of the |
note to October 5, 2020, (ii) that 1847’s failure to repay the note on the original maturity date of April 5, 2020 shall not constitute |
and event of default under the note and (iii) to increase the principal amount of the note by $ 207,145 , as a forbearance fee. In connection with the amendment, (i) the Company |
issued to Leonite another five-year warrant to purchase 200,000 common shares at an exercise price of $1.25 per share (subject to adjustment), |
which may be exercised on a cashless basis and (ii) upon closing of the Asien’s Acquisition, 1847 Asien issued to Leonite shares |
of common stock equal to a 5% interest in 1847 Asien. The amendment represented a prepayment of principal and accrued interest resulting |
in a debt extinguishment and the Company recorded an aggregate extinguishment loss of $773,856. Under the note, Leonite had the right at any |
time at its option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the note |
into fully paid and non-assessable common shares or any shares of capital stock or other securities of the Company into which such common |
shares may be changed or reclassified. On May 4, 2020, Leonite converted $ 100,000 of |
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