Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 20212022

OR

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

ENTERPRISE DIVERSIFIED, INC.

(Exact Name of Registrant as Specified in Its Charter)

Commission file number 000-27763

(434) 336-7737

(Registrant’s telephone number, including area code)

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

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.

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 May 12, 202111, 2022 is 2,647,383.

Table of Contents

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-monththree-month period ended March 31, 2021, 2022, 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-timeone-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, for the three-month period ended March 31, 2021, 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 ownedwholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), and Willow Oak Capital Management, LLC, LLC.

Willow Oak Asset Management Affiliate Management Services, LLC (“is an asset management platform focused on growing and enhancing the alternative investment landscape. Willow Oak AMS”)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 Asset Management Fund Management Services, LLC (“offers affiliated managers strategic consulting, operational support, and growth opportunities through minority partnerships and other bespoke relationships. Affiliations to date include fund reinvestments, fund launching, investor relations, and fund management administrative support. The Company intends to actively expand its Willow Oak FMS”).platform with additional offerings that enhance the value of the Willow Oak platform to managers and funds across the investing community. 

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 earnsearned a share of management and performance fees earned. On May 31, 2021, however, Willow Oak initiated a series of liquidating distributions of its investment in Alluvial Fund according to a mutually agreed upon cash distribution schedule with the general partner. On December 31, 2021, Willow Oak initiated its third and final liquidating cash distribution in respect of such schedule, and during the three-month period ended March 31, 2022, the Company received a corresponding partial cash distribution of $1,680,208. As of December 31, 2021, and subsequently as of March 31, 2021, 2022, Willow Oak continues to hold its directno longer holds any remaining investment in Alluvial Fund. In accordance with the partnership terms of Alluvial Fund, however, a portion of Willow Oak’s capital account was retained by the general partner until the fund’s activities for the year ended December 31, 2021, were finalized through an independent audit. The retained amount was not actively invested and was not subject to investment gains or losses. The retained amount is represented by the investment redemption receivable amount on the accompanying consolidated balance sheets; however it has been fully collected subsequent to the three-month period ended March 31, 2022. Investment gains and losses for activity during the prior periods presented are reported as revenue on the accompanying unaudited condensed consolidated statements of operations.

In furtherance of establishing the asset management operations business,August 2020, 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.created two wholly-owned entities, Willow Oak is the sole member of Bonhoeffer CapitalAsset Management Affiliate Management Services, 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,AMS”) and Willow Oak receives 50%Asset Management Fund Management Services, LLC (“Willow Oak FMS”), to support the Willow Oak platform and 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 all performancebenefits of affiliation and ongoing fund management fees earned. Additionally,services (“FMS”). Willow Oak FMS earns a direct fee from the privateaffiliated limited partnershippartnerships for therendering administrative, compliance program management, 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 coordination, accounting and bookkeeping, annual audit coordination, and liaison to third-party service providers. On November 1, 2020, this agreement was renewed with revised terms that include an exchange of services between Willow Oak and Arquitos. 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 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 a wholly owned subsidiary namedNew Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”),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 a like-namedthe seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, then an ENDI director.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 an unaffiliated third-party purchaser, Woodmont, Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 andwhich 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. As was previously reported in the Company’s Current Report on Form 8-K filed with the SEC on May 20, 2021, on May 17, 2021, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in New Mt Melrose in conjunction with a cash payment to the Company. As of the quarterly period ended June 30, 2021, and for all subsequent reporting periods, the Company does not hold any remaining interests in the New Mt Melrose entity. See Note 4Notes 3 and 8 for more information.

As has been previously reported, in July 2017, ENDI created a wholly ownedwholly-owned real estate subsidiary named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. During the three-month period ended March 31, 2022, the Company sold the sole residential property remaining in the portfolio. As a result of this sale, the Company no longer maintains any residential rental properties or rental leases. As of March 31, 2021, 2022, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes four residential properties andtwo vacant land. Subsequent to March 31, 2021, one residential property has been sold. Our real estate portfolio under EDI Real Estate, LLC is primarilylots located in Roanoke, Virginia. The portfolio includes single-family homes, both rented and vacant, that are managed by a third-party property management company.Virginia, comprising the entirety of the Company’s remaining real estate portfolio.

Internet Operations

The Company operates its internet operations segment through Sitestar.net, a wholly ownedwholly-owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-partythird-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-timeone-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. Additional investment activity that is not specifically mentioned below is included in the accompanying consolidated financial statements.

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 December 31, 2020, the Company accepted a revision of terms to the original promissory note, which include,includes, 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. In line with the revision of note terms, during the three-monththree-month period ended March 31, 2021, the Company was issued 454,097 shares of Triad Guaranty, Inc. in lieu of interest accrued on the note receivable as of December 31, 2020.

