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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended September 30, 2020

 

ENTERPRISE DIVERSIFIED, INC.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Commission file number 000-27763

 

Nevada

88-0397234

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

1518 Willow Lawn Drive, Richmond, VA

23230

(Address of Principal Executive Offices)

(Zip Code)

 

(434) 336-7737

(Registrant’s telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

Not applicable

Not applicable

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    [X] Yes  ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    [X] Yes  ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐ Yes  ☒ No

 

The number of shares outstanding of the issuer’s Common Stock, $0.125 par value, as of November 11, 2020 is 2,602,240.

 

 

 

 

Table of Contents

 

 

Page No.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

 

 

PART I

Item 1. Financial Statements 

3

Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019

3

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

4

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019

5

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019

6

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019  

7

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

30

Item 4. Controls and Procedures

30

 

 

PART II

Item 1. Legal Proceedings

31

Item 1A. Risk Factors

31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3. Defaults Upon Senior Securities

31

Item 4. Mine Safety Disclosures

31

Item 5. Other Information

31

Item 6. Exhibits

31

 

 

Signatures

32

 

1

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including, without limitation, Part I, Item 2, “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, maintenance of strategic alliances, and other factors discussed elsewhere in this Form 10-Q, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors.

 

2

 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

ENTERPRISE DIVERSIFIED, INC.

And Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

 

                 
   

September 30, 2020 (unaudited)

   

December 31, 2019

 

Assets

               

Current Assets

               
Cash and cash equivalents   $ 337,149     $ 666,810  
Accounts receivable, net     49,824       52,889  
Other current assets     17,000       29,555  
Other current assets - held for resale     261       428  

Total current assets

    404,234       749,682  

Long-term Assets

               
Real estate - held for investment, net     244,789       380,515  
Real estate - held for resale, net     133,909       98,910  
Property and equipment, net     14,719       17,753  
Goodwill, net     212,445       212,445  
Note receivable     206,918       195,121  
Long-term investments     11,135,580       10,126,204  
Lease right-of-use assets           45,056  
Other assets     73,429       73,958  

Total long-term assets

    12,021,789       11,149,962  

Total assets

  $ 12,426,023     $ 11,899,644  

Liabilities and Stockholders’ Equity

               

Current Liabilities

               
Accounts payable   $ 63,573     $ 157,934  
Accrued compensation     143,953       175,259  
Accrued expenses     32,951       23,115  
Deferred revenue     213,498       204,960  
Lease liability, current           46,435  
Notes payable, current     17,043       11,453  
Other current liabilities - held for resale     147,113       146,958  

Total current liabilities

    618,131       766,114  

Long-term Liabilities

               
Notes payable, net of current portion     482,635       499,572  

Total long-term liabilities

    482,635       499,572  

Total liabilities

    1,100,766       1,265,686  

Stockholders’ Equity

               

Preferred stock, $0.001 par value, 30,000,000 shares authorized; none issued

           

Common stock, $0.125 par value, 2,800,000 shares authorized; 2,602,240 and 2,566,646 shares issued and outstanding

    325,280       320,831  

Additional paid-in capital

    27,439,334       27,313,734  

Accumulated other comprehensive income

           
Accumulated deficit     (16,439,357 )     (17,000,607 )

Total stockholders’ equity

    11,325,257       10,633,958  

Total liabilities and stockholders’ equity

  $ 12,426,023     $ 11,899,644  

 

 

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

 

3

 
 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   

For the three months ended

   

For the nine months ended

 
   

September 30

   

September 30

 
   

2020

   

2019

   

2020

   

2019

 

Revenues - asset management

  $ 1,607,150     $ (159,085 )   $ 1,130,815     $ 1,127,075  

Revenues - real estate

    16,129       19,359       219,772       420,464  

Revenues - internet operations

    242,237       265,171       741,011       805,990  

Revenues - other

                      212,631  

Total revenues

    1,865,516       125,445       2,091,598       2,566,160  
                                 

Cost of revenues - real estate

    12,157       30,753       151,480       358,126  

Cost of revenues - internet operations

    85,412       83,517       251,829       254,373  

Total cost of revenues

    97,569       114,270       403,309       612,499  
                                 

Gross profit (loss) - asset management

    1,607,150       (159,085 )     1,130,815       1,127,075  

Gross profit (loss) - real estate

    3,972       (11,394 )     68,292       62,338  

Gross profit - internet operations

    156,825       181,654       489,182       551,617  

Gross profit - other

                      212,631  

Total gross profit (loss)

    1,767,947       11,175       1,688,289       1,953,661  
                                 

Selling, general, and administrative expenses:

                               

Insurance

    11,737       (963 )     40,560       68,630  
Professional fees     122,102       88,295       466,351       395,452  
Salaries and wages     164,733       135,916       492,329       565,328  
Travel and meals     121       9,458       3,256       31,942  
Other operating expenses     42,019       45,465       147,016       383,155  

Total selling, general and administrative expenses

    340,712       278,171       1,149,512       1,444,507  

Income (loss) from operations

    1,427,235       (266,996 )     538,777       509,154  
                                 
Loss on sale of subsidiary                       (4,157,809 )
Impairment expense           (3,040 )           (228,405 )

Interest expense

    (5,771 )     (13,473 )     (19,787 )     (293,202 )

Other income (loss), net

    7,632       28,420       26,498       67,369  

Total other income (loss)

    1,861       11,907       6,711       (4,612,047 )
                                 

Income (loss) from continuing operations before income taxes

    1,429,096       (255,089 )     545,488       (4,102,893 )

Income tax benefit (expense)

                       

Income (loss) from continuing operations

    1,429,096       (255,089 )     545,488       (4,102,893 )
                                 

Income (loss) from discontinued operations, net of taxes

    1,857       (31,151 )     15,762       (1,441,156 )

Net income (loss)

  $ 1,430,953     $ (286,240 )   $ 561,250     $ (5,544,049 )
                                 
Net income (loss) per share, basic and diluted     0.55       (0.11 )     0.22       (2.18 )
Net income (loss) per share from continuing operations, basic and diluted     0.55       (0.10 )     0.21       (1.61 )
Net income (loss) per share from discontinued operations, basic and diluted     0.00       (0.01 )     0.01       (0.57 )

Weighted average number of shares, basic

    2,602,240       2,544,776       2,596,541       2,544,776  

Weighted average number of shares, diluted

    2,602,908       2,544,776       2,597,136       2,544,776  

 

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

 

4

 
 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   

For the three months ended

   

For the nine months ended

 
   

September 30

   

September 30

 
   

2020

   

2019

   

2020

   

2019

 

Net income (loss)

  $ 1,430,953     $ (286,240 )   $ 561,250     $ (5,544,049 )

Other comprehensive income (loss), net of tax:

                               

Change in foreign currency translation adjustments

                       

Comprehensive income (loss)

  $ 1,430,953     $ (286,240 )   $ 561,250     $ (5,544,049 )

 

 

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

 

5

 
 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 

                   

Additional

           

Accumulated Other

           

Total

 
   

Common

           

Paid-in

   

Treasury

   

Comprehensive

   

Accumulated

   

Stockholders’

 
   

Stock

   

Amount

   

Capital

   

Stock

   

Income

   

Deficit

   

Equity

 

Balance December 31, 2019

    2,566,646     $ 320,831     $ 27,313,734     $     $     $ (17,000,607 )   $ 10,633,958  

Net income (loss)

                                  (1,971,168 )     (1,971,168 )

Stock issuance

    35,594       4,449       125,600                         130,049  

Balance March 31, 2020

    2,602,240       325,280       27,439,334                   (18,971,775 )     8,792,839  

Net income (loss)

                                  1,101,465       1,101,465  

Balance June 30, 2020

    2,602,240       325,280       27,439,334                   (17,870,310 )     9,894,304  
Net income (loss)                                   1,430,953       1,430,953  
Balance September 30, 2020     2,602,240     $ 325,280     $ 27,439,334     $     $     $ (16,439,357 )   $ 11,325,257  

 

                   

Additional

           

Accumulated Other

           

Total

 
   

Common

           

Paid-in

   

Treasury

   

Comprehensive

   

Accumulated

   

Stockholders’

 
   

Stock

   

Amount

   

Capital

   

Stock

   

Income

   

Deficit

   

Equity

 

Balance December 31, 2018

    2,544,776     $ 328,160     $ 27,718,308     $ (511,901 )   $ 3,054     $ (11,621,970 )   $ 15,915,651  

Net income (loss)

