CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

 

 

PART I

 

ITEM 1.

BUSINESS

 

Overview

 

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

 

During the year ended December 31, 2020, the Company operated through 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 (i) our equity in Mt Melrose, LLC, which manages properties held for investment and held for resale located in Lexington, Kentucky, and (ii) 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 activity that is not considered to be one of our primary lines of business, 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, comprised of former subsidiary Specialty Contracting Group, LLC’s operation of HVAC and plumbing companies in Arizona. However, for the year ended December 31, 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.

 

Willow Oak is an asset management platform focused on growing and enhancing the alternative investment landscape. Willow Oak seeks partnerships with alternative investment managers in the early stages of growth in order to build a network of unique investment opportunities for investors and scalable, professional operations for managers. Willow Oak offers affiliated managers strategic consulting, operational support and growth opportunities through minority partnerships and other bespoke relationships. Affiliations to date include fund seeding and reinvestments, fund launching, investor relations, and fund management administrative support. The Company intends to actively expand its Willow Oak platform with additional offerings that enhance the value of the Willow Oak platform to managers and funds across the investing community. 

 

On August 21, 2020, Willow Oak created two wholly-owned entities, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”) and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”), to support this partnership model in perpetuity. Willow Oak AMS earns gross revenue shares commensurate with ownership stakes in investment management firms in exchange for the provision of benefits of affiliation and ongoing fund management services (“FMS”). Willow Oak FMS earns a direct fee from affiliated limited partnerships for rendering administrative, compliance, and tax and audit liaison services. 

 

Real Estate Operations

 

As has been previously reported 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 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 New Mt Melrose and its real estate portfolio. 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.

 

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

 

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.

 

 

Other Operations

 

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

 

Other operations also 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.

 

Discontinued Operations - Home Services Operations

 

Prior to May 24, 2019, the Company operated a home services operations segment through its former 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, via Specialty Contracting Group, completed a divestiture of the home services operations to an unaffiliated third-parity purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, all of Specialty Contracting Group’s personal property and customer lists and records were conveyed to Rooter Hero, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed Specialty Contracting Group’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 then-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 actually received from the customer accounts transferred (7.5% of any monthly revenue generated from qualified sales during the first year, and 5% of any such monthly revenue during years two through five; in each case subject to reduction for pre-approved warranty-related costs concerning select customers). 

 

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

 

See Note 3 for more information.

 

Products and Services

 

Asset Management Operations

 

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

 

In 2016, the Company made 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 a special limited partner, Willow Oak earns a share of management and performance fees earned. As of December 31, 2020, Willow Oak continues to hold its direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying consolidated statements of operations.

 

In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement 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. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.

 

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: strategic planning, investor relations, marketing, operations, compliance and legal, accounting and bookkeeping, annual audit coordination, and liaison to third-party service providers.  Willow Oak earns monthly and annual fees as consideration for these services.

 

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% beneficial owner, manages capital through separately managed accounts and a private investment fund launched January 1, 2020. Willow Oak 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. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.

 

On September 29, 2020, Willow Oak, through Willow Oak Asset Management Affiliate Management Services, LLC ("Willow Oak AMS"), executed a strategic relationship agreement with SVN Capital, LLC to become a 20% beneficial owner of the firm in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak FMS. As a beneficial owner of SVN Capital, LLC, Willow Oak is entitled to 20% of gross management and performance fees earned by the firm. Additionally, Willow Oak FMS earns a direct fee from SVN Capital Fund, LP, a private investment fund launched by the firm’s managing member, for the administrative, compliance and tax and audit liaison services it renders.

 

 

Real Estate Operations

 

As has been previously reported, in December 2017, ENDI created New Mt Melrose, a wholly-owned subsidiary at that time, 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 the seller, Old Mt. Melrose. 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, which agreed to assume full responsibility for the management and operation of New Mt Melrose and its real estate portfolio. 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.

 

As has been previously reported, 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 December 31, 2020, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes four 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 December 31, 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, wholesale managed modem services, web hosting, third-party software as a reseller, 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), as well as web hosting and related services to consumers and businesses.

 

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

 

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

 

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

 

As of December 31, 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 year ended December 31, 2020.

 

Management routinely endeavors to identify 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.

 

 

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 recent activities comprising other operations.

 

Former Investment Activity with 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 consolidated statements of operations for the year ended December 31, 2019. Accordingly, this investment activity with Huckleberry Real Estate Fund II, LLC was completed prior to commencement of the fiscal year ended December 31, 2020.

 

Financing Arrangement Regarding Triad Guaranty, Inc.

