10-K/A: 1847 Holdings Amends 2024 Annual Report, Cites Going Concern

1847 Holdings LLC filed an amendment to its 2024 Annual Report, primarily to correct fiscal year certifications, while its auditors expressed substantial doubt about the company's ability to continue as a going concern due to recurring losses and a significant working capital deficit.

Summary

• The company filed an amendment (10-K/A) to its Annual Report for the fiscal year ended December 31, 2024, solely to furnish revised certifications by its principal executive and financial officers due to a typographical error in the original filing.
• Auditors issued a going concern opinion on the financial statements for the year ended December 31, 2024, citing recurring losses, negative cash flows from operations, and a working capital deficit of $111,927,759.
• The company reported a net loss from continuing operations of $106,804,254 for the year ended December 31, 2024, significantly higher than the $23,988,403 loss in 2023.
• Total revenues increased to $15,710,330 in 2024 from $14,190,135 in 2023, primarily driven by the construction segment.
• The construction segment's revenue increased by 24.1% to $11,960,884 in 2024, attributed to new multi-family projects and increased average customer contract value.
• The automotive supplies segment's revenue decreased by 17.6% to $3,749,446 in 2024, primarily due to working capital constraints on inventory.
• The company incurred a loss on change in fair value of warrant liabilities of $77,638,662 in 2024, a substantial increase from $27,900 in 2023.
• The company completed the acquisition of CMD Inc. (CMD) on December 16, 2024, for an aggregate purchase price of $18,825,000, consisting of cash and a promissory note.
• Three subsidiaries (Asiens Appliance, ICU Eyewear, and High Mountain Door & Trim) were reported as discontinued operations in 2024 and 2023 due to assignments for the benefit of creditors or asset sales.
• The company identified material weaknesses in its internal controls over financial reporting, including lack of written documentation for policies, insufficient accounting personnel for segregation of duties, and ineffective IT general controls.
• The company's common shares are listed on NYSE American, but it faces delisting risks if its share price falls below $0.10 or due to its shareholders' deficit of approximately $96 million as of December 31, 2024.
• The company's management believes current working capital and expected additional financing are sufficient for operations for at least one year from the financial statement issuance date, but acknowledges additional funds are required to execute its business plan and acquisition strategy.

Sentiment

Score: 2

Explanation: The company faces significant financial distress, evidenced by a going concern opinion, substantial net losses, and a large working capital deficit. While there are some positive revenue trends in one segment and recent capital raises, the overall financial health and identified material weaknesses in internal controls present a highly negative outlook.

Positives

• Total revenues increased by 10.7% to $15,710,330 in 2024 from $14,190,135 in 2023.
• The construction segment's revenue grew by 24.1% to $11,960,884 in 2024, driven by new multi-family projects and higher average customer contract values.
• The acquisition of CMD Inc. on December 16, 2024, is expected to enhance operational synergies within the Construction Segment and aligns with the company's strategy of acquiring undervalued, profitable small and middle-market businesses.
• The company's automotive supplies business holds 45 patents (utility and design), providing a competitive barrier and higher profit margins for utility-patented products.
• The automotive supplies business has long-term supplier and customer relationships, with many spanning over 10-15 years.
• The construction business has a strong regional presence in the fast-growing Las Vegas and Boise metro areas, with established blue-chip clients and diversified capabilities.
• Management believes its strong relationships with deal intermediaries provide substantial opportunities to purchase small businesses at attractive multiples (3-6x EBITDA).

Negatives

• Auditors issued a going concern opinion, indicating substantial doubt about the company's ability to continue operations.
• The company reported a significant net loss from continuing operations of $106,804,254 for 2024, a substantial increase from $23,988,403 in 2023.
• A total working capital deficit of $111,927,759 as of December 31, 2024.
• Used $14,635,636 in cash flows from operating activities in 2024.
• The automotive supplies segment's revenue decreased by 17.6% in 2024, primarily due to working capital constraints on inventory.
• A substantial loss on change in fair value of warrant liabilities of $77,638,662 was recorded in 2024.
• The company recognized a loss on extinguishment of debt of $4,709,793 in 2024.
• The company has a shareholders deficit of $96,466,037 as of December 31, 2024.
• Three subsidiaries (Asiens Appliance, ICU Eyewear, and High Mountain Door & Trim) were discontinued operations in 2024 due to financial distress or strategic sales, indicating past business failures.
• The related party promissory note with Stephen Mallatt, Jr. and Rita Mallatt (officers of Kyles) with an outstanding principal balance of $578,290 and accrued interest of $71,312 is currently in default.
• The company has identified material weaknesses in its internal controls over financial reporting, which could lead to inaccurate financial reporting and fraud.

