UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 20202021
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 | (I.R.S. Employer | |
| 23230 | |
(Address of Principal Executive Offices) |
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(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 |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.125 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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 emerging growth company. See 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).☐ Yes ☒ No
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2020,2021, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $3,381,71010,565,129 based on the price at which the common stock last sold on such day. This price reflects inter-dealer prices without retail mark up, mark down, or commissions, and may not represent actual transactions.
The number of shares outstanding of Common Stock, $0.125 par value, as of March 26, 202125, 2022 is 2,647,383.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 20212022 Proxy Statement for the Annual Meeting of Shareholders,Stockholders, scheduled to be held on May 2725, 2021,2022, are incorporated by reference into Part III of this Form 10-K.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A. | ||
Item 8. | ||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | |
Item 9A. | ||
Item 9B. | ||
Item 9C. | Disclosure Regarding Foreign Jurisdiction that Prevent Inspections | |
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
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Item 16. | ||
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including, without limitation, Part I, Item 1, “Business” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan,” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties which may affect the Company’s business and prospects, including changes in economic and market conditions, acceptance of the Company’s products and services, maintenance of strategic alliances, and other factors discussed elsewhere in this Form 10-K, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors.
BUSINESS |
Overview
Enterprise Diversified, Inc. (formerly White Dove Systems, Inc., Interfoods Consolidated, Inc., and then Sitestar Corporation) was incorporated in Nevada on December 17, 1992. On June 1, 2018, the Company amended its Articles of Incorporation to change the name of the Company to “Enterprise Diversified, Inc.” Unless the context otherwise requires, and when used in this Report, the “Company,” “ENDI,” “we,” “our,” or “us” refers to Enterprise Diversified, Inc. and its subsidiaries.
During the year ended December 31, 2020,2021, the Company operated through four reportable segments:
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● | Real Estate Operations - this segment includes (i) prior to its sale on May 17, 2021, our equity in Mt Melrose, LLC, which manages properties held for investment and held for resale located in Lexington, Kentucky, and (ii) revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in |
● | Internet Operations - this segment includes revenue and expenses related to |
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● | Other Operations - this segment includes any revenue and expenses from nonrecurring or one-time strategic funding or similar activity that is not considered to be one of our primary lines of business, and any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company. |
During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations, comprised of former subsidiary Specialty Contracting Group, LLC’s operation of HVAC and plumbing companies in Arizona. However, for the year ended December 31, 2020,2021, and for all prior periods presented, Home Services Operations are reported as discontinued operations.
The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
Asset Management Operations
The Company operates its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”) and Willow Oak Capital Management, LLC.
Willow Oak is an asset management platform focused on growing and enhancing the alternative investment landscape. Willow Oak seeks partnerships with alternative investment managers in the early stages of growth in order to build a network of unique investment opportunities for investors and scalable, professional operations for managers. Willow Oak offers affiliated managers strategic consulting, operational support, and growth opportunities through minority partnerships and other bespoke relationships. Affiliations to date include fund seeding and reinvestments, fund launching, investor relations, and fund management administrative support. The Company intends to actively expand its Willow Oak platform with additional offerings that enhance the value of the Willow Oak platform to managers and funds across the investing community.
On August 21, 2020, Willow Oak created two wholly-owned entities, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”) and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”), to support this partnership model in perpetuity. Willow Oak AMS earns gross revenue shares commensurate with ownership stakes in investment management firms in exchange for the provision of benefits of affiliation and ongoing fund management services (“FMS”). Willow Oak FMS earns a direct fee from affiliated limited partnerships for rendering administrative, compliance program management, and tax and audit liaison services.
Real Estate Operations
As has been previously reported, in December 2017, ENDI created a wholly-owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), to acquire a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into in December 2017 with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, then an ENDI director. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of New Mt Melrose and its real estate portfolio. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. 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 NoteNotes 4 and 11 for more information.
Our other real estate operations include activity from a legacy real estate investment portfolio held through EDI Real Estate, LLC, a wholly-owned subsidiary. The portfolio, primarily located in the Roanoke area of Virginia, includes a residential propertiesrental property and vacant land. The portfolio includesresidential property is a single-family homeshome that areis currently rented and managed through a third-party property manager, as well as other properties being listed for sale.manager.
Internet Operations
The Company operates its internet operations segment through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
Other Operations
Other operations include nonrecurring or one-time strategic funding or similar activity that isare not considered to be one of the Company’s primary lines of business. This activity includes opportunities such as the Company’s former investment activity with Huckleberry Real Estate Fund II, LLC and its existing financing arrangement regarding Triad Guaranty, Inc.
Other operations also include any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operated aits home services operations segment through its former subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.
As has been previously reported, onin May 24, 2019, the Company, via Specialty Contracting Group, completed a divestiture of the home services operations to an unaffiliated third-parity purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, all of Specialty Contracting Group’s personal property and customer lists and records were conveyed to Rooter Hero, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed Specialty Contracting Group’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s then-remaining customer accounts going forward. No cash consideration was exchanged in the transaction. Rather, as consideration for the transaction, Rooter Hero agreed to pay monthly royalties for the sixty (60) months following the closing calculated on the basis of any revenue actually received from the customer accounts transferred (7.5% of any monthly revenue generated from qualified sales during the first year, and 5% of any such monthly revenue during years two through five; in each case subject to reduction for pre-approved warranty-related costs concerning select customers).
On October 22, 2019, the Company, as and being the sole and managing member of Specialty Contracting Group, LLC, resolved to dissolve and wind up Specialty Contracting Group and proceed with distributing its assets in accordance with §18-804 of the Delaware Limited Liability Company Act. Management had determined that Specialty Contracting Group’s continued existence was not reasonably practicable or financially feasible; the entity having no operational capabilities, no significant assets, and no prospects for the carrying on of any business or receipt of revenue. All of Specialty Contracting Group’s cash on hand was paid out ratably to its creditors and claimants; however, its assets were not sufficient to satisfy in full its known liabilities. After making such payments out of and to the extent of its assets, Specialty Contracting Group filed a Certificate of Cancellation with the Secretary of State of the State of Delaware on November 15, 2019, thereby effecting the cancellation and termination of the legal existence of the entity.
See Note 3 for more information.
Products and Services
Asset Management Operations
The Company operates its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC (“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 earnsearned a share of management and performance fees earned. As of DecemberOn May 31, 2020,2021, however, Willow Oak continues to holdinitiated a series of liquidating distributions of its direct investment in Alluvial Fund.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 totaling $3,734,465 in respect of such withdrawal. This brings the total cash distribution amount to $17,772,369 for the year ended December 31, 2021. In accordance with the partnership terms of Alluvial Fund, a portion of Willow Oak’s capital account will be retained by the general partner until the fund’s activities for the year ended December 31, 2021, have been finalized through an independent audit. The retained amount will not be actively invested and will not be subject to investment gains or losses. The retained amount is represented by the investment redemption receivable amount on the accompanying consolidated balance sheets. Investment gains and losses for activity during the year ended December 31, 2021, and for prior periods presented, are reported as revenue on the accompanying consolidated statements of operations. As of December 31, 2021, Willow Oak no longer holds any remaining investment in Alluvial Fund.
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 isare 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. In exchange, Willow Oak continues to provide ongoing FMS services. Willow Oak 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 Asset Management Affiliate Management Services, LLC ("Willow Oak AMS"),AMS, executed a strategic relationship agreement with SVN Capital, LLC to become a 20% beneficial owner of the firmwhereby 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. As a beneficial owner of SVN Capital, LLC,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.
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 NoteNotes 4 and 11 for more information.
As has been previously reported, in July 2017, ENDI created a wholly-owned real estate subsidiary named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of December 31, 2020,2021, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes fourone residential propertiesproperty and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia. The portfolio includes an occupied single-family homeshome that areis managed by a third-party property management company. The leaseslease in effect as of December 31, 2020, are2021, is based on a month-to-month provision, as the initial annual time periods and include month-to-month provisions after the completionterm of the initial term.lease has been completed. An outside property management company manages this rental property on behalf of the Company.
State and municipal laws and regulations govern the real estate industry in general and do not vary significantly from one community to another.throughout our real estate holding areas. State laws, including the Virginia Residential Landlord and Tenant Act, in addition to local ordinances, govern our rental propertiesproperty 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 fiber-optic)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 December 31, 2020,2021, the focus of our internet operations segment is to generate cash flow, work to make our costs variable, and reinvest in our operations when an acceptable return is available. We did not make significant reinvestments into the internet operations segment during the year ended December 31, 2020.2021.
Management routinely endeavors to identify the market value for domain names owned by the Company in order to assess potential income opportunities. Management evaluates these domain names for third-party sales potential, as well as for other marketing opportunities that could generate new revenue from current customers who utilize the domains.
Other Operations
Other operations include nonrecurring or one-time strategic funding or similar activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main recent activities comprising other operations.
Former Investment Activity with Huckleberry Real Estate Fund
In January 2017, the Company, through Willow Oak, committed to make a capital contribution to Huckleberry Real Estate Fund II, LLC, a private investment fund, in the aggregate amount of $750,000. In May 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly-owned subsidiary of the Company. During the quarter ended March 31, 2019, all contributed capital was returned in full and a gain of $212,631 was recognized as revenue through the other operations segment on our consolidated statements of operations for the year ended December 31, 2019. Accordingly, this investment activity with Huckleberry Real Estate Fund II, LLC was completed prior to commencement of the fiscal year ended December 31, 2020.
Financing Arrangement Regarding Triad Guaranty, Inc.
In August 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy in April 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. On November 12, 2019, the Company exercised its warrants and purchased 450,000 shares of Triad Guaranty, Inc. Subsequently, on December 30, 2019, the Company monetized all 450,000 shares and recognized a gain of $76,500 on the transaction. This gain is included in investment income on the accompanying consolidated statements of operations for the year ended December 31, 2019. On December 31, 2020, the Company accepted a revision of terms to the original promissory note, which include,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, the Company holds its interests in both promissory notes for $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 6 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.
Employees
Human Capital
As of December 31, 20202021, we employed sevensix full-time individuals through the asset management, real estate, internet, and other operations segments. We also utilize outside contractors as necessary to assist with financial reporting,consulting, technical support, and customer service. Our employees are not unionized, and we consider relations with employees to be favorable.
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 year ended December 31, 2021, ENDI incurred $1,148,971 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.
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 Merger Agreement has been included as an Exhibit to this annual report and the description of the Merger Agreement and the transactions contemplated herein is qualified in its entirety by reference to the content of the Merger Agreement. It is not intended to provide factual information about the parties or any of their respective subsidiaries or affiliates. The Merger Agreement should not be read alone, but should instead be read in conjunction with the other information regarding the Merger Agreement, the Merger, the Company, CrossingBridge and the other parties to the Merger Agreement and their respective affiliates and their respective businesses, that will be contained in, or incorporated by reference into, the Registration Statement that will include a proxy statement of the Company and a prospectus of ENDI.
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 Support Agreement is included as Exhibit 2.2 to this annual report. The description of the Support Agreement is qualified in its entirety by reference to the content of the Support Agreement, which is filed herewith as Exhibit 2.2.
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 Annual Report on Form 10-K 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.
Available Information
Enterprise Diversified, Inc. files annual, quarterly, and current reports and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act. Also, the SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company also makes available free of charge on or through the Company’s website, http://www.enterprisediversified.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.
RISK FACTORS |
This item is not required for smaller reporting companies.
UNRESOLVED STAFF COMMENTS |
None.
PROPERTIES |
The Company operates its Asset Management, Real Estate, Internet, and Other operations remotely–that is, without any dedicated office space. The principal office for our Asset Management Operations is office space leased by the Company located in New York, New York.
As of December 31, 2020,2021, through EDI Real Estate, LLC, the Company owns various real estate properties including fourconsisting of one residential propertiesproperty and interests in severaltwo undeveloped lots. Subsequent to December 31, 2021, the last remaining residential property owned by EDI Real Estate, LLC was sold.
LEGAL PROCEEDINGS |
Pursuant to Item 103 of Regulation S-K, as amended, the information required by this Item 3 is provided by cross-reference to the Company’s legal proceedings disclosure located under the Litigation & Legal Proceedings heading in Note 11 to the accompanying consolidated financial statements (see page 41)40).
MINE SAFETY DISCLOSURES |
Not applicable.
MARKET FOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Enterprise Diversified’s Common Stock is listed on the OTC QB Markets (“OTCQB”) under the symbol “SYTE.”
Record Holders
As of March 26, 2021,25, 2022, we had approximately 117 shareholders116 stockholders of record. This number does not reflect the number of individuals or institutional investors holding stock in nominee name through banks, brokerage firms, and others.
Equity Compensation Plans
On November 7, 2019, Enterprise Diversified’s Governance, Compensation, and Nomination Committee of the Board of Directors approved the creation of an equity incentive program for board members as well as eligible senior management. The Committee determined that it was advisable, and in the best interests of the Company and its stockholders, to provide guidelines for the issuance of equity incentive awards, such as restricted stock and restricted stock units, to attract, retain, and motivate eligible persons whose present and potential contributions are important to the long-term success of the Company and its subsidiaries and to align their interests with those of the Company’s stockholders. Consistent with this and the Company’s intention to retain its cash, it was also determined that such a program would provide for a more-formal process by which amounts of director’s fees and annual management bonuses accrued from time to time could be paid, at the direction of the Committee, in shares of Common Stock in lieu of cash. The provisions of the program were memorialized as the Enterprise Diversified, Inc. 2020 Equity Incentive Plan (the “2020 EIP”), which was approved and adopted by the Board effective as of January 31, 2020. The 2020 EIP may be amended or terminated at any time by the Board or the Committee. Effective January 31, 2021, the Board adopted an amendment to the 2020 EIP solely to increase the stated number of shares available for issuance thereunder, so as to accommodate the Company’s February 3, 2021 issuance of shares noted below. A copy of such amendment accompanies this Report as Exhibit 10.8.
Dividends
To date, we have not paid any cash dividends on our capital stock. We intend to retain our cash and, therefore, do not anticipate paying any cash dividends in the foreseeable future.
Issuances of Unregistered Shares of Common Stock
On February 14, 2020, the Company issued a total of 35,594 unregistered shares of its Common Stock to members of the Board of Directors and select senior management in lieu of cash payment of certain accrued director’s fees and annual management bonuses, in line with the 2020 EIP described above. The number of shares issued was determined by the Governance, Compensation, and Nomination Committee of the Board of Directors using the volume weighted average price of a share of Common Stock for the ninety (90) days immediately preceding January 31, 2020, which equaled $3.6537. To the extent this issuance constituted an offer or sale of securities under the Securities Act, it was exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.
On February 3, 2021, the Company issued a total of 45,143 unregistered shares of its Common Stock to members of the Board of Directors and select senior management in lieu of cash payment of certain accrued director’s fees and annual management bonuses, in line with the 2020 EIP described above. The number of shares issued was determined by the Governance, Compensation, and Nomination Committee of the Board of Directors using the volume weighted average price of a share of Common Stock for the ninety (90) days immediately preceding January 31, 2021, which equaled $5.3166. To the extent this issuance constituted an offer or sale of securities under the Securities Act, it was exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.
|
Not applicable.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis should be read in conjunction with the Company’s accompanying consolidated financial statements and accompanying notes as of and for the years ended December 31, 20202021 and 2019.2020. The discussion of results, causes, and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. Additionally, it should be noted that a uniform comparative analysis cannot be performed for all segments, as a segment’s limited financial history or recent restructuring results in less comparable financial performance.
Summary of Financial Performance
Common stockholders’ equity increased from $10,633,958$14,043,411 at December 31, 2019,2020, to $14,043,41117,105,760 at December 31, 2020.2021. This change was primarily attributable to $3,267,052$4,225,702 of net income in the asset management operations segment, $467,824 of net income in the internet operations segment, $202,676$824,284 of net income in the real estate operations segment, and $165,186$434,228 of net income resulting from discontinued operations underin the home servicesinternet operations segment, and was partially offset by $823,334$2,661,865 of net loss in the other operations segment. There was no reportable income attributed to discontinued operations for the year ended December 31, 2021. Corporate expenses for the year ended December 31, 2020,2021, included in the net loss from other operations, totaled $966,862.$2,148,641. Total comprehensive net income for the year ended December 31, 20202021 equaled $3,279,404.$2,822,349.
Balance Sheet Analysis
This section provides an overview of changes in our assets, liabilities, and equity and should be read together with our accompanying consolidated financial statements, including the accompanying notes to the financial statements. The table below provides a balance sheet summary for the periods presented and is designed to provide an overview of the balance sheet changes from quarter to quarter.
December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2019 | December 31, 2021 | September 30, 2021 | June 30, 2021 | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||
Cash and equivalents | $ | 341,007 | $ | 337,149 | $ | 425,985 | $ | 553,468 | $ | 666,810 | $ | 13,487,482 | $ | 9,316,890 | $ | 9,399,112 | $ | 292,767 | $ | 341,007 | ||||||||||||||||||||
Accounts receivables, net | 144,791 | 49,824 | 28,394 | 35,298 | 52,889 | 351,405 | 302,548 | 369,893 | 130,155 | 144,791 | ||||||||||||||||||||||||||||||
Investment redemption receivable | 3,734,465 | 5,579,679 | — | — | — | |||||||||||||||||||||||||||||||||||
Investments, at fair value | 13,574,462 | 11,135,580 | 9,586,178 | 8,354,270 | 10,126,204 | — | 3,765,834 | 8,512,439 | 15,736,234 | 13,574,462 | ||||||||||||||||||||||||||||||
Real estate, total | 241,876 | 378,698 | 383,128 | 376,499 | 479,425 | 26,911 | 27,334 | 27,732 | 239,500 | 241,876 | ||||||||||||||||||||||||||||||
Goodwill and other assets | 555,044 | 524,772 | 545,407 | 548,725 | 574,316 | 340,495 | 490,599 | 493,618 | 508,094 | 555,044 | ||||||||||||||||||||||||||||||
Total assets | $ | 14,857,180 | $ | 12,426,023 | $ | 10,969,092 | $ | 9,868,260 | $ | 11,899,644 | $ | 17,940,758 | $ | 19,482,884 | $ | 18,802,794 | $ | 16,906,750 | $ | 14,857,180 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | 65,524 | $ | 63,573 | $ | 77,670 | $ | 188,732 | $ | 157,934 | $ | 11,474 | $ | 67,585 | $ | 48,920 | $ | 60,734 | $ | 65,524 | ||||||||||||||||||||
Accrued expenses | 306,063 | 176,904 | 119,839 | 124,255 | 198,374 | 645,798 | 465,606 | 117,103 | 137,803 | 306,063 | ||||||||||||||||||||||||||||||
Income taxes payable | 6,532 | 360,000 | — | — | — | |||||||||||||||||||||||||||||||||||
Deferred revenue | 192,088 | 213,498 | 210,671 | 201,430 | 204,960 | 171,194 | 198,199 | 198,045 | 198,848 | 192,088 | ||||||||||||||||||||||||||||||
Notes payable and other liabilities | 250,094 | 646,791 | 666,608 | 561,004 | 704,418 | — | — | 24,461 | 247,305 | 250,094 | ||||||||||||||||||||||||||||||
Total liabilities | 813,769 | 1,100,766 | 1,074,788 | 1,075,421 | 1,265,686 | 834,998 | 1,091,390 | 388,529 | 644,690 | 813,769 | ||||||||||||||||||||||||||||||
Total stockholders’ equity | 14,043,411 | 11,325,257 | 9,894,304 | 8,792,839 | 10,633,958 | 17,105,760 | 18,391,494 | 18,414,265 | 16,262,060 | 14,043,411 | ||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 14,857,180 | $ | 12,426,023 | $ | 10,969,092 | $ | 9,868,260 | $ | 11,899,644 | $ | 17,940,758 | $ | 19,482,884 | $ | 18,802,794 | $ | 16,906,750 | $ | 14,857,180 |
Financial Condition, Liquidity, and Capital Resources
During 2020,the year ended December 31, 2021, Enterprise Diversified carried out its business strategy in four operating segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, as of the year ended December 31, 2020, and for all prior periods presented, home services operations are reported as discontinued operations. Our primary focus is on generating cash flow so that we have the flexibility to pursue opportunities as they present themselves. We will only invest cash in each segment if we believe that the return on this invested capital is appropriate for the risk associated with the investment. This consideration is measured against all investment opportunities available to us and is not limited to these particular segments or the Company’s historical operations.
