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grid note was terminated. Building Lease On September 1, 2020, Kyle’s entered into |
an industrial lease agreement with the Kyle’s Sellers, who are officers of Kyle’s and principal shareholders of the Company. |
See Note 13 for details regarding this lease. NOTE 16—SHAREHOLDERS’ EQUITY (DEFICIT) Allocation Shares As of December 31, 2021 and 2020, the Company |
had authorized and outstanding 1,000 allocation shares. These allocation shares do not entitle the holder thereof to vote on any matter |
relating to the Company other than in connection with amendments to the Company’s operating agreement and in connection with certain |
other corporate transactions as specified in the operating agreement. The Manager owns 100 % of the allocation shares |
of the Company which represent the original equity interest in the Company. As a holder of the allocation shares, the Manager is entitled |
to receive a 20 % profit allocation as a form of preferred distribution, pursuant to a profit allocation formula upon the occurrence of |
certain events. Generally, the distribution of the profit allocation is paid upon the occurrence of the sale of a material amount of capital |
stock or assets of one of the Company’s businesses, including if the Company distributes its equity ownership in a subsidiary to |
the Company’s shareholders in a spin-off or similar transaction (a “Sale Event”), or, at the option of the Manager, |
at the five-year anniversary date of the acquisition of one of the Company’s businesses (a “Holding Event”). The Company |
records distributions of the profit allocation to the holders upon occurrence of a Sale Event or Holding Event as dividends declared on |
allocation interests to stockholders’ equity when they are approved by the Company’s board of directors. The 1,000 allocation shares are issued and outstanding |
and held by the Manager, which is controlled by Mr. Roberts, the Company’s chief executive officer and a principal shareholder. Series A Senior Convertible Preferred Shares On September 30, 2020, the Company executed a |
share designation, which was amended on November 20, 2020, March 26, 2021 and September 29, 2021, to designate 4,450,460 of its shares |
as series A senior convertible preferred shares. Following is a description of the rights of the |
series A senior convertible preferred shares. Dividends. Dividends at the rate per annum |
of 14.0 % of the stated value ($ 2.00 per share, subject to adjustment) shall accrue on the series A senior convertible preferred shares. |
Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends shall be payable quarterly in arrears |
on each dividend payment date in cash or common shares at the Company’s discretion. Dividends payable in common shares shall be |
calculated based on a price equal to eighty percent ( 80 %) of the volume weighted average price (“VWAP”) for the common shares |
on the Company’s principal trading market during the five (5) trading days immediately prior to the applicable dividend payment |
date; provided, however, that if the common shares are not registered, and rulemaking referred to below is effective on the payment date, |
the dividends payable in common shares shall be calculated based upon the fixed price of $ 1.57 ; provided further, that the Company may |
only elect to pay dividends in common shares based upon such fixed price if the VWAP for the five (5) trading days immediately prior to |
the applicable dividend payment date is $ 1.57 or higher. F- 41 1847 HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020 Liquidation. Subject to the rights of the |
Company’s creditors and the holders of any senior securities or parity securities (in each case, as defined in the share designation), |
upon any liquidation of the Company or its subsidiaries, before any payment or distribution of the assets of the Company (whether capital |
or surplus) shall be made to or set apart for the holders of securities that are junior to the series A senior convertible preferred shares |
as to the distribution of assets on any liquidation of the Company, each holder of outstanding series A senior convertible preferred shares |
shall be entitled to receive an amount of cash equal to 115 % of the stated value plus an amount of cash equal to all accumulated accrued |
and unpaid dividends thereon (whether or not declared) to, but not including the date of final distribution to such holders. If, upon |
any liquidation of the Company, the assets of the Company, or proceeds thereof, distributable among the holders of the series A senior |
convertible preferred shares shall be insufficient to pay in full the preferential amount payable to the holders of the series A senior |
convertible preferred shares and liquidating payments on any other shares of any class or series of parity securities as to the distribution |
of assets on any liquidation of the Company, then such assets, or the proceeds thereof, shall be distributed among the holders of series |
A senior convertible preferred shares and any such other parity securities ratably in accordance with the respective amounts that would |
be payable on such series A senior convertible preferred shares and any such other parity securities if all amounts payable thereon were |
paid in full. Voting Rights . The series A senior convertible |
preferred shares do not have any voting rights; provided that, so long as any series A senior convertible preferred shares are outstanding, |
the affirmative vote of holders of a majority of series A senior convertible preferred shares, which majority must include Leonite so |
long as Leonite holds any series A senior convertible preferred shares (the “Requisite Holders”), voting as a separate class, |
shall be necessary for approving, effecting or validating any amendment, alteration or repeal of any of the provisions of the share designation. |
In addition, so long as any series A senior convertible preferred shares are outstanding, the affirmative vote of the Requisite Holders |
shall be required prior to the Company’s (or Kyle’s or Wolo’s) creation or issuance of (i) any parity securities; (ii) |
any senior securities; and (iii) any new indebtedness other than (A) intercompany indebtedness by Kyle’s or Wolo in favor of the |
Company, (B) indebtedness incurred in favor of the sellers of Kyle’s or Wolo in connection with the acquisition of Kyle’s |
or Wolo, or (C) indebtedness (or the refinancing of such indebtedness) the proceeds of which are used to complete the acquisition of Kyle’s |
or Wolo related expenses or working capital to operate the business of Kyle’s or Wolo. Notwithstanding the foregoing, this shall |