                                  373,769       373,769  

Balance March 31, 2019

    2,544,776       328,160       27,718,308       (511,901 )     3,054       (11,248,201 )     16,289,420  

Net income (loss)

                                  (5,631,585 )     (5,631,585 )

Balance June 30, 2019

    2,544,776       328,160       27,718,308       (511,901 )     3,054       (16,879,786 )     10,657,835  
Net income (loss)                                   (286,240 )     (286,240 )
Balance September 30, 2019     2,544,776     $ 328,160     $ 27,718,308     $ (511,901 )   $ 3,054     $ (17,166,026 )   $ 10,371,595  

 

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

 

6

 
 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2020 and 2019

 

   

2020

   

2019

 

Cash flows from (used in) operating activities:

               

Net income (loss) from continuing operations

  $ 545,488     $ (4,102,893 )

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

               
Loss on sale of subsidiary           4,157,809  
Deconsolidation of assets and liabilities from sale of subsidiary           (149,425 )
Impairment of long-term assets           170,858  

Depreciation and amortization

    16,424       155,708  

Gain on long-term investments

    (992,789 )     (1,218,399 )

Bad debt expense

    322       95,756  

Gain on sale of real estate

    (73,165 )     (16,932 )
Loss on disposal of property and equipment           11,931  

(Increase) decrease in:

               

Accounts receivable, net

    2,743       100,545  

Notes receivable

    (11,797 )     (11,754 )

Other current assets

    12,555       (11,589 )

Increase (decrease) in:

               

Accounts payable

    (94,361 )     (60,107 )

Accrued expenses

    107,200       (113,240 )

Deferred revenue

    8,538       7,599  

Accrued interest

          103,909  

Net cash flows (used in) continuing operations

    (478,842 )     (880,224 )

Net cash flows (used in) from discontinued operations

    16,084       (269,458 )

Net cash flows (used in) operating activities

    (462,758 )     (1,149,682 )

Cash flows from (used in) investing activities:

               
Proceeds from investments           714,285  

Purchases of investments

    (16,587 )     (49,038 )

Proceeds from sale of real estate

    172,000       772,850  
Improvements to real estate     (10,969 )     (105,186 )

Proceeds from sale of subsidiary

          100,000  

Proceeds from sale of inventory

          4,160  
Issuance of line of credit           (10,000 )

Net cash flows from continuing operations

    144,444       1,427,071  

Net cash flows from (used in) discontinued operations

           

Net cash flows from investing activities

    144,444       1,427,071  

Cash flows from (used in) financing activities:

               

Principal payments on note payable

    (136,449 )     (819,195 )

Proceeds from notes payable

    125,102       300,000  

Net cash flows (used in) continuing operations

    (11,347 )     (519,195 )

Net cash flows (used in) from discontinued operations

          (32,645 )

Net cash flows (used in) financing activities

    (11,347 )     (551,840 )

Net decrease in cash

    (329,661 )     (274,451 )

Cash and cash equivalents at beginning of the period

    666,810       435,726  

Cash and cash equivalents at end of the period

  $ 337,149     $ 161,275  

 

 

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

 

7

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Nine Months Ended September 30, 2020 and 2019

 

   

2020

   

2019

 

Non-cash and other supplemental information:

               

Transfer of real estate held for investment to held for resale

  $ 177,826     $ 944,387  
Transfer of real estate held for resale to held for investment   $ 43,992     $ 145,000  

Issuance of common stock per equity compensation plan

  $ 130,049     $  

Effects of adoption of new lease guidance on continuing operations

  $     $ 59,563  

Effects of adoption of new lease guidance on discontinued operations

  $     $ 58,127  

Continuing operations cash paid for interest

  $ 19,787     $ 174,951  

Discontinued operations cash paid for interest

  $     $ 7,754  

 

 

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

 

8

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Lines of Business

 

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 three- and nine-month periods ended September 30, 2020, the Company operated through four reportable segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. Other Operations include corporate operations and nonrecurring or one-time strategic funding or similar activity that is not considered to be one of our primary lines of business. During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, as of the quarter ended September 30, 2020, 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.

 

Asset Management Operations

 

The Company operates its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”) and Willow Oak Capital Management, LLC.

 

In 2016, the Company made a strategic determination to fund a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017 by an 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. As of September 30, 2020, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations.

 

In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement in June 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, 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 managed by Coolidge. Under their agreement concerning Bonhoeffer Fund, LP, Willow Oak paid all start-up expense and pays agreed-upon operating expenses that are not partnership expenses, Coolidge is responsible for all investment management, and Willow Oak receives 50% of all performance and management fees earned.

 

On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our Board 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 monthly fixed fee and an annual 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 joint venture, of which Willow Oak Capital Management is a 10% owner, manages capital through separately managed accounts and a private investment fund launched January 1, 2020. As a member of the general partner, Willow Oak Capital Management provides ongoing FMS and operational support in addition to having covered all one-time expenses associated with the launch of Focused Compounding Fund, LP. As consideration for the arrangement, Willow Oak Capital Management 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. 

 

On September 29, 2020, Willow Oak, through its newly formed wholly-owned subsidiary, Willow Oak Asset Management Affiliate Management Services, LLC, executed a strategic relationship agreement with SVN Capital, LLC to become a 20% owner of the firm in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak Asset Management Fund Management Services, LLC, another newly formed wholly-owned subsidiary of Willow Oak. SVN Capital’s managing member, Shreekkanth Viswanathan, manages a global, long-only investment portfolio of compounders and special situations through separately managed accounts and a private limited partnership. As a beneficial owner of the general partner, Willow Oak is entitled to 20% of gross management and performance fees earned. Additionally, Willow Oak Asset Management Fund Management Services, LLC earns a direct fee from the private limited partnership for the administrative, compliance and tax and audit liaison services it renders.

 

9

 

Real Estate Operations

 

In December 2017, ENDI created a wholly-owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), 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 in December 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. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to Woodmont. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. See Note 4 for more information.

 

In July 2017, ENDI created a wholly-owned real estate subsidiary named EDI Real Estate, LLC to hold ENDI’s legacy portfolio of real estate. As of September 30, 2020, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes six residential properties and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia. The portfolio includes single-family homes, both rented and vacant, that are managed by a third-party property management company.

 

Internet Operations

 

The Company operates its internet operations segment 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 to customers in the United States and Canada.

 

Discontinued Operations - Home Services Operations

 

Prior to May 24, 2019, the Company operated its home services operations segment through its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.

 

As has been previously reported, on May 24, 2019, the Company completed its divestiture of the home services operations to Rooter Hero. See Note 3 for more information.

 

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. Additional investment activity that is not specifically mentioned below is included in the accompanying unaudited condensed consolidated financial statements.

 

Huckleberry Real Estate Fund

 

In January 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. In May 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly-owned subsidiary of the Company.

 

During the quarter ended March 31, 2019, all contributed capital was returned in full and a gain of $212,631 was recognized as revenue through the other operations segment on our unaudited condensed consolidated statements of operations for the nine-month period ended September 30, 2019.

 

Triad DIP Investors

 

In August 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 in April 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 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. 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 monetized all 450,000 shares. The borrower has requested an extension from the original note repayment date of April 29, 2020, and as of the quarterly period ended September 30, 2020, the Company is evaluating a renegotiation of terms.

 

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.

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and those entities in which it otherwise has a controlling financial interest, including: Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Mt Melrose, LLC (“New Mt Melrose”) prior to cessation of control resulting from the sale of 65% of the equity in New Mt. Melrose on June 27, 2019 (see Note 4), Specialty Contracting Group, LLC prior to the divestiture transaction on May 24, 2019 (see Note 3), Sitestar.net, Inc., and EDI Real Estate, LLC.

 

All intercompany accounts and transactions have been eliminated in consolidation.

 

10

 

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying interim consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The December 31, 2019 consolidated balance sheet included herein was derived from audited consolidated financial statements as of that date. Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously filed in our Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2020 and the results of operations for the three and nine months ended September 30, 2020 and 2019.

 

Use of Estimates

 

In accordance with GAAP, the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.

 

On an ongoing basis, management evaluates its estimates and judgments, including, among other items, those related to fair value of investments, revenue recognition, accrued expenses, financing operations, fair value of goodwill, fixed asset lives and impairment, lease right-of-use assets and impairment, deferred tax assets, liabilities and valuation allowance, other assets, the present value of lease liabilities, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements.

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash, cash equivalents, accounts receivable, and note receivable. The Company places its cash with high-quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.

 

Cash and Cash Equivalents

 

For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid instruments purchased with a maturity of three months or less.

 

Investments

 

The Company holds various investments through its asset management operations and real estate operations segments. Additionally, investments may be held and reported under the Company’s “other” segment. Assets held through these segments do not have a readily determinable value as these investments are not publicly traded, nor do they have published sales records. These investments are remeasured to fair value on a recurring basis. See Note 5 for more information.

 

As of September 30, 2020 and December 31, 2019, the Company also holds its remaining equity investment in Mt Melrose, LLC through its real estate operations segment. The Company has determined that its remaining equity investment does not have a readily determinable fair value, and the Company will account for the investment at cost, less any impairment, as adjusted for changes resulting from observable price changes. When fair value becomes determinable, the investment will be marked to fair value on a periodic basis.

 

Accounts Receivable

 

The Company grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is the recorded allowance for doubtful accounts and bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are written off from the allowance for doubtful accounts when an account or invoice is individually determined to be uncollectible.

 

Real estate operations segment rental accounts are typically paid by tenants via cash or check no later than the fifth of the month. Any accounts collected after the fifth are charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If payments are not provided in a timely manner, then the amount due is designated as an account receivable. If accounts remain uncollected, then standard operating procedures are followed to commence a notice process for the tenant to either pay the amount due or vacate the property. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. These procedures typically result in low amounts of past due receivables.

 

The internet operations segment attempts to reduce the risk of non-collection by including a late-payment fee and a manual-processing-payment fee to customer accounts. Receivables more than 90 days past due are no longer included in accounts receivable and are turned over to a collection agency. Accounts receivable more than 30 days are considered past due. 

 

As of September 30, 2020 and December 31, 2019, allowances offsetting gross accounts receivable on the accompanying consolidated balance sheets totaled $533 and $307, respectively. For the quarterly periods ended September 30, 2020 and 2019, bad debt expense (recoveries) from continuing operations was $58 and ($147), respectively. For the nine-month periods ended September 30, 2020 and 2019, bad debt expense from continuing operations was $322 and $95,756, respectively.

 

11

 

Property and Equipment

 

Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. Depreciation is computed using the straight-line method based on the estimated useful lives for each of the following asset classifications:

 

Furniture and fixtures (in years)     5  

Equipment (in years)

    7  

Building improvements (in years)

    15  

Buildings (in years)

    27.5  

 

The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Property and equipment to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell.

 

Goodwill and Other Intangible Assets

 

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company tests its goodwill annually as of December 31st or more often if events and circumstances indicate that those assets might not be recoverable. 

 

No impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2020.

 

No impairment adjustments were recorded during the three-month period ended September 30, 2019. During the nine-month period ended September 30, 2019, an impairment adjustment of the remaining home services goodwill of $1,024,591 was recognized and reported as a component of the loss on the divestiture of Specialty Contracting Group, LLC's assets.

 

Impairment testing of goodwill is required at the reporting-unit level (operating segment or one level below operating segment). The impairment test involves calculating the impairment of goodwill based solely on the excess of the carrying value of the reporting unit over the fair value of the reporting unit. Prior to performing the impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment to determine whether a detailed quantitative analysis is required. The Company estimates the fair value of its reporting units using discounted expected future cash flows.

 

Intangible assets (other than goodwill) consist of domain names attributed to the internet operations segment. The Company owns 228 domain names, of which 106 are available for sale. These domains are valued at historical cost. When management determines that material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account internal and external appraisals. Intangible assets determined to have definite lives are amortized over their estimated useful lives. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated future undiscounted cash flows of the related intangible asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.

 

Real Estate

 

Real estate properties held for resale are carried at the lower of cost or fair value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, then the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area in which the real estate is located. Fair value is evaluated annually by management or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable.

 

No impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2020.

 

During the three- and nine-month periods ended September 30, 2019, impairment adjustments of $3,040 and $169,839, respectively, were recorded on a commercial warehouse and various vacant lots held for resale.

 

Real estate properties held for investment are carried at the cost basis plus additional costs where the cost extended the life of or added value to the property. Otherwise, the cost is expensed as incurred. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management.

 

During the three- and nine-month periods ended September 30, 2020, $0 and $43,992, respectively, of real estate held for resale was transferred to real estate held for investment and $133,909 and $177,826, respectively, of real estate held for investment was transferred to real estate held for resale. Additionally, $0 and $10,969, respectively, of improvements were made to existing real estate held for investment during the three- and nine-month periods ended September 30, 2020. During the three- and nine-month periods ended September 30, 2019, $0 and $7,435, respectively, of improvements were made to real estate held for resale.

 

Accrued Compensation

 

Accrued compensation represents performance-based incentives that have not yet been paid. Additional compensation can be paid in the form of cash or via the issuance of Company stock. Compensation structures for employees are a pre-approved part of a formal employment agreement or arrangement. Stock based compensation, issued as part of the Company’s 2020 Equity Incentive Plan, is reserved for board members and members of senior management. The compensation accrual amount is based on the final value of Company stock that has been approved to be issued by the Governance, Compensation and Nomination Committee of the Board of Directors. These compensation amounts are accrued when earned and able to be estimated and are paid or issued annually after financial records are finalized.

 

Other Accrued Expenses

 

Other accrued expenses represent incurred but not-yet-paid expenses from payroll accruals, professional fees, and other accrued taxes.

 

12

 

Leases

 

On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases” (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840 and established ASC Topic 842. ASU No. 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted this guidance using the following practical expedients:

 

 

the Company did not reassess if any expired or existing contracts are leases or contain leases;

 

 

 

 

the Company did not reassess the classification of any expired or existing leases; and

 

 

 

 

the Company did not reassess whether the classification of existing costs associated with expired or existing leases should be classified as initial direct costs.

 

Additionally, the Company made ongoing accounting policy elections whereby it (i) does not recognize right-of-use (ROU) assets or lease liabilities for short-term leases (those with original terms of 12 months or less) and (ii) combines lease and non-lease elements of our leases. 

 

Upon adoption of the new guidance on January 1, 2019, the Company recorded an ROU asset of approximately $184,000 (net of existing deferred rent liability) and recognized a lease liability of approximately $186,000, with no resulting cumulative effect adjustment to retained earnings.

 

Revenue Recognition

 

Asset Management Operations and Other Investment Revenue

 

The Company earns revenue from investments and through various fee share and consulting agreements, including realized and unrealized gains and losses, which may result in negative period or quarterly revenues. Management fees earned are recorded monthly and are included in revenue on the accompanying unaudited condensed consolidated statements of operations. Performance fees earned are accrued monthly, paid out annually, and are also included in revenue on the accompanying unaudited condensed consolidated statements of operations. Consulting fees are billed, paid, and recorded on a monthly basis. Long-term investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized as revenue in the period of adjustment.

 

Management notes that the structure of these arrangements leaves a very low possibility for nonperformance. While the amount of revenue varies from month to month, collectability is very high. No contract assets or liabilities are recognized or incurred.

 

Additionally, the Company earns revenue from direct participation in various private investment funds, primarily the Alluvial Fund. This results in the realized and unrealized gains and losses within a fund such as the Alluvial Fund being recognized as revenue, or a decrease in revenue, on the accompanying unaudited condensed consolidated statements of operations.

 

A summary of revenue earned through asset management operations for the three- and nine-month periods ended September 30, 2020 and 2019 is included below:

 

    For the three months ended     For the nine months ended  

Asset Management Operations Revenue

 

September 30, 2020

   

September 30, 2019

   

September 30, 2020

   

September 30, 2019

 

Realized and unrealized gains (losses) on investment activity

  $ 1,545,239     $ (197,306 )   $ 989,609     $ 1,005,969  

Management and performance fee revenue

    37,858       13,672       69,153       44,645  

Fund management services revenue

    24,053       24,549       72,053       76,461  

Total revenue

  $ 1,607,150     $ (159,085 )   $ 1,130,815     $ 1,127,075  

 

Real Estate Revenue

 

The Company earns real estate revenue through rental agreements on real estate held for investment, as well as through the sale of real estate held for resale.

 

Rental revenue from real estate held for investment is recognized when it is earned, generally on the last day of each month or at another regular period agreed upon by the Company and the tenant. Tenants generally provide a security deposit at the time of possession. This deposit is held separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. Management has concluded that the nature of the performance obligation is cyclical and predictable with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.

 

Revenue from real estate held for resale is recognized upon closing of the sale (transfer of control), as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time.

