Exhibit 10.3


 


THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR
AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE
STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.


 


1847
CABINETS INC.


 


8%
VESTING PROMISSORY NOTE


 


	Up
    to $1,260,000	September
    30, 2020


 


FOR
VALUE RECEIVED, 1847 Cabinets Inc., a Delaware corporation (the “Company”), promises to pay to Stephen
Mallatt, Jr. and Rita Mallatt, each in his and her capacity as a Seller (collectively, the “Holder”), subject
to Section 4 below, the principal sum of One Million, Fifty Thousand Dollars ($1,050,000.00), as adjusted as set forth herein
(the “Principal”) in lawful money of the United States of America, with interest payable on the Vested portion
of Principal at the rate of eight percent (8%) per annum. To the extent Vested, the unpaid Principal and all accrued but unpaid
interest on such Vested portion of Principal shall be paid in full to the Holder on the last day of the thirty-sixth (36th)
month following the date of this Note (the “Maturity Date”).


 


Capitalized
terms used herein but not defined herein shall have the meaning ascribed to them in that certain Stock Purchase Agreement, dated
August 27, 2020, (the “Purchase Agreement”), among the Company, the Holder and Kyle’s Custom Wood Shop,
Inc., an Idaho corporation (“Kyle’s”), and 1847 Holdings LLC, a Delaware limited liability company (“Buyer
Parent”), pursuant to which the Company is acquiring the Shares from the Holder.


 


The
following is a statement of the rights of the Holder of this Note and the terms and conditions to which this Note is subject,
and to which the Holder, by acceptance of this Note, agrees:


 


1.
Principal Repayment. If, and to the extent, that the Principal is Vested, the Vested portion of the Principal along with
all accrued, but unpaid interest on the Vested portion of the Principal, shall be paid in one lump sum on the Maturity Date.


 


2.
Interest. Interest (the “Interest”) shall accrue on the unpaid Vested portion of Principal from the
date of issuance of this Note until such Vested portion of Principal is repaid in full at the simple rate of eight percent (8%)
per annum. The portion of accrued, but unpaid, Interest on the Vested portion of the Principal is payable at Maturity. All computations
of the Interest rate hereunder shall be made on the basis of a 360-day year of twelve 30-day months. In the event that any Interest
rate provided for herein shall be determined to be unlawful, such Interest rate shall be computed at the highest rate permitted
by applicable law. Any payment by the Company of any Interest amount in excess of that permitted by law shall be considered a
mistake, with the excess being applied to the Principal of this Note without prepayment premium or penalty.


 






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3.
Redemption. The Company will have the right to redeem all but no less than all of the Note at any time prior to the Maturity
Date pursuant to the terms of this Note. Notwithstanding anything to contrary in this Note, if the Company elects to redeem, 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 of this Note plus accrued but unpaid Interest thereon (calculated over 36 months). For purposes of this
Section 3, the “unvested Principal amount” shall be $350,000.00 per year. By way of example: if the Company elects
to redeem this Note on January 25, 2021, the Company shall pay the Vested Principal amount for year 2020, calculated as of December
31, 2020 pursuant to Section 4 below, plus $700,000 ($350,000 x 2), plus all accrued but unpaid interest on the sum total (calculated
over 36 months).


 


4.
Vesting.


 


(a)
General. The payment of the Principal and accrued Interest thereon is subject to vesting in accordance with this Section
4. The Company shall only be required to pay the Vested portion of the Principal and Interest on the Vested portion of the Principal
on the Maturity Date. For purposes of this Note, “Vested” means the percentage of the Principal that has vested
(i.e., has become payable to the Holder) in accordance with this Section 4.


 


(b)
Calculation. The Vested Principal of the Note due at the Maturity Date shall be calculated each year based on the average
annual consolidated EBITDA of the Company 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 CSN percentage (the “Vested CSN Percentage”).
The Vested Principal for each year shall be equal to the Vested CSN Percentage for that year multiplied by $350,000.00. To the
extent that the Vested CSN 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 CSN Percentage for the subject year is equal to or greater than 120%, the Vested Principal shall
be equal to $420,000.00 for that year and no more. For the avoidance of doubt and for purposes of illustration an example vesting
calculation is attached hereto as Exhibit A.


