UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 20172019
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
(Exact Name of Registrant as Specified in Its Charter)
Commission file number 000-27763
Nevada | 88-0397234 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
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1518 Willow Lawn Drive, Richmond, VA | 23230 | |
(Address of Principal Executive Offices) | (Zip Code) |
(434) 382-7366336-7737
(Issuer’sRegistrant’s telephone number, including area code)
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 pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). [X] Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
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Non-accelerated filer |
| [X] | Smaller reporting company | [X] | ||
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Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined byin Rule 12b-2 of the Exchange Act). ☐ Yes [X] No
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 |
The number of shares outstanding of the issuer’s Common Stock, $0.001$0.125 par value, as of November 9, 20178, 2019 is 282,830,163.2,544,776.
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Notes to Unaudited Condensed Consolidated Financial Statements | 10 | ||
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds | 35 | ||
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CAUTIONARY STATEMENT REGARDINGREGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including, without limitation, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan”“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'sCompany’s business and prospects, including changes in economic and market conditions, acceptance of the Company’s products, maintenance of strategic alliances, and other factors discussed elsewhere in this Form 10-Q, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors.
PART I. FINANCIALFINANCIAL INFORMATION
SITESTAR CORPORATION
And Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
|
| September 30, 2017 (unaudited) |
|
| December 31, 2016 |
| September 30, 2019 | December 31, 2018 (audited) | ||||||||
Assets |
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Current Assets |
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Cash and cash equivalents |
| $ | 151,867 |
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| $ | 2,607,370 |
| $ | 161,275 | $ | 435,726 | ||||
Accounts receivable, net |
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| 481,123 |
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| 212,751 |
| 35,646 | 58,263 | ||||||
Investments, at fair value |
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| 133,989 |
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| 599,500 |
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Inventory | — | 120,940 | ||||||||||||||
Other current assets |
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| 135,248 |
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| 2,554,861 |
| 30,164 | 95,095 | ||||||
Current assets - held for sale | 135,589 | 232,363 | ||||||||||||||
Total current assets |
|
| 902,227 |
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|
| 5,974,482 |
| 362,674 | 942,387 | ||||||
Long-term Assets | ||||||||||||||||
Real estate - held for investment, net | 440,575 | 9,492,877 | ||||||||||||||
Real estate - held for resale |
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| 337,481 |
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| 1,399,280 |
| 971,633 | 2,318,912 | ||||||
Real estate - held for investment, net |
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| 502,368 |
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| 506,011 |
| ||||||||
Property and equipment, net |
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| 371,497 |
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| 143,464 |
| 10,522 | 1,019,742 | ||||||
Property and equipment - held for resale | — | 73,212 | ||||||||||||||
Goodwill, net |
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| 1,991,994 |
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| 1,553,745 |
| 212,445 | 212,445 | ||||||
Note receivable |
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| 226,000 |
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|
| — |
| 191,160 | 169,406 | ||||||
Non-current investments, at fair value |
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| 12,067,983 |
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|
| — |
| ||||||||
Long-term investments, at fair value or net asset value | 9,522,236 | 8,915,238 | ||||||||||||||
Lease right-of-use assets | 59,563 | — | ||||||||||||||
Other assets |
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| 69,625 |
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| 264,250 |
| 74,135 | 74,664 | ||||||
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| 15,566,948 |
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|
| 3,866,750 |
| ||||||||
Long-term assets - held for sale | — | 1,300,569 | ||||||||||||||
Total long-term assets | 11,482,269 | 23,577,065 | ||||||||||||||
Total assets |
| $ | 16,469,175 |
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| $ | 9,841,232 |
| $ | 11,844,943 | $ | 24,519,452 | ||||
Liabilities and Stockholders' Equity |
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Current Liabilities |
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Deferred revenue |
| $ | 239,748 |
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| $ | 214,898 |
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Notes payable, current |
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| 449,363 |
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| 240,000 |
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Accounts payable |
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| 180,692 |
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| 77,918 |
| $ | 66,584 | $ | 165,495 | ||||
Accrued bonus |
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| 110,000 |
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| 51,855 |
| 33,966 | 90,444 | ||||||
Accrued expenses |
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| 108,294 |
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| 71,532 |
| 17,737 | 112,983 | ||||||
Accrued interest | — | 134,623 | ||||||||||||||
Deferred revenue | 217,811 | 210,212 | ||||||||||||||
Lease liability, current | 61,402 | — | ||||||||||||||
Notes payable, current | 311,292 | 1,002,965 | ||||||||||||||
Other current liabilities - held for sale | 262,031 | 317,487 | ||||||||||||||
Total current liabilities |
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| 1,088,097 |
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| 656,203 |
| 970,823 | 2,034,209 | ||||||
Notes payable |
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| 209,272 |
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| 25,000 |
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Long-term Liabilities | ||||||||||||||||
Notes payable, net of current portion | 502,525 | 6,518,854 | ||||||||||||||
Other long-term liabilities - held for sale | — | 50,738 | ||||||||||||||
Total long-term liabilities |
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| 209,272 |
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| 25,000 |
| 502,525 | 6,569,592 | ||||||
Total liabilities |
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| 1,297,369 |
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| 681,203 |
| 1,473,348 | 8,603,801 | ||||||
Stockholders' equity |
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Stockholders' Equity | ||||||||||||||||
Preferred stock, $0.001 par value, 30,000,000 shares authorized; none issued |
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| — |
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| — |
| — | — | ||||||
Common stock, $0.001 par value, 300,000,000 shares authorized; 294,526,821 and 204,152,616 shares issued; 282,830,163 and 190,230,163 shares outstanding |
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| 294,527 |
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| 204,152 |
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Common stock, $0.125 par value, 2,800,000 shares authorized; 2,625,282 shares issued; 2,544,776 shares outstanding | 328,160 | 328,160 | ||||||||||||||
Additional paid-in-capital |
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| 23,538,493 |
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| 19,096,858 |
| 27,718,308 | 27,718,308 | ||||||
Treasury stock, at cost, 11,696,658 and 13,822,453 common shares |
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| (544,571 | ) |
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| (637,561 | ) | ||||||||
Accumulated other comprehensive (loss) income |
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| (16,928 | ) |
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| 39,343 |
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Treasury stock, at cost, 80,506 common shares | (511,901 | ) | (511,901 | ) | ||||||||||||
Accumulated other comprehensive income | 3,054 | 3,054 | ||||||||||||||
Accumulated deficit |
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| (8,099,715 | ) |
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| (9,542,763 | ) | (17,166,026 | ) | (11,621,970 | ) | ||||
Total stockholders' equity attributable to Sitestar Corporation Stockholders |
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| 15,171,806 |
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| 9,160,029 |
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Noncontrolling interest in consolidated subsidiaries |
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| — |
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| — |
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Total stockholders' equity |
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| 15,171,806 |
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| 9,160,029 |
| 10,371,595 | 15,915,651 | ||||||
Total liabilities and stockholders' equity |
| $ | 16,469,175 |
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| $ | 9,841,232 |
| $ | 11,844,943 | $ | 24,519,452 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
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| For the three months ended September 30 |
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| For the nine months ended September 30 |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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Revenues - internet operations |
| $ | 314,202 |
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| $ | 355,384 |
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| $ | 977,629 |
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| $ | 1,068,283 |
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Revenues - HVAC |
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| 1,332,239 |
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| 906,910 |
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| 3,526,913 |
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| 939,932 |
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Revenues - real estate |
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| 324,044 |
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| 404,923 |
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| 1,216,190 |
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| 1,992,371 |
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Revenues - asset management |
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| 715,598 |
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| — |
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| 1,320,808 |
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|
| — |
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Total revenues |
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| 2,686,083 |
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| 1,667,217 |
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| 7,041,540 |
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| 4,000,586 |
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Cost of revenues - internet operations |
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| 81,144 |
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| 70,290 |
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| 237,098 |
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| 290,043 |
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Cost of revenues - HVAC |
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| 875,991 |
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| 619,881 |
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| 2,307,902 |
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| 633,053 |
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Cost of revenues - real estate |
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| 306,537 |
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| 402,285 |
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| 1,264,602 |
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| 1,918,603 |
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Cost of revenues - asset management |
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| — |
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| — |
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| — |
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| — |
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Total cost of revenues |
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| 1,263,672 |
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| 1,092,456 |
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| 3,809,602 |
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| 2,841,699 |
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Gross profit - internet operations |
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| 233,058 |
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| 285,094 |
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| 740,531 |
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| 778,240 |
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Gross profit - HVAC |
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| 456,248 |
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| 287,029 |
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| 1,219,011 |
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| 306,879 |
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Gross profit (loss) - real estate |