 

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 and recognized a gain of $76,500 on the transaction. This gain is included in investment income on the accompanying consolidated statements of operations for the year ended December 31, 2019. On December 31, 2020, the Company accepted a revision of terms to the original promissory note which include, among other things, an extension of the loan maturity date to December 31, 2022, an increase of interest to the amount of 12% annually, and a provision to settle all currently accrued interest through the issuance of Triad Guaranty, Inc. common shares.

 

Corporate Operations

 

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

 

Employees

 

As of December 31, 2020, we employed seven full-time individuals through the asset management, real estate, internet, and other operations segments. We also utilize outside contractors as necessary to assist with financial reporting, technical support, and customer service. Our employees are not unionized, and we consider relations with employees to be favorable.

 

Available Information

 

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

 

 

ITEM 1A.

RISK FACTORS

 

This item is not required for smaller reporting companies.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

The Company operates its Real Estate, Internet, and Other operations remotely–that is, without dedicated office space. The principal office for our Asset Management Operations is office space leased by the Company located in New York, New York.

 

As of December 31, 2020, through EDI Real Estate, LLC, the Company owns various real estate properties including four residential properties and interests in several undeveloped lots.

 

ITEM 3.

LEGAL PROCEEDINGS

 

Pursuant to Item 103 of Regulation S-K, as amended, the information required by this Item 3 is provided by cross-reference to the Company’s legal proceedings disclosure located under the Litigation & Legal Proceedings heading in Note 11 to the accompanying consolidated financial statements (see page 41).

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5.

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

 

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

 

Record Holders

 

As of March 26, 2021, we had approximately 117 shareholders of record. This number does not reflect the number of individuals or institutional investors holding stock in nominee name through banks, brokerage firms, and others.

 

Equity Compensation Plans

 

On November 7, 2019, Enterprise Diversified’s Governance, Compensation, and Nomination Committee of the Board of Directors approved the creation of an equity incentive program for board members as well as eligible senior management. The Committee determined that it was advisable, and in the best interests of the Company and its stockholders, to provide guidelines for the issuance of equity incentive awards, such as restricted stock and restricted stock units, to attract, retain, and motivate eligible persons whose present and potential contributions are important to the long-term success of the Company and its subsidiaries and to align their interests with those of the Company’s stockholders. Consistent with this and the Company’s intention to retain its cash, it was also determined that such a program would provide for a more-formal process by which amounts of director’s fees and annual management bonuses accrued from time to time could be paid, at the direction of the Committee, in shares of Common Stock in lieu of cash. The provisions of the program were memorialized as the Enterprise Diversified, Inc. 2020 Equity Incentive Plan (the “2020 EIP”), which was approved and adopted by the Board effective as of January 31, 2020. The 2020 EIP may be amended or terminated at any time by the Board or the Committee. Effective January 31, 2021, the Board adopted an amendment to the 2020 EIP solely to increase the stated number of shares available for issuance thereunder, so as to accommodate the Company’s February 3, 2021 issuance of shares noted below. A copy of such amendment accompanies this Report as Exhibit 10.8.

 

Dividends

 

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

 

Issuances of Unregistered Shares of Common Stock

 

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

 

On February 3, 2021, the Company issued a total of 45,143 unregistered shares of its Common Stock to members of the Board of Directors and select senior management in lieu of cash payment of certain accrued director’s fees and annual management bonuses, in line with the 2020 EIP described above. The number of shares issued was determined by the Governance, Compensation, and Nomination Committee of the Board of Directors using the volume weighted average price of a share of Common Stock for the ninety (90) days immediately preceding January 31, 2021, which equaled $5.3166. To the extent this issuance constituted an offer or sale of securities under the Securities Act, it was exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7.

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

 

This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis should be read in conjunction with the Company’s accompanying consolidated financial statements and accompanying notes as of and for the years ended December 31, 2020 and 2019. The discussion of results, causes, and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. Additionally, it should be noted that a uniform comparative analysis cannot be performed for all segments, as a segment’s limited financial history or recent restructuring results in less comparable financial performance.

 

Summary of Financial Performance

 

Common stockholders’ equity increased from $10,633,958 at December 31, 2019, to $14,043,411 at December 31, 2020. This change was primarily attributable to $3,267,052 of net income in the asset management operations segment, $467,824 of net income in the internet operations segment, $202,676 of net income in the real estate operations segment, and $165,186 of net income resulting from discontinued operations under the home services operations segment, and was partially offset by $823,334 of net loss in the other operations segment. Corporate expenses for the year ended December 31, 2020, included in the net loss from other operations, totaled $966,862. Total comprehensive net income for the year ended December 31, 2020 equaled $3,279,404.

 

 

Balance Sheet Analysis

 

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

 

		December 31, 2020				September 30, 2020				June 30, 2020				March 31, 2020				December 31, 2019
ASSETS
Cash and equivalents		$	341,007			$	337,149			$	425,985			$	553,468			$	666,810
Accounts receivables, net			144,791				49,824				28,394				35,298				52,889
Investments, at fair value			13,574,462				11,135,580				9,586,178				8,354,270				10,126,204
Real estate, total			241,876				378,698				383,128				376,499				479,425
Goodwill and other assets			555,044				524,772				545,407				548,725				574,316
Total assets		$	14,857,180			$	12,426,023			$	10,969,092			$	9,868,260			$	11,899,644
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	65,524			$	63,573			$	77,670			$	188,732			$	157,934
Accrued expenses			306,063				176,904				119,839				124,255				198,374
Deferred revenue			192,088				213,498				210,671				201,430				204,960
Notes payable and other liabilities			250,094				646,791				666,608				561,004				704,418
Total liabilities			813,769				1,100,766				1,074,788				1,075,421				1,265,686
Total stockholders’ equity			14,043,411				11,325,257				9,894,304				8,792,839				10,633,958
Total liabilities and stockholders’ equity		$	14,857,180			$	12,426,023			$	10,969,092			$	9,868,260			$	11,899,644

 

Financial Condition, Liquidity, and Capital Resources

 

During 2020, Enterprise Diversified carried out its business strategy in four operating segments: 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 year ended December 31, 2020, and for all prior periods presented, home services operations are reported as discontinued operations. Our primary focus is on generating cash flow so that we have the flexibility to pursue opportunities as they present themselves. We will only invest cash in each segment if we believe that the return on this invested capital is appropriate for the risk associated with the investment. This consideration is measured against all investment opportunities available to us and is not limited to these particular segments or the Company’s historical operations.

 

Cash and equivalents totaled $341,007 at the year ended December 31, 2020, compared to $666,810 at year-end December 31, 2019. Real estate held for investment decreased to $241,876 at the year ended December 31, 2020, compared to $380,515 at year-end December 31, 2019, and real estate held for resale decreased to $0 at the year ended December 31, 2020, compared to $98,910 at year-end December 31, 2019. Total notes payable also decreased to $250,094 at the year ended December 31, 2020, from $511,025 at year-end December 31, 2019. The decreases in real estate and notes payable are primarily due to the opportunistic sales of certain EDI Real Estate rental properties. The Company does not expect to make significant reinvestments into property and equipment used in operating activities at this time.

 

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

 

The aging of accounts receivable as of December 31, 2020, and December 31, 2019, is as shown:

 

		December 31, 2020				December 31, 2019
Current		$	142,121			$	50,909
30 – 60 days			1,836				1,495
60 + days			834				485
Total		$	144,791			$	52,889

 

We have no material capital expenditure requirements.

 

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 provided 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 were eligible for forgiveness after a period, as selected by the borrower, of either eight or twenty-four weeks, provided the borrower used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintained its payroll levels. The amount of loan forgiveness was subject to reduction if the borrower terminated employees or reduced salaries during the selected time period.

 

The Company applied for and was granted loan forgiveness by the Small Business Administration for the full value of its PPP loan in December 2020. The principal value of the loan, along with accrued interest, has been recognized as other income on the accompanying consolidated statements of operations for the year ended December 31, 2020.

 

During the quarter ended September 30, 2017, EDI Real Estate, LLC, as a borrower, issued two promissory notes, each secured by a property held for investment. These notes carry annual interest rates of 6%, pay interest quarterly, and are due September 15, 2022, with early payoff permitted. During January 2020, one of these notes was paid off. Additionally, during the quarter ended September 30, 2018, EDI Real Estate, LLC issued a promissory note secured by additional properties held for investment. This note carries an annual interest rate of 5.6% and fully matures on September 1, 2033, with early payoff permitted. The interest rate on this note is subject to change once each five-year period based on an index rate plus a margin of 2.750 percentage points. The index rate is calculated as a monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of five years.

 

 

Notes payable as of December 31, 2020 and 2019, consisted of the following:

 

		Interest Rates			Average Term		2020				2019
Interest-bearing amount due on promissory note through EDI Real Estate, LLC			5.60%		15 years		$	154,094			$	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								(5,609	)			(11,453	)
Long-term portion							$	244,485			$	499,572

 

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

 

2021		$	5,609
2022			101,507
2023			5,828
2024			6,145
2025 and thereafter			131,005
Total		$	250,094

 

Off-Balance Sheet Arrangements

 

We were not a party to any material off-balance sheet arrangements as of December 31, 2020, nor at any time from January 1, 2020 through December 31, 2020.

 

Other Contractual Obligations

 

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 December 31, 2020, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying consolidated statements of operations.

 

Also through the asset management operations segment, an operating lease on office space in New York City commenced on October 1, 2017, and extended through September 30, 2020. On October 1, 2020, the Company renewed this lease on a month-to-month basis at a reduced rate for limited access given the state of the New York City rental market as a result of the COVID-19 pandemic.