 


(c)
For purposes of this Section 4, “EBITDA” means the earnings before interest, taxes, depreciation and amortization
expenses, in accordance with generally accepted accounting principles applied on a basis consistent with the accounting policies,
practices and procedures used to prepare the Company’s financial statements as of the Closing Date, which shall include
any state and federal tax credits (including any research and development tax credit) received on behalf of the Company and, which
shall exclude i) any management fees or transition expenses payable to Buyer Parent or any subsidiary or affiliate of Buyer Parent
and the salaries, independent contractor payments, transition expenses of any additional management personnel in addition to Seller
collectively in excess of $130,000 per annum, and ii) all fees, charges, commissions, and expenses in any way related to the Acquisition.


 






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5.
Events of Default. In the event that any of the following (each, an “Event of Default”) shall occur:


 


(a)
Non-Payment. The Company shall default in the payment of the Vested portion of the Principal of, or accrued Interest on
the Vested portion of Principal of, this Note as and when the same shall become due and payable, whether by acceleration or otherwise;
or


 


(b)
Default in Covenants. The Company shall default in any material manner in the observance or performance of any covenants
or agreements set forth in the Purchase Agreement, this Note, or any other agreement entered into on connection with the transactions
contemplated by the Purchase Agreement (collectively, the “Transaction Documents”); or


 


(c)
Breach of Representations and Warranties. The Company materially breaches any representation or warranty contained in the
Transaction Documents; or


 


(d)
Illegality of Note. Any court of competent jurisdiction issues an order declaring the Note or any provision thereunder
to be illegal; or


 


(e)
Bankruptcy. The Company shall: (i) admit in writing its inability to pay its debts as they become due; (ii) apply for,
consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Company or any of
its property, or make a general assignment for the benefit of creditors; (iii) in the absence of such application, consent or
acquiesce in, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Company
or for any part of its property; or (iv) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement
or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding,
in respect of the Company, and, if such case or proceeding is not commenced by the Company or converted to a voluntary case, such
case or proceeding shall be consented to or acquiesced in by the Company or shall result in the entry of an order for relief;
or


 


(f)
Change of Control. There is a change of control of the Company by reason of the sale of 51% or more of the stock of the
Company or a sale of substantially all the assets of the Company


 


then,
and so long as such Event of Default is continuing for a period of two (2) business days in the case of non-payment under Section
5(a) or for a period of thirty (30) calendar days in the case of events under Sections 5(b) through 5(d) (and the event which
would constitute such Event of Default, if curable, has not been cured), by written notice to the Company from the Holder, all
obligations of the Company under this Note shall be immediately due and payable without presentment, demand, protest or any other
action nor obligation of the Holder of any kind, all of which are hereby expressly waived, and Holder may exercise any other remedies
the Holder may have at law or in equity. If an Event of Default specified in Section 5(e) above occurs, the Vest portion of the
Principal of, and accrued Interest thereon, shall automatically, and without any declaration or other action on the part of any
Holder, become immediately due and payable.


 






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6.
Affirmative Covenants of the Company. The Company hereby agrees that, so long as the Note remains outstanding and unpaid,
or any other amount is owing to the Holder hereunder, the Company will:


 


(a)
Corporate Existence and Qualification. Take the necessary steps to preserve its corporate existence and its right to conduct
business in all states in which the nature of its business requires qualification to do business;


 


(b)
Compliance with Law. Comply with the charter and bylaws or other organizational or governing documents of the Company,
and any law, treaty, rule or regulation, or determination of an arbitrator or a court or other governmental authority, in each
case applicable to or binding upon the Company or any of its property or to which each of the Company or any of its properties
is subject;


 


(c)
Taxes. Duly pay and discharge all taxes or other claims, which might become a lien upon any of its property except to the
extent that any thereof are being in good faith appropriately contested with adequate reserves provided therefor;


 


(d)
Further Assurances. The Company shall execute and deliver any and all such further documents and take any and all such
other actions as may be reasonably necessary or appropriate to carry out the intent and purposes of this Note and to consummate
the transactions contemplated herein.


 


7.
Subordination.


 


(a)
All claims of the Holder to the Principal, Interest, and any other amounts at any time owed under this Note (collectively, “Junior
Indebtedness”) is hereby expressly subordinated in right of payment, as herein set forth, to the prior payment in full
of all Senior Indebtedness (as defined below). No payment under Junior Indebtedness shall be made by the Company, nor shall the
Holder exercise any remedies under the Junior Indebtedness (including taking any legal action (whether judicial or otherwise)
to collect the Junior Indebtedness), if, at the time of such payment, exercise or immediately after giving effect thereto, (i)
there shall exist any “Default” or “Event of Default” under any agreements governing any of the Senior
Indebtedness or (ii) the maturity of any of the Senior Indebtedness has been accelerated and such acceleration has not been waived
or such Senior Indebtedness has not been paid in full; provided, however, that (x) in the event that the holder of any Senior
Indebtedness accelerates such Senior Indebtedness, then the Holder may accelerate the indebtedness evidenced by this Note, and
(y) if the Company is permitted under the terms of the Senior Indebtedness to pay an amount due and owing under this Note and
fails to make such payment, then so long as the terms of the Senior Indebtedness do not prohibit such action, the Holder may exercise
its rights to be paid such amount, but only such amount (and Holder shall not be permitted to accelerate hereunder).


 






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(b)
Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to
creditors upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary
or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all Senior Indebtedness of the Company shall first
be paid in full, or payment thereof provided for in money, before any payment is made under Junior Indebtedness; and upon any
such dissolution or winding up or liquidation or reorganization, any distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to which the Holder as holder of the Junior Indebtedness would be entitled except for
the provisions hereof, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other
person making such payment or distribution, or by the Holder if received by Holder, directly to the holder of the Senior Indebtedness,
or its representatives, to the extent necessary to pay all such Senior Indebtedness in full, in money, after giving effect to
any concurrent prepayment or distribution to or for the benefit of the holders of such Senior Indebtedness, before any payment
or distribution is made to the Holder with respect to the Junior Indebtedness.


 


(c)
If the holders of the Senior Indebtedness in good faith believe Holder may fail to timely file a proof of claim in any such proceeding,
the holder(s) of the Senior Indebtedness may do so for Holder.


 


(d)
In the event that any payment or distribution of assets of the Company of any kind or character, whether in cash, property or
securities, prohibited by the foregoing shall be received by the Holder before all the Senior Indebtedness is paid in full, or
provisions made for such payment, in accordance with its terms, such payment or distribution shall be held for the benefit of,
and shall be paid over or delivered to, the holders of the Senior Indebtedness or their representative or representatives, as
their respective interests may appear, for application to the payment of all the Senior Indebtedness remaining unpaid to the extent
necessary to pay all such Senior Indebtedness in full, in money, in accordance with its terms, after giving effect to any concurrent
payment or distribution to or for the holders of such Senior Indebtedness.


 


(e)
The provisions hereof are solely for the purpose of defining the relative rights of the holders of the Senior Indebtedness on
the one hand and the Holder as holder of the Junior Indebtedness on the other hand, and nothing herein shall impair, as between
the Company and the Holder, the obligations of the Company under the Junior Indebtedness, which are unconditional and absolute.
With this in mind, notwithstanding the other provisions of this Section 7, if and so long as all documents governing the Senior
Indebtedness permit one of the actions restricted by this Section 7, the restriction shall be waived and the restricted action
permitted hereunder.


 


(f)
No right of any present or future holder of any Senior Indebtedness to enforce the subordination as herein provided shall at any
time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or any act or failure to act,
in good faith, by any such holder of the Senior Indebtedness, or any noncompliance by the Company with the terms, provisions and
covenants hereof, regardless of any knowledge thereof any holder of the Senior Indebtedness may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing, the holders of the Senior Indebtedness may, at any time and from
time to time, without the consent of or notice to the Holder, without incurring responsibility to the Holder and without impairing
or releasing the subordination provided in this Note or the obligations hereunder of the Holder to the holders of the Senior Indebtedness,
do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or create,
renew or alter, the Senior Indebtedness, or otherwise amend or supplement in any manner the Senior Indebtedness or any instrument
evidencing the same or any agreement under which the Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise
deal with any property pledged, mortgaged or otherwise securing the Senior Indebtedness; (iii) release any person liable or contingently
liable in any manner for the payment or collection of the Senior Indebtedness; and/or (iv) exercise or refrain from exercising
any rights against the Company or any other person.


