Loading...
Docoh

Enterprise Diversified (SYTE)

Filed: 13 May 22, 4:31pm
 

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, 2022

 

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

 

Nevada

88-0397234

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

1806 Summit Avenue, Suite 300, Richmond, VA

23230

(Address of Principal Executive Offices)

(Zip Code)

 

(434) 336-7737

(Registrant’s telephone number, including area code)

 


 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

Not applicable

Not applicable

 

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

 

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

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

 

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

 

The number of shares outstanding of the issuer’s Common Stock, $0.125 par value, as of May 11, 2022 is 2,647,383.

 

 

 

 

Table of Contents

 

 

Page No.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

 

 

PART I

Item 1. Financial Statements 

3

Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021

3

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021

4

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021

5

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021  

6

Notes to Unaudited Condensed Consolidated Financial Statements

8

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

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

Item 4. Controls and Procedures

29

 

 

PART II

Item 1. Legal Proceedings

30

Item 1A. Risk Factors

30

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

30

Item 3. Defaults Upon Senior Securities

30

Item 4. Mine Safety Disclosures

30

Item 5. Other Information

30

Item 6. Exhibits

30

 

 

Signatures

31

 

1

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including, without limitation, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan,” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties which may affect the Company’s business and prospects, including changes in economic and market conditions, acceptance of the Company’s products, maintenance of strategic alliances, and other factors discussed elsewhere in this Form 10-Q, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors.

 

2

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

ENTERPRISE DIVERSIFIED, INC.

And Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  

March 31, 2022 (unaudited)

  

December 31, 2021

 

Assets

        

Current Assets

        

Cash and cash equivalents

 $15,020,160  $13,487,482 

Accounts receivable, net

  39,454   351,405 

Investment redemption receivable

  2,053,587   3,734,465 

Other current assets

  15,387   6,417 

Total current assets

  17,128,588   17,579,769 

Long-term Assets

        

Property and equipment, net

  8,650   9,661 

Notes receivable

  50,000   50,000 

Goodwill, net

  212,445   212,445 

Real estate - held for investment, net

  0   26,911 

Other assets

  60,049   61,972 

Total long-term assets

  331,144   360,989 

Total assets

 $17,459,732  $17,940,758 

Liabilities and Stockholders’ Equity

        

Current Liabilities

        

Accounts payable

 $16,366  $11,474 

Accrued compensation

  37,759   337,759 

Accrued expenses

  834,636   308,039 

Deferred revenue

  191,501   171,194 

Income taxes payable

  6,532   6,532 

Total current liabilities

  1,086,794   834,998 

Total liabilities

  1,086,794   834,998 

Stockholders’ Equity

        

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

  0   0 

Common stock, $0.125 par value, 10,000,000 shares authorized; 2,647,383 shares issued and outstanding

  330,922   330,922 

Additional paid-in capital

  27,673,692   27,673,692 

Accumulated deficit

  (11,631,676)  (10,898,854)

Total stockholders’ equity

  16,372,938   17,105,760 

Total liabilities and stockholders’ equity

 $17,459,732  $17,940,758 

 

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

 

3

 
 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

  For the three months ended 
  March 31 
  

2022

  

2021

 

Revenues - asset management

 $38,495  $2,193,854 

Revenues - real estate

  1,800   9,736 

Revenues - internet operations

  216,680   232,266 

Total revenues

  256,975   2,435,856 
         

Cost of revenues - real estate

  445   7,644 

Cost of revenues - internet operations

  71,194   71,963 

Total cost of revenues

  71,639   79,607 
         

Gross profit - asset management

  38,495   2,193,854 

Gross profit - real estate

  1,355   2,092 

Gross profit - internet operations

  145,486   160,303 

Total gross profit

  185,336   2,356,249 
         

Selling, general, and administrative expenses

        

Insurance

  19,787   6,603 

Professional fees

  744,853   143,505 

Salaries and wages

  156,847   182,954 

Travel and meals

  12,046   351 

Other operating expenses

  50,713   44,577 

Total selling, general and administrative expenses

  984,246   377,990 

Income (loss) from operations

  (798,910)  1,978,259 
         

Gain on sale of real estate

  43,140    

Interest expense

     (4,795)

Other income, net

  22,948   5,185 

Total other income (loss)

  66,088   390 
         

Income (loss) from operations before income taxes

  (732,822)  1,978,649 

Income tax expense

      

Net income (loss)

 $(732,822) $1,978,649 
         

Net income (loss) per share, basic and diluted

  (0.28)  0.75 

Weighted average number of shares, basic

  2,647,383   2,630,831 

Weighted average number of shares, diluted

  2,647,383   2,631,499 

 

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

 

4

 
 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

          

Additional

      

Total

 
  

Common

      

Paid-in

  

Accumulated

  

Stockholders

 
  

Stock

  

Amount

  

Capital

  

Deficit

  

Equity

 

Balance December 31, 2021

  2,647,383  $330,922  $27,673,692  $(10,898,854) $17,105,760 

Net loss

     0   0   (732,822)  (732,822)

Balance March 31, 2022

  2,647,383  $330,922  $27,673,692  $(11,631,676) $16,372,938 

 

 

 

          

Additional

      

Total

 
  

Common

      

Paid-in

  

Accumulated

  

Stockholders

 
  

Stock

  

Amount

  

Capital

  

Deficit

  

Equity

 

Balance December 31, 2020

  2,602,240  $325,280  $27,439,334  $(13,721,203) $14,043,411 

Net income

     0   0   1,978,649   1,978,649 

Stock issuance

  45,143   5,642   234,358   0   240,000 

Balance March 31, 2021

  2,647,383  $330,922  $27,673,692  $(11,742,554) $16,262,060 

 

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

 

5

 
 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2022 and 2021

 

  

2022

  

2021

 

Cash flows from operating activities:

        

Net income (loss) from operations

 $(732,822) $1,978,649 

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

        

Unrealized gains on long-term investments

     (2,053,384)

Accrued stock compensation expense

     37,500 

Gain on sale of real estate

  (43,140)   

Bad debt expense

  6,832   89 

Depreciation and amortization

  3,332   3,563 

Accrued interest income on notes receivable

     (4,650)

Other

  720   231 

(Increase) decrease in:

        

Investment redemption receivable

  1,680,208    

Accounts receivable, net

  305,119   14,547 

Other current assets

  (8,970)  4,772 

Increase (decrease) in:

        

Accounts payable

  4,892   (4,790)

Accrued expenses

  226,597   34,240 

Deferred revenue

  20,307   6,760 

Net cash flows from operating activities

  1,463,075   17,527 

Cash flows from (used in) investing activities:

        

Proceeds from sale of real estate

  69,603    

Purchases of investments

     (62,978)

Net cash flows from (used in) investing activities

  69,603   (62,978)

Cash flows used in financing activities:

        

Principal payments on note payable

     (2,789)

Net cash flows used in financing activities

     (2,789)

Net increase (decrease) in cash

  1,532,678   (48,240)

Cash and cash equivalents at beginning of the period

  13,487,482   341,007 

Cash and cash equivalents at end of the period

 $15,020,160  $292,767 

 

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

 

6

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Three Months Ended March 31, 2022 and 2021

 

  

2022

  

2021

 

Non-cash and other supplemental information:

        

Consulting services received in lieu of cash receipts

 $12,750  $12,750 

Issuance of common stock per equity compensation plan

 $0  $240,000 

Transfer of real estate held for investment to held for resale

 $0  $169,181 

Accrued interest receivable converted to common stock

 $0  $45,410 

Cash paid for interest

 $0  $4,795 

 

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

 

7

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Lines of Business

 

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

 

During the three-month period ended March 31, 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-time strategic funding or similar activity that is not considered to be one of our primary lines of business. 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 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. 