Cash and equivalents totaled $341,007 at the year ended December 31, 2020, compared to $666,810$13,487,482 at year-end December 31, 2019.2021, compared to $341,007 at year-end December 31, 2020. Real estate held for investment decreased to $241,876 at the year ended December 31, 2020, compared to $380,515$26,911 at year-end December 31, 2019,2021, compared to $241,876 at year-end December 31, 2020, and real estate held for resalelong-term investments decreased to $0 at year-end December 31, 2021, compared to $13,574,462 at year-end December 31, 2020. Total accrued expenses increased to $645,798 at year-end December 31, 2021, compared to $306,063 at year-end December 31, 2020, and total notes payable decreased to $0 at the year ended December 31, 2020, compared to $98,9102021, from $250,094 at year-end December 31, 2019. Total notes payable also decreased2020. The increase in cash and equivalents and decrease in long-term investments are primarily attributed to $250,094 at the year ended December 31, 2020,series of liquidating distributions the Company initiated from $511,025 at year-end December 31, 2019.Alluvial Fund during the current year. The decreases in real estate and notes payable are primarily due to the opportunistic sales of certain EDI Real Estate rental properties. The increase in accrued expenses is largely a product of additional legal and professional fees incurred as part of the Business Combination, which is further described in Note 11. The Company does not expect to make significant reinvestments into property and equipment used in operating activities at this time.
The Company currently believes that our existing balances of cash, cash equivalents, and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.
The aging of accounts receivable as of December 31, 2020,2021, and December 31, 2019,2020, is as shown:
December 31, 2020 | December 31, 2019 | December 31, 2021 | December 31, 2020 | |||||||||||||
Current | $ | 142,121 | $ | 50,909 | $ | 348,745 | $ | 142,121 | ||||||||
30 – 60 days | 1,836 | 1,495 | 1,545 | 1,836 | ||||||||||||
60 + days | 834 | 485 | 1,115 | 834 | ||||||||||||
Total | $ | 144,791 | $ | 52,889 | $ | 351,405 | $ | 144,791 |
We have no material capital expenditure requirements.
During the quarterly period ended June 30, 2020, the Company received loan proceeds in the amount of $125,102 under the Paycheck Protection Program, as amended (the “PPP”), administered by the U.S. Small Business Administration. The PPP, established as part of the U.S. Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”), generally provided for economic assistance in the way of loans to qualifying business for amounts up to two-and-a-half times the average monthly payroll expenses of the qualifying business. Under the PPP, amounts of loan principal and accrued interest were eligible for forgiveness after a period, as selected by the borrower, of either eight or twenty-four weeks, provided the borrower used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintained its payroll levels. The amount of loan forgiveness was subject to reduction if the borrower terminated employees or reduced salaries during the selected time period.
The Company applied for and was granted loan forgiveness by the Small Business Administration for the full value of its PPP loan in December 2020. The principal value of the loan, along with accrued interest, has been recognized as other income on the accompanying consolidated statements of operations for the year ended December 31, 2020.
During the quarterquarterly period ended September 30, 2017,2018, EDI Real Estate, LLC, as a borrower, issued two promissory notes, each secured by a property held for investment. These notes carry annual interest rates of 6%, pay interest quarterly, and are due September 15, 2022, with early payoff permitted. During January 2020, one of these notes was paid off. Additionally, during the quarter ended September 30, 2018, EDI Real Estate, LLC issued a promissory note secured by additionalcertain properties held for investment. This note carriescarried an annual interest rate of 5.6% and fully maturesmatured on September 1, 2033, with early payoff permitted. The interest rate on this note iswas subject to change once each five-year period based on an index rate plus a margin of 2.750 percentage points. The index rate iswas calculated as a monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of five years. During the quarterly period ended September 30, 2021, the remaining loan balance was paid in full and no future payments are required.
During the quarterly period ended September 30, 2017, EDI Real Estate, LLC, as a borrower, issued a promissory note secured by a property held for investment. This note carried an annual interest rate of 6%, accrued interest quarterly, and was due September 15, 2022, with early payoff permitted. During the quarterly period ended June 30, 2021, the balance of this note was paid in full in conjunction with the sale of the property. No future payments are required.
Notes payable as of December 31, 20202021 and 2019,2020, consisted of the following:
Interest Rates | Average Term | 2020 | 2019 | ||||||||||
Interest-bearing amount due on promissory note through EDI Real Estate, LLC | 5.60% | 15 years | $ | 154,094 | $ | 373,425 | |||||||
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC | 6.00% | 5 years | 96,000 | 137,600 | |||||||||
Less current portion | (5,609 | ) | (11,453 | ) | |||||||||
Long-term portion | $ | 244,485 | $ | 499,572 |
The timing of future payments of notes payable are as follows:
2021 | $ | 5,609 | ||
2022 | 101,507 | |||
2023 | 5,828 | |||
2024 | 6,145 | |||
2025 and thereafter | 131,005 | |||
Total | $ | 250,094 |
Off-Balance Sheet Arrangements
We were not a party to any material off-balance sheet arrangements as of December 31, 2020, nor at any time from January 1, 2020 through December 31, 2020.
Interest Rates | Average Term | 2021 | 2020 | ||||||||||
Interest-bearing amount due on promissory note through EDI Real Estate, LLC | 5.60% | 15 years | $ | — | $ | 154,094 | |||||||
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC | 6.00% | 5 years | — | 96,000 | |||||||||
Less current portion | — | (5,609 | ) | ||||||||||
Long-term portion | $ | — | $ | 244,485 |
Other Contractual Obligations
In 2016, the Company made a strategic determination to fund a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017, by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As of December 31, 2020, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying consolidated statements of operations. During the year ended December 31, 2021, the Company completed a liquidating withdrawal schedule from the Alluvial Fund in order to further strengthen the Company’s assertion that it is not subject to the application of the Investment Company Act of 1940, further discussed below. As of December 31, 2021, Willow Oak no longer holds any investment in Alluvial Fund.
As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to Woodmont. Under the terms of the parties’ membership interest purchase agreement, the Company had agreed to indemnify Woodmont against certain losses actually incurred by Woodmont as a result of breaches of the Company’s representations and warranties made under the agreement. Also, in connection with the transaction, the Company and Woodmont had entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC, which had set forth the general terms and conditions governing the arrangements between the two members. In line with the Company’s sale of its remaining membership interests in Mt Melrose to Woodmont effective May 17, 2021, all of such contractual obligations have been terminated, and are no longer in effect as of the quarterly period ended June 30, 2021.
Also through the asset management operations segment, an operating lease on office space in New York City commenced on October 1, 2017, and extended through September 30, 2020. On October 1, 2020, the Company renewed this lease on a month-to-month basis at a reduced rate for limited storage access given the state of the New York City rental market as a result of the COVID-19 pandemic.
Through the former home services operations segment, an operating lease on warehouse and office space in Scottsdale, Arizona, commenced on May 1, 2018. This lease would have extended through May 31, 2021. This lease was not conveyed with the divestiture on May 24, 2019. Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC) was the lessee party to the lease. However, Specialty Contracting Group, in connection with its dissolution and winding up, surrendered possession of the premises to the landlord, in default of this lease. As of December 31, 2020, the remaining balance of the lease liability has been written off as the likelihood for any future collection is remote. This reduction in liability is included as income from discontinued operations on the accompanying consolidated statements of operations for the year ended December 31, 2020.
As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). Under the terms of the parties’ membership interest purchase agreement, the Company agreed to indemnify Woodmont against any losses actually incurred as a result of breaches of the Company’s representations and warranties made under the agreement. To date, Woodmont has made several claims for indemnification under the agreement, all of which have been rejected and disputed by the Company. Also, in connection with the transaction, the Company and Woodmont entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC (the “A&R LLC Agreement”). The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members. The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont is designated as the sole manager. In addition, the Company expressly agreed to a three-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose; and with respect to any matters requiring a vote of the members, the Company will vote with (i.e., the same as) Woodmont. Subsequent to the transaction, Woodmont, as the manager of Mt Melrose, has purported that the Company’s membership interest in Mt Melrose has been diluted to 20.8%. The Company disputes this assertion and maintains that it has retained its 35% membership interest.
Discussion Regarding COVID-19 Potential Impacts
Due to the continuing uncertainty surrounding the COVID-19 pandemic, the Companymanagement has experienced, and continuescontinued to expect, market volatility as primarily related to its investment in the Alluvial Fund. As reported in prior periods, this volatility can create periods when the asset management operations segment produces negative revenue amounts. Due to the size of the investment, these negative revenue amounts can also have a sizable impact on the Company’s balance sheets at a given point-in-time. The nature of this investment has inherent market risks, and short-term results can be unpredictable.
Thus far, such periods of volatility have not had significant short-term cash flow impacts to the Company; however, due to the Company’s relative size, there is an inherent lack of affordable, short-term lending options in the event of an unexpected negative cash flow situation. As previously mentioned, during the quarterly period ended June 30, 2020, the Company received loan proceeds in the amount of $125,102 under the Paycheck Protection Program. The Small Business Administration determined that companies of our size generally were less likely to have access to adequate sources of liquidity in the current economic environment, and because of this, established a safe harbor whereby borrowers that received PPP loans with an original principal amount of less than $2 million were deemed to have made the required certification concerning the necessity of the loan request in good faith.
Management continues toregularly monitor and assess all Company operations for additional potential impacts of the COVID-19 pandemic.pandemic, including as infectious variants such as Omicron have emerged. As of the year ended December 31, 2020,2021, 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 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, owning, holding, 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 Investment Company Act of 1940 (the “1940 Act”).
However, beginning during the quarterly period ended March 31, 2021, and continuing, to date, on an ongoing basis, representatives from the Securities and Exchange Commission (“SEC”) Division of Investment Management and the Company have engaged in informal discussions and correspondence regarding a general inquiry by the SEC as to the Company’s current status under the 1940 Act, namely as a result of the apparent quantitative significance of the Company’s assets that from time to time may have constituted “investment securities” in relation to the Company’s total assets.
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, nor that of acquiring, owning, or holding “investment securities,” and the Board resolved to explore certain strategic options so as to eliminate as soon as is reasonably possible any uncertainty in regard to the Company’s status under the 1940 Act.
Subsequently, as of the quarterly period ended September 30, 2021, management determined that our ownership of “investment securities” fell below the 40% threshold established by the 1940 Act. This decrease was attributed to the completion of the Company’s withdrawals from the Alluvial Fund, LP, as previously discussed.
Results of Operations
Asset Management Operations
The Company operates its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”) and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”). These subsidiaries were formed on October 10, 2016, May 24, 2018, and August 21, 2020, respectively. During the segment’s first year of operations, Willow Oak entered into three fee share agreements with multiple private investment partnerships and made an additional investment through another partnership arrangement. During the year ended December 31, 2018, two new partnerships were formed, multiple fee share agreements were entered into, and a new service offering, Fund Management Services, was launched. During the year ended December 31, 2019, one new joint venture was formed in which Willow Oak Capital Management is a non-managing beneficial owner. During the year ended December 31, 2020, we assisted in the launch of a new private investment fund, and two new wholly-owned entities, Willow Oak AMS and Willow Oak FMS, were formed to advance strategic relationships with external investment firms. Additionally, Willow Oak formalized a new strategic relationship with an investment firm, becoming a non-managing beneficial owner in exchange for the provision of certain ongoing FMS and operational services.
As of December 31, 2020,2021, Willow Oak continues to hold a directno longer holds any remaining investment in the Alluvial Fund, LP. The realized and unrealized investment gains and losses earned during the current year and in prior periods presented are reported as revenue on the accompanying consolidated statements of operations. This treatment can result in reporting negative revenue figures for a given period. Willow Oak continues to earn revenue through theits remaining fee share arrangements, as well as through fund management services.
During the year ended December 31, 2021, the asset management operations segment produced $4,650,298 of revenue. There were no costs of revenue and operating expenses totaled $424,596. Net income for the year ended December 31, 2021, totaled $4,225,702. This compares to the year ended December 31, 2020, when the asset management operations segment produced $3,690,473 of revenue. Costrevenue, there were no costs of revenue, was $0 and operating expenses totaled $425,704. Other income attributable to the asset management operations segment totaled $2,283. Net income for the year ended December 31, 2020, totaled $3,267,052. This compares to the year ended December 31, 2019, when the asset management operations segment produced $1,773,276 of revenue, cost of revenue was $0,$425,704, and operating expenses totaled $410,226. Additionally, other income for the year ended December 31, 2019, was $36,565, and total net income for the year ended December 31, 2019, was $1,399,615.totaled $2,283. The increase in revenue in 20202021 is due to market volatility and increased returns through the Company’s Alluvial investment along with an increase in fee share revenues from the new service and affiliate relationships. The slight increase in operating expenses is primarily due to higher payroll expenses as the segment expands its fund management services offerings. Otheragreements and affiliate fee share relationships. Asset management operations operating expenses remained comparable year over year.
On December 31, 2021, Willow Oak initiated its third and final liquidating cash distribution totaling $3,734,465 income respect of such withdrawal. This brings the total cash distribution amount to $17,772,369 for the segmentyear ended December 31, 2021. In accordance with the partnership terms of Alluvial Fund, a portion of Willow Oak’s capital account will be retained by the general partner until the fund’s activities for the year ended December 31, 2021, have been finalized through an independent audit. The retained amount will not be actively invested and will not be subject to investment gains or losses. The retained amount is primarily due to sub-lease rental income earned throughincluded within the Company’s New York office space.
investment redemption receivable amount on the accompanying consolidated balance sheets. As of December 31, 2021, Willow Oak no longer holds any remaining investment in Alluvial Fund. This compares to the year ended December 31, 2020, when the fair value of long-term investments held through the asset management operations segment totaled $13,520,616. This compares to the fair value of long-term investments held at December 31, 2019, which totaled $10,072,358. The increase in investments is attributable to positive Alluvial Fund performance during the year ended December 31, 2020. Management notes that, while short-term market volatility can have a significant effect on reported revenue for a given period, the Company’s overall investment strategy is ultra-long-term focused.
The tables below provide a summary of income statement amounts over time. These figures are specific to the asset management operations segment and are presented for the annual and quarterly periods designated below.
Annual | Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||||
Revenues | $ | 3,690,473 | $ | 1,773,276 | $ | 4,650,298 | $ | 3,690,473 | ||||||||
Cost of revenue | — | — | — | — | ||||||||||||
Operating expenses | 425,704 | 410,226 | 424,596 | 425,704 | ||||||||||||
Other income (expense) | 2,283 | 36,565 | ||||||||||||||
Comprehensive income (loss) | $ | 3,267,052 | $ | 1,399,615 | ||||||||||||
Other income | — | 2,283 | ||||||||||||||
Net income | $ | 4,225,702 | $ | 3,267,052 |
Asset Management Operations Revenue | Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||||
Unrealized gains on investment activity | $ | 3,424,267 | $ | 1,607,644 | $ | 4,178,870 | $ | 3,424,267 | ||||||||
Management and performance fee revenue | 176,598 | 65,171 | ||||||||||||||
Performance fee revenue | 308,466 | 116,179 | ||||||||||||||
Management fee revenue | 78,504 | 60,419 | ||||||||||||||
Fund management services revenue | 89,608 | 100,461 | 84,458 | 89,608 | ||||||||||||
Total revenue | $ | 3,690,473 | $ | 1,773,276 | $ | 4,650,298 | $ | 3,690,473 |
Quarterly | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2021 | September 30, 2021 | June 30, 2021 | March 31, 2021 | ||||||||||||||||||||||||
Revenues | $ | 2,559,658 | $ | 1,607,150 | $ | 1,268,819 | $ | (1,745,154 | ) | $ | 94,125 | $ | 806,314 | $ | 1,556,005 | $ | 2,193,854 | |||||||||||||||
Cost of revenue | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Operating expenses | 102,353 | 120,368 | 93,742 | 109,241 | 80,788 | 113,158 | 112,939 | 117,711 | ||||||||||||||||||||||||
Other income (expense) | — | — | — | 2,283 | ||||||||||||||||||||||||||||
Comprehensive income (loss) | $ | 2,457,305 | $ | 1,486,782 | $ | 1,175,077 | $ | (1,852,112 | ) | |||||||||||||||||||||||
Net income | $ | 13,337 | $ | 693,156 | $ | 1,443,066 | $ | 2,076,143 |
Real Estate Operations
EDI Real Estate Operations
ForDuring the year ended December 31, 2020,2021, the EDI Real Estatereal estate operations segment generated revenue of $578,313,$356,560, which includes rental revenue of $59,313,$17,060, and the cost of revenues of $326,636,$248,424, which includes $43,726$8,695 of cost of rental revenues. Operating expenses during the year ended December 31, 2021, were $39,185 and other income totaled $755,333. Net income for the real estate operations segment for the year ended December 31, 2020, were $31,937 and other expenses2021, totaled $17,064. Net$824,284. Other income for EDI Real Estate operations for the year ended December 31, 2020, totaled $202,676.2021 is primarily attributable to the gain recognized on the sale of the remaining noncontrolling Mt Melrose entity membership interests totaling $778,872. This compares to the year ended December 31, 2019,2020, when EDI Real Estatethe real estate operations segment generated revenue of $171,792,$578,313, including rental revenue of $76,792,59,313, cost of revenues of $209,410,$326,636, including cost of rental revenues of $104,279,$43,726, operating expenses of $42,080,$31,937, other expenses of $75,359,$17,064, and a total net lossincome of $155,057.$202,676. Other expenses incurred during the yearsyear ended December 31, 2020, and 2019, were primarily interest-related expenses. Significant deferred maintenance expenses incurred in the prior year did not recur, which resulted in aThe current year decreasedecreases in therevenue and cost of rental revenue.revenue are due to the diminishing real estate portfolio. The slight increase in operating expenses during the current year is primarily attributable to the amortization of the remaining debt issuance expenses associated with the previously outstanding mortgage payable. The remaining balance of this mortgage was paid in full during the current year.
EDI Real Estate Operations
No impairment adjustments were recorded during the yearyears ended December 31, 2021 and 2020. During the year ended December 31, 2019, net impairment adjustments of $26,170 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value throughout the year.
Through EDI Real Estate, as of December 31, 20202021 and 2019,2020, the EDI Real Estate portfolio of properties included the following units:
EDI Real Estate | December 31, 2020 | December 31, 2019 | December 31, 2021 | December 31, 2020 | ||||||||||||
Units occupied or available for rent | 4 | 6 | 1 | 4 | ||||||||||||
Vacant lots held for investment | 3 | — | 2 | 3 | ||||||||||||
Total units held for investment | 7 | 6 | 3 | 7 | ||||||||||||
Units held for resale | — | 2 | ||||||||||||||
Vacant lots held for resale | — | 3 | ||||||||||||||
Total units held for resale | — | 5 |
Units held for investment consist of single-family residential rental units.
The leaseslease in effect as of December 31, 2020, are2021, is based on annual time periods and typically includea month-to-month provisions after the completion ofprovision, as the initial term.annual term has been completed. An outside property management company manages thesethis rental propertiesproperty on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties.
EDI Real Estate | December 31, 2020 | December 31, 2019 | December 31, 2021 | December 31, 2020 | ||||||||||||
Total real estate held for investment | $ | 303,158 | $ | 484,590 | $ | 43,821 | $ | 303,158 | ||||||||
Accumulated depreciation | (61,282 | ) | (104,075 | ) | (16,910 | ) | (61,282 | ) | ||||||||
Real estate held for investment, net | 241,876 | 380,515 | $ | 26,911 | $ | 241,876 | ||||||||||
Real estate held for resale, net | $ | — | $ | 98,910 |
Mt Melrose Operations
As described in Note 4, management previously determined that the Company no longer has a controlling financial interest in Mt Melrose. All activity prior to the deconsolidation event was included on our consolidated statements of operations for given prior reporting periods under the real estate segment. No Mt Melrose activity is included on the consolidated statements of operations for the year ended December 31, 2020. For the year ended December 31, 2019, Mt Melrose activity is only included through June 27, 2019, the date of the majority sale of the Company’s membership interest. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our consolidated balance sheets. Accordingly, there are no consolidated Mt Melrose assets as of the years ended December 31, 2020 and 2019 included on the accompanying consolidated balance sheets.
For the year ended December 31, 2019, the Mt Melrose portfolio generated rental revenue of $365,971. The cost of rental revenue totaled $276,049. Operating expenses for the year ended December 31, 2019, were $295,945. Other expenses totaled $4,580,940 and the net loss for the year ended December 31, 2019, totaled $4,786,963. Other expenses for the year ended December 31, 2019 are primarily related to the loss recognized on the equity sale of the Mt Melrose entity mentioned previously, which totaled $4,157,809.
For the years ended December 31, 2021 and 2020, and 2019,prior to the sale of the remaining membership interests on May 17, 2021, the Company’s remaining investment in Mt Melrose iswas carried on our consolidated balance sheets asfor $53,846. This carrying value iswas reflective of the mechanics of the June 27, 2019 transaction, rather than management’s perceived value ofas the Company’s remaining interest.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 have allowed the portfolio to continue its redirection, which management believes will provideprovided long-term returns greater than its current carrying value. Management’s belief was substantiated as the Company recognized a gain of $778,872 during the quarterly period ended June 30, 2021, and current year ended December 31, 2021, on the sale of its then-remaining membership interests in the Mt Melrose entity. This gain is recognized on the accompanying consolidated statements of operations as a gain on sale of noncontrolling interest in subsidiary. As of the quarterly period ended June 30, 2021, and subsequently as of year-end December 31, 2021, the Company no longer holds any interest in the Mt Melrose entity. As noted above, this compares to the year ended December 31, 2020, when the Company’s remaining investment in Mt Melrose was carried on the consolidated balance sheets for $53,846. See Notes 4 and 11 for more information.
The tables below provide a summary of income statement amounts over time. These figures are specific to the real estate segment as a whole and are presented for the annual and quarterly periods designated below. Revenue and expenses related to the Mt Melrose portfolio of properties are included through the consolidation period, which ended on June 27, 2019 upon the Company’s majority equity sale of the entity.
Annual | Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||||
Revenues | $ | 578,313 | $ | 537,763 | $ | 356,560 | $ | 578,313 | ||||||||
Cost of revenue | 326,636 | 485,459 | 248,424 | 326,636 | ||||||||||||
Operating expenses | 31,937 | 338,025 | 39,185 | 31,937 | ||||||||||||
Other income (expense) | (17,064 | ) | (4,712,766 | ) | 755,333 | (17,064 | ) | |||||||||
Comprehensive income (loss) | $ | 202,676 | $ | (4,998,487 | ) | |||||||||||
Net income | $ | 824,284 | $ | 202,676 |
Quarterly | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2021 | September 30, 2021 | June 30, 2021 | March 31, 2021 | ||||||||||||||||||||||||
Revenues | $ | 358,541 | $ | 16,129 | $ | 16,494 | $ | 187,149 | $ | 9,300 | $ | 1,800 | $ | 335,724 | $ | 9,736 | ||||||||||||||||
Cost of revenue | 175,156 | 12,157 | 7,114 | 132,209 | 4,105 | 466 | 236,209 | 7,644 | ||||||||||||||||||||||||
Operating expenses | 8,286 | 5,940 | 1,075 | 16,636 | (751 | ) | 15,202 | 18,249 | 6,485 | |||||||||||||||||||||||
Other income (expense) | (3,610 | ) | (5,456 | ) | (6,730 | ) | (1,268 | ) | (12 | ) | (332 | ) | 760,472 | (4,795 | ) | |||||||||||||||||
Comprehensive income (loss) | $ | 171,489 | $ | (7,424 | ) | $ | 1,575 | $ | 37,036 | |||||||||||||||||||||||
Net income (loss) | $ | 5,934 | $ | (14,200 | ) | $ | 841,738 | $ | (9,188 | ) |
Internet Operations
Revenue attributed to the internet operations segment during the year ended December 31, 2020,2021, totaled $978,946$895,385 and cost of revenue totaled $321,582.$270,627. Operating expenses for the segment totaled $193,791$212,217 for the year ended December 31, 2020,2021, and other income totaled $4,251.$21,687. Net income for the internet operations segment was $467,824$434,228 for the year ended December 31, 2020.2021. Other income for the year ended December 31, 2021, consists primarily of gains recognized on the sales of an unused Autonomous System Number and a domain name. This compares to the year ended December 31, 2019,2020, when revenue totaled $1,066,229,$978,946, cost of revenues totaled $330,654,$321,582, operating expenses were $223,118,$193,791, other income was $10,169,$4,251, and comprehensivenet income was $519,572. Included in the segment’s comprehensive$467,824. Other income for the year ended December 31, 2019, was an accumulated other comprehensive loss related to the recognition of foreign currency translation adjustments. Other income for the years ended December 31, 2020, and 2019, is primarily the result of refundable sales tax credits and credit card rewards. The year over year decrease in revenue and cost of revenue is in line with the decline in total customer accounts.
As of December 31, 2020,2021, we have a total of 7,0096,973 customer accounts across the U.S. and Canada. This compares to the year ended December 31, 2019,2020, when we had a total of 7,4667,009 customer accounts. While the total number of customer accounts did not decrease significantly year over year, the sales mix has shifted slightly from higher revenue, lower margin products to lower revenue, higher margin products. As of December 31, 2020,2021, approximately 60%49% of our internet segment revenue is driven by internet access services, with the remaining 40%51% being earned though web hosting and other web-based storage services. This compares to the year ended December 31, 2020, when approximately 60% of our internet segment revenue was driven by internet access services, with the remaining 40% being earned though web hosting and other web-based storage services.
Amortization expense on domain names used for internet operations during the year ended December 31, 2021 totaled $7,278. There was no comparable amortization expense on domain names for the year ended December 31, 2020.
Approximately 92% of our customer accounts are U.S.-based, while 8% are Canada-based. Revenue generated by our U.S. customers totaled $929,383$851,274 and revenue generated by our Canadian customers totaled $49,563$44,111 during the year ended December 31, 2020.2021. This compares to revenue generated by our U.S. customers of $1,011,407$929,383 and revenue generated by our Canadian customers of $54,822$49,563 during the year ended December 31, 2019.2020.
The tables below provide a summary of income statement amounts over time. These figures are specific to the internet operations segment and are presented for the annual and quarterly periods designated below.
Annual | Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||||
Revenues | $ | 978,946 | $ | 1,066,229 | $ | 895,385 | $ | 978,946 | ||||||||
Cost of revenue | 321,582 | 330,654 | 270,627 | 321,582 | ||||||||||||
Operating expenses | 193,791 | 223,118 | 212,217 | 193,791 | ||||||||||||
Other income (expense) | 4,251 | 10,169 | ||||||||||||||
Other comprehensive income (loss) | — | (3,054 | ) | |||||||||||||
Comprehensive income (loss) | $ | 467,824 | $ | 519,572 | ||||||||||||
Other income | 21,687 | 4,251 | ||||||||||||||
Net income | $ | 434,228 | $ | 467,824 |
Quarterly | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | ||||||||||||
Revenues | $ | 237,935 | $ | 242,237 | $ | 245,215 | $ | 253,559 | ||||||||
Cost of revenue | 69,753 | 85,412 | 79,229 | 87,188 | ||||||||||||
Operating expenses | 50,270 | 49,239 | 46,434 | 47,848 | ||||||||||||
Other income (expense) | 351 | 777 | 2,753 | 370 | ||||||||||||
Comprehensive income (loss) | $ | 118,263 | $ | 108,363 | $ | 122,305 | $ | 118,893 |
Discontinued Operations - Home Services Operations
As noted previously, Specialty Contracting Group, LLC’s historical operations are now classified as “discontinued operations” in our consolidated financial statements, and all presented prior periods have also been reclassified to discontinued operations for comparability. Net income reported from discontinued operations related to the home services operations segment for the year ended December 31, 2020 was $165,186. Included in this amount is $147,113 of extinguished debt from expired historical obligations. Also included in net income is a $20,484 loss recovery on discontinued operations that represents royalties earned in accordance with the Rooter Hero royalty arrangement mentioned previously. This compares to the net loss of $1,510,475 reported from discontinued operations related to the home services operations segment for the year ended December 31, 2019.
Quarterly | December 31, 2021 | September 30, 2021 | June 30, 2021 | March 31, 2021 | ||||||||||||
Revenues | $ | 221,103 | $ | 218,097 | $ | 223,919 | $ | 232,266 | ||||||||
Cost of revenue | 66,772 | 61,863 | 70,029 | 71,963 | ||||||||||||
Operating expenses | 60,426 | 54,905 | 50,345 | 46,541 | ||||||||||||
Other income | 1,036 | 19,930 | 360 | 361 | ||||||||||||
Net income | $ | 94,941 | $ | 121,259 | $ | 103,905 | $ | 114,123 |
Other Operations
The Company’s other operations segment did not produce any revenue or cost of goods soldrevenue during the year ended December 31, 2020.2021. Operating expenses totaled $966,862$2,148,641, other expenses were $146,692, and other income was $143,528tax expense totaled $366,532 for the year ended December 31, 2020.2021. Included in other expenses for the year ended December 31, 2021, is an impairment expense of $189,515 related to the Company’s promissory note from and common stock of Triad Guaranty, Inc. See Note 6 for more information on the Company’s considerations surrounding its Triad investments. Corporate operating expenses accounted for the full $2,148,641 of reported operating expenses for the year ended December 31, 2021. The total net loss attributed to the other operations segment was $2,661,865 for the year ended December 31, 2021. This compares to the year ended December 31, 2020, when our other operations segment again produced no revenue and no cost of revenue. Operating expenses totaled $966,862, other income was $143,528, and there was no income tax expense. Included in other income for the year ended December 31, 2020, for the other operations segment is $125,839 of debt extinguishment as a result of the forgiveness of the Company’s PPP loan. Corporate operating expenses accounted for the full $966,862 of reported operating expenses. This resulted in a net loss of $823,334 for the other operations segment for the year ended December 31, 2020. This compares to the year ended December 31, 2019, when our other operations segment produced $212,631 of revenue and no cost of goods sold. Operating expenses totaled $1,101,098 and other income
Income tax expense was $96,551higher for the year ended December 31, 2019.2021, primarily due to the tax effects of the Company’s liquidation of its investment in Alluvial Fund, LP. The other income was primarily related to a realized gain on the sale of Triad Guaranty, Inc. stock. Corporate operating expenses accounted for the full $1,101,098 of reported operating expenses for our other operations. ThisAlluvial fund liquidation resulted in the recognition of previously unrealized net investment gains. The Company was able to offset a significant portion of the realized investment activity with net loss of $791,916 for our other operations segment for the year ended December 31, 2019.
Corporate expenses were loweroperating losses that had been carried forward from prior years. The Company did not recognize any income tax expense for the year ended December 31, 2020, as the Company operated at a tax loss for the year, and any deferred liabilities associated with unrealized gains in the Alluvial Fund investments 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 year ended December 31, 2021. See Note 13 for more information.
Corporate expenses were higher for the year ended December 31, 2021 primarily due to a decrease in accounting fees, legal fees, and payroll allocations but were offset by an increase in legal fees, director fees, and consulting fees, which are non-cash.associated with the Company’s Business Combination. See Note 11 for more information.
The tables below provide a summary of income statement amounts over time. These figures are specific to other business segments, including corporate and various other investments, and are presented for the annual and quarterly periods designated below.
Annual | Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||||
Revenues | $ | — | $ | 212,631 | $ | — | $ | — | ||||||||
Cost of revenue | — | — | — | — | ||||||||||||
Operating expenses | 966,862 | 1,101,098 | 2,148,641 | 966,862 | ||||||||||||
Other income (expense) | 143,528 | 96,551 | (146,692 | ) | 143,528 | |||||||||||
Comprehensive income (loss) | $ | (823,334 | ) | $ | (791,916 | ) | ||||||||||
Income tax expense | (366,532 | ) | — | |||||||||||||
Net loss | $ | (2,661,865 | ) | $ | (823,334 | ) |
Quarterly | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2021 | September 30, 2021 | June 30, 2021 | March 31, 2021 | ||||||||||||||||||||||||
Revenues | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Cost of revenue | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Operating expenses | 307,873 | 165,165 | 204,391 | 289,433 | 1,222,809 | 477,234 | 241,345 | 207,253 | ||||||||||||||||||||||||
Other income (expense) | 129,546 | 6,540 | 3,750 | 3,692 | (170,605 | ) | 14,248 | 4,841 | 4,824 | |||||||||||||||||||||||
Comprehensive income (loss) | $ | (178,327 | ) | $ | (158,625 | ) | $ | (200,641 | ) | $ | (285,741 | ) | ||||||||||||||||||||
Income tax expense | (6,532 | ) | (360,000 | ) | — | — | ||||||||||||||||||||||||||
Net loss | $ | (1,399,946 | ) | $ | (822,986 | ) | $ | (236,504 | ) | $ | (202,429 | ) |
Discontinued Operations - Home Services Operations
As noted previously, Specialty Contracting Group, LLC’s historical operations are now classified as “discontinued operations” in our consolidated financial statements, and all presented prior periods have also been reclassified to discontinued operations for comparability. For the year ended December 31, 2021, there was no reportable net income from discontinued operations related to the home services segment. This compares to net income reported from discontinued operations related to the home services operations segment for the year ended December 31, 2020, of $165,186. Included in this amount is $147,113 of extinguished debt from expired historical obligations. Also included in net income from discontinued operations for the year ended December 31, 2020, is a $20,484 loss recovery on discontinued operations that represents royalties earned in accordance with the Rooter Hero royalty arrangement mentioned previously.
Summary Discussion of Critical Accounting Estimates
Our accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements (see page 29). As disclosed in Note 2, the preparation of financial statements requires the use of judgments and estimates. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. We considered the following to be our most critical accounting estimates that involve significant judgment:
Fair-Value of Long-Term Assets
Goodwill
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. This qualitative assessment and the ongoing evaluation of events and circumstances represent critical accounting estimates. Management considers a variety of factors when making these estimates, which include, but are not limited to, internal changes in the segment’s operations, external changes that affect the segment’s industry, and overall financial condition of the segment and Company.
Management did not identify any events or circumstances throughout the year that would indicate potential goodwill impairment, nor did management’s qualitative assessment performed on December 31 indicate a potential goodwill impairment. Total goodwill reported on the consolidated balance sheets is $212,445 at December 31, 2021.
Notes Receivable
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. This estimation of collectability represents the critical accounting estimate. Management considers multiple factors when making this estimate, which include, but are not limited to, the perceived risk profile of the borrower, current financial condition and liquidity of the borrower, and availability and perceived value of the borrower’s collateral.
Management’s assessment of the collectability of the Triad Guaranty, Inc. note receivable was adjusted during the current year in accordance with the above mentioned December 27, 2021, transaction. This transaction indicated a decrease in the market’s perceived collectability of the original Triad Guaranty, Inc. note. The Company recorded an impairment expense of $144,105 to its historical promissory note from Triad Guaranty, Inc., which is included on the accompanying consolidated statement of operations for the year ended December 31, 2021. The Company’s historical Triad Guaranty, Inc. note is included on the consolidated balance sheets for $25,000 as of the year ended December 31, 2021. The remaining notes receivable balance on the consolidated balance sheet is comprised of the Company’s December 27, 2021 purchase of an additional Triad Guaranty, Inc. note receivable, also for $25,000, as of the year ended December 31, 2021.
Long-Term Investments
When investment inputs or publicly available information are limited or unavailable, management estimates the value of certain long-term investment using the limited information it has available. This estimation process, which was used to measure the value of the Company’s common stock in Triad Guaranty, Inc., represents a critical accounting estimate. Management utilizes the available inputs to perform an initial valuation estimate and subsequently updates that valuation when additional inputs become available.
The Company historically measured its investment in the Triad Guaranty, Inc. stock at its cost basis, which was equal to the amount of accrued interest on the historical Triad Guaranty, Inc. promissory note as of December 31, 2020. The above mentioned December 27, 2021, transaction, however, indicated a decrease in the market’s valuation of the common stock of Triad Guaranty, Inc. The Company recorded an impairment expense of $45,410 to its historical Triad Guaranty, Inc. common stock, which is included on the accompanying statement of operations for the year ended December 31, 2021. The Company has attributed no value to its historical Triad Guaranty, Inc. stock as of December 31, 2021, on the accompanying consolidated balance sheets.
Other Intangible Assets
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. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. These initial appraisals, as well as the subsequent evaluation of events and circumstances that may indicate impairment, represent critical accounting estimates.
Management did not identify any events or circumstances throughout the year that would indicate potential impairment of the Company’s domain names, nor did management’s assessment performed on December 31 indicate potential impairment of the Company’s domain names. The total value of the Company’s domain names, net of amortization, reported under other assets on the consolidated balance sheets is $61,972 as of the year ended December 31, 2021.
Deferred Tax Assets and Liabilities
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. 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. Management’s analysis of the amount of deferred tax assets that will ultimately be realized represents a critical accounting estimate.
As of the year ended December 31, 2021, the Company recognized a net deferred tax asset of $1,432,017. In an effort to remain conservative and limit the potential financial impact of management’s estimate, the Company has provided a full valuation allowance against its net deferred tax assets as of the year ended December 31, 2021. This results in no value being attributed to the Company’s net deferred tax assets on the accompanying consolidated balance sheet as of the year ended December 31, 2021. See Note 13 for more information.
Contingencies, Commitments, and Litigation
Liabilities are recognized when management determines that contingencies, commitments, and/or litigation represent events that are more likely than not to result in a measurable obligation to the Company. Management’s analysis of these events represents a critical accounting estimate.
As of and during the year ended December 31, 2021, management did not identify any such events that would more likely than not result in a measurable obligation to the Company. Accordingly, the Company has not recorded any such liabilities related to contingencies, commitments, and/or litigation on the accompanying consolidated balance sheets as of the year ended December 31, 2021.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
This item is not required by smaller reporting companies.
FINANCIAL STATEMENTS |
The information required by this Item 8 may be found immediately after the signatures to this Report and is incorporated herein by reference.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
As previously reported in our Current Report on Form 8-K filed with the SEC on July 15, 2019, on July 10, 2019, the Company formally engaged Brown Edwards & Company, LLP to serve as the Company’s independent registered public accounting firm for the year ending December 31, 2019. Prior to this time, Cherry Bekaert, LLP had been appointed as the Company’s independent registered public accounting firm for the year ending December 31, 2019, having served as the Company’s independent registered public accounting firm since 2016. There has been no other change in the independent accountants engaged to audit the financial statements of the Company and its subsidiaries during the last two fiscal years ended December 31, 2020, and there2021. There have been no disagreements with such independent accountants during the last two fiscal years ended December 31, 2020,2021, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of the design and operation of our “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of December 31, 2020.2021. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Based upon this evaluation, and based upon material weaknesses in our internal control over financial reporting identified as of the date of our most recent evaluation of internal controls over financial reporting, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2020.2021.
Management’s Report on Internal Control over Financial Reporting
The management of Enterprise Diversified, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements. Under the supervision and with the participation of our management, including our Executive Chairman and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our management concluded that, as of December 31, 2020,2021, our internal control over financial reporting was not effective based on such criteria. We have reviewed the results of management’s assessment with our Board of Directors. In addition, we will evaluate any changes to our internal control on a quarterly basis to determine if a material change occurred.
Material Weaknesses in Internal Controls
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.
As a result of our evaluations, we identified the following material weaknessweaknesses in our internal control over financial reporting as of December 31, 2020:2021:
We have not properly designed internal controls over the preparationSegregation of our financial statements. We have incorporated consultants, new hires, and review processes to alleviate some of the associated risksDuties: The Company has a lack of segregation of duties due to the limited size of its staff. Specifically -
● | There is not a formal review of all adjusting journal entries; |
● | Revenues for the internet operations segment are processed by a single individual; |
● | There is not a formal procedure for the review and assignment of access rights within certain software systems; and |
● | The individual with responsibility for reviewing journal entries, reviewing bank and credit card payments, and other reconciliations also has a wide range of access within the Company’s systems and is an authorized signor on bank accounts. |
Financial Close and Reporting: The Company does not have effective internal controls over all parts of the financial close and reporting matters; however, formalprocess in that one individual is responsible for reconciling significant accounts, preparing the most significant journal entries, evaluating complex transactions and consistent policiesreporting requirements, and procedures, as well as complete control documentationalso is responsible for all significantthe financial statement close, consolidation, and reporting areas, have not been prepared or implemented.process.
Changes in Our Internal Controls
During the yearyears ended December 31, 2021 and 2020, the Company continued to uphold its established processes and controls surrounding its financial reporting, but did not make any significant modifications to its control environment.
During the year ended December 31, 2019, the The Company hired a new Vice President of Operations in ordercontinues to build out new company processes and optimize existing company procedures. Additionally, this role is intendedmake efforts to create a dedicated operational manager across each of the business segments. As a result, corporate management has greater visibility over financial transactions andreinforce its internal control processes.enviornment by utilizing an external accounting firm during its financial closing process, engaging third-party consultants to review the accounting and related dislcosures 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.
OTHER INFORMATION |
None.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not applicable.
We expect to file with the SEC in April 2021 2022 (and, in any event, not later than 120 days after the close of our last fiscal year), a definitive Proxy Statement, pursuant to SEC Regulation 14A in connection with our annual meeting of stockholders scheduled to be held on May 27, 2021.25, 2022.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 20212022 annual meeting of stockholders under the sections entitled “Information with Respect to Nominees,” “Management,” and “Corporate Governance.”
EXECUTIVE COMPENSATION |
The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 20212022 annual meeting of stockholders under the section entitled “Executive Compensation.”
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 20212022 annual meeting of stockholders under the sections entitled “Security Ownership of Directors and Executive Officers” and “Information as to Certain Stockholders.”
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 20212022 annual meeting of stockholders under the sections entitled “Determinations Regarding Independence” and “Transactions with Related Persons.”
|
Our independent public accounting firm is Brown, Edwards & Company, L.L.P., Lynchburg, Virginia, PCAOB Auditor ID 423.
The information required by this item is incorporated herein by reference from the Company’s definitive Proxy Statement for the 20212022 annual meeting of stockholders under the section entitled “Ratification of the Selection of Independent Registered Public Accounting Firm.”
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) | Financial Statements – Contained in Item 8: |
(b) | Exhibits – The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference: |
Exhibit | Description | |
101 | Pursuant to Rule 405 of Regulation S-T, the following materials from Enterprise Diversified Inc.’s Annual Report on Form 10-K for the year ended December 31, | |
104 | Cover page Interactive Data File (formatted as Inline XBRL and combined in Exhibit 101) |
(a) Filed as an exhibit to the Registrant’s Form-10SB, as amended, initially filed with the Securities and Exchange Commission on October 22, 1999, and incorporated herein by reference.
(b) Filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on January 28, 2015, and incorporated herein by reference.
(c) Filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2016, and incorporated herein by reference.
(d) Filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2016, and incorporated herein by reference.
(e) Filed as Exhibit 3.1 to Registrant’s Form 8-K Amendment No. 1 filed with the Securities and Exchange Commission on January 24, 2018, and incorporated herein by reference.
(f)(d) Filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on January 26, 2017, and incorporated herein by reference.
(g)(e) Filed as Exhibit 10.13 to Registrant’s Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission on March 30, 2018, and incorporated herein by reference.
(h) Filed as Exhibit 3.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on June 7, 2018, and incorporated herein by reference.
(i)(f) Filed as Exhibit 3.2 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on June 7, 2018, and incorporated herein by reference.
(j)(g) Filed as Exhibit 10.12 to Registrant’s Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission on April 1, 2019, and incorporated herein by reference.
(k)(h) Filed as Exhibit 16.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 15, 2019, and incorporated herein by reference.
(l) Filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 3, 2019, and incorporated herein by reference.
(m) Filed as Exhibit 99.1 to Registrant’s Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission on March 30, 2020, and incorporated herein by reference.
(n)(i) Filed as Exhibit 3.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 29, 2020, and incorporated herein by reference.
(o)(j) Filed as Exhibit 4.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 29, 2020, and incorporated herein by reference.
* Pursuant(k) Filed as Exhibit 10.8 to a requestRegistrant’s Form 10-K for confidential treatment, portions of this Exhibit have been redacted from the publiclyfiscal year ended December 31, 2020 filed document and have been furnished separately towith the Securities and Exchange Commission on March 29, 2021, and incorporated herein by reference.
(l) Filed as required by Rule 24b-2 underExhibit 3.1 to Registrant’s Form 8-K Amendment No. 1 filed with the Securities and Exchange Act of 1934, as amended.Commission on July 8, 2021, and incorporated herein by reference.
(m) Filed as Exhibit 2.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 29, 2021, and incorporated herein by reference.
(n) Filed as Exhibit 2.2 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 29, 2021, and incorporated herein by reference.
** Filed herewith
FORM 10-K SUMMARY |
None.
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENTERPRISE DIVERSIFIED, INC.
(REGISTRANT)
Date: March | By: | /s/Steven L. Kiel | ||
Steven L. Kiel | ||||
Executive Chairman | ||||
(Principal Executive Officer) | ||||
Date: March | By: | /s/Alea A. Kleinhammer | ||
Alea A. Kleinhammer | ||||
Chief Financial Officer | ||||
(Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March | By: | /s/Steven L. Kiel | ||
Steven L. Kiel | ||||
Executive Chairman | ||||
(Principal Executive Officer) | ||||
Date: March | By: | /s/Alea A. Kleinhammer | ||
Alea A. Kleinhammer | ||||
Chief Financial Officer | ||||
(Principal Financial Officer) | ||||
Date: March | By: | /s/Jeremy K. Deal | ||
Jeremy K. Deal | ||||
Vice-Chairman | ||||
Date: March | By: | /s/Keith D. Smith | ||
Keith D. Smith | ||||
Director | ||||
Date: March | By: | /s/Thomas Braziel | ||
Thomas Braziel | ||||
| ||||
Director |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Enterprise Diversified, Inc.
Richmond, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Enterprise Diversified, Inc. and subsidiaries (the “Company”) as of December 31, 20202021 and 2019,2020, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020,2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202021 and 2019,2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020,2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
Description of the Matter
As described in Note 2 to the consolidated financial statements, the Company recognizes revenue from customers across multiple revenue streams. The principal considerations for our determination that performing procedures relating to revenue recognition is a critical audit matter are the significant audit effort in performing procedures and evaluating evidence related to the Company’s revenues, as well as the judgment in determining that revenues were recognized in the correct period.
How We Addressed the Matter in Our Audit
We obtained an understanding and evaluated the design of the Company’s revenue recognition processes. We reviewed the Company’s revenue recognition policies to test that they were in accordance with accounting principles generally accepted in the United States of America. For a sample of revenue transactions, we performed detail transaction testing by agreeing the amounts recognized to contractual agreements, invoices, collections, and testing the mathematical accuracy of the recorded revenue, as well as the related receivable or deferred revenue balances. For a sample of accounts receivable balances, we confirmed the amounts due to the Company at year-endyear end directly with customers.
Valuation of Investments
Description of the Matter
At December 31, 2020, the Company’s investments included $13,520,616 in an alternative investment fund at fair value. The fair value of this fund is determined by management using the net asset value (“NAV”) practical expedient for estimating fair value as disclosed in Notes 5 and 6 to the consolidated financial statements. The principal considerations for our determination that performing procedures relating to investment valuation is a critical audit matter are the significant audit effort in performing procedures and evaluating evidence related to the Company’s valuation, including the use of a specialist.
How We Addressed the Matter in Our Audit
We obtained an understanding and evaluated the design of the Company’s investment valuation process, including management’s assessment of the significant inputs and estimates used in the fair value measurement. We confirmed the Company’s reported fair value directly with the fund manager including the Company’s ownership percentage of the fund’s net assets. We utilized a third-party valuation specialist with specialized skills and knowledge who assisted in evaluating the reasonableness of the fair value measurement. The specialist tested the valuation of the fund’s underlying investment holdings and reviewed the fund’s valuation methodologies for conformity with accounting principles generally accepted in the United States of America. We also reviewed subsequent events and valuation balances and considered whether they corroborated or contradicted the Company’s year-end value.
/s/ Brown, Edwards & Company, L.L.P.
We have served as the Company’s auditor since 2019.
Lynchburg, Virginia
March 29, 202128, 2022
Andand Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 20202021 and 20192020
December 31, 2020 | December 31, 2019 | December 31, 2021 | December 31, 2020 | |||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 341,007 | $ | 666,810 | $ | 13,487,482 | $ | 341,007 | ||||||||
Accounts receivable, net | 144,791 | 52,889 | 351,405 | 144,791 | ||||||||||||
Investment redemption receivable | 3,734,465 | |||||||||||||||
Other current assets | 44,530 | 29,555 | 6,417 | 44,530 | ||||||||||||
Current assets - held for resale | 231 | 428 | — | 231 | ||||||||||||
Total current assets | 530,559 | 749,682 | 17,579,769 | 530,559 | ||||||||||||
Long-term Assets | ||||||||||||||||
Real estate - held for investment, net | 241,876 | 380,515 | 26,911 | 241,876 | ||||||||||||
Real estate - held for resale, net | — | 98,910 | ||||||||||||||
Property and equipment, net | 13,707 | 17,753 | 9,661 | 13,707 | ||||||||||||
Goodwill, net | 212,445 | 212,445 | 212,445 | 212,445 | ||||||||||||
Note receivable | 210,879 | 195,121 | ||||||||||||||
Notes receivable | 50,000 | 210,879 | ||||||||||||||
Long-term investments | 13,574,462 | 10,126,204 | — | 13,574,462 | ||||||||||||
Lease right-of-use assets | — | 45,056 | ||||||||||||||
Other assets | 73,252 | 73,958 | 61,972 | 73,252 | ||||||||||||
Total long-term assets | 14,326,621 | 11,149,962 | 360,989 | 14,326,621 | ||||||||||||
Total assets | $ | 14,857,180 | $ | 11,899,644 | $ | 17,940,758 | $ | 14,857,180 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $ | 65,524 | $ | 157,934 | $ | 11,474 | $ | 65,524 | ||||||||
Accrued compensation | 281,904 | 175,259 | 337,759 | 281,904 | ||||||||||||
Accrued expenses | 24,159 | 23,115 | 308,039 | 24,159 | ||||||||||||
Deferred revenue | 192,088 | 204,960 | 171,194 | 192,088 | ||||||||||||
Lease liability, current | — | 46,435 | ||||||||||||||
Income taxes payable | 6,532 | 0 | ||||||||||||||
Notes payable, current | 5,609 | 11,453 | — | 5,609 | ||||||||||||
Other current liabilities - held for resale | — | 146,958 | ||||||||||||||
Total current liabilities | 569,284 | 766,114 | 834,998 | 569,284 | ||||||||||||
Long-term Liabilities | ||||||||||||||||
Notes payable, net of current portion | 244,485 | 499,572 | — | 244,485 | ||||||||||||
Total long-term liabilities | 244,485 | 499,572 | — | 244,485 | ||||||||||||
Total liabilities | 813,769 | 1,265,686 | 834,998 | 813,769 | ||||||||||||
Stockholders’ Equity | ||||||||||||||||
Preferred stock, $0.001 par value, 30,000,000 shares authorized; none issued | — | — | 0 | 0 | ||||||||||||
Common stock, $0.125 par value, 2,800,000 shares authorized; 2,602,240 and 2,566,646 shares issued and outstanding | 325,280 | 320,831 | ||||||||||||||
Common stock, $0.125 par value, 10,000,000 and 2,800,000 shares authorized; 2,647,383 and 2,602,240 shares issued and outstanding | 330,922 | 325,280 | ||||||||||||||
Additional paid-in capital | 27,439,334 | 27,313,734 | 27,673,692 | 27,439,334 | ||||||||||||
Accumulated deficit | (13,721,203 | ) | (17,000,607 | ) | (10,898,854 | ) | (13,721,203 | ) | ||||||||
Total stockholders’ equity | 14,043,411 | 10,633,958 | 17,105,760 | 14,043,411 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 14,857,180 | $ | 11,899,644 | $ | 17,940,758 | $ | 14,857,180 |
The accompanying notes are an integral part of these consolidated financial statements.
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended | Year Ended | |||||||
December 31, 2020 | December 31, 2019 | |||||||
Revenues - asset management | $ | 3,690,473 | $ | 1,773,276 | ||||
Revenues - real estate | 578,313 | 537,763 | ||||||
Revenues - internet operations | 978,946 | 1,066,229 | ||||||
Revenues - other | — | 212,631 | ||||||
Total revenues | 5,247,732 | 3,589,899 | ||||||
Cost of revenues - real estate | 326,636 | 485,459 | ||||||
Cost of revenues - internet operations | 321,582 | 330,654 | ||||||
Total cost of revenues | 648,218 | 816,113 | ||||||
Gross profit - asset management | 3,690,473 | 1,773,276 | ||||||
Gross profit - real estate | 251,677 | 52,304 | ||||||
Gross profit - internet operations | 657,364 | 735,575 | ||||||
Gross profit - other | — | 212,631 | ||||||
Total gross profit | 4,599,514 | 2,773,786 | ||||||
Selling, general, and administrative expenses | ||||||||
Insurance | 54,999 | 94,785 | ||||||
Professional fees | 694,749 | 726,274 | ||||||
Salaries and wages | 672,785 | 786,797 | ||||||
Travel and meals | 4,603 | 34,732 | ||||||
Other operating expenses | 191,158 | 429,879 | ||||||
Total selling, general and administrative expenses | 1,618,294 | 2,072,467 | ||||||
Income from operations | 2,981,220 | 701,319 | ||||||
Gain on debt extinguishment | 125,839 | — | ||||||
Investment income | — | 92,594 | ||||||
Loss on sale of subsidiary | — | (4,157,809 | ) | |||||
Impairment expense | — | (199,626 | ) | |||||
Interest expense | (23,651 | ) | (312,745 | ) | ||||
Other income, net | 30,810 | 8,105 | ||||||
Total other income (loss) | 132,998 | (4,569,481 | ) | |||||
Income (loss) from continuing operations before income taxes | 3,114,218 | (3,868,162 | ) | |||||
Income tax benefit (expense) | — | — | ||||||
Income (loss) from continuing operations | 3,114,218 | (3,868,162 | ) | |||||
Income (loss) from discontinued operations, net of taxes | 165,186 | (1,510,475 | ) | |||||
Net income (loss) | $ | 3,279,404 | $ | (5,378,637 | ) | |||
Net income (loss) per share, basic and diluted | 1.26 | (2.11 | ) | |||||
Net income (loss) per share from continuing operations, basic and diluted | 1.20 | (1.52 | ) | |||||
Net income (loss) per share from discontinued operations, basic and diluted | 0.06 | (0.59 | ) | |||||
Weighted average number of shares, basic | 2,597,974 | 2,544,896 | ||||||
Weighted average number of shares, diluted | 2,598,587 | 2,614,896 |
The accompanying notes are an integral part of these consolidated financial statements.
Years Ended December 31, 2021 and 2020
and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended | Year Ended | |||||||
December 31, 2020 | December 31, 2019 | |||||||
Net income (loss) | $ | 3,279,404 | $ | (5,378,637 | ) | |||
Other comprehensive income (loss), net of tax: | ||||||||
Change in foreign currency translation adjustments | — | (3,054 | ) | |||||
Comprehensive income (loss) | $ | 3,279,404 | $ | (5,381,691 | ) |
Year Ended | Year Ended | |||||||
December 31, 2021 | December 31, 2020 | |||||||
Revenues - asset management | $ | 4,650,298 | $ | 3,690,473 | ||||
Revenues - real estate | 356,560 | 578,313 | ||||||
Revenues - internet operations | 895,385 | 978,946 | ||||||
Total revenues | 5,902,243 | 5,247,732 | ||||||
Cost of revenues - real estate | 248,424 | 326,636 | ||||||
Cost of revenues - internet operations | 270,627 | 321,582 | ||||||
Total cost of revenues | 519,051 | 648,218 | ||||||
Gross profit - asset management | 4,650,298 | 3,690,473 | ||||||
Gross profit - real estate | 108,136 | 251,677 | ||||||
Gross profit - internet operations | 624,758 | 657,364 | ||||||
Total gross profit | 5,383,192 | 4,599,514 | ||||||
Selling, general, and administrative expenses | ||||||||
Insurance | 59,109 | 54,999 | ||||||
Professional fees | 1,813,262 | 694,749 | ||||||
Salaries and wages | 760,775 | 672,785 | ||||||
Travel and meals | 6,505 | 4,603 | ||||||
Other operating expenses | 184,988 | 191,158 | ||||||
Total selling, general and administrative expenses | 2,824,639 | 1,618,294 | ||||||
Income from operations | 2,558,553 | 2,981,220 | ||||||
Gain on sale of noncontrolling interest in subsidiary | 778,872 | — | ||||||
Impairment expense | (189,515 | ) | — | |||||
Interest expense | (7,327 | ) | (23,651 | ) | ||||
Gain on debt extinguishment | — | 125,839 | ||||||
Other income, net | 48,298 | 30,810 | ||||||
Total other income | 630,328 | 132,998 | ||||||
Income from continuing operations before income taxes | 3,188,881 | 3,114,218 | ||||||
Income tax expense | (366,532 | ) | — | |||||
Income from continuing operations | 2,822,349 | 3,114,218 | ||||||
Income from discontinued operations, net of taxes | — | 165,186 | ||||||
Net income | $ | 2,822,349 | $ | 3,279,404 | ||||
Net income per share, basic and diluted | 1.07 | 1.26 | ||||||
Net income per share from continuing operations, basic and diluted | 1.07 | 1.20 | ||||||
Net income per share from discontinued operations, basic and diluted | 0.00 | 0.06 | ||||||
Weighted average number of shares, basic | 2,643,302 | 2,597,974 | ||||||
Weighted average number of shares, diluted | 2,643,633 | 2,598,587 |
The accompanying notes are an integral part of these consolidated financial statements.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Additional | Accumulated Other | Total | Additional | Total | ||||||||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Treasury | Comprehensive | Accumulated | Stockholders’ | Common | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||||||||||
Stock | Amount | Capital | Stock | Income | Deficit | Equity | Stock | Amount | Capital | Deficit | Equity | |||||||||||||||||||||||||||||||||||||
Balance December 31, 2019 | 2,566,646 | $ | 320,831 | $ | 27,313,734 | $ | — | $ | — | $ | (17,000,607 | ) | $ | 10,633,958 | ||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 3,279,404 | 3,279,404 | |||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2020 | 2,602,240 | $ | 325,280 | $ | 27,439,334 | $ | (13,721,203 | ) | $ | 14,043,411 | ||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 2,822,349 | 2,822,349 | |||||||||||||||||||||||||||||||||||||||||||
Stock issuance | 35,594 | 4,449 | 125,600 | — | — | — | 130,049 | 45,143 | 5,642 | 234,358 | 0 | 240,000 | ||||||||||||||||||||||||||||||||||||
Balance December 31, 2020 | 2,602,240 | $ | 325,280 | $ | 27,439,334 | $ | — | $ | — | $ | (13,721,203 | ) | $ | 14,043,411 | ||||||||||||||||||||||||||||||||||
Balance December 31, 2021 | 2,647,383 | $ | 330,922 | $ | 27,673,692 | $ | (10,898,854 | ) | $ | 17,105,760 |
Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
Common | Paid-in | Treasury | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||||||||||
Stock | Amount | Capital | Stock | Income | Deficit | Equity | ||||||||||||||||||||||
Balance December 31, 2018 | 2,544,776 | $ | 328,160 | $ | 27,718,308 | $ | (511,901 | ) | $ | 3,054 | $ | (11,621,970 | ) | $ | 15,915,651 | |||||||||||||
Net income (loss) | — | — | — | — | — | (5,378,637 | ) | (5,378,637 | ) | |||||||||||||||||||
Stock issuance | 21,870 | 2,734 | 97,264 | — | — | — | 99,998 | |||||||||||||||||||||
Cancellation of treasury stock | — | (10,063 | ) | (501,838 | ) | 511,901 | — | — | — | |||||||||||||||||||
Foreign currency translation reclassification to current earnings | — | — | — | — | (3,054 | ) | — | (3,054 | ) | |||||||||||||||||||
Balance December 31, 2019 | 2,566,646 | $ | 320,831 | $ | 27,313,734 | $ | — | $ | — | $ | (17,000,607 | ) | $ | 10,633,958 |
Additional | Total | |||||||||||||||||||
Common | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
Stock | Amount | Capital | Deficit | Equity | ||||||||||||||||
Balance December 31, 2019 | 2,566,646 | $ | 320,831 | $ | 27,313,734 | $ | (17,000,607 | ) | $ | 10,633,958 | ||||||||||
Net income | — | 0 | 0 | 3,279,404 | 3,279,404 | |||||||||||||||
Stock issuance | 35,594 | 4,449 | 125,600 | 0 | 130,049 | |||||||||||||||
Balance December 31, 2020 | 2,602,240 | $ | 325,280 | $ | 27,439,334 | $ | (13,721,203 | ) | $ | 14,043,411 |
The accompanying notes are an integral part of these consolidated financial statements.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 20202021 and 20192020
2020 | 2019 | 2021 | 2020 | |||||||||||||
Cash flows (used in) from operating activities: | ||||||||||||||||
Net income (loss) from continuing operations | $ | 3,114,218 | $ | (3,868,162 | ) | |||||||||||
Cash flows from (used in) operating activities: | ||||||||||||||||
Net income from continuing operations | $ | 2,822,349 | $ | 3,114,218 | ||||||||||||
Adjustments to reconcile net income to net cash flows (used in) operating activities: | ||||||||||||||||
Unrealized gains on long-term investments | (3,424,267 | ) | (1,820,074 | ) | (4,177,241 | ) | (3,424,267 | ) | ||||||||
Gain on sale of noncontrolling interest in subsidiary | (778,872 | ) | — | |||||||||||||
Accrued stock compensation expense | 250,000 | 240,000 | ||||||||||||||
Impairment of long-term assets | 189,515 | — | ||||||||||||||
Gain on sale of real estate | (286,256 | ) | (73,399 | ) | (128,262 | ) | (286,256 | ) | ||||||||
Depreciation and amortization | 24,053 | 20,526 | ||||||||||||||
Accrued interest income on notes receivable | (14,105 | ) | (15,758 | ) | ||||||||||||
Other | 231 | — | ||||||||||||||
Bad debt expense | 43 | 210 | ||||||||||||||
Gain on debt extinguishment | (125,839 | ) | — | — | (125,839 | ) | ||||||||||
Loss on sale of subsidiary | — | 4,157,809 | ||||||||||||||
Impairment of long-term assets | — | 154,015 | ||||||||||||||
Deconsolidation of assets and liabilities from sale of subsidiary | — | (149,425 | ) | |||||||||||||
Depreciation and amortization | 20,526 | 161,130 | ||||||||||||||
Bad debt expense | 210 | 88,511 | ||||||||||||||
Accrued stock compensation expense | 240,000 | 128,849 | ||||||||||||||
Accrued interest income on notes receivable | (15,758 | ) | (15,715 | ) | ||||||||||||
Loss on disposal of property and equipment | — | 4,088 | ||||||||||||||
Gain on foreign currency reclassification | — | (3,054 | ) | |||||||||||||
(Increase) decrease in: | ||||||||||||||||
Accounts receivable, net | (92,112 | ) | (32,614 | ) | (206,657 | ) | (92,112 | ) | ||||||||
Other current assets | (14,975 | ) | (10,980 | ) | 38,582 | (14,975 | ) | |||||||||
Inventory | — | 4,160 | ||||||||||||||
Increase (decrease) in: | ||||||||||||||||
Accounts payable | (61,332 | ) | (92,410 | ) | ||||||||||||
Accrued expenses | (3,641 | ) | (95,546 | ) | 329,735 | (3,641 | ) | |||||||||
Accounts payable | (92,410 | ) | 1,976 | |||||||||||||
Deferred revenue | (12,872 | ) | (5,252 | ) | (20,894 | ) | (12,872 | ) | ||||||||
Accrued interest | — | 103,909 | ||||||||||||||
Net cash flows (used in) from continuing operations | (693,176 | ) | (1,269,774 | ) | ||||||||||||
Net cash flows (used in) from discontinued operations | 18,425 | (66,595 | ) | |||||||||||||
Income taxes payable | 6,532 | 0 | ||||||||||||||
Net cash flows (used in) continuing operations | (1,726,323 | ) | (693,176 | ) | ||||||||||||
Net cash flows from discontinued operations | — | 18,425 | ||||||||||||||
Net cash flows (used in) operating activities | (674,751 | ) | (1,336,369 | ) | (1,726,323 | ) | (674,751 | ) | ||||||||
Cash flows from (used in) investing activities: | ||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Proceeds from sale of investments | 14,037,904 | — | ||||||||||||||
Proceeds from sale of noncontrolling interest in subsidiary | 850,000 | — | ||||||||||||||
Proceeds from sale of real estate | 519,000 | 1,774,317 | 339,500 | 519,000 | ||||||||||||
Purchases of investments | (23,991 | ) | (53,942 | ) | (74,512 | ) | (23,991 | ) | ||||||||
Purchase of note receivable | (25,000 | ) | — | |||||||||||||
Purchase of domain name | (5,000 | ) | — | |||||||||||||
Improvements to real estate held for investment | (10,969 | ) | (105,186 | ) | — | (10,969 | ) | |||||||||
Proceeds from maturity of investments | — | 681,381 | ||||||||||||||
Proceeds from sale of subsidiary | — | 100,000 | ||||||||||||||
Proceeds from sale of investments | — | 35,515 | ||||||||||||||
Issuance of line of credit | — | (10,000 | ) | |||||||||||||
Net cash flows from continuing operations | 484,040 | 2,422,085 | 15,122,892 | 484,040 | ||||||||||||
Net cash flows from discontinued operations | — | — | ||||||||||||||
Net cash flows from investing activities | 484,040 | 2,422,085 | 15,122,892 | 484,040 | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Cash flows used in financing activities: | ||||||||||||||||
Principal payments on note payable | (260,931 | ) | (1,121,987 | ) | (250,094 | ) | (260,931 | ) | ||||||||
Proceeds from notes payable | 125,839 | 300,000 | — | 125,839 | ||||||||||||
Net cash flows (used in) from continuing operations | (135,092 | ) | (821,987 | ) | ||||||||||||
Net cash flows (used in) from discontinued operations | — | (32,645 | ) | |||||||||||||
Net cash flows (used in) continuing operations | (250,094 | ) | (135,092 | ) | ||||||||||||
Net cash flows (used in) financing activities | (135,092 | ) | (854,632 | ) | (250,094 | ) | (135,092 | ) | ||||||||
Net increase (decrease) in cash | (325,803 | ) | 231,084 | 13,146,475 | (325,803 | ) | ||||||||||
Cash and cash equivalents at beginning of the period | 666,810 | 435,726 | 341,007 | 666,810 | ||||||||||||
Cash and cash equivalents at end of the period | $ | 341,007 | $ | 666,810 | $ | 13,487,482 | $ | 341,007 |
The accompanying notes are an integral part of these consolidated financial statements.
ENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 20202021 and 20192020
2020 | 2019 | |||||||
Non-cash and other supplemental information: | ||||||||
Transfer of real estate held for investment to held for resale | $ | 177,826 | $ | 193,835 | ||||
Issuance of common stock per equity compensation plan | $ | 130,049 | $ | — | ||||
Transfer of real estate held for resale to held for investment | $ | 43,992 | $ | — | ||||
Continuing operations cash paid for interest | $ | 22,914 | $ | 312,745 | ||||
Transfer of property, plant, and equipment held for use to held for resale | $ | — | $ | 822,829 | ||||
Transfer of land to held for investment | $ | — | $ | 145,000 | ||||
Repayment of loan via issuance of common stock | $ | — | $ | 100,000 | ||||
Effects of adoption of new lease guidance | $ | — | $ | 46,435 | ||||
Effects of adoption of new lease guidance on discontinued operations | $ | — | $ | 50,110 | ||||
Discontinued operations cash paid for interest | $ | — | $ | 7,754 |
2021 | 2020 | |||||||
Non-cash and other supplemental information: | ||||||||
Investment distribution receivable | $ | 3,734,465 | $ | — | ||||
Issuance of common stock per equity compensation plan | $ | 240,000 | $ | 130,049 | ||||
Transfer of real estate held for investment to held for resale | $ | 211,213 | $ | 177,826 | ||||
Consulting services received in lieu of cash receipts | $ | 51,000 | $ | 8,500 | ||||
Accrued interest receivable converted to common stock | $ | 45,410 | $ | — | ||||
Continuing operations cash paid for interest | $ | 7,327 | $ | 22,914 | ||||
Transfer of real estate held for resale to held for investment | $ | — | $ | 43,992 |
The accompanying notes are an integral part of these consolidated financial statements.
and Subsidiaries
NOTES TO 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 year ended December 31, 2020, 2021, the Company operated through four4 reportable segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. Other Operations include corporate operations and nonrecurring or one-timeone-time strategic funding or similar activity that is not considered to be one of our primary lines of business. During periods prior to the quarter ended June 30,2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, for the year ended December 31, 2020, 2021, and for all prior periods presented, Home Services Operations are reported as discontinued operations. The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
Asset Management Operations
The Company operates its asset management operations business through its wholly-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”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 earnsearned a share of management and performance fees earned. As of DecemberOn May 31, 2020,2021, however, Willow Oak continues to holdinitiated a series of liquidating distributions of its direct investment in Alluvial Fund.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 totaling $3,734,465 in respect of such withdrawal. This brings the total cash distribution amount to $17,772,369 for the year ended December 31, 2021. In accordance with the partnership terms of Alluvial Fund, a portion of Willow Oak’s capital account will be retained by the general partner until the fund’s activities for the year ended December 31, 2021, have been finalized through an independent audit. The retained amount will not be actively invested and will not be subject to investment gains or losses. The retained amount is represented by the investment redemption receivable amount on the accompanying consolidated balance sheets. Investment gains and losses for activity during the year ended December 31, 2021, and for prior periods presented, are reported as revenue on the accompanying consolidated statements of operations. As of December 31, 2021, Willow Oak no longer holds any remaining investment in Alluvial Fund.
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 isare 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-partythird-party service providers. Willow Oak earns monthly and annual fees as consideration for these services. On November 1, 2020, this agreementarrangement 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 earnsin the following areas: strategic development, marketing, networking and fundraising. In exchange, Willow Oak continues to provide ongoing FMS services. Willow Oak continues to earn monthly and annual fees as consideration for these services. See Note 14 for additional information.
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-timeone-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 to become a 20% beneficial owner of the firmwhereby 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. As a beneficial owner of SVN Capital, LLC,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.
Real Estate Operations
As has been previously reported, in December 2017, ENDI created New Mt Melrose, a wholly-owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”),at that time, to acquire a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into in December 2017 with a like-namedthe seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, then an ENDI director.Melrose. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to an unaffiliated third-party purchaser, Woodmont, Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 andwhich agreed to assume full responsibility for the management and operation of New Mt Melrose and its real estate portfolio. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. As was previously reported in the Company’s Current Report on Form 8-K filed with the SEC on May 20, 2021, on May 17, 2021, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in New Mt Melrose in conjunction with a cash payment to the Company. As of the quarterly period ended June 30, 2021, and subsequently the year ended December 31, 2021, the Company does not hold any remaining interests in the New Mt Melrose entity. See Note Notes 4 and 11 for more information.
As has been previously reported, in July 2017, ENDI created a wholly-owned real estate subsidiary named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of December 31, 2020, 2021, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes fourone residential propertiesproperty and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia. The portfolio includes an occupied single-family homes, both rented and vacant,home that areis managed by a third-partythird-party property management company. The lease in effect as of December 31, 2021, is based on a month-to-month provision, as the initial annual term of the lease has been completed. An outside property management company manages this rental property on behalf of the Company.
Internet Operations
The Company operates its internet operations segment through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-partythird-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operated a home services operations segment through its former subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.
As has been previously reported, on May 24, 2019, the Company completed a divestiture of the home services operations to Rooter Hero. See Note 3 for more information.
Other Operations
Other operations include nonrecurring or one-timeone-time strategic funding or similar activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main recent activities comprising other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying consolidated financial statements.
Former Investment Activity with Huckleberry Real Estate Fund
In January 2017, the Company, through Willow Oak, committed to make a capital contribution to Huckleberry Real Estate Fund II, LLC, a private investment fund, in the aggregate amount of $750,000. In May 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly-owned subsidiary of the Company.
During the quarter ended March 31, 2019, all contributed capital was returned in full and a gain of $212,631 was recognized as revenue through the other operations segment on our consolidated statements of operations for the year ended December 31, 2019. Accordingly, this investment activity with Huckleberry Real Estate Fund II, LLC was completed prior to commencement of the fiscal year ended December 31, 2020.
Financing Arrangement Regarding Triad Guaranty, Inc.
In August 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy in April 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. On November 12, 2019, the Company exercised its warrants and purchased 450,000 shares of Triad Guaranty, Inc. Subsequently, on December 30, 2019, the Company monetized all 450,000 shares. On December 31, 2020, the Company accepted a revision of terms to the original promissory note, which include,includes, among other things, an extension of the loan maturity date to December 31, 2022, an increase of interest to the amount of 12% annually, and a provision to settle all currently accrued interest through the issuance of Triad Guaranty, Inc. common shares.
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, the Company holds its interests in both promissory notes for $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 6 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 consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and those entities in which it otherwise has a controlling financial interest, including: Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Mt Melrose,Willow Oak Asset Management Affiliate Management Services, LLC, (“New Mt Melrose”) prior to cessation of control resulting from the sale of 65% of the equity in New Mt Melrose on June 27, 2019 (see Note 4), Specialty Contracting Group,Willow Oak Asset Management Fund Management Services, LLC, prior to the divestiture transaction on May 24, 2019 (see Note 3),Bonhoeffer Capital Management, LLC, Sitestar.net, Inc., and EDI Real Estate, LLC.
All intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In accordance with Accounting Principles Generally Accepted Accounting Principles in the United States of America (“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 holds various investments through its asset management operations and real estate operations segments. Additionally, investments may be held and reported under the Company’s “other” segment. Assets held through these segments do not have a readily determinable value as these investments are either not publicly traded, nor do theynot have published sales records. These investmentsrecords, 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 5 for more information.
AsDuring the year ended December 31, 2021, and as of December 31, 2020, and 2019, the Company also holdsheld its remaining equity investment in Mt Melrose, LLC through its real estate operations segment. The Company has determined that its remaining equity investment does did not have a readily determinable fair value, and the Company will accountaccounted for the investment at cost, less any impairment, as adjusted for changes resulting from observable price changes. When fair value becomes determinableAs mentioned previously, on May 17, 2021, however, the Company entered into an agreement with Woodmont that terminated and transactions or events occur that provide indicationeffected a sale to Woodmont of the Company’s remaining membership interests in New Mt Melrose in conjunction with a changecash payment to the Company. As of the quarterly period ended June 30, 2021, and subsequently as of the year ended December 31, 2021, the Company does not hold any remaining interests in value, the investment will be marked to fair value on a periodic basis.New Mt Melrose entity.
Accounts Receivable
The Company’s asset management operations segment records receivable amounts for management fee shares and fund management services revenue earned on a monthly basis. PerformanceManagement fee shares crystalize and fund management services fees are collected on an annual basis while management fee shares crystalizecalculated and are collected on either a monthly or quarterly basis as dictated by the respective partnership agreement. Fund management services receivables are collected monthly in line with ongoing performance. The Company historically has had no collection issues with management fee shareshares 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.
The Company also grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is the recorded allowance for doubtful accounts and bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are written off from the allowance for doubtful accounts when an account or invoice is individually determined to be uncollectible.
Real estate operations segment rental accounts are typically paid by tenants via cash or check no later than the fifth of the month. Any accounts collected after the fifth are charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If payments are not provided in a timely manner, then the amount due is designated as an account receivable. If accounts remain uncollected, then standard operating procedures are followed to commence a notice process for the tenant to either pay the amount due or vacate the property. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. These procedures typically result in low amounts of past due receivables.
The internet operations segment attempts to reduce the risk of non-collection by including a late-payment fee and a manual-processing-payment fee to customer accounts. Receivables more than 90 days past due are no longer included in accounts receivable and are turned over to a collection agency. Accounts receivable more than 30 days are considered past due.
As of December 31, 2020 2021 and 2019,2020, allowances offsetting gross accounts receivable on the accompanying consolidated balance sheets totaled $421$474 and $307,$421, respectively. For the years ended December 31, 2020 2021 and 2019,2020, bad debt expense from continuing operations wastotaled $43 and $210, and $88,511, respectively.
Notes Receivable
The Company does not routinely issue notes receivable in the ordinary course of business, but when a business opportunity arises, a subsidiary may issue a note if it appears to be favorable to the Company. Notes receivable are recorded at their principal amount and interest is accrued quarterly based on the applicable interest rate. The Company makes an assessment of the ultimate collectability of each note receivable on an annual basis based upon the financial condition of the borrower.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. Depreciation is computed using the straight-line method based on the estimated useful lives for each of the following asset classifications:
Furniture and fixtures (in years) | 5 | ||
Equipment (in years) | 7 | ||
Building improvements (in years) |
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The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Property and equipment to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell.
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company tests its goodwill annually as of December 31st 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 yearyears ended December 31, 2020.
During the year ended December 31, 2019, an impairment adjustment of the remaining home services goodwill of $1,024,591 was recognized 2021 and reported as a component of the loss on the divestiture of Specialty Contracting Group, LLC’s assets.2020.
Intangible assets (other than goodwill) consist of domain names attributed to the internet operations segment. The Company owns 228225 domain names, of which 106105 are available for sale. These domains are valued at historical cost. When management determines that material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account internal and external appraisals. Intangible assets determined to have definite lives are amortized over their estimated useful lives. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated future undiscounted cash flows of the related intangible asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.
NoNaN impairment adjustments were recorded during the years ended December 31, 2020 2021 and 2019.2020.
Amortization expense on domain names used for internet operations during the year ended December 31, 2021 totaled $7,278. There was no comparable amortization expense on domain names for the year ended December 31, 2020.
Real Estate
Real estate properties held for resale are carried at the lower of cost or fair value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, then the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area in which the real estate is located. Fair value is evaluated annually by management or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable.
NoNaN impairment adjustments were recorded during the yearyears ended December 31, 2021 and 2020.
During the year ended December 31, 2019, net impairment adjustments of $26,170 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value throughout the year.
During the year ended December 31, 2019, an impairment adjustment of $126,827 was recorded on the Company’s commercial warehouse held for resale in order to properly reflect market value at that time.
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 years ended December 31, 2020 2021 and 2019,2020, $0 and $43,992, and $0, respectively, of real estate held for resale was transferred to real estate held for investment and $177,826$211,213 and $193,835,$177,826, respectively, of real estate held for investment was transferred to real estate held for resale. Additionally, $10,969$0 and $105,186,$10,969, respectively, of improvements were made to existing real estate held for investment during the years ended December 31, 2020 2021 and 2019.2020. During the years ended December 31, 2020 2021 and 2019, 2020,no improvements were made to real estate held for resale.
Accrued Compensation
Accrued compensation represents performance-based incentives that have not yet been paid. Additional compensation can be paid in the form of cash or via the issuance of Company stock. Compensation structures for employees are a pre-approved part of a formal employment agreement or arrangement. Stock basedStock-based compensation, issued as part of the Company’s 2020 Equity Incentive Plan, is reserved for board members and members of senior management. The compensation accrual amount is based on the final value of Company stock that has been approved to be issued by the Governance, Compensation, and Nomination Committee of the Board of Directors. These compensation amounts are accrued when earned and able to be estimated and are paid or issued annually after financial records are finalized.
Other Accrued Expenses
Other accrued expenses represent incurred but not-yet-paidnot-yet-paid expenses from payroll accruals, professional fees, and other accrued taxes.
Leases
On January 1, 2019, theThe Company adopted ASU No. 2016-02, “Leases” (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840 and established ASC Topic 842. ASU No. 2016-02 requires an entity to recognizerecords right-of-use (ROU) assets and lease liabilities arising from a lease for both financing and operating leases along with additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.that contain terms extending longer than one year. The Company adopted this guidance using the following practical expedients:
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Additionally, the Company made ongoing accounting policy elections whereby it (i) does not recognize right-of-use (ROU)ROU assets or lease liabilities for short-term leases (those with original terms of 12 months or less) and (ii). In making our determinations, the Company combines lease and non-lease elements of our leases.
Revenue Recognition
Asset Management Operations and Other Investment Revenue
The Company earns revenue from services and investments, and through various fee share and consulting agreements, including realized and unrealized gains and losses, and through various fee share and service agreements, which may result in negative revenues forperiod or quarterly revenues. Management fee shares and fund management services fees are earned and recorded on a given period. Management fees earned are recorded monthly basis, and are included in revenue on the accompanying consolidated statements of operations.
Performance fees earnedfee shares are accrued monthly, paid out annually,dependent upon exceeding specified relative or absolute investment return thresholds, which vary by affiliate relationship, and typically include annual measurement periods. Performance fee shares are 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. Performance fee shares are also included in revenue on the accompanying consolidated statements of operations. Fund management services fees are billed, paid, and recorded on a monthly basis.
Long-term investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized as revenue in the period of adjustment.
Management notes that the structure of these arrangements leaves a very low possibility for nonperformance. While the amount of revenue variescan vary from month to month, collectability is very high. No contract assets or liabilities are recognized or incurred.
Additionally, the Company earns revenue from direct participation in various private investment funds, primarily the Alluvial Fund. This results in the realized and unrealized gains and losses within a fund such as the Alluvial Fund being recognized as revenue, or a decrease in revenue, on the accompanying consolidated statements of operations.
A summary of revenue earned through asset management operations for the years ended December 31, 2020 2021 and 20192020 is included below:
Asset Management Operations Revenue | Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||||
Unrealized gains on investment activity | $ | 3,424,267 | $ | 1,607,644 | $ | 4,178,870 | $ | 3,424,267 | ||||||||
Management and performance fee revenue | 176,598 | 65,171 | ||||||||||||||
Performance fee revenue | 308,466 | 116,179 | ||||||||||||||
Management fee revenue | 78,504 | 60,419 | ||||||||||||||
Fund management services revenue | 89,608 | 100,461 | 84,458 | 89,608 | ||||||||||||
Total revenue | $ | 3,690,473 | $ | 1,773,276 | $ | 4,650,298 | $ | 3,690,473 |
Real Estate Revenue
The Company earns real estate revenue through rental agreements on real estate held for investment, as well as through the sale of real estate held for resale.
Rental revenue from real estate held for investment is recognized when it is earned, generally on the last day of each month or at another regular period agreed upon by the Company and the tenant. Tenants generally provide a security deposit at the time of possession. This deposit is held separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. Management has concluded that the nature of the performance obligation is cyclical and predictable with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.
Revenue from real estate held for resale is recognized upon closing of the sale (transfer of control), as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time.
Internet Revenue
The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-timeone-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for nonperformance. Contract liabilities (deferred revenue) were recognized in the amount of collections received in advance of services to be performed. No contract assets wereare recognized or incurred.
The Company generates revenue in its internet operations segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, third-partythird-party software as a reseller, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), web hosting, and additional related services to consumers and businesses. Customers may also subscribe to web hosting plans to include email access and storage. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.
Discontinued Revenue - Home Services Revenue
Prior to the divestiture transaction on May 24, 2019, a wholly-owned subsidiary of the Company performed HVAC and plumbing service repairs and installed HVAC units for its customers through the former home services operations segment. Revenue was recognized upon completion of the installation or service call. Sales were adjusted for any returns or allowances. A return or allowance situation would arise based on the two-year workmanship warranty that typically conveyed with the installation of a new unit. There was also a two-year assurance warranty on newly installed parts and equipment that was honored by the manufacturer. If an installation was performed over multiple days, then it was accounted for using work-in-process (WIP) accounting. Contract progress was measured by comparing materials and labor hours incurred to materials and labor hours expected per the contract. These types of contracts were typically completed within one month’s time. A small portion of revenue was from the sale of annual service agreements. Revenue attributable to these agreements was recognized over the life of the agreement.
If payment was received prior to contract completion, then the amount of revenue attributable to the unperformed work was designated as deferred revenue. If payment was not provided in advance or at the time of service or installation completion, then the amount due was recognized as revenue and as an account receivable.
Management has acknowledged that these performance obligations were recognized at designated points in time during the contract, including the completion of the contract. As the customer controlled the asset and had the right to use it during the contract, the Company had the right to payment for performance completed to date. Contract liabilities (deferred revenue) were recognized in the amount of collections received in advance of services to be performed. No contract assets were recognized or incurred.
Deferred Revenue
Deferred revenue represents collections from customers in advance of internet or home services to be performed. Revenue is recognized in the period service is provided. Total deferred revenue from continuing operations decreased from $204,960$192,088 at December 31, 2019 2020 to $192,088$171,194 at December 31, 2020. 2021. During the years ended December 31, 2020 2021 and 2019, $204,6352020, $178,047 and $206,520,$202,123, respectively, of revenue from continuing operations was recognized from prior-year contract liabilities (deferred revenue).
Income Taxes
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment, inclusive of the recent tax reform act. The most recent three tax years, fiscal years ended December 31, 2021, December 31, 2020, and December 31, 2019, and December 31, 2018, are open to potential IRS examination.
During the year ended December 31, 2021, the Company reported income tax expense of $366,532. No comparable income tax expense was reported during the year ended December 31, 2020. The current year income tax expense is primarily attributable to the current year distribution activities related to the Company’s investment in Alluvial Fund. The current year income tax expense amount was calculated 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“two-class method” or the “treasury method.” Dilutive earnings per share under the “two class“two-class method” is calculated by dividing net income available to common stockholders as adjusted for the participating securities, by the weighted-average number of shares outstanding plus the dilutive impact of all other potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives. Dilutive earnings per share under the “treasury method” are calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the dilutive impact of all potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives.
None of the potentially dilutive securities had a dilutive impact during the years ended December 31, 2020 and 2019 after rounding was applied.
The number of anti-dilutivepotentially dilutive shares for the year ended December 31, 2019,2021 and 2020, consisting of common shares underlying common stock equity incentives, was 668.668. These potentially dilutive shares were reversed during the current year as certain vesting requirements were not met and the shares are no longer available to be issued under the Company’s common stock equity incentive plan. None of the potentially dilutive securities had a dilutive impact after rounding was applied.
Other Comprehensive Income
Other comprehensive income is the result of the impact of foreign currency translations related to the Company’s internet segment operations in Canada.
Recently Issued Accounting Pronouncements
In August 2018, June 2016, the FASB issued ASU No. 2018-13, “Fair Value Measurement” (Topic 820). The guidance intends to improve the effectiveness of the disclosures relating to recurring and nonrecurring fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019. Portions of the guidance are to be adopted prospectively while other portions are to be adopted retroactively. Early adoption is permitted. The Company adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2016 the FASB issued ASU No. 2016-13,-13, “Financial Instruments - Credit Losses” (Topic 326)326). The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate should now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. In April 2019, the FASB further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments. In May 2019, the FASB issued further guidance to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible financial instruments. In November 2019, the FASB issued further guidance on expected recoveries for purchased financial assets with credit deterioration, and transition refiled for troubled debt restructurings, disclosures related to accrued interest receivables, and financial assets secured by collateral maintenance provisions. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. The Company currently expects that the adoption of this guidance may change the way we assess the collectability of our receivables and recoverability of other financial instruments. The Company will adopt this guidance as of January 1, 2023. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (Topic 805). This update provided that an acquirer no longer records deferred revenue of the acquiree based on its acquisition date fair value. Rather, the acquirer accounts for contract assets and liabilities in accordance with ASC 606 as if it had originated the contract (i.e., continue to account for such assets and liabilities as has historically been done by the acquiree in accordance with ASC 606). This new guidance is required to be adopted by public entities in years beginning after December 15, 2022 on a prospective basis. Early adoption is permitted. The Company has adopted this guidance as of December 31, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements.
The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying consolidated financial statements.
NOTE 3. HISTORICAL HOME SERVICES DIVESTITURESUBSIDIARY ASSET SALE
On May 24, 2019, as has been previously reported, the Company completed a divestiture of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC), to an unaffiliated third-partythird-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, all of Specialty Contracting Group’s personal property and customer lists and records were conveyed to Rooter Hero, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed Specialty Contracting Group’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s then-remaining customer accounts going forward. No cash consideration was exchanged in the transaction. Rather, as consideration for the transaction, Rooter Hero agreed to pay monthly royalties for the sixty (60) (60) months following the closing calculated on the basis of any revenue actually received from the customer accounts transferred (7.5% of any monthly revenue generated from qualified sales during the first year, and 5% of any such monthly revenue during years two through five; in each case subject to reduction for pre-approved warranty-related costs concerning select customers).
As reported in prior periods, the home services subsidiary had failed to meet approved budgets and had underperformed since its inception in 2016. Management noted that the largely decentralized management approach was not a good fit for this industry, and the extensive operating requirements were not conducive to smaller company capacities. The cyclical nature of the business also resulted in unpredictable cash flows, which created immediate and significant needs for additional Company resources. Due to the past performance of the company, management determined that additional resources should not be allocated to this subsidiary.
The decision was made to exit the business during the quarter ended June 30, 2019. The operations of Specialty Contracting Group, LLC werehad been considered a component of, and the divestiture reflected a strategic shift in, the Company’s business. As such, Specialty Contracting Group, LLC’s historical operations have been classified as discontinued operations in the Company’s financial statements. The loss from discontinued operations has been determined using a loss recovery approach, as the collection of future royalties is uncertain and a reasonable estimate could not be made. This approach requires that the contingent consideration, the future royalties to be received, be valued at the lesser of the amount of the “probable,” defined as a greater than 50% likelihood, future proceeds or the carrying value of the disposed assets. Due to the unpredictability of the contingent consideration, and management’s inherent lack of control over the buyer’s operations, management determined it would not be reasonable to attempt to value the contingent consideration. This resulted in assigning the contingent consideration a current valuation of zero. As and to the extent any royalties are deemed probable, they will be subsequently recognized as a “recovery from discontinued operations” on the statements of operations and will offset, or recover, the initial loss recorded. Accordingly,During the year ended December 31, 2021, there were no material royalties or other activity from discontinued operations. Comparatively, during the yearsyear ended December 31, 2020, and 2019, an offsetting $20,484, and $21,629, respectively, recoveryof royalties on discontinued operations waswere recognized within the reported $165,186 and $(1,510,475) of net income (loss)recoveries from discontinued operations, respectively.
A breakdownAs ofDecember 31, 2021, there are no discontinued assets andor liabilities as reported on the face of the accompanying consolidated financial statements for the years ended December 31, 2020 and 2019, is as follows:
December 31, 2020 | December 31, 2019 | |||||||
Cash and cash equivalents | $ | 231 | $ | 428 | ||||
Accounts receivable | — | — | ||||||
Other current assets | — | — | ||||||
Total current assets - held for resale | 231 | 428 | ||||||
Accounts payable | — | 96,848 | ||||||
Accrued expenses | — | — | ||||||
Lease liabilities | — | 50,110 | ||||||
Other current liabilities | — | — | ||||||
Notes payable, current | — | — | ||||||
Total current liabilities - held for resale | $ | — | $ | 146,958 |
A breakdown of the initial recorded pre-tax loss as reported on the accompanying consolidated statementsbalance sheets. As of operationsDecember 31, 2020, discontinued assets reported on the accompanying consolidated balance sheets totaled $231. No discontinued liabilities were reported as of the year ended December 31, 2019 is presented below. Asset and liability values used in the calculation represent the Company’s carrying value as of the date of sale, May 24, 2019.
Sale of vehicles, equipment, and furniture, net of depreciation | $ | 230,578 | ||
Impairment of remaining goodwill | 1,024,591 | |||
Total carrying value of assets sold | 1,255,169 | |||
Vehicle and equipment notes payable assumed by the buyer | 76,791 | |||
Service agreements assumed by the buyer | 19,646 | |||
Total carrying value of liabilities assumed | 96,437 | |||
Net loss on sale of subsidiary, pre-tax | $ | 1,158,732 |
As has been previously reported, on October 22, 2019, the Company, as and being the sole and managing member of Specialty Contracting Group, LLC, resolved to dissolve and wind up Specialty Contracting Group and proceed with distributing its assets in accordance with §18-804 of the Delaware Limited Liability Company Act. Management had determined that Specialty Contracting Group’s continued existence was not reasonably practicable or financially feasible; the entity having no operational capabilities, no significant assets, and no prospects for the carrying on of any business or receipt of revenue. All of Specialty Contracting Group’s cash on hand was paid out ratably to its creditors and claimants; however, its assets were not sufficient to satisfy in full its known liabilities. After making such payments out of and to the extent of its assets, Specialty Contracting Group filed a Certificate of Cancellation with the Secretary of State of the State of Delaware on November 15, 2019, thereby effecting the cancellation and termination of the legal existence of the entity. The extinguishment of these liabilities, totaling $147,113, have been included in net income from discontinued operations for the year ended December 31, 2020.
A reconciliation of discontinued operations as reported on the accompanying consolidated statements of operations for the years ended December 31, 2020 2021 and 2019,2020, is as follows:
For the year ended | ||||||||
December 31, 2020 | December 31, 2019 | |||||||
Revenues | $ | — | $ | 675,963 | ||||
Cost of revenues | — | 432,872 | ||||||
Gross profit | — | 243,091 | ||||||
Selling, general, and administrative expenses | 2,411 | 535,650 | ||||||
Loss on sale of subsidiary, net of recoveries | 20,484 | (1,125,364 | ) | |||||
Debt extinguishment | (147,113 | ) | — | |||||
Other income (expense), net | — | (92,552 | ) | |||||
Net income (loss) reported as discontinued operations | $ | 165,186 | $ | (1,510,475 | ) |
For the year ended | ||||||||
December 31, 2021 | December 31, 2020 | |||||||
Revenues | $ | 0 | $ | 0 | ||||
Cost of revenues | 0 | 0 | ||||||
Gross profit | 0 | 0 | ||||||
Selling, general, and administrative expenses | 0 | 2,411 | ||||||
Loss on sale of subsidiary, net of recoveries | 0 | 20,484 | ||||||
Debt extinguishment | 0 | (147,113 | ) | |||||
Other income (expense), net | 0 | 0 | ||||||
Net income reported as discontinued operations | $ | 0 | $ | 165,186 |
NOTE 4. HISTORICAL SALE OF CONTROLLING INTEREST IN REAL ESTATE SUBSIDIARY
Historical Transaction
As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-partythird-party purchaser, Woodmont Lexington, LLC, a Delaware limited liability company (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio. The Company retained a 35% membership interest in Mt Melrose. Subsequent to the transaction, however, Woodmont, as the manager of Mt Melrose, has purported that the Company’s membership interest in Mt Melrose has been diluted to 20.8%. The Company disputes this assertion and maintains that it has retained its 35% membership interest.
Prior to this transaction, the Company had grown uncomfortable with the extreme amounts of high-priced debt that the Mt Melrose subsidiary had taken on. There were significant principal payments due over the next 12 months at the subsidiary level that the portfolio’s cash flows could not offset and the Company was unwilling to subsidize. As reported in previous quarterly and annual reports, in November 2018 management implemented a right-sizing strategy for the Mt Melrose portfolio. This strategy included the hiring of a dedicated third-party property manager, a restructuring of overhead expenses, the divestiture of non-cash-flowing properties, and a focus on refinancing high-interest debt. The property manager was responsible for all day-to-day operations including, but not limited to: tenant relations and communications, property repairs and renovations, vacancy marketing, and turnover procedures. This allowed management to remain passive operationally and focus on property sales and refinancing opportunities. Subsequent to the sale on June 27, 2019, the property manager continued to fulfill the day-to-day operational responsibilities, and, to management’s knowledge, Woodmont continues to act on management’s previous right-sizing efforts by liquidating non-cash-flowing properties and pursuing refinancing options.
In connection with this transaction, the Company and Woodmont also entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC (the “A&R LLC Agreement”). The A&R LLC Agreement setssetting forth the general terms and conditions governing the arrangements between the two members. The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont is designated as the sole manager. In addition, the Company has expressly agreed members, which arrangements were intended to a three-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose; and with respect to any matters requiring a vote of the members, the Company will vote with (i.e., the same as) Woodmont. This arrangement allowsallow the Company to maintain itsa passive management structure, while still owning a significant portion of the partnership.
Under the terms of the A&R LLC Agreement, distributions of cash, from whatever source, may be made to the members at such times, and in such amounts, as the manager, Woodmont, determines; provided, however, that any such distributions will be made in accordance with the following priorities: (i) distribution of amounts up to a cumulative total of $2,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement); (ii) then, distribution of cumulative amounts in excess of $2,000,000 and up to $3,000,000 will be made 67% to the Company and 33% to Woodmont; and (iii) thereafter, distribution of cumulative amounts in excess of $3,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement).
While the operations of Mt Melrose, LLC arewere considered a component of the Company’s business, the June 27, 2019, sale did not represent a major strategic shift in the Company’s business. While we deconsolidated the operations of Mt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest, Mt Melrose, LLC’s historical operations continuecontinued to be reflected as “continuing operations” in the Company’s financial statements.
Deconsolidation Due to Transfer of Control
Prior to the sale of 65% of its Mt Melrose interest, the Company owned 100% of the membership interests in Mt Melrose, LLC and controlled the entity by virtue of its voting interests. As a result, the Company consolidated Mt Melrose under the “voting interests” (VOE) consolidation model.
By virtue of the A&R LLC Agreement, and the aforementioned standstill agreement, Woodmont That is, the sole “manager” responsible for all management and operating decisions of Mt Melrose. Management determined that as of June 27, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose and will no longer consolidate Mt Melrose. Furthermore, the Company has concluded that Mt Melrose does not qualify as a “variable interest entity” as Mt Melrose has sufficient equity at risk to permit operations and the Company is not the primary beneficiary of Mt Melrose’s activities. All activity prior to the deconsolidation event has beenwas included on our consolidated statements of operations for given prior reporting periods in continuing operations, and under the real estate segment. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have beenwere removed from our consolidated balance sheets. Thesheets, and the Company’s membership interest in Mt Melrose is nowthen became accounted for as an investment in the equity of Mt Melrose, LLC in the Company’s reported financial statements.
Accounting for RemainingThen-Remaining Mt Melrose Investment
The Company adopted ASU 2016-012016-01 effective January 1, 2018. ASU 2016-012016-01 generally requires entities to measure equity investments at fair value and recognize any changes in fair value in net income. However, entities are able to elect a measurement alternative for equity investments that do not have a “readily determinable fair value.” The Company has determined that its equity investment in Mt Melrose did not have a readily determinable fair value at the time of deconsolidation. The Company’s inability to “exercise significant influence” due to the previously mentioned standstill agreement,reported contractual agreements, also supportssupported the use of the measurement alternative. Under this alternative, the Company measureshad measured the Mt Melrose investment at its implied fair value and assessassessed it for impairment at each reporting date, or more often if indication of a potential impairment exists. When fair value becomes determinable, from observable price changes in orderly transactions, the Company’s investment will be marked to fair value on a periodic basis. Future dividends will be recognized as income and returns of capital recognized as a reduction in the Company’s investment when and if received.date.
Using the $100,000$100,000 transaction price for a 65% interest in Mt Melrose, LLC on June 27, 2019, the implied value of the Company’s retained 35% equity interest at the time of the transaction was $53,846. This amount ishas been included under the long-term investment amount on the accompanying consolidated balance sheets as of December 31, 2020 and 2019.2020.
EffectiveHowever, as mentioned previously, 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 27, 2019, 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 lossgain of $778,872 on the partial May 17, 2021, sale, of Mt Melrose in the amount of $4,157,809, which has been reported separatelyis included as a separate line item on the accompanying consolidated statements of operations in continuing operations and under the real estate segment for the year ended December 31, 2019. The amount2021. This gain is representative of the loss is based upon the value ofdifference between the Company’s remaining interest in the subsidiary, less the Company’s previousmost recent carrying value of its Mt Melrose equity investment, various other intercompany reimbursements, and the subsidiary. final sale price represented by the May 17, 2021 transaction.
NOTE 5. INVESTMENTS
Certain assets held through the Company, Willow Oak Asset Management, LLC, or EDI Real Estate, LLC, do not have a readily determinable value, as these investments are not publicly traded, nor do they have published sales records. The investment in Alluvial Fund, LP, isprior to the final liquidating withdrawal on December 31, 2021, was measured using net asset value (NAV) as the practical expedient and iswas exempt from the fair value hierarchy (see Note 6)6). The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and allocated based on total fund contributions. The Company’s investment in the Alluvial Fund iswas remeasured to fair value on a recurring basis and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Due to the nature of the Mt Melrose, LLC investment (subsequent to the lossCompany’s transfer, relinquishment of control, and subsequent sale (see Note 4)4)), the investment iswas measured at cost basis, as fair value is was not determinable until additional inputs and measurements becomebecame available. As mentioned in Note 6, due to the illiquid nature of Triad Guaranty, Inc. common stock and the lack of currently available financial information for the entity, the Company has recorded an impairment on its historical shares of Triad Guaranty, Inc. common stock. As of December 31, 2021, the Company attributes no value to its 847,847 aggregate shares of Triad Guaranty, Inc. common stock.
Cost Basis | Unrealized Gain | Fair Value | Cost Basis | Unrealized Gain | Fair Value | |||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||
Alluvial Fund, LP | $ | 7,064,758 | $ | 6,455,858 | $ | 13,520,616 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Mt Melrose, LLC | 53,846 | — | 53,846 | 0 | 0 | 0 | ||||||||||||||||||
Total | $ | 7,118,604 | $ | 6,455,858 | $ | 13,574,462 | $ | 0 | $ | 0 | $ | 0 |
Cost Basis | Unrealized Gain | Fair Value | Cost Basis | Unrealized Gain | Fair Value | |||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||
Alluvial Fund, LP | $ | 7,042,732 | $ | 3,029,626 | $ | 10,072,358 | $ | 7,064,758 | $ | 6,455,858 | $ | 13,520,616 | ||||||||||||
Mt Melrose, LLC | 53,846 | — | 53,846 | 53,846 | 0 | 53,846 | ||||||||||||||||||
Total | $ | 7,096,578 | $ | 3,029,626 | $ | 10,126,204 | $ | 7,118,604 | $ | 6,455,858 | $ | 13,574,462 |
Alluvial Fund is a private investment fund that focuses on investing in what it believes are deeply mispriced securities in the United States and abroad. Alluvial Fund focuses on small companies, thinly traded issues, and special situations, seeking to identify value that its management believes the market has yet to recognize. During the yearsyear ended December 31, 2020 and 2019, 2021, the Company initiated a total of $17,772,369 in redemptions from the Alluvial Fund. The Company did not withdraw redeem any funds from the Alluvial Fund during the year ended December 31, 2020. For the year ended December 31, 2021, the Company also reinvested certain management orand performance fees earned through the Alluvial Fund. For the years ended December 31, 2020 and 2019, theThe total amountsamount of these reinvested fees were $22,027 and $19,056, respectively.
During$74,512 for the year ended December 31, 2019,2021. Comparatively, for the Company recognized $76,810 year ended December 31, 2020, the total amount of realized gains through the other operations segment, primarily related to the Company’s sale of its Triad Guaranty, Inc. stock.these reinvested fees were $22,027.
NOTE 6. FAIR VALUE OF ASSETS AND LIABILITIES
GAAP defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date, and establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:
● | Level 1 - inputs are quoted prices in active markets as of the measurement date for identical assets and liabilities that the Company has the ability to access; this category includes exchange-traded mutual funds and equity securities; |
● | Level 2 - inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates or yield curves, that are observable |
● | 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 values its investments at fair value at the end of each reporting period. See description of these investments in Note 5 above.
(Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | (Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | |||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
Alluvial Fund, LP | $ | — | $ | — | $ | — | $ | 13,520,616 | $ | 13,520,616 | $ | 0 | $ | 0 | $ | 0 | $ | — | $ | 0 | ||||||||||||||||||||
Total investments | $ | — | $ | — | $ | — | $ | 13,520,616 | $ | 13,520,616 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
(Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | (Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | |||||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
Alluvial Fund, LP | $ | — | $ | — | $ | — | $ | 10,072,358 | $ | 10,072,358 | $ | 0 | $ | 0 | $ | 0 | $ | 13,520,616 | $ | 13,520,616 | ||||||||||||||||||||
Total investments | $ | — | $ | — | $ | — | $ | 10,072,358 | $ | 10,072,358 | $ | 0 | $ | 0 | $ | 0 | $ | 13,520,616 | $ | 13,520,616 |
(a) | Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company analyzes goodwill on an annual basis or more often if events or changes in circumstances indicate potential impairments. No impairments were recorded during the yearyears ended December 31, 2020. During the year ended December 31, 2019, an impairment of the remaining home services segment goodwill of $1,024,591 was recognized 2021 and reported as a component of the loss on the divestiture of Specialty Contracting Group, LLC’s assets.2020.
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. No impairments were recorded during the yearyears ended December 31, 2021 and 2020. During the year ended December 31, 2019, an impairment adjustment of $126,827 was recorded on a commercial warehouse held for resale in order to properly reflect market value at that time. Additionally, during the year ended December 31, 2019, net impairment adjustments of $26,170 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value at that time.
As discussed in Note 4, the Company’s ongoingprevious equity investment in Mt Melrose, LLC iswas carried at its implied cost under the alternative approach and will bewas assessed for impairment at each balance sheet date.No impairments were recorded during the years ended December 31, 2021, and 2020.
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 currently 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, the Company holds its interests in both promissory notes for $50,000 under notes receivable on the accompanying consolidated balance sheets and has attributed no value to its aggregate shares of Triad Guaranty, Inc. common stock.
NOTE 7. PROPERTY AND EQUIPMENT
The cost of property and equipment at December 31, 2021, and December 31, 2020, and December 31, 2019, consisted of the following:
2020 | 2019 | 2021 | 2020 | |||||||||||||
Computers and equipment | $ | 17,330 | $ | 17,330 | $ | 17,330 | $ | 17,330 | ||||||||
Furniture and fixtures | 10,850 | 10,850 | 10,850 | 10,850 | ||||||||||||
28,180 | 28,180 | 28,180 | 28,180 | |||||||||||||
Less accumulated depreciation | (14,473 | ) | (10,427 | ) | (18,519 | ) | (14,473 | ) | ||||||||
Property and equipment, net | $ | 13,707 | $ | 17,753 | $ | 9,661 | $ | 13,707 |
Depreciation expense from continuing operations was $4,046 for the year ended December 31, 2020, and $27,284 for the year ended December 31, 2019. Included in these amounts are $0 and $9,310 forboth the years ended December 31, 2020 2021 and 2019, respectively, of depreciation expense related to personal property used in real estate segment rental operations. The depreciation expense related to personal property is included in the real estate segment cost-of-goods-sold amount on the accompanying consolidated statements of operations.
As of December 31, 2020, management has not identified any properties or lots as real estate held for resale. This compares to the year ended December 31, 2019, when management identified two residential real estate properties and several vacant lots as held for resale. These properties and lots were carried at $98,910 on the accompanying consolidated balance sheets as of December 31, 2019.
On December 24, 2019, the Company completed the sale of a commercial warehouse space held for resale located in Lexington, Kentucky. The property was sold at its carrying value of $850,000. Net proceeds totaled $487,944 after repayment of the attached promissory note. The sale resulted in a loss of $56,467, which is included in other expenses under the real estate segment for the year ended December 31, 2019.2020.
NOTE 8. REAL ESTATE
EDI Real Estate | December 31, 2020 | December 31, 2019 | December 31, 2021 | December 31, 2020 | ||||||||||||
Units occupied or available for rent | 4 | 6 | 1 | 4 | ||||||||||||
Vacant lots held for investment | 3 | — | 2 | 3 | ||||||||||||
Total units held for investment | 7 | 6 | 3 | 7 | ||||||||||||
Units held for resale | — | 2 | ||||||||||||||
Vacant lots held for resale | — | 3 | ||||||||||||||
Total units held for resale | — | 5 |
EDI Real Estate | December 31, 2020 | December 31, 2019 | December 31, 2021 | December 31, 2020 | ||||||||||||
Total real estate held for investment | $ | 303,158 | $ | 484,590 | $ | 43,821 | $ | 303,158 | ||||||||
Accumulated depreciation | (61,282 | ) | (104,075 | ) | (16,910 | ) | (61,282 | ) | ||||||||
Real estate held for investment, net | 241,876 | 380,515 | $ | 26,911 | $ | 241,876 | ||||||||||
Real estate held for resale, net | $ | — | $ | 98,910 |
During the year ended December 31, 2021, 3 properties held for resale and 1 vacant lot were sold for gross proceeds of $339,500. Net proceeds totaled $80,259. This compares to their total carrying value of $211,238, which resulted in a net gain of $128,262 being recognized during the current year. This compares to the year ended December 31, 2020, fourwhen 4 properties held for resale were sold for gross proceeds of $519,000. Net$519,000 and net proceeds totaled $229,209. This comparescompared to their total carrying value of $232,744, which resulted in a net gainsgain of $286,256 being recognized on the sales. Duringduring the year ended December 31, 2019, one property held for resale was sold for gross proceeds of $95,000. Net proceeds totaled $84,869. This compares to its carrying value of $95,000, which resulted in no gain or loss being recognized on the transaction. No2020. NaN properties were purchased during the yearyears ended December 31, 2020 2021 or 2019 for the EDI Real Estate portfolio.
Future Minimum Rental Revenues - EDI Real Estate, LLC
The future anticipated minimum rental revenues based on leases in place as of December 31, 2020, for EDI Real Estate, LLC are as follows:
2020 | $ | 18,079 | ||
2021 | — | |||
2022 | — | |||
Total | $ | 18,079 |
Mt Melrose, LLC
As described in Note 4, management previously has determined that the Company no longer has a controlling financial interest in Mt Melrose. All activity prior to the deconsolidation event has been included on our consolidated statements of operations for given prior reporting periods under the real estate segment. No Mt Melrose activity is included on the consolidated statements of operations for the year ended December 31, 2020. As of June 27, 2019, all previously consolidated assets 2021 and liabilities of Mt Melrose, LLC have been removed from our consolidated balance sheets. Accordingly, there are no consolidated Mt Melrose assets as of and for the years ended December 31, 2020 and 2019 included on the accompanying consolidated balance sheets.
NOTE 9. NOTES PAYABLE
Notes payable at December 31, 2020 2021 and 2019,2020, consist of the following:
Interest Rates | Average Term | 2020 | 2019 | |||||||||
Interest-bearing amount due on promissory note through EDI Real Estate, LLC | 5.60% | 15 years | $ | 154,094 | $ | 373,425 | ||||||
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC | 6.00% | 5 years | 96,000 | 137,600 | ||||||||
Less current portion | (5,609 | ) | (11,453 | ) | ||||||||
Long-term portion | $ | 244,485 | $ | 499,572 |
The timing of future payments of notes payable are as follows as of December 31, 2020:
2021 | $ | 5,609 | ||
2022 | 101,507 | |||
2023 | 5,828 | |||
2024 | 6,145 | |||
2025 and thereafter | 131,005 | |||
Total | $ | 250,094 |
Interest Rates | Average Term | 2021 | 2020 | ||||||||||
Interest-bearing amount due on promissory note through EDI Real Estate, LLC | 5.60% | 15 years | $ | 0 | $ | 154,094 | |||||||
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC | 6.00% | 5 years | 0 | 96,000 | |||||||||
Less current portion | 0 | (5,609 | ) | ||||||||||
Long-term portion | $ | 0 | $ | 244,485 |
During the quarterly period ended June 30, 2020, the Company received loan proceeds in the amount of $125,102 under the Paycheck Protection Program, as amended (the “PPP”), administered by the U.S. Small Business Administration. The PPP, established as part of the U.S. Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”), generally provided for economic assistance in the way of loans to qualifying business for amounts up to two-and-a-halftwo-and-a-half times the average monthly payroll expenses of the qualifying business. Under the PPP, amounts of loan principal and accrued interest were eligible for forgiveness after a period, as selected by the borrower, of either eight or twenty-four weeks, provided the borrower used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintained its payroll levels. The amount of loan forgiveness was subject to reduction if the borrower terminated employees or reduced salaries during the selected time period.
The Company applied for and was granted loan forgiveness by the Small Business Administration for the full value of its PPP loan in December 2020. The principal value of the loan, along with accrued interest, has been recognized as a gain on debt extinguishment on the accompanying consolidated statements of operations for the year ended December 31, 2020.
During the quarterly period ended September 30, 2018, EDI Real Estate, LLC, as a borrower, issued a promissory note secured by additionalcertain properties held for investment. This note carriescarried an annual interest rate of 5.6% and fully maturesmatured on September 1, 2033, with early payoff permitted. The interest rate on this note iswas subject to change once each five-yearfive-year period based on an index rate plus a margin of 2.750 percentage points. The index rate iswas calculated as a monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of five years. During the yearquarterly period ended December 31, 2020, three properties from September 30, 2021, the originalremaining loan package were sold and the corresponding principal balance of $203,271 was paid down.in full and no future payments are required.
During the quarterly period ended September 30, 2017, EDI Real Estate, LLC, as a borrower, issued twoa promissory notes, eachnote secured by a property held for investment. These notes carry annual interest rates of 6%, pay interest quarterly, and are due September 15, 2022, with early payoff permitted. During the year ended December 31, 2020, one note totaling $41,600 was paid in full as the secured property was sold.
During the quarter ended March 31, 2019, the Company issued a promissory note secured by the commercial warehouse held for resale. TheThis note carried an annual interest rate of 8%6%, paidaccrued interest quarterly, and was due upon successful sale of the warehouse September 15, 2022, with early payoff permitted. Accordingly,During the quarterly period ended June 30, 2021, the balance of this note was paid off during December 2019,in full in conjunction with the sale of the warehouse.property. No future payments are required.
NOTE 10. SEGMENT INFORMATION
During the year ended December 31, 2020, 2021, the Company operated through four business segments with separate management and reporting infrastructures that offer different products and services. The four business segments are as follows: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations.
During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, as of the year ended December 31, 2020, and for all prior periods presented, Home Services Operations are reported as discontinued operations.
As mentioned in Note 3, on May 24, 2019, the Company completed a divestiture of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC, to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). The current and comparative resultshome services operations on May 24, 2019. As a result, as of the year ended December 31, 2021, and for all prior periods presented, the Company’s former home services operations segment havehas been reported as discontinued on the accompanying consolidated financial statements for the year ended December 31, 2020.
As mentioned in Note 4, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC.
Management determined that as of June 27, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose; therefore, the Company no longer consolidates Mt Melrose. All activity prior to the deconsolidation event has been included on our consolidated statements of operations for given prior reporting periods under the real estate segment. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our consolidated balance sheets.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) our equity in Mt Melrose, LLC, prior to the sale of the Company’s remaining membership interests on May 17, 2021, which managesmanaged properties held for investment and held for resale located in Lexington, Kentucky, and (ii) revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia.
The internet operations segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services. 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.
TheOur internet segment includes revenue generated by operations in both the United States and Canada. InDuring the year ended December 31, 2021, the internet segment generated revenue of $851,274 in the United States and revenue of $44,111 in Canada. This compares to the year ended December 31, 2020,when the internet segment generated revenue of $929,383 in the United States and revenue of $49,563 in Canada. This compares to the year ended December 31, 2019, where the internet segment generated revenue of $1,011,407 in the United States and revenue of $54,822 in Canada. All assets reported under the internet operations segment for the years ended December 31, 2020 2021 and 2019,2020, are located within the United States.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the years ended December 31, 2020 2021 and 2019.2020.
Year Ended December 31, 2020 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2021 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||||||||||||||||||||||||||
Revenues | $ | 3,690,473 | $ | 578,313 | $ | 978,946 | $ | — | $ | — | $ | 5,247,732 | $ | 4,650,298 | $ | 356,560 | $ | 895,385 | $ | 0 | $ | 0 | $ | 5,902,243 | ||||||||||||||||||||||||
Cost of revenue | — | 326,636 | 321,582 | — | — | 648,218 | 0 | 248,424 | 270,627 | 0 | 0 | 519,051 | ||||||||||||||||||||||||||||||||||||
Operating expenses | 425,704 | 31,937 | 193,791 | 966,862 | — | 1,618,294 | 424,596 | 39,185 | 212,217 | 2,148,641 | 0 | 2,824,639 | ||||||||||||||||||||||||||||||||||||
Other income (expense) | 2,283 | (17,064 | ) | 4,251 | 143,528 | — | 132,998 | 0 | 755,333 | 21,687 | (146,692 | ) | 0 | 630,328 | ||||||||||||||||||||||||||||||||||
Income tax expense | — | — | — | (366,532 | ) | — | (366,532 | ) | ||||||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations | 3,267,052 | 202,676 | 467,824 | (823,334 | ) | — | 3,114,218 | 4,225,702 | 824,284 | 434,228 | (2,661,865 | ) | 0 | 2,822,349 | ||||||||||||||||||||||||||||||||||
Income (loss) from discontinued operations | — | — | — | — | 165,186 | 165,186 | ||||||||||||||||||||||||||||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | 0 | 0 | 212,445 | 0 | 0 | 212,445 | ||||||||||||||||||||||||||||||||||||
Identifiable assets | $ | 13,721,139 | $ | 321,265 | $ | 476,101 | $ | 338,444 | $ | 231 | $ | 14,857,180 | $ | 4,174,175 | $ | 44,744 | $ | 428,666 | $ | 13,293,173 | $ | 0 | $ | 17,940,758 |
Year Ended December 31, 2019 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2020 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||||||||||||||||||||||||||
Revenues | $ | 1,773,276 | $ | 537,763 | $ | 1,066,229 | $ | 212,631 | $ | — | $ | 3,589,899 | $ | 3,690,473 | $ | 578,313 | $ | 978,946 | $ | 0 | $ | 0 | $ | 5,247,732 | ||||||||||||||||||||||||
Cost of revenue | — | 485,459 | 330,654 | — | — | 816,113 | 0 | 326,636 | 321,582 | 0 | 0 | 648,218 | ||||||||||||||||||||||||||||||||||||
Operating expenses | 410,226 | 338,025 | 223,118 | 1,101,098 | — | 2,072,467 | 425,704 | 31,937 | 193,791 | 966,862 | 0 | 1,618,294 | ||||||||||||||||||||||||||||||||||||
Other income (expense) | 36,565 | (4,712,766 | ) | 10,169 | 96,551 | — | (4,569,481 | ) | 2,283 | (17,064 | ) | 4,251 | 143,528 | 0 | 132,998 | |||||||||||||||||||||||||||||||||
Income (loss) from continuing operations | 1,399,615 | (4,998,487 | ) | 522,626 | (791,916 | ) | — | (3,868,162 | ) | 3,267,052 | 202,676 | 467,824 | (823,334 | ) | 0 | 3,114,218 | ||||||||||||||||||||||||||||||||
Income (loss) from discontinued operations | — | — | — | — | (1,510,475 | ) | (1,510,475 | ) | 0 | 0 | 0 | 0 | 165,186 | 165,186 | ||||||||||||||||||||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | 0 | 0 | 212,445 | 0 | 0 | 212,445 | ||||||||||||||||||||||||||||||||||||
Identifiable assets | $ | 10,186,353 | $ | 556,994 | $ | 414,935 | $ | 740,934 | $ | 428 | $ | 11,899,644 | $ | 13,721,139 | $ | 321,265 | $ | 476,101 | $ | 338,444 | $ | 231 | $ | 14,857,180 |
NOTE 11. COMMITMENTS AND CONTINGENCIES
Leases
As of December 31, 2021 and 2020, the Company has no remaining long-term leases classified as operating leases and no finance leases. This comparesthat require right-of-use assets or lease liabilities to the year ended December 31, 2019, when the Company had three leases classified as operating leases and no finance leases.
As of December 31, 2019, the three operating leases corresponded to: office space for Willow Oak Asset Management, LLC; warehouse space for corporate matters; and the warehouse and office facilities for Specialty Contracting Group, LLC, which did not convey with the divestiture and was surrendered to the landlord.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. The previous lease for warehouse space for corporate matters was a short-term lease, under 12 months, and expired in February 2020. In accordance with ongoing accounting policy elections, the Company does not recognize right-of-use (ROU) assets or lease liabilities for short-term or month-to-month leases. Total rental expenses attributed to these short-term leases for the year ended December 31, 2020 were $18,684.2021, are $21,000. This compares to total rental expenses of $18,684 attributed to these short-term leases for the year ended December 31, 2020.
With respect to the former leased facilities for Specialty Contracting Group, LLC, possession of the premises was surrendered to the landlord, in connection with the dissolution and winding up of Specialty Contracting Group, in default of that lease. As of December 31, 2020, the remaining balance of the lease liability has been written off as the likelihood of any future payment being required is remote. This reduction in liability is included as income from discontinued operations on the accompanying consolidated statements of operations for the year ended December 31, 2020.
Lease costs for the years ended December 31, 2020 2021 and 20192020 consisted of the following:
2020 | 2019 | 2021 | 2020 | |||||||||||||
Finance lease costs: | ||||||||||||||||
Amortization of ROU assets | $ | — | $ | — | $ | 0 | $ | 0 | ||||||||
Interest on lease liabilities | — | — | 0 | 0 | ||||||||||||
Operating lease costs | 46,058 | 64,092 | 0 | 46,058 | ||||||||||||
Sublease income | (2,283 | ) | (28,405 | ) | 0 | (2,283 | ) | |||||||||
Total lease costs from continuing operations | 43,775 | 35,687 | 0 | 43,775 | ||||||||||||
Total lease costs from discontinued operations | — | 64,901 | 0 | 0 | ||||||||||||
Total lease costs | $ | 43,775 | $ | 100,588 | $ | 0 | $ | 43,775 |
As the Company has no remaining leases classified as operating leases or financing leases as of the yearyears ended December 31, 2021 and 2020, 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 mentioned in Note 4,has been previously reported, on June 27, 2019, December 29, 2021, the Company, sold 65%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 its membership interest in Mt Melrose, LLCMerger (the “Merger Agreement”), pursuant to an unaffiliated third-party purchaser, Woodmont Lexington, LLC. As consideration for the transaction, Woodmont paidwhich the Company $100,000 andhas agreed to assume full responsibility forbecome, subject to stockholder approval and the managementparties’ 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, operation of Mt Melrose and its real estate portfolio. Undercollectively with the termsother transactions described in the Merger Agreement, the “Business Combination”). Upon closing of the parties’ membership interest purchase agreement,Business Combination, all of the Company agreed to indemnify Woodmont against any losses actually incurred as a result of breachesoutstanding shares of the Company’s representationscapital stock will be exchanged for and warranties made underconverted into the agreement. To date, Woodmont has made several claims for indemnification underright to receive shares of New Parent, which will become the agreement, allCompany’s sole stockholder. In order to effect the Mergers and the Business Combination, New Parent will form two merger subsidiaries. Upon the closing of which have been rejectedthe Merger Agreement, the first merger subsidiary will merge with and disputed byinto the Company.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.
On 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 March 2022. Subsequent to the year ended December 31, 2021, the parties have begun 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.
As has been previously reported, various disputes havehad arisen and are continuing 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”).
Shortly following the closing of the Mt Melrose transaction, the relationshipAs has been previously reported, these disputes had resulted in certain litigation between the Company and Woodmont unfortunately soured. Woodmont unexpectedly proceeded to make numerous claims and demands uponparties commenced by the Company (including four formal claims for indemnification under the parties’ purchase agreement), which the Company has determined to be unfounded. All the while, Woodmont made repeated “low ball” offers to buy out the Company’s remaining interest in Mt Melrose, insisting that the Company relinquish its Mt Melrose interest in order to avoid further claims and demands and in order to avoid threatened public disparagement (including by way of statements made on various social media by Woodmont’s representative). The Company has rejected such offers, as being unfavorable and not November 20, 2019, in the long-term best interestsDelaware Court of the Company and its shareholders.
Also,Chancery, Enterprise Diversified, Inc. v. Woodmont actingLexington, LLC, et al., C.A. No.2019-0928-JTL (Del. Ch.) (the “Delaware Action”), as the sole manager of Mt Melrose, purported to unilaterally amend and restatewell as of August 29, 2019 the Mt Melrose limited liability company agreement amongcertain litigation between the parties purporting to changepreviously pending in the terms of the distribution waterfall the parties had expressly agreed to and purporting to reallocate the parties’ respective interestsCircuit Court in Mt Melrose – unilaterally reducing the Company’s percentage membership interest from 35% to 20.8% while increasing Woodmont’s percentage membership interest from 65% to 79.2%. The Company has rejected and disputed these purported changes. In addition, on January 7, 2020, Woodmont, acting as the sole manager of Mt Melrose, also caused Mt Melrose to distribute a $600,000 cash dividend directly to Woodmont. Woodmont expressly excluded the Company from receiving any portion of this distribution. The Company has rejected and disputed the propriety of this distribution.
In connection with the primary disputes between the Company and Woodmont, following the Company’s initiation of the Delaware Action discussed below, on December 5, 2019, Woodmont also filed a verified complaint in the Fayette County, Kentucky, Circuit Court against the Company and a third party who was then-under contract with the Company for such party’s purchase of the Company’s warehouse and associated real property located in Lexington, Kentucky – seeWoodmont Lexington,Mt Melrose II, LLC, et al. v. Enterprise Diversified, et al.Inc., C.A. No.19-CI-4304 (Ky. Fayette Circuit Court, Civil Action No. 19-CI-04304 (the “Kentucky Action”Cir. Ct.). The Court in the Kentucky Action enjoined the Company and the warehouse purchaser from removing or cleaning out the various items of building materials and salvage owned by Mt Melrose that hadAs also has been placed in the warehouse premises, and required the Company and the warehouse purchaser to provide rent-free access so that Woodmont and Mt Melrose could realize “full value” on their liquidation of the stored personal property until February 1, 2020. The Company believed that Woodmont’s attempt to hold up the sale of an $850,000 warehouse and property because it wanted to store spare building materials and salvage there, rent free, for more than six months, was disingenuous and intentionally injurious. Accordingly, on December 27, 2019, the Company filed verified counter-claims in the Kentucky Action against Woodmont, alleging, among other things, Woodmont’s tortious interference with the Company’s business and Woodmont’s unjust enrichment. However, the Company subsequently voluntarily dismissed its verified counter-claims against Woodmont without prejudice on August 3, 2020, which such voluntary dismissal effectively terminated the Kentucky Action for the time being (the Company may re-file such claims (whether in Kentucky or Delaware) at a later time).
The Company believes that Woodmont, directly and by its representative, Tice Brown, has engaged in intentionally injurious and harassing conduct concerning Mt Melrose that runs counter to the long-term best interests of the Company and its shareholders. Accordingly, as previously reported, commencing in the Company’s Current Report on Form 8-K filed with the SEC on November 20, 2019, the Company filed a verified complaint in the Court of Chancery of the State of Delaware on November 20, 2019, commencing a civil action against Woodmont – seeCivil Action No. 2019-0928-JTL (the “Delaware Action”). The Delaware Action was filed by the Company in response to the repeated claims and demands and injurious conduct by Woodmont and its representative. On March 9, 2020, the Company filed further an amended verified complaint against Woodmont in the Delaware Action, expanding its claims against Woodmont. On April 6, 2020, Woodmont filed an answer to the complaint in the Delaware Action, along with verified counter-claims against the Company for Woodmont’s previously-asserted claims for indemnification under the parties’ purchase agreement. The Company is seeking, among other relief available against Woodmont, injunctive, declaratory and equitable relief, and relief for, among other things, Woodmont’s breaches of contract and unjust enrichment, along with attorneys’ fees and expenses. On July 24, 2020, the Company filed its reply to the counterclaims asserted by Woodmont in which it denied Woodmont’s allegations. While management intends to vigorously prosecute the Company’s claims and defend the Company’s rights against Woodmont in these matters, 2021, the Company and Woodmont have agreed to engage in voluntary mediation concerning their various disputes through the Delaware Court of Chancery,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 voluntary mediation is commencing in March 2021. The Delaware Action remains pendingthe 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 Delaware Court of Chancery; however, as per the Court’s order dated February 3, 2021, it is currently stayed pending the outcome of such mediation, except to the extent thatmembership interest purchase agreement between the Company and Woodmont otherwise agreeand 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 writing.Mt Melrose, the Company received $850,000 in cash proceeds during the quarterly period ended June 30, 2021.
NOTE 12. STOCKHOLDERS’ EQUITY
Classes of Shares
As of December 31, 2020, 2021, the Company’s Articles of Incorporation, as amended, authorize 32,800,000an 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 2,800,00010,000,000 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 December 31, 2020, September 30, 2021, the Company has not issued any shares of its preferred stock (including, without limitation, its Series A Preferred Stock).
As previously reported in the Company’s Current Report on Form 8-K8-K filed with the SEC on July 29, 2020, the Company has adopted a certain stockholder rights agreement styled as the Tax Benefit Preservation Plan, dated as of July 24, 2020, by and between the Company and Colonial Stock Transfer Company, Inc., as rights agent. The Tax Benefit Preservation Plan was adopted as a means designed to safeguard against inadvertent diminution or limitation of the Company’s valuable tax assets. As previously reported, pursuant to the Tax Benefit Preservation Plan, as of July 24, 2020, the Company has designated a series of its preferred stock as the Series A Preferred Stock, consisting of 250,000 shares so designated.
Common Stock
As of December 31, 2020, 2,602,240 2021, 2,647,383 shares of the Company’s common stock were issued and outstanding.
Cancellation of Treasury Shares
On December 30, 2019, 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 completedfiled a Certificate of Amendment to its Articles of Incorporation with the cancellationNevada Secretary of 80,506 treasuryState on June 16, 2021, increasing the number of shares of its common stock, then-remaining, upon resolutionpar value of $0.125 per share, which the Company shall have the authority to issue from the Board2,800,000 shares of Directors.common stock to 10,000,000 shares of common stock.
NOTE 13. INCOME TAXES
The provision for federal and state income taxes for the years ended December 31, 2020 2021 and 20192020 included the following:
2020 | 2019 | 2021 | 2020 | |||||||||||||
Current benefit (provision): | ||||||||||||||||
Current provision: | ||||||||||||||||
Federal | $ | — | $ | — | $ | 294,825 | $ | — | ||||||||
State | — | — | 71,707 | — | ||||||||||||
Deferred benefit: | ||||||||||||||||
Federal | 504,902 | 1,097,146 | — | 504,902 | ||||||||||||
State | 102,121 | 95,202 | — | 102,121 | ||||||||||||
Valuation allowance | (607,023 | ) | (1,192,348 | ) | — | (607,023 | ) | |||||||||
Total income tax provision | $ | — | $ | — | $ | 366,532 | $ | — |
Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2020 2021 and 20192020 are as follows:
2020 | 2019 | 2021 | 2020 | |||||||||||||
Deferred tax assets: | ||||||||||||||||
Carrying value differences | $ | 81,247 | $ | 232,030 | $ | 0 | $ | 81,247 | ||||||||
Net operating loss carryforward | 3,403,318 | 2,927,848 | 1,463,835 | 3,403,318 | ||||||||||||
Tax credits | 15,070 | 6,250 | 0 | 15,070 | ||||||||||||
Other | — | — | ||||||||||||||
Subtotal | 3,499,635 | 3,166,128 | 1,463,835 | 3,499,635 | ||||||||||||
Valuation allowance | (2,133,861 | ) | (2,732,064 | ) | (1,432,017 | ) | (2,133,861 | ) | ||||||||
Net deferred tax assets | 1,365,774 | 434,064 | 31,818 | 1,365,774 | ||||||||||||
Deferred tax liabilities: | ||||||||||||||||
Net unrealized gains on appreciated investments | (1,365,774 | ) | (434,064 | ) | (31,818 | ) | (1,365,774 | ) | ||||||||
Net deferreds | $ | — | $ | — | $ | 0 | $ | 0 |
A reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory tax rate for the years ended December 31, 2021, and 2020, is as follows:
2021 | 2020 | |||||||
U.S. federal statutory rate | 21.0 | % | 21.0 | % | ||||
Adjustments to reconcile to the effective rate: | ||||||||
State and local income taxes, net of federal tax benefits | 4.0 | 4.6 | ||||||
Transaction costs | 9.1 | 0 | ||||||
Dividends received | (1.0 | ) | 0 | |||||
PPP loan extinguishment | 0 | (1.0 | ) | |||||
Valuation allowance | (21.3 | ) | (24.6 | ) | ||||
Effective income tax rate | 11.8 | % | 0 | % |
GAAP provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based on the weight of available evidence, which includes the Company’s historical operational performance and the reported cumulative losses in the three-yearthree-year period preceding 2020, ending December 31, 2021, the Company has provided a full valuation allowance against its net deferred tax assets. The deferred tax liability results from gains on appreciated investments that are realized for financial accounting purposes but not for tax purposes.
As of December 31, 2020, 2021, the Company had federal net operating loss carryforwards of approximately $13.4 million and state net operating loss carryforwards of approximately $13.45.7 million. These carryforwards will expire in various amounts beginning in 2032.2035. Internal Revenue Code Section 382 limits the use of net operating loss carryforwards in certain situations where changes occur in the stock ownership of a company. The Company believes that an ownership change did occur in August 2016. Net operating losses that arose prior to that ownership change will have limited availability to offset taxable income arising in periods following the ownership change.
The Company is required to recognize in the financial statements the impact of a tax position, if that position is not more likely than not of being sustained on audit, based on the technical merits of the position. The Company’s policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. TheThere was no unrecognized tax benefit was $0 as of December 31, 2020. 2021. The Company does not expect that its uncertain tax positions will materially change in the next 12 months. No liability related to uncertain tax positions is recorded on the accompanying financial statements related to uncertain tax positions.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. To the extent of the Company’s tax loss carryovers, the Company’s federal and state tax returns will be subject to examination by the tax authorities from the earliest years in which such tax attributes arise. While the amount of those tax loss carryovers continues to be subject to adjustment, any assessment of additional tax for those prior years is generally barred, except for the three most recent years (federal) or four most recent years (state). Tax contingencies are based upon their technical merits, relative law, and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.
During the year ended December 31, 2021, the Company reported income tax expense of $366,532. No comparable income tax expense was reported during the year ended December 31, 2020. The current year income tax expense is primarily attributable to the current year distribution activities related to the Company’s investment in Alluvial Fund. The current year income tax expense amount was calculated after applying historical net operating loss carryforwards, which are subject to certain limitations.
NOTE 14. RELATED PARTY TRANSACTIONS
Former CEO, Erhartic
As of the year ended December 31, 2015, the Company previously purported to lease its office building in Lynchburg, Virginia, from the Former CEO, Frank Erhartic, of the Company. Public records indicate that the owner of this property from at least January 1, 2014, through December 31, 2015, was the Former CEO’s ex-wife. The Company has filed a lawsuit against the Former CEO, Erhartic, in order to recover, among other amounts, the payments made to the Former CEO. Additional information on this lawsuit can be found in Note 11. The Company vacated the building as of January 15, 2016.
The Company also leased a storage facility in Salem, Virginia, from the Former CEO, Erhartic. The Company is attempting to recover the payments made to the Former CEO related to this facility. The lease was not approved by the process required by the Company’s Code of Ethics. The Former CEO has refused to provide access to the storage facility to management and has not returned Company-owned equipment located at the storage facility. The value of this equipment is also included in the lawsuit. Additional information can be found in Note 11.
The Former CEO, Erhartic, created several land trusts and designated the Company as the trustee. The Former CEO and, the Company believes, the Former CFO placed personally owned properties within these land trusts. This activity was not approved by the process required by the Company’s Code of Ethics. This activity is the subject of litigation involving the Former CEO, Erhartic. Additional information can be found in Note 11.
Bonhoeffer Fund, LP
The Company’s subsidiary, Willow Oak Asset Management, LLC, signed a fee share agreement on June 13, 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, also an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership. Under their agreement, Willow Oak pays all start-up and operating expenses that are not partnership expenses under the limited partnership agreement. Willow Oak receives 50% of all performance and management fees earned by the general partner. During the years ended December 31, 2020 2021 and 2019,2020, the Company earned $36,217$94,428 and $38,599,$36,217, respectively, of revenue through this Bonhoeffer Fund arrangement.
Willow Oak Asset Management, LLC
On October 1, 2017, Willow Oak Asset Management, LLC entered into sub-lease agreements with Arquitos Capital Management, LLC, which is managed by our director and principal executive officer, Steven L. Kiel, JDP Capital Management, LLC, which is managed by our director and vice-chairman, Jeremy K. Deal, and B.E. Capital Management, LLC, which is managed by our director, Thomas Braziel. At the commencement of the sub-lease arrangement, neither Jeremy K. Deal nor Tomas Braziel met the criteria for a related party. Upon Jeremy K. Deal’s board appointment on April 3, 2018 and Thomas Braziel’s appointment on May 5, 2019, the sub-lease arrangements qualify as related party transactions. During the years ended December 31, 2020 2021 and 2019,2020, the Company earned $2,283$0 and $28,405,$2,283, respectively, of sub-lease revenue through these arrangements. Willow Oak’s sub-lease agreement with Arquitos Capital Management, LLC expired on October 31, 2018, and as of December 31, 2019, the remaining two sub-lease arrangements have also expired. The revenue earned for the year ended December 31, 2020, related to the recognition of certain deferred amounts.
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 isare managed by our director and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak Fund Management Services (“FMS”) consisting of the following services: investor relations, marketing, administration, legal, accounting and bookkeeping, annual audit coordination, and liaison to third-partythird-party service providers. Willow Oak earned monthly and annual fees as consideration for these services. On November 1, 2020, this agreementarrangement 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. In exchange, Willow Oak continues to provide ongoing FMS services. Willow Oak continues to earn monthly and annual fees as consideration for these services. These terms are in effect until October 31, 2022. During the years ended December 31, 2020 2021 and 2019,2020, the Company earned $89,930$59,318 and $100,461,$89,930, respectively, of revenue through this fund management services arrangement.
NOTE 15. SUBSEQUENT EVENTSFinancing Arrangement Regarding Triad Guaranty, Inc.
On December 27, 2021, the Company completed the purchase of an investment consisting of a $155,000 promissory note issued by Triad Guaranty, Inc., along with 393,750 common shares of Triad Guaranty, Inc., for $25,000 from B.E. Capital Management, LLC, which is managed by our director, Thomas Braziel. The discounted value of this purchase is reflective of the implied collectability of the promissory note and the relative illiquidity of Triad Guaranty, Inc. stock. Management believes that this addition to the Company’s existing note and related investment in Triad Guaranty, Inc. will be beneficial by strengthening the Company’s position as a creditor, which will ultimately result in a higher probability of collection when the note matures.
Voting and Support Agreement
As has been previously reported, on December 29, 2021, the Company, along with Arquitos Capitol Offshore Master, Ltd., Steven Kiel, Thomas Braziel, Jeremy Deal, Alea Kleinhammer, and Keith Smith (collectively the “Shareholders’), entered into a certain Voting and Support Agreement, in connection with the Company’s Business Combination previously discussed (see Note 11). Each of the Shareholders (other than Arquitos Capitol Offshore Master, Ltd. ) may be deemed to be an affiliate of the Company. Pursuant to the terms of the Voting and Support Agreement, the Shareholders have agreed with the Company to vote their shares of capital stock of the Company in favor of the Merger Agreement and transactions contemplated therein, including the Business Combination, 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. The Shareholders have also agreed to waive their dissenters rights under Nevada law with respect to the Business Combination, not to solicit or support any corporate transaction that constitutes or could reasonably be expected to constitute, an alternative to the Business Combination, and not to sell, transfer, assign or otherwise take any action that would have the effect of preventing or disabling the Shareholders from voting their shares of the Company in accordance with its obligations under the Voting Support Agreement. The Voting Support Agreement automatically terminates upon the termination of the Merger Agreement or upon the mutual agreement of the parties to the Voting Support Agreement. The Shareholders are not receiving any compensation or other renumeration in exchange for their entering into the Voting and Support Agreement.
NOTE 15. SUBSEQUENT EVENTS
Management has evaluated all subsequent events from December 31, 2020, 2021, through March 29, 2021, 28, 2022, the date the consolidated financial statements were issued. Management concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.