 

Through the former home services operations segment, an operating lease on warehouse and office space in Scottsdale, Arizona, commenced on May 1, 2018. This lease would have extended through May 31, 2021. This lease was not conveyed with the divestiture on May 24, 2019. Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC) was the lessee party to the lease. However, Specialty Contracting Group, in connection with its dissolution and winding up, surrendered possession of the premises to the landlord, in default of this lease. As of December 31, 2020, the remaining balance of the lease liability has been written off as the likelihood for any future collection is remote. This reduction in liability is included as income from discontinued operations on the accompanying consolidated statements of operations for the year ended December 31, 2020.

 

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

 

Discussion Regarding COVID-19 Potential Impacts

 

Due to the continuing uncertainty surrounding the COVID-19 pandemic, the Company has experienced, and continues to expect, market volatility as primarily related to its investment in the Alluvial Fund. As reported in prior periods, this volatility can create periods when the asset management operations segment produces negative revenue amounts. Due to the size of the investment, these negative revenue amounts can also have a sizable impact on the Company’s balance sheets at a given point-in-time. The nature of this investment has inherent market risks, and short-term results can be unpredictable.

 

Thus far, such periods of volatility have not had significant short-term cash flow impacts to the Company; however, due to the Company’s relative size, there is an inherent lack of affordable, short-term lending options in the event of an unexpected negative cash flow situation. As previously mentioned, during the quarterly period ended June 30, 2020, the Company received loan proceeds in the amount of $125,102 under the Paycheck Protection Program. The Small Business Administration determined that companies of our size generally were less likely to have access to adequate sources of liquidity in the current economic environment, and because of this, established a safe harbor whereby borrowers that received PPP loans with an original principal amount of less than $2 million were deemed to have made the required certification concerning the necessity of the loan request in good faith.

 

Management continues to monitor and assess all Company operations for additional potential impacts of the COVID-19 pandemic. As of the year ended December 31, 2020, the Company has not been forced to make significant operational changes as a result of the pandemic. Management does not anticipate additional challenges in meeting existing obligations, nor do we expect significant customer or vendor interruptions. However, the extent to which the continuing COVID-19 pandemic ultimately may impact our business, financial condition, liquidity and results of operations likely will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the continuing pandemic, the direct and indirect impact of the continuing pandemic on our employees, customers and service providers, as well as the U.S. economy, and the actions taken by governmental authorities and other third parties in response to the continuing pandemic.

 

 

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”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”) and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”). These subsidiaries were formed on October 10, 2016, May 24, 2018, and August 21, 2020, 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 beneficial owner. During the year ended December 31, 2020, we assisted in the launch of a new private investment fund, and two new wholly-owned entities, Willow Oak AMS and Willow Oak FMS, were formed to advance strategic relationships with external investment firms. Additionally, Willow Oak formalized a new strategic relationship with an investment firm, becoming a non-managing beneficial owner in exchange for the provision of certain ongoing FMS and operational services.

 

As of December 31, 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 consolidated statements of operations. This treatment can result in reporting negative revenue figures for a given period. Willow Oak continues to earn revenue through the remaining fee share arrangements, as well as through fund management services.

 

During the year ended December 31, 2020, the asset management operations segment produced $3,690,473 of revenue. Cost of revenue was $0 and operating expenses totaled $425,704. Other income attributable to the asset management operations segment totaled $2,283. Net income for the year ended December 31, 2020, totaled $3,267,052. This compares to the year ended December 31, 2019, when the asset management operations segment produced $1,773,276 of revenue, cost of revenue was $0, and operating expenses totaled $410,226. Additionally, other income for the year ended December 31, 2019, was $36,565, and total net income for the year ended December 31, 2019, was $1,399,615. The increase in revenue in 2020 is due to market volatility and increased returns through the Company’s Alluvial investment along with an increase in fee share revenues from the new service and affiliate relationships. The slight increase in operating expenses is primarily due to higher payroll expenses as the segment expands its fund management services offerings. Other income for the segment is primarily due to sub-lease rental income earned through the Company’s New York office space.

 

As of December 31, 2020, the fair value of long-term investments held through the asset management operations segment totaled $13,520,616. This compares to the fair value of long-term investments held at December 31, 2019, which totaled $10,072,358. The increase in investments is attributable to positive Alluvial Fund performance during the year ended December 31, 2020. 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 tables below provide a summary of income statement amounts over time. These figures are specific to the asset management operations segment and are presented for the annual and quarterly periods designated below.