 

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 earned 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, 2022, Willow Oak no 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 consolidated statements of operations.

 

In August 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 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 benefits of affiliation and ongoing fund management services (“FMS”). Willow Oak FMS earns a direct fee from affiliated limited partnerships for rendering administrative, compliance program management, and tax and audit liaison services. 

 

8

 

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. 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 Notes 3 and 8 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. 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, 2022, through EDI Real Estate, LLC, ENDI owns two vacant lots located in Roanoke, 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-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 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 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-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.

 

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.

 

9

 

 

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, 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-K for the year ended December 31, 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, 2022, and the results of operations for the three months ended March 31, 2022 and 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 can 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. Investments 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 4 for more information.

 

Accounts Receivable

 

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

 

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

 

10

 

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:

 

Furniture and fixtures (in years)  5 

Equipment (in years)

  7 

Building improvements (in years)

  15 

Buildings (in years)

  27.5 

 

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

 

Goodwill and Other Intangible Assets

 

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company tests its goodwill annually as of December 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-month periods ended March 31, 2022, and 2021.

 

Intangible assets (other than goodwill) consist of domain names attributed to the internet operations segment. The Company owns 236 domain names, of which 108 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.

 

NaN impairment adjustments were recorded during the three-month periods ended March 31, 2022, and 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.

 

11

 

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.

 

NaN impairment adjustments were recorded during the three-month periods ended March 31, 2022, and 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 period ended March 31, 2021, $169,181 of real estate held for investment was transferred to real estate held for resale. NaN improvements were made to real estate held for investment or held for resale during the three-month periods ended March 31, 2022, and 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. Compensation issued as part of the Company’s 2020 Equity Incentive Plan is reserved for board members and members of senior management. The compensation accrual amount is based on the final value of Company stock that has been approved to be issued by the Governance, Compensation, and Nomination Committee of the Board of Directors. These compensation amounts are accrued when earned and able to be estimated and are paid or issued annually after financial records are finalized.

 

Other Accrued Expenses

 

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

 

Leases

 

The Company records right-of-use assets and lease liabilities arising from both financing and operating leases that contain terms extending longer than one year. The Company does not recognize right-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

 

Management fee shares and fund management services fees are earned and recorded on a monthly basis and are included in revenue on the accompanying unaudited consolidated statements of operations. 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. Performance fee shares are recognized 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 prior periods.

 

Long-term investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized 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 can vary from month to month, collectability is very high. No contract assets or liabilities are recognized or incurred.

 

A summary of revenue earned through asset management operations for the three-month periods ended March 31, 2022, and 2021 is included below: 

 

Asset Management Operations Revenue

 Quarterly Period Ended March 31, 2022  Quarterly Period Ended March 31, 2021 

Unrealized gains on investment activity

 $0  $2,054,471 

Performance fee revenue

  0   99,579 

Management fee revenue

  16,745   19,264 

Fund management services revenue

  21,750   20,540 

Total revenue

 $38,495  $2,193,854 

 

Real Estate Revenue

 

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

 

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

 

12

 

Internet Revenue

 

The Company sells internet and email services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of 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) are recognized in the amount of collections received in advance of services to be performed. No contract assets are recognized or incurred.

 

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

 

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 increased from $171,194 at December 31, 2021, to $191,501 at March 31, 2022. During the three-month periods ended March 31, 2022, and 2021, $98,632 and $119,312, respectively, of revenue 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, 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” is 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 period ended March 31, 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 period ended March 31, 2021 after rounding was applied.

  

Recently Issued Accounting Pronouncements

 

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

 

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. 

 

13

 

 

 

NOTE 3. HISTORICAL SALE OF REMAINING INTEREST IN REAL ESTATE SUBSIDIARY

 

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, 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.

 

However, as has been previously reported, 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 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 subsequently as of December 31, 2021, the Company does not hold any remaining interests in Mt Melrose, LLC. During the quarterly period ended June 30, 2021, the Company recognized a gain of $778,872 on the May 17, 2021, sale, which was included as a separate line item on the unaudited condensed consolidated statements of operations for the quarterly period ended June 30, 2021. This gain was representative of the difference between the Company’s carrying value of its Mt Melrose equity investment, various other intercompany reimbursements, and the final sale price represented by the May 17, 2021 transaction.

 

14

 

 

NOTE 4. FAIR VALUE OF ASSETS AND LIABILITIES

 

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

 

 

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

 

 

 

 

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

 

 

 

 

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The Company does not hold any assets or liabilities measured at fair value on a recurring basis as of the quarterly period ended March 31, 2022, or as of the year ended December 31, 2021.

 

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

 

The Company analyzes goodwill on an annual basis or more often if events or changes in circumstances indicate potential impairments. NaN impairments were recorded during the three-month periods ended March 31, 2022, and 2021.

 

The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate an impairment may have occurred. NaN impairments were recorded during the three-month periods ended March 31, 2022, and 2021.

 

As discussed previously, the Company holds common stock in Triad Guaranty, Inc. This stock was received in accordance with the December 31, 2020 revisions to the original promissory note, which included Triad stock to be issued in lieu of accrued interest. The Company historically measured its investment in the stock at its cost basis, which was equal to the amount of accrued interest on the promissory note as of December 31, 2020. On December 27, 2021, the Company purchased additional Triad Guaranty, Inc. common stock along with another promissory note from a related party. Due to the illiquid nature of Triad Guaranty, Inc. stock, as well as the lack of available financial information for the entity, on December 31, 2021, the Company impaired the full historical value, $45,410, of its investment in Triad Guaranty, Inc. stock. Additionally, on December 31, 2021, the Company recorded an impairment of $144,105 on its historical promissory note from Triad Guaranty, Inc. due to concerns regarding its ultimate collectability. The total impairment recorded on the Triad Guaranty, Inc. stock and promissory note was $189,515. 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 0 value to its aggregate shares of Triad Guaranty, Inc. common stock.

 

15

 

 

NOTE 5. PROPERTY AND EQUIPMENT

 

The cost of property and equipment at March 31, 2022, and December 31, 2021, consisted of the following:

 

  

March 31, 2022

  

December 31, 2021

 

Computers and equipment

 $17,330  $17,330 

Furniture and fixtures

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

Less accumulated depreciation

  (19,530)  (18,519)

Property and equipment, net

 $8,650  $9,661 

 

Depreciation expense was $1,012 for both three-month periods ended March 31, 2022 and 2021.

 

16

 

 

 

NOTE 6. REAL ESTATE

 

EDI Real Estate, LLC

 

Through EDI Real Estate, as of March 31, 2022, and December 31, 2021, the Company identified the following units as held for resale or held for investment as noted below:

 

EDI Real Estate

 

March 31, 2022

  

December 31, 2021

 

Units occupied or available for rent

  0   1 

Vacant lots held for investment

  2   2 

Total units held for investment

  2   3 

 

As of March 31, 2022, the 2 vacant lots located in Roanoke, Virginia are not assigned a value on the accompanying consolidated balance sheets, as the lots hold limited value due to their rural location and lack of utility and access.

 

The unit held for investment as of December 31, 2021, consisted of a single-family residential rental unit. This property was sold during the three-month period ended March 31, 2022.