 

Internet Revenue

 

The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for nonperformance. Contract liabilities (deferred revenue) were recognized in the amount of collections received in advance of services to be performed. No contract assets were recognized or incurred.

 

The Company generates revenue in its internet operations segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, third-party software as a reseller, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), web hosting, and additional related services to consumers and businesses. Customers may also subscribe to web hosting plans to include email access and storage. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.

 

13

 

Discontinued Revenue - Home Services Revenue

 

Prior to the divestiture transaction on May 24, 2019, the Company performed HVAC and plumbing service repairs and installed HVAC units for its customers through its home services operations segment. Revenue was recognized upon completion of the installation or service call. Sales were adjusted for any returns or allowances. A return or allowance situation would arise based on the two-year workmanship warranty that typically conveyed with the installation of a new unit. There was also a two-year assurance warranty on newly installed parts and equipment that was honored by the manufacturer. If an installation was performed over multiple days, then it was accounted for using work-in-process (WIP) accounting. Contract progress was measured by comparing materials and labor hours incurred to materials and labor hours expected per the contract. These types of contracts were typically completed within one month’s time. A small portion of revenue was from the sale of annual service agreements. Revenue attributable to these agreements was recognized over the life of the agreement.

 

If payment was received prior to contract completion, then the amount of revenue attributable to the unperformed work was designated as unearned revenue. If payment was not provided in advance or at the time of service or installation completion, then the amount due was recognized as revenue and as an account receivable.

 

Management has acknowledged that these performance obligations were recognized at designated points in time during the contract, including the completion of the contract. As the customer controlled the asset and had the right to use it during the contract, the Company had the right to payment for performance completed to date. Contract liabilities (deferred revenue) were recognized in the amount of collections received in advance of services to be performed. No contract assets were recognized or incurred.

 

Deferred Revenue

 

Deferred revenue represents collections from customers in advance of internet or home services to be performed. Revenue is recognized in the period service is provided. Total deferred revenue from continuing operations increased from $204,960 at December 31, 2019 to $213,498 at September 30, 2020. During the quarterly periods ended September 30, 2020 and 2019, $21,733 and $24,287, respectively, of revenue from continuing operations was recognized from prior-year contract liabilities (deferred revenue). For the nine-month periods ended September 30, 2020 and 2019, $193,408 and $196,840, respectively, of revenue from continuing operations was recognized from prior-year contract liabilities.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment, inclusive of the recent tax reform act. The most recent three tax years, fiscal years ended December 31, 2019, December 31, 2018, and December 31, 2017, are open to potential IRS examination.

 

Income (Loss) Per Share

 

Basic income (loss) per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.

 

In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potentially dilutive common shares is anti-dilutive. In periods of net income, diluted earnings per share is computed using the more dilutive of the “two class method” or the “treasury method.” Dilutive earnings per share under the “two class method” is calculated by dividing net income available to common stockholders as adjusted for the participating securities, by the weighted-average number of shares outstanding plus the dilutive impact of all other potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives. Dilutive earnings per share under the “treasury method” are calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the dilutive impact of all potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives.

 

None of the potentially dilutive securities had a dilutive impact during the three- and nine-month periods ended September 30, 2020 after rounding was applied. No potentially dilutive securities existed for the three- and nine-month periods ended September 30, 2019.

 

The number of anti-dilutive shares for the three- and nine-month periods ended September 30, 2020, consisting of common shares underlying common stock equity incentives, was 668.

  

Recently Issued Accounting Pronouncements

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement” (Topic 820). The guidance intends to improve the effectiveness of the disclosures relating to recurring and nonrecurring fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019. Portions of the guidance are to be adopted prospectively while other portions are to be adopted retroactively. Early adoption is permitted. The Company adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate should now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. In April 2019, the FASB further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments. In May 2019, the FASB issued further guidance to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible financial instruments. In November 2019, the FASB issued further guidance on expected recoveries for purchased financial assets with credit deterioration, and transition refiled for troubled debt restructurings, disclosures related to accrued interest receivables, and financial assets secured by collateral maintenance provisions. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. The Company currently expects that the adoption of this guidance may change the way we assess the collectability of our receivables and recoverability of other financial instruments. The Company will adopt this guidance as of January 1, 2023. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying unaudited consolidated financial statements. 

 

14

 

 

NOTE 3. HOME SERVICES SUBSIDIARY ASSET SALE

 

On May 24, 2019, as reported in 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. Rather, as consideration for the transaction, Rooter Hero agreed to 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.

 

As reported in prior periods, the home services subsidiary had failed to meet approved budgets and had underperformed since its inception in 2016. Management noted that the largely decentralized management approach was not a good fit for this industry, and the extensive operating requirements were not conducive to smaller company capacities. The cyclical nature of the business also resulted in unpredictable cash flows, which created immediate and significant needs for additional Company resources. Due to the past performance of the company, management determined that additional resources should not be allocated to this subsidiary. 

 

The decision was made to exit the business during the quarter ended June 30, 2019. The operations of Specialty Contracting Group, LLC were considered a component of, and the divestiture reflected a strategic shift in, the Company’s business. As such, Specialty Contracting Group, LLC’s historical operations have been classified as discontinued operations in the Company’s financial statements. The loss from discontinued operations has been determined using a loss recovery approach, as the collection of future royalties is uncertain and a reasonable estimate could not be made. This approach requires that the contingent consideration, the future royalties to be received, be valued at the lesser of the amount of the “probable,” defined as a greater than 50% likelihood, future proceeds or the carrying value of the disposed assets. Due to the unpredictability of the contingent consideration, and management’s inherent lack of control over the buyer’s operations, management determined it would not be reasonable to attempt to value the contingent consideration. This resulted in assigning the contingent consideration a current valuation of zero. As and to the extent any royalties are deemed probable, they will be subsequently recognized as a “recovery from discontinued operations” on the statements of operations and will offset, or recover, the initial loss recorded. Accordingly, during the three- and nine-month periods ended September 30, 2020, an offsetting $1,887 and $18,143 recovery on discontinued operations was recognized within the reported $1,857 and $15,762 of net income from discontinued operations, respectively.

 

A breakdown of discontinued assets and liabilities as reported on the face of the accompanying condensed consolidated balance sheets for the periods ended September 30, 2020 and December 31, 2019, is as follows:

 

   

September 30, 2020

   

December 31, 2019

 

Cash and cash equivalents

  $ 261     $ 428  

Total current assets - held for resale

    261       428  
                 

Accounts payable

    97,003       96,848  

Lease liabilities

    50,110       50,110  

Total current liabilities - held for resale

  $ 147,113     $ 146,958  

 

A reconciliation of discontinued operations as reported on the accompanying unaudited condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2020 and 2019, is as follows:

 

   

For the three months ended

   

For the nine months ended

 
   

September 30, 2020

   

September 30, 2019

   

September 30, 2020

   

September 30, 2019

 

Revenues

  $     $     $     $ 675,963  

Cost of revenues

                      427,215  

Gross profit

                      248,748  

Selling, general, and administrative expenses

    30       25,342       2,381       515,156  

Income (loss) on sale of subsidiary, net of recoveries

    1,887       12,183       18,143       (1,134,810 )

Other income (expense), net

          (17,992 )           (39,938 )

Net income (loss) reported as discontinued operations

  $ 1,857     $ (31,151 )   $ 15,762     $ (1,441,156 )

 

15

 

 

 

NOTE 4. SALE OF CONTROLLING INTEREST IN REAL ESTATE SUBSIDIARY

 

Transaction

 

On June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC, a Delaware limited liability company (“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. The Company retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest. Subsequent to the transaction, however, 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.

 

Prior to this transaction, the Company had grown uncomfortable with the extreme amounts of high-priced debt that the Mt Melrose subsidiary had taken on. There were significant principal payments due over the next 12 months at the subsidiary level that the portfolio’s cash flows could not offset and the Company was unwilling to subsidize. As reported in previous quarterly and annual reports, in November 2018 management implemented a right-sizing strategy for the Mt Melrose portfolio. This strategy included the hiring of a dedicated third-party property manager, a restructuring of overhead expenses, the divestiture of non-cash-flowing properties, and a focus on refinancing high-interest debt. The property manager was responsible for all day-to-day operations including, but not limited to: tenant relations and communications, property repairs and renovations, vacancy marketing, and turnover procedures. This allowed management to remain passive operationally and focus on property sales and refinancing opportunities. Subsequent to the sale on June 27, 2019, the property manager continued to fulfill the day-to-day operational responsibilities, and, to management’s knowledge, Woodmont continues to act on management’s previous right-sizing efforts by liquidating non-cash-flowing properties and pursuing refinancing options.