 






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(g)
Each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance
of this Note, shall be entitled to rely on the subordination provisions set forth in this Note.


 


(h)
Notwithstanding the provisions of this Section 7, the Holder shall not be charged with knowledge of the existence of facts which
would prohibit the making of any payments on the Junior Indebtedness unless and until the holder(s) of the Senior Indebtedness
or their representatives send written notice to Holder of same.


 


(i)
Subject to the payment in full of all the Senior Indebtedness, Holder as holder of the Junior Indebtedness shall be subrogated
to the rights of the holders of the Senior Indebtedness to receive payments or distributions of assets of the Company applicable
to the Senior Indebtedness until the Senior Indebtedness shall be paid in full.


 


(j)
The Holder shall confirm (in writing) the above subordination provisions if requested by any holder of the Senior Indebtedness,
and shall execute and deliver such additional subordination agreements, consistent with the foregoing as any holder of Senior
Indebtedness may require.


 


(k)
For purposes hereof, “Senior Indebtedness” means, with respect to the Company, all indebtedness of the Company,
whether outstanding on the date of the execution of this Note or thereafter created, to banks, insurance companies, other financial
institutions, private equity funds, hedge funds or other similar funds, unless in the instrument creating or evidencing such indebtedness
it is provided that such indebtedness is not senior in right of payment to this Note. Senior Indebtedness shall also include indebtedness
for taxes owed to federal or state agencies and other indebtedness of the Company, as the case may be, that by operation of law
has a right that is senior to the Junior Indebtedness.


 


8.
Mutilated, Destroyed, Lost or Stolen Note. If this Note shall become mutilated or defaced, or be destroyed, lost or stolen,
the Company shall execute and deliver a new note of like Principal amount in exchange and substitution for the mutilated or defaced
Note, or in lieu of and in substitution for the destroyed, lost or stolen Note. In the case of a mutilated or defaced Note, the
Holder shall surrender such Note to the Company. In the case of any destroyed, lost or stolen Note, the Holder shall furnish to
the Company: (i) evidence to its satisfaction of the destruction, loss or theft of such Note and (ii) such security or indemnity
(which shall not include the posting of any bond) as may be reasonably required by the Company to hold the Company harmless.


 






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9.
Waiver of Demand, Presentment, etc. The Company hereby expressly waives demand and presentment for payment, notice of nonpayment,
protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence
in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all
sums owing and to be owing hereunder, regardless of and without any notice, diligence, act or omission as or with respect to the
collection of any amount called for hereunder. The Company agrees that, in the event of an Event of Default, to reimburse the
Holder for all reasonable costs and expenses (including reasonable legal fees of one counsel) incurred in connection with the
enforcement and collection of this Note.


 


10.
Payment. All payments with respect to this Note shall be made in lawful money of the United States of America, at the address
of the Holder as of the date hereof or as designated in writing by the Holder from time to time. The receipt by the Holder of
immediately available funds shall constitute a payment of the Principal and Interest hereunder and shall satisfy and discharge
the liability for Principal and Interest on this Note to the extent of the sum represented by such payment. Payment shall be credited
first to the accrued Interest then due and payable and the remainder applied to Principal.


 


11.
Assignment. The rights and obligations of the Company and the Holder of this Note shall be binding upon, and inure to the
benefit of, the successors and permitted assigns of the parties hereto. To complete an assignment or transfer this Note, the Holder
shall deliver a completed and executed Form of Assignment attached hereto as Exhibit B and surrender and deliver this Note,
duly endorsed, to the Company’s office or such other address which the Company shall designate, upon receipt of which a
new Note, in substantially the form of this Note (any such new Note, a “New Note”), evidencing the portion
of this Note so transferred shall be issued to the transferee and a New Note evidencing the remaining portion of this Note not
so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Note by the transferee thereof shall
be deemed the acceptance by such transferee of all of the rights and obligations in respect of the New Note that the Holder has
in respect of this Note. Interest and Principal are payable only to the registered Holder of this Note set forth on the books
and records of the Company. Any assignment pursuant to this Section 11 remains subject to the occurrence of the Contingency Event.