Risks

• Auditors have issued a going concern opinion, raising substantial doubt about the company's ability to continue operations.
• The company has generated losses since inception and relies on external financing, with no assurance that sufficient funds will be available on reasonable terms.
• Inability to effectively integrate acquired businesses could lead to drains on resources, management distraction, and failure to realize anticipated benefits.
• Future success is highly dependent on key personnel of the manager and business management teams; loss of these individuals could materially adversely affect operations.
• Competition for acquisition targets may lead to sub-optimal prices or missed opportunities.
• Inability to successfully fund future acquisitions due to unavailability of debt or equity financing on acceptable terms could impede the acquisition strategy.
• Management and acquisition strategies can be changed without shareholder consent, potentially leading to riskier business activities.
• Insufficient cash flow from operating subsidiaries may prevent the company from making distributions to shareholders.
• Loans with third parties contain covenants; default could lead to acceleration of obligations and restrictions on distributions.
• Leverage from future credit facilities could inhibit operating flexibility and reduce cash flow for distributions.
• Conflicts of interest may arise in business transactions with target businesses related to executive officers, directors, or the manager.
• Operational objectives of different businesses may conflict, creating competing demands for resources.
• The company could be deemed an investment company under the Investment Company Act if it makes significant non-controlling investments, leading to costly additional regulation.
• Material weaknesses in internal control over financial reporting could lead to inaccurate financial results and fraud.
• The construction business is highly dependent on U.S. home improvement, repair, remodel, and new home construction activity, which are sensitive to economic conditions and interest rates.
• The construction business is subject to seasonal fluctuations and factors beyond control, such as extreme weather.
• Difficulties in recruiting and retaining qualified sales and installation personnel could hinder growth in the construction segment.
• Increases in labor costs, union activity, and work stoppages could materially affect financial performance.
• Catastrophic loss of key manufacturing facilities could adversely affect the business.
• Exposure to product liability, workmanship warranty, negligence, construction defect, and breach of contract claims in the construction business could lead to significant liabilities and reputational harm.
• Intense competition in the construction industry from national and local manufacturers, as well as large retail chains, could harm financial condition.
• Dependence on a limited number of third-party suppliers for key finished goods and raw materials in the construction business poses risks of supply interruptions and increased costs.
• Increased prices for finished goods or raw materials could increase cost of revenues and decrease demand for products.
• Changes to U.S. trade policy, tariffs, and import/export regulations (especially from China and Canada) could adversely affect operating results and supply chains.
• High dependence on key suppliers in the automotive supplies business, with a substantial portion of finished goods purchased from five vendors, poses risks of supply interruptions and increased costs.
• Reliance on manufacturers in Taiwan and China exposes the automotive supplies business to complex regulatory regimes, logistical challenges, and geopolitical risks.
• Dependence on third-party delivery services for inbound and outbound shipping exposes the automotive supplies business to increased costs and service interruptions.
• Increases in commodity prices (fuel, plastic, steel) could negatively impact margins in the automotive supplies business.
• Challenges associated with international operations (e.g., political instability, currency fluctuations, regulatory changes) could limit growth.
• Geopolitical conflicts (e.g., Russia-Ukraine war, Israel-Hamas conflict, China-Taiwan tensions) could impact global economic conditions, supply chains, and inflation.
• Interruptions in fulfillment operations (e.g., distribution centers) could lead to sales decline and reputational harm.
• Intense competition and limited barriers to entry in the aftermarket auto parts industry, with competitors having greater resources, could lead to reduced sales and profitability.
• Dependence on key personnel in the automotive supplies business; loss of such personnel could harm operations.
• Risk of product catalog database theft or replication could lead to loss of competitive advantage.
• Economic conditions affecting vehicle miles driven, accident rates, and insurance company policies could reduce demand for auto parts.
• Increased sales tax obligations due to U.S. Supreme Court decision (South Dakota v. Wayfair) could reduce competitive advantage and sales.
• Higher wage and benefit costs could adversely affect profitability.
• Exposure to product liability lawsuits in the automotive industry could lead to substantial damages and reputational harm.
• Security threats, such as ransomware attacks, to IT infrastructure could expose the company to liability and damage reputation.
• Failure to comply with privacy laws and regulations and protect customer data could harm business and reputation.
• Challenges by OEMs to the validity of the aftermarket auto parts industry and claims of intellectual property infringement could adversely affect the business.
• Inability to protect intellectual property rights could impair reputation and brand.
• Litigation and regulatory matters could result in substantial judgments, fines, and costs.
• Global climate change or legal/regulatory responses to it could adversely affect demand for products and increase costs.
• Termination of the management services agreement does not affect the manager's rights to receive profit allocations, and removal may incur significant fees.
• The CEO controls the manager, potentially making it difficult to sever ties with the CEO.
• The manager and management team members may engage in competing activities.
• The manager has sole discretion to determine if an acquisition opportunity meets criteria, potentially leading to missed opportunities for the company.
• If the management services agreement is terminated, the manager has the right to cause the company to purchase its allocation shares at a potentially significant put price, which could restrict the company's operations and distributions.
• Termination of the management services agreement requires the company to change its name and cease using the '1847' term, incurring costs and potential business impact.
• Indemnification obligations to the manager could result in material adverse financial impact.
• The manager can resign on 120 days' notice, potentially disrupting operations if a replacement is not found.
• The amount recorded for allocation shares is subject to substantial period-to-period changes, impacting results of operations.
• The management fee paid to the manager is based on adjusted net assets, not performance, potentially incentivizing asset growth over business performance and reducing cash for distributions.
• The amount of profit allocation to the manager could be substantial and is uncertain, potentially reducing cash available for shareholders and operations.
• The obligation to pay management fees and profit allocation (including put price) may require the company to liquidate assets or incur debt.
• Shareholders are subject to taxation on their share of taxable income whether or not they receive cash distributions.
• The company could be subject to an entity-level tax if it fails the qualifying income exception for publicly traded partnerships, materially reducing cash flow for distributions.
• Tax law changes could adversely affect the investment.
• Compliance with tax-related requirements may force the company to forego attractive business opportunities.
• Non-corporate U.S. taxpayers may not be able to deduct certain fees, costs, or expenses for federal income tax purposes.
• A portion of income may be treated as unrelated business taxable income for tax-exempt holders.
• A portion of income may be treated as effectively connected with a U.S. trade or business for non-U.S. taxpayers.
• Inability to maintain NYSE American listing could impair shareholders' ability to trade shares and raise capital.
• Future sales of securities may affect market price and result in material dilution.
• Rule 144 sales in the future may have a depressive effect on share price.
• Preferred shares are senior to common shares as to distributions and liquidation, limiting common shareholder distributions.
• Issuance of additional debt and equity securities senior to common shares could adversely affect common share price.
• Failure to meet market expectations for earnings and cash distributions could adversely affect common share price.
• If common shares are considered 'penny stock,' U.S. broker-dealers may be discouraged from effecting transactions.
• Holders of common shares may not be entitled to a jury trial with respect to claims arising under the operating agreement.

Future Outlook

Management plans to continue focusing on acquiring small businesses in attractive industry sectors, limiting external acquisition leverage to maintain a debt to EBITDA ratio not exceeding 1.25x to 1 for operating subsidiaries. The company expects to improve businesses through organic growth, add-on acquisitions, and operational improvements. It intends to raise capital primarily through debt financing at the operating company level, additional equity offerings, or asset sales. The long-term goals are to make and grow regular distributions to common shareholders and increase shareholder value over time. The company is actively developing and implementing remediation plans to address identified material weaknesses in internal controls, including increasing personnel resources, engaging internal control consultants, and preparing written documentation of policies.

Management Comments

• Management believes, based on its operating plan, that current working capital and current and expected additional financing is sufficient to fund operations and satisfy obligations as they come due for at least one year from the financial statement issuance date.
• Management believes additional funds are required to execute the business plan and strategy of acquiring additional businesses.
• Management believes that its management and acquisition strategies will allow it to achieve goals to make and grow regular distributions to common shareholders and increase common shareholder value over time.
• Management believes that private company operators and corporate parents looking to sell their businesses will consider the company an attractive purchaser.
• Management believes that the merger and acquisition market for small businesses is highly fragmented and provides significant opportunities to purchase businesses at attractive prices.
• Management believes that its management teams strong relationships with business brokers, investment and commercial bankers, accountants, attorneys and other potential sources of acquisition opportunities offers substantial opportunities to purchase small businesses.
• Management believes significant opportunities exist to improve the performance of acquired businesses.
• Management believes that its long-term perspective provides certain advantages, including the ability to recruit and develop management teams, focus on long-term value creation, create sector-specific businesses, achieve industry exposure, and maintain long-term relationships.
• Management believes that its managers collective investment experience and approach provide several competitive advantages, enabling the acquisition of additional businesses.
• Management believes the company is in substantial compliance with all applicable environmental requirements.
• Management sees increasing sales through new products and online marketing, expanding into traditional and OEM replacement horn markets, growing international markets (Mexico, Canada, Netherlands), and additional focus on municipal and public safety markets as key growth initiatives for the automotive supplies business.
• Management believes the company has maintained an excellent reputation in the automotive industry for over 55 years through exclusive products and designs.
• Management believes the company has an excellent relationship with its employees in both construction and automotive supplies segments.
• Management believes its remediation plan will be sufficient to address identified material weaknesses and strengthen internal control over financial reporting.

Industry Context

The company operates as an acquisition holding company targeting small businesses (enterprise value < $50 million) across diverse industries, including construction (finish carpentry, cabinetry) and automotive supplies (horns, warning lights). It leverages the fragmented nature of the small business M&A market, where valuations are typically lower than for larger companies. The construction segment is sensitive to the U.S. housing market, interest rates, and labor availability, operating in competitive regional markets like Las Vegas and Boise. The automotive supplies segment competes in the highly fragmented aftermarket auto parts industry, facing challenges from economic conditions, supply chain disruptions (especially from China and Taiwan), and potential intellectual property disputes with OEMs. The company's strategy of acquiring and actively managing small businesses aims to capitalize on operational improvements and organic/add-on growth, a model often seen in private equity but applied here by a publicly traded entity.

Comparison to Industry Standards

• The filing does not provide specific comparable company financial results or industry benchmarks for direct comparison of financial metrics like revenue growth, profitability, or cash flow.
• The company states that platform acquisitions with enterprise values less than $50.0 million commanded valuation premiums of 6.0x to 7.1x trailing twelve-month adjusted EBITDA in 2023, compared to 8.0x to 9.9x for larger acquisitions. The company believes it can acquire small businesses for multiples ranging from three to six times EBITDA, suggesting it aims for acquisitions below the average small business valuation.
• The company's construction business competes with specialty builders like Holguin, Star Hardware, DMC, Rystin Construction, Next Level Door and Trim, Western Casework, Henrick-and-Oherron in Las Vegas, and Franklins and Western Idaho in Boise, as well as national retail chains like Home Depot and Lowes. No specific comparative performance data for these competitors is provided.
• The automotive supplies business competes with FIAMM, Grote, Peterson Manufacturing Company, ECCO, Vixen Horns, HornBlasters, and Kleinn. No specific comparative performance data for these competitors is provided.
• The company's reliance on a limited number of suppliers for key finished goods and raw materials, particularly from China and Taiwan, is a common industry risk, but the filing does not provide specific industry benchmarks for supplier diversification or supply chain resilience.

Management Changes

Corporate Governance

Legal Proceedings

• The company is not currently aware of any legal proceedings or claims that it believes will have a material adverse effect on its business, financial condition, or operating results.

Related Party Transactions

• The company pays its manager (controlled by CEO Ellery W. Roberts) a quarterly management fee (Parent Management Fee) equal to 0.5% (2.0% annualized) of its adjusted net assets. This fee is reduced by offsetting management fees received by the manager from subsidiaries.
• For 2024, the company expensed $2,267,000 in management fees from continued operations and $350,000 from discontinued operations. For 2023, these figures were $633,333 and $691,667, respectively.
• The manager owns 100% of the company's allocation shares, entitling it to a 20% profit allocation upon certain trigger events (sale of a material amount of assets or a holding event after 5 years), subject to an 8% hurdle rate.
• The manager is also entitled to transaction fees (2% of aggregate purchase price, decreasing for larger deals) for acquisitions or dispositions, which do not offset the management fee.
• A $2,000,000 distribution receivable from the manager, recognized in 2020, was settled in full during 2024 as a credit against future profit allocations and transaction fees.
• The company's right to use the '1847' term and related intellectual property is licensed from the manager; termination of the management services agreement would require the company to cease using the name.
• Kyles Custom Wood Shop, Inc. (a subsidiary) leases a facility from Stephen Mallatt, Jr. and Rita Mallatt (officers of Kyles) under an industrial lease agreement, with monthly base rent increasing over time. The company expensed $87,106 under this lease in 2024.
• A promissory note issued by 1847 Cabinet to Stephen Mallatt, Jr. and Rita Mallatt in the principal amount of $1,260,000 (related to the Kyles acquisition) has an outstanding principal balance of $578,290 and accrued interest of $71,312 as of December 31, 2024, and is currently in default.

Stakeholder Impact

• **Shareholders:** Face significant risk due to the going concern opinion, substantial net losses, and working capital deficit. Potential for significant dilution from future equity raises and warrant exercises. Common shareholders are junior to preferred shareholders and debt holders for distributions and liquidation. The jury trial waiver in the operating agreement may limit legal recourse.
• **Employees:** The company's future success depends on retaining key personnel. Material weaknesses in internal controls could impact operational stability. The company believes it has excellent relationships with its employees.
• **Customers:** Potential for delayed product delivery in the construction segment due to supply chain issues or personnel shortages. The automotive supplies segment's revenue decline due to working capital constraints on inventory could impact product availability. Past discontinuations of subsidiaries (Asiens, ICU Eyewear, High Mountain) indicate potential service disruptions for customers of those businesses.
• **Suppliers:** The company's dependence on a limited number of suppliers, especially from China and Taiwan, exposes suppliers to risks related to the company's financial health and geopolitical factors. The default on a related party promissory note indicates potential payment issues for some creditors.
• **Creditors:** The company's substantial debt, working capital deficit, and going concern opinion indicate high risk for creditors. The priority of management fees, profit allocations, and potential put price to the manager over distributions to shareholders could impact the company's ability to service other debts.

Next Steps

• Management plans to secure additional bank lines of credit and obtain additional financing through debt or equity transactions to fund operations and satisfy obligations.
• The company will continue to identify, perform due diligence on, negotiate, and consummate platform acquisitions of small businesses.
• The company is undertaking remedial measures to address material weaknesses in internal controls, including increasing personnel resources, engaging internal control consultants, and preparing written documentation of policies and procedures.
• The automotive supplies segment plans to increase sales through new products and online marketing, expand into traditional market and original equipment replacement horns, grow presence in international markets (Mexico, Canada, Netherlands), and focus on municipal and public safety markets.
• The construction business plans geographic expansion into surrounding areas (Twin Falls, McCall, Sun Valley in Idaho, Northern and Southern Nevada, Utah, and Arizona) and expansion into commercial projects and tract homes.
• The construction business is in the process of expanding warehouse space and operations in Nevada to capture additional bid opportunities in the ready-to-assemble (RTS) cabinet segment.

Key Dates

Recommendation

The company faces severe financial distress, as evidenced by a 'going concern' opinion from its auditors, a net loss of over $106 million in 2024, and a working capital deficit exceeding $111 million. Its ability to continue operations is highly dependent on securing additional financing, which is uncertain. The significant loss on warrant liabilities and the default on a related party note further highlight financial instability. While there was revenue growth in one segment and recent capital raises, these are overshadowed by the overall negative financial position and identified material weaknesses in internal controls. The potential for substantial dilution from future equity offerings and the complex fee structure with the manager, which prioritizes payments over common shareholder distributions, add to the risk. Given these factors, the stock presents a high risk of capital loss.

Keywords

Acquisition Holding Company, Small Business Acquisition, Construction Services, Automotive Aftermarket, Horn and Safety Products, SEC Filing, 10-K/A, Going Concern, Financial Performance, Working Capital Deficit, Net Loss, Revenue Growth, Discontinued Operations, Internal Controls, Material Weaknesses, NYSE American Listing, Shareholder Deficit, Debt Financing, Equity Offerings, Management Fees, Profit Allocation, Warrant Liabilities, Related Party Transactions, Corporate Governance, Risk Factors, Intellectual Property, Supply Chain Risk, Tariffs, Geopolitical Risk