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| 17,507 |
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| 2,638 |
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| (48,412 | ) |
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| 73,768 |
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Gross profit - asset management |
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| 715,598 |
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|
| — |
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| 1,320,808 |
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| — |
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Total gross profit |
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| 1,422,411 |
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| 574,761 |
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| 3,231,938 |
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| 1,158,887 |
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Selling, general and administrative expenses |
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| 606,378 |
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| 634,338 |
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| 1,909,650 |
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| 1,152,715 |
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Total operating expenses |
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| 606,378 |
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| 634,338 |
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| 1,909,650 |
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|
| 1,152,715 |
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Income from operations |
|
| 816,033 |
|
|
| (59,577 | ) |
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| 1,322,288 |
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|
| 6,172 |
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Other (expense) income, net |
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| (8,877 | ) |
|
| 93,779 |
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| 120,760 |
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| 98,350 |
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Income before income taxes |
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| 807,156 |
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| 34,202 |
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| 1,443,048 |
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| 104,522 |
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Income tax benefit (expense) |
|
| — |
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|
| — |
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|
| — |
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|
| — |
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Net income |
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| 807,156 |
|
|
| 34,202 |
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|
| 1,443,048 |
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|
| 104,522 |
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Less: net income attributable to the noncontrolling interest |
|
| — |
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| 14,102 |
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|
| — |
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| 16,955 |
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Net income attributable to Sitestar Corporation stockholders |
| $ | 807,156 |
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| $ | 20,100 |
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| $ | 1,443,048 |
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| $ | 87,567 |
|
Earnings per share, basic and diluted |
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| 0.00 |
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| 0.00 |
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|
| 0.01 |
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| 0.00 |
|
Weighted average number of shares, basic and diluted |
|
| 282,830,163 |
|
|
| 122,794,725 |
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| 272,315,145 |
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| 92,644,688 |
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For the three months ended September 30 | For the nine months ended September 30 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues - asset management | $ | (159,085 | ) | $ | 330,112 | $ | 1,127,075 | $ | 522,044 | |||||||
Revenues - real estate | 19,359 | 220,600 | 420,464 | 592,583 | ||||||||||||
Revenues - internet operations | 265,171 | 288,312 | 805,990 | 887,635 | ||||||||||||
Revenues - other | — | 20,934 | 212,631 | 121,031 | ||||||||||||
Total revenues | 125,445 | 859,958 | 2,566,160 | 2,123,293 | ||||||||||||
Cost of revenues - real estate | 30,753 | 107,527 | 358,126 | 342,449 | ||||||||||||
Cost of revenues - internet operations | 83,517 | 86,658 | 254,373 | 238,385 | ||||||||||||
Cost of revenues - other | — | 31,800 | — | 156,731 | ||||||||||||
Total cost of revenues | 114,270 | 225,985 | 612,499 | 737,565 | ||||||||||||
Gross profit (loss) - asset management | (159,085 | ) | 330,112 | 1,127,075 | 522,044 | |||||||||||
Gross profit - real estate | (11,394 | ) | 113,073 | 62,338 | 250,134 | |||||||||||
Gross profit - internet operations | 181,654 | 201,654 | 551,617 | 649,250 | ||||||||||||
Gross profit - other | — | (10,866 | ) | 212,631 | (35,700 | ) | ||||||||||
Total gross profit | 11,175 | 633,973 | 1,953,661 | 1,385,728 | ||||||||||||
Selling, general and administrative expenses | 278,171 | 572,301 | 1,444,507 | 1,776,036 | ||||||||||||
Income (loss) from operations | (266,996 | ) | 61,672 | 509,154 | (390,308 | ) | ||||||||||
Loss on sale of subsidiary | — | — | (3,519,053 | ) | — | |||||||||||
Impairment expense | (3,040 | ) | — | (228,405 | ) | — | ||||||||||
Interest expense | (13,473 | ) | (147,412 | ) | (293,202 | ) | (390,526 | ) | ||||||||
Other income, net | 28,420 | 23,468 | 67,362 | 94,940 | ||||||||||||
Total other income (loss) | 11,907 | (123,944 | ) | (3,973,298 | ) | (295,586 | ) | |||||||||
Income (loss) from continuing operations before income taxes | (255,089 | ) | (62,272 | ) | (3,464,144 | ) | (685,894 | ) | ||||||||
Income tax benefit | — | — | — | — | ||||||||||||
Income (loss) from continuing operations | (255,089 | ) | (62,272 | ) | (3,464,144 | ) | (685,894 | ) | ||||||||
Income (loss) from discontinued operations, net of taxes | (31,151 | ) | 83,254 | (1,441,156 | ) | (62,518 | ) | |||||||||
Net income (loss) | (286,240 | ) | 20,982 | (4,905,300 | ) | (748,412 | ) | |||||||||
Less: net income (loss) attributable to the noncontrolling interest | — | (8,601 | ) | — | (380,437 | ) | ||||||||||
Net income (loss) attributable to Enterprise Diversified, Inc. stockholders | $ | (286,240 | ) | $ | 29,583 | $ | (4,905,300 | ) | $ | (367,975 | ) | |||||
Earnings (loss) per share from continuing operations, basic and diluted | (0.11 | ) | 0.00 | (1.93 | ) | (0.15 | ) | |||||||||
Earnings (loss) per share from discontinued operations, basic and diluted | (0.01 | ) | 0.03 | (0.57 | ) | 0.00 | ||||||||||
Weighted average number of shares, basic | 2,544,776 | 2,540,416 | 2,544,776 | 2,433,340 | ||||||||||||
Weighted average number of shares, diluted | 2,544,776 | 2,540,416 | 2,544,776 | 2,433,340 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| For the three months ended September 30 |
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| For the nine months ended September 30 |
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| 2017 |
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| 2016 |
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| 2017 |
|
| 2016 |
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Net income |
| $ | 807,156 |
|
| $ | 34,202 |
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| $ | 1,443,048 |
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| $ | 104,522 |
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Other comprehensive income (loss), net of tax: |
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|
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|
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|
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Change in foreign currency translation adjustments |
|
| — |
|
|
| (12 | ) |
|
| — |
|
|
| (103 | ) |
Change in unrealized gains related to available-for-sale securities: |
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|
|
|
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Change in fair value of available-for-sale securities |
|
| 10,068 |
|
|
| (21,694 | ) |
|
| 20,664 |
|
|
| 28,657 |
|
Adjustment for net (gains)/losses realized and included in net income |
|
| — |
|
|
| — |
|
|
| (76,935 | ) |
|
| — |
|
Total change in unrealized gains/losses on available-for-sale securities |
|
| 10,068 |
|
|
| (21,694 | ) |
|
| (56,271 | ) |
|
| 28,657 |
|
Other comprehensive income (loss) |
|
| 10,068 |
|
|
| (21,706 | ) |
|
| (56,271 | ) |
|
| 28,554 |
|
Comprehensive income |
|
| 817,224 |
|
|
| 12,496 |
|
|
| 1,386,777 |
|
|
| 133,076 |
|
Less: comprehensive income attributable to the non controlling interest |
|
| — |
|
|
| 14,102 |
|
|
| — |
|
|
| 16,955 |
|
Comprehensive income (loss) attributable to Sitestar Corporation stockholders |
| $ | 817,224 |
|
| $ | (1,606 | ) |
| $ | 1,386,777 |
|
| $ | 116,121 |
|
For the three months ended September 30 | For the nine months ended September 30 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income (loss) | $ | (286,240 | ) | $ | 20,982 | $ | (4,905,300 | ) | $ | (748,412 | ) | |||||
Other comprehensive income (loss), net of tax: | — | — | — | — | ||||||||||||
Comprehensive income (loss) | (286,240 | ) | 20,982 | (4,905,300 | ) | (748,412 | ) | |||||||||
Less: comprehensive loss attributable to the noncontrolling interest | — | (8,601 | ) | — | (380,437 | ) | ||||||||||
Comprehensive income (loss) attributable to Enterprise Diversified, Inc. stockholders | $ | (286,240 | ) | $ | 29,583 | $ | (4,905,300 | ) | $ | (367,975 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||
Common | Paid In | Treasury | Comprehensive | Accumulated | Noncontrolling | Stockholders' | ||||||||||||||||||||||||||
Stock | Amount | Capital | Stock | Income | Deficit | Interest | Equity | |||||||||||||||||||||||||
Balance December 31, 2018 | 2,544,776 | $ | 328,160 | $ | 27,718,308 | $ | (511,901 | ) | $ | 3,054 | $ | (11,621,970 | ) | $ | — | $ | 15,915,651 | |||||||||||||||
Net income (loss) | — | — | — | — | — | 373,769 | — | 373,769 | ||||||||||||||||||||||||
Balance March 31, 2019 | 2,544,776 | 328,160 | 27,718,308 | (511,901 | ) | 3,054 | (11,248,201 | ) | — | 16,289,420 | ||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (4,992,836 | ) | — | (4,992,836 | ) | ||||||||||||||||||||||
Effects of deconsolidation | — | — | — | — | — | (638,749 | ) | — | (638,749 | ) | ||||||||||||||||||||||
Balance June 30, 2019 | 2,544,776 | 328,160 | 27,718,308 | (511,901 | ) | 3,054 | (16,879,786 | ) | — | 10,657,835 | ||||||||||||||||||||||
Net income (loss) | (286,240 | ) | (286,240 | ) | ||||||||||||||||||||||||||||
Balance September 30, 2019 | 2,544,776 | $ | 328,160 | $ | 27,718,308 | $ | (511,901 | ) | $ | 3,054 | $ | (17,166,026 | ) | $ | — | $ | 10,371,595 |
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| Total |
| ||
|
| Common |
|
|
|
|
|
| Additional |
|
| Treasury |
|
| Other Comprehensive |
|
| Accumulated |
|
| Noncontrolling |
|
| Stockholders' |
| |||||||
|
| Stock |
|
| Amount |
|
| Paid In Capital |
|
| Stock |
|
| Income |
|
| Deficit |
|
| Interest |
|
| Equity |
| ||||||||
Balance December 31, 2015 |
|
| 77,404,010 |
|
| $ | 91,327 |
|
| $ | 13,728,989 |
|
| $ | (637,561 | ) |
| $ | 3,415 |
|
| $ | (9,435,125 | ) |
| $ | — |
|
| $ | 3,751,045 |
|
Opening balance adjustment |
|
| 100,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance December 31, 2015 (restated) |
|
| 77,504,010 |
|
|
| 91,327 |
|
|
| 13,728,989 |
|
|
| (637,561 | ) |
|
| 3,415 |
|
|
| (9,435,125 | ) |
|
| — |
|
|
| 3,751,045 |
|
Net (loss) income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (107,638 | ) |
|
| — |
|
|
| (107,638 | ) |
Contributed capital |
|
| 112,826,153 |
|
|
| 112,825 |
|
|
| 5,367,869 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,480,694 |
|
Loss on foreign exchange translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (361 | ) |
|
| — |
|
|
| — |
|
|
| (361 | ) |
Unrealized gain on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 36,289 |
|
|
| — |
|
|
| — |
|
|
| 36,289 |
|
Balance December 31, 2016 |
|
| 190,330,163 |
|
|
| 204,152 |
|
|
| 19,096,858 |
|
|
| (637,561 | ) |
|
| 39,343 |
|
|
| (9,542,763 | ) |
|
| — |
|
|
| 9,160,029 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,443,048 |
|
|
| — |
|
|
| 1,443,048 |
|
Contributed capital |
|
| 92,500,000 |
|
|
| 92,500 |
|
|
| 4,532,500 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,625,000 |
|
Unrealized (loss) gain on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (56,271 | ) |
|
| — |
|
|
| — |
|
|
| (56,271 | ) |
Adjustment for share cancellation |
|
| — |
|
|
| (2,125 | ) |
|
| (90,865 | ) |
|
| 92,990 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance September 30, 2017 |
|
| 282,830,163 |
|
| $ | 294,527 |
|
| $ | 23,538,493 |
|
| $ | (544,571 | ) |
| $ | (16,928 | ) |
| $ | (8,099,715 | ) |
| $ | — |
|
| $ | 15,171,806 |
|
Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||
Common | Paid In | Treasury | Comprehensive | Accumulated | Noncontrolling | Stockholders' | ||||||||||||||||||||||||||
Stock | Amount | Capital | Stock | Income | Deficit | Interest | Equity | |||||||||||||||||||||||||
Balance December 31, 2017 | 2,262,672 | $ | 294,527 | $ | 23,538,493 | $ | (544,571 | ) | $ | 3,054 | $ | (7,400,848 | ) | $ | — | $ | 15,890,655 | |||||||||||||||
Net income (loss) | — | — | — | — | — | (143,372 | ) | (87,559 | ) | (230,931 | ) | |||||||||||||||||||||
Contributed capital | 120,601 | 15,075 | 1,643,196 | — | — | — | — | 1,658,271 | ||||||||||||||||||||||||
Initial accounting of VIE | — | — | — | — | — | — | 4,047,623 | 4,047,623 | ||||||||||||||||||||||||
Net equity distribution for asset acquisition | — | — | — | — | — | — | (2,158,270 | ) | (2,158,270 | ) | ||||||||||||||||||||||
Balance March 31, 2018 | 2,383,273 | 309,602 | 25,181,689 | (544,571 | ) | 3,054 | (7,544,220 | ) | 1,801,794 | 19,207,348 | ||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (254,183 | ) | (142,388 | ) | (396,571 | ) | |||||||||||||||||||||
Contributed capital | 148,159 | 18,520 | 2,389,044 | — | — | — | — | 2,407,564 | ||||||||||||||||||||||||