 

The lease in effect as of December 31, 2021, was based on a month-to-month provision as the initial annual term of the lease had been completed. An outside property management company managed this rental property on behalf of the Company. As this property was sold during the three-month period ended March 31, 2022, there are no reportable future anticipated rental revenues.

 

EDI Real Estate

 

March 31, 2022

  

December 31, 2021

 

Total real estate held for investment

 $0  $43,821 

Accumulated depreciation

  0   (16,910)

Real estate held for investment, net

 $0  $26,911 

 

For the three-month periods ended March 31, 2022 and 2021, depreciation expense on the EDI Real Estate portfolio of properties was $398 and $2,377, respectively.

 

EDI Real Estate’s sole remaining residential property was sold during the three-month period ended March 31, 2022. Gross proceeds for the sale of the property were $75,000 and net proceeds totaled $69,603. This compares to the property’s carrying value of $26,463, which resulted in a gain of $43,140 on the sale. There were no properties sold during the three-month period ended March 31, 2021. NaN properties were purchased during the three-month periods ended March 31, 2022 and 2021.

 

NaN impairment adjustments were recorded on the EDI Real Estate portfolio during the three-month periods ended March 31, 2022, and 2021.

 

17

 

 

NOTE 7. SEGMENT INFORMATION

 

During the three-month period ended March 31, 2022, the Company operated through four business segments with separate management and reporting infrastructures that offer different products and services. The four business segments are as follows: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations.

 

The asset management operations segment includes revenues and expenses derived from various joint ventures, service offerings, and initiatives undertaken in the asset management industry.

 

The real estate operations segment includes (i) 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, and (ii) our equity in Mt Melrose, LLC, prior to the sale of the Company’s remaining membership interests on May 17, 2021, which managed properties held for investment and held for resale located in Lexington, Kentucky.

 

The internet operations segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services. Our internet segment includes revenue generated by operations in both the United States and Canada. For the three-month periods ended March 31, 2022 and 2021, the internet operations segment generated revenue of $205,877 and $220,280 in the United States and revenue of $10,803 and $11,986 in Canada, respectively. All assets reported under the internet operations segment for the quarterly periods ended March 31, 2022 and 2021, are located within the United States.

 

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

 

Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three-month periods ended March 31, 2022, and 2021.

 

Quarterly Period Ended March 31, 2022

 

Asset Management

  

Real Estate

  

Internet

  

Other

  

Consolidated

 

Revenues

 $38,495  $1,800  $216,680  $0  $256,975 

Cost of revenue

  0   445   71,194   0   71,639 

Operating expenses

  119,417   209   49,844   814,776   984,246 

Other income (expense)

  (173)  43,390   1,408   21,463   66,088 

Income (loss) from operations

  (81,095)  44,536   97,050   (793,313)  (732,822)

Goodwill

  0   0   212,445   0   212,445 

Identifiable assets

 $2,422,054  $19,738  $431,742  $14,586,198  $17,459,732 

 

Quarterly Period Ended March 31, 2021

 

Asset Management

  

Real Estate

  

Internet

  

Other

  

Consolidated

 

Revenues

 $2,193,854  $9,736  $232,266  $0  $2,435,856 

Cost of revenue

  0   7,644   71,963   0   79,607 

Operating expenses

  117,711   6,485   46,541   207,253   377,990 

Other income (expense)

  0   (4,795)  361   4,824   390 

Income (loss) from operations

  2,076,143   (9,188)  114,123   (202,429)  1,978,649 

Goodwill

  0   0   212,445   0   212,445 

Identifiable assets

 $15,820,688  $312,819  $433,317  $339,926  $16,906,750 

 

18

 
 
 

NOTE 8. COMMITMENTS AND CONTINGENCIES

 

Leases

 

As of March 31, 2022, and December 31, 2021, the Company has no long-term leases that require right-of-use assets or lease liabilities to be recognized.

 

The previous lease for office space for Willow Oak Asset Management, LLC expired on September 30, 2020, and has been renewed on a month-to-month basis beginning on October 1, 2020. In accordance with ongoing accounting policy elections, the Company does not recognize right-of-use assets or lease liabilities for short-term or month-to-month leases. Total rental expenses attributed to this short-term lease for both three-month periods ended March 31, 2022 and 2021, were $5,250.

 

There are no other operating lease costs for the three-month periods ended March 31, 2022 and 2021.

 

As the Company has no remaining leases classified as operating leases or financing leases as of the periods ended March 31, 2022 and December 31, 2021, there are no future liabilities or maturities of lease obligations recognized on the accompanying consolidated balance sheets.

 

Other Commitments

 

Agreement and Plan of Merger with CrossingBridge Advisors, LLC, et al

 

As has been previously reported, on December 29, 2021, the Company, along with CrossingBridge Advisors LLC, a Delaware limited liability company (“CBA”), and Cohanzick Management, LLC, a Delaware limited liability company (the “CBA Member”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Company has agreed to become, subject to stockholder approval and the parties’ satisfaction of various closing conditions, a wholly-owned subsidiary of ENDI Corp., a new parent entity that is a Delaware corporation (the “New Parent”), through a series of mergers (the “Mergers” and, collectively with the other transactions described in the Merger Agreement, the “Business Combination”). Upon closing of the Business Combination, all of the outstanding shares of the Company’s capital stock will be exchanged for and converted into the right to receive shares of New Parent, which will become the Company’s sole stockholder. In order to effect the Mergers and the Business Combination, New Parent will form two merger subsidiaries. Upon the closing of the Merger Agreement, the first merger subsidiary will merge with and into the Company (the “First Merger”), with the Company as the surviving entity. Upon consummation of the First Merger, the Company will become a direct, wholly-owned subsidiary of New Parent. Concurrently with the First Merger, and as part of the same overall transaction, the second merger subsidiary will merge with and into CBA (the “Second Merger”), with CBA as the surviving entity. Upon consummation of the Second Merger, CBA will also become a direct, wholly-owned subsidiary of New Parent.

 

Litigation & Legal Proceedings

 

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

 

As has been previously reported, on April 12, 2016, the Company filed a civil action complaint against Frank Erhartic, Jr. (the “Former Erhartic CEO”), the Company’s former CEO and director (prior to December 14, 2015) and currently an owner of record or beneficially of more than 5% of the Company’s Common Stock, alleging, among other things, that the Former Erhartic CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized and wrongful related party transactions, including causing the Company to borrow certain amounts from the Former Erhartic CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments to the Former Erhartic CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former Erhartic CEO, causing the Company to pay certain amounts to the Former Erhartic CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former Erhartic CEO, causing the Company to pay rent on its corporate headquarters owned by the Former Erhartic CEO’s ex-wife in amounts commercially unreasonable and excessive, and to make real estate tax payments thereon for the personal benefit of the Former Erhartic CEO, converting to the Former Erhartic CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by the Former Erhartic CEO, causing the Company to pay personal credit card debt of the Former Erhartic CEO, causing the Company to significantly overpay the Former Erhartic CEO’s health and dental insurance for the benefit of the Former Erhartic CEO, and causing the Company to pay the Former Erhartic CEO’s personal automobile insurance. The Company is seeking, among other relief available, monetary damages in excess of $350,000. This litigation matter is currently pending in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia), and is currently set for trial in November 2022. During the quarterly period ended March 31, 2022, the parties have engaged in settlement discussions respecting the case. Unless this matter is earlier settled by an agreement between the parties, the Company intends to move forward with a trial of the case to conclusion.