 

 

Annual		Year Ended December 31, 2020				Year Ended December 31, 2019
Revenues		$	3,690,473			$	1,773,276
Cost of revenue			—				—
Operating expenses			425,704				410,226
Other income (expense)			2,283				36,565
Comprehensive income (loss)		$	3,267,052			$	1,399,615

 

Asset Management Operations Revenue		Year Ended December 31, 2020				Year Ended December 31, 2019
Unrealized gains on investment activity		$	3,424,267			$	1,607,644
Management and performance fee revenue			176,598				65,171
Fund management services revenue			89,608				100,461
Total revenue		$	3,690,473			$	1,773,276

 

 

Quarterly		December 31, 2020				September 30, 2020				June 30, 2020				March 31, 2020
Revenues		$	2,559,658			$	1,607,150			$	1,268,819			$	(1,745,154	)
Cost of revenue			—				—				—				—
Operating expenses			102,353				120,368				93,742				109,241
Other income (expense)			—				—				—				2,283
Comprehensive income (loss)		$	2,457,305			$	1,486,782			$	1,175,077			$	(1,852,112	)

 

 

Real Estate Operations

 

EDI Real Estate Operations

 

For the year ended December 31, 2020, the EDI Real Estate operations generated revenue of $578,313, which includes rental revenue of $59,313, and the cost of revenues of $326,636, which includes $43,726 of cost of rental revenues. Operating expenses for the year ended December 31, 2020, were $31,937 and other expenses totaled $17,064. Net income for EDI Real Estate operations for the year ended December 31, 2020, totaled $202,676. This compares to the year ended December 31, 2019, when EDI Real Estate operations generated revenue of $171,792, including rental revenue of $76,792, cost of revenues of $209,410, including cost of rental revenues of $104,279, operating expenses of $42,080, other expenses of $75,359, and a total net loss of $155,057. Other expenses incurred during the years ended December 31, 2020 and 2019, were primarily interest-related expenses. Significant deferred maintenance expenses incurred in the prior year did not recur, which resulted in a current year decrease in the cost of rental revenue.

 

 

 

No impairment adjustments were recorded during the year ended December 31, 2020. During the year ended December 31, 2019, net impairment adjustments of $26,170 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value throughout the year.

 

Through EDI Real Estate, as of December 31, 2020 and 2019, the EDI Real Estate portfolio of properties included the following units:

 

EDI Real Estate		December 31, 2020				December 31, 2019
Units occupied or available for rent			4				6
Vacant lots held for investment			3				—
Total units held for investment			7				6
Units held for resale			—				2
Vacant lots held for resale			—				3
Total units held for resale			—				5

 

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

 

The leases in effect, as of December 31, 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		December 31, 2020				December 31, 2019
Total real estate held for investment		$	303,158			$	484,590
Accumulated depreciation			(61,282	)			(104,075	)
Real estate held for investment, net			241,876				380,515
Real estate held for resale, net		$	—			$	98,910

 

Mt Melrose Operations

 

As described in Note 4, management previously determined that the Company no longer has a controlling financial interest in Mt Melrose. All activity prior to the deconsolidation event was included on our consolidated statements of operations for given prior reporting periods under the real estate segment. No Mt Melrose activity is included on the consolidated statements of operations for the year ended December 31, 2020. For the year ended December 31, 2019, Mt Melrose activity is only included through June 27, 2019, the date of the majority sale of the Company’s membership interest. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our consolidated balance sheets. Accordingly, there are no consolidated Mt Melrose assets as of the years ended December 31, 2020 and 2019 included on the accompanying consolidated balance sheets.

 

For the year ended December 31, 2019, the Mt Melrose portfolio generated rental revenue of $365,971. The cost of rental revenue totaled $276,049. Operating expenses for the year ended December 31, 2019, were $295,945. Other expenses totaled $4,580,940 and the net loss for the year ended December 31, 2019, totaled $4,786,963. Other expenses for the year ended December 31, 2019 are primarily related to the loss recognized on the equity sale of the Mt Melrose entity mentioned previously, which totaled $4,157,809.

 

 

 

 

 

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

 

Annual		Year Ended December 31, 2020				Year Ended December 31, 2019
Revenues		$	578,313			$	537,763
Cost of revenue			326,636				485,459
Operating expenses			31,937				338,025
Other income (expense)			(17,064	)			(4,712,766	)
Comprehensive income (loss)		$	202,676			$	(4,998,487	)

 

 

Quarterly		December 31, 2020				September 30, 2020				June 30, 2020				March 31, 2020
Revenues		$	358,541			$	16,129			$	16,494			$	187,149
Cost of revenue			175,156				12,157				7,114				132,209
Operating expenses			8,286				5,940				1,075				16,636
Other income (expense)			(3,610	)			(5,456	)			(6,730	)			(1,268	)
Comprehensive income (loss)		$	171,489			$	(7,424	)		$	1,575			$	37,036

 

 

Internet Operations

 

Revenue attributed to the internet operations segment during the year ended December 31, 2020, totaled $978,946 and cost of revenue totaled $321,582. Operating expenses for the segment totaled $193,791 for the year ended December 31, 2020, and other income totaled $4,251. Net income for the internet segment was $467,824 for the year ended December 31, 2020. This compares to the year ended December 31, 2019, when revenue totaled $1,066,229, cost of revenues totaled $330,654, operating expenses were $223,118, other income was $10,169, and comprehensive income was $519,572. Included in the segment’s comprehensive income for the year ended December 31, 2019, was an accumulated other comprehensive loss related to the recognition of foreign currency translation adjustments. Other income for the years ended December 31, 2020 and 2019, is primarily the result of refundable sales tax credits and credit card rewards.

 

As of December 31, 2020, we have a total of 7,009 customer accounts across the U.S. and Canada. This compares to the year ended December 31, 2019, when we had a total of 7,466 customer accounts. As of December 31, 2020, approximately 60% of our internet segment revenue is driven by internet access services, with the remaining 40% being earned though web hosting and other web-based storage services.

 

Approximately 92% of our customer accounts are U.S.-based, while 8% are Canada-based. Revenue generated by our U.S. customers totaled $929,383 and revenue generated by our Canadian customers totaled $49,563 during the year ended December 31, 2020. This compares to revenue generated by our U.S. customers of $1,011,407 and revenue generated by our Canadian customers of $54,822 during the year ended December 31, 2019.

 

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

 

 

Annual		Year Ended December 31, 2020				Year Ended December 31, 2019
Revenues		$	978,946			$	1,066,229
Cost of revenue			321,582				330,654
Operating expenses			193,791				223,118
Other income (expense)			4,251				10,169
Other comprehensive income (loss)			—				(3,054	)
Comprehensive income (loss)		$	467,824			$	519,572

 

 

Quarterly		December 31, 2020				September 30, 2020				June 30, 2020				March 31, 2020
Revenues		$	237,935			$	242,237			$	245,215			$	253,559
Cost of revenue			69,753				85,412				79,229				87,188
Operating expenses			50,270				49,239				46,434				47,848
Other income (expense)			351				777				2,753				370
Comprehensive income (loss)		$	118,263			$	108,363			$	122,305			$	118,893

 

Discontinued Operations - Home Services Operations

 

As noted previously, Specialty Contracting Group, LLC’s historical operations are now classified as “discontinued operations” in our consolidated financial statements, and all presented prior periods have also been reclassified to discontinued operations for comparability. Net income reported from discontinued operations related to the home services operations segment for the year ended December 31, 2020 was $165,186. Included in this amount is $147,113 of extinguished debt from expired historical obligations. Also included in net income is a $20,484 loss recovery on discontinued operations that represents royalties earned in accordance with the Rooter Hero royalty arrangement mentioned previously. This compares to the net loss of $1,510,475 reported from discontinued operations related to the home services operations segment for the year ended December 31, 2019.

 

 

Other Operations

 

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

 

 

Annual		Year Ended December 31, 2020				Year Ended December 31, 2019
Revenues		$	—			$	212,631
Cost of revenue			—				—
Operating expenses			966,862				1,101,098
Other income (expense)			143,528				96,551
Comprehensive income (loss)		$	(823,334	)		$	(791,916	)

 

 

Quarterly		December 31, 2020				September 30, 2020				June 30, 2020				March 31, 2020
Revenues		$	—			$	—			$	—			$	—
Cost of revenue			—				—				—				—
Operating expenses			307,873				165,165				204,391				289,433
Other income (expense)			129,546				6,540				3,750				3,692
Comprehensive income (loss)		$	(178,327	)		$	(158,625	)		$	(200,641	)		$	(285,741	)

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This item is not required by smaller reporting companies.

 

ITEM 8.

FINANCIAL STATEMENTS

 

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

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

As previously reported in our Current Report on Form 8-K filed with the SEC on July 15, 2019, on July 10, 2019, the Company formally engaged Brown Edwards & Company, LLP to serve as the Company’s independent registered public accounting firm for the year ending December 31, 2019. Prior to this time, Cherry Bekaert, LLP had been appointed as the Company’s independent registered public accounting firm for the year ending December 31, 2019, having served as the Company’s independent registered public accounting firm since 2016. There has been no other change in the independent accountants engaged to audit the financial statements of the Company and its subsidiaries during the last two fiscal years ended December 31, 2020, and there have been no disagreements with such independent accountants during the last two fiscal years ended December 31, 2020, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.

 

ITEM 9A.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of the design and operation of our “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of December 31, 2020. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Based upon this evaluation, and based upon material weaknesses in our internal control over financial reporting identified as of the date of our most recent evaluation of internal controls over financial reporting, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2020.

 

Management’s Report on Internal Control over Financial Reporting

 

The management of Enterprise Diversified, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements. Under the supervision and with the participation of our management, including our Executive Chairman and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our management concluded that, as of December 31, 2020, our internal control over financial reporting was not effective based on such criteria. We have reviewed the results of management’s assessment with our Board of Directors. In addition, we will evaluate any changes to our internal control on a quarterly basis to determine if a material change occurred.

 

Material Weaknesses in Internal Controls

 

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

 

As a result of our evaluations, we identified the following material weakness in our internal control over financial reporting as of December 31, 2020:

 

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

 

Changes in Our Internal Controls

 

During the year ended December 31, 2020, the Company continued to uphold its established processes and controls surrounding its financial reporting, but did not make any significant modifications to its control environment.

 

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

 

ITEM 9B.

OTHER INFORMATION

 

None.

 

 

PART III

 

We expect to file with the SEC in April 2021 (and, in any event, not later than 120 days after the close of our last fiscal year), a definitive Proxy Statement, pursuant to SEC Regulation 14A in connection with our annual meeting of stockholders scheduled to be held on May 27, 2021.

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2021 annual meeting of stockholders under the sections entitled “Information with Respect to Nominees,” “Management,” and “Corporate Governance.”

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2021 annual meeting of stockholders under the section entitled “Executive Compensation.”

 

ITEM 12.

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

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2021 annual meeting of stockholders under the sections entitled “Security Ownership of Directors and Executive Officers” and “Information as to Certain Stockholders.”

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2021 annual meeting of stockholders under the sections entitled “Determinations Regarding Independence” and “Transactions with Related Persons.”

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2021 annual meeting of stockholders under the section entitled “Ratification of the Selection of Independent Registered Public Accounting Firm.”

 

 

PART IV

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)	Financial Statements – Contained in Item 8:

 

		Page
Report of Independent Registered Public Accounting Firm		20
Consolidated Balance Sheets – December 31, 2020 and 2019		21
Consolidated Statements of Operations – Years Ended December 31, 2020 and 2019		22
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2020 and 2019		23
Consolidated Statements of Changes in Stockholders’ Equity – Years Ended December 31, 2020 and 2019		24
Consolidated Statements of Cash Flows – Years Ended December 31, 2020 and 2019		25
Notes to Consolidated Financial Statements		27

 

 

 

 

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

 

Exhibit		Description
3.1(i)		Articles of Incorporation of the Registrant (December 17, 1992) (a)
3.1(ii)		Amended Articles of Incorporation (July 29, 1998) (a)
3.1(iii)		Amended Articles of Incorporation (October 26, 1998) (a)
3.1(iv)		Amended Articles of Incorporation (July 14, 1999) (a)
3.1(v)		Amended Articles of Incorporation (July 28, 1999) (a)
3.1(vi)		Certificate of Amendment to the Articles of Incorporation (January 23, 2018) (e)
3.1(vii)		Certificate of Change Pursuant to Nevada Revised Statutes Section 78.209 (June 1, 2018) (h)
3.1(viii)		Certificate of Amendment to the Articles of Incorporation (June 1, 2018) (i)
3.1(ix)		Certificate of Designation of Series A Preferred Stock of Enterprise Diversified, Inc. (n)
3.2(i)		Bylaws of the Registrant (December 17, 1992) (a)
3.2(ii)		Amended Bylaws of the Registrant (January 28, 2015) (b)
4.1		Tax Benefit Preservation Plan, dated as of July 24, 2020, by and between Enterprise Diversified, Inc. and Colonial Stock Transfer Company, Inc., as rights agent (o)
10.1		Limited Partnership Agreement of Alluvial Fund, LP dated as of January 1, 2017, and entered into by Willow Oak Asset Management, LLC on December 27, 2016 (c)
10.2		Side Letter Agreement dated December 28, 2016, by and between Willow Oak Asset Management, LLC and Alluvial Capital Management, LLC (for itself and on behalf of Alluvial Fund, LP) (d) *
10.3		Employment Agreement dated January 25, 2017 by and between Sitestar Corporation and Tabitha Keatts (f)
10.4		Amendment to Alluvial Side Letter Agreement (December 15, 2017) (g)
10.5		Employment Agreement effective as of October 5, 2018 by and between the Registrant and Alea A. Kleinhammer (j)
10.6		Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC dated June 27, 2019 (l)
10.7		Enterprise Diversified, Inc. 2020 Equity Incentive Plan (m)
16.1		Letter of Cherry Bekaert, LLP dated July 15, 2019 (k)
10.8		Amendment to Enterprise Diversified, Inc. 2020 Equity Incentive Plan adopted January 31, 2021**
21		List of Subsidiaries **
31.1		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) **
31.2		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) **
32		Certification Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **

 

 

 

 

Exhibit		Description
101		Pursuant to Rule 405 of Regulation S-T, the following materials from Enterprise Diversified Inc.’s Annual Report on Form 10-K for the year ended December 31, 2020, and the year ended December 31, 2019, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2020 and 2019; (ii) Consolidated Statements of Operations for the Years ended December 31, 2020 and 2019; (iii) Consolidated Statements of Cash Flows for the Years ended December 31, 2020 and 2019 (iv) Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2020 and 2019; (v) Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(m) Filed as Exhibit 99.1 to Registrant’s Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission on March 30, 2020, and incorporated herein by reference.

 

(n) Filed as Exhibit 3.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 29, 2020, and incorporated herein by reference.

 

(o) Filed as Exhibit 4.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 29, 2020, and incorporated herein by reference.

 

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

 

** Filed herewith

 

ITEM 16.

FORM 10-K SUMMARY

 

None.

 

 

 

SIGNATURES

 

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

 

ENTERPRISE DIVERSIFIED, INC.

(REGISTRANT)

 

Date: March 29, 2021		By:		/s/Steven L. Kiel
				Steven L. Kiel
				Executive Chairman
				(Principal Executive Officer)
Date: March 29, 2021		By:		/s/Alea A. Kleinhammer
				Alea A. Kleinhammer
				Chief Financial Officer
				(Principal Financial Officer)

 

 

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

 

 

Date: March 29, 2021		By:		/s/Steven L. Kiel
				Steven L. Kiel
				Executive Chairman
				(Principal Executive Officer)
Date: March 29, 2021		By:		/s/Alea A. Kleinhammer
				Alea A. Kleinhammer
				Chief Financial Officer
				(Principal Financial Officer)
Date: March 29, 2021		By:		/s/Jeremy K. Deal
				Jeremy K. Deal
				Vice-Chairman
Date: March 29, 2021		By:		/s/Keith D. Smith
				Keith D. Smith
				Director
Date: March 29, 2021		By:		/s/Thomas Braziel
				Thomas Braziel
				Director

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

Enterprise Diversified, Inc.

Richmond, Virginia

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Enterprise Diversified, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

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

 

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

 

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

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Revenue Recognition

 

Description of the Matter

 

As described in Note 2 to the consolidated financial statements, the Company recognizes revenue from customers across multiple revenue streams. The principal considerations for our determination that performing procedures relating to revenue recognition is a critical audit matter are the significant audit effort in performing procedures and evaluating evidence related to the Company’s revenues, as well as the judgment in determining that revenues were recognized in the correct period.

 

How We Addressed the Matter in Our Audit

 

We obtained an understanding and evaluated the design of the Company’s revenue recognition processes. We reviewed the Company’s revenue recognition policies to test that they were in accordance with accounting principles generally accepted in the United States of America. For a sample of revenue transactions, we performed detail transaction testing by agreeing the amounts recognized to contractual agreements, invoices, collections, and testing the mathematical accuracy of the recorded revenue, as well as the related receivable or deferred revenue balances.  For a sample of accounts receivable balances, we confirmed the amounts due to the Company at year-end directly with customers.

 

Valuation of Investments

 

Description of the Matter

 

At December 31, 2020, the Company’s investments included $13,520,616 in an alternative investment fund at fair value. The fair value of this fund is determined by management using the net asset value (“NAV”) practical expedient for estimating fair value as disclosed in Notes 5 and 6 to the consolidated financial statements. The principal considerations for our determination that performing procedures relating to investment valuation is a critical audit matter are the significant audit effort in performing procedures and evaluating evidence related to the Company’s valuation, including the use of a specialist.

 

How We Addressed the Matter in Our Audit

 

We obtained an understanding and evaluated the design of the Company’s investment valuation process, including management’s assessment of the significant inputs and estimates used in the fair value measurement. We confirmed the Company’s reported fair value directly with the fund manager including the Company’s ownership percentage of the fund’s net assets. We utilized a third-party valuation specialist with specialized skills and knowledge who assisted in evaluating the reasonableness of the fair value measurement. The specialist tested the valuation of the fund’s underlying investment holdings and reviewed the fund’s valuation methodologies for conformity with accounting principles generally accepted in the United States of America. We also reviewed subsequent events and valuation balances and considered whether they corroborated or contradicted the Company’s year-end value.

 

 

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

 

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

 

Lynchburg, Virginia

March 29, 2021

 

 

 

ENTERPRISE DIVERSIFIED, INC.

And Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31, 2020 and 2019

 

 

 

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

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

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

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

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

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

 

 

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

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2020 and 2019

 

 

 

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

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years Ended December 31, 2020 and 2019

 

 

 

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

 

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS