CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K, including, without limitation, Part I, Item 1, “Business” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan,” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties which may affect the Company’s business and prospects, including changes in economic and market conditions, acceptance of the Company’s products and services, maintenance of strategic alliances, and other factors discussed elsewhere in this Form 10-K, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors.

 

 

 

PART I

 

ITEM 1.

BUSINESS

 

Overview

 

Enterprise Diversified, Inc. (formerly White Dove Systems, Inc., Interfoods Consolidated, Inc., and then Sitestar Corporation) was incorporated in Nevada on December 17, 1992. On June 1, 2018, the Company amended its Articles of Incorporation to change the name of the Company to “Enterprise Diversified, Inc.” Unless the context otherwise requires, and when used in this Report, the “Company,” “ENDI,” “we,” “our,” or “us” refers to Enterprise Diversified, Inc. and its subsidiaries.

 

During the year ended December 31, 2019, the Company operated through five reportable segments:

 

●	Asset Management Operations - this segment includes revenue and expenses derived from our various joint ventures, service offerings, and initiatives undertaken in the asset management industry;

●

Real Estate Operations - this segment includes revenue and expenses related to the management of properties held for investment and held for resale through Mt Melrose (prior to the sale of 65% of our equity in Mt Melrose on June 27, 2019) located in Lexington, Kentucky, and revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia;

●	Internet Operations - this segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services;

●	Home Services Operations - this segment includes discontinued revenue and expenses derived from our former operation of HVAC and plumbing companies in Arizona; and

●

Other Operations - this segment includes any revenue and expenses from nonrecurring or one-time strategic funding or similar opportunities previously undertaken, and any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.

 

As of the year ended December 31, 2019, and for all prior periods presented, Home Services Operations are reported as discontinued operations. The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.

 

In previous periods, the Company reported under the following six business segments: Asset Management, Mt Melrose, HVAC, Internet, Real Estate, and Corporate. In an effort to highlight the direction of the Company and increase segment transparency, these historical segments were reorganized during the quarter ended June 30, 2018. Additional reorganizations were made as of January 1, 2019, in order to appropriately reflect the similarities in the Company’s real estate operations. As a result, the “Mt Melrose” and legacy “Real Estate” segments are referred to collectively as “Real Estate,” with the “HVAC” segment being referred to as “Home Services.” “Corporate” and other additional investments are combined under “Other Operations.” The “Asset Management” and “Internet” segments remain unchanged. See below for additional information on the activity included in each respective segment report.

 

Note that as of May 24, 2019, as per the Current Report on Form 8-K filed with the SEC on May 28, 2019, the Company completed a divestiture of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC), to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and conveyed all of the subsidiary’s personal property and customer lists and records, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed the subsidiary’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s remaining customer accounts going forward. No cash consideration was exchanged in the transaction. As consideration for the transaction, Rooter Hero will pay monthly royalties for the sixty (60) months following the closing, calculated on the basis of any revenue received from the customer accounts transferred. Under such royalty arrangements, the Company will receive 7.5% of any monthly revenue generated from qualified sales during the first year, and 5% of any monthly revenue during years two through five. Royalties received will be reduced by pre-approved warranty-related costs for select customers.

 

Additionally, on June 27, 2019, as per the Current Report on Form 8-K filed with the SEC on July 3, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio.

 

Asset Management Operations

 

ENDI created a wholly-owned subsidiary on October 10, 2016, named Willow Oak Asset Management, LLC (“Willow Oak”). Willow Oak is an asset management operational platform oriented to the value-investing community. Value investing and knowledge of the global value-investing community are core competencies of Willow Oak’s management. Willow Oak intends to apply its core competencies to become a hub for the value-investing community, offering various forms of affiliations with respected value investment managers. Such affiliations to date include fund seeding and reinvestments, fund launching, investor relations, and fund management administrative support. The Company intends to actively expand its Willow Oak platform with additional affiliations and services that enhance the value of the Willow Oak platform to all affiliated funds. 

 

Willow Oak began offering its fund management services (“FMS”) to external funds on November 1, 2018, when it signed a consulting services agreement with Arquitos Capital, a domestic and offshore private investment fund controlled by Steven Kiel, a Company director and our principal executive officer. Willow Oak also provides FMS to the Bonhoeffer Fund. FMS consists of services not typically provided by traditional third-party providers to the hedge fund industry, including: access to the Willow Oak network, investor relations and marketing, administration and compliance, interface to traditional service providers, standard tools and best practices repository, and access to Willow-Oak-vetted third-party service providers.

 

Willow Oak expanded its affiliations on October 1, 2019, forming a new joint venture with Focused Compounding Capital Management, LLC (“Focused Compounding Capital Management”) through a wholly-owned Company subsidiary, Willow Oak Capital Management, LLC (“Willow Oak Capital Management”). Willow Oak Capital Management was made a 10% owner of Focused Compounding Capital Management and is entitled to receive 10% of any and all gross fees (including management fees and incentive fees), before expenses, generated from any and all separately managed accounts and funds that are managed or advised, directly or indirectly, by Focused Compounding Capital Management, including a new private investment fund, Focused Compounding Fund, LP, that was launched by Focused Compounding Capital Management on January 1, 2020. Under the terms of the joint venture, Focused Compounding Capital Management’s principals, Geoff Gannon and Andrew Kuhn, agreed to bear sole responsibility for any and all investment advisory matters associated with the conduct of Focused Compounding Capital Management’s business, while Willow Oak Capital Management agreed to bear the organizational expenses of the fund launch and also to provide Willow Oak’s FMS to Focused Compounding Capital Management on an ongoing basis. 

 

 

Real Estate Operations

 

The Company operates its real estate operations through EDI Real Estate, LLC, a wholly-owned subsidiary, and, indirectly, through Mt Melrose, LLC, a formerly consolidated subsidiary. Mt Melrose, LLC owns and operates a portfolio of residential and other income-producing real estate in Lexington, Kentucky, which was acquired pursuant to a certain Master Real Estate Asset Purchase Agreement entered into on December 10, 2017, with a like-named seller, Mt. Melrose, LLC, a Kentucky limited liability company (“Old Mt. Melrose”). On January 10, 2018, Mt Melrose, LLC (“New Mt Melrose”) completed its first acquisition of 44 real properties under the agreement, and on June 29, 2018, it completed its second acquisition of 69 additional real properties under the agreement. However, during the quarterly period ended December 31, 2018, the parties mutually agreed to terminate the Master Real Estate Asset Purchase Agreement and no further acquisitions were consummated. A third-party property manager was engaged during this quarterly period ended December 31, 2018, to manage certain of the real properties previously acquired. Management also determined that it was necessary to right-size New Mt Melrose’s operations to reduce its level of high-interest debt. In an effort to expedite the optimization of the Mt Melrose portfolio, management further determined that a dedicated operator was necessary to manage the subsidiary. Accordingly, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose, LLC to Woodmont, who agreed to assume full responsibility for the management and operation of New Mt Melrose and its real estate portfolio. The general terms and conditions governing the arrangement between the Company and Woodmont are set forth in an Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC.

 

Our other real estate operations include activity from a legacy real estate investment portfolio held through EDI Real Estate, LLC. The portfolio, primarily located in the Roanoke area of Virginia, includes residential properties and vacant land. The portfolio includes single-family homes that are currently rented and managed through a third-party property manager, as well as other properties currently listed for sale.

Internet Operations

 

The Company operates its internet operations through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services and support to customers in the United States and Canada.

 

Discontinued Operations - Home Services Operations

 

The Company operated its home services operations through Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC), formerly a wholly-owned subsidiary focused on the management of HVAC and plumbing companies in Arizona. As of December 31, 2017, the subsidiary had closed on six acquisitions for an aggregate purchase price of approximately $2.02 million, which included earn-outs of approximately $325,000. For all six acquisitions, all earn-outs had been paid in full as of December 31, 2018. On May 24, 2019, the Company completed its divestiture of the home services operations to Rooter Hero. As of the year ended December 31, 2019, and for all prior periods presented, all revenue and expenses related to home services operations have been reported as discontinued operations on the accompanying consolidated statements of operations.

 

Other Operations

 

Other operations include corporate activity and nonrecurring or one-time strategic funding or similar activity, previously undertaken, that is not considered to be one of the Company’s primary lines of business. This activity includes opportunities such as the Company’s investment in Huckleberry Real Estate Fund II, LLC and its financing arrangement with Triad Guaranty, Inc.

 

This also includes any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.

 

Products and Services

 

Asset Management Operations

 

The Company operates its asset management operations business through Willow Oak.

 

In 2016, the Company made a strategic determination to fund a seed investment totaling $10 million through Willow Oak to assist in the launch of Alluvial Fund, LP, a private investment partnership that was launched on January 1, 2017 by unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. Under a side letter agreement with Alluvial Fund’s general partner, Willow Oak agreed not to fully withdraw its capital account prior to a date five years after the effective date of the side letter agreement. However, on December 31, 2017, pursuant to an amendment to the side letter agreement dated December 15, 2017, the Company caused $3.0 million to be withdrawn from Alluvial Fund in order to partially fund the Company’s acquisitions of real estate in the 2018 Mt Melrose transactions. As of December 31, 2019, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying consolidated statements of operations.

 

In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement on June 13, 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, who is also an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership. Under their agreement, Willow Oak paid all start-up expenses and pays agreed-upon operating expenses that are not partnership expenses, and Willow Oak receives 50% of all performance and management fees earned by the general partner.

 

On August 1, 2018, Willow Oak, through a wholly-owned Company subsidiary, Willow Oak Capital Management, LLC (“Willow Oak Capital Management”), launched a newly organized private investment partnership, Willow Oak Select Fund, LP (“Select Fund”). Willow Oak Capital Management served as the general partner of Select Fund. Select Fund ultimately dissolved in June 2019 so that other joint ventures and partnerships could be pursued.

 

On November 1, 2018, Willow Oak also entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak’s Fund Management Services (“FMS”) consisting of the following services: investor relations, marketing, administration, legal, accounting and bookkeeping, annual audit coordination, and liaison to third-party service providers. As consideration for the services, Arquitos pays Willow Oak a fixed fee and a performance-based fee.

 

On October 1, 2019, Willow Oak partnered with Geoff Gannon and Andrew Kuhn to form Focused Compounding Capital Management, LLC (“Focused Compounding”). This new joint venture, of which Willow Oak Capital Management, LLC is a 10% owner, manages capital through separately managed accounts and a private partnership launched January 1, 2020. As a member of the general partner, Willow Oak provides ongoing FMS and operational support in addition to covering all one-time expenses associated with the launch of Focused Compounding Fund, LP. As consideration for the arrangement, Willow Oak is entitled to 10% of gross management and performance fees earned by Focused Compounding. In addition to hosting a popular investing podcast, the individual principals of Focused Compounding share investment news and advice through a subscription-based service. 

 

 

Real Estate Operations

 

ENDI created a wholly-owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), on December 14, 2017, to acquire a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into on December 10, 2017, with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, then an ENDI director. On January 10, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a first acquisition from Old Mt. Melrose of 44 residential and other income-producing real properties located in Lexington, Kentucky. On June 29, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a second acquisition from Old Mt. Melrose of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky. The Company accounted for the first and second purchases of properties as an asset acquisition (consisting of a concentrated group of similar identifiable assets, including land, buildings, improvements, and in-place leases). As has been reported, on June 27, 2019 the Company sold 65% of its membership interest in New Mt Melrose, LLC to Woodmont. The Company deconsolidated the operations of New Mt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest.

 

ENDI created a wholly-owned real estate subsidiary on July 10, 2017, named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of December 31, 2019, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes eight residential properties and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily focused in the Roanoke area of Virginia. The portfolio includes single-family homes, both rented and vacant, that are managed by a third-party property management company. The leases in effect as of December 31, 2019, are based on annual time periods and include month-to-month provisions after the completion of the initial term.

 

State and municipal laws and regulations govern the real estate industry and do not vary significantly from one community to another. State laws, including the Virginia Residential Landlord and Tenant Act, in addition to local ordinances, govern rental properties and also do not vary significantly throughout our real estate holding areas.

 

Internet Operations

 

Sitestar.net is an Internet Service Provider (ISP) that offers consumer and business-grade internet access, web hosting, and various ancillary services. We provide services to customers in the United States and Canada. This segment markets and sells narrow-band (dial-up and ISDN) and broadband services (DSL and fiber-optic). Additionally, we market and sell web hosting and related services to consumers and businesses.

 

Our primary competitors include regional and national cable and telecommunications companies that have substantially greater market presence, brand-name recognition, and financial resources compared to Sitestar.net. Secondary competitors include local and regional ISPs.

 

The residential broadband internet access market is dominated by cable and telecommunications companies. These companies offer internet connectivity through the use of cable modems, Digital Subscriber Line (DSL) programs, and fiber. These competitors have extensive scale and significantly more resources than Sitestar.net. Competitors often offer incentives for customers to purchase internet access by offering discounts for bundled service offerings (i.e., phone, television, Internet). While we are a reseller of broadband services including DSL and fiber services, our profit margin is heavily influenced by these competitive forces.

 

There are currently laws and regulations directly applicable to access or commerce on the internet, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security, and the convergence of traditional telecommunications services with Internet communications. We may be positively or negatively affected by the repeal, modification, or adoption of various laws and regulations. These changes may occur at the international, federal, state, and local levels, and may cover a wide range of issues.

 

As of December 31, 2019, the focus of our internet segment is to generate cash flow, work to make our costs variable, and reinvest in our operations when an acceptable return is available. We did not make significant reinvestments into the internet segment during 2019.

 

Management is currently identifying the market value for domain names owned by the Company in order to assess potential income opportunities. Management evaluates these domain names for third-party sales potential, as well as for other marketing opportunities that could generate new revenue from current customers who utilize the domains.

 

Discontinued Operations - Home Services Operations

 

Prior to May 24, 2019, the Company operated its home services segment through its wholly-owned subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company, along with JNJ Investments, LLC, an unaffiliated third party, organized and launched Specialty Contracting Group, LLC on June 13, 2016. On May 18, 2018, the Company terminated its operating agreement with JNJ Investments, LLC, dated June 13, 2016. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.

 

 

 

Other Operations

 

Other operations include nonrecurring or one-time strategic funding or similar activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main activities that comprise other operations.

 

Huckleberry Real Estate Fund

 

On January 30, 2017, the Company, through Willow Oak, committed to make a capital contribution to Huckleberry Real Estate Fund II, LLC, a private investment fund, in the aggregate amount of $750,000. On May 14, 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly-owned subsidiary of the Company. Under the fund’s operating agreement, the fund’s managing member has sole discretion regarding the amounts and timing of any distributions to the members of the fund. As of December 31, 2019, a full redemption has been made, with the related gain included on the consolidated statements of operations under the other operations segment.

 

Triad DIP Investors

 

On August 24, 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy on April 27, 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 on May 18, 2018. The terms of the promissory note provide for interest in the amount of 10% annually, a repayment date no later than April 29, 2020, and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. Accordingly, on April 28, 2018, the Company was issued warrants to purchase 450,000 shares for $0.01 per share. On November 12, 2019, the Company exercised its warrants and purchased 450,000 shares of Triad Guaranty, Inc. Subsequently, on December 30, 2019 the Company sold all 450,000 shares at a price of $0.18/share.

 

Corporate Operations

 

Corporate operations include any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.

 

Employees

 

As of December 31, 2019, we employed seven full-time individuals through the asset management, real estate, internet, home services, and other segments. We also utilize outside contractors as necessary to assist with financial reporting, technical support, and customer service. Our employees are not unionized, and we consider relations with employees to be favorable.

 

Available Information

 

Enterprise Diversified, Inc. files annual, quarterly, and current reports and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act. Also, the SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company also makes available free of charge on or through the Company’s website, http://www.enterprisediversified.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

 

 

ITEM 1A.

RISK FACTORS

 

This item is not required for smaller reporting companies.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

The Company operates its Real Estate, Internet, and Other operations remotely–that is, without dedicated office space. The principal office for our Asset Management Operations is office space leased by the Company located in New York, New York. The principal office of our Home Services Operations, prior to being discontinued, was a mix of office and industrial warehouse space previously leased by Specialty Contracting Group, LLC located in Scottsdale, Arizona.

 

As of December 31, 2019, through EDI Real Estate, LLC, the Company owns various real estate properties including eight residential properties and interests in several undeveloped lots. Subsequent to December 31, 2019, two properties held for resale have been sold.

 

On December 24, 2019, the Company completed the sale of its commercial warehouse space located in Lexington, Kentucky. The property was sold at its carrying value of $850,000.

 

ITEM 3.

LEGAL PROCEEDINGS

 

Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.

 

On April 12, 2016, the Company filed a civil action complaint against Frank Erhartic, Jr. (the “Former Erhartic CEO”), the Company’s former CEO and director (prior to December 14, 2015) and currently an owner of record or beneficially of more than 5% of the Company’s Common Stock, alleging, among other things, that the Former Erhartic CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized and wrongful related party transactions, including causing the Company to borrow certain amounts from the Former Erhartic CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments to the Former Erhartic CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former Erhartic CEO, causing the Company to pay certain amounts to the Former Erhartic CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former Erhartic CEO, causing the Company to pay rent on its corporate headquarters owned by the Former Erhartic CEO’s ex-wife in amounts commercially unreasonable and excessive, and to make real estate tax payments thereon for the personal benefit of the Former Erhartic CEO, converting to the Former Erhartic CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by the Former Erhartic CEO, causing the Company to pay personal credit card debt of the Former Erhartic CEO, causing the Company to significantly overpay the Former Erhartic CEO’s health and dental insurance for the benefit of the Former Erhartic CEO, and causing the Company to pay the Former Erhartic CEO’s personal automobile insurance. The Company is seeking, among other relief available, monetary damages in excess of $350,000. This litigation matter is currently pending in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia).

 

Other: Mt Melrose-related Proceedings

 

Various disputes have arisen and are continuing between the Company and Woodmont Lexington, LLC (“Woodmont”), the entity to whom the Company sold, on June 27, 2019, 65% of the Company’s membership interest in Mt Melrose, LLC (“Mt Melrose”). 

 

In undertaking a sale of its membership interests in Mt Melrose, the Company had sought to partner with an operator who, in exchange for being granted a substantial equity interest at a significant discount to the amounts the Company had invested in Mt Melrose, would assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio and endeavor in good faith to generate favorable returns inuring to the long-term best interests of the Company and its shareholders.

 

Shortly following the closing of the Mt Melrose transaction, however, the relationship between the Company and Woodmont soured. Woodmont, by its representative, Tice Brown, unexpectedly proceeded to make numerous claims and demands upon the Company, which the Company determined to be unfounded and frivolous, if not disingenuous to the parties’ understandings. During the year ended December 31, 2019, Woodmont also has submitted three formal claims for indemnification under the parties’ purchase agreement, each of which were considered by the Company and then rejected and disputed in short order as unfounded. An additional claim has been submitted, considered, and disputed subsequent to December 31, 2019.

 

In addition, Woodmont, acting as the sole manager of Mt Melrose, purported to unilaterally amend and restate as of August 29, 2019 the Mt Melrose limited liability company agreement among the parties, purporting to change the terms of the distribution waterfall the parties had expressly agreed to and purporting to reallocate the parties’ respective interests in Mt Melrose – unilaterally reducing the Company’s percentage membership interest from 35% to 20.8% while increasing Woodmont’s percentage membership interest from 65% to 79.2%. The Company has rejected and disputed these purported changes and Woodmont’s conduct.                    

 

In connection with the primary disputes between the Company and Woodmont and following the Company’s Delaware Action (as defined below), on December 5, 2019, Woodmont also filed a verified complaint in the Fayette County, Kentucky Circuit Court against the Company and a third party who was then-under contract with the Company for such party’s purchase of the Company’s warehouse and associated real property located in Lexington, Kentucky – see Woodmont Lexington, LLC, et al. v. Enterprise Diversified, et al., Fayette Circuit Court, Civil Action No. 19-CI-04304 (the “Kentucky Action”). The Court in the Kentucky Action enjoined the Company and the warehouse purchaser from removing or cleaning out the various items of building materials and salvage owned by Mt Melrose that had been placed in the warehouse premises, and required the Company and the warehouse purchaser to provide rent-free access so that Woodmont and Mt Melrose could realize “full value” on their liquidation of the stored personal property until February 1, 2020. The Company believes that Woodmont’s attempt to hold up the sale of an $850,000 warehouse and property because it wanted to store spare toilets, doors, floor tiles and other residential building materials there, rent free, for more than six months, was disingenuous and intentionally injurious to the Company. On December 27, 2019, the Company filed verified counter-claims in the Kentucky Action against Woodmont, alleging, among other things, Woodmont’s tortious interference with the Company’s business and Woodmont’s unjust enrichment. The Company is seeking, among other relief available against Woodmont, declaratory relief; trial by jury on all issues; money damages, including all special and consequential damages, in amounts to be determined at trial; and the Company’s costs and expenses, including attorneys’ fees; together with pre- and post-judgement interest. The parties to the Kentucky Action have recently engaged in settlement negotiations, although they have not been successful. This action remains pending in the Fayette County, Kentucky Circuit Court.             

 

All the while, since the closing of the Mt Melrose transaction, Woodmont, by its representative, Tice Brown, has made repeated “low ball” offers to buy out the Company’s remaining interest in Mt Melrose, insisting that the Company relinquish its Mt Melrose interest in order to avoid further claims and demands and in order to avoid threatened public disparagement (including by way of statements made on various social media by Woodmont’s representative, Tice Brown). All such offers have been rejected or not responded to by the Company, as being unfavorable, undesirable, and not in the long-term best interests of the Company and its shareholders.

 

On January 7, 2020, Woodmont, acting as the sole manager of Mt Melrose, also caused Mt Melrose to distribute a $600,000 cash dividend directly to Woodmont. Woodmont expressly excluded the Company from receiving any portion of this distribution. The Company has rejected and disputed the propriety of this distribution and Woodmont’s conduct.

 

 

The Company believes that Woodmont, directly and by its representative, Tice Brown, has engaged, and continues to engage, in intentionally injurious and harassing conduct concerning Mt Melrose that runs counter to the long-term best interests of the Company and its shareholders. Accordingly, as previously reported in the Company’s Current Report on Form 8-K filed with the SEC on November 20, 2019, the Company filed a verified complaint in the Court of Chancery of the State of Delaware on November 20, 2019, commencing a civil action against Woodmont – see Civil Action No. 2019-0928-JTL (the “Delaware Action”). The Delaware Action was filed by the Company in response to the repeated claims and demands and injurious conduct by Woodmont and its representative, Tice Brown. On March 9, 2020, the Company filed further an amended verified complaint against Woodmont in the Delaware Action, expanding its claims against Woodmont. The Company is seeking, among other relief available against Woodmont, injunctive, declaratory and equitable relief, and relief for, among other things, Woodmont’s breaches of contract and unjust enrichment, along with attorneys’ fees and expenses. This action remains pending in the Delaware Court of Chancery.

 

Management intends to vigorously prosecute the Company’s claims, and defend the Company’s rights, against Woodmont and its representative, Tice Brown, in all of these Mt Melrose-related proceedings.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5.

MARKET FOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Enterprise Diversified’s Common Stock is listed on the OTC QB Markets (“OTCQB”) under the symbol “SYTE.”

 

Record Holders

 

As of March 27, 2020, we had approximately 119 shareholders of record. This number does not reflect the number of individuals or institutional investors holding stock in nominee name through banks, brokerage firms, and others.

 

Equity Compensation Plans

 

On November 7, 2019, Enterprise Diversified’s Governance, Compensation, and Nomination Committee of the Board of Directors approved the creation of an equity incentive program for board members as well as eligible senior management. The Committee determined that it was advisable, and in the best interests of the Company and its stockholders, to provide guidelines for the issuance of equity incentive awards, such as restricted stock and restricted stock units, to attract, retain, and motivate eligible persons whose present and potential contributions are important to the long-term success of the Company and its subsidiaries and to align their interests with those of the Company’s stockholders. Consistent with this and the Company’s intention to retain its cash, it was also determined that such a program would provide for a more-formal process by which amounts of director’s fees and annual management bonuses accrued from time to time could be paid, at the direction of the Committee, in shares of Common Stock in lieu of cash. The provisions of the program were memorialized as the Enterprise Diversified, Inc. 2020 Equity Incentive Plan (the “2020 EIP”), which was approved and adopted by the Board effective as of January 31, 2020. The 2020 EIP may be amended or terminated at any time by the Board or the Committee. A copy of the 2020 EIP accompanies this Report as Exhibit 99.1.

 

Dividends

 

To date, we have not paid any cash dividends on our capital stock. We intend to retain our cash and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

 

Issuances of Unregistered Shares of Common Stock

 

On December 20, 2019, the Company issued 21,870 unregistered shares of its Common Stock to Steven L. Kiel, the Company’s Executive Chairman, as its repayment of an outstanding $100,000 promissory note owed to Mr. Kiel. The number of shares issued in lieu of cash payment of the obligation was determined by the Governance, Compensation, and Nomination Committee of the Board of Directors using the volume weighted average price of a share of Common Stock for the immediately preceding ninety (90) days, which equaled $4.57. To the extent this issuance constituted an offer or sale of securities under the Securities Act, it was exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.

 

On February 14, 2020, the Company issued a total of 35,594 unregistered shares of its Common Stock to members of the Board of Directors and select senior management in lieu of cash payment of certain accrued director’s fees and annual management bonuses, in line with the 2020 EIP described above. The number of shares issued was determined by the Governance, Compensation, and Nomination Committee of the Board of Directors using the volume weighted average price of a share of Common Stock for the ninety (90) days immediately preceding January 31, 2020, which equaled $3.6537. To the extent this issuance constituted an offer or sale of securities under the Securities Act, it was exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis should be read in conjunction with the Company’s accompanying consolidated financial statements and accompanying notes as of and for the years ended December 31, 2019 and 2018. The discussion of results, causes, and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. Additionally, it should be noted that a uniform comparative analysis cannot be performed for all segments, as a segment’s limited financial history or recent restructuring results in less comparable financial performance.

 

Summary of Financial Performance

 

Common stockholders’ equity decreased from $15,915,651 at December 31, 2018, to $10,633,958 at December 31, 2019. This change was attributable to $4,998,487 of net loss in the real estate segment, $1,510,475 of loss resulting from discontinued operations under the home services segment, and $791,916 of net loss in other segments, and was partially offset by $1,399,615 of net income in the asset management segment and $522,626 of net income in the internet segment. Corporate expenses for the year ended December 31, 2019, included in the net loss from other operations, totaled $1,101,098. Total comprehensive net loss (all attributable to Enterprise Diversified, Inc. stockholders) for the year ended December 31, 2019 equaled $5,381,691, which includes $3,054 of accumulated other comprehensive loss attributable to the internet segment.

 

Historical Variable Interests

 

As of the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018, the Company had determined that Old Mt. Melrose was a “variable interest entity” because the seller’s equity interests in Old Mt. Melrose were not effective in determining whether the seller or New Mt Melrose had a controlling financial interest, and that New Mt Melrose’s rights under a certain Cash Flow Agreement that had been entered into on January 10, 2018 with Old Mt. Melrose (the “Cash Flow Agreement”) were deemed to be variable interests in Old Mt. Melrose. During those periods, the Company had determined that New Mt Melrose was the primary beneficiary of Old Mt. Melrose since substantially all of Old Mt. Melrose’s activities had been conducted on behalf of New Mt Melrose and because New Mt Melrose may have been required to provide financial support to Old Mt. Melrose under the Cash Flow Agreement. As its primary beneficiary, New Mt Melrose previously consolidated Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose had been consolidated accordingly on the unaudited consolidated balance sheets for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018. As noted on the unaudited consolidated statements of stockholders’ equity during those quarters, the ending noncontrolling interest allocated to the variable interest entity represented the remaining equity held by Old Mt. Melrose for properties that had not yet been acquired under the Purchase Agreement. The ending noncontrolling interest amount also included any income or loss generated by the remaining properties that were to be acquired under the Purchase Agreement for the period then ended.

 

As of November 1, 2018, pursuant to the termination of the Master Real Estate Asset Purchase Agreement and Cash Flow Agreement noted above, New Mt Melrose was no longer the primary beneficiary of Old Mt. Melrose. Additionally, as of November 1, 2018, New Mt Melrose no longer had a controlling financial interest in Old Mt. Melrose. Consequently, as of November 1, 2018, the Company no longer consolidated the fair values of the assets and liabilities of Old Mt. Melrose, and the balance of noncontrolling interest as of December 31, 2019 and 2018, is accordingly reflected as zero on the accompanying consolidated balance sheets and statements of stockholders’ equity.

 

 

Balance Sheet Analysis

 

This section provides an overview of changes in our assets, liabilities, and equity and should be read together with our accompanying consolidated financial statements, including the accompanying notes to the financial statements. The table below provides a balance sheet summary for the periods presented and is designed to provide an overview of the balance sheet changes from quarter to quarter.

 

		December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019				December 31, 2018
ASSETS
Cash and equivalents		$	666,810			$	161,275			$	542,856			$	519,525			$	435,726
Accounts receivables, net			52,889				35,646				20,212				65,614				58,263
Investments, at fair value			10,126,204				9,522,236				9,735,274				9,821,054				8,915,238
Real estate, total			479,425				1,412,208				1,421,364				11,691,075				11,811,789
Goodwill and other assets			574,316				713,578				769,570				3,353,607				3,298,436
Total assets		$	11,899,644			$	11,844,943			$	12,489,276			$	25,450,875			$	24,519,452
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	157,934			$	66,584			$	161,357			$	168,147			$	165,495
Accrued expenses			198,374				51,703				80,761				453,657				338,050
Deferred revenue			204,960				217,811				217,020				213,288				210,212
Notes payable and other liabilities			704,418				1,137,250				1,372,303				8,326,363				7,890,044
Total liabilities			1,265,686				1,473,348				1,831,441				9,161,455				8,603,801
Total stockholders’ equity			10,633,958				10,371,595				10,657,835				16,289,420				15,915,651
Total liabilities and stockholders’ equity		$	11,899,644			$	11,844,943			$	12,489,276			$	25,450,875			$	24,519,452

 

Financial Condition, Liquidity, and Capital Resources

 

During 2019, Enterprise Diversified carried out its business strategy in five operating segments: Asset Management Operations, Real Estate Operations, Internet Operations, Home Services Operations, and Other Operations. As of the year ended December 31, 2019, and for all prior periods presented, home services operations are reported as discontinued operations. Our primary focus is on generating cash flow so that we have the flexibility to pursue opportunities as they present themselves. We will only invest cash in each segment if we believe that the return on this invested capital is appropriate for the risk associated with the investment. This consideration is measured against all investment opportunities available to us and is not limited to these particular segments or the Company’s historical operations.

 

Cash and equivalents totaled $666,810 at the year ended December 31, 2019, compared to $435,726 at year-end December 31, 2018. The Company intends to continue to build up cash reserves moving forward. Real estate held for investment decreased to $380,515 at the year ended December 31, 2019, compared to $9,492,877 at year-end December 31, 2018, and real estate held for resale decreased to $98,910 at the year ended December 31, 2019, compared to $2,318,912 at year-end December 31, 2018. Property and equipment also decreased to $17,753 at the year ended December 31, 2019, from $1,019,742 at year-end December 31, 2018. The decreases in real estate and property and equipment are primarily due to the equity sale and subsequent deconsolidation under the real estate segment. The Company does not expect to make significant reinvestments into property and equipment used in operating activities at this time. Total notes payable decreased to $511,025 from $7,521,819 during the same time period. This decrease was also primarily related to the equity sale and deconsolidation under the real estate segment.

 

The Company currently believes that our existing balances of cash, cash equivalents, and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.

 

The aging of accounts receivable as of December 31, 2019, and December 31, 2018, is as shown:

 

		December 31, 2019				December 31, 2018
Current		$	50,909			$	58,263
30 – 60 days			1,495				—
60 + days			485				—
Total		$	52,889			$	58,263

 

We have no material capital expenditure requirements.

 

As of December 31, 2019, no lines of credit remain open through the home services segment. The line of credit that existed as of December 31, 2018 through the home services segment, was held with Steven L. Kiel, an ENDI director and our principal executive officer. The Company assumed this debt, which was paid off during the current year through the issuance of Company stock. Additional debt held through the home services segment as of December 31, 2018, included loans for various vehicles and equipment. Two vehicle loans were entered into during the quarter ended March 31, 2018. These loans required monthly payments through May 2023 and held annual interest rates of 5.99%. As of December 31, 2019, all of these loans have been assumed by Rooter Hero, as a result of our divestiture of the home services segment. See Note 3 for more information.

 

During the quarter ended September 30, 2017, EDI Real Estate, LLC, as a borrower, issued two promissory notes, each secured by a property held for investment. These notes carry annual interest rates of 6%, pay interest quarterly, and are due September 15, 2022, with early payoff permitted. Subsequent to the year ended December 31, 2019, one of these notes has been paid off. Additionally, during the quarter ended September 30, 2018, EDI Real Estate, LLC issued a promissory note secured by additional properties held for investment. This note carries an annual interest rate of 5.6% and fully matures on September 1, 2033, with early payoff permitted. The interest rate on this note is subject to change once each five-year period based on an index rate plus a margin of 2.750 percentage points. The index rate is calculated as a monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of five years.

 

 

With respect to outstanding debt secured by the real properties acquired by Mt Melrose, LLC, these notes began to mature during the year ended December 31, 2018, with the last note extending until January 2042. Some of these loans were interest only while others accrued interest that is due in full with a final balloon payment. As of December 31, 2018, the debt secured by the real properties had varying annual interest rates from 4.375% to 13%. As the Company no longer has a controlling financial interest in Mt Melrose, it no longer consolidates Mt Melrose, LLC’s assets, liabilities (including notes payable), or results of operations.

 

The remaining notes payable as of December 31, 2019, consisted of the following:

 

		Interest Rates			Average Term		2019				2018
Interest-bearing amounts due on traditional mortgages on real estate held through Mt Melrose, LLC			4.38% - 5.75%		14 years		$	—			$	4,505,139
Interest-bearing amounts due on hard money loans on real estate held through Mt Melrose, LLC			10.00% - 13.00%		2 years			—				2,379,851
Interest-bearing amounts due on promissory notes			10.00%		1 year			—				131,279
Non-interest-bearing amount due on promissory notes			0.00%		1 year			—				218,270
Equipment and vehicle capital leases and loans acquired by HVAC Value Fund, LLC			0.00% - 4.90%		5 years			—				55,797
Vehicle loans through HVAC Value Fund, LLC			5.99%		5 years			—				53,638
Interest-bearing amount due on promissory note through EDI Real Estate, LLC			5.60%		15 years			373,425				384,304
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC			6.00%		5 years			137,600				137,600
Less notes related to discontinued operations								—				(209,436	)
Less accrued interest								—				(134,623	)
Less current portion								(11,453	)			(1,002,965	)
Long-term portion							$	499,572			$	6,518,854

 

The timing of future payments of notes payable are as follows:

 

2020		$	11,453
2021			12,181
2022			12,891
2023			151,242
2024 and thereafter			323,258
Total		$	511,025

 

Off-Balance Sheet Arrangements

 

We are not a party to any material off-balance sheet arrangements as of December 31, 2019, nor at any time from January 1, 2019, through December 31, 2019.

 

Other Contractual Obligations

 

As previously reported in our Current Reports on Form 8-K filed with the SEC on September 19, 2016, and December 30, 2016, respectively, on September 19, 2016, the Company announced that it had entered into a letter of intent agreement with Alluvial Capital Management, LLC (“Alluvial Capital”) to make a seed investment through Willow Oak Asset Management in Alluvial Fund, LP, a private investment partnership that was launched by Alluvial Capital on January 1, 2017 (“Alluvial Fund”). Alluvial Capital acts as the general partner and the Company, through Willow Oak Asset Management, has invested in Alluvial Fund as a limited partner.

 

The Company, through Willow Oak, agreed to make capital contributions to Alluvial Fund in the aggregate amount of $10 million to be provided over four equal tranches on January 1, 2017, April 1, 2017, July 1, 2017, and October 1, 2017. As of September 30, 2017, the Company satisfied its obligation to provide $10 million in accordance with the contribution schedule. On January 1, 2018, pursuant to an amendment to the Alluvial Side Letter Agreement, dated December 15, 2017, Willow Oak withdrew $3,000,000 from its $10,000,000 investment in Alluvial Fund, LP in order to partially fund the Company’s first close of the Mt Melrose Transaction. Arquitos Capital Partners, LP, which is managed by our director and principal executive officer Steven L. Kiel, simultaneously invested $3,000,000 in Alluvial to temporarily replace the amount withdrawn by Willow Oak. The Arquitos investment into Alluvial counts toward Willow Oak’s seed investment total for purposes of Willow Oak’s agreement with Alluvial.

 

Also through the asset management operations segment, an operating lease on office space in New York City commenced on October 1, 2017. This lease extends through September 30, 2020.

 

Through the home services segment, an operating lease on warehouse and office space in Scottsdale, Arizona, commenced on May 1, 2018. This lease extends through May 31, 2021. This lease was not conveyed with the divestiture on May 24, 2019. Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC) was the lessee party to the lease. Specialty Contracting Group, in connection with its dissolution and winding up, surrendered possession of the premises to the landlord, in default of this lease.

 

On June 27, 2019, as per the Current Report on Form 8-K filed with the SEC on July 3, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). Under the terms of the parties’ membership interest purchase agreement, the Company agreed to indemnify Woodmont against any losses actually incurred as a result of breaches of the Company’s representations and warranties made under the agreement. To date, Woodmont has made four claims for indemnification under the agreement, all of which have been rejected and disputed by the Company. Also, in connection with the transaction, the Company and Woodmont entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC (the “A&R LLC Agreement”). The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members. The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont is designated as the sole manager. In addition, the Company expressly agreed to a three-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose; and with respect to any matters requiring a vote of the members, the Company will vote with (i.e., the same as) Woodmont. Subsequent to the transaction, Woodmont, as the manager of Mt Melrose, has purported that the Company’s membership interest in Mt Melrose has been diluted to 20.8%. The Company disputes this assertion and maintains that it has retained its 35% membership interest.

 

 

Results of Operations

 

Asset Management Operations

 

The Company operates its asset management operations business through two wholly-owned subsidiaries, Willow Oak Asset Management, LLC and Willow Oak Capital Management, LLC. These subsidiaries were formed on October 10, 2016 and May 24, 2018, respectively. During the segment’s first year of operations, Willow Oak entered into three fee share agreements with multiple private investment partnerships and made an additional investment through another partnership arrangement. During the year ended December 31, 2018, two new partnerships were formed, multiple fee share agreements were entered into, and a new service offering, Fund Management Services, was launched. During the year ended December 31, 2019, one new joint venture was formed in which Willow Oak Capital Management is a non-managing owner.

 

As of December 31, 2019, Willow Oak holds a direct investment in the Alluvial Fund, LP. The realized and unrealized investment gains and losses are reported as revenue on the accompanying consolidated statements of operations. This treatment can result in reporting negative revenue figures for a given period. Willow Oak continues to earn revenue through the remaining fee share arrangements, as well as through fund management services.

 

During the year ended December 31, 2019, the asset management operations segment produced $1,773,276 of revenue. Cost of revenue was $0 and operating expenses totaled $410,226. Other income attributable to the asset management operations segment totaled $36,565. Net income for the year ended December 31, 2019, totaled $1,399,615. This compares to the year ended December 31, 2018, when the asset management operations segment produced negative $775,249 of revenue, cost of revenue was $0, and operating expenses totaled $286,283. Additionally, other income for the year ended December 31, 2018, was $41,632, and total net loss for the year ended December 31, 2018, was $1,019,900. The increase in revenue in 2019 is due to market volatility and the application of specific GAAP revenue recognition rules as noted above. The increase in operating expenses is primarily due to higher payroll and event expenses. Other income for the segment is primarily due to sub-lease rental income earned through the Company’s New York office space.

 

As of December 31, 2019, the fair value of long-term investments held through the asset management operations segment totaled $10,072,358. This compares to the fair value of long-term investments held at December 31, 2018, which totaled $8,446,488. This increase in investments is attributable to positive Alluvial Fund performance during the year ended December 31, 2019. 

 

The tables below provide a summary of income statement amounts over time. These figures are specific to the asset management operations segment and are presented for the annual and quarterly periods designated below.

 

 

Annual		Year Ended December 31, 2019				Year Ended December 31, 2018
Revenues		$	1,773,276			$	(775,249	)
Cost of revenue			—				—
Operating expenses			410,226				286,283
Other income (expense)			36,565				41,632
Comprehensive income (loss)		$	1,399,615			$	(1,019,900	)

 

Asset Management Operations Revenue		Year Ended December 31, 2019				Year Ended December 31, 2018
Realized and unrealized gains (losses) on investment activity		$	1,607,644			$	(834,014	)
Management and performance fee revenue			65,171				41,151
Fund management services revenue			100,461				17,614
Total revenue		$	1,773,276			$	(775,249	)

 

 

Quarterly		December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019
Revenues		$	646,201			$	(159,085	)		$	589,180			$	696,980
Cost of revenue			—				—				—				—
Operating expenses			100,330				81,906				104,526				123,464
Other income (expense)			17,491				4,983				7,052				7,039
Comprehensive income (loss)		$	563,362			$	(236,008	)		$	491,706			$	580,555

 

 

Real Estate Operations

 

EDI Real Estate Operations

 

For the year ended December 31, 2019, the EDI Real Estate portfolio generated rental revenue of $76,792. The cost of rental revenue totaled $104,279. Operating expenses for the year ended December 31, 2019, were $42,080. Other expenses totaled $75,359 and the net loss for the year ended December 31, 2019, totaled $155,057. This compares to the year ended December 31, 2018, when the EDI Real Estate portfolio generated rental revenue of $77,391, cost of rental revenue totaled $43,063, operating expenses were $17,200, other expenses totaled $13,591, and net rental income was $3,537. Other expenses incurred during the years ended December 31, 2019 and 2018, were primarily interest-related expenses. The 2019 increases in cost of rental revenue and operating expenses were due to significant deferred maintenance expenses and newly allocated payroll expenses, respectively.

 

 

 

During the year ended December 31, 2019, net impairment adjustments of $26,170 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect sales activity throughout the year. During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year.

 

Through EDI Real Estate, as of December 31, 2019, the Company owns a total of eleven units consisting of six units held for investment, two units held for resale, and three vacant lots held for resale as noted below:

 

EDI Real Estate		December 31, 2019		December 31, 2018
Units occupied or available for rent		6		6
Vacant units being prepared for rent		—		3
Total units held for investment		6		9
Units held for resale		2		—
Vacant lots held for resale		3		3
Total units held for resale		5		3

 

Units held for investment consist of single-family residential rental units.

 

The leases in effect, as of December 31, 2019, are based on annual time periods and typically include month-to-month provisions after the completion of the initial term. An outside property management company manages these rental properties on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties.

 

EDI Real Estate		December 31, 2019				December 31, 2018
Total real estate held for investment		$	484,590			$	710,022
Accumulated depreciation			(104,075	)			(107,576	)
Real estate held for investment, net			380,515				602,446
Real estate held for resale		$	98,910			$	40,047

 

Mt Melrose Operations

 

Management has determined that the Company no longer has a controlling financial interest in Mt Melrose and is no longer the primary beneficiary as of June 27, 2019. All activity prior to the deconsolidation event has been included on the accompanying consolidated statements of operations for the year ended December 31, 2019, under the real estate segment. Simultaneously, as of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the consolidated balance sheets. Note that this deconsolidation event is separate from the deconsolidation event that took place on November 1, 2018, related to the change in variable interest reporting. As of December 31, 2018, the Company did have a controlling financial interest in Mt Melrose and was the primary beneficiary.

 

For the period ended June 27, 2019, the Mt Melrose portfolio generated rental revenue of $365,971. The cost of rental revenue totaled $276,049. Operating expenses for the period ended June 27, 2019, were $295,945. Other expenses totaled $4,580,940 and the net loss for the period ended June 27, 2019, totaled $4,786,963. This compares to the year ended December 31, 2018, when the Mt Melrose portfolio generated rental revenue of $778,657, cost of rental revenue totaled $450,859, operating expenses were $920,309, other expenses totaled $1,416,257, and total net loss was $2,008,768. The other expenses for the year ended December 31, 2019 are primarily related to the loss recognized on the equity sale of the Mt Melrose entity mentioned previously, which totaled $4,157,809. Other expenses incurred during the year ended December 31, 2018, were primarily impairment and interest-related expenses.

 

 

 

 

 

The consolidated Mt Melrose assets as of December 31, 2018, included the following units:

 

Mt Melrose		December 31, 2018
Units occupied or available for rent			98
Vacant units being prepared for rent			15
Total units - held for investment			113
Residential and commercial units			48
Vacant lots			9
Total units - held for resale			57

 

As of December 31, 2018, the Mt Melrose portfolio of properties was carried at the following amounts on the accompanying consolidated balance sheets:

 

Mt Melrose		December 31, 2018
Total real estate held for investment		$	9,049,945
Accumulated depreciation			(159,514	)
Real estate held for investment, net			8,890,431
Real estate held for resale		$	2,278,865

 

Additionally, during the year ended December 31, 2019, a commercial warehouse was sold for gross proceeds of $850,000. Net proceeds after closing costs and a promissory note payoff were $487,944. This resulted in a loss on the sale in the amount of $56,467. This loss is included in other expenses under the real estate segment for the year ended December 31, 2019.

 

The tables below provide a summary of income statement amounts over time. These figures are specific to the real estate segment as a whole and are presented for the annual and quarterly periods designated below. Revenue and expenses related to the Mt Melrose portfolio of properties are included through the consolidation period, which ended on June 27, 2019 with the Company’s majority equity sale of the entity.

 

Annual		Year Ended December 31, 2019				Year Ended December 31, 2018
Revenues		$	537,763			$	778,657
Cost of revenue			485,459				450,859
Operating expenses			338,025				920,309
Other income (expense)			(4,712,766	)			(1,416,257	)
Comprehensive income (loss)		$	(4,998,487	)		$	(2,008,768	)

 

 

Quarterly		December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019
Revenues		$	117,299			$	19,359			$	218,599			$	182,506
Cost of revenue			127,433				30,753				164,130				163,143
Operating expenses			10,254				11,827				211,536				104,408
Other income (expense)			(4,179	)			(13,709	)			(4,566,752	)			(128,126	)
Comprehensive income (loss)		$	(24,567	)		$	(36,930	)		$	(4,723,819	)		$	(213,171	)

 

For the quarters ended September 30 and June 30, 2019, the Company previously reported the net loss recognized on the sale of our controlling interest in our Mt Melrose subsidiary as an other expense under Other Operations. As of December 31, 2019, the Company has found it appropriate to report this loss under the Real Estate segment. For all reported segment activity, this reclassification has been made as of June 30, 2019. The loss on the sale continues to show separately on the consolidated statements of operations for the year ended December 31, 2019. Additionally, an entry has been made to combine the deconsolidation activity previously reported on the consolidated statements of stockholders’ equity, in the amount of $638,749, with the net loss on the sale reported on the statements of operations for the period ended June 30, 2019. Total ending stockholder’s equity for the period ended June 30, 2019, remains unchanged.

 

 

Internet Operations

 

As of December 31, 2019, the focus of our internet segment is to generate cash flow, work to make our costs variable, and reinvest in our operations when an acceptable return is available. We did not make significant reinvestments into the internet segment during the year ended December 31, 2019.

 

Revenue attributed to the internet segment during the year ended December 31, 2019, totaled $1,066,229 and cost of revenue totaled $330,654. Operating expenses for the segment totaled $223,118 for the year ended December 31, 2019, and other income totaled $10,169. Accumulated other comprehensive loss related to the recognition of foreign currency translation adjustments totaled $3,054. Total comprehensive income for the internet segment was $519,572 for the year ended December 31, 2019. This compares to the year ended December 31, 2018, when revenue totaled $1,168,843, cost of revenues totaled $325,234, operating expenses were $241,654, other income was $35,649, and comprehensive income was $637,604. Other income in 2018 for the segment is the result of the sale of various blocks of IP addresses.

 

Management is currently identifying the market value for domain names owned by the Company in order to assess potential income opportunities. Management evaluates these domain names for third-party sales potential, as well as for other marketing opportunities that could generate new revenue from current customers who utilize the domains.

 

As of December 31, 2019, we have a total of 7,466 customer accounts across the U.S. and Canada. This compares to the year ended December 31, 2018, when we had a total of 8,058 customer accounts. As of December 31, 2019, approximately 64% of our internet segment revenue is driven by internet access services, with the remaining 36% being earned though web hosting and other web-based storage services.

 

Approximately 92% of our customer accounts are U.S.-based, while 8% are Canada-based. Revenue generated by our U.S. customers totaled $1,011,407 and revenue generated by our Canadian customers totaled $54,822 during the year ended December 31, 2019. This compares to revenue generated by our U.S. customers of $1,101,999 and revenue generated by our Canadian customers of $66,844 during the year ended December 31, 2018.

 

The tables below provide a summary of income statement amounts over time. These figures are specific to the internet segment and are presented for the annual and quarterly periods designated below.

 

 

Annual		Year Ended December 31, 2019				Year Ended December 31, 2018
Revenues		$	1,066,229			$	1,168,843
Cost of revenue			330,654				325,234
Operating expenses			223,118				241,654
Other income (expense)			10,169				35,649
Other comprehensive income (loss)			(3,054	)			—
Comprehensive income (loss)		$	519,572			$	637,604

 

 

Quarterly		December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019
Revenues		$	260,239			$	265,171			$	265,917			$	274,902
Cost of revenue			76,281				83,517				83,243				87,613
Operating expenses			57,646				43,168				59,035				63,269
Other income (expense)			5,852				384				3,541				392
Other comprehensive income (loss)			(3,054	)			—				—				—
Comprehensive income (loss)		$	129,110			$	138,870			$	127,180			$	124,412

 

Discontinued Operations - Home Services Operations

 

As noted previously, Specialty Contracting Group, LLC’s historical operations are now classified as “discontinued operations” in our consolidated financial statements, and all presented prior periods have also been reclassified to discontinued operations for comparability. The net loss reported from discontinued operations related to the home services segment, as of the year ended December 31, 2019, was $1,510,475. Included in this amount is an offsetting $21,629 loss recovery on discontinued operations that represents royalties earned in accordance with the Rooter Hero royalty arrangement mentioned previously. This compares to the net loss of $915,163 reported from discontinued operations related to the home services segment for the year ended December 31, 2018.

 

 

Other Operations

 

The tables below provide a summary of income statement amounts over time. These figures are specific to other business segments, including corporate and various other investments, and are presented for the annual and quarterly periods designated below.

 

 

Annual		Year Ended December 31, 2019				Year Ended December 31, 2018
Revenues		$	212,631			$	160,492
Cost of revenue			—				202,533
Operating expenses			1,101,098				875,527
Other income (expense)			96,551				2,673
Comprehensive income (loss)		$	(791,916	)		$	(914,895	)

 

 

Quarterly		December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019
Revenues		$	—			$	—			$	—			$	212,631
Cost of revenue			—				—				—				—
Operating expenses			459,624				141,270				305,284				194,920
Other income (expense)			79,876				20,249				(7,471	)			3,897
Comprehensive income (loss)		$	(379,748	)		$	(121,021	)		$	(312,755	)		$	21,608

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This item is not required by smaller reporting companies.

 

ITEM 8.

FINANCIAL STATEMENTS

 

The information required by this Item 8 may be found immediately after the signatures to this report and is incorporated herein by reference.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

As previously reported in our Current Report on Form 8-K filed with the SEC on July 15, 2019, on July 10, 2019, the Company formally engaged Brown Edwards & Company, LLP to serve as the Company’s independent registered public accounting firm for the year ending December 31, 2019. Prior to this time, Cherry Bekaert, LLP had been appointed as the Company’s independent registered public accounting firm for the year ending December 31, 2019, having served as the Company’s independent registered public accounting firm since 2016. There has been no other change in the independent accountants engaged to audit the financial statements of the Company and its subsidiaries during the last two fiscal years ended December 31, 2019, and there have been no disagreements with such independent accountants during the last two fiscal years ended December 31, 2019, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.

 

ITEM 9A.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of the design and operation of our “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of December 31, 2019. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Based upon this evaluation, and based upon material weaknesses in our internal control over financial reporting identified as of the date of our most recent evaluation of internal controls over financial reporting, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2019.

 

Management’s Report on Internal Control over Financial Reporting

 

The management of Enterprise Diversified, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements. Under the supervision and with the participation of our management, including our Executive Chairman and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our management concluded that, as of December 31, 2019, our internal control over financial reporting was not effective based on such criteria. We have reviewed the results of management’s assessment with our Board of Directors. In addition, we will evaluate any changes to our internal control on a quarterly basis to determine if a material change occurred.

 

Material Weaknesses in Internal Controls

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.

 

As a result of our evaluations, we identified the following material weakness in our internal control over financial reporting as of December 31, 2019:

 

We have not properly designed internal controls over the preparation of our financial statements. We have incorporated consultants, new hires, and review processes to alleviate some of the associated risks of segregation of duties and financial reporting matters; however, formal and consistent policies and procedures, as well as complete control documentation for all significant financial reporting areas, have not been prepared or implemented.

 

Changes in Our Internal Controls

 

During the year ended December 31, 2019, the Company hired a new Vice President of Operations in order to build out new company processes and optimize existing company procedures. Additionally, this role is intended to create a dedicated operational manager across each of the business segments. As a result, corporate management has greater visibility over financial transactions and internal control processes.

 

During the previous year ended December 31, 2018, the Company had separated the Chief Executive Officer and Chief Financial Officer roles to allow for more specific focus on the Company’s operational and financial needs. Additionally, the Company had hired a new Vice President and Chief of Staff to enhance management’s oversight and further segregate management roles and responsibilities. The Company also had hired an additional accountant at the corporate level in order to add additional layers of internal review and provide segregation of accounting and financial reporting roles and responsibilities.

 

 

ITEM 9B.

OTHER INFORMATION

 

Specialty Contracting Group, LLC

 

On October 22, 2019, the Company, as and being the sole and managing member of Specialty Contracting Group, LLC, resolved to dissolve and wind up Specialty Contracting Group and proceed with distributing its assets in accordance with §18-804 of the Delaware Limited Liability Company Act. Management had determined that Specialty Contracting Group’s continued existence was not reasonably practicable or financially feasible; the entity having no operational capabilities, no significant assets, and no prospects for the carrying on of any business or receipt of revenue. All of Specialty Contracting Group’s cash on hand was paid out ratably to its creditors and claimants; however, its assets were not sufficient to satisfy in full its known liabilities. After making such payments out of and to the extent of its assets, Specialty Contracting Group filed a Certificate of Cancellation with the Secretary of State of the State of Delaware on November 15, 2019, thereby effecting the cancellation and termination of the entity.

 

Reverse Stock Split

 

As previously reported in our Current Report on Form 8-K filed with the SEC on June 7, 2018, the Board of Directors of the Company previously approved, on March 29, 2018, a reverse stock split of all of the Company’s Common Stock, pursuant to which every 125 shares of Common Stock of the Company were reverse split, reconstituted, and converted into one (1) share of Common Stock of the Company (the “Reverse Stock Split”). To effectuate the aforesaid Reverse Stock Split, the Company previously filed on May 23, 2018, a Certificate of Change Pursuant to Nevada Revised Statutes (“NRS”) Section 78.209 (the “Certificate of Change”) with the Secretary of State of the State of Nevada, with a specified effective filing date of June 1, 2018.

 

The Company submitted an Issuer Company Related Action Notification regarding the Reverse Stock Split to the Financial Industry Regulatory Authority (“FINRA”) on May 22, 2018. FINRA declared the Reverse Stock Split effective in the marketplace July 23, 2018 (the “FINRA Effective Date”). Accordingly, while the Certificate of Change became effective under Nevada state corporate law on June 1, 2018, the Reverse Stock Split did not become effective as to shareholders or the marketplace until the FINRA Effective Date.

 

Split Adjustment

 

On the FINRA Effective Date, the total number of shares of the Company’s Common Stock held by each stockholder converted automatically into the number of whole shares of Common Stock equal to (i) the number of shares of Common Stock held by such stockholder immediately prior to the Reverse Stock Split, divided by (ii) one hundred twenty five (125). No fractional shares were issued, and no cash or other consideration was paid. Rather, any fraction of a share of Common Stock that otherwise would have resulted from the Reverse Stock Split were rounded up to the next whole share of Common Stock. That is, stockholders who otherwise would have been entitled to receive fractional shares because they held a number of pre-Reverse Stock Split shares of the Company’s Common Stock not evenly divisible by one hundred twenty five (125), had the number of post-Reverse Stock Split shares of the Company’s Common Stock to which they were entitled rounded up to the next whole number of shares of the Company’s Common Stock. Stockholders’ equity and all references to share and per-share amounts in this annual report on Form 10-K and in the accompanying consolidated financial statements have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.

 

Ownership Unchanged

 

Immediately after the Reverse Stock Split, each stockholder’s percentage ownership interest in the Company and proportional voting power remained unchanged except for minor adjustments resulting from the Company’s election to round up any fraction of a share of Common Stock that otherwise would have resulted from the Reverse Stock Split. The rights and privileges of the holders of shares of Common Stock of the Company were substantially unaffected by the Reverse Stock Split.

 

Capitalization

 

Immediately prior to the Certificate of Change becoming effective, the aggregate number of shares which the Company had the authority to issue was three hundred fifty million (350,000,000) shares of Common Stock at $.001 par value, and thirty million (30,000,000) shares of Serial Preferred Stock at $.001 par value. As a result of the Certificate of Change and Reverse Stock Split, the aggregate number of shares which the Company has the authority to issue is two million eight hundred thousand (2,800,000) shares of Common Stock at $.125 par value, and thirty million (30,000,000) shares (unchanged) of Serial Preferred Stock at $.001 par value. 

 

 

 

PART III

 

We expect to file with the SEC in April 2020 (and, in any event, not later than 120 days after the close of our last fiscal year), a definitive Proxy Statement, pursuant to SEC Regulation 14A in connection with our annual meeting of stockholders scheduled to be held on May 28, 2020.

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2020 annual meeting of stockholders under the sections entitled “Information with Respect to Nominees,” “Management,” and “Corporate Governance.”

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2020 annual meeting of stockholders under the section entitled “Executive Compensation.”

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2020 annual meeting of stockholders under the sections entitled “Security Ownership of Directors and Executive Officers” and “Information as to Certain Stockholders.”

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2020 annual meeting of stockholders under the sections entitled “Determinations Regarding Independence” and “Transactions with Related Persons.”

 

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2020 annual meeting of stockholders under the section entitled “Proposal 4. Ratification of the Selection of Independent Registered Public Accounting Firm.”

 

 

 

PART IV

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)	Financial Statements – Contained in Item 8:

 

		Page
Reports of Independent Registered Public Accounting Firms		22
Consolidated Balance Sheets – December 31, 2019 and 2018		23
Consolidated Statements of Operations – Years Ended December 31, 2019 and 2018		24
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2019 and 2018		25
Consolidated Statements of Changes in Stockholders’ Equity – Years Ended December 31, 2019 and 2018		26
Consolidated Statements of Cash Flows – Years Ended December 31, 2019 and 2018		27
Notes to Consolidated Financial Statements		29

 

 

 

 

(b)	Exhibits – The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference:

 

Exhibit		Description
3.1(i)		Articles of Incorporation of the Registrant (December 17, 1992) (a)
3.1(ii)		Amended Articles of Incorporation (July 29, 1998) (a)
3.1(iii)		Amended Articles of Incorporation (October 26, 1998) (a)
3.1(iv)		Amended Articles of Incorporation (July 14, 1999) (a)
3.1(v)		Amended Articles of Incorporation (July 28, 1999) (a)
3.1(vi)		Certificate of Amendment to the Articles of Incorporation (January 23, 2018) (f)
3.1(vii)		Certificate of Change Pursuant to Nevada Revised Statutes Section 78.209 (June 1, 2018) (l)
3.1(viii)		Certificate of Amendment to the Articles of Incorporation (June 1, 2018) (m)
3.2(i)		Bylaws of the Registrant (December 17, 1992) (a)
3.2(ii)		Amended Bylaws of the Registrant (January 28, 2015) (b)
10.1		Limited Partnership Agreement of Alluvial Fund, LP dated as of January 1, 2017, and entered into by Willow Oak Asset Management, LLC on December 27, 2016 (c)
10.2		Side Letter Agreement dated December 28, 2016, by and between Willow Oak Asset Management, LLC and Alluvial Capital Management, LLC (for itself and on behalf of Alluvial Fund, LP) (d) *
10.3		Form of Sitestar Corporation Private Placement Subscription Agreement (e)
10.4		Master Real Estate Asset Purchase Agreement by and between Sitestar Corporation and Mt. Melrose, LLC, dated December 10, 2017 (p)
10.5		Cash Flow Agreement by and between Mt Melrose, LLC, d.b.a. Mt Melrose II, LLC and Mt. Melrose, LLC, dated January 10, 2018 (o)
10.6		Form of Sitestar Corporation Private Placement Subscription Agreement (g)
10.7		Limited Liability Company Operating Agreement of Huckleberry Real Estate Fund II, LLC dated as of January 24, 2017 and entered into by Willow Oak Asset Management, LLC on January 24, 2017 (h)
10.8		Side Letter Agreement dated January 23, 2017 by and between Willow Oak Asset Management, LLC and Huckleberry Capital Management, LLC (for itself and on behalf of Huckleberry Real Estate Fund II, LLC) (i)
10.9		Employment Agreement dated January 25, 2017 by and between Sitestar Corporation and Tabitha Keatts (j)
10.10		Amendment to Alluvial Side Letter Agreement (December 15, 2017) (k)
10.11		Employment Agreement effective as of October 5, 2018 by and between the Registrant and Alea A. Kleinhammer (n)
10.12		Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC dated June 27, 2019 (r)
16.1		Letter of Cherry Bekaert, LLP dated July 15, 2019 (q)
21		List of Subsidiaries **
31.1		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) **
31.2		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) **
32		Certification Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
99.1		Enterprise Diversified, Inc. 2020 Equity Incentive Plan**

 

 

 

 

Exhibit		Description
101		Pursuant to Rule 405 of Regulation S-T, the following materials from Enterprise Diversified Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019, and the year ended December 31, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2019 and 2018; (ii) Consolidated Statements of Operations for the Years ended December 31, 2019 and 2018; (iii) Consolidated Statements of Cash Flows for the Years ended December 31, 2019 and 2018 (iv) Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2019 and 2018; (v) Notes to Consolidated Financial Statements

 

(a) Filed as an exhibit to the Registrant’s Form-10SB, as amended, initially filed with the Securities and Exchange Commission on October 22, 1999, and incorporated herein by reference.

 

(b) Filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on January 28, 2015, and incorporated herein by reference.

 

(c) Filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2016, and incorporated herein by reference.

 

(d) Filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2016, and incorporated herein by reference.

 

(e) Filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on November 9, 2016, and incorporated herein by reference.

 

(f) Filed as Exhibit 3.1 to Registrant’s Form 8-K Amendment No. 1 filed with the Securities and Exchange Commission on January 24, 2018, and incorporated herein by reference.

 

(g) Filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on February 6, 2017, and incorporated herein by reference.

 

(h) Filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on January 30, 2017, and incorporated herein by reference.

 

(i) Filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on January 30, 2017, and incorporated herein by reference.

 

(j) Filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on January 26, 2017, and incorporated herein by reference.

 

(k) Filed as Exhibit 10.13 to Registrant’s Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission on March 30, 2018, and incorporated herein by reference.

 

(l) Filed as Exhibit 3.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on June 7, 2018, and incorporated herein by reference.

 

(m) Filed as Exhibit 3.2 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on June 7, 2018, and incorporated herein by reference.

 

(n) Filed as Exhibit 10.12 to Registrant’s Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission on April 1, 2019, and incorporated herein by reference.

 

(o) Filed as Exhibit 10.6 to Registrant’s Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission on March 30, 2018, and incorporated herein by reference.

 

(p) Filed as Exhibit 10.5 to Registrant’s Form 10-K for the fiscal year ended December 31, 2017 filed with the Securities and Exchange Commission on March 30, 2018, and incorporated herein by reference.

 

(q) Filed as Exhibit 16.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 15, 2019, and incorporated herein by reference.

 

(r) Filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 3, 2019, and incorporated herein by reference.

 

* Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

 

** Filed herewith

 

ITEM 16.

FORM 10-K SUMMARY

 

None.

 

 

 

SIGNATURES

 

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ENTERPRISE DIVERSIFIED, INC.

(REGISTRANT)

 

Date: March 30, 2020		By:		/s/Steven L. Kiel
				Steven L. Kiel
				Executive Chairman
				(Principal Executive Officer)
Date: March 30, 2020		By:		/s/Alea A. Kleinhammer
				Alea A. Kleinhammer
				Chief Financial Officer
				(Principal Financial Officer)

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

Date: March 30, 2020		By:		/s/Steven L. Kiel
				Steven L. Kiel
				Executive Chairman
				(Principal Executive Officer)
Date: March 30, 2020		By:		/s/Alea A. Kleinhammer
				Alea A. Kleinhammer
				Chief Financial Officer
				(Principal Financial Officer)
Date: March 30, 2020		By:		/s/Jeremy K. Deal
				Jeremy K. Deal
				Vice-Chairman
Date: March 30, 2020		By:		/s/Keith D. Smith
				Keith D. Smith
				Director
Date: March 30, 2020		By:		/s/Thomas Braziel
				Thomas Braziel
				Director

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

Enterprise Diversified, Inc.

Richmond, Virginia

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Enterprise Diversified, Inc. and subsidiaries (the “Company”) as of December 31, 2019, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Emphasis of Matters

As discussed in Note 3 of the Notes to Consolidated Financial Statements, the Company entered into a sales agreement to transfer all of the personal property and customer lists and records, and certain other assets and liabilities of Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC) to a third party. The total loss on disposal of $1,158,732, and associated current operating results, has been reported on the Income (loss) from discontinued operations line of the Company’s consolidated statements of operations for the year ended December 31, 2019. In addition, the current and non-current assets and liabilities previously related to Specialty Contracting Group, LLC have been reclassified to the appropriate held for sale categories on the Company’s consolidated balance sheets. Our opinion is not modified with respect to this matter.

 

As discussed in Note 4 of the Notes to Consolidated Financial Statements, the Company sold 65% of its membership interest in Mt Melrose, LLC to a third party. The total loss on the sale of Mt Melrose LLC of $4,157,809 has been reported on the Loss on sale of subsidiary line of the Company’s consolidated statements of operations for the year ended December 31, 2019. Our opinion is not modified with respect to this matter.

 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

          

                                                        

/s/ Brown, Edwards & Company, L.L.P.

 

We have served as the Company’s auditor since 2019.

 

Lynchburg, Virginia

March 30, 2020

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and
Stockholders of Enterprise Diversified, Inc.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Enterprise Diversified, Inc. (the “Company”) as of December 31, 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes, (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.

 

 

/s/ Cherry Bekaert LLP

 

We have served as the Company’s auditor from 2016 through 2018.

 

Charlotte, North Carolina

April 1, 2019

 

 

 

ENTERPRISE DIVERSIFIED, INC.

And Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31, 2019 and 2018

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2019 and 2018

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years Ended December 31, 2019 and 2018

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS