OVERVIEW OF OUR BUSINESS
Overview
We are an acquisition holding company focused on acquiring and
managing a group of small businesses, which we characterize as those that have an enterprise value of less than $50 million, in
a variety of different industries headquartered in North America. To date, we have completed two acquisitions.
In March 2017, our subsidiary, 1847 Neese Inc., or 1847 Neese,
acquired Neese, Inc., or Neese. Headquartered in Grand Junction, Iowa and founded in 1991, Neese is an established business specializing
in providing a wide range of land application services and selling equipment and parts, primarily to the agricultural industry,
but also to the construction and lawn and garden industries.
In April 2019, we acquired substantially all of the assets of
Goedeker Television Co., or Goedeker Television, through our subsidiary 1847 Goedeker Inc., or Goedeker, which now operates the
prior business of Goedeker Television, a Missouri corporation founded in 1951. Headquartered in St. Louis, Missouri, Goedeker is
a one-stop e-commerce destination for home furnishings, including appliances, furniture, bath and kitchen fixtures, décor,
lighting and home goods.
Through our structure, we plan to offer investors an opportunity
to participate in the ownership and growth of a portfolio of businesses that traditionally have been owned and managed by private
equity firms, private individuals or families, financial institutions or large conglomerates. We believe that our management and
acquisition strategies will allow us to achieve our goals to begin making and growing regular distributions to our common shareholders
and increasing common shareholder value over time.
We seek to acquire controlling interests in small businesses
that we believe operate in industries with long-term macroeconomic growth opportunities, and that have positive and stable earnings
and cash flows, face minimal threats of technological or competitive obsolescence and have strong management teams largely in place.
We believe that private company operators and corporate parents looking to sell their businesses will consider us to be an attractive
purchaser of their businesses. We intend to make these future businesses our majority-owned subsidiaries and intend to actively
manage and grow such businesses. We expect to improve our businesses over the long term through organic growth opportunities, add-on
acquisitions and operational improvements.
We have engaged 1847 Partners LLC, which we refer to as our
manager, to manage our day-to-day operations and affairs, oversee the management and operations of our businesses and perform certain
other services on our behalf, subject to the oversight of our board of directors. We believe our manager’s expertise and
experience will be a critical factor in executing our strategy to begin making and growing distributions to our common shareholders
and increasing common shareholder value over time.
Market Opportunity
We seek to acquire and manage small businesses, which we characterize
as those that have an enterprise value of less than $50 million. We believe that the merger and acquisition market for small businesses
is highly fragmented and provides significant opportunities to purchase businesses at attractive prices. For example, according
to GF Data, platform acquisitions with enterprise values greater than $50.0 million commanded valuation premiums 30% higher than
platform acquisitions with enterprise values less than $50.0 million (8.2x trailing twelve month adjusted EBITDA (Earnings Before
Interest, Taxes, Depreciation and Amortization) versus 6.3x trailing twelve month adjusted EBITDA, respectively).
We believe that the following factors contribute to lower acquisition
multiples for small businesses:
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there are typically fewer potential acquirers for these businesses;
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third-party financing generally is less available for these acquisitions;
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sellers of these businesses may consider non-economic factors, such as continuing board membership or the effect of the sale
on their employees; and
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these businesses are generally less frequently sold pursuant to an auction process.
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We believe that our management team’s strong relationships
with business brokers, investment and commercial bankers, accountants, attorneys and other potential sources of acquisition opportunities
offers us substantial opportunities to purchase small businesses. See “—Our Manager—Key Personnel of our Manager”
for more information about our management team.
We also believe that significant opportunities exist to improve
the performance of the businesses upon their acquisition. In the past, our manager has acquired businesses that are often formerly
owned by seasoned entrepreneurs or large corporate parents. In these cases, our manager has frequently found that there have been
opportunities to further build upon the management teams of acquired businesses. In addition, our manager has frequently found
that financial reporting and management information systems of acquired businesses may be improved, both of which can lead to substantial
improvements in earnings and cash flow. Finally, because these businesses tend to be too small to have their own corporate development
efforts, we believe opportunities exist to assist these businesses in meaningful ways as they pursue organic or external growth
strategies that were often not pursued by their previous owners.
Our long-term goals are to begin making and growing regular
distributions to our common shareholders and to increase common shareholder value over the long-term. We acquired Neese and all
of the assets of Goedeker Television primarily so that we can achieve a base of cash flow to build our company and begin making
and growing regular distributions to our common shareholders. We believe that these acquisitions will help us achieve our long-term
goals.
We plan to continue focusing on acquiring other businesses.
Therefore, we intend to continue to identify, perform due diligence on, negotiate and consummate platform acquisitions of small
businesses in attractive industry sectors.
Unlike buyers of small businesses that rely on significant leverage
to consummate acquisitions (as demonstrated by the data below), we plan to limit the use of third party (i.e., external) acquisition
leverage so that our debt will not exceed the market value of the assets we acquire and so that our debt to EBITDA ratio will not
exceed 1.25x to 1 for our operating subsidiaries. We believe that limiting leverage in this manner will avoid the imposition on
stringent lender controls on our operations that would otherwise potentially hamper the growth of our operating subsidiaries and
otherwise harm our business even during times when we have positive operating cash flows. Additionally, in our experience, leverage
rarely leads to “break-out” returns and often creates negative return outcomes that are not correlated with the profitability
of the business.
Source: GF Data M&A Report (May 2019)
Source: GF Data Leverage Report (May
2019)
Management Strategy
Our management strategy involves the identification, performance
of due diligence, negotiation and consummation of acquisitions. After acquiring businesses, we will attempt to grow the businesses
both organically and through add-on or bolt-on acquisitions. Add-on or bolt-on acquisitions are acquisitions by a company of other
companies in the same industry. Following the acquisition of companies, we will seek to grow the earnings and cash flow of acquired
companies and, in turn, begin making and growing regular distributions to our common shareholders and to increase common shareholder
value over time. We believe we can increase the cash flows of our businesses by applying our intellectual capital to improve and
grow our future businesses.
We will seek to acquire and manage small businesses. We believe
that the merger and acquisition market for small businesses is highly fragmented and provides opportunities to purchase businesses
at attractive prices. We believe we will be able to acquire small businesses for multiples ranging from three to six times EBITDA.
We also believe, and our manager has historically found, that significant opportunities exist to improve the performance of these
businesses upon their acquisition.
In general, our manager will oversee and support the management
team of our future platform businesses by, among other things:
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recruiting and retaining managers to operate our future businesses by using structured incentive compensation programs, including
minority equity ownership, tailored to each business;
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regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management
in the development and implementation of information systems;
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assisting the management teams of our future businesses in their analysis and pursuit of prudent organic growth strategies
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identifying and working with future business management teams to execute on attractive external growth and acquisition opportunities;
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identifying and executing operational improvements and integration opportunities that will lead to lower operating costs and
operational optimization;
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providing the management teams of our future businesses the opportunity to leverage our experience and expertise to develop
and implement business and operational strategies; and
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forming strong subsidiary level boards of directors to supplement management teams in their development and implementation
of strategic goals and objectives.
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We also believe that our long-term perspective provides us with
certain additional advantages, including the ability to:
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recruit and develop management teams for our future businesses that are familiar with the industries in which our future businesses
operate;
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focus on developing and implementing business and operational strategies to build and sustain shareholder value over the long
term;
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create sector-specific businesses enabling us to take advantage of vertical and horizontal acquisition opportunities within
a given sector;
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achieve exposure in certain industries in order to create opportunities for future acquisitions; and
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develop and maintain long-term collaborative relationships with customers and suppliers.
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We intend to continually increase our intellectual capital as
we operate our businesses and acquire new businesses and as our manager identifies and recruits qualified operating partners and
managers for our businesses.
Acquisition Strategy
Our acquisition strategies involve the acquisition of small
businesses in various industries that we expect will produce positive and stable earnings and cash flow, as well as achieve attractive
returns on our invested capital. In this respect, we expect to make acquisitions in industries wherein we believe an acquisition
presents an attractive opportunity from the perspective of both (i) return on assets or equity and (ii) an easily identifiable
path for growing the acquired businesses. We believe that attractive opportunities will increasingly present themselves as private
sector owners seek to monetize their interests in longstanding and privately-held businesses and large corporate parents seek to
dispose of their “non-core” operations.
We believe that the greatest opportunities for generating consistently
positive annual returns and, ultimately, residual returns on capital invested in acquisitions will result from targeting capital
light businesses operating in niche geographical markets with a clearly identifiable competitive advantage within the following
industries: business services, consumer services, consumer products, consumable industrial products, industrial services, niche
light manufacturing, distribution, alternative/specialty finance and in select cases, specialty retail. While we believe that the
professional experience of our management team within the industries identified above will offer the greatest number of acquisition
opportunities, we will not eschew opportunities if a business enjoys an inarguable moat around its products and services in an
industry which our management team may have less familiarity.
From a financial perspective, we expect to make acquisitions
of small businesses that are stable, have minimal bad debt, and strong accounts receivable. In addition, we expect to acquire companies
that have been able to generate positive pro forma cash available for distribution for a minimum of three years prior to acquisition.
Our previous acquisitions of Neese and Goedeker met these acquisition criteria.
We expect to benefit from our manager’s ability to identify
diverse acquisition opportunities in a variety of industries. In addition, we intend to rely upon our management teams’ experience
and expertise in researching and valuing prospective target businesses, as well as negotiating the ultimate acquisition of such
target businesses. In particular, because there may be a lack of information available about these target businesses, which may
make it more difficult to understand or appropriately value such target businesses, we expect our manager will:
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engage in a substantial level of internal and third-party due diligence;
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critically evaluate the management team;
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identify and assess any financial and operational strengths and weaknesses of any target business;
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analyze comparable businesses to assess financial and operational performances relative to industry competitors;
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actively research and evaluate information on the relevant industry; and
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thoroughly negotiate appropriate terms and conditions of any acquisition.
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We expect the process of acquiring new businesses to be time-consuming
and complex. Our manager has historically taken from 2 to 24 months to perform due diligence on, negotiate and close acquisitions.
Although we expect our manager to be at various stages of evaluating several transactions at any given time, there may be significant
periods of time during which it does not recommend any new acquisitions to us.
Upon an acquisition of a new business, we intend to rely on
our manager’s experience and expertise to work efficiently and effectively with the management of the new business to jointly
develop and execute a business plan.
While we will primarily seek to acquire controlling interests
in a business, we may also acquire non-control or minority equity positions in businesses where we believe it is consistent with
our long-term strategy.
As discussed in more detail below, we intend to raise capital
for additional acquisitions primarily through debt financing, primarily at our operating company level, additional equity offerings
by our company, the sale of all or a part of our businesses or by undertaking a combination of any of the above.
Our primary corporate purpose is to own, operate and grow our
operating businesses. However, in addition to acquiring businesses, we expect to sell businesses that we own from time to
time. Our decision to sell a business will be based upon financial, operating and other considerations rather than a plan
to complete a sale of a business within any specific time frame. We may also decide to own and operate some or all of our
businesses in perpetuity if our board believes that it makes sense to do so. Upon the sale of a business, we may use the resulting
proceeds to retire debt or retain proceeds for future acquisitions or general corporate purposes. Generally, we do not expect to
make special distributions at the time of a sale of one of our businesses; instead, we expect that we will seek to gradually increase
regular common shareholder distributions over time.
There are several risks associated with our acquisition strategy,
including the following risks, which are described more fully in Item 1A. “Risk Factors—Risks Related to Our Business
and Structure”:
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we may not be able to successfully fund future acquisitions of new businesses due to the unavailability of debt or equity financing
on acceptable terms, which could impede the implementation of our acquisition strategy;
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we may experience difficulty as we evaluate, acquire and integrate businesses that we may acquire, which could result in drains
on our resources, including the attention of our management, and disruptions of our on-going business;
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we face competition for businesses that fit our acquisition strategy and, therefore, we may have to acquire targets at sub-optimal
prices or, alternatively, forego certain acquisition opportunities; and
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we may change our management and acquisition strategies without the consent of our shareholders, which may result in a determination
by us to pursue riskier business activities.
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Strategic Advantages
Based on the experience of our manager and its ability to identify
and negotiate acquisitions, we expect to be strongly positioned to acquire additional businesses. Our manager has strong relationships
with business brokers, investment and commercial bankers, accountants, attorneys and other potential sources of acquisition opportunities.
In negotiating these acquisitions, we believe our manager will be able to successfully navigate complex situations surrounding
acquisitions, including corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations.
We expect that the flexibility, creativity, experience and expertise
of our manager in structuring transactions will provide us with strategic advantages by allowing us to consider non-traditional
and complex transactions tailored to fit a specific acquisition target.
Our manager also has a large network of deal intermediaries
who we expect to expose us to potential acquisitions. Through this network, we expect to have a substantial pipeline of potential
acquisition targets. Our manager also has a well-established network of contacts, including professional managers, attorneys, accountants
and other third-party consultants and advisors, who may be available to assist us in the performance of due diligence and the negotiation
of acquisitions, as well as the management and operation of our businesses once acquired.
Valuation and Due Diligence
When evaluating businesses or assets for acquisition, we will
perform a rigorous due diligence and financial evaluation process. In doing so, we will seek to evaluate the operations of the
target business as well as the outlook for the industry in which the target business operates. While valuation of a business is,
by definition, a subjective process, we will be defining valuations under a variety of analyses, including:
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discounted cash flow analyses;
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evaluation of trading values of comparable companies;
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expected value matrices;
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assessment of competitor, supplier and customer environments; and
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examination of recent/precedent transactions.
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One outcome of this process is an effort to project the expected
cash flows from the target business as accurately as possible. A further outcome is an understanding of the types and levels of
risk associated with those projections. While future performance and projections are always uncertain, we believe that our detailed
due diligence review process allows us to more accurately estimate future cash flows and more effectively evaluate the prospects
for operating the business in the future. To assist us in identifying material risks and validating key assumptions in our financial
and operational analysis, in addition to our own analysis, we intend to engage third-party experts to review key risk areas, including
legal, tax, regulatory, accounting, insurance and environmental. We may also engage technical, operational or industry consultants,
as necessary.
A further critical component of the evaluation of potential
target businesses will be the assessment of the capability of the existing management team, including recent performance, expertise,
experience, culture and incentives to perform. Where necessary, and consistent with our management strategy, we will actively seek
to augment, supplement or replace existing members of management who we believe are not likely to execute the business plan for
the target business. Similarly, we will analyze and evaluate the financial and operational information systems of target businesses
and, where necessary, we will actively seek to enhance and improve those existing systems that are deemed to be inadequate or insufficient
to support our business plan for the target business.
Financing
We will finance future acquisitions primarily through additional
equity and debt financings. We believe that having the ability to finance most, if not all, acquisitions with the general capital
resources raised by our company, rather than financing relating to the acquisition of individual businesses, provides us with an
advantage in acquiring attractive businesses by minimizing delay and closing conditions that are often related to acquisition-specific
financings. In this respect, we believe that, at some point in the future, we may need to pursue additional debt or equity financings,
or offer equity in our company or target businesses to the sellers of such target businesses, in order to fund acquisitions.
Our Competitive Advantages
We believe that our manager’s collective investment experience
and approach to executing our investment strategy provide our company with several competitive advantages. These competitive advantages,
certain of which are discussed below, have enabled our management to generate very attractive risk- adjusted returns for investors
in their predecessor firms.
Robust Network. Through their
activities with their predecessor firms and their comprehensive marketing capabilities, we believe that the management team of
our manager has established a “top of mind” position among investment bankers and business brokers targeting small
businesses. By employing an institutionalized, multi-platform marketing strategy, we believe our manager has established a robust
national network of personal relationships with intermediaries, seasoned operating executives, entrepreneurs and managers, thereby
firmly establishing our company’s presence and credibility in the small business market. In contrast to many other buyers
of and investors in small businesses, we believe that we can buy businesses at value-oriented multiples and through our asset management
activities with a group of professional, experienced and talented operating partners, create appreciable value. We believe our
experience, track record and consistent execution of our marketing and investment activities will allow us to maintain a leadership
position as the preferred partner for today’s small business market.
Disciplined Deal Sourcing.
We employ an institutionalized, multi-platform approach to sourcing new acquisition opportunities. Our deal sourcing efforts include
leveraging relationships with more than 3,000 qualified deal sources through regular calling, mail and e-mail campaigns, assignment
of regional marketing responsibilities, in-person visits and high-profile sponsorship of important conferences and industry events.
We supplement these activities by retaining selected intermediary firms to conduct targeted searches for opportunities in specific
categories on an opportunistic basis. As a result of the significant time and effort spent on these activities, we believe we established
close relationships and unique “top of mind” awareness with many of the most productive intermediary sources for small
business acquisition opportunities in the United States. While reinforcing our market leadership, this capability enables us to
generate a large number of attractive acquisition opportunities.
Differentiated Acquisition Capabilities
in the Small Business Market. We deploy a differentiated approach to acquiring businesses in the small business market.
Our management concentrates their efforts on mature companies with sustainable value propositions, which can be supported by our
resources and institutional expertise. Our evaluation of acquisition opportunities typically involves significant input from a
seasoned operating partner with relevant experience, which we believe enhances both our diligence and ongoing monitoring capabilities.
In addition, we approach every acquisition opportunity with creative structures, which we believe enables us to engineer mutually
attractive scenarios for sellers, whereas competing buyers may be limited by their rigid structural requirements. We believe our
commitment to conservative capital structures and valuation will enhance each acquired operating subsidiary’s ability to
deliver consistent levels of cash available for distribution, while additionally supporting reinvestment for growth.
Value Proposition for Business Owners.
We employ a creative, flexible approach by tailoring each acquisition structure to meet the specific liquidity needs and certain
qualitative objectives of the target’s owners and management team. In addition to serving as an exit pathway for sellers,
we seek to align our interests with the sellers by enabling them to retain and/or earn (through incentive compensation) a substantial
economic interest in their businesses following the acquisition and by typically allowing the incumbent management team to retain
operating control of the acquired operating subsidiary on a day-to-day basis. We believe that our company is an appealing buyer
for small business owners and managers due to our track record of capitalizing portfolio companies conservatively, enhancing our
ability to execute on its strategic initiatives and adding equity value. As a result, we believe business owners and managers will
find our company to be a dynamic, value-added buyer that brings considerable resources to achieve their strategic, capital and
operating needs, resulting in substantial value creation for the operating subsidiary.
Operating Partner. Our manager
has consistently worked with a strong network of seasoned operating partners - former entrepreneurs and executives with extensive
experience building, managing and optimizing successful small businesses across a range of industries. We believe that our operating
partner model will enable our company to make a significant improvement in the operating subsidiary, as compared to other buyers,
such as traditional private equity firms, which rely principally upon investment professionals to make acquisition/investment and
monitoring decisions regarding not only the business, financial and legal due diligence aspects of a business but also the more
operational aspects including industry dynamics, management strength and strategic growth initiatives. We typically engage an operating
partner soon after identifying a target business for acquisition, enhancing our acquisition judgment and building the acquisition
team’s relationship with the subsidiary’s management team. Operating partners usually serve as a member of the board
of directors of an operating subsidiary and spend two to four days per month working with the subsidiary’s management team.
We leverage the operating partner’s extensive experience to build the management team, improve operations and assist with
strategic growth initiatives, resulting in value creation.
Small Business Market Experience.
We believe the history and experience of our manager’s partnering with companies in the small business market allows us to
identify highly attractive acquisition opportunities and add significant value to our operating subsidiaries. Our manager’s
investment experience in the small business market prior to forming our company has further contributed to our institutional expertise
in the acquisition, strategic and operational decisions critical to the long-term success of small businesses. Since 2000, the
management team of our manager has collectively been presented with several thousand investment opportunities and actively worked
with more than 30 small businesses on all facets of their strategy, development and operations, which we have successfully translated
into unique, institutionalized capabilities directed towards creating value in small businesses.
Intellectual Property
Our manager owns certain intellectual property relating to the
term “1847.” Our manager has granted our company a license to use the term “1847” in its business.
Employees
As of December 31, 2019, the only full-time employee of our
company is Ellery W. Roberts, our Chairman, Chief Executive Officer, President and Chief Financial Officer.
OUR CORPORATE STRUCTURE AND HISTORY
Our company is a Delaware limited liability company that was
formed on January 22, 2013. Your rights as a holder of common shares, and the fiduciary duties of our board of directors and executive
officers, and any limitations relating thereto, are set forth in the operating agreement governing our company and may differ from
those applying to a Delaware corporation. However, subject to certain exceptions, the documents governing our company specify that
the duties of our directors and officers will be generally consistent with the duties of directors and officers of a Delaware corporation.
Our company is classified as a partnership for U.S. federal
income tax purposes. Under the partnership income tax provisions, our company will not incur any U.S. federal income tax liability;
rather, each of our shareholders will be required to take into account his or her allocable share of company income, gain, loss,
and deduction. As a holder of our shares, you may not receive cash distributions sufficient in amount to cover taxes in respect
of your allocable share of our company’s net taxable income. Our company will file a partnership return with the Internal
Revenue Service, or IRS, and will issue tax information, including a Schedule K-1, to you that describes your allocable share of
our company’s income, gain, loss, deduction, and other items. The U.S. federal income tax rules that apply to partnerships
are complex and complying with the reporting requirements may require significant time and expense. See “Material U.S. Federal
Income Tax Considerations” included in our registration statement on Form S-1, as amended (File No. 333-236041), for more
information.
Our company currently has two classes of limited liability company
interests - the common shares and the allocation shares. In connection with the offering described under Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulation
A Offering” below, we will also establish series A preferred shares. All of our allocation shares have been and will continue
to be held by our manager. See “Description of Securities” included in our registration statement on Form S-1, as amended
(File No. 333-236041), for more information about our shares.
On March 3, 2017, our newly formed wholly-owned subsidiary 1847
Neese acquired all of the issued and outstanding capital stock of Neese for an aggregate purchase price of $6,655,000, consisting
of: (i) $2,225,000 in cash (subject to certain adjustments); (ii) 450 shares of the common stock of 1847 Neese, valued by the parties
at $1,530,000, constituting 45% of its capital stock; (iii) the issuance of a vesting promissory note in the principal amount of
$1,875,000 (which was determined to have a fair value of $395,634) due June 30, 2020; and (iv) the issuance of a short-term promissory
note in the principal amount of $1,025,000 due March 3, 2018. As a result of this transaction, we own 55% of 1847 Neese, with the
remaining 45% held by third parties. 1847 Neese was formed in the State of Delaware on October 11, 2016 and Neese was formed in
the State of Iowa in January 1993.
On January 10, 2019, we formed Goedeker as a wholly-owned subsidiary
in the State of Delaware. On March 20, 2019, we formed 1847 Goedeker Holdco Inc., or 1847 Goedeker, as a wholly-owned subsidiary
in the State of Delaware and then we transferred all of our shares in Goedeker to 1847 Goedeker, such that Goedeker became a wholly-owned
subsidiary of 1847 Goedeker.
On April 5, 2019, Goedeker acquired substantially all of the
assets of Goedeker Television for an aggregate purchase price of $6,200,000 consisting of: (i) $1,500,000 in cash, subject to adjustment;
(ii) the issuance of a promissory note in the principal amount of $4,100,000; and (iii) up to $600,000 in earn out payments. As
additional consideration, 1847 Goedeker agreed to issue to each of the stockholders of Goedeker Television a number of shares of
its common stock equal to a 11.25% non-dilutable interest in all of the issued and outstanding stock of 1847 Goedeker as of the
closing date. As a result of this transaction, we own 70% of 1847 Goedeker, with the remaining 30% held by third parties.
The following chart depicts our current organizational structure:
See “—Our Manager” for more details regarding
the ownership of our manager.
OUR MANAGER
Overview of Our Manager
Our manager, 1847 Partners LLC, is a Delaware limited liability
company. It has two classes of limited liability interests known as Class A interests and Class B interests. The Class A interests,
which give the holder the right to the profit allocation received by our manager as a result of holding our allocation shares,
are owned in their entirety by 1847 Partners Class A Member LLC; and the Class B interests, which give the holder the right to
all other profits or losses of our manager, including the management fee payable to our manager by us, are owned in their entirety
by 1847 Partners Class B Member LLC. 1847 Partners Class A Member LLC is owned 52% by Ellery W. Roberts, our Chief Executive Officer,
38% by 1847 Founders Capital LLC, which is owned by Edward J. Tobin, and approximately 9% by Louis A. Bevilacqua, the managing
member of Bevilacqua PLLC, outside counsel to our company, with the balance being owned by a former contractor to such law firm.
1847 Partners Class B Member LLC is owned 54% by Ellery W. Roberts, 36% by 1847 Founders Capital LLC and 10% by Louis A. Bevilacqua.
Mr. Roberts is also the sole manager of both entities. In the future, Mr. Roberts may cause 1847 Partners Class A Member LLC or
1847 Partners Class B Member LLC to issue units to employees of our manager to incentivize those employees by providing them with
the ability to participate in our manager’s incentive allocation and management fee.
Key Personnel of Our Manager
The key personnel of our manager are Ellery W. Roberts, our
Chief Executive Officer, and Edward J. Tobin. Please see Item 10. “Directors, Executive Officers and Corporate Governance”
for a description of the business experience of these individuals. Each of these individuals will be compensated entirely by our
manager from the management fees it receives. As employees of our manager, these individuals devote a substantial majority of their
time to the affairs of our company.
Collectively, the management team of our manager has more than
60 years of combined experience in acquiring and managing small businesses and has overseen the acquisitions and financing of over
50 businesses.
Acquisition and Disposition Opportunities
Our manager has exclusive responsibility for reviewing and making
recommendations to our board of directors with respect to acquisition and disposition opportunities. If our manager does not originate
an opportunity, our board of directors will seek a recommendation from our manager prior to making a decision concerning such opportunity.
In the case of any acquisition or disposition opportunity that involves an affiliate of our manager or us, our nominating and corporate
governance committee, or, if we do not have such a committee, the independent members of our board of directors, will be required
to authorize and approve such transaction.
Our manager will review each acquisition or disposition opportunity
presented to our manager to determine if such opportunity satisfies the acquisition and disposition criteria established by our
board of directors. The acquisition and disposition criteria provide that our manager will review each acquisition opportunity
presented to it to determine if such opportunity satisfies our company’s acquisition and disposition criteria, and if it
is determined, in our manager’s sole discretion, that an opportunity satisfies the criteria, our manager will refer the opportunity
to our board of directors for its authorization and approval prior to the consummation of any such opportunity.
Our investment criteria include the following:
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Revenue of at least $5.0 million
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Current year EBITDA/Pre-tax Income of at least $1.5 million with a history of positive cash flow
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Clearly identifiable “blueprint” for growth with the potential for break-out returns
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Well-positioned companies within our core industry categories (consumer-driven, business-to-business, light manufacturing and
specialty finance) with strong returns on capital
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Opportunities wherein building management team, infrastructure and access to capital are the primary drivers of creating value
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Headquartered in North America
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We believe we will be able to acquire small businesses for multiples
ranging from three to six times EBITDA. With respect to investment opportunities that do not fall within the criteria set forth
above our manager must first present such opportunities to our board of directors. Our board of directors and our manager will
review these criteria from time to time and our board of directors may make changes and modifications to such criteria as our company
makes additional acquisitions and dispositions.
If an acquisition opportunity is referred to our board of directors
by our manager and our board of directors determines not to timely pursue such opportunity in whole or in part, any part of such
opportunity that our company does not promptly pursue may be pursued by our manager or may be referred by our manager to any person,
including affiliates of our manager. In this case, our manager is likely to devote a portion of its time to the oversight of this
opportunity, including the management of a business that we do not own.
If there is a disposition, our manager must use its commercially
reasonable efforts to manage a process through which the value of such disposition can be maximized, taking into consideration
non-financial factors such as those relating to competition, strategic partnerships, potential favorable or adverse effects on
us, our businesses, or our investments or any similar factors that may reasonably perceived as having a short- or long-term impact
on our business, results of operations and financial condition.
Management Services Agreement
The management services agreement sets forth the services to
be performed by our manager. Our manager will perform such services subject to the oversight and supervision of our board of directors.
In general, our manager will perform those services for our
company that would be typically performed by the executive officers of a company. Specifically, our manager will perform the following
services, which we refer to as the management services, pursuant to the management services agreement:
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manage the day-to-day business and operations of our company, including our liquidity and capital resources and compliance
with applicable law;
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identify, evaluate, manage, perform due diligence on, negotiate and oversee acquisitions of target businesses and any other
investments;
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evaluate and oversee the financial and operational performance of our businesses, including monitoring the business and operations
of such businesses, and the financial performance of any other investments that we make;
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provide, on our behalf, managerial assistance to our businesses;
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evaluate, manage, negotiate and oversee dispositions of all or any part of any of our property, assets or investments, including
disposition of all or any part of our businesses;
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provide or second, as necessary, employees of our manager to serve as executive officers or other employees of our company
or as members of our board of directors; and
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perform any other services that would be customarily performed by executive officers and employees of a publicly listed or
quoted company.
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Our company and our manager have the right at any time during
the term of the management services agreement to change the services provided by our manager. In performing management services,
our manager will have all necessary power and authority to perform, or cause to be performed, such services on behalf of our company,
and, in this respect, our manager will be the only provider of management services to our company. Nonetheless, our manager will
be required to obtain authorization and approval of our board of directors in all circumstances where executive officers of a corporation
typically would be required to obtain authorization and approval of a corporation’s board of directors, including, for example,
with respect to the consummation of an acquisition of a target business, the issuance of securities or the entry into credit arrangements.
While our Chief Executive Officer, Mr. Ellery W. Roberts, intends
to devote substantially all of his time to the affairs of our company, neither Mr. Roberts, nor our manager, is expressly prohibited
from investing in or managing other entities. In this regard, the management services agreement will not require our manager and
its affiliates to provide management services to our company exclusively.
Secondment of Our Executive Officers
In accordance with the terms of the management services agreement,
our manager may second to our company our executive officers, which means that these individuals will be assigned by our manager
to work for us during the term of the management services agreement. Our board of directors has appointed Mr. Roberts as an executive
officer of our company. Although Mr. Roberts is an employee of our manager, he will report directly, and be subject, to our board
of directors. In this respect, our board of directors may, after due consultation with our manager, at any time request that our
manager replace any individual seconded to our company and our manager will, as promptly as practicable, replace any such individual;
however, our Chief Executive Officer, Mr. Roberts, controls our manager, which may make it difficult for our board of directors
to completely sever ties with Mr. Roberts. Our manager and our board of directors may agree from time to time that our manager
will second to our company one or more additional individuals to serve on behalf of our company, upon such terms as our manager
and our board of directors may mutually agree.
Indemnification by our Company
Our company has agreed to indemnify and hold harmless our manager
and its employees and representatives, including any individuals seconded to our company, from and against all losses, claims and
liabilities incurred by our manager in connection with, relating to or arising out of the performance of any management services.
However, our company will not be obligated to indemnify or hold harmless our manager for any losses, claims and liabilities incurred
by our manager in connection with, relating to or arising out of (i) a breach by our manager or its employees or its representatives
of the management services agreement, (ii) the gross negligence, willful misconduct, bad faith or reckless disregard of our manager
or its employees or representatives in the performance of any of its obligations under the management services agreement, or (iii)
fraudulent or dishonest acts of our manager or its employees or representatives with respect to our company or any of its businesses.
Termination of Management Services Agreement
Our board of directors may terminate the management services
agreement and our manager’s appointment if, at any time:
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a majority of our board of directors vote to terminate the management services agreement, and the holders of at least a majority
of the outstanding shares (other than shares beneficially owned by our manager) then entitled to vote also vote to terminate the
management services agreement;
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neither Mr. Roberts nor his designated successor controls our manager, which change of control occurs without the prior written
consent of our board of directors;
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there is a finding by a court of competent jurisdiction in a final, non-appealable order that (i) our manager materially breached
the terms of the management services agreement and such breach continued unremedied for 60 days after our manager receives written
notice from our company setting forth the terms of such breach, or (ii) our manager (x) acted with gross negligence, willful misconduct,
bad faith or reckless disregard in performing its duties and obligations under the management services agreement, or (y) engaged
in fraudulent or dishonest acts in connection with the business or operations of our company;
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our manager has been convicted of a felony under federal or state law, our board of directors finds that our manager is demonstrably
and materially incapable of performing its duties and obligations under the management services agreement, and the holders of at
least 66 2/3% of the then outstanding shares, other than shares beneficially owned by our manager, vote to terminate the management
services agreement; or
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there is a finding by a court of competent jurisdiction that our manager has (i) engaged in fraudulent or dishonest acts in
connection with the business or operations of our company or (ii) acted with gross negligence, willful misconduct, bad faith or
reckless disregard in performing its duties and obligations under the management services agreement, and the holders of at least
66 2/3% of the then outstanding shares (other than shares beneficially owned by our manager) vote to terminate the management services
agreement.
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In addition, our manager may resign and terminate the management
services agreement at any time upon 120 days prior written notice to our company, and this right is not contingent upon the finding
of a replacement manager. However, if our manager resigns, until the date on which the resignation becomes effective, it will,
upon request of our board of directors, use reasonable efforts to assist our board of directors to find a replacement manager at
no cost and expense to our company.
Upon the termination of the management services agreement, seconded
officers, employees, representatives and delegates of our manager and its affiliates who are performing the services that are the
subject of the management services agreement will resign their respective position with our company and cease to work at the date
of such termination or at any other time as determined by our manager. Any director appointed by our manager may continue serving
on our board of directors, subject to the terms of the operating agreement.
If we terminate the management services agreement, our company
and its businesses have agreed to cease using the term “1847”, including any trademarks based on the name of our company
that may be licensed to them by our manager, under the licensing provisions of the management services agreement, entirely in their
businesses and operations within 180 days of such termination. Such licensing provisions of the management services agreement would
require our company and its businesses to change their names to remove any reference to the term “1847” or any reference
to trademarks licensed to them by our manager. In this respect, our right to use the term “1847” and related intellectual
property is subject to licensing provisions between our manager, on the one hand, and our company and our businesses, on the other
hand.
Except with respect to the termination fee payable to our manager
due to a termination of the management services agreement based solely on a vote of our board of directors and our shareholders,
no other termination fee is payable upon termination of the management services agreement for any other reason. See “—Our
Manager as a Service Provider—Termination Fee” for more information about the termination fee payable upon termination
of the management services agreement.
While termination of the management services agreement will
not affect any terms and conditions, including those relating to any payment obligations, that exist under any offsetting management
services agreements or transaction services agreements, such agreements will be terminable by future businesses that we acquire
upon 60 days prior written notice and there will be no termination or other similar fees due upon such termination. Notwithstanding
termination of the management services agreement, our manager will maintain its rights with respect to the allocation shares it
then owns, including its rights under the supplemental put provision of our operating agreement. See “—Our Manager
as an Equity Holder—Supplemental Put Provision” for more information on our manager’s put right with respect
to the allocation shares.
Our Relationship with Our Manager, Manager Fees and Manager
Profit Allocation
Our relationship with our manager is based on our manager having
two distinct roles: first, as a service provider to us and, second, as an equity holder of the allocation shares.
As a service provider, our manager performs a variety of services
for us, which entitles it to receive a management fee. As holder of our company’s allocation shares, our manager has the
right to a preferred distribution in the form of a profit allocation upon the occurrence of certain events. Our manager paid $1,000
for the allocation shares. In addition, our manager will have the right to cause our company to purchase the allocation shares
then owned by our manager upon termination of the management services agreement.
These relationships with our manager are governed principally
by the following agreements:
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the management services agreements relating to the services our manager will perform for us and our businesses; and
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our company’s operating agreement relating to our manager’s rights with respect to the allocation shares it owns
and which contains the supplemental put provision relating to our manager’s right to cause our company to purchase the allocation
shares it owns.
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We also expect that our manager will enter into offsetting management
services agreements and transaction services agreements with our businesses directly. These agreements, and some of the material
terms relating thereto, are discussed in more detail below. The management fee, profit allocation and put price under the supplemental
put provision will be payment obligations of our company and, as a result, will be paid, along with other company obligations,
prior to the payment of distributions on the series A preferred shares, if and when they are issued, or distributions to common
shareholders.
The following table provides a simplified description of the
fees and profit allocation rights held by our manager. Further detail is provided in the following subsections.
Description
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Fee Calculation
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Payment Term
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Management Fees
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Determined by management services agreement
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0.5% of adjusted net assets (2.0% annually)
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Quarterly
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Determined by offsetting management services agreement
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Payment of fees by our subsidiary businesses that result in a dollar for dollar reduction of manager fees paid by us to our manager such that our manager cannot receive duplicate fees from both us and our subsidiary
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Quarterly
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Termination fee – determined by management services agreement
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Accumulated management fee paid in the preceding 4 fiscal quarters multiplied by 2. Paid only upon termination by our board and a majority in interest of our shareholders
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Determined by management services agreement
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Reimbursement of manager’s costs and expenses in providing services to us, but not including: (1) costs of overhead; (2) due diligence and other costs for potential acquisitions our board of directors does not approve pursuing or that are required by acquisition target to be reimbursed under a transaction services agreement; and (3) certain seconded officers and employees
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Ongoing
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Transaction Services Fees
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Acquisition services of target businesses or disposition of subsidiaries – fees determined by transaction services agreements
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2.0% of aggregate purchase price up to $50 million; plus 1.5% of aggregate purchase price in excess of $50 million and up to and equal to $100 million; plus 1.0% of aggregate purchase price in excess of $100 million
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Per transaction
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Manager profit allocation determined by our operating agreement
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20% of certain profits and gains
on a sale of subsidiary after clearance of the 8% annual hurdle rate
8% hurdle rate determined for any
subsidiary by multiplying the subsidiary’s average quarterly share of our assets by an 8% annualized rate
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Sale of a material amount of capital
stock or assets of one of our businesses or subsidiaries.
Holding event: at the option of our
manager, for the 30 day period following the 5th anniversary of an acquired business (but only based on historical profits of the
business)
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Our Manager as a Service Provider
Management Fee
Our company will pay our manager a quarterly management fee
equal to 0.5% (2.0% annualized) of its adjusted net assets, as discussed in more detail below.
Subject to any adjustments discussed below, for performing management
services under the management services agreement during any fiscal quarter, our company will pay our manager a management fee with
respect to such fiscal quarter. The management fee to be paid with respect to any fiscal quarter will be calculated as of the last
day of such fiscal quarter, which we refer to as the calculation date. The management fee will be calculated by an administrator,
which will be our manager so long as the management services agreement is in effect. The amount of any management fee payable by
our company as of any calculation date with respect to any fiscal quarter will be (i) reduced by the aggregate amount of any offsetting
management fees, if any, received by our manager from any of our businesses with respect to such fiscal quarter, (ii) reduced (or
increased) by the amount of any over-paid (or under-paid) management fees received by (or owed to) our manager as of such calculation
date, and (iii) increased by the amount of any outstanding accrued and unpaid management fees.
As an obligation of our company, the management fee will be
paid prior to the payment of distributions on the series A preferred shares, if and when they are issued, or distributions to our
common shareholders. If we do not have sufficient liquid assets to pay the management fee when due, we may be required to liquidate
assets or incur debt in order to pay the management fee.
Offsetting Management Services Agreements
Pursuant to the management services agreement, we have agreed
that our manager may, at any time, enter into offsetting management services agreements with our businesses pursuant to which our
manager may perform services that may or may not be similar to management services. Any fees to be paid by one of our businesses
pursuant to such agreements are referred to as offsetting management fees and will offset, on a dollar-for-dollar basis, the management
fee otherwise due and payable by our company under the management services agreement with respect to a fiscal quarter. The management
services agreement provides that the aggregate amount of offsetting management fees to be paid to our manager with respect to any
fiscal quarter shall not exceed the management fee to be paid to our manager with respect to such fiscal quarter.
Our manager entered into offsetting management services agreements
with 1847 Neese and Goedeker and may enter into offsetting management services agreements with our future subsidiaries, which agreements
would be in the form prescribed by our management services agreement.
The services that our manager will provide to future subsidiaries
under the offsetting management services agreements will include: conducting general and administrative supervision and oversight
of the subsidiary’s day-to-day business and operations, including, but not limited to, recruiting and hiring of personnel,
administration of personnel and personnel benefits, development of administrative policies and procedures, establishment and management
of banking services, managing and arranging for the maintaining of liability insurance, arranging for equipment rental, maintenance
of all necessary permits and licenses, acquisition of any additional licenses and permits that become necessary, participation
in risk management policies and procedures; and overseeing and consulting with respect to our business and operational strategies,
the implementation of such strategies and the evaluation of such strategies, including, but not limited to, strategies with respect
to capital expenditure and expansion programs, acquisitions or dispositions and product or service lines. If our manager and the
subsidiary do not enter into an offsetting management services agreement, our manager will provide these services for our subsidiaries
under our management services agreement.
The offsetting management fee paid to our manager for providing
management services to a future subsidiary will vary.
On March 3, 2017, 1847 Neese entered into an offsetting management
services agreement with our manager and on April 5, 2019, Goedeker entered into an offsetting management services agreement with
our manager. Pursuant to the offsetting management services agreements, each of 1847 Neese and Goedeker appointed our manager to
provide certain services to it for a quarterly management fee equal to $62,500 per quarter (in the case of Goedeker, such fee is
equal to the greater of $62,500 or 2% of Adjusted Net Assets (as defined in the management services agreement)); provided, however,
that (i) pro rated payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate amount of
management fees paid or to be paid by 1847 Neese or Goedeker, together with all other management fees paid or to be paid by all
other subsidiaries of our company to our manager, in each case, with respect to any fiscal year exceeds, or is expected to exceed,
9.5% of our gross income with respect to such fiscal year, then the management fee to be paid by 1847 Neese or Goedeker for any
remaining fiscal quarters in such fiscal year shall be reduced, on a pro rata basis determined by reference to the management fees
to be paid to our manager by all of the subsidiaries of our company, until the aggregate amount of the management fee paid or to
be paid by 1847 Neese or Goedeker, together with all other management fees paid or to be paid by all other subsidiaries of our
company to our manager, in each case, with respect to such fiscal year, does not exceed 9.5% of our gross income with respect to
such fiscal year, and (iii) if the aggregate amount the management fee paid or to be paid by 1847 Neese or Goedeker, together with
all other management fees paid or to be paid by all other subsidiaries of our company to our manager, in each case, with respect
to any fiscal quarter exceeds, or is expected to exceed, the aggregate amount of the management fee (before any adjustment thereto)
calculated and payable under the management services agreement, which we refer to as the parent management fee, with respect to
such fiscal quarter, then the management fee to be paid by 1847 Neese or Goedeker for such fiscal quarter shall be reduced, on
a pro rata basis, until the aggregate amount of the management fee paid or to be paid by 1847 Neese or Goedeker, together with
all other management fees paid or to be paid by all other subsidiaries of our company to our manager, in each case, with respect
to such fiscal quarter, does not exceed the parent management fee calculated and payable with respect to such fiscal quarter.
Notwithstanding the foregoing, under terms of a term loan from
Home State Bank, no fees may be paid to our manager under the Neese offsetting management services agreement without permission
of the bank, which our does not expect to be granted within the forthcoming year. In addition, payment of the management fee under
the Goedeker offsetting management services agreement is subordinated to the payment of interest on a promissory note issued to
Goedeker Television, such that no payment of the management fee may be made if Goedeker is in default under such note with regard
to interest payments and, for the avoidance of doubt, such payment of the management fee will be contingent on Goedeker being in
good standing on all associated loan covenants. In addition, during the period that that any amounts are owed under the note or
the earn out payments under the asset purchase agreement with Goedeker Television, the annual management fee shall be capped at
$250,000. In addition, the rights of our manager to receive payments under the Goedeker offsetting management services agreement
are subordinate to the rights of Burnley Capital LLC and Small Business Community Capital II, L.P. under separate subordination
agreements that Goedeker entered into with them on April 5, 2019.
Each of 1847 Neese and Goedeker shall also reimburse our manager
for all of its costs and expenses which are specifically approved by its board of directors, including all out-of-pocket costs
and expenses, which are actually incurred by our manager or its affiliates on behalf of 1847 Neese or Goedeker in connection with
performing services under the offsetting management services agreements.
The services provided by our manager include: conducting general
and administrative supervision and oversight of day-to-day business and operations, including, but not limited to, recruiting and
hiring of personnel, administration of personnel and personnel benefits, development of administrative policies and procedures,
establishment and management of banking services, managing and arranging for the maintaining of liability insurance, arranging
for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses and permits that
become necessary, participation in risk management policies and procedures; and overseeing and consulting with respect to business
and operational strategies, the implementation of such strategies and the evaluation of such strategies, including, but not limited
to, strategies with respect to capital expenditure and expansion programs, acquisitions or dispositions and product or service
lines.
Example of Calculation of Management Fee with Adjustment
for Offsetting Management Fees
In order to better understand how the management fee is calculated,
we are providing the following example:
Quarterly management fee:
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(in thousands)
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1
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Consolidated total assets
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$
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100,000
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2
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Consolidated accumulation amortization of intangibles
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5,000
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3
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Total cash and cash equivalents
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5,000
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4
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Adjusted total liabilities
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(10,000
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)
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5
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Adjusted net assets (Line 1 + Line 2 – Line 3 – Line 4)
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90,000
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6
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Multiplied by quarterly rate
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0.5
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%
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7
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Quarterly management fee
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$
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450
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Offsetting management fees:
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8
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Acquired company A offsetting management fees
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$
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(100
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)
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9
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Acquired company B offsetting management fees
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(100
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)
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10
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Acquired company C offsetting management fees
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(100
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)
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11
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Acquired company D offsetting management fees
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(100
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)
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12
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Total offsetting management fees (Line 8 + Line 9 – Line 10 – Line 11)
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(400
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)
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13
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Quarterly management fee payable by Company (Line 7 + Line 12)
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$
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50
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The foregoing example provides hypothetical information only
and does not intend to reflect actual or expected management fee amounts.
For purposes of the calculation of the management fee:
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“Adjusted net assets” will be equal to, with respect to our company as of any calculation date, the sum of (i)
consolidated total assets (as determined in accordance with United States generally accepted accounting principles, or GAAP) of
our company as of such calculation date, plus (ii) the absolute amount of consolidated accumulated amortization of intangibles
(as determined in accordance with GAAP) for our company as of such calculation date, minus (iii) total cash and cash equivalents,
minus (iv) the absolute amount of adjusted total liabilities of our company as of such calculation date.
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“Adjusted total liabilities” will be equal to, with respect to our company as of any calculation date, our company’s
consolidated total liabilities (as determined in accordance with GAAP) as of such calculation date after excluding the effect of
any outstanding third party indebtedness of our company.
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“Quarterly management fee” will be equal to, as of any calculation date, the product of (i) 0.5%, multiplied by
(ii) our company’s adjusted net assets as of such calculation date; provided, however, that with respect to any fiscal quarter
in which the management services agreement is terminated, our company will pay our manager a management fee with respect to such
fiscal quarter equal to the product of (i)(x) 0.5%, multiplied by (y) our company’s adjusted net assets as of such calculation
date, multiplied by (ii) a fraction, the numerator of which is the number of days from and including the first day of such fiscal
quarter to but excluding the date upon which the management services agreement is terminated and the denominator of which is the
number of days in such fiscal quarter.
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“Total offsetting management fees” will be equal to, as of any calculation date, fees paid to our manager by the
businesses that we acquire in the future under separate offsetting management services agreements.
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Transaction Services Agreements
Pursuant to the management services agreement, we have agreed
that our manager may, at any time, enter into transaction services agreements with any of our businesses relating to the performance
by our manager of certain transaction-related services in connection with the acquisitions of target businesses by our company
or its businesses or dispositions of our company’s or its businesses’ property or assets. These services may include
those customarily performed by a third-party investment banking firm or similar financial advisor, which may or may not be similar
to management services, in connection with the acquisition of target businesses by us or our subsidiaries or disposition of subsidiaries
or any of our property or assets or those of our subsidiaries. In connection with providing transaction services, our manager will
generally receive a fee equal to the sum of (i) 2.0% of the aggregate purchase price of the target business up to and equal to
$50 million, plus (ii) 1.5% of the aggregate purchase price of the target business in excess of $50 million and up to and equal
to $100 million, plus (iii) 1.0% of the aggregate purchase price over $100 million, subject to annual review by our board of directors.
The purchase price of a target business shall be defined as the aggregate amount of consideration, including cash and the value
of any shares issued by us on the date of acquisition, paid for the equity interests of such target business plus the aggregate
principal amount of any debt assumed by us of the target business on the date of acquisition or any similar formulation. The other
terms and conditions relating to the performance of transaction services will be established in accordance with market practice.
Our manager may enter into transaction services agreements with
our subsidiaries and future subsidiaries, which agreements would be in the form prescribed by our management services agreement.
The services that our manager will provide to our subsidiaries
and future subsidiaries under the transaction services agreements will include the following services that would be provided in
connection with a specific transaction identified at the time that the transaction services agreement is entered into: reviewing,
evaluating and otherwise familiarizing itself and its affiliates with the business, operations, properties, financial condition
and prospects of the future subsidiary and its target acquisition and preparing documentation describing the future subsidiary’s
operations, management, historical financial results, projected financial results and any other relevant matters and presenting
such documentation and making recommendations with respect thereto to certain of our manager’s affiliates.
Any fees received by our manager pursuant to such a transaction
services agreement will be in addition to the management fee payable by our company pursuant to the management services agreement
and will not offset the payment of such management fee. A transaction services agreement with any of our businesses may provide
for the reimbursement of costs and expenses incurred by our manager in connection with the acquisition of such businesses.
Transaction services agreements will be reviewed, authorized
and approved by our company’s board of directors on an annual basis.
Reimbursement of Expenses
Our company will be responsible for paying costs and expenses
relating to its business and operations. Our company agreed to reimburse our manager during the term of the management services
agreement for all costs and expenses of our company that are incurred by our manager or its affiliates on behalf of our company,
including any out-of-pocket costs and expenses incurred in connection with the performance of services under the management services
agreement, and all costs and expenses the reimbursement of which are specifically approved by our company’s board of directors.
Our company will not be obligated or responsible for reimbursing
or otherwise paying for any costs or expenses relating to our manager’s overhead or any other costs and expenses relating
to our manager’s conduct of its business and operations. Also, our company will not be obligated or responsible for reimbursing
our manager for costs and expenses incurred by our manager in the identification, evaluation, management, performance of due diligence
on, negotiation and oversight of potential acquisitions of new businesses for which our company (or our manager on behalf of our
company) fails to submit an indication of interest or letter of intent to pursue such acquisition, including costs and expenses
relating to travel, marketing and attendance of industry events and retention of outside service providers relating thereto. In
addition, our company will not be obligated or responsible for reimbursing our manager for costs and expenses incurred by our manager
in connection with the identification, evaluation, management, performance of due diligence on, negotiating and oversight of an
acquisition by our company if such acquisition is actually consummated and the business so acquired entered into a transaction
services agreement with our manager providing for the reimbursement of such costs and expenses by such business. In this respect,
the costs and expenses associated with the pursuit of add-on acquisitions for our company may be reimbursed by any businesses so
acquired pursuant to a transaction services agreement.
All reimbursements will be reviewed and, in certain circumstances,
approved by our company’s board of directors on an annual basis in connection with the preparation of year-end financial
statements.
Termination Fee
We will pay our manager a termination fee upon termination of
the management services agreement if such termination is based solely on a vote of our company’s board of directors and our
shareholders; no other termination fee will be payable to our manager in connection with the termination of the management services
agreement for any other reason. The termination fee that is payable to our manager will be equal to the product of (i) two (2)
multiplied by (ii) the sum of the amount of the quarterly management fees calculated with respect to the four fiscal quarters immediately
preceding the termination date of the management services agreement. The termination fee will be payable in eight equal quarterly
installments, with the first such installment being paid on or within five (5) business days of the last day of the fiscal quarter
in which the management services agreement was terminated and each subsequent installment being paid on or within five (5) business
days of the last day of each subsequent fiscal quarter, until such time as the termination fee is paid in full to our manager.
Our Manager as an Equity Holder
Manager’s Profit Allocation
Our manager owns 100% of the allocation shares of our company,
which generally will entitle our manager to receive a 20% profit allocation as a form of preferred distribution. Upon the sale
of a company subsidiary, our manager will be paid a profit allocation if the sum of (i) the excess of the gain on the sale of such
subsidiary over a high water mark plus (ii) the subsidiary’s net income since its acquisition by our company exceeds the
8% hurdle rate. The 8% hurdle rate is the product of (i) a 2% rate per quarter, multiplied by (ii) the number of quarters such
subsidiary was held by our company, multiplied by (iii) the subsidiary’s average share (determined based on gross assets,
generally) of our consolidated net equity (determined according to GAAP with certain adjustments). In certain circumstances, after
a subsidiary has been held for at least 5 years, our manager may also trigger a profit allocation with respect to such subsidiary
(determined based solely on the subsidiary’s net income since its acquisition). The calculation of the profit allocation
and the rights of our manager, as the holder of the allocation shares, are governed by the operating agreement.
Our board will have the opportunity to review and approve the
calculation of manager’s profit allocation when it becomes due and payable. Our manager will not receive a profit allocation
on an annual basis. Instead, our manager will be paid a profit allocation only upon the occurrence of one of the following events,
which we refer to collectively as the trigger events:
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the sale of a material amount, as determined by our manager and reasonably consented to by a majority of our company’s
board of directors, of the capital stock or assets of one of our businesses or a subsidiary of one of our businesses, which event
we refer to as a sale event; or
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at the option of our manager, for the 30-day period following the fifth anniversary of the date upon which we acquired a controlling
interest in a business, which event we refer to as a holding event. If our manager elects to forego declaring a holding event with
respect to such business during such period, then our manager may only declare a holding event with respect to such business during
the 30-day period following each anniversary of such fifth anniversary date with respect to such business. Once declared, our manager
may only declare another holding event with respect to a business following the fifth anniversary of the calculation date with
respect to a previously declared holding event.
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We believe this payment timing, rather than a method that provides
for annual allocation payments, more accurately reflects the long-term performance of each of our businesses and is consistent
with our intent to hold, manage and grow our businesses over the long term. We refer generally to the obligation to make this payment
to our manager as the “profit allocation” and, specifically, to the amount of any particular profit allocation as the
“manager’s profit allocation.”
Definitions used in, and an example of the calculation of profit
allocation, are set forth in more detail below.
The amount of our manager’s profit allocation will be
based on the extent to which the “total profit allocation amount” (as defined below) with respect to any business,
as of the last day of any fiscal quarter in which a trigger event occurs, which date we refer to as the “calculation date”,
exceeds the relevant hurdle amounts (as described below) with respect to such business, as of such calculation date. Our manager’s
profit allocation will be calculated by an administrator, which will be our manager so long as the management services agreement
is in effect, and such calculation will be subject to a review and approval process by our company’s board of directors.
For this purpose, “total profit allocation amount” will be equal to, with respect to any business as of any calculation
date, the sum of:
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the contribution-based profit (as described below) of such business as of such calculation date, which will be calculated upon
the occurrence of any trigger event with respect to such business; plus
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the excess of the cumulative gains and losses of our company (as described below) over the high water mark (as described below)
as of such calculation date, which will only be calculated upon the occurrence of a sale event with respect to such business, and
not on a holding event (we generally expect this component to be the most significant component in calculating total profit allocation
amount).
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Specifically, manager’s profit allocation will be calculated
and paid as follows:
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manager’s profit allocation will not be paid with respect to a trigger event relating to any business if the total profit
allocation amount, as of any calculation date, with respect to such business does not exceed such business’ level 1 hurdle
amount (based on an 8% annualized hurdle rate, as described below), as of such calculation date; and
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manager’s profit allocation will be paid with respect to a trigger event relating to any business if the total profit
allocation amount, as of any calculation date, with respect to such business exceeds such business’ level 1 hurdle amount,
as of such calculation date. Our manager’s profit allocation to be paid with respect to such calculation date will be equal
to the sum of the following:
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100% of such business’ total profit allocation amount, as of such calculation date, with respect to that portion of the
total profit allocation amount that exceeds such business’ level 1 hurdle amount (but is less than or equal to such business’
level 2 hurdle amount (which is based on a 10% annualized hurdle rate, as described below), in each case, as of such calculation
date. We refer to this portion of the total profit allocation amount as the “catch-up.” The “catch-up”
is intended to provide our manager with an overall profit allocation of 20% of the business’ total profit allocation amount
until such business’ level 2 hurdle amount has been reached; plus
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20% of the total profit allocation amount, as of such calculation date, that exceeds such business’ level 2 hurdle amount
as of such calculation date; minus
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the high water mark allocation, if any, as of such calculation date. The effect of deducting the high water mark allocation
is to take into account profit allocations our manager has already received in respect of past gains attributable to previous sale
events.
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The administrator will calculate our manager’s profit
allocation on or promptly following the relevant calculation date, subject to a “true-up” calculation upon availability
of audited or unaudited consolidated financial statements, as the case may be, of our company to the extent not available on such
calculation date. Any adjustment necessitated by the true-up calculation will be made in connection with the next calculation of
manager’s profit allocation. Because of the length of time that may pass between trigger events, there may be a significant
delay in our company’s ability to realize the benefit, if any, of a true-up of our manager’s profit allocation.
Once calculated, the administrator will submit the calculation
of our manager’s profit allocation, as adjusted pursuant to any true-up, to our company’s board of directors for its
review and approval. The board of directors will have ten business days to review and approve the calculation, which approval shall
be automatic absent disapproval by the board of directors. Our manager’s profit allocation will be paid ten business days
after such approval.
If the board of directors disapproves of the administrator’s
calculation of manager’s profit allocation, the calculation and payment of manager’s profit allocation will be subject
to a dispute resolution process, which may result in manager’s profit allocation being determined, at our company’s
cost and expense, by two independent accounting firms. Any determination by such independent accounting firms will be conclusive
and binding on our company and our manager.
We will also pay a tax distribution to our manager if our manager
is allocated taxable income by our company but does not realize distributions from our company at least equal to the taxes payable
by our manager resulting from allocations of taxable income. Any such tax distributions will be paid in a similar manner as profit
allocations are paid.
For any fiscal quarter in which a trigger event occurs with
respect to more than one business, the calculation of our manager’s profit allocation, including the components thereof,
will be made with respect to each business in the order in which controlling interests in such businesses were acquired or obtained
by our company and the resulting amounts shall be aggregated to determine the total amount of manager’s profit allocation.
If controlling interests in two or more businesses were acquired at the same time and such businesses give rise to a calculation
of manager’s profit allocation during the same fiscal quarter, then manager’s profit allocation will be further calculated
separately for each such business in the order in which such businesses were sold.
As obligations of our company, profit allocations and tax distributions
will be paid prior to the payment of distributions to our shareholders. If we do not have sufficient liquid assets to pay the profit
allocations or tax distributions when due, we may be required to liquidate assets or incur debt in order to pay such profit allocation.
Our manager will have the right to elect to defer the payment of our manager’s profit allocation due on any payment date.
Once deferred, our manager may demand payment thereof upon 20 business days’ prior written notice.
Termination of the management services agreement, by any means,
will not affect our manager’s rights with respect to the allocation shares that it owns, including its right to receive profit
allocations, unless our manager exercises its put right to sell such allocation shares to our company.
Example of Calculation of Manager’s Profit Allocation
Our manager will receive a profit allocation at the end of the
fiscal quarter in which a trigger event occurs, as follows (all dollar amounts are in millions):
Assumptions
Year 1:
Acquisition of Company A
Acquisition of Company B
Year 4
Company A (or assets thereof) sold for $25 capital
gain (as defined below) over its net book value of assets at time of sale, which is a qualifying trigger event
Company A’s average allocated share of our consolidated
net equity over its ownership is $50
Company A’s holding period in quarters is 12
Company A’s contribution-based profit since
acquisition is $5
Year 6:
Company B’s contribution-based profit since
acquisition is $7
Company B’s average allocated share of our consolidated
net equity over its ownership is $25
Company B’s holding period in quarters is 20
Company B’s cumulative gains and losses are
$20
Manager elects to have holding period measured for
purposes of profit allocation for Company B
Quarterly management fee:
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Year 4
A, due to
sale
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Year 6
B, due to
5 year hold
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1
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Contribution-based profit since acquisition for respective subsidiary
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$
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5
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$
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7
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2
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Gain/ Loss on sale of company
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25
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0
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3
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Cumulative gains and losses
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25
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20
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4
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High water mark prior to transaction
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0
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20
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5
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Total Profit Allocation Amount (Line 1 + Line 3)
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30
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27
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6
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Business’ holding period in quarters since ownership or last measurement due to holding event
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12
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20
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7
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Business’ average allocated share of consolidated net equity
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50
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25
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8
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Business’ level 1 hurdle amount (2.00% * Line 6 * Line 7)
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12
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10
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9
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Business’ excess over level 1 hurdle amount (Line 5 – Line 8)
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18
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17
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10
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Business’ level 2 hurdle amount (125% * Line 8)
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15
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12.5
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11
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Allocated to manager as “catch-up” (Line 10 – Line 8)
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3
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2.5
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12
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Excess over level 2 hurdle amount (Line 9 – Line 11)
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15
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14.5
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13
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Allocated to manager from excess over level 2 hurdle amount (20% * Line 12)
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3
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2.9
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14
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Cumulative allocation to manager (Line 11 + Line 13)
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6
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5.4
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15
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High water mark allocation (20% * Line 4)
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0
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4
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16
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Manager’s Profit Allocation for Current Period (Line 14 – Line 15,> 0)
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$
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6
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$
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1.4
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For purposes of calculating profit allocation:
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An entity’s “adjusted net assets” will be equal to, as of any date, the sum of (i) such entity’s
consolidated total assets (as determined in accordance with GAAP) as of such date, plus (ii) the absolute amount of such entity’s
consolidated accumulated amortization of intangibles (as determined in accordance with GAAP) as of such date, minus (iii) the absolute
amount of such entity’s adjusted total liabilities as of such date.
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An entity’s “adjusted total liabilities” will be equal to, as of any date, such entity’s consolidated
total liabilities (as determined in accordance with GAAP) as of such date after excluding the effect of any outstanding third party
indebtedness of such entity.
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A business’ “allocated share of our company’s overhead” will be equal to, with respect to any
measurement period as of any calculation date, the aggregate amount of such business’ quarterly share of our company’s
overhead for each fiscal quarter ending during such measurement period.
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A business’ “average allocated share of our consolidated equity” will be equal to, with respect to
any measurement period as of any calculation date, the average (i.e., arithmetic mean) of a business’ quarterly allocated
share of our consolidated equity for each fiscal quarter ending during such measurement period.
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“Capital gains” (i) means, with respect to any entity, capital gains (as determined in accordance with GAAP)
that are calculated with respect to the sale of capital stock or assets of such entity and which sale gave rise to a sale event
and the calculation of profit allocation and (ii) will be equal to the amount, adjusted for minority interests, by which (x) the
net sales price of such capital stock or assets, as the case may be, exceeded (y) the net book value (as determined in accordance
with GAAP) of such capital stock or assets, as the case may be, at the time of such sale, as reflected on our company’s consolidated
balance sheet prepared in accordance with GAAP; provided, that such amount shall not be less than zero.
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“Capital losses” (i) means, with respect to any entity, capital losses (as determined in accordance with
GAAP) that are calculated with respect to the sale of capital stock or assets of such entity and which sale gave rise to a sale
event and the calculation of profit allocation and (ii) will be equal to the amount, adjusted for minority interests, by which
(x) the net book value (as determined in accordance with GAAP) of such capital stock or assets, as the case may be, at the time
of such sale, as reflected on our consolidated balance sheet prepared in accordance with GAAP, exceeded (y) the net sales
price of such capital stock or assets, as the case may be; provided, that such absolute amount thereof shall not be less
than zero.
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Our “consolidated net equity” will be equal to, as of any date, the sum of (i) our consolidated total
assets (as determined in accordance with GAAP) as of such date, plus (ii) the aggregate amount of asset impairments (as
determined in accordance with GAAP) that were taken relating to any businesses owned by us as of such date, plus (iii) our
consolidated accumulated amortization of intangibles (as determined in accordance with GAAP), as of such date minus (iv)
our consolidated total liabilities (as determined in accordance with GAAP) as of such date.
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A business’ “contribution-based profits” will be equal to, for any measurement period as of any calculation
date, the sum of (i) the aggregate amount of such business’ net income (loss) (as determined in accordance with GAAP and
as adjusted for minority interests) with respect to such measurement period (without giving effect to (x) any capital gains or
capital losses realized by such business that arise with respect to the sale of capital stock or assets held by such business and
which sale gave rise to a sale event and the calculation of profit allocation or (y) any expense attributable to the accrual or
payment of any amount of profit allocation or any amount arising under the supplemental put agreement, in each case, to the extent
included in the calculation of such business’ net income (loss)), plus (ii) the absolute aggregate amount of such
business’ loan expense with respect to such measurement period, minus (iii) the absolute aggregate amount of such
business’ allocated share of our company’s overhead with respect to such measurement period.
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Our “cumulative capital gains” will be equal to, as of any calculation date, the aggregate amount of capital
gains realized by our company as of such calculation date, after giving effect to any capital gains realized by our company on
such calculation date, since its inception.
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Our “cumulative capital losses” will be equal to, as of any calculation date, the aggregate amount of capital
losses realized by our company as of such calculation date, after giving effect to any capital losses realized by our company on
such calculation date, since its inception.
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Our “cumulative gains and losses” will be equal to, as of any calculation date, the sum of (i) the
amount of cumulative capital gains as of such calculation date, minus (ii) the absolute amount of cumulative capital losses
as of such calculation date.
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The “high water mark” will be equal to, as of any calculation date, the highest positive amount of capital
gains and losses as of such calculation date that were calculated in connection with a qualifying trigger event that occurred prior
to such calculation date.
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The “high water mark allocation” will be equal to, as of any calculation date, the product of (i) the amount
of the high water mark as of such calculation date, multiplied by (ii) 20%.
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A business’ “level 1 hurdle amount” will be equal to, as of any calculation date, the product of (i)
(x) the quarterly hurdle rate of 2.00% (8% annualized), multiplied by (y) the number of fiscal quarters ending during such
business’ measurement period as of such calculation date, multiplied by (ii) a business’ average allocated share
of our consolidated equity for each fiscal quarter ending during such measurement period.
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A business’ “level 2 hurdle amount” will be equal to, as of any calculation date, the product of (i)
(x) the quarterly hurdle rate of 2.5% (10% annualized, which is 125% of the 8% annualized hurdle rate), multiplied by (y)
the number of fiscal quarters ending during such business’ measurement period as of such calculation date, multiplied
by (ii) a business’ average allocated share of our consolidated equity for each fiscal quarter ending during such measurement
period.
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A business’ “loan expense” will be equal to, with respect to any measurement period as of any calculation
date, the aggregate amount of all interest or other expenses paid by such business with respect to indebtedness of such business
to either our company or other company businesses with respect to such measurement period.
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The “measurement period” will mean, with respect to any business as of any calculation date, the period
from and including the later of (i) the date upon which we acquired a controlling interest in such business and (ii) the immediately
preceding calculation date as of which contribution-based profits were calculated with respect to such business and with respect
to which profit allocation were paid (or, at the election of the allocation member, deferred) by our company up to and including
such calculation date.
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Our company’s “overhead” will be equal to, with respect to any fiscal quarter, the sum of (i)
that portion of our operating expenses (as determined in accordance with GAAP) (without giving effect to any expense attributable
to the accrual or payment of any amount of profit allocation or any amount arising under the supplemental put agreement to the
extent included in the calculation of our operating expenses), including any management fees actually paid by our company to our
manager, with respect to such fiscal quarter that are not attributable to any of the businesses owned by our company (i.e., operating
expenses that do not correspond to operating expenses of such businesses with respect to such fiscal quarter), plus (ii)
our accrued interest expense (as determined in accordance with GAAP) on any outstanding third party indebtedness of our company
with respect to such fiscal quarter, minus (iii) revenue, interest income and other income reflected in our unconsolidated
financial statements as prepared in accordance with GAAP.
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A “qualifying trigger event” will mean, with respect to any business, a trigger event that gave rise to
a calculation of total profit allocation with respect to such business as of any calculation date and (ii) where the amount of
total profit allocation so calculated as of such calculation date exceeded such business’ level 2 hurdle amount as of such
calculation date.
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A business’ “quarterly allocated share of our consolidated equity” will be equal to, with respect
to any fiscal quarter, the product of (i) our consolidated net equity as of the last day of such fiscal quarter, multiplied
by (ii) a fraction, the numerator of which is such business’ adjusted net assets as of the last day of such fiscal quarter
and the denominator of which is the sum of (x) our adjusted net assets as of the last day of such fiscal quarter, minus
(y) the aggregate amount of any cash and cash equivalents as such amount is reflected on our consolidated balance sheet as prepared
in accordance with GAAP that is not taken into account in the calculation of any business’ adjusted net assets as of the
last day of such fiscal quarter.
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A business’ “quarterly share of our company’s overhead” will be equal to, with respect to any
fiscal quarter, the product of (i) the absolute amount of our company’s overhead with respect to such fiscal quarter,
multiplied by (ii) a fraction, the numerator of which is such business’ adjusted net assets as of the last day of
such fiscal quarter and the denominator of which is our adjusted net assets as of the last day of such fiscal quarter.
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An entity’s “third party indebtedness” means any indebtedness of such entity owed to any third party
lenders that are not affiliated with such entity.
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Supplemental Put Provision
In addition to the provisions discussed above, in consideration
of our manager’s acquisition of the allocation shares, our operating agreement contains a supplemental put provision pursuant
to which our manager will have the right to cause our company to purchase the allocation shares then owned by our manager upon
termination of the management services agreement.
If the management services agreement is terminated at any time
or our manager resigns, then our manager will have the right, but not the obligation, for one year from the date of such termination
or resignation, as the case may be, to elect to cause our company to purchase all of the allocation shares then owned by our manager
for the put price as of the put exercise date.
For purposes of this provision, the “put price”
is equal to, as of any exercise date, (i) if we terminate the management services agreement, the sum of two separate, independently
made calculations of the aggregate amount of manager’s profit allocation as of such exercise date or (ii) if our manager
resigns, the average of two separate, independently made calculations of the aggregate amount of manager’s profit allocation
as of such exercise date, in each case, calculated assuming that (x) all of the businesses are sold in an orderly fashion for fair
market value as of such exercise date in the order in which the controlling interest in each business was acquired or otherwise
obtained by our company, (y) the last day of the fiscal quarter ending immediately prior to such exercise date is the relevant
calculation date for purposes of calculating manager’s profit allocation as of such exercise date. Each of the two separate,
independently made calculations of our manager’s profit allocation for purposes of calculating the put price will be performed
by a different investment bank that is engaged by our company at its cost and expense. The put price will be adjusted to account
for a final “true-up” of our manager’s profit allocation.
Our manager and our company can mutually agree to permit our
company to issue a note in lieu of payment of the put price when due; provided, that if our manager resigns and terminates the
management services agreement, then our company will have the right, in its sole discretion, to issue a note in lieu of payment
of the put price when due. In either case the note would have an aggregate principal amount equal to the put price, would bear
interest at a rate of LIBOR plus 4.0% per annum, would mature on the first anniversary of the date upon which the put price was
initially due, and would be secured by the then-highest priority lien available to be placed on our equity interests in each of
our businesses.
Our company’s obligations under the put provision of our
operating agreement are absolute and unconditional. In addition, our company will be subject to certain obligations and restrictions
upon exercise of our manager’s put right until such time as our company’s obligations under the put provision of our
operating agreement, including any related note, have been satisfied in full, including:
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subject to our company’s right to issue a note in the circumstances described above, our company must use commercially
reasonable efforts to raise sufficient debt or equity financing to permit our company to pay the put price or note when due and
obtain approvals, waivers and consents or otherwise remove any restrictions imposed under contractual obligations or applicable
law or regulations that have the effect of limiting or prohibiting our company from satisfying its obligations under the supplemental
put agreement or note;
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our manager will have the right to have a representative observe meetings of our company’s board of directors and have
the right to receive copies of all documents and other information furnished to the board of directors;
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our company and its businesses will be restricted in their ability to sell or otherwise dispose of their property or assets
or any businesses they own and in their ability to incur indebtedness (other than in the ordinary course of business) without granting
a lien on the proceeds therefrom to our manager, which lien will secure our company’s obligations under the put provision
of our operating agreement or note; and
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our company will be restricted in its ability to (i) engage in certain mergers or consolidations, (ii) sell, transfer or otherwise
dispose of all or a substantial part of its business, property or assets or all or a substantial portion of the stock or beneficial
ownership of its businesses or a portion thereof, (iii) liquidate, wind-up or dissolve, (iv) acquire or purchase the property,
assets, stock or beneficial ownership or another person, or (v) declare and pay distributions on the series A preferred shares,
if and when they are issued, and distributions to our common shareholders.
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Our company also has agreed to indemnify our manager for any
losses or liabilities it incurs or suffers in connection with, arising out of or relating to its exercise of its put right or any
enforcement of terms and conditions of the supplemental put provision of our operating agreement.
As an obligation of our company, the put price will be paid
prior to the payment of distributions to our shareholders. If we do not have sufficient liquid assets to pay the put price when
due, we may be required to liquidate assets or incur debt in order to pay the put price.
Termination of the management services agreement, by any means,
will not affect our manager’s rights with respect to the allocation shares that it owns. In this regard, our manager will
retain its put right and its allocation shares after ceasing to serve as our manager. As a result, if we terminate our manager,
regardless of the reason for such termination, it would retain the right to exercise the put right and demand payment of the put
price.
LAND MANAGEMENT SERVICE BUSINESS
Overview
On March 3, 2017, we completed the acquisition of Neese. Headquartered
in Grand Junction, Iowa and founded in 1991, Neese is an established business specializing in providing a wide range of land application
services and selling equipment and parts, primarily to the agricultural industry, but also to the construction and lawn and garden
industries. Neese’s revenue mix is composed of waste disposal and a variety of agricultural services, wholesaling of agricultural
equipment and parts, local trucking services, various shop services, and other products and services. Services to the local agricultural
and farming communities include manure spreading, land rolling, bin whipping, cleaning of bulk storage bins and silos, equipment
rental, trucking, vacuuming, building erection, and others.
Neese carries high-quality farm and ranch
equipment from prominent manufacturers, including Buhler Versatile Tractors, Harvest International, Nuhn Industries Ltd., Twinstar,
Fantini, Loftness, Roto-Grind, Sage Oil Vac, Dixie Chopper, and many others.
Products and Services
Waste Disposal and Land Application Services
Neese’s largest revenue source is providing waste disposal
and land application services, primarily for the agricultural industry, and to a lesser extent, industrial and municipal customers.
Services to the local agricultural and farming communities include manure spreading and land rolling. Neese also has a fleet of
trucks that haul products for a variety of customers. Service revenues accounted for approximately 65.9% and 63.2% of Neese’s
total revenues for the years ended December 31, 2019 and 2018, respectively.
Equipment and Parts Sales
Neese sells a wide range of farm and agricultural equipment.
Some of the major brands offered include, but are not limited to, the following:
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Versatile Tractors, which have a heavy frame and powerful Cummins QSX 15-liter engine that are hard working with the lugging
power to pull pans and clear land;
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Harvest International, which is a leading manufacturer of grain augers and grain handling equipment;
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Nuhn Industries Ltd., which is a leading manufacturer of liquid manure spreaders, liquid manure agitators, liquid manure pumps,
and manure hauling equipment;
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Twinstar Basket rakes, which are designed to produce the highest quality hay;
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Fantini, which is a leading company in the production of corn and sunflower headers;
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Loftness crop shredders and grain baggers;
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Roto-Grind grain handling and storage equipment;
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Dixie Chopper, marketed as the world’s fastest lawnmower; and
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Sage Oil Vac’s innovative, alternative fluid handling systems.
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Other Products and Services
Neese provides a variety of services to the local agricultural
and farming communities, including bin whipping, cleaning all types of bulk storage bins and silos, equipment rental, trucking,
vacuuming, building erection, and other services.
Pricing
Neese prices its products and services at what the market will
bear. Pricing is generally determined by product and service mix, supply and demand, wholesale prices on equipment/parts, competitive
forces, and other factors.
Supplier Relationships
Neese employs a variety of suppliers with two suppliers representing
10% or more of our total purchases. Neese maintains close relationships with its suppliers. Neese’s key vendors and suppliers
are listed in the table below.
Supplier
|
|
Relationship Established (Year)
|
|
Product or Service Supplied
|
|
Total Purchases (2018)
|
|
|
Total Purchases (2019)
|
|
|
Percent of 2019 Purchases
|
|
Nuhn Industries
|
|
2002
|
|
Agricultural Equipment
|
|
$
|
942,611
|
|
|
$
|
719,058
|
|
|
|
20.0
|
%
|
Quick Oil Co.
|
|
1993
|
|
Fuel
|
|
|
662,001
|
|
|
|
570,226
|
|
|
|
15.9
|
%
|
Wellmark
|
|
2004
|
|
Health insurance
|
|
|
239,700
|
|
|
|
249,544
|
|
|
|
6.9
|
%
|
Meyer Mfg
|
|
1993
|
|
Agricultural Equipment
|
|
|
128,706
|
|
|
|
180,776
|
|
|
|
5.0
|
%
|
ComData
|
|
2009
|
|
Fuel purchases
|
|
|
160,876
|
|
|
|
102,006
|
|
|
|
2.8
|
%
|
EMC
|
|
2018
|
|
Company insurance
|
|
|
96,982
|
|
|
|
77,438
|
|
|
|
2.2
|
%
|
Auto owners ins.
|
|
1993
|
|
Company insurance
|
|
|
154,282
|
|
|
|
58,795
|
|
|
|
1.6
|
%
|
Products are purchased from these suppliers on an at-will basis.
Such manufacturers could discontinue sales to Neese at any time or upon short notice. If any of these suppliers discontinued selling
or were unable to continue selling to Neese, there could be a material adverse effect on our business and results of operations.
Relationships with suppliers are subject to change from time
to time. Changes in Neese’s relationships with suppliers occur periodically, and could positively or negatively impact our
net sales and operating profits. Please see Item 1A. “Risk Factors—Risks Related to Land Management Services Business—We
depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply
products to us.” However, we believe that we can be successful in mitigating negative effects resulting from unfavorable
changes in the relationships between Neese and its suppliers through, among other things, the development of new or expanded supplier
relationships.
Sales and Marketing
Neese relies primarily on the following methods to generate
new business:
|
●
|
one inside salesperson;
|
|
●
|
the founders’ business development efforts;
|
|
●
|
a corporate website: www.neeseinc.com;
|
|
●
|
advertising in local/regional trade publications and newspapers;
|
|
●
|
attending agricultural trade shows; and
|
We believe that Neese’s growth to date is also the result
of the creation and maintenance of an excellent reputation with numerous farms and other players throughout the agricultural community
of central Iowa. In addition, we believe that the founders have been instrumental in building the account base through extensive
industry experience and product knowledge. Neese has a firm commitment to product quality and timely delivery, and customer satisfaction.
Customers and Markets
Neese currently serves approximately 580 active accounts. The
end user market is the agricultural industry (livestock and crop production markets). Neese also performs work for and sells to
industrial and municipal customers. The general service area is within a 60-mile radius of Neese’s headquarters in Grand
Junction, Iowa.
We believe that Neese’s established customer base is a
strong asset that contributes to its stability and presents opportunities for sales growth. Neese has a diversified customer base
without reliance on several large customers. For the year ended December 31, 2019, one customer accounted for more than 10% of
sales, and the next largest customer accounted for 3.4% of sales.
Competition
The U.S. farm and garden equipment wholesalers industry includes
manufacturers’ wholesale sales branches as well as retail dealers in farm equipment, which are grouped with wholesalers because
their products are sold primarily for business use rather than personal or household use. Large distributors have few economies
of scale but can offer customers a wider range of products. Small distributors can compete successfully by holding exclusive territory
rights to popular products.
Neese competes with numerous companies that offer similar products
and/or services. We believe that Neese’s primary competitive advantage is its decades-long, superior reputation for high
quality products, service, reliability and stability, and safety record. Additionally, Neese is located in central Iowa, a strategic
location due to its proximity to the State’s agricultural industry and its easy access to Interstate 35.
Competitive Strengths
Based on our management’s belief and experience in the
industry, we believe that the following competitive strengths enable Neese to compete effectively.
|
●
|
Name and reputation: We believe that Neese enjoys a long-standing (25-year) reputation for its focus on offering
a full line of new and used farm equipment and parts, and providing superior waste hauling, land application, and other services
with competitive pricing and superior customer service.
|
|
●
|
Strong customer relationships: We believe that Neese has strong ties to hundreds of agricultural, industrial,
and municipal organizations throughout its marketplace.
|
|
●
|
Highly trained and professional staff: We believe that Neese’s personnel are its most important asset.
Neese employs dedicated and highly skilled professionals who have extensive industry experience. In order to ensure that customers
receive the most efficient and cost-effective service, Neese provides continuous safety and management training to its dedicated
team of professionals.
|
Growth Strategies
We will strive to grow Neese’s business by pursuing the
following growth strategies.
|
●
|
Expansion of product and service lines. Neese plans to continue expanding its product and service lines based
on management’s assessment of customer needs.
|
|
●
|
Expansion of trucking services. Neese has increased its trucking business with a fleet of 13 trucks that
it owns. The trucking business increases revenue during times when waste hauling is not as busy.
|
|
●
|
Increased sales and marketing. Neese also plans to continue spending additional resources on sales and marketing
personnel and strategies in order to secure new client accounts.
|
Intellectual Property
We do not own or license any material intellectual property
in connection with the operation of Neese.
Employees
As of December 31, 2019, Neese employed 29 full-time employees,
as depicted in the table below.
Department/Function
|
|
Employees
|
|
Management
|
|
|
2
|
|
Office Employees
|
|
|
5
|
|
Truck Drivers
|
|
|
7
|
|
Mechanics
|
|
|
2
|
|
General Labor
|
|
|
7
|
|
Sales
|
|
|
1
|
|
Product Supervisors
|
|
|
5
|
|
TOTALS
|
|
|
29
|
|
None of Neese’s employees are represented by labor unions,
and Neese believes that it has an excellent relationship with its employees.
Regulation
Neese is subject to a wide variety of laws and regulations,
which historically have not had a material effect on our business. For example, most of the products sold and service provided
are regulated by a host of state and federal agencies, including, one or more of the following: the Environmental Protection Agency,
the Iowa Department of Natural Resources and the Consumer Products Safety Commission. Since we are a wholesaler (and not a manufacturer)
of these products, responsibility for compliance generally falls upon the manufacturer. Neese is required to hold a commercial
manure handler license which requires an annual training program.
RETAIL AND APPLIANCES BUSINESS
Overview
On April 5, 2019, we completed the acquisition of substantially
all of the assets of Goedeker Television through our subsidiary Goedeker, which now operates the prior business of Goedeker Television,
a Missouri corporation founded in 1951. Headquartered in St. Louis, Missouri, Goedeker is a one-stop e-commerce destination for
home furnishings, including appliances, furniture, bath and kitchen fixtures, décor, lighting and home goods. Goedeker has
evolved from a local brick and mortar operation serving the St. Louis metro area to a large nationwide omnichannel retailer. While
Goedeker still maintains its St. Louis showroom, over 90% of sales are placed through its website at www.goedekers.com. Goedeker
offers over 227,000 SKUs organized by category and product features, providing visitors to the site an easy to navigate shopping
experience.
Through its e-commerce business model, Goedeker offers a one-stop
online marketplace for consumers looking for variety, style, service and value when shopping for nearly any home product need.
Goedeker is focused on bringing its customers an experience that is at the forefront of shopping online for the home. Goedeker
has built a large online selection of appliances, furniture, bath and kitchen fixtures, décor, lighting and home goods.
It is able to offer this vast selection of products because it holds minimal inventory. Goedeker specializes in the home category
and this has enabled it to build a shopping experience and logistics infrastructure that is tailored to the unique characteristics
of its market.
The delivery experience and overall customer service that Goedeker
offers its shoppers are central to its business. Goedeker purchases inventory only after a sale has been made through its website.
This allows Goedeker to tightly manage its inventory and warehouse space while still providing customers quick delivery times and
control over the entire process. About 90% of appliances flow through Goedeker’s warehouse while almost all furniture is
drop shipped to the customer. All inventory is managed with a barcode system and is automatically tracked through Goedeker’s
Microsoft Dynamics GP ERP system.
Products
Appliances
The appliance category is Goedeker’s largest revenue source,
with a long history of selling these products and serving the distinct needs of consumers looking to replace or add to their home
appliances. Goedeker offers roughly 22,000 appliance SKUs from all mainline original equipment manufacturers, including refrigerators,
stoves, ovens, dishwashers, microwaves, washers and dryers. Sales of appliances accounted for approximately 82.2% of Goedeker’s
revenues for the period from acquisition (April 5, 2019) to December 31, 2019.
Furniture
Goedeker began selling furniture online in 2015 and currently
offers approximately 148,000 SKUs from over 340 furniture vendors. Furniture is the second largest product category. The organization
of product by type and characteristics makes for a rich and pleasurable shopping experience in a complicated product category.
Sales of furniture accounted for approximately 12.7% of Goedeker’s revenues for the period from acquisition (April 5, 2019)
to December 31, 2019.
Other Products
Goedeker offers a broad assortment of products in the décor,
bed & bath, lighting, outdoor living and electronics categories. While these are not individually high-volume categories, they
complement the appliance and furniture categories to produce a one-stop home goods offering for customers. Other sales accounted
for approximately 5.1% of Goedeker’s revenues for the period from acquisition (April 5, 2019) to December 31, 2019.
Pricing
We believe that Goedeker’s pricing model is one of its
largest competitive differentiators as Goedeker strives to be the low price in the market. Goedeker’s team tracks pricing
daily on more than 22,000 appliance SKUs, comparing prices withal major online competitors. Adjustments are made daily to ensure
Goedeker has the low-price option in the market and is best positioned to convert customers once they arrive at Goedeker.
Vendor/Supplier Relationships
Goedeker offers more than 1,000 vendors and over 227,000 SKUs
available for purchase through www.goedekers.com. This depth of vendor relationships gives consumers numerous options in all product
categories resulting in a true one-stop shopping destination. Goedeker’s key vendors and suppliers are listed in the table
below.
Supplier
|
|
Total Purchases
(2018)
|
|
|
Total Purchases
(2019)
|
|
|
Percent of
Purchases
(2019)
|
|
Whirlpool
|
|
$
|
19,812,400
|
|
|
$
|
17,337,900
|
|
|
|
44.1
|
%
|
General Electric
|
|
|
4,214,400
|
|
|
|
2,528,000
|
|
|
|
6.4
|
%
|
Bosch
|
|
|
3,671,200
|
|
|
|
2,479,800
|
|
|
|
6.3
|
%
|
Electrolux
|
|
|
2,647,100
|
|
|
|
2,081,600
|
|
|
|
5.3
|
%
|
LG
|
|
|
2,097,900
|
|
|
|
1,980,200
|
|
|
|
5.0
|
%
|
Samsung
|
|
|
3,479,000
|
|
|
|
1,481,400
|
|
|
|
3.8
|
%
|
Products are purchased from these suppliers on an at-will basis.
Relationships with suppliers are subject to change from time to time. Changes in Goedeker’s relationships with suppliers
occur periodically and could positively or negatively impact its net sales and operating profits. Please see Item 1A. “Risk
Factors—Risks Related to Retail and Appliances Business.” However, we believe that Goedeker can be successful in mitigating
negative effects resulting from unfavorable changes in the relationships between Goedeker and its suppliers through, among other
things, the development of new or expanded supplier relationships.
Sales and Marketing
Email
Goedeker leverages its extensive data base of approximately
198,000 past and potential opt in customers with email marketing to produce targeted messaging at a mass level. The marketing team
produces three new email messages per week, utilizing in-house graphic design, copy and editing resources. The messaging ranges
from themes such as seasonal, category and product messaging to a simple thank you note shortly after a purchase is made. Not all
people in the data base receive all emails, but roughly 1/3 of them will receive at least one e-mail per week. The messaging is
targeted based on past order activity, order frequency, customer preferences of product or category and shopping cart abandonment.
As an incentive for opting into Goedeker’s mailing list,
it provides customers with a $20 discount coupon on orders of $850 or more. Because a vast majority of new subscribers are one
step away from making a purchase, Goedeker has been successful with this promotion in converting “browsers” to “buyers.”
Social Media
Goedeker has utilized social media sparingly to drive traffic
and build brand awareness, primarily through Facebook, Pinterest, Instagram and Twitter. Goedeker believes that there is great
potential with social media as a brand-building tool, but has been reluctant to increase spending in this area as the marketing
focus has been on conversions and sales over brand. However, Goedeker anticipates that social media will become a growing focus
for its marketing spend.
Social Media Paid Advertising
Goedeker currently utilizes paid advertising on Google, Facebook
and Bing. The majority of its add spending is centered on Google Shopping which lets Goedeker leverage its competitive pricing
in the final stage of a customer’s buying journey. Goedeker utilizes Facebook Ads largely as a retargeting platform to stay
in touch with recent website browsers as well as past customers.
Affiliate Marketing
Goedeker has invested in affiliate marketing in the past, but
has since scaled back this effort. Certain states have been targeting online companies and charging sales tax on sales passed through
by affiliate residents of such state. Goedeker found that the administrative burden and tax impact of revenue generated by many
of the affiliates outweighed the benefits. As of the date of this report, Goedeker has only one affiliate marketing relationship
remaining with 200 affiliate publishers.
Customers and Markets
Goedeker has an extensive data base of approximately 198,000
past and potential opt in customers. Goedeker caters to highly educated, mature individuals with disposable income. The average
shopper is between 40 and 60 years old, lived in a single-family domicile and is a home owner. Approximately one-half of Goedeker’s
clientele has an annual income in excess of $100,000, which allows them to take advantage of Goedeker’s premium product offerings.
Competition
Goedeker competes with numerous companies that offer similar
products. We believe that Goedeker’s primary competitive advantage is its decades-long, superior reputation for high quality
products, service, and reliability.
Appliances
The U.S. appliance market in general is highly fragmented with
thousands of local and regional retailers competing for share in what has historically been a high touch sale process with strict
showroom requirements. Goedeker’s main competitors in the appliance market include Lowe’s, Home Depot, AJ Madison,
Appliance Connection, and US Appliance.
While the broader consumer electronics category is fairly cyclical
following general economic waves, the major appliance category is a very steady performer within this group. The shifting landscape
to online sales in the segment is providing a significant market share capture and positioning opportunity for companies. Goedeker
has and is continuing to capitalize on this market shift.
Furniture and Homewares
Although consolidation in the U.S. furniture and homeware market
continues to progress, the industry is still relatively fragmented compared to other retail subsectors of similar market value.
Goedeker’s main competitors in the furniture and homewares market include Wayfair and Ashley Home Stores.
Much like the appliance market, the shifting landscape to online
sales in the segment is providing a significant market share capture and positioning opportunity for companies, led by giants such
as Wayfair and Amazon. Goedeker has and is continuing to capitalize on this market shift.
Competitive Strengths
Based on management’s belief and experience in the industry, we
believe that the following competitive strengths enable Goedeker to compete effectively.
|
●
|
Name and reputation: We believe that Goedeker enjoys a long-standing (50+ years) reputation for its focus on
offering a full line of appliances and other home furnishings with competitive pricing and superior customer service.
|
|
●
|
Strong customer relationships: Goedeker caters to the committed shopper who is interested in purchasing top-of-the-line
appliances, furniture and other home goods at low prices. We believe that these customers value Goedeker’s dedication to
providing outstanding customer service and repeatedly use Goedeker for their home product needs.
|
|
●
|
Highly trained and professional staff: We believe that Goedeker’s personnel are its most important asset.
Goedeker has an internal sales support team of five personnel who are trained to educate and support customers when selecting and
buying products. Approximately 40% of customer orders consist of a phone conversation with a Goedeker sales team member which becomes
a differentiator when competing with online only companies.
|
Growth Strategies
We will strive to grow Goedeker’s business by pursuing
the following growth strategies.
|
●
|
Expand in the commercial market. Goedeker has directed all marketing efforts toward the consumer. With remodels
and new home construction, there is opportunity to market to home builders, contractors and interior designers who are making or
influencing the purchasing decision for many consumers. We believe that Goedeker’s low price business model would be received
well by this market, creating substantial revenue opportunities and more repeat business.
|
|
●
|
Ride the wave of online retail. Online retail has grown significantly in the past few years. As this market evolves,
we expect that consumers will become even more comfortable with large online purchasers like major appliances. We believe that
Goedeker is well positioned to naturally benefit from the growth in online retail.
|
|
●
|
Expand category management. Goedeker has expanded from online appliances to furniture and other categories while
maintaining management headcount. Management feels that committing dedicated resources to each category and building them out in
business unit fashion will not only drive revenue but increase and stabilize margins.
|
|
●
|
Warehouse expansion. Goedeker is operating from a converted retail space with confined square footage. With additional
warehouse operations, Goedeker could take advantage of buying opportunities and capture time-sensitive customers more frequently.
|
|
●
|
Open on Sundays. Goedeker’s store, customer support and warehouse operations have traditionally been closed
on Sundays. We intend to begin opening operations on this busy shopping day which we expect to generate additional sales.
|
Intellectual Property
Goedeker has several domain names, including for its www.goedekers.com
website. It does not own or license any other material intellectual property in connection with the operation of Goedeker.
Employees
As of December 31, 2019, Goedeker employed 72 full-time employees.
Department/Function
|
|
Employees
|
|
Accounting/Finance
|
|
|
11
|
|
Sales and Marketing
|
|
|
12
|
|
Customer Service
|
|
|
10
|
|
Human Resources
|
|
|
1
|
|
Information Technology
|
|
|
13
|
|
Product Data Management
|
|
|
7
|
|
Purchasing
|
|
|
5
|
|
Warehouse
|
|
|
13
|
|
TOTALS
|
|
|
72
|
|
None of Goedeker’s employees are represented by labor
unions, and we believe that it has an excellent relationship with its employees.
Regulation
Goedeker’s business is subject a variety of laws and regulations
applicable to companies conducting business on the Internet. Jurisdictions vary as to how, or whether, existing laws governing
areas such as personal privacy and data security, consumer protection or sales and other taxes, among other areas, apply to the
Internet and e-commerce, and these laws are continually evolving. For example, certain applicable privacy laws and regulations
require Goedeker to provide customers with its policies on sharing information with third parties, and advance notice of any changes
to these policies. Related laws may govern the manner in which Goedeker stores or transfers sensitive information or impose obligations
on Goedeker in the event of a security breach or inadvertent disclosure of such information. Additionally, tax regulations in jurisdictions
where Goedeker does not currently collect state or local taxes may subject it to the obligation to collect and remit such taxes,
or to additional taxes, or to requirements intended to assist jurisdictions with their tax collection efforts. New legislation
or regulation, the application of laws from jurisdictions whose laws do not currently apply to Goedeker’s business, or the
application of existing laws and regulations to the Internet and e-commerce generally could result in significant additional taxes
on Goedeker’s business. Further, Goedeker could be subject to fines or other payments for any past failures to comply with
these requirements. The continued growth and demand for e-commerce is likely to result in more laws and regulations that impose
additional compliance burdens on e-commerce companies.
An investment in our securities involves a high degree of
risk. You should carefully read and consider all of the risks described below, together with all of the other information contained
or referred to in this report, before making an investment decision with respect to our securities. If any of the following events
occur, our financial condition, business and results of operations (including cash flows) may be materially adversely affected.
In that event, the market price of our shares could decline, and you could lose all or part of your investment.
Risks Related to Our Business and Structure
We may not be able to effectively integrate the businesses
that we may acquire.
Our ability to realize the anticipated benefits of acquisitions
will depend on our ability to integrate those businesses with our own. The combination of multiple independent businesses is a
complex, costly and time-consuming process and there can be no assurance that we will be able to successfully integrate businesses
into our business, or if such integration is successfully accomplished, that such integration will not be costlier or take longer
than presently contemplated. Integration of future acquisitions may include various risks and uncertainties, including the factors
discussed in the paragraph below. If we cannot successfully integrate and manage the businesses within a reasonable time, we may
not be able to realize the potential and anticipated benefits of the such acquisitions, which could have a material adverse effect
on our share price, business, cash flows, results of operations and financial position.
We will consider other acquisitions that we believe will complement,
strengthen and enhance our growth. We evaluate opportunities on a preliminary basis from time to time, but these transactions may
not advance beyond the preliminary stages or be completed. Such acquisitions are subject to various risks and uncertainties, including:
|
●
|
the inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some
of which are in diverse geographic regions) and achieve expected synergies;
|
|
●
|
the potential disruption of existing business and diversion of management’s attention from day-to-day operations;
|
|
●
|
the inability to maintain uniform standards, controls, procedures and policies;
|
|
●
|
the need or obligation to divest portions of the acquired companies;
|
|
●
|
the potential failure to identify material problems and liabilities during due diligence review of acquisition targets;
|
|
●
|
the potential failure to obtain sufficient indemnification rights to fully offset possible liabilities associated with acquired
businesses; and
|
|
●
|
the challenges associated with operating in new geographic regions.
|
We are a new company with limited history and we may not
be able to manage our future businesses on a profitable basis.
We were formed on January 22, 2013 and operated a management
consulting business from inception through October 3, 2017. On March 3, 2017, we acquired Neese, which is a business that provides
a wide range of products and services for the agriculture, construction, lawn and garden industries. On April 5, 2019, we acquired
the assets of Goedeker Television, a one-stop e-commerce destination for home furnishings, including appliances, furniture, bath
and kitchen fixtures, décor, lighting and home goods. We plan to acquire additional operating businesses in the future.
Our manager will manage the day-to-day operations and affairs of our company and oversee the management and operations of our future
businesses, subject to the oversight of our board of directors. If we do not develop effective systems and procedures, including
accounting and financial reporting systems, to manage our operations as a consolidated public company, we may not be able to manage
the combined enterprise on a profitable basis, which could adversely affect our ability to pay distributions to our shareholders.
Our future success is dependent on the employees of our
manager, our manager’s operating partners and the management team of our business, the loss of any of whom could materially
adversely affect our financial condition, business and results of operations.
Our future success depends, to a significant extent, on the
continued services of the employees of our manager. The loss of their services may materially adversely affect our ability to manage
the operations of our businesses. The employees of our manager may leave our manager and go to companies that compete with us in
the future. In addition, we will depend on the assistance provided by our manager’s operating partners in evaluating, performing
diligence on and managing our businesses. The loss of any employees of our manager or any of our manager’s operating partners
may materially adversely affect our ability to implement or maintain our management strategy or our acquisition strategy.
The future success of Neese, Goedeker and our future businesses
also depends on the respective management teams of those businesses because we intend to operate our businesses on a stand-alone
basis, primarily relying on their existing management teams for day-to-day operations. Consequently, their operational success,
as well as the success of any organic growth strategy, will be dependent on the continuing efforts of the management teams of our
future businesses. We will seek to provide these individuals with equity incentives in our company and to have employment agreements
with certain persons we have identified as key to their businesses. However, these measures may not prevent these individuals from
leaving their employment. The loss of services of one or more of these individuals may materially adversely affect our financial
condition, business and results of operations.
We may experience difficulty as we evaluate, acquire and
integrate businesses that we may acquire, which could result in drains on our resources, including the attention of our management,
and disruptions of our on-going business.
We intend to acquire small businesses in various industries.
Generally, because such businesses are privately held, we may experience difficulty in evaluating potential target businesses as
much of the information concerning these businesses is not publicly available. Therefore, our estimates and assumptions used to
evaluate the operations, management and market risks with respect to potential target businesses may be subject to various risks
and uncertainties. Further, the time and costs associated with identifying and evaluating potential target businesses and their
industries may cause a substantial drain on our resources and may divert our management team’s attention away from the operations
of our businesses for significant periods of time.
In addition, we may have difficulty effectively integrating
and managing acquisitions. The management or improvement of businesses we acquire may be hindered by a number of factors, including
limitations in the standards, controls, procedures and policies implemented in connection with such acquisitions. Further, the
management of an acquired business may involve a substantial reorganization of the business’ operations resulting in the
loss of employees and customers or the disruption of our ongoing businesses. We may experience greater than expected costs or difficulties
relating to an acquisition, in which case, we might not achieve the anticipated returns from any particular acquisition.
We face competition for businesses that fit our acquisition
strategy and, therefore, we may have to acquire targets at sub-optimal prices or, alternatively, forego certain acquisition opportunities.
We have been formed to acquire and manage small businesses.
In pursuing such acquisitions, we expect to face strong competition from a wide range of other potential purchasers. Although the
pool of potential purchasers for such businesses is typically smaller than for larger businesses, those potential purchasers can
be aggressive in their approach to acquiring such businesses. Furthermore, we expect that we may need to use third-party financing
in order to fund some or all of these potential acquisitions, thereby increasing our acquisition costs. To the extent that other
potential purchasers do not need to obtain third-party financing or are able to obtain such financing on more favorable terms,
they may be in a position to be more aggressive with their acquisition proposals. As a result, in order to be competitive, our
acquisition proposals may need to be aggressively priced, including at price levels that exceed what we originally determined to
be fair or appropriate. Alternatively, we may determine that we cannot pursue on a cost-effective basis what would otherwise be
an attractive acquisition opportunity.
We may not be able to successfully fund future acquisitions
of new businesses due to the unavailability of debt or equity financing on acceptable terms, which could impede the implementation
of our acquisition strategy.
In order to make future acquisitions, we intend to raise capital
primarily through debt financing, primarily at our operating company level, additional equity offerings, the sale of equity or
assets of our businesses, offering equity in our company or our businesses to the sellers of target businesses or by undertaking
a combination of any of the above. Because the timing and size of acquisitions cannot be readily predicted, we may need to be able
to obtain funding on short notice to benefit fully from attractive acquisition opportunities. Such funding may not be available
on acceptable terms. In addition, the level of our indebtedness may impact our ability to borrow at our company level. The sale
of additional shares of any class of equity will also be subject to market conditions and investor demand for such shares at prices
that may not be in the best interest of our shareholders. These risks may materially adversely affect our ability to pursue our
acquisition strategy.
We may change our management and acquisition strategies
without the consent of our shareholders, which may result in a determination by us to pursue riskier business activities.
We may change our strategy at any time without the consent of
our shareholders, which may result in our acquiring businesses or assets that are different from, and possibly riskier than, the
strategy described in this report. A change in our strategy may increase our exposure to interest rate and currency fluctuations,
subject us to regulation under the Investment Company Act of 1940, as amended, which we refer to as the Investment Company Act,
or subject us to other risks and uncertainties that affect our operations and profitability.
We have identified material weaknesses in our internal
control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able
to accurately report our financial results and prevent fraud. As a result, current and potential shareholders could lose confidence
in our financial statements, which would harm the trading price of our common shares.
Companies that file reports with the Securities and Exchange
Commission, or the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX
404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports
on Form 10-K filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, to contain a report from management
assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended
by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated filers or
accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting
to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller
reporting companies, like us, are not required to include an attestation report of their auditors in annual reports.
A report of our management is included under Item 9A. “Controls
and Procedures.” We are a smaller reporting company and, consequently, are not required to include an attestation report
of our auditor in our annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404,
we can provide no assurance that we will receive a positive attestation from our independent auditors.
During its evaluation of the effectiveness
of internal control over financial reporting as of December 31, 2019, management identified material weaknesses. These material
weaknesses were associated with our lack of (i) appropriate policies and procedures to evaluate the proper accounting and disclosures
of key documents and agreements, (ii) adequate segregation of duties with our limited accounting personnel and reliance upon outsourced
accounting services and (iii) sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge
and experience in the application of GAAP commensurate with our financial reporting requirements. We are undertaking remedial
measures, which measures will take time to implement and test, to address these material weaknesses. There can be no assurance
that such measures will be sufficient to remedy the material weaknesses identified or that additional material weaknesses or other
control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our
internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail
to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect
the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results
could cause investors to lose confidence in our reported financial information and lead to a decline in our share price.
Because our Chief Executive Officer controls our manager
and owns a controlling interest in our company, he is able to designate our directors and officers and control all major decisions
and corporate actions and, so long as our Chief Executive Officer retains ownership of a majority of our outstanding common shares
and control over our manager, you will not be able to elect any directors or have a meaningful say in any major decisions or corporate
actions, which could decrease the price and marketability of our shares.
Our Chief Executive Officer owns 2,625,000 common shares, or
approximately 82.92% of our outstanding common shares. Our Chief Executive Officer also controls our manager. As a result, our
Chief Executive Officer is able to elect all of our directors, appoint all of our officers, control the shareholder vote on any
major decision or corporate action and control our operations. Our Chief Executive Officer can unilaterally decide major corporate
actions such as mergers, acquisitions, future securities offerings, amendments to our operating agreement and other significant
company events. Our Chief Executive Officer’s unilateral control over us could decrease the price and marketability of our
common shares.
If we are unable to generate sufficient cash flow from
the anticipated future dividends and interest payments that we expect to receive from Neese, Goedeker or our future businesses,
we may not be able to make distributions to our shareholders.
We expect that our company’s primary business will be
the holding and managing of controlling interests in Neese, Goedeker and the other operating businesses that we expect to acquire
in the future. Therefore, we will be dependent upon the ability of our businesses to generate cash flows and, in turn, distribute
cash to us in the form of interest and principal payments on indebtedness and distributions on equity to enable us, first, to satisfy
our financial obligations including payment of the distributions on the series A preferred shares if and when they are issued and,
second, to make other distributions to our common shareholders. The ability of our future businesses to make payments to us may
also be subject to limitations under laws of the jurisdictions in which they are incorporated or organized. If, as a consequence
of these various restrictions or otherwise, we are unable to generate sufficient cash flow from our businesses, we may not be able
to declare, or may have to delay or cancel payment of, distributions on the series A preferred shares, if and when they are issued,
and distributions to our common shareholders.
In addition, the put price and profit allocation will be payment
obligations of our company and, as a result, will be senior in right to the payment of any distributions to our shareholders. Further,
we are required to make a profit allocation to our manager upon satisfaction of applicable conditions to payment. See Item 1. “Business—Our
Manager—Our Manager as an Equity Holder” for more information about our manager’s put right and profit allocation.
Our existing master lease agreement contains certain terms
that could limit our ability to operate and could materially adversely affect our financial condition.
The cash portion of the acquisition of Neese was financed under
a capital lease transaction for Neese’s equipment with Utica Leaseco, LLC, pursuant to a master lease agreement, as amended
in October 2017, for the purchase of equipment used in our business, under which we are obligated to repay Utica Leaseco, LLC for
certain of Neese’s equipment that it leases to 1847 Neese and Neese. In connection with the master lease agreement, we granted
Utica Leaseco, LLC a security interest in and lien on all of Neese’s equipment, accounts receivable, general intangibles,
inventory and certain other properties.
The master lease agreement contains customary events of default,
including non-payment of rent or other payment within five (5) days of the due date, failure to maintain, use or operate the equipment
in compliance with applicable law, or failure to perform any other terms, covenants or conditions under the master lease agreement.
If an event of default were to occur, Utica Leaseco, LLC may pursue all remedies available to it, including terminating our right
to use the equipment and other rights but not our obligations under the master lease agreement, and recover liquidating damages.
The loss of our ability to use the equipment could limit our ability to operate and could materially adversely affect our financial
condition.
Our revolving loans and term loans contain certain terms
that could materially adversely affect our financial condition.
We and our subsidiaries are parties to certain revolving loans
and term loans with third parties, which are secured by the assets of our subsidiaries. The loans agreements contain customary
representations, warranties and affirmative and negative financial and other covenants. If an event of default were to occur under
any of these loans, the lender thereto may pursue all remedies available to it, including declaring the obligations under its respective
loan immediately due and payable, which could materially adversely affect our financial condition. See Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further
discussion regarding our borrowing activities.
In the future, we may seek to enter into other credit
facilities to help fund our acquisition capital and working capital needs. These credit facilities may expose us to additional
risks associated with leverage and may inhibit our operating flexibility and reduce cash flow available for payment of the distributions
on the series A preferred shares and for other distributions to our shareholders.
We may seek to enter into other credit facilities with third-party
lenders to help fund our acquisitions. Such credit facilities will likely require us to pay a commitment fee on the undrawn amount
and will likely contain a number of affirmative and restrictive covenants.
If we violate any such covenants, our lenders could accelerate
the maturity of any debt outstanding and we may be prohibited from making any distributions to our shareholders. Such debt may
be secured by our assets, including the stock we may own in businesses that we may acquire in the future and the rights we have
under intercompany loan agreements that we may enter into in the future with our businesses. Our ability to meet our debt service
obligations may be affected by events beyond our control and will depend primarily upon cash produced by businesses that we currently
manage and may acquire in the future and distributed or paid to our company. Any failure to comply with the terms of our indebtedness
may have a material adverse effect on our financial condition.
In addition, we expect that such credit facilities will bear
interest at floating rates which will generally change as interest rates change. We will bear the risk that the rates that we are
charged by our lenders will increase faster than we can grow the cash flow from our businesses or businesses that we may acquire
in the future, which could reduce profitability, materially adversely affect our ability to service our debt, cause us to breach
covenants contained in our third-party credit facilities and reduce cash flow available for distribution.
We may engage in a business transaction with one or more
target businesses that have relationships with our executive officers, our directors, our manager, our manager’s employees
or our manager’s operating partners, or any of their respective affiliates, which may create or present conflicts of interest.
We may decide to engage in a business transaction with one or
more target businesses with which our executive officers, our directors, our manager, our manager’s employees, our manager’s
operating partners, or any of their respective affiliates, have a relationship, which may create or present conflicts of interest.
Regardless of whether we obtain a fairness opinion from an independent investment banking firm with respect to such a transaction,
conflicts of interest may still exist with respect to a particular acquisition and, as a result, the terms of the acquisition of
a target business may not be as advantageous to our shareholders as it would have been absent any conflicts of interest.
The operational objectives and business plans of our businesses
may conflict with our operational and business objectives or with the plans and objective of another business we own and operate.
Our businesses will operate in different industries and face
different risks and opportunities depending on market and economic conditions in their respective industries and regions. A business’
operational objectives and business plans may not be similar to our objectives and plans or the objectives and plans of another
business that we own and operate. This could create competing demands for resources, such as management attention and funding needed
for operations or acquisitions, in the future.
If, in the future, we cease to control and operate our
businesses or other businesses that we acquire in the future or engage in certain other activities, we may be deemed to be an investment
company under the Investment Company Act.
We have the ability to make investments in businesses that we
will not operate or control. If we make significant investments in businesses that we do not operate or control, or that we cease
to operate or control, or if we commence certain investment-related activities, we may be deemed to be an investment company under
the Investment Company Act. Our decision to sell a business will be based upon financial, operating and other considerations rather
than a plan to complete a sale of a business within any specific time frame. If we were deemed to be an investment company, we
would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or
modify our investments or organizational structure or our contract rights to fall outside the definition of an investment company.
Registering as an investment company could, among other things, materially adversely affect our financial condition, business and
results of operations, materially limit our ability to borrow funds or engage in other transactions involving leverage and require
us to add directors who are independent of us or our manager and otherwise will subject us to additional regulation that will be
costly and time-consuming.
Risks Related to Our Relationship with Our Manager
Termination of the management services agreement will
not affect our manager’s rights to receive profit allocations and removal of our manager may cause us to incur significant
fees.
Our manager owns all of our allocation shares, which generally
will entitle our manager to receive a profit allocation as a form of preferred distribution. In general, this profit allocation
is designed to pay our manager 20% of the excess of the gains upon dispositions of our subsidiaries, plus an amount equal to the
net income of such subsidiaries since their acquisition by our company, over an annualized hurdle rate. If our manager resigns
or is removed, for any reason, it will remain the owner of our allocation shares. It will therefore remain entitled to all profit
allocations while it holds our allocation shares regardless of whether it is terminated as our manager. If we terminate our manager,
it may therefore be difficult or impossible for us to find a replacement to serve the function of our manager, because we would
not be able to force our manager to transfer its allocation shares to a replacement manager so that the replacement manager could
be entitled to a profit allocation. Therefore, as a practical matter, it may be difficult for us to replace our manager without
its cooperation. If it becomes necessary to replace our manager and we are unable to replace our manager without its cooperation,
we may be unable to continue to manage our operations effectively and our business may fail.
If we terminate the management services agreement with our manager,
any fees, costs and expenses already earned or otherwise payable to our manager upon termination would become immediately due.
Moreover, if our manager were to be removed and our management services agreement terminated by a vote of our board of directors
and a majority of our common shares other than common shares beneficially owned by our manager, we would also owe a termination
fee to our manager on top of the other fees, costs and expenses. In addition, the management services agreement is silent as to
whether termination of our manager “for cause” would result in a termination fee; there is therefore a risk that the
agreement may be interpreted to entitle our manager to a termination fee even if terminated “for cause”. The termination
fee would equal twice the sum of the amount of the quarterly management fees calculated with respect to the four fiscal quarters
immediately preceding the termination date of the management services agreement. As a result, we could incur significant management
fees as a result of the termination of our manager, which may increase the risk that our business may be unable to meet its financial
obligations or otherwise fail.
Mr. Ellery W. Roberts, our Chief Executive Officer, director
and majority shareholder, controls our manager. If some event were to occur to cause Mr. Roberts (or his designated successor,
heirs, beneficiaries or permitted assigns) not to control our manager without the prior written consent of our board of directors,
our manager would be considered terminated under our agreement. In addition, in his capacity as one of our directors and our majority
shareholder, Mr. Roberts has the power to cause us to voluntarily terminate the management services agreement, although such voluntary
termination would also require the vote of a majority of our board of directors. As such, Mr. Roberts may directly or jointly cause
the adverse consequences from termination of our manager discussed above to occur.
Our manager and the members of our management team may
engage in activities that compete with us or our businesses.
Although our Chief Executive Officer intends to devote substantially
all of his time to the affairs of our company and our manager must present all opportunities that meet our company’s acquisition
and disposition criteria to our board of directors, neither our manager nor our Chief Executive Officer is expressly prohibited
from investing in or managing other entities. In this regard, the management services agreement and the obligation to provide management
services will not create a mutually exclusive relationship between our manager and its affiliates, on the one hand, and our company,
on the other. See Item 1. “Business—Our Manager” for more information about our relationship with our manager
and our management team.
Our manager need not present an acquisition opportunity
to us if our manager determines on its own that such acquisition opportunity does not meet our company’s acquisition criteria.
Our manager will review any acquisition opportunity to determine
if it satisfies our company’s acquisition criteria, as established by our board of directors from time to time. If our manager
determines, in its sole discretion, that an opportunity fits our criteria, our manager will refer the opportunity to our board
of directors for its authorization and approval prior to signing a letter of intent, indication of interest or similar document
or agreement. Opportunities that our manager determines do not fit our criteria do not need to be presented to our board of directors
for consideration. In addition, upon a determination by our board of directors not to promptly pursue an opportunity presented
to it by our manager, in whole or in part, our manager will be unrestricted in its ability to pursue such opportunity, or any part
that we do not promptly pursue, on its own or refer such opportunity to other entities, including its affiliates. If such an opportunity
is ultimately profitable, we will have not participated in such opportunity. See Item 1. “Business—Our Manager—Acquisition
and Disposition Opportunities” for more information about our company’s current acquisition criteria.
Our Chief Executive Officer, Mr. Ellery W. Roberts, controls
our manager and, as a result we may have difficulty severing ties with Mr. Roberts.
Under the terms of the management services agreement, our board
of directors may, after due consultation with our manager, at any time request that our manager replace any individual seconded
to our company, and our manager will, as promptly as practicable, replace any such individual. However, because Mr. Roberts controls
our manager, we may have difficulty completely severing ties with Mr. Roberts absent terminating the management services agreement
and our relationship with our manager. Further, termination of the management services agreement could give rise to a significant
financial obligation of our company, which may have a material adverse effect on our business and financial condition. See Item
1. “Business—Our Manager” for more information about our relationship with our manager.
If the management services agreement is terminated, our
manager, as holder of the allocation shares, has the right to cause our company to purchase its allocation shares, which may have
a material adverse effect on our financial condition.
If: (i) the management services agreement is terminated at any
time other than as a result of our manager’s resignation, subject to (ii); or (ii) our manager resigns, our manager will
have the right, but not the obligation, for one year from the date of termination or resignation, as the case may be, to cause
our company to purchase the allocation shares for the put price. The put price shall be equal to, as of any exercise date: (i)
if we terminate the management services agreement, the sum of two separate, independently made calculations of the aggregate amount
of the “base put price amount” as of such exercise date; or (ii) if our manager resigns, the average of two separate,
independently made calculations of the aggregate amount of the “base put price amount” as of such exercise date. If
our manager elects to cause our company to purchase its allocation shares, we are obligated to do so and, until we have done so,
our ability to conduct our business, including our ability to incur debt, to sell or otherwise dispose of our property or assets,
to engage in certain mergers or consolidations, to acquire or purchase the property, assets or stock of, or beneficial interests
in, another business, or to declare and pay distributions, would be restricted. These financial and operational obligations of
our company may have a material adverse effect on our financial condition, business and results of operations. See Item 1. “Business—Our
Manager—Our Manager as an Equity Holder—Supplemental Put Provision” for more information about our manager’s
put right and our obligations relating thereto, as well as the definition and calculation of the base put price amount.
If the management services agreement is terminated, we
will need to change our name and cease our use of the term “1847”, which in turn could have a material adverse impact
upon our business and results of operations as we would be required to expend funds to create and market a new name.
Our manager controls our rights to the term “1847”
as it is used in the name of our company. Our company and any businesses that we acquire must cease using the term “1847,”
including any trademark based on the name of our company that may be licensed to them by our manager under the license provisions
of our management services agreement, entirely in their businesses and operations within 180 days of our termination of the management
services agreement. The sublicense provisions of the management services agreement would require our company and its businesses
to change their names to remove any reference to the term “1847” or any reference to trademarks licensed to them by
our manager. This also would require us to create and market a new name and expend funds to protect that name, which may have a
material adverse effect on our business and results of operations.
We have agreed to indemnify our manager under the management
services agreement that may result in an indemnity payment that could have a material adverse impact upon our business and results
of operations.
The management services agreement provides that we will indemnify,
reimburse, defend and hold harmless our manager, together with its employees, officers, members, managers, directors and agents,
from and against all losses (including lost profits), costs, damages, injuries, taxes, penalties, interests, expenses, obligations,
claims and liabilities of any kind arising out of the breach of any term or condition in the management services agreement or the
performance of any services under such agreement except by reason of acts or omissions constituting fraud, willful misconduct or
gross negligence. If our manager is forced to defend itself in any claims or actions arising out of the management services agreement
for which we are obligated to provide indemnification, our payment of such indemnity could have a material adverse impact upon
our business and results of operations.
Our manager can resign on 120 days’ notice and we
may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could materially
adversely affect our financial condition, business and results of operations, as well as the market price of our shares.
Our manager has the right, under the management services agreement,
to resign at any time on 120 days written notice, whether we have found a replacement or not. If our manager resigns, we may not
be able to contract with a new manager or hire internal management with similar expertise and ability to provide the same or equivalent
services on acceptable terms within 120 days, or at all, in which case our operations are likely to experience a disruption, our
financial condition, business and results of operations, as well as our ability to pay distributions are likely to be materially
adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management, acquisition
activities and supervision of our business is likely to suffer if we are unable to identify and reach an agreement with a single
institution or group of executives having the experience and expertise possessed by our manager and its affiliates. Even if we
are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity
with our businesses may result in additional costs and time delays that could materially adversely affect our financial condition,
business and results of operations as well as the market price of our shares.
The amount recorded for the allocation shares may be subject
to substantial period-to-period changes, thereby significantly adversely impacting our results of operations.
Our company will record the allocation shares at the redemption
value at each balance sheet date by recording any change in fair value through its income statement as a dividend between net income
and net income available to common shareholders. The redemption value of the allocation shares is largely related to the value
of the profit allocation that our manager, as holder of the allocation shares, will receive. The redemption value of the allocation
shares may fluctuate on a period-to-period basis based on the distributions we pay to our common shareholders, the earnings of
our businesses and the price of our common shares, which fluctuation may be significant, and could cause a material adverse effect
on our company’s results of operations. See Item 1. “Business—Our Manager—Our Manager as an Equity Holder”
for more information about the terms and calculation of the profit allocation and any payments under the supplemental put provisions
of our operating agreement.
We cannot determine the amount of management fee that
will be paid to our manager over time with certainty, which management fee may be a significant cash obligation of our company
and may reduce the cash available for operations and distributions to our shareholders.
Our manager’s management fee will be calculated by reference
to our company’s adjusted net assets, which will be impacted by the following factors:
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the acquisition or disposition of businesses by our company;
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organic growth, add-on acquisitions and dispositions by our businesses; and
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the performance of our businesses.
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We cannot predict these factors, which may cause significant
fluctuations in our adjusted net assets and, in turn, impact the management fee we pay to our manager. Accordingly, we cannot determine
the amount of management fee that will be paid to our manager over time with any certainty, which management fee may represent
a significant cash obligation of our company and may reduce the cash available for our operations and distributions to our shareholders.
We must pay our manager the management fee regardless
of our performance. Therefore, our manager may be induced to increase the amount of our assets rather than the performance of our
businesses.
Our manager is entitled to receive a management fee that is
based on our adjusted net assets, as defined in the management services agreement, regardless of the performance of our businesses.
In this respect, the calculation of the management fee is unrelated to our company’s net income. As a result, the management
fee may encourage our manager to increase the amount of our assets by, for example, recommending to our board of directors the
acquisition of additional assets, rather than increase the performance of our businesses. In addition, payment of the management
fee may reduce or eliminate the cash we have available for distributions to our shareholders.
The management fee is based solely upon our adjusted net
assets; therefore, if in a given year our performance declines, but our adjusted net assets remain the same or increase, the management
fee we pay to our manager for such year will increase as a percentage of our net income and may reduce the cash available for distributions
to our shareholders.
The management fee we pay to our manager will be calculated
solely by reference to our company’s adjusted net assets. If in a given year the performance of our company declines, but
our adjusted net assets remain the same or increase, the management fee we pay to our manager for such year will increase as a
percentage of our net income and may reduce the cash available for distributions to our shareholders. See Item 1. “Business—Our
Manager—Our Manager as a Service Provider—Management Fee” for more information about the terms and calculation
of the management fee.
The amount of profit allocation to be paid to our manager
could be substantial. However, we cannot determine the amount of profit allocation that will be paid over time or the put price
with any certainty.
We cannot determine the amount of profit allocation that will
be paid over time or the put price with any certainty. Such determination would be dependent on, among other things, the number,
type and size of the acquisitions and dispositions that we make in the future, the distributions we pay to our shareholders, the
earnings of our businesses and the market value of common shares from time to time, factors that cannot be predicted with any certainty
at this time. Such factors will have a significant impact on the amount of any profit allocation to be paid to our manager, especially
if our share price significantly increases. See Item 1. “Business—Our Manager—Our Manager as an Equity Holder—Manager’s
Profit Allocation” for more information about the calculation and payment of profit allocation. Any amounts paid in respect
of the profit allocation are unrelated to the management fee earned for performance of services under the management services agreement.
The management fee and profit allocation to be paid to
our manager may significantly reduce the amount of cash available for distributions to shareholders and for operations.
Under the management services agreement, our company will be
obligated to pay a management fee to and, subject to certain conditions, reimburse the costs and out-of-pocket expenses of our
manager incurred on behalf of our company in connection with the provision of services to our company. Similarly, our businesses
will be obligated to pay fees to and reimburse the costs and expenses of our manager pursuant to any offsetting management services
agreements entered into between our manager and our businesses, or any transaction services agreements to which such businesses
are a party. In addition, our manager, as holder of the allocation shares, will be entitled to receive a profit allocation upon
satisfaction of applicable conditions to payment and may be entitled to receive the put price upon the occurrence of certain events.
While we cannot quantify with any certainty the actual amount of any such payments in the future, we do expect that such amounts
could be substantial. See Item 1. “Business—Our Manager” for more information about these payment obligations
of our company. The management fee, put price and profit allocation will be payment obligations of our company and, as a result,
will be senior in right to the payment of any distributions to our shareholders. Likewise, the profit allocation may also significantly
reduce the cash available for operations.
Our manager’s influence on conducting our business
and operations, including acquisitions, gives it the ability to increase its fees and compensation to our Chief Executive Officer,
which may reduce the amount of cash available for distributions to our shareholders.
Under the terms of the management services agreement, our manager
is paid a management fee calculated as a percentage of our company’s adjusted net assets for certain items and is unrelated
to net income or any other performance base or measure. See Item 1. “Business—Our Manager—Our Manager as a Service
Provider—Management Fee” for more information about the calculation of the management fee. Our manager, which Ellery
W. Roberts, our Chief Executive Officer, controls, may advise us to consummate transactions, incur third-party debt or conduct
our operations in a manner that may increase the amount of fees paid to our manager which, in turn, may result in higher compensation
to Mr. Roberts because his compensation is paid by our manager from the management fee it receives from our company.
Fees paid by our company and our businesses pursuant to
transaction services agreements do not offset fees payable under the management services agreement and will be in addition to the
management fee payable by our company under the management services agreement.
The management services agreement provides that businesses that
we may acquire in the future may enter into transaction services agreements with our manager pursuant to which our businesses will
pay fees to our manager. See Item 1. “Business—Our Manager—Our Manager as a Service Provider” for more
information about these agreements. Unlike fees paid under the offsetting management services agreements, fees that are paid pursuant
to such transaction services agreements will not reduce the management fee payable by our company. Therefore, such fees will be
in addition to the management fee payable by our company or offsetting management fees paid by businesses that we may acquire in
the future.
The fees to be paid to our manager pursuant to these transaction
service agreements will be paid prior to any principal, interest or dividend payments to be paid to our company by our businesses,
which will reduce the amount of cash available for distributions to our shareholders.
Our manager’s profit allocation may induce it to
make decisions and recommend actions to our board of directors that are not optimal for our business and operations.
Our manager, as holder of all of the allocation shares in our
company, will receive a profit allocation based on the extent to which gains from any sales of our subsidiaries plus their net
income since the time they were acquired exceed a certain annualized hurdle rate. As a result, our manager may be encouraged to
make decisions or to make recommendations to our board of directors regarding our business and operations, the business and operations
of our businesses, acquisitions or dispositions by us or our businesses and distributions to our shareholders, any of which factors
could affect the calculation and payment of profit allocation, but which may otherwise be detrimental to our long-term financial
condition and performance.
The obligations to pay the management fee and profit allocation,
including the put price, may cause our company to liquidate assets or incur debt.
If we do not have sufficient liquid assets to pay the management
fee and profit allocation, including the put price, when such payments are due and payable, we may be required to liquidate assets
or incur debt in order to make such payments. This circumstance could materially adversely affect our liquidity and ability to
make distributions to our shareholders. See Item 1. “Business—Our Manager” for more information about these payment
obligations of our company.
Risks Related to Taxation
Our shareholders will be subject to taxation on their
share of our company’s taxable income, whether or not they receive cash distributions from our company.
Our company is a limited liability company and will be classified
as a partnership for U.S. federal income tax purposes. Consequently, our shareholders will be subject to U.S. federal income taxation
and, possibly, state, local and foreign income taxation on their share of our company’s taxable income, whether or not they
receive cash distributions from our company. There is, accordingly, a risk that our shareholders may not receive cash distributions
equal to their portion of our company’s taxable income or even in an amount sufficient to satisfy the tax liability that
results from that income. This risk is attributable to a number of variables, such as results of operations, unknown liabilities,
government regulations, financial covenants relating to the debt of our company, funds needed for future acquisitions and/or to
satisfy short- and long-term working capital needs of our businesses, and the discretion and authority of our company’s board
of directors to make distributions or modify our distribution policy.
As a partnership, our company itself will not be subject to
U.S. federal income tax (except as may be imposed under certain recently enacted partnership audit rules), although it will file
an annual partnership information return with the IRS. The information return will report the results of our company’s activities
and will contain a Schedule K-1 for each company shareholder reflecting allocations of profits or losses (and items thereof) to
members of our company, that is, to the shareholders. Each partner of a partnership is required to report on his or her income
tax return his or her share of items of income, gain, loss, deduction, credit, and other items of the partnership (in each case,
as reflected on such Schedule K-1) without regard to whether cash distributions are received. Each holder will be required to report
on his or her tax return his or her allocable share of company income, gain, loss, deduction, credit and other items for our company’s
taxable year that ends with or within the holder’s taxable year. Thus, holders of common shares will be required to report
taxable income (and thus be subject to significant income tax liability) without a corresponding current receipt of cash if our
company were to recognize taxable income and not make cash distributions to the shareholders.
Generally, the determination of a holder’s distributive
share of any item of income, gain, loss, deduction, or credit of a partnership is governed by the operating agreement. The income
tax laws governing the allocation of company income, gains, losses, deductions or credits set forth in a particular Schedule K-1
are complex and there can be no assurance that the IRS would not successfully challenge any allocation set forth in any such Schedule
K-1. Whether an allocation set forth in any particular K-1 issued to a shareholder will be accepted by the IRS depends on a facts
and circumstances analysis of the underlying economic arrangement of our company’s shareholders. If the IRS were to prevail
in challenging the allocations provided by the operating agreement, the amount of income or loss allocated to holders for U.S.
federal income tax purposes could be increased or reduced or the character of the income or loss could be modified. See “Material
U.S. Federal Income Tax Considerations” included in our registration statement on Form S-1, as amended (File No. 333-236041),
for more information.
All of our company’s income could be subject to
an entity-level tax in the United States, which could result in a material reduction in cash flow available for distribution to
shareholders and thus could result in a substantial reduction in the value our shares.
Based on the number of shareholders we have and because our
shares are listed for trading on the over-the-counter market, we believe that our company will be regarded as a publicly-traded
partnership. Under the federal tax laws, a publicly-traded partnership generally will be treated as a corporation for U.S. federal
income tax purposes. A publicly-traded partnership will be treated as a partnership, however, and not as a corporation, for U.S.
federal tax purposes, so long as 90% or more of its gross income for each taxable year in which it is publicly traded constitutes
“qualifying income” within the meaning of section 7704(d) of the Internal Revenue Code of 1986, as amended, or the
Code, and our company is not required to register under the Investment Company Act. Qualifying income generally includes dividends,
interest (other than interest derived in the conduct of a lending or insurance business or interest the determination of which
depends in whole or in part on the income or profits of any person), certain real property rents, certain gain from the sale or
other disposition of real property, gains from the sale of stock or debt instruments which are held as capital assets, and certain
other forms of “passive-type” income. Our company expects to realize sufficient qualifying income to satisfy the qualifying
income exception. Our company also expects that we will not be required to register under the Investment Company Act.
In certain cases, income that would otherwise qualify for the
qualifying income exception may not so qualify if it is considered to be derived from an active conduct of a business. For example,
the IRS may assert that interest received by our company from its subsidiaries is not qualifying income because it is derived in
the conduct of a lending business. If our company fails to satisfy the qualifying income exception or is required to register under
the Investment Company Act, our company will be classified as a corporation for U.S. federal (and certain state and local) income
tax purposes, and shareholders of our company would be treated as shareholders in a domestic corporation. Our company would be
required to pay federal income tax at regular corporate rates on its income. In addition, our company would likely be liable for
state and local income and/or franchise taxes on its income. Distributions to the shareholders would constitute ordinary dividend
income (taxable at then existing ordinary income rates) or, in certain cases, qualified dividend income (which is generally subject
to tax at reduced tax rates) to such holders to the extent of our company’s earnings and profits, and the payment of these
dividends would not be deductible to our company. Taxation of our company as a corporation could result in a material reduction
in distributions to our shareholders and after-tax return and, thus, would likely result in a substantial reduction in the value
of, or materially adversely affect the market price of, our shares.
The present U.S. federal income tax treatment of an investment
in our shares may be modified by administrative, legislative, or judicial interpretation at any time, and any such action may affect
investments previously made. For example, changes to the U.S. federal tax laws and interpretations thereof could make it more difficult
or impossible to meet the qualifying income exception for our company to be classified as a partnership, and not as a corporation,
for U.S. federal income tax purposes, necessitate that our company restructure its investments, or otherwise adversely affect an
investment in our shares.
In addition, our company may become subject to an entity level
tax in one or more states. Several states are evaluating ways to subject partnerships to entity level taxation through the imposition
of state income, franchise, or other forms of taxation. If any state were to impose a tax upon our company as an entity, our distributions
to you would be reduced.
Complying with certain tax-related requirements may cause
our company to forego otherwise attractive business or investment opportunities or enter into acquisitions, borrowings, financings,
or arrangements our company may not have otherwise entered into.
In order for our company to be treated as a partnership for
U.S. federal income tax purposes and not as a publicly traded partnership taxable as a corporation, our company must meet the qualifying
income exception discussed above on a continuing basis and our company must not be required to register as an investment company
under the Investment Company Act. In order to effect such treatment, our company may be required to invest through foreign or domestic
corporations, forego attractive business or investment opportunities or enter into borrowings or financings our company (o any
of our subsidiaries, as the case may be) may not have otherwise entered into. This may adversely affect our ability to operate
solely to maximize our cash flow. In addition, our company may not be able to participate in certain corporate reorganization transactions
that would be tax free to our shareholders if our company were a corporation.
Non-corporate investors who are U.S. taxpayers will not
be able to deduct certain fees, costs or other expenses for U.S. federal income tax purposes.
Our company will pay a management fee (and possibly certain
transaction fees) to our manager. Our company will also pay certain costs and expenses incurred in connection with activities of
our manager. Our company intends to deduct such fees and expenses to the extent that they are reasonable in amount and are not
capital in nature or otherwise nondeductible. It is expected that such fees and other expenses will generally constitute miscellaneous
itemized deductions for non-corporate U.S. taxpayers who hold our shares. Under current law that is in effect for taxable years
beginning after December 31, 2017 and before January 1, 2026, non-corporate U.S. taxpayers may not deduct any such miscellaneous
itemized deductions for U.S. federal income tax purposes. A non-corporate U.S. taxpayer’s inability to deduct such items
could result in such holder reporting as his or her share of company taxable income an amount that exceeds any cash actually distributed
to such U.S. taxpayer for the year. Corporate U.S. holders of our shares generally will be able to deduct these fees, costs and
expenses in accordance with applicable U.S. federal income tax law.
A portion of the income arising from an investment in
our shares may be treated as unrelated business taxable income and taxable to certain tax-exempt holders despite such holders’
tax-exempt status.
Our company expects to incur debt that would be treated as “acquisition
indebtedness” under section 514 of the Code with respect to certain of its investments. To the extent our company recognizes
income from any investment with respect to which there is “acquisition indebtedness” during a taxable year, or to the
extent our company recognizes gain from the disposition of any investment with respect to which there is “acquisition indebtedness,”
a portion of the income received will be treated as unrelated business taxable income and taxable to tax-exempt investors. In addition,
if the IRS successfully asserts that we are engaged in a trade or business for U.S. federal income tax purposes (for example, if
it determines we are engaged in a lending business), then tax-exempt and in certain cases non-U.S. holders would be subject to
U.S. income tax on any income generated by such business. The foregoing only applies if the amount of such business income does
not cause our company to fail to meet the qualifying income test (which would happen if such income exceeded 10% of our gross income,
and in which case such failure would cause us to be taxable as a corporation).
A portion of the income arising from an investment in
our shares may be treated as income that is effectively connected with our conduct of a U.S. trade or business, which income would
be taxable to holders who are not U.S. taxpayers.
If the IRS successfully asserts that we are engaged in a trade
or business in the United States for U.S. federal income tax purposes (for example, if it determines we are engaged in a lending
business), then in certain cases non-U.S. holders would be subject to U.S. income tax on any income that is effectively connected
with such business. It could also cause the non-U.S. holder to be subject to U.S. federal income tax on a sale of his or her interest
in our company under recently enacted tax law. The foregoing only applies if the amount of such business income does not cause
our company to fail to meet the qualifying income test (which would happen if such income exceeded 10% of our gross income, and
in which case such failure would cause us to be taxable as a corporation).
Risks related to recently enacted legislation.
The rules dealing with U.S. federal income taxation are constantly
under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. No assurance can be
given as to whether, when or in what form the U.S. federal income tax laws applicable to us and our shareholders may be enacted.
Changes to the U.S. federal income tax laws and interpretations of U.S. federal income tax laws could adversely affect an investment
in our shares.
We cannot predict whether, when or to what extent new U.S. federal
tax laws, regulations, interpretations or rulings will be issued, nor is the long-term impact of recently enacted tax legislation
clear. Prospective investors are urged to consult their tax advisors regarding the effect of potential changes to the U.S. federal
income tax laws on an investment in our shares.
Risks Related to Land Management Services Business
The outbreak of the novel coronavirus (COVID-19)
is growing and its impacts may cause a material adverse effect on Neese’s business.
In December 2019, a novel strain of coronavirus, or COVID-19,
was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 150 countries. COVID-19 has also spread to every
state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13,
2020, the United States declared a national emergency with respect to COVID-19.
The potential impact and duration of COVID-19 could have repercussions
across regional and global economies and financial markets. The outbreak of COVID-19 in many countries continues to adversely impact
global economic activity and has contributed to significant volatility and negative pressure in financial markets and supply chains. The
continued spread of COVID-19 has had, and could have a significantly greater, material adverse effect on the U.S. economy
as a whole, as well as the local economy where Neese conducts its operations.
Many states and cities have reacted by instituting quarantines,
restrictions on travel, “stay at home” rules, and restrictions on the types of business that may continue to operate.
Many non-essential businesses have been forced to close. Although governmental officials in Iowa, where Neese conducts its business,
have not yet instated these measures, we expect that they may do so in the near future. These restrictions, if implemented, will
likely have a negative impact on business activity and the local economy and may adversely impact Neese’s operations.
Furthermore, Neese is dependent upon manufacturers to provide
it with all of the equipment and parts that it sells, and several have notified it of disruptions to their production and/or supply
chain related to the virus outbreak. Any business disruption or failure of these suppliers to meet delivery requirements and commitments
may cause delays in future shipments and potential lost or delayed revenue.
The rapid development and fluidity of this situation precludes
any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 and the current financial, economic and capital
markets environment, and future developments in the global supply chain and other areas present material uncertainty and risk with
respect to Neese’s performance, financial condition, results of operations and cash flows.
Adverse weather conditions, including
as a result of future climate change, may adversely affect the availability, quality and price of agricultural commodities and
agricultural commodity products, which may impact Neese’s business, as well as our operations and operating results.
Adverse weather conditions have historically
caused volatility in the agricultural commodity industry by causing crop failures or significantly reduced harvests, which may
affect the supply and pricing of agricultural commodities, and result in reduce demand for our products and services and negatively
affect the creditworthiness of agricultural producers who do business with us.
Severe adverse weather conditions,
such as hurricanes or severe storms, may also result in extensive property damage, extended business interruption, personal injuries
and other loss and damage to agricultural producers who do business with us. Our operations also rely on dependable and efficient
transportation services. A disruption in transportation services, as a result of weather conditions or otherwise, may also significantly
adversely impact our operations.
Additionally, the potential physical
impacts of climate change are uncertain and may vary by region. These potential effects could include changes in rainfall patterns,
water shortages, changing sea levels, changing storm patterns and intensities, and changing temperature levels that could adversely
impact our costs and business operations, the location and costs of global agricultural commodity production and the supply and
demand for agricultural commodities. These effects could be material to our results of operations, liquidity or capital resources.
Government policies and regulations,
particularly those affecting the agricultural sector and related industries, could adversely affect our operations and profitability.
Agricultural commodity production and
trade flows are significantly affected by government policies and regulations. Governmental policies affecting the agricultural
industry, such as taxes, tariffs, duties, subsidies, import and export restrictions on agricultural commodities and commodity products
and energy policies (including biofuels mandates), can influence industry profitability, the planting of certain crops versus other
uses of agricultural resources, the location and size of crop production, whether unprocessed or processed commodity products are
traded and the volume and types of imports and exports. In addition, international trade disputes can adversely affect agricultural
commodity trade flows by limiting or disrupting trade between countries or regions.
Increases in prices for, among other
things, food, fuel and crop inputs, such as fertilizers, have become the subject of significant discussion by governmental bodies
and the public throughout the world in recent years. In some countries, this has led to the imposition of policies such as price
controls, tariffs and export restrictions on agricultural commodities. Future governmental
policies, regulations or actions affecting our industries may adversely affect the supply of, demand for and prices of our products
and services, restrict our ability to do business and cause our financial results to suffer.
We depend upon manufacturers
who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us.
We do not manufacture any products
we sell, and instead purchase our products from manufacturers. Since we purchase products from many manufacturers under at-will
contracts and contracts which can be terminated without cause upon 90 days’ notice or less, or which expire without express
rights of renewal, manufacturers could discontinue sales to us immediately or upon short notice. In lieu of termination, a manufacturer
may also change the terms upon which it sells, for example, by raising prices or broadening distribution to third parties. For
these and other reasons, we may not be able to acquire desired merchandise in sufficient quantities or on acceptable terms in the
future.
Any significant interruption in the
supply of products by manufacturers could disrupt our ability to deliver merchandise to our customers in a timely manner, which
could have a material adverse effect on our business, financial condition and results of operations.
Manufacturers are subject to certain
risks that could adversely impact their ability to provide us with their products on a timely basis, including industrial accidents,
environmental events, strikes and other labor disputes, union organizing activity, disruptions in logistics or information systems,
loss or impairment of key manufacturing sites, product quality control, safety, and licensing requirements and other regulatory
issues, as well as natural disasters and other external factors over which neither they nor we have control. In addition, our operating
results depend to some extent on the orderly operation of our receiving and distribution processes, which depend on manufacturers’
adherence to shipping schedules and our effective management of our distribution facilities and capacity.
If a material interruption of supply
occurs, or a significant manufacturer ceases to supply us or materially decreases its supply to us, we may not be able to acquire
products with similar quality as the products we currently sell or to acquire such products in sufficient quantities to meet our
customers’ demands or on favorable terms to our business, any of which could adversely impact our business, financial condition
and results of operations.
Competition in Neese’s
business and the agricultural equipment industry could adversely affect our business.
Neese sells products and services into
a regional market. The principal competitive factors in our regional market includes product performance, innovation and quality,
distribution, customer service and price. The competitive environment in the Neese’s business and the agricultural equipment
industry includes global competitors and many regional and local competitors. These competitors have varying numbers of product
lines competing with our products and services and each has varying degrees of regional focus. An important part of the competition
within the agricultural equipment industry during the past decade has come from a variety of short-line and specialty manufacturers,
as well as indigenous regional competitors, with differing manufacturing and marketing methods. Due to industry conditions, including
the merger of certain large integrated competitors, we believe the agricultural equipment business continues to undergo change
and is becoming more competitive. Our inability to successfully compete with respect to product performance, innovation and
quality, distribution, customer service and price could adversely affect our results of operations and financial condition.
Risks Related to Retail and Appliances Business
The outbreak of the novel coronavirus (COVID-19)
is growing and its impacts may cause a material adverse effect on Goedeker’s business.
In December 2019, a novel strain of coronavirus, or COVID-19,
was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 150 countries. COVID-19 has also spread to every
state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13,
2020, the United States declared a national emergency with respect to COVID-19.
The potential impact and duration of COVID-19 could have repercussions
across regional and global economies and financial markets. The outbreak of COVID-19 in many countries continues to adversely impact
global economic activity and has contributed to significant volatility and negative pressure in financial markets and supply chains. The
continued spread of COVID-19 has had, and could have a significantly greater, material adverse effect on the U.S. economy
as a whole, as well as the local economy where Goedeker conducts its operations.
Many countries, states and cities have reacted by instituting
quarantines, restrictions on travel, “stay at home” rules, and restrictions on the types of business that may continue
to operate. On March 21, 2020, the government of St. Louis County, Missouri, where Goedeker operates, announced a stay at home
order that went into effect on March 23, 2019 and will last for 30 days. Pursuant to this order, non-essential business, including
Goedeker, were forced to close. Although much of Goedeker’s sales are completed online, these restrictions have had a negative
impact on business activity and may adversely impact Goedeker’s operations.
Furthermore, Goedeker is dependent upon suppliers to provide
it with all of the products that it sells. These restrictions, which may expand depending on the progression of the pandemic, have
impacted and may continue to impact suppliers and manufacturers of certain of Goedeker’s products. As a result, Goedeker
has faced and may continue to face delays or difficulty sourcing certain products, which could negatively affect its business and
financial results. Even if Goedeker is able to find alternate sources for such products, they may cost more, which could adversely
impact Goedeker’s profitability and financial condition. At this time, there is significant uncertainty relating to the potential
effect of COVID-19 on Goedeker’s business and the costs that it may incur as a result. Infections have become more widespread,
which may worsen the supply shortage or restrict third-party manufacturing or other operations.
Further, customers’ financial condition may be adversely
impacted as a result of the impacts of COVID-19 and efforts taken to prevent its spread, which could result in reduced demand for
Goedeker’s products and services.
The rapid development and fluidity of this situation precludes
any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 and the current financial, economic and capital
markets environment, and future developments in the global supply chain and other areas present material uncertainty and risk with
respect to Goedeker’s performance, financial condition, results of operations and cash flows.
If we fail to acquire new customers or retain existing
customers, or fail to do so in a cost-effective manner, we may not be able to achieve profitability.
Our success depends on our ability to acquire and retain customers
in a cost-effective manner. In order to expand our customer base, we must appeal to and acquire customers who have historically
used other means of commerce to purchase home goods and may prefer alternatives to our offerings, such as the websites of our competitors
or our suppliers’ own websites. We have made significant investments related to customer acquisition and expect to continue
to spend significant amounts to acquire additional customers. Our advertising efforts consist primarily of email marketing, affiliate
marketing, and to a lesser extent, social media. These efforts are expensive and may not result in the cost-effective acquisition
of customers. We cannot assure you that the net profit from new customers we acquire will ultimately exceed the cost of acquiring
those customers. If we fail to deliver a quality shopping experience, or if consumers do not perceive the products we offer to
be of high value and quality, we may not be able to acquire new customers. If we are unable to acquire new customers who purchase
products in numbers sufficient to grow our business, we may not be able to generate the scale necessary to drive beneficial network
effects with our suppliers or efficiencies in our logistics network, our net revenue may decrease, and our business, financial
condition and operating results may be materially adversely affected.
We believe that many of our new customers originate from word-of-
mouth and other non-paid referrals from existing customers. Therefore, we must ensure that our existing customers remain loyal
to us in order to continue receiving those referrals. If our efforts to satisfy our existing customers are not successful, we may
not be able to acquire new customers in sufficient numbers to continue to grow our business, or we may be required to incur significantly
higher marketing expenses in order to acquire new customers.
Our success depends in part on our ability to increase
our net revenue per active customer. If our efforts to increase customer loyalty and repeat purchasing as well as maintain high
levels of customer engagement are not successful, our growth prospects and revenue will be materially adversely affected.
Our ability to grow our business depends on our ability to retain
our existing customer base and generate increased revenue and repeat purchases from this customer base, and maintain high levels
of customer engagement. To do this, we must continue to provide our customers and potential customers with a unified, convenient,
efficient and differentiated shopping experience by:
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providing imagery, tools and technology that attract customers who historically would have bought elsewhere;
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maintaining a high-quality and diverse portfolio of products;
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delivering products on time and without damage; and
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maintaining and further developing our online platforms.
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If we fail to increase net revenue per active customer, generate
repeat purchases or maintain high levels of customer engagement, our growth prospects, operating results and financial condition
could be materially adversely affected.
Our business depends on our ability to build and maintain
strong brands. We may not be able to maintain and enhance our brands if we receive unfavorable customer complaints, negative publicity
or otherwise fail to live up to consumers’ expectations, which could materially adversely affect our business, results of
operations and growth prospects.
Maintaining and enhancing our brands is critical to expanding
our base of customers and suppliers. Our ability to maintain and enhance our brand depends largely on our ability to maintain customer
confidence in our product and service offerings, including by delivering products on time and without damage. If customers do not
have a satisfactory shopping experience, they may seek out alternative offerings from our competitors and may not return to our
sites as often in the future, or at all. In addition, unfavorable publicity regarding, for example, our practices relating to privacy
and data protection, product quality, delivery problems, competitive pressures, litigation or regulatory activity, could seriously
harm our reputation. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our customer
base and result in decreased revenue, which could adversely affect our business and financial results. A significant portion of
our customers’ brand experience also depends on third parties outside of our control, including suppliers and logistics providers
such as FedEx, UPS, DHL, the U.S. Postal Service and other third-party delivery agents. If these third parties do not meet our
or our customers’ expectations, our brands may suffer irreparable damage.
In addition, maintaining and enhancing these brands may require
us to make substantial investments, and these investments may not be successful. If we fail to promote and maintain our brands,
or if we incur excessive expenses in this effort, our business, operating results and financial condition may be materially adversely
affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brands may become increasingly
difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to provide high quality products
to our customers and a reliable, trustworthy and profitable sales channel to our suppliers, which we may not be able to do successfully.
Customer complaints or negative publicity about our sites, products,
delivery times, customer data handling and security practices or customer support, especially on blogs, social media websites and
our sites, could rapidly and severely diminish consumer use of our sites and consumer and supplier confidence in us and result
in harm to our brands.
Our efforts to expand our business into new brands, products,
services, technologies, and geographic regions will subject us to additional business, legal, financial, and competitive risks
and may not be successful.
Our business success depends to some extent on our ability to
expand our customer offerings by launching new brands and services and by expanding our existing offerings into new geographies.
Launching new brands and services or expanding geographically requires significant upfront investments, including investments in
marketing, information technology, and additional personnel. We may not be able to generate satisfactory revenue from these efforts
to offset these costs. Any lack of market acceptance of our efforts to launch new brands and services or to expand our existing
offerings could have a material adverse effect on our business, prospects, financial condition and results of operations. Further,
as we continue to expand our fulfillment capability or add new businesses with different requirements, our logistics networks become
increasingly complex and operating them becomes more challenging. There can be no assurance that we will be able to operate our
networks effectively.
We have also entered and may continue to enter into new markets
in which we have limited or no experience, which may not be successful or appealing to our customers. These activities may present
new and difficult technological and logistical challenges, and resulting service disruptions, failures or other quality issues
may cause customer dissatisfaction and harm our reputation and brand. Further, our current and potential competitors in new market
segments may have greater brand recognition, financial resources, longer operating histories and larger customer bases than we
do in these areas. As a result, we may not be successful enough in these newer areas to recoup our investments in them. If this
occurs, our business, financial condition and operating results may be materially adversely affected.
If we fail to manage our growth effectively, our business,
financial condition and operating results could be harmed.
To manage our growth effectively, we must continue to implement
our operational plans and strategies, improve and expand our infrastructure of people and information systems and expand, train
and manage our employee base. We have rapidly increased employee headcount since our inception to support the growth in our business.
To support continued growth, we must effectively integrate, develop and motivate a large number of new employees. We face significant
competition for personnel. Failure to manage our hiring needs effectively or successfully integrate our new hires may have a material
adverse effect on our business, financial condition and operating results.
Additionally, the growth of our business places significant
demands on our operations, as well as our management and other employees. For example, we typically launch hundreds of promotional
events across thousands of products each month on our sites via emails and personalized displays. These events require us to produce
updates of our sites and emails to our customers on a daily basis with different products, photos and text. Any surge in online
traffic and orders associated with such promotional activities places increased strain on our operations, including our logistics
network, and may cause or exacerbate slowdowns or interruptions. The growth of our business may require significant additional
resources to meet these daily requirements, which may not scale in a cost-effective manner or may negatively affect the quality
of our sites and customer experience. We are also required to manage relationships with a growing number of suppliers, customers
and other third parties. Our information technology systems and our internal controls and procedures may not be adequate to support
future growth of our supplier and employee base. If we are unable to manage the growth of our organization effectively, our business,
financial condition and operating results may be materially adversely affected.
Our ability to obtain continued financing is critical
to the growth of our business. We will need additional financing to fund operations, which additional financing may not be available
on reasonable terms or at all.
Our future growth, including the potential for future market
expansion will require additional capital. We will consider raising additional funds through various financing sources, including
the procurement of additional commercial debt financing. However, there can be no assurance that such funds will be available on
commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to execute
our growth strategy, and operating results may be adversely affected. Any additional debt financing will increase expenses and
must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility.
Our ability to obtain financing may be impaired by such factors
as the capital markets, both generally and specifically in our industry, which could impact the availability or cost of future
financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations,
are not sufficient to satisfy our capital needs, we may be required to decrease the pace of, or eliminate, our future product offerings
and market expansion opportunities and potentially curtail operations.
Our business is highly competitive. Competition presents
an ongoing threat to the success of our business.
Our business is rapidly evolving and intensely competitive,
and we have many competitors in different industries. Our competition includes furniture stores, big box retailers, department
stores, specialty retailers, and online retailers and marketplaces in the U.S., including:
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Furniture Stores: Ashley Furniture, Bob’s Discount Furniture, Havertys, Raymour & Flanagan, Rooms
To Go;
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Big Box Retailers: Bed Bath & Beyond, Home Depot, IKEA, Lowe’s, Target and Walmart;
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Department Stores: JCPenney and Macy’s;
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Specialty Retailers: Crate and Barrel, Ethan Allen, TJX, At Home, Williams Sonoma, Restoration Hardware, Arhaus,
Horchow, Room & Board, Mitchell Gold + Bob Williams;
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Online Retailers and Online Marketplaces: Amazon, Wayfair, Houzz and eBay; and
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Other: AJ Madison, Appliance Connection and US Appliance.
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We expect competition in e-commerce generally to continue to
increase. We believe that our ability to compete successfully depends upon many factors both within and beyond our control, including:
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the size and composition of our customer base;
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the number of suppliers and products we feature on our sites;
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our selling and marketing efforts;
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the quality, price and reliability of products we offer;
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the convenience of the shopping experience that we provide;
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our ability to distribute our products and manage our operations; and
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our reputation and brand strength.
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Many of our current competitors have, and potential competitors
may have, longer operating histories, greater brand recognition, larger fulfillment infrastructures, greater technical capabilities,
faster and less costly shipping, significantly greater financial, marketing and other resources and larger customer bases than
we do. These factors may allow our competitors to derive greater net revenue and profits from their existing customer base, acquire
customers at lower costs or respond more quickly than we can to new or emerging technologies and changes in consumer habits. These
competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and
adopt more aggressive pricing policies, which may allow them to build larger customer bases or generate net revenue from their
customer bases more effectively than we do.
Our success depends, in substantial part, on our continued
ability to market our products through search engines and social media platforms.
The marketing of our products depends on our ability to cultivate
and maintain cost-effective and otherwise satisfactory relationships with search engines and social media platforms, including
those operated by Google, Facebook, Bing and Yahoo! These platforms could decide to change their terms and conditions of use at
any time (and without notice) and/or significantly increase their fees. No assurances can be provided that we will be able to maintain
cost-effective and otherwise satisfactory relationships with these platforms and our inability to do so in the case of one or more
of these platforms could have a material adverse effect on our business, financial condition and results of operations.
We obtain a significant number of visits via search engines
such as Google, Bing and Yahoo! Search engines frequently change the algorithms that determine the ranking and display of results
of a user’s search and may make other changes to the way results are displayed, which can negatively affect the placement
of links and, therefore, reduce the number of visits to our website. The growing use of online ad-blocking software may also impact
the success of our marketing efforts because we may reach a smaller audience and fail to bring more customers to our website, which
could have a material adverse effect on our business, financial condition and results of operations.
System interruptions that impair customer access to our
sites or other performance failures or incidents involving our logistics network, our technology infrastructure or our critical
technology partners could damage our business, reputation and brand and substantially harm our business and results of operations.
The satisfactory performance, reliability and availability of
our sites, transaction processing systems, logistics network, and technology infrastructure are critical to our reputation and
our ability to acquire and retain customers, as well as maintain adequate customer service levels.
For example, if one of our data centers fails or suffers an
interruption or degradation of services, we could lose customer data and miss order fulfillment deadlines, which could harm our
business. Our systems and operations, including our ability to fulfill customer orders through our logistics network, are also
vulnerable to damage or interruption from inclement weather, fire, flood, power loss, telecommunications failure, terrorist attacks,
labor disputes, cyber-attacks, data loss, acts of war, break-ins, earthquake and similar events. In the event of a data center
failure, the failover to a back-up could take substantial time, during which time our sites could be completely shut down. Further,
our back-up services may not effectively process spikes in demand, may process transactions more slowly and may not support all
of our site’s functionality.
We use complex proprietary software in our technology infrastructure,
which we seek to continually update and improve. We may not always be successful in executing these upgrades and improvements,
and the operation of our systems may be subject to failure. In particular, we have in the past and may in the future experience
slowdowns or interruptions on some or all of our sites when we are updating them, and new technologies or infrastructures may not
be fully integrated with existing systems on a timely basis, or at all. Additionally, if we expand our use of third-party services,
including cloud-based services, our technology infrastructure may be subject to increased risk of slowdown or interruption as a
result of integration with such services and/or failures by such third-parties, which are out of our control. Our net revenue depends
on the number of visitors who shop on our sites and the volume of orders we can handle. Unavailability of our sites or reduced
order fulfillment performance would reduce the volume of goods sold and could also materially adversely affect consumer perception
of our brand.
We may experience periodic system interruptions from time to
time. In addition, continued growth in our transaction volume, as well as surges in online traffic and orders associated with promotional
activities or seasonal trends in our business, place additional demands on our technology platform and could cause or exacerbate
slowdowns or interruptions. If there is a substantial increase in the volume of traffic on our sites or the number of orders placed
by customers, we may be required to further expand and upgrade our technology, logistics network, transaction processing systems
and network infrastructure. There can be no assurance that we will be able to accurately project the rate or timing of increases,
if any, in the use of our sites or expand and upgrade our systems and infrastructure to accommodate such increases on a timely
basis. In order to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of
our sites, which is particularly challenging given the rapid rate at which new technologies, customer preferences and expectations
and industry standards and practices are evolving in the e-commerce industry. Accordingly, we redesign and enhance various functions
on our sites on a regular basis, and we may experience instability and performance issues as a result of these changes.
Any slowdown, interruption or performance failure of our sites
and the underlying technology and logistics infrastructure could harm our business, reputation and our ability to acquire, retain
and serve our customers, which could materially adversely affect our results of operations.
Our failure or the failure of third-party service providers
to protect our sites, networks and systems against security breaches, or otherwise to protect our confidential information, could
damage our reputation and brand and substantially harm our business and operating results.
We collect, maintain, transmit and store data about our customers,
employees, contractors, suppliers, vendors and others, including credit card information and personally identifiable information,
as well as other confidential and proprietary information. We also employ third-party service providers that store, process and
transmit certain proprietary, personal and confidential information on our behalf. We rely on encryption and authentication technology
licensed from third parties in an effort to securely transmit, encrypt, anonymize or pseudonymize certain confidential and sensitive
information, including credit card numbers. Advances in computer capabilities, new technological discoveries or other developments
may result in the whole or partial failure of this technology to protect transaction and personal data or other confidential and
sensitive information from being breached or compromised. Our security measures, and those of our third-party service providers,
may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins,
phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security
of information stored in or transmitted by our sites, networks and systems or that we or our third-party service providers otherwise
maintain, including payment card systems and human resources management platforms. We and our service providers may not anticipate
or prevent all types of attacks until after they have already been launched, and techniques used to obtain unauthorized access
to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers. In
addition, security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breaches by
our employees or by persons with whom we have commercial relationships.
Breaches of our security measures or those of our third-party
service providers or cyber security incidents could result in unauthorized access to our sites, networks and systems; unauthorized
access to and misappropriation of personal information, including consumers’ and employees’ personally identifiable
information, or other confidential or proprietary information of ourselves or third parties; limited or terminated access to certain
payment methods or fines or higher transaction fees to use such methods; viruses, worms, spyware or other malware being served
from our sites, networks or systems; deletion or modification of content or the display of unauthorized content on our sites; interruption,
disruption or malfunction of operations; costs relating to breach remediation, deployment or training of additional personnel and
protection technologies, responses to governmental investigations and media inquiries and coverage; engagement of third party experts
and consultants; litigation, regulatory action and other potential liabilities. If any of these breaches of security occur, our
reputation and brand could be damaged, our business may suffer, we could be required to expend significant capital and other resources
to alleviate problems caused by such breaches and we could be exposed to a risk of loss, litigation or regulatory action and possible
liability. In addition, any party who is able to illicitly obtain a customer’s password could access that customer’s
transaction data or personal information. Any compromise or breach of our security measures, or those of our third-party service
providers, could violate applicable privacy, data security and other laws, and cause significant legal and financial exposure,
adverse publicity and a loss of confidence in our security measures, which could have a material adverse effect on our business,
financial condition and operating results. We may need to devote significant resources to protect against security breaches or
to address problems caused by breaches, diverting resources from the growth and expansion of our business.
We may be subject to product liability and other similar
claims if people or property are harmed by the products we sell.
Some of the products we sell may expose us to product liability
and other claims and litigation (including class actions) or regulatory action relating to safety, personal injury, death or environmental
or property damage. Some of our agreements with members of our supply chain may not indemnify us from product liability for a particular
product, and some members of our supply chain may not have sufficient resources or insurance to satisfy their indemnity and defense
obligations. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities
actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.
Risks associated with the suppliers from whom our products
are sourced could materially adversely affect our financial performance as well as our reputation and brand.
We depend on our ability to provide our customers with a wide
range of products from qualified suppliers in a timely and efficient manner. Political and economic instability, the financial
stability of suppliers, suppliers’ ability to meet our standards, labor problems experienced by suppliers, the availability
or cost of raw materials, merchandise quality issues, currency exchange rates, trade tariff developments, transport availability
and cost, transport security, inflation, and other factors relating to our suppliers are beyond our control.
Our agreements with most of our suppliers do not provide for
the long-term availability of merchandise or the continuation of particular pricing practices, nor do they usually restrict such
suppliers from selling products to other buyers. There can be no assurance that our current suppliers will continue to seek to
sell us products on current terms or that we will be able to establish new or otherwise extend current supply relationships to
ensure product acquisitions in a timely and efficient manner and on acceptable commercial terms. Our ability to develop and maintain
relationships with reputable suppliers and offer high quality merchandise to our customers is critical to our success. If we are
unable to develop and maintain relationships with suppliers that would allow us to offer a sufficient amount and variety of quality
merchandise on acceptable commercial terms, our ability to satisfy our customers’ needs, and therefore our long-term growth
prospects, would be materially adversely affected.
Further, we rely on our suppliers’ representations of
product quality, safety and compliance with applicable laws and standards. If our suppliers or other vendors violate applicable
laws, regulations or our supplier code of conduct, or implement practices regarded as unethical, unsafe, or hazardous to the environment,
it could damage our reputation and negatively affect our operating results. Further, concerns regarding the safety and quality
of products provided by our suppliers could cause our customers to avoid purchasing those products from us, or avoid purchasing
products from us altogether, even if the basis for the concern is outside of our control. As such, any issue, or perceived issue,
regarding the quality and safety of any items we sell, regardless of the cause, could adversely affect our brand, reputation, operations
and financial results.
We also are unable to predict whether any of the countries in
which our suppliers’ products are currently manufactured or may be manufactured in the future will be subject to new, different,
or additional trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions.
Any event causing a disruption or delay of imports from suppliers with international manufacturing operations, including the imposition
of additional import restrictions, restrictions on the transfer of funds or increased tariffs or quotas, could increase the cost
or reduce the supply of merchandise available to our customers and materially adversely affect our financial performance as well
as our reputation and brand. Furthermore, some or all of our suppliers’ foreign operations may be adversely affected by political
and financial instability, resulting in the disruption of trade from exporting countries, restrictions on the transfer of funds
or other trade disruptions.
In addition, our business with foreign suppliers may be affected
by changes in the value of the U.S. dollar relative to other foreign currencies. For example, any movement by any other foreign
currency against the U.S. dollar may result in higher costs to us for those goods. Declines in foreign currencies and currency
exchange rates might negatively affect the profitability and business prospects of one or more of our foreign suppliers. This,
in turn, might cause such foreign suppliers to demand higher prices for merchandise in their effort to offset any lost profits
associated with any currency devaluation, delay merchandise shipments, or discontinue selling to us altogether, any of which could
ultimately reduce our sales or increase our costs.
Our vendors have imposed conditions in our business arrangements
with them. If we are unable to continue satisfying these conditions, or such vendors impose additional restrictions with which
we cannot comply, it could have a material adverse effect on our business, financial condition and operating results.
Our vendors have strict conditions for doing business with them. Several
are sizeable such as General Electric, Whirlpool and DMI. If we cannot satisfy these conditions or if they impose additional
or more restrictive conditions that we cannot satisfy, our business would be materially adversely affected. It would be materially
detrimental to our business if these vendors decided to no longer do business with us, increased the pricing at which they allow
us to purchase their goods or impose other restrictions or conditions that make it more difficult for us to work with them. Any
of these events could have a material adverse effect on our business, financial condition and operating results.
We may be unable to source new suppliers or strengthen
our relationships with current suppliers.
We have relationships with over 1,000 suppliers. Our
agreements with suppliers are generally terminable at will by either party upon short notice. If we do not maintain our existing
relationships or build new relationships with suppliers on acceptable commercial terms, we may not be able to maintain a broad
selection of merchandise, and our business and prospects would suffer severely.
In order to attract quality suppliers, we must:
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demonstrate our ability to help our suppliers increase their sales;
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offer suppliers a high quality, cost-effective fulfillment process; and
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continue to provide suppliers with a dynamic and real-time view of our demand and inventory needs.
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If we are unable to provide our suppliers with a compelling
return on investment and an ability to increase their sales, we may be unable to maintain and/or expand our supplier network, which
would negatively impact our business.
We depend on our suppliers to perform certain services
regarding the products that we offer.
As part of offering our suppliers’ products for sale on
our sites, suppliers are often responsible for conducting a number of traditional retail operations with respect to their respective
products, including maintaining inventory and preparing merchandise for shipment to our customers. In these instances, we may be
unable to ensure that suppliers will perform these services to our or our customers’ satisfaction in a manner that provides
our customer with a unified brand experience or on commercially reasonable terms. If our customers become dissatisfied with the
services provided by our suppliers, our business, reputation and brands could suffer.
We depend on our relationships with third parties, and
changes in our relationships with these parties could adversely impact our revenue and profits.
We rely on third parties to operate certain elements of our
business. For example, carriers such as FedEx, UPS, DHL and the U.S. Postal Service deliver many of our small parcel products and
larger products are often delivered by third party national, regional, and local transportation companies. As a result, we may
be subject to shipping delays or disruptions caused by inclement weather, natural disasters, system interruptions and technology
failures, labor activism, health epidemics or bioterrorism. We are also subject to risks of breakage or other damage during delivery
by any of these third parties. We also use and rely on other services from third parties, such as retail partner services, telecommunications
services, customs, consolidation and shipping services, as well as warranty, installation and design services.
We may be unable to maintain these relationships, and these
services may also be subject to outages and interruptions that are not within our control. For example, failures by our telecommunications
providers have in the past and may in the future interrupt our ability to provide phone support to our customers. Third parties
may in the future determine they no longer wish to do business with us or may decide to take other actions or make changes to their
practices that could harm our business. We may also determine that we no longer want to do business with them. If products are
not delivered in a timely fashion or are damaged during the delivery process, or if we are not able to provide adequate customer
support or other services or offerings, our customers could become dissatisfied and cease buying products through our sites, which
would adversely affect our operating results.
The seasonal trends in our business create variability
in our financial and operating results and place increased strain on our operations.
We experience surges in orders associated with promotional activities
and seasonal trends. This activity may place additional demands on our technology systems and logistics network and could cause
or exacerbate slowdowns or interruptions. Any such system, site or service interruptions could prevent us from efficiently receiving
or fulfilling orders, which may reduce the volume or quality of goods or services we sell and may cause customer dissatisfaction
and harm our reputation and brand.
Our business may be adversely affected if we are unable
to provide our customers a cost-effective shopping platform that is able to respond and adapt to rapid changes in technology.
The number of people who access the Internet through devices
other than personal computers, including mobile phones, smartphones, handheld computers such as notebooks and tablets, video game
consoles, and television set-top devices, has increased dramatically in the past few years. We continually upgrade existing technologies
and business applications to keep pace with these rapidly changing and continuously evolving technologies, and we may be required
to implement new technologies or business applications in the future. The implementation of these upgrades and changes requires
significant investments and as new devices and platforms are released, it is difficult to predict the problems we may encounter
in developing applications for these alternative devices and platforms. Additionally, we may need to devote significant resources
to the support and maintenance of such applications once created. Our results of operations may be affected by the timing, effectiveness
and costs associated with the successful implementation of any upgrades or changes to our systems and infrastructure to accommodate
such alternative devices and platforms. Further, in the event that it is more difficult or less compelling for our customers to
buy products from us on their mobile or other devices, or if our customers choose not to buy products from us on such devices or
to use mobile or other products that do not offer access to our sites, our customer growth could be harmed and our business, financial
condition and operating results may be materially adversely affected.
Significant merchandise returns could harm our business.
We allow our customers to return products, subject to our return
policy. If merchandise returns are significant, our business, prospects, financial condition and results of operations could be
harmed. Further, we modify our policies relating to returns from time to time, which may result in customer dissatisfaction or
an increase in the number of product returns. Many of our products are large and require special handling and delivery. From time
to time our products are damaged in transit, which can increase return rates and harm our brand.
Uncertainties in economic conditions and their impact
on consumer spending patterns, particularly in the home goods segment, could adversely impact our operating results.
Consumers may view a substantial portion of the products we
offer as discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macro-economic
conditions that impact consumer spending, including discretionary spending. Some of the factors adversely affecting consumer spending
include levels of unemployment; consumer debt levels; changes in net worth based on market changes and uncertainty; home foreclosures
and changes in home values or the overall housing, residential construction or home improvement markets; fluctuating interest rates;
credit availability, including mortgages, home equity loans and consumer credit; government actions; fluctuating fuel and other
energy costs; fluctuating commodity prices and general uncertainty regarding the overall future economic environment. Adverse economic
changes in any of the regions in which we sell our products could reduce consumer confidence and could negatively affect net revenue
and have a material adverse effect on our operating results.
Our business relies heavily on email and other messaging
services, and any restrictions on the sending of emails or messages or an inability to timely deliver such communications could
materially adversely affect our net revenue and business.
Our business is highly dependent upon email and other messaging
services for promoting our sites and products. Daily promotions offered through emails and other messages sent by us, or on our
behalf by our vendors, generate a significant portion of our net revenue. We provide daily emails to customers and other visitors
informing them of what is available for purchase on our sites that day, and we believe these messages are an important part of
our customer experience and help generate a substantial portion of our net revenue. If we are unable to successfully deliver emails
or other messages to our subscribers, or if subscribers decline to open our emails or other messages, our net revenue and profitability
would be materially adversely affected. Changes in how webmail applications organize and prioritize email may also reduce the number
of subscribers opening our emails. For example, in 2013 Google Inc.’s Gmail service began offering a feature that organizes
incoming emails into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational
features may result in our emails being delivered in a less prominent location in a subscriber’s inbox or viewed as “spam”
by our subscribers and may reduce the likelihood of that subscriber opening our emails. Actions by third parties to block, impose
restrictions on or charge for the delivery of emails or other messages could also adversely impact our business. From time to time,
Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties
that result in our inability to successfully deliver emails or other messages to third parties. Changes in the laws or regulations
that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications
would also materially adversely impact our business. Our use of email and other messaging services to send communications about
our sites or other matters may also result in legal claims against us, which may cause us increased expenses, and if successful
might result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send
emails or other messages. We also rely on social networking messaging services to send communications and to encourage customers
to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions
that would limit our ability or our customers’ ability to send communications through their services, disruptions or downtime
experienced by these social networking services or decline in the use of or engagement with social networking services by customers
and potential customers could materially adversely affect our business, financial condition and operating results.
We are subject to risks related to online payment methods.
We accept payments using a variety of methods, including credit
card, debit card, PayPal, credit accounts and gift cards. As we offer new payment options to consumers, we may be subject to additional
regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange
and other fees, which may increase over time and raise our operating costs and lower profitability. We are also subject to payment
card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard and
rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to
comply. As our business changes, we may also be subject to different rules under existing standards, which may require new assessments
that involve costs above what we currently pay for compliance. If we fail to comply with the rules or requirements of any provider
of a payment method we accept, if the volume of fraud in our transactions limits or terminates our rights to use payment methods
we currently accept, or if a data breach occurs relating to our payment systems, we may, among other things, be subject to fines
or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit card and debit card payments
from consumers or to facilitate other types of online payments. If any of these events were to occur, our business, financial condition
and operating results could be materially adversely affected.
We occasionally receive orders placed with fraudulent credit
card data. We may suffer losses as a result of orders placed with fraudulent credit card data even if the associated financial
institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions.
If we are unable to detect or control credit card fraud, our liability for these transactions could harm our business, financial
condition and results of operations.
Government regulation of the Internet and e-commerce is
evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results
of operations.
We are subject to general business regulations and laws as well
as regulations and laws specifically governing the Internet and e-commerce. Existing and future regulations and laws could impede
the growth of the Internet, e- commerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy and
data security, anti-spam, content protection, electronic contracts and communications, consumer protection, Internet neutrality
and gift cards. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer
privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate
or address the unique issues raised by the Internet or e-commerce. It is possible that general business regulations and laws, or
those specifically governing the Internet or e-commerce, may be interpreted and applied in a manner that is inconsistent from one
jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our practices have complied,
comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of
these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by
governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts
in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our sites by
consumers and suppliers and may result in the imposition of monetary liability. We may also be contractually liable to indemnify
and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations. Adverse legal
or regulatory developments could substantially harm our business. Further, if we enter into new market segments or geographical
areas and expand the products and services we offer, we may be subject to additional laws and regulatory requirements or prohibited
from conducting our business, or certain aspects of it, in certain jurisdictions. We will incur additional costs complying with
these additional obligations and any failure or perceived failure to comply would adversely affect our business and reputation.
Failure to comply with applicable laws and regulations
relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations
relating to privacy, data protection and consumer protection, could adversely affect our business and our financial condition.
A variety of laws and regulations govern the collection, use,
retention, sharing, export and security of personal information. Laws and regulations relating to privacy, data protection and
consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and
applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As
a result, our practices may not comply, or may not comply in the future with all such laws, regulations, requirements and obligations.
Any failure, or perceived failure, by us to comply with our posted privacy policies or with any applicable privacy or consumer
protection- related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory
guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely
affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities
or others or other liabilities or require us to change our operations and/or cease using certain data sets. Any such claim, proceeding
or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings,
distract our management, increase our costs of doing business, result in a loss of customers and suppliers and may result in the
imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs
or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection
or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.
Federal, state and international governmental authorities continue
to evaluate the privacy implications inherent in the use of proprietary or third-party “cookies” and other methods
of online tracking for behavioral advertising and other purposes. U.S. and foreign governments have enacted, have considered or
are considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage
in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies
or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices
and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement
of cookies or to block other tracking technologies, which could if widely adopted significantly reduce the effectiveness of such
practices and technologies. The regulation of the use of cookies and other current online tracking and advertising practices or
a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and
limit our ability to acquire new customers on cost-effective terms and consequently, materially adversely affect our business,
financial condition and operating results.
In addition, various federal, state and foreign legislative
and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations
or issue revised rules or guidance regarding privacy, data protection and consumer protection. Any such changes may force us to
incur substantial costs or require us to change our business practices. This could compromise our ability to pursue our growth
strategy effectively and may adversely affect our ability to acquire customers or otherwise harm our business, financial condition
and operating results.
Changes in tax treatment of companies engaged in e-commerce
may adversely affect the commercial use of our sites and our financial results.
Due to the global nature of the Internet, it is possible that
various states or foreign countries might attempt to impose additional or new regulation on our business or levy additional or
new sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels
are currently reviewing the appropriate treatment of companies engaged in e-commerce. New or revised international, federal, state
or local tax regulations or court decisions may subject us or our customers to additional sales, income and other taxes. For example,
on June 21, 2018, the U.S. Supreme Court rendered a 5-4 majority decision in South Dakota v. Wayfair Inc., 17-494 where
the Court held, among other things, that a state may require an out-of-state seller with no physical presence in the state to
collect and remit sales taxes on goods the seller ships to consumers in the state, overturning existing court precedent. Other
new or revised taxes and, in particular, sales taxes, value added tax and similar taxes could increase the cost of doing business
online and decrease the attractiveness of selling products over the Internet. New taxes and rulings could also create significant
increases in internal costs necessary to capture data and collect and remit taxes. Any of these events could have a material adverse
effect on our business, financial condition and operating results.
We rely on the performance of members of management and
highly skilled personnel, and if we are unable to attract, develop, motivate and retain well-qualified employees, our business
could be harmed.
We believe our success has depended, and continues to depend,
on the members of our senior management team. The loss of any of our senior management or other key employees could materially
harm our business. Our future success also depends on our continuing ability to attract, develop, motivate and retain highly qualified
and skilled employees, particularly mid-level managers and merchandising and technology personnel. The market for such positions
is competitive. Qualified individuals are in high demand, and we may incur significant costs to attract them. Our inability to
recruit and develop mid-level managers could materially adversely affect our ability to execute our business plan, and we may not
be able to find adequate replacements. All of our officers and other U.S. employees are at-will employees, meaning that they may
terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely
difficult to replace. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees,
our business, financial condition and operating results may be materially adversely affected.
We may not be able to adequately protect our intellectual
property rights.
We regard our customer lists, domain names, trade dress, trade
secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trade secret protection,
agreements and other methods with our employees and others to protect our proprietary rights. We might not be able to obtain broad
protection for all of our intellectual property. For example, we are the registrant of the Internet domain name for our website
of www.goedekers.com, as well as various related domain names. However, we might not be able to prevent third parties from registering,
using or retaining domain names that interfere with our consumer communications or infringe or otherwise decrease the value of
our marks, domain names and other proprietary rights.
The protection of our intellectual property rights may require
the expenditure of significant financial, managerial and operational resources. We may initiate claims or litigation against others
for infringement, misappropriation or violation of our intellectual property rights or proprietary rights or to establish the validity
of such rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert
the efforts of our technical and management personnel, which may materially adversely affect our business, financial condition
and operating results. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or
prevent third parties from infringing or misappropriating our proprietary rights, and we may not be able to broadly enforce all
of our intellectual property rights. Any of our intellectual property rights may be challenged by others or invalidated through
administrative process or litigation. Additionally, the process of obtaining intellectual property protections is expensive and
time-consuming, and we may not be able to pursue all necessary or desirable actions at a reasonable cost or in a timely manner.
Even if issued, there can be no assurance that these protections will adequately safeguard our intellectual property, as the legal
standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are
uncertain. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology
or intellectual property rights. We may also be exposed to claims from third parties claiming infringement of their intellectual
property rights, or demanding the release or license of open source software or derivative works that we developed using such software
(which could include our proprietary code) or otherwise seeking to enforce the terms of the applicable open source license. These
claims could result in litigation and could require us to purchase a costly license, publicly release the affected portions of
our source code, be limited in or cease using the implicated software unless and until we can re-engineer such software to avoid
infringement or change the use of the implicated open source software.
We may be accused of infringing intellectual property
rights of third parties.
The e-commerce industry is characterized by vigorous protection
and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. We may
be subject to claims and litigation by third parties that we infringe their intellectual property rights. The costs of supporting
such litigation and disputes are considerable, and there can be no assurances that favorable outcomes will be obtained. As our
business expands and the number of competitors in our market increases and overlaps occur, we expect that infringement claims may
increase in number and significance. Any claims or proceedings against us, whether meritorious or not, could be time-consuming,
result in considerable litigation costs, require significant amounts of management time or result in the diversion of significant
operational resources, any of which could materially adversely affect our business, financial condition and operating results.
We have received in the past, and we may receive in the future,
communications alleging that certain items posted on or sold through our sites violate third-party copyrights, designs, marks and
trade names or other intellectual property rights or other proprietary rights. Brand and content owners and other proprietary rights
owners have actively asserted their purported rights against online companies. In addition to litigation from rights owners, we
may be subject to regulatory, civil or criminal proceedings and penalties if governmental authorities believe we have aided and
abetted in the sale of counterfeit or infringing products.
Such claims, whether or not meritorious, may result in the expenditure
of significant financial, managerial and operational resources, injunctions against us or the payment of damages by us. We may
need to obtain licenses from third parties who allege that we have violated their rights, but such licenses may not be available
on terms acceptable to us, or at all. These risks have been amplified by the increase in third parties whose sole or primary business
is to assert such claims.
We are engaged in legal proceedings that could cause us
to incur unforeseen expenses and could occupy a significant amount of our management’s time and attention.
From time to time, we are subject to litigation or claims that
could negatively affect our business operations and financial position. Litigation disputes could cause us to incur unforeseen
expenses, result in site unavailability, service disruptions, and otherwise occupy a significant amount of our management’s
time and attention, any of which could negatively affect our business operations and financial position. We also from time to time
receive inquiries and subpoenas and other types of information requests from government authorities and we may become subject to
related claims and other actions related to our business activities. While the ultimate outcome of investigations, inquiries, information
requests and related legal proceedings is difficult to predict, such matters can be expensive, time-consuming and distracting,
and adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices,
reputational harm or costs and significant payments, any of which could negatively affect our business operations and financial
position.
Risks Related to Ownership of Our Common
Shares
Our common shares are quoted on the Pink Market, which
may have an unfavorable impact on our share price and liquidity.
Our common shares are quoted on the Pink Market operated by
OTC Markets Group Inc. The Pink Market is a significantly more limited market than the New York Stock Exchange or The Nasdaq Stock
Market. The quotation of our shares on the Pink Market may result in a less liquid market available for existing and potential
shareholders to trade our common shares, could depress the trading price of our common shares and could have a long-term adverse
impact on our ability to raise capital in the future.
We cannot predict the extent to which an active public
trading market for our common shares will develop or be sustained. If an active public trading market does not develop or cannot
be sustained, you may be unable to liquidate your investment in our common shares.
At present, there is minimal public trading in our common shares.
We cannot predict the extent to which an active public market for our common shares will develop or be sustained due to a number
of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional
investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention
of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our common shares until such time as we became more seasoned and viable. As a consequence, there may be periods
of several days or more when trading activity in our common shares is minimal or non-existent, as compared to a seasoned issuer
which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect
on share price. We cannot give you any assurance that an active public trading market for our common shares will develop or be
sustained. If such a market cannot be sustained, you may be unable to liquidate your investment in our common shares.
If an active public market develops, the market price,
trading volume and marketability of our common shares may, from time to time, be significantly affected by numerous factors beyond
our control, which may materially adversely affect the market price of your common shares, the marketability of your common shares
and our ability to raise capital through future equity financings.
The market price and trading volume of our common shares may
fluctuate significantly. Many factors that are beyond our control may materially adversely affect the market price of your common
shares, the marketability of your common shares and our ability to raise capital through equity financings. These factors include
the following:
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price and volume fluctuations in the stock markets generally which create highly variable and unpredictable pricing of equity
securities;
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significant volatility in the market price and trading volume of securities of companies in the sectors in which our businesses
operate, which may not be related to the operating performance of these companies and which may not reflect the performance of
our businesses;
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differences between our actual financial and operating results and those expected by investors;
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fluctuations in quarterly operating results;
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loss of a major funding source;
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operating performance of companies comparable to us;
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changes in regulations or tax law;
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share transactions by our principal shareholders;
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recruitment or departure of key personnel; and
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general economic trends and other external factors including inflation, interest rates, and costs and availability of raw materials,
fuel and transportation.
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Future sales of common shares may affect the market price
of our common shares.
We cannot predict what effect, if any, future sales of our common
shares, or the availability of common shares for future sale, will have on the market price of our common shares. Sales of substantial
amounts of our common shares in the public market, or the perception that such sales could occur, could materially adversely affect
the market price of our common shares and may make it more difficult for you to sell your common shares at a time and price which
you deem appropriate.
Rule 144 sales in the future may have a depressive effect
on our share price.
All of the outstanding common shares held by the present officers,
directors, and affiliate shareholders are “restricted securities” within the meaning of Rule 144 under the Securities
Act. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements
of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws.
Rule 144 provides in essence that a person who is an affiliate or officer or director who has held restricted securities for six
months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed
the greater of 1.0% of a company’s outstanding common shares. There is no limitation on the amount of restricted securities
that may be sold by a non-affiliate after the owner has held the restricted securities for a period of six months if our company
is a current, reporting company under the Exchange Act. A sale under Rule 144 or under any other exemption from the Securities
Act, if available, or pursuant to subsequent registration of common shares of present shareholders, may have a depressive effect
upon the price of the common shares in any market that may develop.
Our series A preferred shares will
have distribution and liquidation rights that will be senior to our common shares.
On November 6, 2019, we launched an offering of series A preferred
shares under Regulation A of Section 3(6) of the Securities Act for Tier 2 offerings, pursuant to which we are offering a minimum
of 54,000 and up to a maximum of 320,000 of series A preferred shares at an offering price of $25.00 per share. As of the
date of this report, we have not yet completed a closing of this offering and no series A preferred shares have been issued. If
and when any series A preferred shares are issued, they will rank senior to our common shares with
respect to the payment of dividends and the distribution of assets upon liquidation. The holders of series A preferred shares will
be entitled to quarterly distributions at a rate of 12% per annum. In addition, upon any liquidation, dissolution or winding
up of our affairs, whether voluntary or involuntary, or deemed liquidation event (e.g., sale
of our company), each holder of outstanding series A preferred shares shall be entitled to receive an amount of cash equal
to $25.00 per share plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether or not declared),
before any payment shall be made to our common shareholders. The payment of this liquidation preference could result in common
shareholders not receiving any consideration upon a liquidation or deemed liquidation event. The existence of the distribution
and liquidation preferences may also reduce the value of our common shares, make it harder for us to sell shares of common shares
in offerings in the future, or prevent or delay a change of control.
We may issue additional debt and equity securities, which
are senior to our common shares as to distributions and in liquidation, which could materially adversely affect the market price
of our common shares.
In the future, we may attempt to increase our capital resources
by entering into additional debt or debt-like financing that is secured by all or up to all of our assets, or issuing debt or equity
securities, which could include issuances of commercial paper, medium-term notes, senior notes, subordinated notes or shares. In
the event of our liquidation, our lenders and holders of our debt securities would receive a distribution of our available assets
before distributions to our shareholders. Any preferred securities, if issued by our company, may have a preference with respect
to distributions and upon liquidation, which could further limit our ability to make distributions to our shareholders. Because
our decision to incur debt and issue securities in our future offerings will depend on market conditions and other factors beyond
our control, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financing.
Further, market conditions could require us to accept less favorable
terms for the issuance of our securities in the future. Thus, you will bear the risk of our future offerings reducing the value
of your common shares and diluting your interest in us. In addition, we can change our leverage strategy from time to time without
approval of holders of our common shares, which could materially adversely affect the market share price of our common shares.
Our potential future earnings and cash distributions to
our shareholders may affect the market price of our common shares.
Generally, the market price of our common shares may be based,
in part, on the market’s perception of our growth potential and our current and potential future cash distributions, whether
from operations, sales, acquisitions or refinancings, and on the value of our businesses. For that reason, our common shares may
trade at prices that are higher or lower than our net asset value per share. Should we retain operating cash flow for investment
purposes or working capital reserves instead of distributing the cash flows to our shareholders, the retained funds, while increasing
the value of our underlying assets, may materially adversely affect the market price of our common shares. Our failure to meet
market expectations with respect to earnings and cash distributions and our failure to make such distributions, for any reason
whatsoever, could materially adversely affect the market price of our common shares.
Were our common shares to be considered penny stock, and
therefore become subject to the penny stock rules, U.S. broker-dealers may be discouraged from effecting transactions in our common
shares.
Our common shares may be subject to the penny stock rules under
the Exchange Act. These rules regulate broker-dealer practices for transactions in “penny stocks.” Penny stocks are
generally equity securities with a price of less than $5.00 per share. The penny stock rules require broker-dealers that derive
more than 5% of their customer transaction revenues from transactions in penny stocks to deliver a standardized risk disclosure
document that provides information about penny stocks, and the nature and level of risks in the penny stock market, to any non-institutional
customer to whom the broker-dealer recommends a penny stock transaction. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson and monthly account
statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations and
the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to completing
the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the
penny stock rules require that prior to a transaction, the broker and/or dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
The transaction costs associated with penny stocks are high, reducing the number of broker-dealers who may be willing to engage
in the trading of our shares. These additional penny stock disclosure requirements are burdensome and may reduce all the trading
activity in the market for our common shares. As long as our common shares are subject to the penny stock rules, holders of our
common shares may find it more difficult to sell their common shares.
Holders of our common shares may not be entitled to a
jury trial with respect to claims arising under our operating agreement, which could result in less favorable outcomes to the plaintiffs
in any such action.
Our operating agreement
governing our common shares provides that, to the fullest extent permitted by law, holders of our common shares waive the right
to a jury trial of any claim they may have against us arising out of or relating to our operating agreement, including any claim
under the U.S. federal securities laws.
If we opposed a jury trial
demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of
that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute
jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United
States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable,
including under the laws of the State of Delaware, which govern our operating agreement, by a federal or state court in the State
of Delaware, which has non-exclusive jurisdiction over matters arising under the operating agreement. In determining whether to
enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently
and voluntarily waived the right to a jury trial. We believe that this is the case with respect to our operating agreement. It
is advisable that you consult legal counsel regarding the jury waiver provision before entering into the operating agreement.
If you or any other holders
or beneficial owners of our common shares bring a claim against us in connection with matters arising under our operating agreement,
including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial
with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us. If a lawsuit is brought
against us under our operating agreement, it may be heard only by a judge or justice of the applicable trial court, which would
be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including
results that could be less favorable to the plaintiffs in any such action.
Nevertheless, if this
jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the operating agreement
with a jury trial. No condition, stipulation or provision of the operating agreement serves as a waiver by any holder or beneficial
owner of our common shares or by us of compliance with the U.S. federal securities laws and the rules and regulations promulgated
thereunder.