not apply to any financing transaction the use of proceeds of which the Company will use to redeem the series A senior convertible preferred |
shares and the warrants issued in connection therewith. Conversion Rights . Each series A senior |
convertible preferred share, plus all accrued and unpaid dividends thereon, shall be convertible, at the option of the holder thereof, |
at any time and from time to time into such number of fully paid and nonassessable common shares determined by dividing the stated value, |
plus the value of the accrued, but unpaid, dividends thereon, by the conversion price of $ 1.75 per share; provided that in no event shall |
the holder of any series A senior convertible preferred shares be entitled to convert any number of series A senior convertible preferred |
shares that upon conversion the sum of (i) the number of common shares beneficially owned by the holder and its affiliates and (ii) the |
number of common shares issuable upon the conversion of the series A senior convertible preferred shares with respect to which the determination |
of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.99 % of the then outstanding |
common shares of the Company. This limitation may be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, upon |
not less than sixty-one (61) days’ prior notice to the Company. Redemption . The Company may redeem in whole, |
or upon the written consent of the Requisite Holders and in the manner provided for in such written consent, in part, the series A senior |
convertible preferred shares by paying in cash therefore a sum equal to 115 % of the stated value plus the amount of accrued and unpaid |
plus any other amounts due pursuant to the terms of the series A senior convertible preferred shares. Adjustments . The share designation contains |
standard adjustments to the conversion price in the event of any share splits, share combinations, share reclassifications, dividends |
paid in common shares, sales of substantially all of the Company’s assets, mergers, consolidations or similar transactions. In addition, |
the share designation provides that if, but only if, the Requisite Holders provide the Company with at least ten (10) business day’s |
prior written notice, then, from and after the date of such notice, the stated dividend rate, the stated value and the conversion price |
shall automatically adjust as follows: ● On the first day of the 12 th month following the issuance |
date of any series A senior convertible preferred shares, the stated dividend rate shall increase by five percent (5.0%) per annum |
and the conversion price shall adjust to the lower of the (i) initial conversion price and (ii) the price equal to the lowest VWAP of |
the ten (10) trading days immediately preceding such date. F- 42 1847 HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020 ● On the first day of the 24 th month following the issuance |
date of any series A senior convertible preferred shares, the stated dividend rate shall increase by an additional five percent |
(5.0%) per annum, the stated value shall increase by ten percent (10%) and the conversion price shall automatically adjust to the lower |
of the (i) initial conversion price and (ii) the price equal to the lowest VWAP of the ten (10) trading days immediately preceding such |
date. ● On the first day of the 36 th month following the issuance |
date of any series A senior convertible preferred shares, the stated dividend rate shall increase by an additional five percent |
(5.0%) per annum, the stated value shall increase by ten percent (10%) and the conversion price shall automatically adjust to the lower |
of the (i) initial conversion price and (ii) the price equal to the lowest VWAP of the ten (10) trading days immediately preceding the |
third adjustment date. Notwithstanding the foregoing, the conversion |
price for purposes of the adjustments above shall not be adjusted to a number that is below $0.0075. In addition, if any legislation or |
rules are adopted whereby the holding period of securities for purposes of Rule 144 of the Securities Act of 1933, as amended, for convertible |
securities that convert at market-adjusted rates is increased resulting in a longer holding period for convertible securities like the |
series A senior convertible preferred shares and the unavailability at the time of conversion of Rule 144, the pricing provisions that |
are based upon the lowest VWAP of the previous ten (10) trading days immediately preceding the relevant adjustment date shall be removed |
unless the common shares issuable upon conversion are then registered under an effective registration statement. Additional Equity Interest. On the third |
adjustment date set forth above, the Company is required to cause Kyle’s and Wolo to issue to the holders of series A senior convertible |
preferred shares, on a pro rata basis, a ten percent ( 10 %) equity stake Kyle’s and/or Wolo (the “Additional Equity Interest”). |
The holders of series A senior convertible preferred shares issued in connection with the financing to complete the acquisition of Kyle’s |
shall receive the equity stake in Kyle’s and the holders of series A senior convertible preferred shares issued in connection with |
the financing to complete the acquisition of Wolo shall receive the equity stake in Wolo. The Company is required to cause Kyle’s |
and Wolo to grant to the holders of the series A senior convertible preferred shares upon the issuance to them of the Additional Equity |
Interest a right to receive an additional number of shares of common stock of Kyle’s or Wolo if Kyle’s or Wolo issues to any |
third-party equity securities at a price below the acquisition price (as defined below). Such additional number of shares of common stock |
of Kyle’s or Wolo to be issued in such instance shall be equal to a number of shares of common stock of Kyle’s or Wolo which, |
when added to the number of shares of common stock of Kyle’s or Wolo constituting the Additional Equity Interest, would be equal |
to the total number of shares of common stock which would have been issued to a holder of series A senior convertible preferred shares |
if the price per share of common stock of Kyle’s or Wolo was equivalent to the price per equity security paid by such third-party |
in Kyle’s or Wolo. For purposes of this provision, “acquisition price” means the price per share of Kyle’s and |
Wolo that was paid by the Company upon the acquisition of Kyle’s and Wolo, respectively. On September 30, 2020, the Company sold an aggregate |
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