 


12.
Waiver and Amendment. Any provision of this Note, including, without limitation, the due date hereof, and the observance
of any term hereof, may be amended, waived or modified (either generally or in a particular instance and either retroactively
or prospectively) only with the written consent of the Company and the Holder.


 


13.
Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed
to have been duly given if given in accordance with the provisions of the Purchase Agreement.


 


14.
Governing Law. This Note shall be governed in all respects, including validity, interpretation and effect, by the internal
laws of the State of Idaho.


 


15.
Headings. The descriptive headings contained in this Note are included for convenience of reference only and will not affect
in any way the meaning or interpretation of this Note.


 


16.
Severability. If one or more provisions of this Note are held to be unenforceable under applicable law, such provisions
shall be excluded from this Note, and the balance of this Note shall be interpreted as if such provisions were so excluded and
shall be enforceable in accordance with its terms.


 


[Signature
Page Follows]


 






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IN
WITNESS WHEREOF, the undersigned have caused this Note to be issued as of the date first above written.


 


	 	1847 Cabinets Inc.
	 	 	 
	 	By:	/s/ Kenneth Yuan
	 	Name: 	Kenneth Yuan
	 	Title:	Chief Executive Officer



 






     


     


    

 


EXHIBIT
A


 


Note
Vesting Example


 


Year
1:


 


	 	●	Average
    annual consolidated EBITDA of the Company for the year ending December 31, 2020 equals $1,500,000.


 


	 	●	Then
    the Vested CSN Percentage for year 2020 equals 107.14% (1,500,000/1,400,000 * 100). The CNS Percentage for year ending 2020
    falls within the range of 80% to 120%.


 


	 	●	Therefore,
    the Principal will Vest for year 2020 in the amount of $374,990 ($350,000 * 1.0714).


 


Year
2:


 


	 	●	Average
    annual consolidated EBITDA of the Company for the year ending December 31, 2021 equals $600,000.


 


	 	●	Then
    the Vested CSN Percentage for year 2020 equals 42.86% (600,000/1,400,000 * 100).


 


	 	●	The
    CNS Percentage for year ending 2021 falls below the range of 80% to 120%.


 


	 	●	Therefore,
    the Principal will Vest for year 2021 in the amount of $0.00.


 


Year
3:


 


	 	●	Average
    annual consolidated EBITDA of the Company for the year ending December 31, 2022 equals $2,000,000.


 


	 	●	Then
    the Vested CSN Percentage for year 2020 equals 142.86% (2,000,000/1,400,000 * 100).


 


	 	●	The
    CNS Percentage for year ending 2021 falls above the range of 80% to 120%.


 


	 	●	Therefore,
    the Principal will Vest for year 2022 in the amount of $420,000 (cap).


 


Total
Vested principal amount over Term equals $794,990 (374,990 + 420,000). Interest will be calculated based on the forgoing Vested
principal amount as accrued at the rate of 8% per annum from the date of issuance of the Note until such Vested portion is repaid
in full on the Maturity Date.


 






     


     


    

 


EXHIBIT
B


 


Form
of Assignment


 


TO:1847
Cabinets Inc.,


 


FOR
VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ___________________ (name), __________________________________________
(address), US$____________ of 8% Vesting Promissory Note (“Note”) of 1847 Cabinets Inc. (the “Company”),
including any and all accrued and unpaid interest owing thereon, registered in the name of the undersigned on the records of the
Company represented by the within certificate, and irrevocably appoints ___________________ the attorney of the undersigned to
transfer the said securities on the books or register with full power of substitution.


 


DATED
this ________ day of, __________________, 20 ____.


 


	 

        _______________________________

        (Signature of Registered Note Holder)

         

         

        ________________________________

        (Print name of Registered Note Holder)

         






Instructions:


 


		1.	Signature
of Holder must be the signature of the person appearing on the face of the Note.


 


		2.	If
the transfer of Note is signed by a trustee, executor, administrator, curator, guardian, attorney, officer of a corporation or
any person acting in a fiduciary or representative capacity, the certificate must be accompanied by evidence of authority to sign
satisfactory to the Company.