 

Other: Mt Melrose-related Proceedings

 

As has been previously reported, various disputes had arisen between the Company and Woodmont Lexington, LLC (“Woodmont”), the entity to whom the Company previously sold, on June 27, 2019, 65% of the Company’s membership interest in Mt Melrose, LLC (“Mt Melrose”). 

 

As has been previously reported, these disputes had resulted in certain litigation between the parties commenced by the Company on November 20, 2019, in the Delaware Court of Chancery, Enterprise Diversified, Inc. v. Woodmont Lexington, LLC, et al., C.A. No. 2019-0928-JTL (Del. Ch.), as well as certain litigation between the parties previously pending in the Circuit Court in Fayette County, Kentucky, Mt Melrose II, LLC, et al. v. Enterprise Diversified, Inc., C.A. No. 19-CI-4304 (Ky. Fayette Cir. Ct.).  As also has been previously reported, commencing in March 2021, the Company and Woodmont agreed to engage in voluntary mediation concerning their various disputes through the Delaware Court of Chancery.

 

As outcome to the parties’ mediation, on May 17, 2021, the Company, on the one hand, and Woodmont and Mt Melrose, on the other hand, entered into a confidential settlement agreement and mutual general release, pursuant to which the parties have amicably settled all of their disputes and the previously reported related litigation between them. Pursuant to such settlement, all rights and obligations of the Company to Woodmont and/or Mt Melrose, and of Woodmont and/or Mt Melrose to the Company, set forth in the membership interest purchase agreement between the Company and Woodmont and the Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC by and among the Company and Woodmont dated June 27, 2019, and all amendments of those agreements, have been terminated and are of no further force or effect, effective as of May 17, 2021. As consideration for such termination and the Company’s sale to Woodmont of all of the Company’s membership interests in Mt Melrose, the Company received $850,000 in cash proceeds during the quarterly period ended June 30, 2021.

 

19

 
 

NOTE 9. STOCKHOLDERS’ EQUITY

  

Classes of Shares

 

As of March 31, 2022, the Company’s Articles of Incorporation, as amended, authorize an aggregate of 40,000,000 shares of capital stock of the Company, consisting of 30,000,000 authorized shares of serial preferred stock, par value of $0.001 per share, and 10,000,000 authorized shares of common stock, par value of $0.125 per share.

 

Preferred Stock

 

Preferred stock, any series, shall have the powers, preferences, rights, qualifications, limitations, and restrictions as from time to time fixed by the Company’s Board of Directors in its sole discretion. As of March 31, 2022, the Company has not issued any shares of its preferred stock.

 

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

 

However, subsequent to the quarterly period ended March 31, 2022, as reported in the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2022, the Company executed an Amendment to the Tax Benefit Preservation Plan on April 1, 2022.  The Amendment was entered into pursuant to the determination by the Company’s Board of Directors to amend the Tax Benefit Preservation Plan to accelerate the expiration of the rights thereunder to the close of business on April 5, 2022, thereby effectively terminating the Tax Benefit Preservation Plan as of such time.  In connection with such Amendment, the Company also cancelled its designation of the preferred stock previously designated as the Series A Preferred Stock; and, accordingly, the 250,000 unissued shares of preferred stock previously designated as Series A Preferred Stock have been withdrawn and returned to the status of authorized but unissued shares of preferred stock, without designation.

 

Common Stock

 

As of March 31, 2022, 2,647,383 shares of the Company’s common stock were issued and outstanding.

 

As previously reported in the Company’s Current Report on Form 8-K Amendment No. 1 filed with the SEC on July 8, 2021, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Nevada Secretary of State on June 16, 2021, increasing the number of shares of common stock, par value of $0.125 per share, which the Company shall have the authority to issue from 2,800,000 shares of common stock to 10,000,000 shares of common stock.

 

 

NOTE 10. SUBSEQUENT EVENTS

 

Subsequent to the quarterly period ended March 31, 2022, as reported in the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2022, the Company executed an Amendment to the Tax Benefit Preservation Plan on April 1, 2022.  The Amendment was entered into pursuant to the determination by the Company’s Board of Directors to amend the Tax Benefit Preservation Plan to accelerate the expiration of the rights thereunder to the close of business on April 5, 2022, thereby effectively terminating the Tax Benefit Preservation Plan as of such time.  See Note 9 for more information.

 

On April 5, 2022, the Company received the full remaining investment redemption receivable amount from Alluvial Fund, LP. Accordingly, as of April 5, 2022, there is no remaining investment redemption receivable amount due to the Company.

 

Management has evaluated all other subsequent events from March 31, 2022, through May 13, 2022, the date the consolidated financial statements were issued. Management concluded that no additional subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.

 

20

 
 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related footnotes for the quarterly period ended March 31, 2022. 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 restructuring results in less comparable financial performance.

 

Overview

 

During the quarterly period ended March 31, 2022, Enterprise Diversified, Inc. (“ENDI,” the “Company,” or “we”) 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) 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, and (ii) prior to its sale on May 17, 2021, our equity in Mt Melrose, LLC, which managed properties held for investment and held for resale located in Lexington, Kentucky;
 

● 

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.

 

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”), 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”).

 

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 earned 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, 2022, Willow Oak no 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 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 program management, and tax and audit liaison services it renders.

 

On November 1, 2018, Willow Oak Asset Management, LLC entered into a fund management services agreement with Arquitos Investment Manager, LP, Arquitos Capital Management, LLC, and Arquitos Capital Offshore Master, Ltd. (collectively “Arquitos”), which are 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 program management and legal coordination, accounting and bookkeeping, annual audit and tax coordination, and liaison to third-party service providers. Willow Oak earns monthly and annual fees as consideration for these services. On November 1, 2020, this arrangement was renewed with revised terms that include an exchange of services between Willow Oak and Arquitos. Steven Kiel, through Arquitos, has been contracted to perform ongoing consulting services for the benefit of Willow Oak in the following areas: strategic development, marketing, networking and fundraising. Willow Oak continues to provide ongoing FMS services, and continues to earn 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 program management, 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 whereby Willow Oak would receive certain economic and other rights in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak FMS. Pursuant to these economic rights, 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 program management, and tax and audit liaison services it renders.

 

21

 

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. 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 subsequently the year ended December 31, 2021, the Company does not hold any remaining interests in the New Mt Melrose entity. See Notes 3 and 8 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. 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, 2022, through EDI Real Estate, LLC, ENDI owns two vacant lots located in Roanoke, Virginia, comprising the entirety of the Company’s remaining real estate portfolio.

 

State and municipal laws and regulations govern the real estate industry in general and do not vary significantly throughout our real estate holding areas. State laws, including the Virginia Residential Landlord and Tenant Act, in addition to local ordinances, govern our 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, fiber-optic, and wireless), 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, and 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 March 31, 2022, 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 quarterly period ended March 31, 2022.

 

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.

 

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 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-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.

 

22

 

Summary of Financial Performance

 

Common stockholders’ equity decreased from $17,105,760 at December 31, 2021, to $16,372,938 at March 31, 2022. This change was attributable to $97,050 of net income in the internet operations segment and $44,536 of net income in the real estate operations segment, and was offset by a net loss of $81,095 in the asset management operations segment and a net loss of $793,313 in other segments. Corporate expenses for the three-month period ended March 31, 2022, included in the net loss from other operations, totaled $814,776. Total comprehensive net loss for the three-month period ended March 31, 2022, equaled $732,822.

 

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.

 

  

March 31, 2022

  

December 31, 2021

  

September 30, 2021

  

June 30, 2021

  

March 31, 2021

 

ASSETS

                    

Cash and equivalents

 $15,020,160  $13,487,482  $9,316,890  $9,399,112  $292,767 

Accounts receivables, net

  39,454   351,405   302,548   369,893   130,155 

Investment redemption receivable

  2,053,587   3,734,465   5,579,679       

Investments, at fair value

        3,765,834   8,512,439   15,736,234 

Real estate, total

     26,911   27,334   27,732   239,500 

Goodwill and other assets

  346,531   340,495   490,599   493,618   508,094 

Total assets

 $17,459,732  $17,940,758  $19,482,884  $18,802,794  $16,906,750 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                    

Accounts payable

 $16,366  $11,474  $67,585  $48,920  $60,734 

Accrued expenses

  872,395   645,798   465,606   117,103   137,803 

Income taxes payable

  6,532   6,532   360,000       

Deferred revenue

  191,501   171,194   198,199   198,045   198,848 

Notes payable and other liabilities

           24,461   247,305 

Total liabilities

  1,086,794   834,998   1,091,390   388,529   644,690 

Total stockholders’ equity

  16,372,938   17,105,760   18,391,494   18,414,265   16,262,060 

Total liabilities and stockholders’ equity

 $17,459,732  $17,940,758  $19,482,884  $18,802,794  $16,906,750 

 

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 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 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 private investment fund, and two 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 strategic relationship with an investment firm, becoming a non-managing beneficial owner in exchange for the provision of certain ongoing FMS and operational services.

 

During the three-month period ended March 31, 2022, the asset management operations segment produced $38,495 of revenue. There were no costs of revenue, operating expenses totaled $119,417, and other expenses were $173. The net loss for the three-month period ended March 31, 2022, totaled $81,095. This compares to the three-month period ended March 31, 2021, when the asset management operations segment produced $2,193,854 of revenue, there were no costs of revenue, and operating expenses totaled $117,711. Total net income for the three-month period ended March 31, 2021, was $2,076,143.

 

The decrease in revenue for the three-month period ended March 31, 2022, is primarily due to the absence of returns from the Company’s historical Alluvial Fund investment. As mentioned previously, as of December 31, 2021, the Company no longer holds a direct interest in Alluvial Fund. Operating expenses remained comparable quarter over quarter.

 

On December 31, 2021, Willow Oak initiated its third and final liquidating cash distribution from Alluvial Fund, and during the three-month period ended March 31, 2022, the Company received a corresponding partial cash distribution of $1,680,208. In accordance with the partnership terms of Alluvial Fund, 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. As of December 31, 2021, and subsequently as of March 31, 2022, Willow Oak no longer holds any remaining investment in Alluvial Fund. 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 consolidated statements of operations. As of March 31, 2022 and December 31, 2021, the asset management operations segment does not hold any short or long-term investments. Willow Oak continues to earn revenue through its remaining fee share arrangements, as well as through fund management services.

 

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 three-month periods designated below.

 

Asset Management Operations Revenue

 Quarterly Period Ended March 31, 2022  Quarterly Period Ended March 31, 2021 

Unrealized gains on investment activity

 $  $2,054,471 

Performance fee revenue

     99,579 

Management fee revenue

  16,745   19,264 

Fund management services revenue

  21,750   20,540 

Total revenue

 $38,495  $2,193,854 

 

23

 

Real Estate Operations

 

For the three-month period ended March 31, 2022, the real estate operations segment generated revenue of $1,800 and cost of revenues of $445, all of which is attributed to rental activities. Operating expenses for the three-month period ended March 31, 2022, were $209. Other income totaled $43,390 and net income for the three-month period ended March 31, 2022, totaled $44,536. Other income for the three-month period ended March 31, 2022, is primarily attributable to the sale of the sole remaining residential property, which resulted in a gain of $43,140. This compares to the three-month period ended March 31, 2021, when the real estate operations segment generated revenue of $9,736 and cost of revenue of $7,644, all of which was also related to rental activities. Operating expenses for the three-month period ended March 31, 2021, were $6,485, other expenses totaled $4,795, and the total reported net loss was $9,188. Other expenses incurred during the three-month period ended March 31, 2021, were primarily interest-related expenses. The current period decreases in revenue, cost of revenue, and operating expenses are due to the diminished rental real estate portfolio.

 

EDI Real Estate Operations

 

As of March 31, 2022, and December 31, 2021, the EDI Real Estate portfolio of properties included the following units:

 

EDI Real Estate

 

March 31, 2022

  

December 31, 2021

 

Units occupied or available for rent

  0   1 

Vacant lots held for investment

  2   2 

Total units held for investment

  2   3 

 

As of March 31, 2022, the two vacant lots located in Roanoke, Virginia are not assigned a value on the accompanying consolidated balance sheets, as the lots hold limited value due to their rural location and lack of utility and access.

 

The unit held for investment as of December 31, 2021, consisted of a single-family residential rental unit. This property was sold during the three-month period ended March 31, 2022.

 

The lease in effect as of December 31, 2021, was based on a month-to-month provision as the initial annual term of the lease had been completed. An outside property management company managed this rental property on behalf of the Company. As this property was sold during the three-month period ended March 31, 2022, there are no reportable future anticipated rental revenues.

 

EDI Real Estate

 

March 31, 2022

  

December 31, 2021

 

Total real estate held for investment

 $  $43,821 

Accumulated depreciation

     (16,910)

Real estate held for investment, net

 $  $26,911 

 

For the three-month periods ended March 31, 2022 and 2021, depreciation expense on the EDI Real Estate portfolio of properties was $398 and $2,377, respectively.

 

EDI Real Estate’s sold remaining residential property was sold during the three-month period ended March 31, 2022. Gross proceeds for the sale of the property were $75,000 and net proceeds totaled $69,603. This compares to the property’s carrying value of $26,463, which resulted in a gain of $43,140 on the sale. There were no properties sold during the three-month period ended March 31, 2021. No properties were purchased during the three-month periods ended March 31, 2022 and 2021.

 

No impairment adjustments were recorded on the EDI Real Estate portfolio during the three-month periods ended March 31, 2022, and 2021.

 

Mt Melrose Operations

 

For the quarterly period ended March 31, 2021, prior to the sale of the remaining membership interests on May 17, 2021, the Company’s remaining investment in Mt Melrose was carried on our condensed consolidated balance sheets for $53,846. This carrying value was reflective of the mechanics of the June 27, 2019 transaction, as the Company could not obtain current appraisals for each individual property at that time. By way of the Mt Melrose transaction, the Company was able to significantly reduce direct and overhead expenses, improve net cash flows, and fully deconsolidate approximately $6.4 million of debt. Additionally, the Company was afforded the opportunity to refocus growth opportunities to its asset management operations segment. These circumstances, rather than the cash consideration received, are what strategically prompted the majority sale of the Mt Melrose entity. Additional debt restructurings and sales of previously inactive real estate properties allowed the portfolio to continue its redirection, which management believes provided long-term returns greater than its carrying value. Management’s belief was substantiated as the Company recognized a gain of $778,872 during the quarterly period ended June 30, 2021, on the sale of its then-remaining membership interests in the Mt Melrose entity. As of the prior period ended June 30, 2021, the Company no longer holds any interest in the Mt Melrose entity. No comparable activity existed for the quarterly period ended March 31, 2022. See Notes 3 and 8 for more information.

 

Internet Operations

 

Revenue attributed to the internet operations segment during the three-month period ended March 31, 2022 totaled $216,680, and cost of revenue totaled $71,194. Operating expenses for the segment totaled $49,844 for the three-month period ended March 31, 2022, and other income totaled $1,408. Total net income for the internet operations segment was $97,050 for the three-month period ended March 31, 2022. This compares to the three-month period ended March 31, 2021, when revenue totaled $232,266, cost of revenues totaled $71,963, operating expenses were $46,541, other income was $361, and net income was $114,123.

 

As of March 31, 2022, we have a total of 6,962 customer accounts across the U.S. and Canada. This compares to the three-month period ended March 31, 2021, when we had a total of 6,895 customer accounts. Even through the internet operations segment has seen an increase in total customer accounts, total comparative revenue has slightly decreased due to the segment’s evolving sales mix. The sales mix for the internet operations segment has shifted from higher revenue, lower margin products to lower revenue, higher margin products. During the three-month period ending March 31, 2022, approximately 49% of our revenue is driven by internet access services, with the remaining 51% being earned though web hosting, email, and other web-based storage services. This compares to the three-month period ending March 31, 2021, when approximately 60% of our revenue was driven by internet access services, with the remaining 40% being earned though web hosting, email, and other web-based storage services.

 

As of March 31, 2022, approximately 92% of our customer accounts are U.S.-based, while 8% are Canada-based. Revenue generated by our U.S. customers totaled $205,877, and revenue generated by our Canadian customers totaled $10,803 during the three-month period ended March 31, 2022. This compares to revenue generated by our U.S. customers of $220,280, and revenue generated by our Canadian customers of $11,986 during the three-month period ended March 31, 2021.

 

24

 

Other Operations

 

For the three-month period ended March 31, 2022, the Company’s other operations segment did not produce any revenue or cost of sales. Operating expenses totaled $814,776, and other income was $21,463 for the three-month period ended March 31, 2022. Corporate operating expenses accounted for the full $814,776 of reported operating expenses for our other operations segment. This resulted in a net loss of $793,313 for the three-month period ended March 31, 2022. This compares to the three-month period ended March 31, 2021, when the other operations segment again did not produce any revenue or cost of sales, but did incur corporate operating expenses of $207,253, other income of $4,824, and a net loss of $202,429 for the period. Corporate expenses are higher for the three-month period ended March 31, 2022, primarily due to increased corporate legal expenses associated with the Company’s proposed merger transaction.

 

The Company did not recognize any income tax expense for the three-month periods ended March 31, 2022 and 2021, as the Company operated at a tax loss for those periods, and any deferred tax liabilities associated with unrealized gains in the Alluvial Fund investments for the three-month period ended March 31, 2021, were offset by deferred tax assets. The Company continues to provide a full valuation allowance against its net deferred tax assets, including net operating loss carryforwards, as of the three-month period ended March 31, 2022.

 

25

 

Proposed Merger with CBA

 

As previously announced on December 29, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ENDI Corp., a Delaware corporation (“ENDI”), Zelda Merger Sub 1, Inc., a Delaware corporation (“First Merger Sub”), Zelda Merger Sub 2, LLC, a Delaware limited liability company (“Second Merger Sub”), CrossingBridge Advisors, LLC, a Delaware limited liability company (“CrossingBridge”), and Cohanzick Management, L.L.C., a Delaware limited liability company (“Cohanzick” and, together with the Company, ENDI, First Merger Sub, Second Merger Sub and CrossingBridge, the “Parties”).

 

Pursuant to the terms of the Merger Agreement, the Company will merge with First Merger Sub, a wholly-owned subsidiary of ENDI, with the Company being the surviving entity (the “First Merger”), and CrossingBridge will merge with Second Merger Sub, also a wholly-owned subsidiary of ENDI, with CrossingBridge being the surviving entity (the “Second Merger” and, together with the First Merger, the “Merger”). In connection with the Merger, each share of common stock of the Company will be converted into the right to receive one (1) share of Class A common stock, par value $0.0001 per share, of ENDI (the “Class A Common Shares”), and Cohanzick, as the sole member of CrossingBridge, will receive 2,400,000 Class A Common Shares and 1,800,000 shares of Class B common stock, par value $0.0001 per share, of ENDI (the “Class B Common Shares”, and together with the Class A Common Shares, the “Common Shares”), a Class W-1 Warrant to purchase 1,800,000 Class A Common Shares and a Class W-2 Warrant to purchase 250,000 Class A Common Shares. The Class A Common Shares and Class B Common Shares are identical other than the Class B Common Shares have the right to designate directors (as described below) and that the Class B Common Shares shall not be entitled to participate in dividends or other distributions with respect to the Class A Common Shares and shall not receive any assets of ENDI in the event of a liquidation. The warrant to purchase 1,800,000 Class A Common Shares and the warrant to purchase 250,000 Class A Common Shares to be issued to Cohanzick may be exercised in whole or in part at any time prior to the date that is five (5) years after the date of the Merger closing, at an exercise price of $8.00 per Class A Common Share subject to certain customary adjustments. Each of the warrants may also be exercised on a “cashless” basis at any time at the election of the holder and if not fully exercised prior to the expiration date of the warrant, shall be automatically exercised on a “cashless” basis. In addition, Cohanzick or its designee has agreed to purchase an aggregate of 100,000 Class A Common Shares, and shall have the right, but not the obligation, to purchase an additional 250,000 Class A Common Shares (collectively the “Additional Shares”), not later than five (5) business days following the consummation of the Merger at a price equal to the lesser of $8.00 or the 60 day volume weighted average price of Enterprise Diversified’s common shares as of the Merger closing date (the “Closing”), excluding the highest and lowest trading days. Certain of our officers, directors and employees shall have the right, but not the obligation, to purchase up to a further 55,000 Class A Common Shares on the same terms as the purchase of the Additional Shares. During the quarterly period ended March 31, 2022, ENDI incurred $585,226 of transaction costs directly associated with due diligence, public reporting, and legal advice associated with the Merger Agreement.

 

The Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement have been approved by our board of directors and by the board of managers of Cohanzick and remains subject to the approval of our stockholders. Holders of our common shares shall have dissenters’ rights as provided by Section 92A of the Nevada Revised Statutes. The Company and ENDI have filed a draft registration statement on Form S-4, including a prospectus registering the issuance of the ENDI Class A Common Shares, Class B Common Shares, Warrants and Class A Common Shares underlying the Warrants and draft proxy statement of the Company relating to the meeting of stockholders of the Company to approve the Merger Agreement and the transactions contemplated thereby, including the Merger. Further, as discussed in more detail below, certain of the Company’s stockholders have entered into voting and support agreements pursuant to which such stockholders have agreed to vote their shares of capital stock of the Company in favor of the Merger.

 

The Merger Agreement contains customary representations and warranties of the Company, CrossingBridge, ENDI, Cohanzick and the merger subsidiaries, and certain of the parties to the Merger Agreement have agreed to customary covenants, including, among others, covenants relating to: (1) the conduct of their respective businesses during the interim period between the execution of the Merger Agreement and the consummation of the Merger; (2) the use of reasonable best efforts to obtain governmental and regulatory approvals; and (3) obligations of the Company to convene a meeting of its stockholders to approve the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

Completion of the Merger is subject to various customary conditions, including, among others, (1) approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, by our stockholders, (2) the draft registration statement on Form S-4 being declared effective by the U.S. Securities and Exchange Commission (“SEC”), (3) the quotation of ENDI’s Class A Common Shares on the OTC Market, (4) the absence of any law, order or regulatory ruling prohibiting the consummation of the Merger and (5) the truth of each party’s representations and warranties, and the performance of each party’s covenants.

 

The Merger Agreement contains certain termination rights including upon: (1) the mutual written agreement of the Company and CrossingBridge to terminate the Merger Agreement, (2) the written notice of either the Company or CrossingBridge if the Merger has not closed by June 30, 2022, (3) a material breach of the Merger Agreement by us or CrossingBridge, which breach cannot be cured within thirty (30) days, (4) the failure to obtain any required regulatory or governmental approvals, (5) the failure to obtain the approval of the Company’s stockholders, or (6) the failure of our board of directors to make, or the withdrawal, amendment or qualification, in a manner adverse to CrossingBridge, of a recommendation in favor of the merger, or the failure of our board to include its recommendation in the proxy statement or the recommendation by the board of an alternative proposal or similar actions. In the event of the termination of the Merger Agreement pursuant to clause (6) of the preceding sentence, we shall pay a fee in the amount of $1,000,000 to CrossingBridge. In addition, pursuant to the Merger Agreement, we have agreed, subject to Closing, to reimburse CrossingBridge certain fees and expenses, the amount of which will be determined upon Closing.

 

Pursuant to the Merger Agreement, ENDI has agreed that at the Closing, it will enter into a registration rights agreement with certain stockholders of ENDI following the Closing that are deemed to be affiliates of ENDI immediately following the Closing, under which such stockholders’ Class A Common Shares, including the Class A Common Shares underlying any warrants issued in connection with the Merger, will be registered for resale under the Securities Act of 1933, as amended. In addition, ENDI has agreed that at the Closing, it will amend and restate its certificate of incorporation to provide for, among other things, the rights of the holders of the Class B Common Shares to designate certain members of ENDI’s board of directors.

 

The amended and restated certificate of incorporation of ENDI will provide that so long as the holders of Class B Common Shares and their affiliates own at least 25% of the outstanding Common Shares, the holders of Class B Common Shares shall have the right to designate 60% of the authorized number of directors on ENDI’s board of directors (rounded up or down to the nearest whole number as necessary in light of the actual number of members of the board of directors). So long as the holders of Class B Common Shares and their affiliates own at least 15% but less than 25% of the outstanding Common Shares, the holders of Class B Common Shares shall have the right to designate 40% of the authorized number of directors on ENDI’s board of directors (rounded up or down to the nearest whole number as necessary in light of the actual number of members of the board of directors). So long as the holders of Class B Common Shares and their affiliates own at least 5% but less than 15% of the outstanding Common Shares, the holders of Class B Common Shares shall have the right to designate one (1) director on ENDI’s board of directors. At the closing, the Class B Common Shares shall be entitled to designate 3 of the 5 members of ENDI’s board of directors.

 

ENDI has also agreed at the Closing, it will enter into a stockholder agreement and separate voting agreement with Cohanzick and certain stockholders of ENDI pursuant to which, among other provisions, from and after the date that the holders of Class B Common Shares are no longer entitled to elect at least one (1) director to ENDI’s board of directors pursuant to the amended and restated certificate of incorporation as described above, so long as David Sherman and his affiliates, who will collectively beneficially own approximately 61.3% of the issued and outstanding voting stock of ENDI immediately following the Merger (assuming the Additional Shares are not issued), beneficially own at least 25% of the outstanding Common Shares, will have the right to nominate up to 60% of the authorized number of directors on the ENDI board, and the stockholders named therein have agreed to vote in support of such director nominees. David Sherman is the controlling member of Cohanzick and together with his affiliates has an economic interest of approximately 87% of Cohanzick. The number of directors David Sherman and his affiliates are permitted to nominate to ENDI’s board of directors decreases to 40% if David Sherman and his affiliates cease to beneficially own less than 25% but at least 15% of the outstanding Common Shares. So long as David Sherman and his affiliates own at least 5% but less than 15% of the outstanding Common Shares, David Sherman and his affiliates shall have the right to nominate one (1) director.

 

The above description of the Merger Agreement and the transactions contemplated therein does not purport to be complete and is qualified in its entirety by reference to the content of the Merger Agreement, which was included as an Exhibit to the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2022, as well as the information contained in, or incorporated by reference into, the Registration Statement and/or accompanying proxy and prospectus materials, as from time to time filed with the SEC.

 

26

 

Voting and Support Agreement

 

In connection with the Merger Agreement we and certain of our stockholders holding an aggregate of approximately 34% of the issued and outstanding voting capital stock of the Company have entered into a voting and support agreement (the “Support Agreement”) pursuant to which such stockholders of the Company have agreed to vote their shares of capital stock of the Company in favor of the Merger Agreement and the transactions contemplated thereby, including the Merger, and against any action, agreement, transaction or proposal that would result in a breach of any covenant or other provision of the Merger Agreement or that would reasonably be expected to result in the transactions contemplated by the Merger Agreement from not being completed. Pursuant to the Support Agreement, the stockholders party thereto have also agreed to waive their dissenters rights under Nevada law with respect to the Merger, not to solicit or support any corporate transaction that constitutes or could reasonably be expected to constitute, an alternative to the Merger, and not to sell, transfer, assign or otherwise take any action that would have the effect of preventing or disabling the stockholder from voting its shares of the Company in accordance with its obligations under the Support Agreement. The Support Agreement automatically terminates upon the termination of the Merger Agreement or upon the mutual agreement of the parties to the Support Agreement. The description of the Support Agreement is qualified in its entirety by reference to the content of the Support Agreement, which was included as an Exhibit to the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2022.

 

Because of the material conditions to closing, including the approval of our stockholders of the Merger Agreement, we cannot assure you that the Merger will close as scheduled or at all, or on the terms described herein. If consummated, the Merger may result in significant changes to the business of the Company and the terms of an investment in shares of our common stock.

 

No Offer or Solicitation

 

This Quarterly Report on Form 10-Q is not intended to and shall not constitute a proxy statement or the solicitation of a proxy, consent or authorization with respect to any securities in respect of the Proposed Merger and shall not constitute an offer to sell or the solicitation of an offer to buy or subscribe for any securities or a solicitation of any vote of approval, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

 

Financial Condition, Liquidity, and Capital Resources

 

During the three-month period ended March 31, 2022, Enterprise Diversified carried out its business strategy in four operating segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other 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 a 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 $15,020,160 at the three-month period ended March 31, 2022, compared to $13,487,482 at year-end December 31, 2021. Accounts receivable decreased to $39,454 at March 31, 2022, compared to $351,405 at December 31, 2021. Investment redemption receivable decreased from $3,734,465 at year-end December 31, 2021 to $2,053,587 at the three-month period ended March 31, 2022. Real estate held for investment decreased to $0 at the three-month period ended March 31, 2022, compared to $26,911 at year-end December 31, 2021. Additionally, accrued compensation decreased from $337,759 at year-end December 31, 2021, to $37,759 at the three-month period ended March 31, 2022. Finally, accrued expenses increased to $834,636 at the three-month period ended March 31, 2022, compared to $308,039 at year-end December 31, 2021. The increase in cash and equivalents and decrease in investment redemption receivable are attributable to the Company’s withdrawals from Alluvial Fund, LP. The Company’s decrease in accounts receivable are due to the repayment of fee shares earned through Willow Oak’s various fee share arrangements, some of which crystalize at the calendar year-end. The decrease in real estate held for investment is due to the sale of the remaining EDI Real Estate rental property as discussed previously. The decrease in accrued compensation is due to the payment of year-end bonus and director fees during the three-month period ended March 31, 2022. The increase in accrued expenses is largely attributed to an increase in legal fees associated with the Company’s proposed merger transaction with CBA. 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 March 31, 2022, and December 31, 2021 is as shown:

 

  

March 31, 2022

  

December 31, 2021

 

Current

 $37,788  $348,745 

30 – 60 days

  926   1,545 

60 + days

  740   1,115 

Total

 $39,454  $351,405 

 

We have no material capital expenditure requirements.

 

27

 

Discussion Regarding COVID-19 Potential Impacts

 

Due to the continuing uncertainty surrounding the COVID-19 pandemic, management has continued to regularly monitor and assess all Company operations for potential impacts of the COVID-19 pandemic, including as infectious variants such as Omicron have emerged. As of the quarterly period ended March 31, 2022, 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 continue to 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.

 

Discussion Regarding the Company’s Status Under the Investment Company Act of 1940

 

As discussed above, the Company, directly and through our controlled subsidiaries, currently is engaged primarily in asset management operations, real estate operations, and internet operations lines of business–that is, in businesses other than that of investing, reinvesting, or trading in securities. We are not engaged primarily, nor do we propose to engage primarily, in the business of investing, reinvesting, or trading in securities; nor does the Company propose to operate any of its businesses in a manner that would cause the Company to be subject to regulation as an “investment company” under the 1940 Act.

 

Beginning during the quarterly period ended March 31, 2021, and continuing to date, the Company has been conducting informal discussions and correspondence with members of the staff of the Securities and Exchange Commission’s (“SEC”) Division of Investment Management regarding a general inquiry by the SEC as to the Company’s status under the 1940 Act, notably given the Company’s indirect investment in Alluvial Fund, LP, which has been fully divested.

 

Generally, under Section 3(a)(1) of the 40 Act, a company is deemed to be an investment company if:

 

●         

it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

●         

it is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets on an unconsolidated basis.

 

Historically, the Company has structured its various business lines to allow it to satisfy both tests under Section 3(a)(1).  However, in 2019, as part of a strategic reallocation of its resources, the Company conducted divestitures of certain significant assets, resulting in its ownership of investment securities with a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis. Our ownership of “investment securities” was largely comprised of our investment and limited partnership interests in Alluvial Fund, LP. In this respect, as the composition of our assets had changed over time, including by virtue of our previous sale of membership interests in Mt Melrose, LLC and our previous divestiture of the former Home Services Operations segment, the impact of our long-standing Alluvial Fund investment to the composition of our total assets, as measured under the 1940 Act, had become more pronounced, albeit inadvertently. As a result, the Company sought to avoid the registration requirement under the 1940 Act by satisfying Section 3(b)(1), which provides that a company that would otherwise fit within the definition of investment company under Section 3(a)(1) will not be required to register under the 1940 Act if “it is primarily engaged, directly or through a wholly owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities”.

 

The Company’s ongoing informal discussions with the SEC have been conducted with the aim of strengthening the Company’s position under Section 3(a)(1) of the 1940 Act. As a result of such discussions and correspondence among the Company and the SEC, the Board of Directors of the Company reconfirmed, during the quarterly period ended March 31, 2021, that the Company has a bona fide intent to be engaged primarily in lines of business not constituting that of investing, reinvesting, or trading in securities,  and the Board resolved to explore certain strategic options consistent with that intent.

 

As of the quarterly period ended September 30, 2021, and subsequently as of the quarterly period ended March 31, 2022, management determined that our ownership of “investment securities” has fallen below the 40% threshold in Section 3(a)(1)(C) the 1940 Act. This decrease was attributed to the completion of the Company’s withdrawals from the Alluvial Fund, LP, as previously discussed.

 

28

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

This item is not required by smaller reporting companies.

 

Item 4.

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 March 31, 2022. 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 March 31, 2022.

 

Changes in Our Internal Control over Financial Reporting

 

No change in the Company's internal control over financial reporting occurred during the quarterly period ended March 31, 2022, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting subsequent to the date of our most recent evaluation of the Company's internal control over financial reporting.

 

During the quarterly period ended March 31, 2022, 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. The Company continues to make efforts to reinforce its internal control environment by utilizing an external accounting firm during its financial closing process, engaging third-party consultants to review the accounting and related disclosures for transactions that management and the board of directors determine to be particularly complex, and maintaining strict document retention policies and procedures that allow for full visibility of all financial statements and schedules by all ENDI managers and the Executive Chairman.

 

In response to the identified material weaknesses in the most recent evaluation of internal controls over financial reporting, the Company is internally developing a phased approach that is intended to increase the effectiveness of the design and operation of the Company’s disclosure controls and procedures. In the first phase of the project, the Company expects to work with a third-party professional consultant to prepare formal documentation for its internal controls over financial reporting, which may include: an entity level controls assessment, an IT general controls assessment, and process area flowcharts where necessary. The Company will aim to complete this phase of the process by August 31, 2022.  In phase two of this approach, the Company expects to use its control documentation to identify ineffectively designed and/or control gaps and work to remediate them.  The Company will aim to complete phase two of the project by October 31, 2022, pending the successful completion of phase one.  Finally, in phase three of the project, the Company expects to design a systematic monitoring plan to sufficiently test its new key controls over the course of future reporting periods.  The Company will aim to complete phase three of the project by December 31, 2022, pending the successful completion of phase two. There is no guarantee the Company will be successful in completing this multi-phased approach.

 

29

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

Pursuant to Item 103 of Regulation S-K, as amended, the information required by this item is provided by cross-reference to the Company’s legal proceedings disclosure located under the Litigation & Legal Proceedings heading in Note 8 to the accompanying unaudited consolidated financial statements (see page 19).

 

Item 1A.

Risk Factors

 

This item is not required for smaller reporting companies.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

Exhibit

 

Description

3.1 Certificate of Withdrawal of Certificate of Designation of the Series A Preferred Stock of the Company (April 5, 2022) (a)
4.1 Amendment to the Tax Preservation Plan between the Company and Colonial Stock Transfer Company, Inc., as Rights Agent (April 1, 2022) (b)

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

101

 

Pursuant to Rule 405 of Regulation S-T, the following materials from Enterprise Diversified, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline eXtensible Business Reporting Language (iXBRL) (b): (i) Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021; (ii) Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021; (iii) Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021; (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021; (v) Notes to Unaudited Condensed Consolidated Financial Statements (c)

104 Cover page Interactive Data File (formatted as Inline XBRL and combined in Exhibit 101) (c)

 

(a) Filed as Exhibit 3.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on April 6, 2022, and incorporated herein by reference.

 

(b) Filed as Exhibit 4.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on April 6, 2022, and incorporated herein by reference.

 

(c) These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

 

30

 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

 

 

Date: May 13, 2022

 

/s/ Steven L. Kiel

 

 

Steven L. Kiel

 

 

Executive Chairman

 

 

(Principal Executive Officer)

 

 

 

Date: May 13, 2022

 

/s/ Alea A. Kleinhammer

 

 

Alea A. Kleinhammer

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

 

31