Acquisitions and Business Strategy - The company acquired Neese for a total purchase price of $6,655,000, which included $2,225,000 in cash and a promissory note of $1,875,000[73]. - Goedeker acquired substantially all assets of Goedeker Television for $6,200,000, consisting of $1,500,000 in cash and a promissory note of $4,100,000[75]. - The company aims to acquire small businesses with revenue of at least $5.0 million and current year EBITDA of at least $1.5 million[85]. - The management team has over 60 years of combined experience in acquiring and managing small businesses, overseeing the acquisition and financing of over 50 businesses[82]. - The company expects to acquire small businesses for multiples ranging from three to six times EBITDA[85]. Management Services and Fees - The management services agreement allows the manager to perform day-to-day operations and oversee acquisitions and dispositions[90]. - The company will establish series A preferred shares in connection with its offering[72]. - The management team is incentivized through potential issuance of units to employees of the manager[79]. - The company has the right to terminate the management services agreement under specific conditions, including a majority vote from the board of directors[96]. - The management fee is set at 0.5% of adjusted net assets, equating to an annualized rate of 2.0%[115]. - The management fee for the quarter is calculated based on adjusted net assets, which totaled $90,000 in a hypothetical example, resulting in a quarterly management fee of $450[128]. - Offsetting management fees from acquired companies can reduce the management fee dollar-for-dollar, with a total of $400 in offsetting fees in the hypothetical example[128]. - The company has entered into offsetting management services agreements with 1847 Neese and Goedeker, with a quarterly management fee of $62,500 for Goedeker[123]. - The management fee paid by 1847 Neese or Goedeker is capped at 9.5% of the company's gross income for the fiscal year[123]. - The manager is entitled to a profit allocation of 20% on certain profits after surpassing an 8% annual hurdle rate[108]. - The company may incur debt or liquidate assets to meet management fee obligations if liquid assets are insufficient[117]. - The management services agreement allows for the termination of offsetting agreements with 60 days' notice without termination fees[101]. - The management fee is prioritized over distributions to series A preferred shares and common shareholders[112]. - The adjusted net assets calculation excludes total cash and cash equivalents and adjusted total liabilities[129]. - The quarterly management fee is calculated as 0.5% of the company's adjusted net assets as of the calculation date[131]. - Transaction services agreements allow the manager to charge fees based on a tiered structure: 2.0% for the first $50 million, 1.5% for the next $50 million, and 1.0% for amounts over $100 million[134]. - The manager is entitled to a 20% profit allocation upon the sale of a subsidiary if certain conditions are met, including exceeding an 8% hurdle rate[144]. - The profit allocation is based on the total profit allocation amount exceeding the relevant hurdle amounts at the calculation date[147]. - The company will pay a termination fee equal to two times the sum of the quarterly management fees for the four quarters preceding the termination[143]. - The manager's profit allocation will not be paid if the total profit allocation amount does not exceed the level 1 hurdle amount[150]. - The company is responsible for reimbursing the manager for costs incurred in connection with the management services agreement, excluding overhead costs[139]. - Tax distributions will be paid to the manager if taxable income is allocated but not realized through distributions[154]. - The calculation of the manager's profit allocation will be subject to review and approval by the company's board of directors[152]. - If the company lacks sufficient liquid assets to pay profit allocations, it may need to liquidate assets or incur debt[157]. Financial Performance and Profit Allocation - Quarterly management fee contribution-based profit since acquisition for subsidiary A is $5 million, while for subsidiary B it is $7 million[1]. - Total profit allocation amount is $30 million, compared to $27 million in the previous period[5]. - Business's excess over level 1 hurdle amount is $18 million, up from $17 million previously[9]. - Manager's profit allocation for the current period is $6 million, significantly higher than $1.4 million in the previous period[16]. - Cumulative gains and losses amount to $25 million, with cumulative capital gains at $25 million and cumulative capital losses at $20 million[3]. - Business's average allocated share of consolidated net equity is 50%[7]. - High water mark allocation is $0, compared to $4 million in the previous period[15]. - Allocated to manager as "catch-up" is $3 million, an increase from $2.5 million previously[11]. - Business's level 2 hurdle amount is $15 million, compared to $12.5 million previously[10]. - Cumulative allocation to manager is $6 million, up from $5.4 million in the previous period[14]. Revenue Sources and Market Position - Neese's service revenues accounted for approximately 65.9% and 63.2% of total revenues for the years ended December 31, 2019 and 2018, respectively[198]. - Goedeker's appliance sales represented approximately 82.2% of its revenues from acquisition (April 5, 2019) to December 31, 2019[229]. - Goedeker's furniture sales accounted for approximately 12.7% of its revenues for the same period[230]. - Neese serves approximately 580 active accounts, with one customer accounting for more than 10% of sales and the next largest customer accounting for 3.4%[211]. - Neese plans to expand its trucking services, currently operating a fleet of 13 trucks to increase revenue during slower waste hauling periods[218]. - Goedeker offers over 227,000 SKUs, with a focus on providing a seamless online shopping experience[225]. - Neese maintains strong relationships with suppliers, with two suppliers representing 10% or more of total purchases[203]. - Goedeker's pricing model aims to be the lowest in the market, with daily price tracking on over 22,000 appliance SKUs[232]. - Neese's competitive advantage includes a long-standing reputation for high-quality products and services, particularly in the agricultural sector[213]. - Neese employs 29 full-time employees across various functions, with no representation by labor unions[222]. - Goedeker's total purchases from suppliers in 2019 amounted to $39,407,900, with Whirlpool being the largest supplier at 44.1% of total purchases[234]. - Goedeker has an extensive database of approximately 198,000 past and potential opt-in customers, utilizing targeted email marketing to engage about one-third of them weekly[237]. - Approximately 50% of Goedeker's clientele has an annual income exceeding $100,000, indicating a strong market for premium product offerings[241]. - Goedeker's marketing strategy includes a $20 discount coupon for orders over $850, successfully converting browsers to buyers[238]. - The company plans to expand into the commercial market, targeting home builders and contractors to increase revenue opportunities[252]. - Goedeker aims to capitalize on the growth of online retail, which has significantly increased in recent years[253]. - The company intends to open its operations on Sundays to generate additional sales, as it has traditionally been closed on that day[256]. - Goedeker employs 72 full-time employees across various departments, with the largest teams in Accounting/Finance and Sales and Marketing[258]. - The company has scaled back its affiliate marketing efforts due to administrative burdens and tax impacts, maintaining only one affiliate relationship[240]. - Goedeker's competitive strengths include a 50+ year reputation for quality products and strong customer relationships, with 40% of orders involving direct communication with sales staff[248][249].
1847 LLC(EFSH) - 2019 Q4 - Annual Report