 

In connection with this 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 has 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. This arrangement allows the Company to maintain its passive management structure, while still owning a significant portion of the partnership.

 

Under the terms of the A&R LLC Agreement, distributions of cash, from whatever source, may be made to the members at such times, and in such amounts, as the manager, Woodmont, determines; provided, however, that any such distributions will be made in accordance with the following priorities: (i) distribution of amounts up to a cumulative total of $2,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement); (ii) then, distribution of cumulative amounts in excess of $2,000,000 and up to $3,000,000 will be made 67% to the Company and 33% to Woodmont; and (iii) thereafter, distribution of cumulative amounts in excess of $3,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement).

 

Deconsolidation Due to Transfer of Control

 

Prior to the sale of 65% of its Mt Melrose interest, the Company owned 100% of the membership interests in Mt Melrose, LLC and controlled the entity by virtue of its voting interests. As a result, the Company consolidated Mt Melrose under the “voting interests” (VOE) consolidation model.

 

By virtue of the A&R LLC Agreement, and the aforementioned standstill agreement, Woodmont is the sole “manager” responsible for all management and operating decisions of Mt Melrose. Management determined that as of June 27, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose and will no longer consolidate Mt Melrose. Furthermore, the Company has concluded that Mt Melrose does not qualify as a “variable interest entity” as Mt Melrose has sufficient equity at risk to permit operations and the Company is not the primary beneficiary of Mt Melrose’s activities. All activity prior to the deconsolidation event has been included on our consolidated statements of operations for given prior reporting periods in continuing operations, and under the real estate segment. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our consolidated balance sheets. The Company’s membership interest in Mt Melrose is now accounted for as an investment in the equity of Mt Melrose in the Company’s reported financial statements. 

 

Accounting for Remaining Mt Melrose Investment

 

The Company adopted ASU 2016-01 effective January 1, 2018. ASU 2016-01 generally requires entities to measure equity investments at fair value and recognize any changes in fair value in net income. However, entities are able to elect a measurement alternative for equity investments that do not have a “readily determinable fair value.” The Company has determined that its equity investment in Mt Melrose does not have a readily determinable fair value at the time of deconsolidation. The Company’s inability to “exercise significant influence” due to the previously mentioned standstill agreement, also supports the use of the measurement alternative. Under this alternative, the Company will measure the Mt Melrose investment at its implied fair value and assess it for impairment at each reporting date, or more often if indication of a potential impairment exists. When fair value becomes determinable, from observable price changes in orderly transactions, the Company’s investment will be marked to fair value on a periodic basis. Future dividends will be recognized as income and returns of capital recognized as a reduction in the Company’s investment when and if received.

 

Using the $100,000 transaction price for a 65% interest in Mt Melrose, LLC, the implied value of the retained 35% interest at the time of the transaction is $53,846. This amount is included under the long-term investment amount on the accompanying consolidated balance sheet as of September 30, 2020 and December 31, 2019.

 

16

 

 

 

NOTE 5. INVESTMENTS

 

Certain assets held through the Company, Willow Oak Asset Management, LLC, or EDI Real Estate, LLC do not have a readily determinable value, as these investments are not publicly traded, nor do they have published sales records. The investment in Alluvial Fund, LP is measured using net asset value (NAV) as the practical expedient and is exempt from the fair value hierarchy (see Note 6). The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and allocated based on total fund contributions. The Company’s investment in the Alluvial Fund is remeasured to fair value on a recurring basis and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Due to the nature of the Mt Melrose, LLC investment (subsequent to the loss of control (see Note 4)), the investment is measured at cost basis as fair value is not determinable until additional inputs and measurements become available.

 

   

Cost Basis

   

Unrealized Gain

   

Carrying Value

 

September 30, 2020

                       

Alluvial Fund, LP (at fair value)

  $ 7,059,319     $ 4,022,415     $ 11,081,734  

Mt Melrose, LLC (at cost)

    53,846             53,846  

Total

  $ 7,113,165     $ 4,022,415     $ 11,135,580  

 

   

Cost Basis

   

Unrealized Gain

   

Carrying Value

 

December 31, 2019

                       

Alluvial Fund, LP (at fair value)

  $ 7,042,732     $ 3,029,626     $ 10,072,358  

Mt Melrose, LLC (at cost)

    53,846             53,846  

Total

  $ 7,096,578     $ 3,029,626     $ 10,126,204  

 

Alluvial Fund is a private investment fund that focuses on investing in what it believes are deeply mispriced securities in the United States and abroad. Alluvial Fund focuses on small companies, thinly traded issues, and special situations, seeking to identify value that its management believes the market has yet to recognize. During the three- and nine-month periods ended September 30, 2020 and 2019, the Company did not withdraw management or performance fees earned through the Alluvial Fund. For the quarterly periods ended September 30, 2020 and 2019, the total amounts of these reinvested fees were $4,304 and $4,862, respectively. For the nine-month periods ended September 30, 2020 and 2019, the total amounts of these reinvested fees were $16,587 and $14,126, respectively.

 

 

NOTE 6. FAIR VALUE OF ASSETS AND LIABILITIES

 

GAAP defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date, and establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:

 

 

Level 1 - inputs are quoted prices in active markets as of the measurement date for identical assets and liabilities that the Company has the ability to access; this category includes exchange-traded mutual funds and equity securities;

 

 

 

 

Level 2 - inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates or yield curves, that are observable at commonly quoted intervals; this category includes mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, commercial paper, U.S. agency and municipal debt securities, U.S. Treasury securities, and derivative contracts; and

 

 

 

 

Level 3 - inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability; the measurements are highly subjective.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The Company valued its investments at fair value at the end of each reporting period. See description of these investments in Note 5 above.

 

   

(Level 1)

   

(Level 2)

   

(Level 3)

   

(Excluded) (a)

   

Total at Fair Value

 

September 30, 2020

                                       

Alluvial Fund, LP

  $     $     $     $ 11,081,734     $ 11,081,734  

Total investments

  $     $     $     $ 11,081,734     $ 11,081,734  

 

 

   

(Level 1)

   

(Level 2)

   

(Level 3)

   

(Excluded) (a)

   

Total at Fair Value

 

December 31, 2019

                                       

Alluvial Fund, LP

  $     $     $     $ 10,072,358     $ 10,072,358  

Total investments

  $     $     $     $ 10,072,358     $ 10,072,358  

 

 

(a)

Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

  

17

 

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

 

The Company analyzes goodwill on an annual basis or more often if events or changes in circumstances indicate potential impairments. No impairments were recorded during the three- and nine-month periods ended September 30, 2020.

 

During the three- and nine-month periods ended September 30, 2019, impairment adjustments of the remaining home services goodwill of $0 and $1,024,591, respectively, were recognized and reported as a component of the loss on the divestiture of Specialty Contracting Group, LLC's assets.

 

The Company evaluates real estate held on the balance sheet for potential impairment on an annual basis or whenever events or changes in circumstances indicate an impairment may have occurred. No impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2020.

 

During the three- and nine-month periods ended September 30, 2019, impairment adjustments of $3,040 and $169,839, respectively, were recorded on a commercial warehouse and various vacant lots held for resale.

 

As discussed in Note 4, the Company’s ongoing equity investment in Mt Melrose, LLC is carried at its implied cost under the alternative approach and will be assessed for impairment at each balance sheet date.

 

 

NOTE 7. PROPERTY AND EQUIPMENT

 

The cost of property and equipment at September 30, 2020, and December 31, 2019, consisted of the following:

 

   

2020

   

2019

 

Computers and equipment

  $ 17,330     $ 17,330  

Furniture and fixtures

    10,850       10,850  
      28,180       28,180  

Less accumulated depreciation

    (13,461 )     (10,427 )

Property and equipment, net

  $ 14,719     $ 17,753  

 

Depreciation expense from continuing operations was $1,012 for the quarterly period ended September 30, 2020, and $619 for the quarterly period ended September 30, 2019. Depreciation expense from continuing operations was $3,034 for the nine-month period ended September 30, 2020, and $17,355 for the nine-month period ended September 30, 2019. Included in these amounts are $0 and $6,809 for the nine-month periods ended September 30, 2020 and 2019, respectively, of depreciation expense related to personal property used in real estate segment rental operations. The depreciation expense related to personal property is included in the real estate segment cost-of-goods-sold amount on the accompanying unaudited condensed consolidated statements of operations.

 

18

 

 

 

NOTE 8. REAL ESTATE

 

EDI Real Estate, LLC

 

As of September 30, 2020 and December 31, 2019, the EDI Real Estate portfolio of properties included the following units:

 

EDI Real Estate

 

September 30, 2020

   

December 31, 2019

 

Units occupied or available for rent

    4       6  

Vacant units being prepared for rent

           
Vacant lots     3        

Total units held for investment

    7       6  
                 

Units held for resale

    2       2  

Vacant lots held for resale

          3  

Total units held for resale

    2       5  

 

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

 

The leases in effect as of September 30, 2020, 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

 

September 30, 2020

   

December 31, 2019

 

Total real estate held for investment

  $ 303,158     $ 484,590  

Accumulated depreciation

    (58,369 )     (104,075 )

Real estate held for investment, net

    244,789       380,515  
                 
Total real estate held for resale     192,476       98,910  
Accumulated depreciation     (58,567 )      

Real estate held for resale, net

  $ 133,909     $ 98,910  

 

For the three- and nine-month periods ended September 30, 2020, depreciation expense on the EDI Real Estate portfolio of properties was $4,431 and $12,861, respectively. This compares to depreciation expense for the three- and nine-month periods ended September 30, 2019, when depreciation expense on the EDI Real Estate portfolio of properties was $6,116 and $17,536, respectively.

 

During the quarterly periods ended September 30, 2020 and 2019, EDI Real Estate did not purchase or sell any properties. During the nine-month period ended September 30, 2020, two properties held for resale were sold for gross proceeds of $172,000 and net proceeds totaled $34,749. Subsequent to the quarterly period ended September 30, 2020, the Company sold one property held for resale. During the nine-month period ended September 30, 2019, EDI Real Estate did not purchase or sell any properties.

 

During the three- and nine-month periods ended September 30, 2020, $0 and $43,992, respectively, of real estate held for resale was transferred to real estate held for investment and $133,909 and $177,826, respectively, of real estate held for investment was transferred to real estate held for resale. During the three- and nine-month periods ended September 30, 2019, $121,558 of real estate held for investment was transferred to real estate held for resale. Additionally, $0 and $10,969, respectively, of improvements were made to existing real estate held for investment during the three- and nine-month periods ended September 30, 2020. During the three- and nine-month periods ended September 30, 2019, $0 and $7,435, respectively, of improvements were made to real estate held for resale.

 

There were no impairment adjustments recorded during the three- and nine-month periods ended September 30, 2020. During the three- and nine-month periods ended September 30, 2019, impairment adjustments of $3,040 and $43,012, respectively, were recorded on various vacant lots held for resale within the EDI Real Estate portfolio.

 

Mt Melrose, LLC

 

As described in Note 4, management previously has determined that the Company no longer has a controlling financial interest in Mt Melrose. All activity prior to the deconsolidation event has been included on our unaudited condensed consolidated statements of operations for given prior reporting periods under the real estate segment. No Mt Melrose activity is included on the unaudited condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2020 or the three-month period ended September 30, 2019. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our condensed consolidated balance sheets. Accordingly, there are no consolidated Mt Melrose assets as of the periods ended September 30, 2020 and December 31, 2019 included on the accompanying condensed consolidated balance sheets.

 

For the nine-month period ended September 30, 2019, depreciation expense on the Mt Melrose portfolio of properties was $114,020.

 

During the nine-month period ended September 30, 2019, Mt Melrose sold 21 residential properties and five vacant lots for gross proceeds of $775,850 and net proceeds of $151,671. This compares to their carrying value of $755,918, which resulted in a net gain of $19,932. Mt Melrose did not purchase any properties during the nine-month period ended September 30, 2019.

 

During the nine-month period ended September 30, 2019, an impairment adjustment of $126,827 was recorded on a commercial warehouse held for resale within the Mt Melrose portfolio.

 

Future Minimum Rental Revenues

 

The future anticipated minimum rental revenues based on leases in place as of September 30, 2020, for EDI Real Estate, LLC are as follows:

 

2020

  $ 6,970  

2021

    15,130  

Total

  $ 22,100  

 

19

 

 

NOTE 9. NOTES PAYABLE

 

Notes payable at September 30, 2020, and December 31, 2019, consist of the following:

 

   

Interest Rates

 

Average Term

 

2020

   

2019

 
Interest-bearing amount due on PPP loan through Enterprise Diversified, Inc.     1.00%   2 years   $ 125,102     $  

Interest-bearing amount due on promissory note through EDI Real Estate, LLC

    5.60%  

15 years

    278,576       373,425  

Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC

    6.00%  

5 years

    96,000       137,600  

Less current portion

              (17,043 )     (11,453 )

Long-term portion

            $ 482,635     $ 499,572  

 

The timing of future payments of notes payable are as follows as of September 30, 2020:

 

2020

  $ 2,862  

2021

    17,285  

2022

    239,395  

2023

    19,359  

2024 and thereafter

    220,777  

Total

  $ 499,678  

 

During the quarterly period ended June 30, 2020, the Company received loan proceeds in the amount of $125,102 under the Paycheck Protection Program, as amended (the “PPP”), administered by the U.S. Small Business Administration. The PPP, established as part of the U.S. Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”), generally provides for economic assistance in the way of loans to qualifying business for amounts up to two-and-a-half times the average monthly payroll expenses of the qualifying business. Under the PPP, amounts of loan principal and accrued interest are eligible for forgiveness after a period, as selected by the borrower, of either eight or twenty-four weeks, provided the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the selected time period.

 

PPP loan amounts that are not forgiven will be payable over two years at an interest rate of 1%, with a deferral of payment for the first six months. The Company intends to use the proceeds of its PPP loan for purposes consistent with the eligible purposes enumerated under the PPP. However, while the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot make assurances that we will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.

 

During the quarterly period ended September 30, 2018, EDI Real Estate, LLC, as a borrower, 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. During the quarterly period ended March 31, 2020, one property from the original loan package was sold and the corresponding principal balance of $83,296 was paid down.

 

During the quarterly period 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. During the quarterly period ended March 31, 2020, one note totaling $41,600 was paid in full as the secured property was sold.

 

 

NOTE 10. SEGMENT INFORMATION

 

During the three- and nine-month periods ended September 30, 2020, the Company operated through four business segments with separate management and reporting infrastructures that offer different products and services. The four business segments are as follows: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, as of the quarter ended September 30, 2020, and for all prior periods presented, Home Services Operations are reported as discontinued operations.

 

As mentioned in Note 3, on May 24, 2019, the Company completed a divestiture of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC, to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). The current and comparative results of the home services segment have been reported as discontinued on the accompanying unaudited condensed consolidated financial statements for the quarterly period ended September 30, 2020.

 

As mentioned in Note 4, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC.

 

Management determined that as of June 27, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose; therefore, the Company no longer consolidates Mt Melrose. All activity prior to the deconsolidation event has been included on our consolidated statements of operations for given prior reporting periods under the real estate segment. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our consolidated balance sheets.

 

20

 

The asset management operations segment includes revenues and expenses derived from various joint ventures, service offerings, and initiatives undertaken in the asset management industry. The real estate operations 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. The internet operations segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services. The home services operations segment includes discontinued revenue and expenses derived from our former operation of HVAC and plumbing companies in Arizona. The other operations segment includes revenue and expenses from nonrecurring or one-time strategic funding or similar activity 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.

 

The internet operations segment includes revenue generated by operations in both the United States and Canada. During the quarterly period ended September 30, 2020, the internet operations segment generated revenue of $230,714 in the United States and revenue of $11,523 in Canada. This compares to the quarterly period ended September 30, 2019, when the internet operations segment generated revenue of $251,809 in the United States and revenue of $13,362 in Canada. During the nine-month period ended September 30, 2020, the internet operations segment generated revenue of $703,335 in the United States and revenue of $37,676 in Canada. This compares to the nine-month period ended September 30, 2019, when the internet operations segment generated revenue of $764,327 in the United States and revenue of $41,663 in Canada. All assets reported under the internet operations segment for the periods ended September 30, 2020 and December 31, 2019, are located within the United States.

 

Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three- and nine-month periods ended September 30, 2020 and 2019.

 

Three Months Ended September 30, 2020

 

Asset Management

   

Real Estate

   

Internet

   

Other

   

Discontinued Operations - Home Services

   

Consolidated

 
                                                 

Revenues

  $ 1,607,150     $ 16,129     $ 242,237     $     $     $ 1,865,516  

Cost of revenue

          12,157       85,412                   97,569  

Operating expenses

    120,368       5,940       49,239       165,165             340,712  

Other income (expense)

          (5,456 )     777       6,540             1,861  

Income (loss) from continuing operations

    1,486,782       (7,424 )     108,363       (158,625 )           1,429,096  

Income (loss) from discontinued operations

                            1,857       1,857  

Goodwill

                212,445                   212,445  

Identifiable assets

  $ 11,170,904     $ 452,357     $ 470,667     $ 331,834     $ 261     $ 12,426,023  

 

Nine Months Ended September 30, 2020

 

Asset Management

   

Real Estate

   

Internet

   

Other

   

Discontinued Operations - Home Services

   

Consolidated

 
                                                 

Revenues

  $ 1,130,815     $ 219,772     $ 741,011     $     $     $ 2,091,598  

Cost of revenue

          151,480       251,829                   403,309  

Operating expenses

    323,351       23,651       143,521       658,989             1,149,512  

Other income (expense)

    2,283       (13,454 )     3,900       13,982             6,711  

Income (loss) from continuing operations

    809,747       31,187       349,561       (645,007 )           545,488  

Income (loss) from discontinued operations

                            15,762       15,762  

Goodwill

                212,445                   212,445  

Identifiable assets

  $ 11,170,904     $ 452,357     $ 470,667     $ 331,834     $ 261     $ 12,426,023  

 

Three Months Ended September 30, 2019

 

Asset Management

   

Real Estate

   

Internet

   

Other

   

Discontinued Operations - Home Services

   

Consolidated

 
                                                 

Revenues

  $ (159,085 )   $ 19,359     $ 265,171     $     $     $ 125,445  

Cost of revenue

          30,753       83,517                   114,270  

Operating expenses

    81,906       11,827       43,168       141,270             278,171  

Other income (expense)

    4,983       (13,709 )     384       20,249             11,907  

Income (loss) from continuing operations

    (236,008 )     (36,930 )     138,870       (121,021 )           (255,089 )

Income (loss) from discontinued operations

                            (31,151 )     (31,151 )

Goodwill

                212,445                   212,445  

Identifiable assets

  $ 9,571,808     $ 638,298     $ 392,131     $ 1,107,117     $ 135,589     $ 11,844,943  

 

Nine Months Ended September 30, 2019

 

Asset Management

   

Real Estate

   

Internet

   

Other

   

Discontinued Operations - Home Services

   

Consolidated

 
                                                 

Revenues

  $ 1,127,075     $ 420,464     $ 805,990     $ 212,631     $     $ 2,566,160  

Cost of revenue

          358,126       254,373                   612,499  

Operating expenses

    309,896       327,671       165,457       641,483             1,444,507  

Other income (expense)

    19,074       (4,652,120 )     4,317       16,682             (4,612,047 )

Income (loss) from continuing operations

    836,253       (4,917,453 )     390,477       (412,170 )           (4,102,893 )

Income (loss) from discontinued operations

                            (1,441,156 )     (1,441,156 )

Goodwill

                212,445                   212,445  

Identifiable assets

  $ 9,571,808     $ 638,298     $ 392,131     $ 1,107,117     $ 135,589     $ 11,844,943  

 

21

 

 

 

NOTE 11. COMMITMENTS AND CONTINGENCIES

 

Leases

 

As of September 30, 2020, the Company has no remaining leases classified as operating leases and no finance leases.

 

The previously reported operating lease corresponds to the office space for Willow Oak Asset Management, LLC. This lease expired on September 30, 2020. The right-of-use asset and corresponding lease liability for the Company’s previous operating lease have been reduced to zero on the accompanying consolidated balance sheets.

 

Lease costs for the quarterly period ended September 30, 2020 consisted of the following:

 

Finance lease costs:

       

Amortization of ROU assets

  $  

Interest on lease liabilities

     

Operating lease cost

    15,149  

Total lease costs from continuing operations

    15,149  

Total lease costs from discontinued operations

     

Total lease costs

  $ 15,149  

 

With respect to the former leased facilities for Specialty Contracting Group, LLC, possession of the premises was surrendered to the landlord, in connection with the dissolution and winding up of Specialty Contracting Group, in default of that lease. The outstanding lease liability amount remains on the Company’s balance sheet under other liabilities - held for resale as of the quarterly period ended September 30, 2020. The discount rate used in the calculation of the lease liability held for resale was approximately 6.7%.

 

A maturity analysis of the lease related to discontinued operations, is as follows:

 

2020

  $ 38,635  

2021

    14,832  

2022

     

Total

    53,467  
         

Discount factor

    (3,357 )

Lease liability

    50,110  

Less lease liability from discontinuing operations

    (50,110 )

Amounts due within 12 months

     

Long-term lease liability

  $  

 

Other Commitments

 

As mentioned in Note 4, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC. 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. 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.

 

Litigation & 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).

 

22

 

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. Woodmont also has submitted four 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.

 

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 believed 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 was 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 had engaged in settlement negotiations, although they had not been successful. On August 3, 2020, the Company voluntarily dismissed its verified counter-claims against Woodmont without prejudice, but may re-file them (whether in Kentucky or Delaware) at a later time. The voluntary dismissal effectively terminated the Kentucky Action for the time being.

 

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. On April 6, 2020, Woodmont filed an answer to the complaint in the Delaware Action, along with verified counter-claims against the Company for Woodmont’s previously-asserted claims for indemnification under the parties’ purchase agreement. 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. On July 24, 2020, the Company filed its reply to the counterclaims asserted by Woodmont in which it denied Woodmont’s allegations. 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 these Mt Melrose-related proceedings.

 

23

 

 

NOTE 12. STOCKHOLDERS’ EQUITY

  

Classes of Shares

 

As of September 30, 2020, the Company’s Articles of Incorporation, as amended, authorize 32,800,000 shares of capital stock of the Company, consisting of 30,000,000 authorized shares of serial preferred stock, par value of $0.001 per share, and 2,800,000 authorized shares of common stock, par value of $0.125 per share.

 

Preferred Stock

 

Preferred stock, any series, shall have the powers, preferences, rights, qualifications, limitations, and restrictions as from time to time fixed by the Company’s Board of Directors in its sole discretion.

 

As previously reported in the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2020, the Company has adopted a certain stockholder rights agreement styled as the Tax Benefit Preservation Plan, dated as of July 24, 2020, by and between the Company and Colonial Stock Transfer Company, Inc., as rights agent. The Tax Benefit Preservation Plan was adopted as a means designed to safeguard against inadvertent diminution or limitation of the Company’s valuable tax assets. As previously reported, pursuant to the Tax Benefit Preservation Plan, as of July 24, 2020, the Company has designated a series of its preferred stock as the Series A Preferred Stock, consisting of 250,000 shares so designated.

 

As of September 30, 2020, the Company has not issued any shares of its preferred stock (including, without limitation, its Series A Preferred Stock).

 

Common Stock

 

As of September 30, 2020, 2,602,240 shares of the Company’s common stock were issued and outstanding.

 

Cancellation of Treasury Shares

 

On December 30, 2019, the Company completed the cancellation of 80,506 treasury shares of its common stock then-remaining, upon resolution from the Board of Directors.

 

 

NOTE 13. SUBSEQUENT EVENTS

 

Management has evaluated all subsequent events from September 30, 2020, through the date the unaudited condensed consolidated financial statements were issued. Management concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.

 

24

 
 

 

Item 2.

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 unaudited condensed consolidated financial statements and related footnotes for the quarterly period ended September 30, 2020. 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.

 

Overview

 

During the quarterly period ended September 30, 2020, Enterprise Diversified, Inc. (“ENDI,” the “Company,” or “we”) operated under four 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; 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.

 

During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. This segment now includes discontinued revenue and expenses derived from our former operation of HVAC and plumbing companies in Arizona. As of the quarterly period ended September 30, 2020, and for all prior periods presented, Home Services Operations are reported as discontinued operations.

 

Management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.

 

Note that as of May 24, 2019, as reported in 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. Rather, as consideration for the transaction, Rooter Hero agreed to 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 reported in 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

 

The Company operates its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”) and Willow Oak Capital Management, LLC.

 

In 2016, the Company made a strategic determination to fund a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017 by an 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. As of September 30, 2020, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations.

 

In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement in June 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, 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 launched by Willow Oak and managed by Coolidge. Under their agreement concerning Bonhoeffer Fund, LP, Willow Oak paid all start-up expenses and pays agreed-upon operating expenses that are not partnership expenses, Coolidge is responsible for all investment management, and Willow Oak receives 50% of all performance and management fees earned.

 

On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our Board 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, operations, legal, accounting and bookkeeping, annual audit coordination, and liaison to third-party service providers. As consideration for the services, Arquitos pays Willow Oak a monthly fixed fee and an annual 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 joint venture, of which Willow Oak Capital Management is a 10% owner, manages capital through separately managed accounts and a private investment fund launched January 1, 2020. As a member of the general partner, Willow Oak Capital Management provides ongoing FMS and operational support in addition to having covered all one-time expenses associated with the launch of Focused Compounding Fund, LP. As consideration for the arrangement, Willow Oak Capital Management is entitled to 10% of gross management and performance fees earned by Focused Compounding. 

 

On September 29, 2020, Willow Oak, through its newly formed wholly-owned subsidiary, Willow Oak Asset Management Affiliate Management Services, LLC, executed a strategic relationship agreement with SVN Capital, LLC to become a 20% owner of the firm in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak Asset Management Fund Management Services, LLC, another newly formed wholly-owned subsidiary of Willow Oak. As a beneficial owner of the general partner, Willow Oak is entitled to 20% of gross management and performance fees earned. Additionally, Willow Oak Asset Management Fund Management Services, LLC earns a direct fee from the private limited partnership for the administrative, compliance and tax and audit liaison services it renders.

 

25

 

Real Estate Operations

 

In December 2017, ENDI created a wholly-owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), 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 in December 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. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to Woodmont. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. See Note 4 for more information.

 

In July 2017, ENDI created a wholly-owned real estate subsidiary named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of September 30, 2020, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes six residential properties and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia. The portfolio includes occupied single-family homes that are managed by a third-party property management company. The leases in effect as of September 30, 2020, 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

 

The Company operates its internet operations segment through Sitestar.net, a wholly-owned subsidiary. 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 September 30, 2020, the focus of our internet operations 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 operations segment during the current quarter.

 

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 operations segment through its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.

 

As has been previously reported, on May 24, 2019, the Company completed its divestiture of the home services operations to Rooter Hero. See Note 3 for more information.

 

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

 

In January 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. In May 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly-owned subsidiary of the Company. During the quarter ended March 31, 2019, all contributed capital was returned in full and a gain of $212,631 was recognized as revenue through the other operations segment on our unaudited condensed consolidated statements of operations for the nine-month period ended September 30, 2019.

 

Triad DIP Investors

 

In August 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 in April 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 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. 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 monetized all 450,000 shares. The borrower has requested an extension from the original note repayment date of April 29, 2020, and as of the quarterly period ended September 30, 2020, the Company is evaluating a renegotiation of terms.

 

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.

 

26

 

Summary of Financial Performance

 

Common stockholders’ equity increased from $10,633,958 at December 31, 2019, to $11,325,257 at September 30, 2020. This change was attributable to $809,747 of net income in the asset management operations segment, $349,561 of net income in the internet operations segment, and $31,187 of net income in the real estate operations segment, and was partially offset by a net loss of $645,007 in other segments, and $15,762 of net income resulting from discontinued operations under the home services operations segment. Corporate expenses for the nine-month period ended September 30, 2020, included in the net loss from other operations, totaled $658,989. Total comprehensive net income (all attributable to Enterprise Diversified, Inc. stockholders) for the nine-month period ended September 30, 2020 equaled $561,250.

 

Balance Sheet Analysis

 

This section provides an overview of changes in our assets, liabilities, and equity and should be read together with our accompanying unaudited 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.

 

   

September 30, 2020

   

June 30, 2020

   

March 31, 2020

   

December 31, 2019

   

September 30, 2019

 

ASSETS

                                       

Cash and equivalents

  $ 337,149     $ 425,985     $ 553,468     $ 666,810     $ 161,275  

Accounts receivables, net

    49,824       28,394       35,298       52,889       35,646  

Investments, at fair value

    11,135,580       9,586,178       8,354,270       10,126,204       9,522,236  

Real estate, total

    378,698       383,128       376,499       479,425       1,412,208  

Goodwill and other assets

    524,772       545,407       548,725       574,316       713,578  

Total assets

  $ 12,426,023     $ 10,969,092     $ 9,868,260     $ 11,899,644     $ 11,844,943  

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                       

Accounts payable

  $ 63,573     $ 77,670     $ 188,732     $ 157,934     $ 66,584  

Accrued expenses

    176,904       119,839       124,255       198,374       51,703  

Deferred revenue

    213,498       210,671       201,430       204,960       217,811  

Notes payable and other liabilities

    646,791       666,608       561,004       704,418       1,137,250  

Total liabilities

    1,100,766       1,074,788       1,075,421       1,265,686       1,473,348  

Total stockholders’ equity

    11,325,257       9,894,304       8,792,839       10,633,958       10,371,595  

Total liabilities and stockholders’ equity

  $ 12,426,023     $ 10,969,092     $ 9,868,260     $ 11,899,644     $ 11,844,943  

 

Results of Operations

 

Asset Management Operations

 

The Company operates its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”) 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. During the nine-month period ended September 30, 2020, one new private partnership was launched and two new wholly-owned entities were formed to advance strategic relationships with external investment firms. Additionally, Willow Oak Asset Management formalized a new relationship to become a non-managing member of an affiliate firm.

 

As of September 30, 2020, Willow Oak continues to hold a direct investment in the Alluvial Fund, LP. The realized and unrealized investment gains and losses are reported as revenue on the accompanying unaudited condensed 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 quarterly period ended September 30, 2020, the asset management operations segment produced $1,607,150 of revenue. Cost of revenue was $0 and operating expenses totaled $120,368. Net income for the quarterly period ended September 30, 2020, totaled $1,486,782. This compares to the quarterly period ended September 30, 2019, when the asset management operations segment produced negative $159,085 of revenue, cost of revenue was $0, and operating expenses totaled $81,906. Additionally, other income for the quarterly period ended September 30, 2019, was $4,983, and the total net loss was $236,008. The increase in revenue for the quarterly period ended September 30, 2020 is primarily 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 expenses. Other income for the segment during the quarterly period ended September 30, 2019, was primarily due to sub-lease rental income earned through the Company’s New York office space.

 

As of September 30, 2020, the fair value of long-term investments held through the asset management operations segment totaled $11,081,734. This compares to the fair value of long-term investments held at September 30, 2019, which totaled $9,468,390. This increase in investments is primarily attributable to positive Alluvial Fund performance. Management notes that, while short-term market volatility can have a significant effect on reported revenue for a given period, the Company’s overall investment strategy is ultra-long-term focused.

 

The table below provides a summary of revenue statement amounts over time. These figures are specific to the asset management operations segment and are presented for the three- and nine-month periods designated below.

 

    For the three months ended     For the nine months ended  

Asset Management Operations Revenue

 

September 30, 2020

   

September 30, 2019

   

September 30, 2020

   

September 30, 2019

 

Realized and unrealized gains (losses) on investment activity

  $ 1,545,239     $ (197,306 )   $ 989,609     $ 1,005,969  

Management and performance fee revenue

    37,858       13,672       69,153       44,645  

Fund management services revenue

    24,053       24,549       72,053       76,461  

Total revenue

  $ 1,607,150     $ (159,085 )   $ 1,130,815     $ 1,127,075  

 

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Real Estate Operations

 

For the quarterly period ended September 30, 2020, the real estate operations segment generated rental revenue of $16,129. The cost of rental revenue totaled $12,157. Operating expenses for the quarterly period ended September 30, 2020, were $5,940. Other expenses totaled $5,456 and the net loss for the quarterly period ended September 30, 2020, totaled $7,424. This compares to the quarterly period ended September 30, 2019, when the real estate operations segment generated rental revenue of $19,359 and cost of rental revenue totaled $30,753. Operating expenses for the quarterly period ended September 30, 2019 were $11,827, other expenses totaled $13,709, and the total loss reported was $36,960. Other expenses incurred during the quarterly periods ended September 30, 2020 and 2019, were primarily interest-related expenses. The current period decreases in rental revenue, cost of rental revenue, operating expenses and interest expense are primarily due to the sale of certain real estate properties held historically as rental properties.

 

EDI Real Estate Operations

 

As of September 30, 2020 and December 31, 2019, the EDI Real Estate portfolio of properties included the following units:

 

EDI Real Estate

 

September 30, 2020

   

December 31, 2019

 

Units occupied or available for rent

    4       6  

Vacant units being prepared for rent