On December 27, 2021, the Company completed the purchase of a comparable investment consisting of (i) another Triad Guaranty Inc. promissory note in the original principal sum of $155,000, having the same terms as the December 31, 2020, financing agreement, along with (ii) 393,750 common shares of Triad Guaranty, Inc., for $25,000 from a related party. The value of this purchase is reflective of the implied collectability of the promissory note and the relative illiquidity of Triad Guaranty, Inc. stock. The Company determined that the December 27, 2021, transaction represents an active market transaction of similar assets to the Company’s existing Triad Guaranty, Inc. assets. As a result, the Company recorded a total $189,515 impairment on December 31, 2021, to its existing Triad Guaranty, Inc. promissory note and common stock to reflect the market value implied by the December 27, 2021, transaction. As of December 31, 2021, and subsequently as of March 31, 2022, the Company holds its interests in both promissory notes at $50,000 under notes receivable on the accompanying consolidated balance sheets and has attributed no value to its 847,847 aggregate shares of Triad Guaranty, Inc. common stock. See Note 4 for more information.

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.

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 completed a divestiture of the home services operations to Rooter Hero. See Note 3 for more information.

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, Willow Oak Asset Management Affiliate Management Services, LLC, Willow Oak Asset Management Fund Management Services, LLC, Bonhoeffer Capital Management, LLC, Sitestar.net, Inc., and EDI Real Estate, LLC.

All intercompany accounts and transactions have been eliminated in consolidation.

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, 2020, 2021, 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-K10-K for the year ended December 31, 2020. 2021. 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 March 31, 2021, 2022, and the results of operations for the three months ended March 31, 2021, 2022 and 2020.2021.

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 notes 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 holdscan hold 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 either not publicly traded, do not have published sales records, or do not routinely make current financial information available. These investmentsInvestments held through the asset management operations segment are remeasured to fair value on a recurring basis. Investments held under the real estate operations and other operations segments are remeasured when additional valuation inputs become observable. See Note 54 for more information.

As of March 31, 2021, and December 31, 2020, 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’s asset management operations segment records receivable amounts for fee shares and fund management services revenue earned on a monthly basis. Performance fee shares crystalize and are collected on an annual basis while management fee shares crystalize and are collected on either a monthly or quarterly basis as dictated by the respective partnership agreement. Fund management services receivables are collected monthly in line with ongoing performance. The Company historically has had no collection issues with fee share and fund management receivables, and the overall possibility for non-collection is extremely low. For these reasons, management has determined that it is not necessary to record an allowance against these receivables.

The Company also 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.

The Company’s asset management operations segment records receivable amounts for management fee shares and fund management services revenue earned on a monthly basis. Management fee shares and fund management services fees are calculated and collected on either a monthly or quarterly basis as dictated by the respective partnership agreement. The Company historically has had no collection issues with management fee shares and fund management receivables and the overall possibility for non-collection is extremely low. For these reasons, management has determined that it is not necessary to record an allowance against these receivables.

The Company’s asset management operations segment also records receivable amounts for performance fee shares earned on an annual basis. Performance fee shares are dependent upon exceeding specified relative or absolute investment return thresholds, which vary by affiliate relationship, and typically include annual measurement periods. The Company historically has had no collection issues with performance fee shares and the overall possibility for non-collection is extremely low. For these reasons, management has determined that it is not necessary to record an allowance against these receivables.

Real estate operations segment rental accounts arewere typically paid by tenants via cash or check no later than the fifth of the month. Any accounts collected after the fifth are were charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If payments are were not provided in a timely manner, then the amount due iswas designated as an account receivable. If accounts remainremained uncollected, then standard operating procedures arewere followed to commence a notice process for the tenant to either pay the amount due or vacate the property. Accounts receivable from rental revenue arewere generally considered unrecoverable after 90 days unless the Company reasonably believesbelieved that recovery iswas probable. These procedures typically resultresulted 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 March 31, 2021, 2022, and December 31, 2020, 2021, allowances offsetting gross accounts receivable on the accompanying condensed consolidated balance sheets totaled $509$2,388 and $421,$474, respectively. For the quarterly periods ended March 31, 2021, 2022, and 2020,2021, bad debt expense from continuing operations wasexpenses totaled $6,832 and $89, and $405, respectively.

Notes Receivable

The Company does not routinely issue notes receivable in the ordinary course of business, but when a business opportunity arises, a subsidiary may issue a note if it appears to be favorable to the Company. Notes receivable are recorded at their principal amount and interest is accrued quarterly based on the applicable interest rate. The Company makes an assessment of the ultimate collectability of each note receivable on an annual basis based upon the financial condition of the borrower.

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:

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 31, or more often if events and circumstances indicate that those assets might not be recoverable. 

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.

No impairment adjustments were recorded during the three-monththree-month periods ended March 31, 2021, 2022, and 2020.2021.

Intangible assets (other than goodwill) consist of domain names attributed to the internet operations segment. The Company owns 228236 domain names, of which 106108 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.

NoNaN impairment adjustments were recorded during the three-monththree-month periods ended March 31, 2021, 2022, and 2020.2021.

Amortization expense on domain names used for internet operations during the three-month period ended March 31, 2022 totaled $1,924. There was no comparable amortization expense on domain names for the three-month period ended March 31, 2021.

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.

NoNaN impairment adjustments were recorded during the three-monththree-month periods ended March 31, 2021, 2022, and 2020.2021.

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-month periodsthree-month period ended March 31, 2021, and 2020, $169,181 and $43,917, respectively,$169,181 of real estate held for investment was transferred to real estate held for resale. NoNaN improvements were made to existing real estate held for investment or held for resale during the three-monththree-month periods ended March 31, 2021, 2022, and 2020.2021.

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,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-paidnot-yet-paid expenses from payroll accruals, professional fees, and other accrued taxes.

Leases

The Company records right-of-use (ROU) assets and lease liabilities arising from both financing and operating leases that contain terms extending longer than one year. The Company does not recognize ROUright-of-use assets or lease liabilities for short-term leases (those with original terms of 12 months or less). In making our determinations, the Company combines lease and non-lease elements of our leases.

Revenue Recognition

Asset Management Operations and Other Investment Revenue

The Company earns revenue from investmentsManagement fee shares and through various fee sharefund management services fees are earned and consulting agreements, including realized and unrealized gains and losses, which may result in negative period or quarterly revenues. Management fees earned are recorded on a monthly basis and are included in revenue on the accompanying unaudited condensed consolidated statements of operations. Performance fees earnedfee shares are accrued monthly, paid out annually,dependent upon exceeding specified relative or absolute investment return thresholds, which vary by affiliate relationship, and typically include annual measurement periods. Performance fee shares are also includedrecognized only when it is determined that there is no longer potential for significant reversal, such as when a fund’s performance exceeds a contractual threshold at the end of a specified measurement period. Consequently, a portion of the performance fee shares recognized may be partially or wholly related to services performed in revenue on the accompanying unaudited condensed consolidated statements of operations. Consulting fees are billed, paid, and recorded on a monthly basis. prior periods.

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. During periods prior to the Company’s final liquidating withdrawal from Alluvial Fund on December 31, 2021, the Company earned revenue from investments, including realized and unrealized gains and losses, which may have resulted in negative revenues for a given period.

Management notes that the structure of these arrangements leaves a very low possibility for nonperformance. While the amount of revenue variescan vary 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 the asset management operations segment for the three-monththree-month periods ended March 31, 2021, 2022, and 20202021 is included below:

Real Estate Revenue

ThePrior to the sale of its sole remaining residential rental property during the three-month period ended March 31, 2022, the Company earnsearned 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 iswas recognized when it iswas earned, generally on the last day of each month or at another regular period agreed upon by the Company and the tenant. Tenants generally provideprovided a security deposit at the time of possession. This deposit iswas held separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount is was not provided in a timely manner and was considered unlikely to be recovered. Otherwise, the security deposit iswas returned in a timely manner after the property iswas surrendered back to the Company. Management hashad concluded that the nature of the performance obligation iswas cyclical and predictable with a very low possibility for nonperformance. No contract assets or liabilities arewere recognized or incurred.

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

Internet Revenue

The Company sells internet and email services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-timeone-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 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) wereare recognized in the amount of collections received in advance of services to be performed. No contract assets wereare 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-partythird-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.

Deferred Revenue

Deferred revenue represents collections from customers in advance of internet services to be performed. Revenue is recognized in the period service is provided. Total deferred revenue from continuing operations increased from $192,088$171,194 at December 31, 2020, 2021, to $198,848$191,501 at March 31, 2021. 2022. During the three-monththree-month periods ended March 31, 2021, 2022, and 2020,2021, $98,632 and $119,312, and $127,957, respectively, of revenue from continuing operations was recognized from prior-year contract liabilities (deferred revenue).

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, 2021, December 31, 2020, and December 31, 2019, and December 31, 2018, are open to potential IRS examination.

During the three-month periods ended March 31, 2022 and 2021, the Company did not report any income tax expenses. The current and prior year three-month periods did not produce positive taxable income after applying historical net operating loss carryforwards, which are subject to certain limitations.

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” areis 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.

There were no potentially dilutive shares for the three-month period ended March 31, 2022. The number of potentially dilutive shares for the three-month periodsthree-month period ended March 31, 2021. and 2020, 2021, consisting of common shares underlying common stock equity incentives, was 668. None of the potentially dilutive securities had a dilutive impact during the three-month periodsthree-month period ended March 31, 2021 and 2020 after rounding was applied.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13,2016-13, “Financial Instruments - Credit Losses” (Topic 326)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.

In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (Topic 805). This update provided that an acquirer no longer records deferred revenue of the acquiree based on its acquisition date fair value. Rather, the acquirer accounts for contract assets and liabilities in accordance with ASC 606 as if it had originated the contract (i.e., continue to account for such assets and liabilities as has historically been done by the acquiree in accordance with ASC 606). This new guidance is required to be adopted by public entities in years beginning after December 15, 2022 on a prospective basis. Early adoption is permitted. The Company has adopted this guidance as of December 31, 2021. The adoption of this guidance did not 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 consolidated financial statements. 

NOTE 3. HOME SERVICES SUBSIDIARY ASSET SALE

On May 24, 2019, as has been previously reported, 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, 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).

The operations of Specialty Contracting Group, LLC had been 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-month periods ended March 31, 2021, and 2020, an offsetting $643 and $11,019, respectively, of royalties on discontinued operations were recognized within the reported $643 and $10,756 of recoveries from discontinued operations, respectively.

As of the year ended December 31, 2020, discontinued assets reported on the face of the accompanying condensed consolidated balance sheets totaled $231. No discontinued liabilities were reported as of the year-ended December 31, 2020. This compares to the three-month period ended March 31, 2021, when no discontinued assets or discontinued liabilities are reported on the face of the accompanying condensed consolidated balance sheets.

A reconciliation of discontinued operations as reported on the accompanying unaudited condensed consolidated statements of operations for the three-month periods ended March 31, 2021, and 2020, is as follows:

NOTE 4.3. HISTORICAL SALE OF CONTROLLINGREMAINING INTEREST IN REAL ESTATE SUBSIDIARY

Transaction

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-partythird-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. Subsequent to the transaction, however, Woodmont,

However, as the manager of Mt Melrose, has purported that the Company’s membership interest in Mt Melrose has been diluted to 20.8%; previously reported, on May 17, 2021, the Company has disputed this assertion and maintains that it has retained its 35% membership interest.

In connection with this transaction, the Company and Woodmont also entered into an agreement with Woodmont that terminated and effected 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, including assale to any distributions of cash to the 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 was 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. This arrangement was intended to allow the Company to maintain a passive management structure, while still owning a significant portion of the partnership.

While the operations of Mt Melrose, LLC have been considered a component of the Company’s business, the sale did not represent a major strategic shift in the Company’s business. While we deconsolidated the operations of Mt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest, Mt Melrose, LLC’s historical operations continue to be reflected as “continuing operations” in the Company’s financial statements.

Deconsolidation Due to Transfer of Control

Prior to the sale of 65% of its Mt Melrose interest, the Company owned 100% of theremaining membership interests in Mt Melrose, LLC in conjunction with an $850,000 cash payment to the Company. Accordingly, as of the quarterly period ended June 30, 2021, and controlled the entity by virtuesubsequently as of its voting interests. As a result, December 31, 2021, the Company previously had consolidated Mt Melrose under the “voting interests” (VOE) consolidation model.

By virtue of the A&R LLC Agreement, and the aforementioned standstill agreement, however, Woodmont is the sole “manager” responsible for all management and operating decisions of Mt Melrose. Accordingly, management determined that as of June 27, 2019, the Company no longer has a “controlling financial interest”does not hold any remaining interests in Mt Melrose, and no longer should consolidate Mt Melrose. Furthermore, LLC. During the quarterly period ended June 30, 2021, the Company has concluded that Mt Melrose does not qualifyrecognized a gain of $778,872 on the May 17, 2021, sale, which was included as a “variable interest entity” as Mt Melrose has sufficient equity at risk to permit operations andseparate line item on the Company is not the primary beneficiary of Mt Melrose’s activities. All activity prior to the deconsolidation event has been included on ourunaudited condensed consolidated statements of operations for given prior reporting periods in continuing operations, and under the real estate segment. Asquarterly period ended June 30, 2021. This gain was representative of June 27, 2019, all previously consolidated assets and liabilitiesthe difference between the Company’s carrying value of its 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 did not have a readily determinable fair value atvarious other intercompany reimbursements, and the time of deconsolidation. The Company’s inability to “exercise significant influence” due tofinal sale price represented by the previously mentioned standstill agreement, also supports the use of the measurement alternative. Under this alternative, the Company measures 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 was $53,846. This amount is included under the long-term investment amount on the accompanying consolidated balance sheets as of March 31,May 17, 2021 and December 31, 2020.transaction.