Net equity distribution for asset acquisition | — | — | — | — | — | — | (1,861,643 | ) | (1,861,643 | ) | ||||||||||||||||||||||
Adjustment for rounding of reverse stock split | — | 4 | (4 | ) | — | — | — | — | — | |||||||||||||||||||||||
Balance June 30, 2018 | 2,531,432 | 328,126 | 27,570,729 | (544,571 | ) | 3,054 | (7,798,403 | ) | (202,237 | ) | 19,356,698 | |||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 29,583 | (8,601 | ) | 20,982 | |||||||||||||||||||||||
Sale of treasury stock | 13,068 | — | 147,613 | 32,670 | — | — | — | 180,283 | ||||||||||||||||||||||||
Adjustment for rounding of reverse stock split | 276 | 34 | (34 | ) | — | — | — | — | — | |||||||||||||||||||||||
Balance September 30, 2018 | 2,544,776 | $ | 328,160 | $ | 27,718,308 | $ | (511,901 | ) | $ | 3,054 | $ | (7,768,820 | ) | $ | (210,838 | ) | $ | 19,557,963 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 20172019 and 20162018
|
| 2017 |
|
| 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 1,443,048 |
|
| $ | 104,522 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization |
|
| — |
|
|
| 55 |
|
Depreciation |
|
| 82,309 |
|
|
| 23,236 |
|
Loss (gain) on sale of real estate |
|
| 42,938 |
|
|
| (213,454 | ) |
Gain on sale of available-for-sale securities |
|
| (76,935 | ) |
|
| — |
|
Gain on non-current investments |
|
| (1,317,983 | ) |
|
| — |
|
Loss on disposal of vehicle |
|
| 8,110 |
|
|
| — |
|
Bad debt expense |
|
| 15,281 |
|
|
| 4,383 |
|
Real estate valuation adjustment |
|
| 58,742 |
|
|
| — |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| (283,653 | ) |
|
| (247,828 | ) |
Other current assets |
|
| (80,387 | ) |
|
| (21,888 | ) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Deferred revenue |
|
| 24,850 |
|
|
| (5,088 | ) |
Accounts payable |
|
| 102,774 |
|
|
| 47,037 |
|
Accrued expenses |
|
| 94,907 |
|
|
| 94,313 |
|
Net cash flows from operating activities |
|
| 114,001 |
|
|
| (214,712 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of real estate held for sale |
|
| 683,832 |
|
|
| 1,568,699 |
|
Proceeds from sale of real estate held for investment |
|
| 137,475 |
|
|
| 344,850 |
|
Improvements to real estate held for sale |
|
| (100,596 | ) |
|
| (180,708 | ) |
Improvements to real estate held for investment |
|
| — |
|
|
| (17,542 | ) |
Proceeds from sale of marketable securities |
|
| 486,175 |
|
|
| — |
|
Purchases of marketable securities |
|
| — |
|
|
| (2,486,403 | ) |
Proceeds from sale of domain names |
|
| 200,000 |
|
|
| — |
|
Purchase of domain names |
|
| — |
|
|
| (56,250 | ) |
Purchase of property and equipment |
|
| (34,392 | ) |
|
| — |
|
Capitalized loan fees |
|
| (5,375 | ) |
|
| — |
|
Subsidiary acquisitions |
|
| (8,711,772 | ) |
|
| (1,238,436 | ) |
Net cash flows from investing activities |
|
| (7,344,653 | ) |
|
| (2,065,790 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Principal payments on note payable |
|
| (277,088 | ) |
|
| (90,000 | ) |
Proceeds from notes payable |
|
| 427,237 |
|
|
| — |
|
Proceeds from issuance of common stock |
|
| 4,625,000 |
|
|
| 3,854,719 |
|
Net cash flows from financing activities |
|
| 4,775,149 |
|
|
| 3,764,719 |
|
Net increase (decrease) in cash |
|
| (2,455,503 | ) |
|
| 1,484,217 |
|
Cash and cash equivalents at beginning of the period |
|
| 2,607,370 |
|
|
| 184,731 |
|
Cash and cash equivalents at end of the period |
| $ | 151,867 |
|
| $ | 1,668,948 |
|
2019 | 2018 | |||||||
Cash flows (used in) from operating activities: | ||||||||
Net income (loss) from continuing operations | $ | (3,464,144 | ) | $ | (685,894 | ) | ||
Net income (loss) from discontinued operations | (1,441,156 | ) | (62,518 | ) | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
Deconsolidation of assets and liabilities from sale of subsidiary | (149,425 | ) | — | |||||
Loss on sale of subsidiary | 3,519,053 | — | ||||||
Impairment of long-term assets | 170,858 | 64,038 | ||||||
Depreciation and amortization | 155,708 | 203,186 | ||||||
Gain on long-term investments | (1,218,399 | ) | (493,480 | ) | ||||
Bad debt expense | 95,756 | 24,306 | ||||||
Collection of operating notes receivable | — | 226,000 | ||||||
(Gain) loss on sale of real estate | (16,932 | ) | 11,931 | |||||
(Gain) loss on disposal of property and equipment | 11,938 | — | ||||||
(Increase) decrease in: | ||||||||
Accounts receivable, net | 100,545 | (63,991 | ) | |||||
Notes receivable | (11,754 | ) | — | |||||
Other current assets | (11,589 | ) | (96,900 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts payable | (60,107 | ) | 93,491 | |||||
Accrued expenses | (113,240 | ) | (80,840 | ) | ||||
Deferred revenue | 7,599 | (6,701 | ) | |||||
Accrued interest | 103,909 | 167,899 | ||||||
Net cash flows (used in) continuing operations | (880,224 | ) | (636,955 | ) | ||||
Net cash flows (used in) from discontinued operations | (269,458 | ) | 38,987 | |||||
Net cash flows (used in) operating activities | (1,149,682 | ) | (597,968 | ) | ||||
Cash flows from (used in) investing activities: | ||||||||
Proceeds from sale of investments | 32,904 | — | ||||||
Proceeds from maturity of investments | 681,381 | — | ||||||
Purchases of investments | (49,038 | ) | (17,162 | ) | ||||
Net purchases and sales of real estate | 772,850 | (202,975 | ) | |||||
Improvements to real estate | (105,186 | ) | (1,911,635 | ) | ||||
Proceeds from sale of subsidiary | 100,000 | — | ||||||
Proceeds from sale of inventory | 4,160 | — | ||||||
Proceeds from sale of property and equipment | — | — | ||||||
Proceeds from sale of domain names | — | 29,163 | ||||||
Issuance of line of credit | (10,000 | ) | — | |||||
Issuance of notes receivable | — | (165,444 | ) | |||||
Purchases of property and equipment | — | (949,743 | ) | |||||
Subsidiary acquisitions | — | (552,644 | ) | |||||
Net cash flows (used in) from continuing operations | 1,427,071 | (3,770,440 | ) | |||||
Net cash flows (used in) from discontinued operations | — | (7,717 | ) | |||||
Net cash flows from (used in) from investing activities | 1,427,071 | (3,778,157 | ) | |||||
Cash flows from financing activities: | ||||||||
Principal payments on note payable | (819,195 | ) | (267,117 | ) | ||||
Proceeds from notes payable | 300,000 | 1,721,573 | ||||||
Proceeds from issuance of common stock | — | 180,283 | ||||||
Capitalized loan fees | — | (10,591 | ) | |||||
Net cash flows (used in) from continuing operations | (519,195 | ) | 1,624,148 | |||||
Net cash flows (used in) from discontinued operations | (32,645 | ) | (260,489 | ) | ||||
Net cash flows (used in) from financing activities | (551,840 | ) | 1,363,659 | |||||
Net increase (decrease) in cash | (274,451 | ) | (3,012,466 | ) | ||||
Cash and cash equivalents at beginning of the period | 435,726 | 3,297,059 | ||||||
Cash and cash equivalents at end of the period | $ | 161,275 | $ | 284,593 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended September 30, 20172019 and 20162018
|
| 2017 |
|
| 2016 |
| ||
Non-cash supplemental information: |
|
|
|
|
|
|
|
|
Unrealized loss (gain) on marketable securities reported as other comprehensive income |
| $ | 56,271 |
|
| $ | 28,657 |
|
Issuance of note receivable on sale of real estate held for sale |
| $ | 226,000 |
|
| $ | — |
|
Transfer of real estate held for resale to real estate held for investment |
| $ | 125,000 |
|
| $ | — |
|
Transfer of real estate held for investment to real estate held for resale |
| $ | — |
|
| $ | 152,003 |
|
Transfer of other current assets to investments |
| $ | 2,500,000 |
|
| $ | — |
|
Adjustments to goodwill due to carryback obligations |
| $ | 29,504 |
|
| $ | — |
|
HVAC equipment acquired through capital leases and debt obligations |
| $ | 172,990 |
|
| $ | — |
|
HVAC acquisitions through notes payable |
| $ | 100,000 |
|
| $ | 240,000 |
|
2019 | 2018 | |||||||
Non-cash and other supplemental information: | ||||||||
Transfer of property, plant and equipment to held for resale | $ | 822,829 | $ | — | ||||
Transfer of land to held for investment | $ | 145,000 | $ | 145,406 | ||||
Transfer of real estate held for investment to held for resale | $ | 121,558 | $ | — | ||||
Effects of adoption of new lease guidance | $ | 59,563 | $ | — | ||||
Continuing operations cash paid for interest | $ | 174,951 | $ | 254,028 | ||||
Discontinued operations cash paid for interest | $ | 7,754 | $ | 12,112 | ||||
Effects of adoption of new lease guidance on discontinued operations | $ | 58,127 | $ | — | ||||
Assets and debt consolidated as part of subsidiary acquisition | $ | — | $ | 1,006,600 | ||||
Assumption of debt in subsidiary acquisition | $ | — | $ | 4,565,277 | ||||
Asset acquisition equity activity | $ | — | $ | 4,065,834 | ||||
Real estate held for investment acquired through debt obligations | $ | — | $ | 1,383,339 | ||||
Equipment acquired through debt obligations of discontinued operations | $ | — | $ | 60,752 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Lines of Business
Sitestar Corporation
Enterprise Diversified, Inc. (formerly White Dove Systems, Inc., and then Interfoods Consolidated, Inc.), and then Sitestar Corporation) was incorporated in Nevada on December 17, 1992. On July 26, 1999,June 1, 2018, the Company restatedamended its Articles of Incorporation to change the name of the Company to “Sitestar Corporation.“Enterprise Diversified, Inc.” Unless the context otherwise requires, and when used in this Report, the “Company,” “Sitestar,“ENDI,” “we,” “our”“our,” or “us” refers to Sitestar CorporationEnterprise Diversified, Inc. and its subsidiaries.
The
During the period ended September 30, 2019, the Company operatesoperated through five reportable segments: Corporate, Internet Operations, HVACsegments: Asset Management Operations, Real Estate Operations, Internet Operations, Home Services Operations, and Asset ManagementOther Operations. Other Operations include corporate operations and investment activity that is not considered to be one of our primary lines of business. As of January 1, 2019, legacy real estate operations, previously reported under Other Operations, are now being reported under the Real Estate Operations segment. As of the period ended September 30, 2019, and for all prior periods presented, home services operations are reported as discontinued operations. The management of the Company also continually reviews various investment opportunities, including those in other lines of business.
Corporate
The corporate segment includes any revenue or expenses derived from corporate office operationsNote Regarding Recent Transactions
On May 24, 2019, as well as expenses related to public company reporting,per the oversight of subsidiaries, and other items that affect the overall Company.
Internet Operations
The Company operates its internet segment through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
HVAC Operations
The Company operates its HVAC segment through HVAC Value Fund, LLC. HVAC Value Fund is focused on the acquisition and management of HVAC and plumbing companies in Arizona and throughout the Southwest United States. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016,May 28, 2019, the Company along with JNJ Investments,completed an asset sale transaction of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC an unaffiliated third party and member of(formerly known as HVAC Value Fund, LLC), to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and conveyed all of the subsidiary’s personal property and customer lists and records, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed the subsidiary’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s customer accounts going forward. No cash consideration was exchanged in the transaction. As consideration for the transaction, Rooter Hero will pay monthly royalties for the next 60 months following the closing, calculated on the basis of revenue received from the customer accounts sold. Under such royalty arrangements, the Company will receive 7.5% of monthly revenue generated from qualified sales during the first year, and 5% of monthly revenue during years two through five. The operations of Specialty Contracting Group, LLC organizedare considered a component of, and launched this subsidiarythe sale reflects a major strategic shift in, the Company’s business. As such, Specialty Contracting Group, LLC historical operations are now classified as “discontinued operations” in the Company’s financial statements. See Note 3 for more information.
Additionally, on June 13, 2016. Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has27, 2019, as per the ability to earn profit interests. Under the operating agreement, the Company has first claim to a portion of net income, with the remainder being allocated between the Company and JNJ Investments. JNJ Investments shall also be subject to a Loss Carryforward limitation in the event of a net loss.
As of September 30, 2017, HVAC Value Fund had closed on six acquisitions for an aggregate purchase price of $2.02 million which includes estimated earn outs of approximately $350,000. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016July 3, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and further described above,agreed to assume full responsibility for the purposemanagement and operation of HVAC Value Fund is to acquire HVACMt Melrose and plumbing businesses. Accordingly, these six acquisitions were madeits real estate portfolio. The Company has retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest. While the operations of Mt Melrose, LLC are considered a component of the Company’s business, the sale did not represent a major strategic shift in the ordinary courseCompany’s business. While we deconsolidated the operations of business and consistent with the customs and practices (including with respectMt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest, Mt Melrose, LLC’s historical operations continue to nature, scope, magnitude, quantity, frequency and contemplated purpose) of HVAC Value Fund, and, in turn, the Company.
Real Estate Operations
Sitestar created a wholly-owned real estate subsidiary on July 10, 2017 named EDI Real Estate, LLC. Through EDI Real Estate, LLC, Sitestar owns a real estate investment portfolio that includes 10 residential properties, vacant land, and one commercial property. Our real estate portfolio is primarily focusedbe reflected as “continuing operations” in the Roanoke and Lynchburg areas of Virginia. The portfolio includes single family homes that are currently rented and managed through a third-party property manager, as well as vacant properties being prepared or currently listedCompany’s financial statements. See Note 4 for sale.
10
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)more information.
Note Regarding Historic Consolidation of Old Mt. Melrose
Previously, as of the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018, the Company had determined that Old Mt. Melrose (as defined below) was a “variable interest entity” because the seller’s equity interests in Old Mt. Melrose were not effective in determining whether the seller or New Mt Melrose (as defined below) had a controlling financial interest, and that New Mt Melrose’s rights under the Cash Flow Agreement were deemed to be variable interests in Old Mt. Melrose. As its primary beneficiary, New Mt Melrose previously consolidated Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose had been allocated accordingly on the unaudited condensed consolidated balance sheets for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018.
However, as of November 1, 2018, pursuant to a certain Termination of Master Real Estate Asset Purchase Agreement and Cash Flow Agreement, New Mt Melrose no longer had a controlling financial interest in Old Mt. Melrose and was no longer considered Old Mt. Melrose’s primary beneficiary. Consequently, as of November 1, 2018, the Company no longer consolidates the assets and liabilities of Old Mt. Melrose, and the balance of noncontrolling interest as of December 31, 2018, is appropriately reflected as zero on the accompanying unaudited consolidated statements of stockholders’ equity. See Note 5 for additional information.
Asset Management Operations
Sitestar
Enterprise Diversified, Inc. created a wholly-ownedwholly owned asset management subsidiary on October 10, 2016, named Willow Oak Asset Management, LLC (“Willow Oak”). As previously reported in our Current Reports on Form 8-K filed withWhile not considered an investment company under the SEC on September 19,Investment Company Act of 1940, Willow Oak follows specialized accounting guidance for investment companies.
In 2016, and December 30, 2016, respectively, the Company agreed to make a seed investment totaling $10 million through Willow Oak in Alluvial Fund, LP, an unrelateda private investment partnership that was launched on January 1, 2017. Under a side letter agreement between Willow Oak, Alluvial Fund, and the operating agreement included in the Form 8-K, the Companyfund’s general partner, Willow Oak may not make anya full withdrawal from its Capital Account until its Capital Account balance exceeds $50,000,000 and any partial withdrawal may not reduce the Capital Account balance below $50,000,000. Additionally, a full withdrawal shall not be permittedcapital account prior to a date five years after the effective date of the accompanying Side Letter. As previously reported in our Current Reports on Form 8-K filed with the SECside letter agreement. However, on January 26,1, 2018, pursuant to an amendment to the side letter agreement dated December 15, 2017, the Company also committedcaused $3.0 million to make a capital contributionbe withdrawn from Alluvial Fund in order to Huckleberry Real Estatepartially fund the Company’s acquisition of real estate from Old Mt. Melrose (as defined below). Alluvial Fund II, LLCfocuses on investing in what it believes are deeply mispriced securities in the aggregate amount of $750,000. UnderUnited States and abroad. Alluvial Fund focuses on small companies, thinly traded issues, and special situations, seeking to identify value that its management believes the operating agreement included in the Form 8-K, the Managing Member shall have sole discretion regarding the amounts and timing of Distributionsmarket has yet to Members. The asset management segment did not produce revenue in 2016. Any expenses incurred in 2016 were allocated to the corporate segment. Starting January 1, 2017, all revenue earned and expenses incurred by this segment were allocated as such.recognize.
Willow Oak signed a fee share agreement on May 11, 2017 with Lizard Head, LLC, the general partner of Bridge Reid Fund I, LP, an unrelated private investment partnership. Under the agreement, Willow Oak became a special limited partner to Bridge Reid, providing fund advisory services to Bridge Reid in exchange for payments equal to 33% of the management fees accrued quarterly by the general partner and 33% of the incentive fees accrued annually, on investors who become limited partners after May 11, 2017.
Willow Oak signed a fee share agreement on June 13, 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, who is also a Sitestaran ENDI director. Under the Agreement, Willow Oak and Coolidge areis the sole membersmember 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.agreement and Willow Oak receives 50% of all performance and management fees earned by the general partner. Bonhoeffer Fund utilizes a value-oriented approach to invest in undervalued businesses worldwide that show evidence of compound mispricings, miscategorized business classifications, or are in a state of distress and/or transition exhibiting recurring revenue.
On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our chairman 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, and liaison to third-party service providers. As consideration for the services, Arquitos pays Willow Oak a fixed fee.
Real Estate Operations
ENDI created a wholly owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), on January 10, 2018, which acquired 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 on December 10, 2017, with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, formerly an ENDI director. On January 10, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a first acquisition from Old Mt. Melrose of 44 residential and other income-producing real properties located in Lexington, Kentucky. On June 29, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a second acquisition from Old Mt. Melrose of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky. The Company accounted for the first and second purchases of properties as an asset acquisition (consisting of a concentrated group of similar identifiable assets, including land, buildings, improvements, and in-place leases). On June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose, LLC. The Company deconsolidated the operations of New Mt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest. See Notes 4 and 5 for more information.
Pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose, the parties mutually agreed to terminate the Master Real Estate Asset Purchase Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the Master Real Estate Asset Purchase Agreement. A third-party property manager was engaged as of November 1, 2018, to manage certain of the real properties previously acquired. Management determined that it was necessary to right-size New Mt Melrose operations to reduce its level of high-interest debt. Accordingly, New Mt Melrose began to immediately sell various properties with an emphasis on selling properties that have high-interest-rate loans and do not produce income.
In an effort to expedite the optimization of the Mt Melrose portfolio, management determined that a dedicated operator was necessary to manage the subsidiary. On June 27, 2019, as per the Current Report on Form 8-K filed with the SEC on July 3, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio. The Company has retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest. See Note 4 for more information.
ENDI created a wholly owned real estate subsidiary on July 10, 2017, named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of September 30, 2019, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes nine residential properties and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily focused in the Roanoke area of Virginia. The portfolio includes single-family homes, both rented and vacant, that are managed by a third-party property management company.
Internet Operations
The Company operates its internet 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.
Home Services Operations
Prior to May 24, 2019, the Company operated its home services segment through its wholly owned subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona. The Company, along with JNJ Investments, LLC, an unaffiliated third party, organized and launched Specialty Contracting Group, LLC on June 13, 2016. On May 18, 2018, the Company terminated its operating agreement with JNJ Investments, LLC, dated June 13, 2016.
As of December 31, 2017, Specialty Contracting Group had closed on six acquisitions for an aggregate purchase price of approximately $2.02 million, which included earn-outs of approximately $325,000. For all six acquisitions, all asset allocations made by management were final and all earn-outs had been paid in full as of December 31, 2018.
On May 24, 2019, as per the Current Report on Form 8-K filed with the SEC on May 28, 2019, the Company completed an asset sale transaction of its Home Services Operations to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and conveyed all of Specialty Contracting Group’s personal property and customer lists and records, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed the subsidiary’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s customer accounts going forward. No cash consideration was exchanged in the transaction. As consideration for the transaction, Rooter Hero will pay monthly royalties for the next sixty months following the closing, calculated on the basis of revenue received from the customer accounts sold. Under such royalty arrangements, the Company will receive 7.5% of monthly revenue generated from qualified sales during the first year, and 5% of monthly revenue during years two through five. See Note 3 for more information.
Other Operations
Other operations include investment activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main business units that comprise other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying unaudited consolidated financial statements.
Huckleberry Real Estate Fund Investment
On January 30, 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. On May 14, 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly owned subsidiary of the Company. Under the fund’s operating agreement, the fund’s managing member shall have sole discretion regarding the amounts and timing of any distributions to the members of the fund. The carrying value of this investment included in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2019, and December 31, 2018, is $0 and $468,750, respectively. The decrease in carrying value period over period was due to return of capital that was received prior to June 30, 2019. During the quarter ended March 31, 2019, a gain of $212,631 was recognized as revenue through other segments on the accompanying unaudited condensed consolidated statements of operations.
Triad DIP Investors Investment
On August 24, 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 originally contributed $100,000. Triad Guaranty, Inc. exited bankruptcy on April 27, 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 on May 18, 2018. The terms of the promissory note provide for interest in the amount of 10% annually, a repayment date no later than April 29, 2020, and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. Accordingly, on April 28, 2018, the Company was issued warrants to purchase 450,000 shares for $0.01 per share. Due to a lack of available financial data, these warrants have not been valued on the accompanying unaudited condensed consolidated balance sheets.
Corporate Operations
Corporate operations include any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-ownedwholly owned subsidiaries including: Sitestar.net, Inc., HVAC Value Fund, LLC, EDI Real Estate, LLC, and Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Mt Melrose, LLC (“New Mt Melrose”) prior to the loss of control resulting from the sale of 65% of the equity in New Mt. Melrose on June 27, 2019 (see Note 4), Specialty Contracting Group, LLC prior to its asset sale on May 24, 2019 (see Note 3), Sitestar.net, Inc., and EDI Real Estate, LLC. Additionally, during the period from January 10, 2018, through September 30, 2018, the accompanying unaudited consolidated financial statements include the accounts of Old Mt. Melrose, which was, at that time, determined to be a variable interest entity.
All intercompany accounts and transactions have been eliminated. eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim consolidated financial statements are unaudited. These unaudited condensedinterim consolidated financial statements have been prepared by Sitestar Corporation, pursuant toin accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC).(“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The information furnishedDecember 31, 2018 consolidated balance sheet included herein reflects all adjustments (consistingwas derived from audited consolidated financial statements as of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods.that date. Certain information and footnote disclosuresdisclosure normally presentincluded in annual consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP)GAAP have been omitted pursuant to suchinstructions, rules, and regulations. Theseregulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements should beare read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2016 includedpreviously filed in the Company’sour Annual Report on Form 10-K filed withfor the SEC on March 24, 2017 (the “2016 Form 10-K”)year ended December 31, 2018. TheIn the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2019 and the results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.2019 and 2018.
Use of Estimates
In accordance with Accounting Principles Generally AcceptedGAAP in the United State 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.
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and accounts receivable. The Company places its cash with high qualityhigh-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.
Investments
Cash and Cash Equivalents
The Company currently holds and makes investments in marketable securities through its corporate operations. Marketable securities held are classifieddefines cash equivalents as available-for-sale based on management’s intent. Unrealized gains (losses) are categorized as other comprehensive income. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as earned on the ex-dividend date. all highly liquid instruments purchased with a maturity of three months or less.
Investments
The Company holds additional non-currentvarious recurring investments through its asset management operations. Non-currentand real estate segments. Additionally, one-time investments can be held and reported under the Company’s “other” segment. Assets held through these segments do not qualifyhave a readily determinable value as available-for-sale securities. The classification of these investments is assessed upon purchase and reassessed at each reporting period. Non-currentare not publicly traded, nor do they have published sales records. These investments are remeasured to fair value on a recurring basis. See Note 6 for more information.
As of September 30, 2019, the Company also holds its remaining 35% investment in Mt Melrose, LLC through its real estate segment. The Company has determined that its remaining equity investment does not have a readily determinable fair value and will account for the investment at cost, less any impairment, as adjusted for changes resulting from observable price changes. When fair value becomes determinable, the investment will be marked to market at the endfair value on a periodic basis.
Accounts Receivable
The Company grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is charged off tothe 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 chargedwritten off tofrom the allowance for doubtful accounts when an account or invoice is individually determined to be uncollectible.
Sales
Real estate segment rental accounts are typically paid by tenants via cash or check no later than the fifth of internet services, whichthe 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 automatically processed via credit cardprovided 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 bank account drafts, have beenvacate the Company’s highest exposure to collection risk. 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 Companyinternet segment attempts to reduce thisthe risk of non-collection by including a late paymentlate-payment fee and a manual processing paymentmanual-processing-payment fee to customer accounts. Receivables more than ninety90 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.
Sales
Inventory
Inventory is carried on the balance sheet at either the lower of HVAC servicespurchased cost or net realizable value. Inventory is evaluated periodically for any obsolete or damaged stock.
Property and Equipment
Property and equipment are typically paid via credit card or check upon completionrecorded 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 service. Sales that are not collected upon completion are generally to existing and repeat customers who have established a track recordoperations. Depreciation is computed using the straight-line method based on the estimated useful lives for each of timely payments. Historically, HVAC has not encountered issues with collectability of customer accounts. Accounts receivable more than 60 days are considered past due.the following asset classifications:
Note Receivable
Equipment (in years) | 7 | |||
Building improvements (in years) | 15 | |||
Buildings (in years) | 27.5 |
The Company currently holds a note receivable from the sale of a real estate property to a third-party. This note is long term in nature and no collection issues are expected.
Impairment of Long-LivedLong-lived Assets
In accordance with GAAP, long-lived
Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
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 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. Long-lived assets to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell.
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based on estimated useful lives from three to seven years for equipment and vehicles, fifteen years for building improvements, and thirty-nine years for buildings. Assets held through capital leases are amortized over the life of the related lease. 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.
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 does not amortize goodwill. The Company tests its goodwill annually during the fourth quarteras of its fiscal yearDecember 31st or when events and circumstances indicate that those assets might not be recoverable.
Impairment testing of goodwill is required at the reporting unitreporting-unit level (operating segment or one level below operating segment) and. The impairment test involves a two-step process.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 two-step 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 first step of the impairment test involves comparing the estimated fair values of the Company’s reporting units with the reporting units’ carrying amounts, including goodwill. The Company estimates the fair value of its reporting units using discounted expected future cash flows. If
During the carrying amount of the reporting unit exceeds its fair value, a second step is performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill,year ended December 31, 2018, an impairment loss is recognized in an amount equal to the excess.
The Company performs an analysis of its goodwill as of December 31 annually, or whenever events or changes in circumstances indicate that the assigned values may no longer be appropriate. No impairment was recorded in 2016. During the quarter ended September 30, 2017, a net downward adjustment of $14,504$754,958 was maderecorded to goodwill held through the HVAChome services segment. This adjustmentAs noted above, various qualitative factors were considered before preparing a quantitative analysis. Qualitatively, a general underperformance of previously acquired home services businesses triggered the quantitative analysis. As part of the quantitative analysis, management estimated the fair value of the home services segment at the enterprise level using a discounted cash flow approach. The results were then tested for reasonableness using a market approach by analyzing comparable firms’ growth rates, margins, capital expenditures, and working capital requirements. During the period ended June 30, 2019, an additional impairment of the remaining home services segment goodwill of $1,024,592 was recognized and reported as a component of the resultloss on the sale of two previous sellers not meeting or exceeding the operational terms of carryback notes that were previously included as consideration for these acquisitions. See Note 3 for more information.Specialty Contracting Group, LLC’s assets.
Other intangible assets consist of customer relationships, developed technology and software, trade names, and other assets acquired in conjunction with the purchases of businesses or purchases of assets from other companies. As of September 30, 2017, these intangible assets have been fully amortized. The remaining intangible
Intangible assets consist of domain names attributed to the internet segment.segment. The Company owns 228 domain names, of which 106 are available for sale. These domains are valued at historical cost. When management determines 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 management’s own analysisinternal and an independent third-party valuation specialist’s appraisal.external appraisals. Intangible assets determined to have definite lives are amortized over their estimated useful lives.
The Company owns 634 domain names,
Real Estate
Real estate properties held for resale are carried at the lower of cost or fair market 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 and tax assessed values.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.
During the year ended December 31, 2018, an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for resale” from “held for investment” as part of a portfolio redirection. See Note 5 for more information. Recent tax assessments, valuations, and local real estate agents were used to value this portfolio of held-for-sale properties.
During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management in 1998. During the period ended September 30, 2019, impairment adjustments of $42,407 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect pending sales activity as of the period ended September 30, 2019.
Real estate properties held for investment are carried at the cost basis plus additional expensescosts where the expensecost extended the life of or added value to the property. Otherwise, the expensecost is not capitalized and is charged to expense.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 period ended September 30, 2019, two residential rental properties within the EDI Real Estate, LLC portfolio were transferred from “held for investment” to “held for resale” based on management’s intents.
Accrued Bonus
Accrued bonuses represent performance basedperformance-based incentives that have not yet been paid. The bonus structures are a preapproved part of a formal employment agreement. These bonus amounts are accrued when earned and able to be estimated, and are paid annually after financial records are finalized.
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Other accrued expenses represent incurred but not yet paidnot-yet-paid expenses from Sales and Use taxes for ISP services,payroll accruals, vacation accruals, professional fees, and other payroll accruals.accrued taxes.
Deferred Revenue
Deferred revenue represents collectionsLeases
On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases” (Topic 842), which requires an entity to recognize assets and liabilities arising from customers in advancea lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. Accordingly, at the inception of internet servicesa contract we determine if the arrangement is, or contains, a lease. Right-of-use (“ROU”) assets represent our right to be performed. Revenueuse an underlying asset for the lease term; and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Rent expense is recognized on a straight-line basis over the lease term; for finance leases, a portion of rent expense is classified as interest expense.
The Company has made certain accounting policy elections whereby it (i) does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12 months or less) and (ii) combines lease and non-lease elements of their leases. In the unaudited condensed consolidated balance sheets: lease ROU assets are included in other long-term assets; financed lease assets are included in property and equipment; and lease liabilities are included in other current and long-term liabilities.
Revenue Recognition
Asset Management and Other Investment Revenue
The Company earns revenue from investments through various fee share and consulting agreements, as well as through realized and unrealized gains and losses, which may result in negative period or quarterly revenues. Management fees earned are recorded and paid out monthly and are included in revenue on the accompanying unaudited condensed consolidated statements of operations. Performance fees earned are accrued monthly, paid out annually, and are also included in revenue on the accompanying unaudited condensed consolidated statements of operations. Consulting fees are billed out monthly after services have been performed. As long-term investments do not qualify as available-for-sale securities, 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 serviceof adjustment.
Management notes that the structure of these arrangements leaves a very low possibility for nonperformance. While the amount of revenue varies from month to month, collectability is provided.very high. No contract assets or liabilities are recognized or incurred.
Additionally, the Company earns revenue from direct investments in various funds, primarily the Alluvial Fund. Due to the nature of the investment, the asset management segment recognizes revenue using specialized accounting guidance for investment companies. This results in the unrealized gains and losses within the fund being recognized as revenue, or a decrease in revenue, on the accompanying unaudited condensed consolidated statements of operations.
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 Recognitionfrom 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 OperationsRevenue
The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.
The Company generates revenue in its internet segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, third-party software as a reseller, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), web hosting, and additional related services to consumers and businesses. Customers may also subscribe to web hosting plans to include email access and storage. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.
HVAC Operations
TheHome Services Revenue
Prior to the sale on May 24, 2019, the Company performsperformed HVAC and plumbing service repairs and installsinstalled HVAC units for its customers.customers through its home services segment. Revenue iswas recognized at the timeupon completion of the installation or service call. Sales arewere adjusted for any returns or allowances. A return or allowance situation would arise based on the two-year workmanship warranty that typically conveysconveyed with the installation of a new unit. There iswas also a two-year assurance warranty on newly installed parts and equipment that iswas honored by the manufacturer. If an installation iswas performed over multiple days, then it iswas accounted for using work in processwork-in-process (WIP) accounting in accordance with GAAP. 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 appropriately recognized over the life of the agreement.
If payment iswas received prior to contract completion, then the amount of revenue attributable to the unperformed work was designated as unearned revenue. If payment was not provided in advance or at the time of service or installation completion, then the amount due is designatedwas recognized as revenue and as an account receivable.
Real Estate Operations
Management acknowledged that these performance obligations were recognized at the completion of each contract, whether it be at a point in time or over a period of time. 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. No contract assets or liabilities were recognized or incurred.
Deferred Revenue
Deferred revenue represents collections from customers in advance of internet or real estate held for resale is recognized upon closing of the sale, 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 chargedrental services to cost of revenue at that time.
Rental revenue from real estate held for investmentbe performed. Revenue is recognized when it is due, generally on the first of each month or at another regular period agreed upon between the Company and the tenant. If payments are not provided in a timely manner, the amount due is designated as an account receivable. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. Tenants generally provide a security deposit at the time of possession. This deposit is held separate 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.
Asset Management Operations
The Company earns revenue from investments held through the asset management segment through various fee share agreements as well as through realized and unrealized gains and losses. Management fees earned are recorded and paid out monthly and are included in revenue on the condensed consolidated statement of income. Performance fees earned are accrued monthly, paid out yearly and are also included in revenue on the condensed consolidated statement of income. As non-current investments do not quality as available-for-sale securities, non-current 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.
14
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)performance obligations have been met.
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 basesbasis 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.enactment, inclusive of the recent tax reform act. The most recent three tax years, fiscal years endingended December 31, 2018, December 31, 2017, and December 31, 2016, December 31, 2015, and December 31, 2014, are open to potential IRS examination.
Income Per Share
The basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similarsimilarly to basic income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company has no potentially dilutive securities.
Other Comprehensive Income
Other comprehensive income is the result of two items: the previous impact of foreign currency translations related to the Company’s operations in Canada, and the unrealized gains (losses) from marketable securities classified as available-for-sale.Canada.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU No. 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is required to adoptadopted this standard inguidance, effective January 1, 2019, using the first quarterfollowing practical expedients:
● | the Company did not reassess if any expired or existing contracts are leases or contain leases; | |
● | the Company did not reassess the classification of any expired or existing leases; and | |
● | the Company did not reassess whether the classification of existing costs associated with expired or existing leases should be classified as initial direct costs. |
Additionally, the Company made ongoing accounting policy elections whereby it (i) does not recognize right-of-use (ROU) assets or lease liabilities for short-term leases (those with original terms of 2019. The Company is currently evaluating12 months or less) and (ii) combines lease and non-lease elements of our leases.
Upon adoption of the effect this standard will have on its Consolidated Financial Statements.
In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU No. 2014-09 provides comprehensivenew guidance on January 1, 2019, the recognitionCompany recorded an ROU asset of revenue from customers arising from the transferapproximately $184,000 (net of goodsexisting deferred rent liability) and services. The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures. Early adoption is not permitted. The Company is requiredrecognized a lease liability of approximately $186,000, with no resulting cumulative effect adjustment to adopt this standard in the first quarter of 2018.retained earnings.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes” (Topic 740). The ASU provides guidance related to the classifications of deferred income tax assets and liabilities into current and noncurrent amounts in a classified statement of financial position. Deferred tax assets and liabilities are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax assets and liabilities that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. The Company is required to adopt this standard in the first quarter of 2018. The initial application of the standard is not expected to significantly impact the Company.
In January 2016, the FASB issued ASU No. 2016-01 "Financial“Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities."” Although the ASU retains many of the current requirements for financial instruments, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017; earlier adoption iswas permitted under certain criteria. The Company is currently evaluatingadopted this standard in the impactfirst quarter of 2018. Subsequent to the adoption of this guidance on its consolidated financial condition, results of operations, and cash flows.
15
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)standard, the Company's investments in equity securities are not carried at fair value with change in fair value being reflected in income.
In January 2017, the FASB issued ASU No. 2017-04 “Simplifying2017-01 “Clarifying the Test for Goodwill Impairment”Definition of a Business” (Topic 805). The guidance eliminatesamendments in the requirementupdate provide a screen to calculate “implied fair valuedetermine when a set is not a business. If the screen is not met, the amendments in the update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and (2) remove the evaluation of goodwill” (previously Step 2) fromwhether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. Lastly, the goodwill impairment analysis. Companies are required to calculateamendments in the impairment of their goodwill based solely onupdate narrow the excessdefinition of the carrying value ofterm output so that the reporting unit over its fair value (previously Step 1). Companiesterm is consistent with how outputs are still allowed to perform an initial qualitative assessmentdescribed in Topic 606. The ASU is effective for a reporting unit to determine if the quantitative assessment is necessary. This guidance is required to be adopted in fiscal yearsannual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early2017; earlier adoption is permitted.was permitted under certain criteria. The Company will adoptadopted this ASU on January 1, 2018. While this ASU did not have a material effect on the Company’s financial statements on the date of adoption, the Company did follow the new guidance in determining that its acquisition of properties from Old Mt. Melrose in January 2018 was an asset acquisition. See Note 5 for its 2017 goodwill impairment analysis.additional information.
NOTE 3. BUSINESS CONBINATIONS OR ACQUISITIONSHOME SERVICES SUBSIDIARY ASSET SALE
As of June 17, 2016 and June 30, 2016, HVAC Value Fund completed
On May 24, 2019, as per the 100% acquisition of two HVAC subsidiaries. As of July 8, 2016, HVAC Value Fund completed the 100% acquisition of a third subsidiary. As of July 15, 2016, HVAC Value Fund completed the 100% acquisition of a fourth subsidiary. As of October 1, 2016, HVAC Value Fund completed the 100% acquisition of a fifth subsidiary. As of January 20, 2017, HVAC Value Fund completed the 100% acquisition of a sixth subsidiary. These subsidiaries engage in providing heating, ventilation, plumbing, and air conditioning services, installation, and repairs to residential and commercial customers. As a result of the acquisitions, HVAC Value Fund offers heating, ventilation, plumbing, and air conditioning services to customers in Arizona and the surrounding southwestern states. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016 and described further herein,May 28, 2019, the purposeCompany completed an asset sale transaction of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, isLLC), to acquire HVACan unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and plumbing businesses. Accordingly, these six acquisitions were madeconveyed all of the subsidiary’s personal property and customer lists and records, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed the subsidiary’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s customer accounts going forward. No cash consideration was exchanged in the ordinary coursetransaction. As consideration for the transaction, Rooter Hero will pay monthly royalties for the next sixty months following the closing, calculated on the basis of businessrevenue received from the customer accounts sold. Under such royalty arrangements, the Company will receive 7.5% of monthly revenue generated from qualified sales during the first year, and consistent with5% of monthly revenue during years two through five.
On a pro forma basis, the business acquired on January 20, 2017 contributed revenuesalso resulted in unpredictable cash flows, which created immediate and significant needs for additional Company resources. Due to the past performance of $225,112, net incomethe company, management determined that additional resources should not be allocated to this subsidiary.
The decision was made to HVAC Value Fundexit the business during the quarter ended June 30, 2019. The operations of Specialty Contracting Group, LLC are considered a component of, and the sale reflects a strategic shift in, the Company’s business. As such, Specialty Contracting Group, LLC's historical operations are now classified as discontinued operations in the Company’s financial statements. The asset sale of the home services subsidiary resulted in an initial pre-tax loss of $1,158,733, which has been included on the accompanying unaudited condensed consolidated statements of operations in discontinued operations and under the home services segment for the nine-month period ended September 30, 2017.2019. The following unaudited pro forma summaries present consolidated information of HVAC Value Fund as ifloss from discontinued operations has been determined using the current and previous year business combinations had occurred on January 1 of each respective fiscal year. Some“Loss Recovery Approach.” This approach requires that the contingent consideration, the future royalties to be received, be valued at the lesser of the pro forma informationamount 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 be most prudent not to attempt to value the contingent consideration. This resulted in assigning the contingent consideration a current valuation of zero. As the royalties are deemed probable, they will be subsequently recognized as a “gain from discontinued operations” on the statements of operations and will offset, or recover, the initial loss recorded. Accordingly, during the period ended September 30, 2019, an offsetting $12,183 gain on discontinued operations is included within the $31,151 reported loss on discontinued operations.
September 30, 2019 | December 31, 2018 | |||||||
Cash and cash equivalents | $ | 39,222 | $ | 23,954 | ||||
Accounts receivable | 18,693 | 136,785 | ||||||
Other current assets | 77,674 | 71,624 | ||||||
Total current assets - held for resale | 135,589 | 232,363 | ||||||
Property and equipment, net | — | 270,603 | ||||||
Goodwill | — | 1,024,591 | ||||||
Other long-term assets | — | 5,375 | ||||||
Total long-term assets - held for resale | — | 1,300,569 | ||||||
Accounts payable | 104,475 | 75,208 | ||||||
Accrued expenses | — | 81,213 | ||||||
Other current liabilities | 57,556 | 2,368 | ||||||
Notes payable, current | 100,000 | 158,698 | ||||||
Total current liabilities - held for resale | 262,031 | 317,487 | ||||||
Notes payable, long term - held for resale | — | 50,738 | ||||||
Total long-term liabilities - held for resale | $ | — | $ | 50,738 |
A breakdown of the initial recorded pre-tax loss as reported on the accompanying unaudited condensed consolidated statements of operations as of the nine-month period ended September 30, 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 | 1,024,592 | |||
Total carrying value of assets sold | 1,255,170 | |||
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 | $ | 1,158,733 |
A reconciliation of discontinued operations as reported on the accompanying unaudited condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2019, and September 30, 2018, is as follows:
For the three months ended September 30 | For the nine months ended September 30 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | $ | — | $ | 995,867 | $ | 675,963 | $ | 2,641,373 | ||||||||
Cost of revenues | — | 608,767 | 427,215 | 1,731,750 | ||||||||||||
Gross profit | — | 387,100 | 248,748 | 909,623 | ||||||||||||
Selling, general, and administrative expenses | 25,342 | 302,233 | 515,156 | 972,118 | ||||||||||||
Recovery (loss) on sale of subsidiary | 12,183 | — | (1,134,810 | ) | — | |||||||||||
Other income (expense), net | (17,992 | ) | (1,613 | ) | (39,938 | ) | (12 | ) | ||||||||
Net income (loss) reported as discontinued operations | $ | (31,151 | ) | $ | 83,254 | $ | (1,441,156 | ) | $ | (62,507 | ) |
NOTE 4. SALE OF CONTROLLING INTEREST IN REAL ESTATE SUBSIDIARY
Transaction
On June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC, a Delaware limited liability company (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio. The Company has retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest.
In connection with the transaction, the Company and Woodmont entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC dated June 27, 2019 (the “A&R LLC Agreement”). The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members. The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont is designated as the sole manager. In addition, the Company has expressly agreed to a three-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose; and with respect to any matters requiring a vote of the members, the Company will vote with (i.e., the same as) Woodmont. This arrangement allows the Company to maintain its passive management structure, while still owning a significant portion of the partnership.
Under the terms of the A&R LLC Agreement, distributions of cash, from whatever source, may be made to the members at such times, and in such amounts, as the manager determines; provided, however, that any such distributions will be made in accordance with the following priorities: (i) distribution of amounts up to a cumulative total of $2,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement); (ii) then, distribution of cumulative amounts in excess of $2,000,000 and up to $3,000,000 will be made 67% to the Company and 33% to Woodmont; and (iii) thereafter, distribution of cumulative amounts in excess of $3,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement).
Deconsolidation Due to Transfer of Control
Prior to the sale of Mt Melrose interest, the Company owed 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 revised LLC operating agreement, and the aforementioned standstill agreement, Woodmont is the sole “manager” responsible for all management and operating decisions of Mt Melrose. Management determined that as of June 30, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose and will no longer consolidate Mt Melrose. All activity prior to the deconsolidation event has been included on the accompanying unaudited 2015 financial information, and pro forma informationcondensed consolidated statements of operations for the period ended September 30, 2017 was calculated using annualized,2019, in continuing operations, and under the real estate segment. As of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited 2016 information,condensed consolidated balance sheets. The Company’s 35% membership interest in Mt Melrose will now be accounted for as informationan investment in the equity of Mt Melrose in the Company’s reported financial statements.
Accounting for Remaining Mt Melrose Investment
The Company adopted ASU 2016-01 effective January 1, 2018. ASU 2016-01 generally requires entities to measure equity investments at fair value and recognize any changes in fair value in net income. However, entities are able to elect a measurement alternative for equity investments that do not have a “readily determinable fair value.” The Company has determined that its equity investment in Mt Melrose does not have a readily determinable fair value at the time of deconsolidation. Under this alternative, the Company will measure the Mt Melrose investment at its implied fair value and assess it for impairment at each reporting date, or more often if indication of a potential impairment exists. When fair value becomes determinable, from observable price changes in orderly transactions, the Company’s investment will be marked to fair value on a periodic basis. Future dividends will be recognized as income and returns of capital recognized as a reduction in the Company’s investment when and if received.
Using the $100,000 transaction price for a 65% interest in Mt Melrose, LLC, the implied value of the retained 35% interest is $53,846. This amount is included under the long-term investment amount on the accompanying unaudited condensed consolidated balance sheet for the period ended September 30, 2019.
Effective on June 27, 2019, the Company recognized a loss on the partial sale of Mt Melrose in the amount of $3,519,053, which has been reported separately on the accompanying unaudited condensed consolidated statements of operations in continuing operations and under the other segment for the nine-month period ended September 30, 2019. The amount of the loss is based upon the value of the Company’s remaining interest in the subsidiary, less the Company’s previous carrying value of the subsidiary.
NOTE 5. ASSET ACQUISITION OF REAL ESTATE PROPERTIES
Historical Acquisition
On December 10, 2017, the Company entered into a certain Master Real Estate Asset Purchase Agreement (the “Purchase Agreement”) with Mt. Melrose, LLC, a Kentucky limited liability company (“Old Mt. Melrose”), that owned and managed a portfolio of residential real estate in Lexington, Kentucky. Old Mt. Melrose was owned by Jeffrey I. Moore (“Moore”), a former Company director.
On January 10, 2018, the Company’s wholly owned subsidiary, Mt Melrose, LLC (“New Mt Melrose”), completed the first acquisition of 44 residential and other income-producing real properties under the Purchase Agreement for a total purchase price of $3,956,389, which consisted of $500,000 in cash, 120,602 shares of common stock valued at $1,658,270, and the assumption of $1,798,119 of existing debt.
The Company accounted for the initial purchase of properties as an asset acquisition (consisting of a concentrated group of similarly identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01. The total purchase price, along with approximately $45,250 of transaction expenses, was allocated to the land and buildings acquired based on their relative fair values, as follows:
Land | $ | 800,328 | ||
Buildings | 3,201,311 | |||
Total Value | $ | 4,001,639 |
On June 29, 2018, New Mt Melrose completed the second acquisition of 69 residential and other income-producing real properties under the Purchase Agreement for a total purchase price of $5,174,722, which consisted of 148,158 shares of common stock valued at $2,407,564, and the assumption of $2,767,158 of existing debt.
The Company accounted for the second purchase of properties as an asset acquisition (consisting of a concentrated group of similarly identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01. The total purchase price, along with approximately $7,394 of transaction expenses, was allocated to the land and buildings acquired based on their relative fair values, as follows:
Land | $ | 1,036,423 | ||
Buildings | 4,145,692 | |||
Total Value | $ | 5,182,115 |
Asreal properties previously reported in ouracquired. Management determined that it was necessary to right-size New Mt Melrose operations to reduce its level of high-interest debt. Accordingly, New Mt Melrose began to immediately sell various properties with an emphasis on selling properties that have high-interest-rate loans and do not produce income.
Pro forma nine months ended September 30, 2017 (unaudited) |
| With January 20, 2017 acquisition |
| |
Revenue |
| $ | 3,602,740 |
|
Earnings |
| $ | 104,179 |
|
Pro forma year ended December 31, 2016 (unaudited) |
| With 2016 acquisitions (in aggregate) |
|
| With 2017 acquisition |
|
| Consolidated pro forma year ended December 31, 2016 (unaudited) |
| |||
Revenue |
| $ | 3,781,167 |
|
| $ | 1,456,685 |
|
| $ | 5,237,852 |
|
Earnings |
| $ | 517,495 |
|
| $ | 295,886 |
|
| $ | 813,381 |
|
HVAC Value Fund did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.
16
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following tables summarize the consideration transferred to acquire each subsidiary and the amounts of identified assets acquired and liabilities assumed at the acquisition dates. Management continues to evaluate the valuation components of each acquisition on an ongoing basis.
June 2016 acquisitions (in aggregate) |
|
|
|
|
|
| Fair value of consideration transferred: |
| |
Cash |
| $ | 160,000 |
|
Notes payable |
| $ | 65,000 |
|
|
| Fair value of assets acquired: |
| |
Vehicles |
| $ | 35,000 |
|
Equipment |
| $ | 13,700 |
|
Total identifiable assets |
| $ | 48,700 |
|
Goodwill |
| $ | 176,300 |
|
Subsequent adjustments |
| $ | (15,000 | ) |
Adjusted goodwill |
| $ | 161,300 |
|
July 8, 2016 acquisition |
|
|
|
|
|
| Fair value of consideration transferred: |
| |
Cash |
| $ | 375,000 |
|
Notes payable |
| $ | 100,000 |
|
|
| Fair value of assets acquired: |
| |
Goodwill |
| $ | 475,000 |
|
Subsequent adjustments |
| $ | 3,276 |
|
Adjusted goodwill |
| $ | 478,276 |
|
July 15, 2016 acquisition |
|
|
|
|
|
| Fair value of consideration transferred: |
| |
Cash |
| $ | 340,000 |
|
Notes payable |
| $ | 100,000 |
|
|
| Fair value of assets acquired: |
| |
Vehicles |
| $ | 40,000 |
|
Total identifiable assets |
| $ | 40,000 |
|
Goodwill |
| $ | 400,000 |
|
Subsequent adjustments |
| $ | (17,780 | ) |
Adjusted goodwill |
| $ | 382,220 |
|
October 1, 2016 acquisition |
|
|
|
|
|
| Fair value of consideration transferred: |
| |
Cash |
| $ | 315,000 |
|
|
| Preliminary fair value of assets acquired: |
| |
Vehicles |
| $ | 20,000 |
|
Equipment |
| $ | 5,000 |
|
Total identifiable assets |
| $ | 25,000 |
|
Goodwill |
| $ | 290,000 |
|
January 20, 2017 acquisition |
|
|
|
|
|
| Fair value of consideration transferred: |
| |
Cash |
| $ | 460,000 |
|
Notes payable |
| $ | 100,000 |
|
Assumed obligations |
| $ | 169,255 |
|
|
| Preliminary fair value of assets acquired: |
| |
Equipment |
| $ | 119,684 |
|
Leased Vehicles |
| $ | 143,590 |
|
Total identifiable assets |
| $ | 263,274 |
|
Goodwill |
| $ | 465,981 |
|
17
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The goodwill amounts noted above are attributable to the workforce of the acquired subsidiaries and the significant efficiencies expected to arise after acquisition by HVAC Value Fund. All of the goodwill was assigned to the HVAC segment.Historical Variable Interests
As previously mentioned in Note 2of the quarterly periods ended March 31, 2018, June 30, 2018, and as noted above, in the July 8, 2016 and July 15, 2016 acquisitions a net downward adjustment of $14,504 was made to goodwill during the quarter ended September 30, 2017. Part of2018, the considerations paid for the July 2016 acquisitions were seller carryback notes. The notes were payableCompany had determined that Old Mt. Melrose was a “variable interest entity” because Moore’s equity interests in full on July 11, 2017 and July 30, 2017 and were contingent on certain revenue targets and other operational conditions. As of the quarter ended September 30, 2017 it was determined by management that the revenue targets for the July 8, 2016 acquisition were exceeded, therefore, the payable amount increased and total consideration paid for the acquisition increased. As of the quarter ended September 30, 2017 it was also determined by management that the revenue targets for the July 15, 2016 acquisitionOld Mt. Melrose were not met, therefore, the payable amount decreasedeffective in determining whether Moore or New Mt Melrose had a controlling financial interest, and total consideration paid for the acquisition decreased.
As previously reported in the quarterly reported filed with the SEC on August 8, 2017 and as noted above, in the June 2016 acquisitions,that New Mt Melrose’s rights under a downward adjustment of $15,000 was made to goodwill during the quarter ended June 30, 2017. Part of the consideration paid for the June 2016 acquisitions was a $15,000 seller carryback note. The note was payable in full on July 1, 2017 contingent on certain revenue targets and other operational conditions. As of the quarter ended June 30, 2017 it was determined by managementCash Flow Agreement that neither the revenue targets nor the operational conditions had been met, therefore,entered into on January 10, 2018 with Old Mt. Melrose (the “Cash Flow Agreement”) were deemed to be variable interests in Old Mt. Melrose. At those times, the payableCompany had determined that New Mt Melrose was no longer duethe primary beneficiary of Old Mt. Melrose since substantially all of Old Mt. Melrose’s activities had been conducted on behalf of New Mt Melrose and total consideration paid forbecause New Mt Melrose may have been required to provide financial support to Old Mt. Melrose under the acquisition decreased.
The purchase price allocations above are deemed preliminary for valuation purposes, and management may adjust the allocations for the one year period allotted. Allocations for the October 1, 2016 andCash Flow Agreement. As its primary beneficiary, New Mt Melrose previously consolidated Old Mt. Melrose’s financial results beginning on January 20, 2017 acquisitions remain open for subsequent management adjustment.
NOTE 4. INVESTMENTS
The Company holds various investments through Willow Oak, LLC through its asset management segment and may invest excess cash in marketable securities through its corporate segment.10, 2018. The fair values of the Company’s marketable securities are determined in accordance with GAAP, with fair value being defined asassets and liabilities of Old Mt. Melrose had been allocated accordingly on the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The following available-for-sale securities are re-measured to fair value on a recurring basisunaudited condensed consolidated balance sheets for the quarterly periods ended March 31, 2018, June 30, 2018, and are valued using Level 1 inputs, which are quoted prices (unadjusted) for identical assets in active markets.
|
| Cost Basis |
|
| Unrealized Gain |
|
| Unrealized Loss |
|
| Fair Value |
| ||||
September 30, 2017 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock available for sale |
| $ | 153,970 |
|
| $ | — |
|
| $ | (19,981 | ) |
| $ | 133,989 |
|
|
| Cost Basis |
|
| Unrealized Gain |
|
| Unrealized Loss |
|
| Fair Value |
| ||||
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock available for sale |
| $ | 563,211 |
|
| $ | 36,289 |
|
| $ | — |
|
| $ | 599,500 |
|
In the three and nine month period ended September 30, 2017,2018. As noted on the Company recognized no realized gains or losses and $76,935unaudited condensed consolidated statements of realized gains, respectively. This comparesstockholders’ equity during those quarters, the ending noncontrolling interest allocated to the three and nine monthvariable interest entity represented the remaining equity held by Old Mt. Melrose for properties that had not yet been acquired under the Purchase Agreement. The ending noncontrolling interest amount also included any income or loss generated by the remaining properties that were to be acquired under the Purchase Agreement for the period ended September 30, 2016 when the Company recognized no realized gains or losses.then ended.
Non-currentAs of November 1, 2018, pursuant to the termination of the Master Real Estate Asset Purchase Agreement and Cash Flow Agreement noted above, New Mt Melrose was no longer the primary beneficiary of Old Mt. Melrose. Additionally, as of November 1, 2018, New Mt Melrose no longer had a controlling financial interest in Old Mt. Melrose. Consequently, as of November 1, 2018, the Company no longer consolidates the fair values of the assets and liabilities of Old Mt. Melrose, and the balance of noncontrolling interest as of September 30, 2019, and December 31, 2018, is appropriately reflected as zero on the accompanying unaudited consolidated statements of stockholders’ equity.
NOTE 6. INVESTMENTS
Certain assets held through Willow Oak Asset Management, LLC, Enterprise Diversified, Inc., or EDI Real Estate, LLC do not have a Readily Determinable Valuereadily determinable value, as these investments are not publicly traded, nor do they have published sales records. The investments in Alluvial Fund, isLP, Bonhoeffer Fund, LP, and Willow Oak Select Fund, LP are measured using net asset value (NAV) as the practical expedient and isare exempt from the fair value hierarchy in accordance with FASB ASC 820-10.hierarchy. 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. Due to the nature of the Mt Melrose, LLC (subsequent to the loss of control resulting from the sale of 65% of the equity in New Mt Melrose on June 27, 2019 (see Note 4)) and Huckleberry Real Estate Fund II, LLC investment,investments, the investment isinvestments are measured at cost basis as cost approximates fair value until additional inputs and measurements become available. As the inputs for this investmentthese investments are not readily observable, this investment isthese investments are valued using Level 3, as defined in Note 7, inputs. The following non-current investments are re-measuredremeasured to fair value on a recurring basis, and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Included in the fair value is the cost basis of the investment, as well as any accrued management fees.
Cost Basis | Unrealized Gain | Fair Value | ||||||||||
September 30, 2019 | ||||||||||||
Alluvial Fund, LP | $ | 7,037,798 | $ | 2,428,589 | $ | 9,466,387 | ||||||
Willow Oak Select Fund, LP | 1,313 | 690 | 2,003 | |||||||||
Mt Melrose, LLC | 53,846 | — | 53,846 | |||||||||
Total | $ | 7,092,957 | $ | 2,429,279 | $ | 9,522,236 |
18
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
| Cost Basis |
|
| Accrued Fees |
|
| Unrealized Gain |
|
| Fair Value |
| Cost Basis | Unrealized Gain | Fair Value | ||||||||||||||
September 30, 2017 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||
Alluvial Fund, LP |
| $ | 10,000,000 |
|
| $ | 702 |
|
| $ | 1,317,281 |
|
| $ | 11,317,983 |
| $ | 7,023,676 | $ | 1,422,812 | $ | 8,446,488 | ||||||
Huckleberry Real Estate Fund II, LLC |
|
| 750,000 |
|
|
| — |
|
|
| — |
|
|
| 750,000 |
| 468,750 | — | 468,750 | |||||||||
Total |
| $ | 10,750,000 |
|
| $ | 702 |
|
| $ | 1,317,281 |
|
| $ | 12,067,983 |
| $ | 7,492,426 | $ | 1,422,812 | $ | 8,915,238 |
NOTE 5.7. FAIR VALUE OF ASSETS AND LIABILITIES
The Company has adopted FASB ASC 820, Fair Value Measurements. ASC 820 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. ASC 820 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 1: Inputs are quoted prices in active markets as of the measurement date for identical assets and liabilities that the Company has the ability to access. This category includes exchange-traded mutual funds and equity securities. | |
● | Level 2: Inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates or yield curves, that are observable at commonly quoted intervals. This category includes mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, commercial paper, U.S. agency and municipal debt securities, U.S. Treasury securities, and derivative contracts. | |
● | 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. |
Level 2 - Inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates or yield curves, that are observable at commonly quoted intervals. This category includes mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, commercial paper, U.S. agency and municipal debt securities, U.S. Treasury securities and derivative contracts.
Level 3 - Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The measurements are highly subjective.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company valued its marketable securitiesinvestments at fair value at the end of each reporting period. See description of these investments in Note 46 above.
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| (Excluded) (a) |
|
| Total at Fair Value |
| |||||
September 30, 2017 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
| $ | 133,989 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 133,989 |
|
Huckleberry Real Estate Fund II, LLC |
| $ | — |
|
| $ | — |
|
| $ | 750,000 |
|
| $ | — |
|
| $ | 750,000 |
|
Alluvial Fund, LP |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 11,317,983 |
|
| $ | 11,317,983 |
|
Total investments |
| $ | 133,989 |
|
| $ | — |
|
| $ | 750,000 |
|
| $ | 11,317,983 |
|
| $ | 12,201,972 |
|
(Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | ||||||||||||||||
September 30, 2019 | ||||||||||||||||||||
Alluvial Fund, LP | $ | — | $ | — | $ | — | $ | 9,466,387 | $ | 9,466,387 | ||||||||||
Willow Oak Select Fund, LP | — | — | — | 2,003 | 2,003 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 9,468,390 | $ | 9,468,390 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| (Excluded) (a) |
|
| Total at Fair Value |
| |||||
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
| $ | 599,500 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 599,500 |
|
(Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | ||||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Huckleberry Real Estate Fund II, LLC | $ | — | $ | — | $ | 468,750 | $ | — | $ | 468,750 | ||||||||||
Alluvial Fund, LP | — | — | — | 8,446,488 | 8,446,488 | |||||||||||||||
Total | $ | — | $ | — | $ | 468,750 | $ | 8,446,488 | $ | 8,915,238 |
(a) |
|
|
Assets and Liabilities Measured at Fair Value on a Non-RecurringNonrecurring Basis
The Company analyzes goodwill on an annual basis or whenever events or changes in circumstances indicate potential impairments. ForDuring the year ended December 31, 2016, goodwill held at year end was determined to be valued appropriately and no2018, an impairment existed. During the quarter ended September 30, 2017, a net downward adjustment of $14,504$754,958 was maderecorded to goodwill held throughin the HVAChome services segment. ThisAs described further in Note 1, this adjustment was the result of previous sellers not meeting or exceeding the revenue targetsa general underperformance of carryback notes that were previously included as consideration for the acquisition. See Note 3 for more information.acquired HVAC and plumbing businesses.
The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate a change in their fair market value. For the quarter ended September 30, 2017, the Company adjusted the carrying value of properties held downward by $10,001. ForDuring the year ended December 31, 2016, the Company adjusted the carrying2018, an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value offor those properties held downwardat the end of the year. This adjustment was the result of 62 properties being transitioned to “held for resale” from “held for investment” as part of a portfolio redirection intended to reduce high-interest debt. See Note 5 for more information.
During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by $152,411. These adjustments wereprior management in 1998. This adjustment was the result of repair and improvement expenses exceeding the current market value of the property.property and write downs of previously capitalized improvements made by prior management. During the period ended September 30, 2019, impairment adjustments of $42,407 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect pending sales activity as of the period ended September 30, 2019.
As discussed in Note 5, in January 2018, Mt Melrose, LLC completed its first acquisition of 44 residential and other income-producing real properties for a total purchase price of $3,956,389. Additionally, in June 2018, Mt Melrose, LLC completed its second acquisition of 69 residential and other income-producing real properties for a total purchase price of $5,174,722. The total purchase price, along with transaction expenses, was allocated to the land and buildings acquired based on their relative fair values. The fair values of the land and buildings were determined using Level 3 inputs, namely comparable properties within the Lexington, Kentucky, region.
As discussed in Note 4, the Company’s ongoing equity investment in Mt Melrose, LLC is carried at cost under the alternative approach and will be assessed for impairment at each balance sheet date.
The Company analyzes the carrying value of property and equipment and lease right-of-use assets on an annual basis or whenever events or changes in circumstances indicate potential impairments.
NOTE 6.8. PROPERTY AND EQUIPMENT
The cost of property and equipment at September 30, 20172019, and December 31, 20162018, consisted of the following:
|
| 2017 |
|
| 2016 |
| 2019 | 2018 | ||||||||
Automobile |
| $ | 264,778 |
|
| $ | 115,688 |
| ||||||||
Building | $ | — | $ | 836,827 | ||||||||||||
Computers and equipment |
|
| 178,341 |
|
|
| 36,030 |
| 17,330 | 17,330 | ||||||
Furniture and fixtures |
|
| 25,206 |
|
|
| 25,206 |
| 3,000 | 90,919 | ||||||
Land | �� | 145,000 | ||||||||||||||
|
|
| 468,325 |
|
|
| 176,924 |
| 20,330 | 1,090,076 | ||||||
Less accumulated depreciation |
|
| (96,828 | ) |
|
| (33,460 | ) | (9,808 | ) | (70,334 | ) | ||||
Property and equipment, net |
| $ | 371,497 |
|
| $ | 143,464 |
| $ | 10,522 | $ | 1,019,742 |
Depreciation expense was $65,258 $619 for the three months ended September 30, 2019, and $39,130 for the nine monthsperiod ended September 30, 2018. Included in these amounts are September$0 and $7,807 for the periods ended September 30, 20172019 and $10,1722018, respectively, of depreciation expense related to personal property used in real estate segment rental operations. The depreciation expense related to personal property is included in the real estate segment cost-of-goods-sold amount on the accompanying unaudited condensed consolidated statements of income. The decrease in depreciation expense is due to the sale of the home services vehicles and equipment during the period ended June 30, 2019, as well as the deconsolidation of Mt Melrose, LLC financial activity as of June 30, 2019.
As of the period ended September 30, 2019, management has identified the commercial warehouse, along with two other residential real estate properties, as real estate held for resale. These properties are carried at $971,633 on the accompanying unaudited condensed consolidated balance sheets as of the period ended September 30, 2019. This compares to the year ended December 31, 2016. Increased automobile, computers,2018, when management reported $73,212 of vehicles and equipment areas held for resale and $2,318,912 of real estate as held for resale.
The building owned by the result of acquisitionsCompany is a multipurpose warehouse space located in Lexington, Kentucky. This building was previously owned by Mt Melrose, LLC, but was excluded from the HVACJune 27, 2019, sale and remains with the Company. During the period ended June 30, 2019, management reclassified the building as “held for resale” based on management's intentions given the Mt Melrose equity sale that occurred on June 27, 2019. In the quarterly period ended December 31, 2018, management concluded it would adopt an outsourced property management model for New Mt Melrose. Management, therefore, determined that the warehouse was no longer needed for operations and new servers purchased related to the internet segment.should be divested.
A summary of total assets held for resale as of September 30, 2019, and December 31, 2018, is as follows:
September 30, 2019 | December 31, 2018 | |||||||
Real estate held for resale | $ | 971,633 | $ | 2,318,912 | ||||
Equipment and vehicles held for resale | — | 73,212 | ||||||
Total assets held for resale | $ | 971,633 | $ | 2,392,124 |
NOTE 7.9. REAL ESTATE
EDI Real Estate, LLC
As of September 30, 2017, the Company owned 10 residential properties, one commercial property, and interests in several lots. The Company sold three residential properties in the quarter ended September 30, 2017 for gross proceeds of $299,9002019 and net proceeds of $271,037. The carrying value ofDecember 31, 2018, the three properties sold was $275,541. The Company did not purchase any properties in the quarter ended September 30, 2017.
EDI Real Estate Held for Investmentportfolio of properties included the following units:
As of September 30, 2017, the Company accounted for eight residential properties as held for investment.
EDI Real Estate | September 30, 2019 | December 31, 2018 | ||||||
Units occupied or available for rent | 5 | 6 | ||||||
Vacant units being prepared for rent | 2 | 3 | ||||||
Total units held for investment | 7 | 9 | ||||||
Occupied units held for resale | 2 | — | ||||||
Vacant lots held for resale | 3 | 3 | ||||||
Total units held for resale | 5 | 3 |
The leases in effect, as of the quarterperiod ended September 30, 20172019, are based on either annual or multi-year time periods and typically include month-to-month provisions after the completion of the initial term. An outside property management company manages these rental properties on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties.
Depreciation
EDI Real Estate | September 30, 2019 | December 31, 2018 | ||||||
Total real estate held for investment | $ | 556,867 | $ | 710,022 | ||||
Accumulated depreciation | (116,292 | ) | (107,576 | ) | ||||
Real estate held for investment, net | $ | 440,575 | $ | 602,446 | ||||
Real estate held for resale | $ | 971,633 | $ | 40,047 |
For the period ended September 30, 2019, depreciation expense totaled $17,051on the EDI Real Estate portfolio of properties was $6,116. This compares to depreciation expense for the nine monthsperiod ended September 30, 2017. Total accumulated2018, when depreciation expense on the EDI Real Estate portfolio of properties was $5,304.
EDI Real Estate did not purchase or sell any properties during the periods ending September 30, 2019 and 2018.
During the period ended September 30, 2019, two residential rental properties were transferred from “held for investment” to “held for resale”. The carrying value of these two properties totaled $121,558. EDI Real Estate did not transfer any properties during the period ended September 30, 2018.
During the period ended September 30, 2019, impairment adjustments of $42,407 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect pending sales activity as of the period ended September 30, 2017 totaled $81,057. These2019. During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management.
As described in Note 4, management 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 the accompanying unaudited condensed consolidated statements of operations for the period ended September 30, 2019, under the real estate segment. Simultaneously, as of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2018, however, the Company did have a controlling financial interest in Mt Melrose. The consolidated Mt Melrose assets as of December 31, 2018, included the following units:
Mt Melrose | December 31, 2018 | |||
Units occupied or available for rent | 98 | |||
Vacant units being prepared for rent | 15 | |||
Total units held for investment | 113 | |||
Residential and commercial units | 48 | |||
Vacant lots | 9 | |||
Total units held for resale | 57 |
Real Estate Heldeither annual or multi-year time periods. Month-to-month leases are reserved for Resale
As of September 30, 2017, the Company accounted for two residential properties, one commercial property, and several lots as held for resale. These propertiesspecial circumstances. Units held for resale wereconsist of single-family units, multi-family units, commercial properties, and undeveloped lots of land.
Mt Melrose | December 31, 2018 | |||
Total real estate held for investment | $ | 9,049,945 | ||
Accumulated depreciation | (159,514 | ) | ||
Real estate held for investment, net | $ | 8,890,431 | ||
Real estate held for resale | $ | 2,278,865 |
During the period ended September 30, 2018, Mt Melrose transferred one property with a carrying value of $145,406 from “held for investment” to “held for resale”.
20
Notesthe end of the year. This adjustment was the result of 62 properties being transitioned to Unaudited Condensed Consolidated Financial Statements (Continued)“held for resale” from “held for investment” as part of a portfolio redirection that was intended to reduce high-interest debt.
Future Minimum Rental Revenues
The future anticipated minimum rental revenues based on leases in place as of September 30, 2019, for EDI Real Estate, LLC are as follows:
2019 | $ | 14,565 | ||
2020 | 28,180 | |||
2021 | — | |||
Total | $ | 42,745 |
NOTE 8.10. NOTES PAYABLE
Notes payable at September 30, 20172019, and December 31, 20162018, consist of the following:
|
| 2017 |
|
| 2016 |
| ||
Interest bearing amount due on acquisition through HVAC Value Fund, LLC |
|
| 25,000 |
|
|
| 250,000 |
|
Non-interest bearing amount due on acquisition through HVAC Value Fund, LLC |
|
| 73,838 |
|
|
| 15,000 |
|
Interest bearing amount due on line of credit through HVAC Value Fund, LLC |
|
| 289,637 |
|
|
| — |
|
Equipment and vehicle capital leases acquired by HVAC Value Fund, LLC |
|
| 132,560 |
|
|
|
|
|
Interest bearing amount due on real estate held for investment through EDI Real Estate, LLC |
|
| 137,600 |
|
|
| — |
|
Less current portion |
|
| (449,363 | ) |
|
| (240,000 | ) |
Long-term portion |
| $ | 209,272 |
|
| $ | 25,000 |
|
Interest Rates | Average Term | 2019 | 2018 | |||||||||
Interest-bearing amounts due on traditional mortgages on real estate held through Mt Melrose, LLC | 4.38% - 5.75% | 14 years | $ | — | $ | 4,505,139 | ||||||
Interest-bearing amounts due on hard money loans on real estate held through Mt Melrose, LLC | 10.00% - 13.00% | 2 years | — | 2,379,851 | ||||||||
Interest-bearing amount due on promissory note on warehouse | 8.00% | 1 year | 300,000 | — | ||||||||
Interest-bearing amounts due on promissory notes | 10.00% | 1 year | — | 131,279 | ||||||||
Non-interest-bearing amount due on promissory notes | 0.00% | 1 year | 100,000 | 218,270 | ||||||||
Equipment and vehicle capital leases and loans acquired by HVAC Value Fund, LLC | 0.00% - 4.90% | 5 years | — | 55,797 | ||||||||
Vehicle loans through HVAC Value Fund, LLC | 5.99% | 5 years | — | 53,638 | ||||||||
Interest-bearing amount due on promissory note through EDI Real Estate, LLC | 5.60% | 15 years | 376,217 | 384,304 | ||||||||
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC | 6.00% | 5 years | 137,600 | 137,600 | ||||||||
Less notes related to discontinued operations | (100,000) | (209,436) | ||||||||||
Less accrued interest | — | (134,623) | ||||||||||
Less current portion | (311,292) | (1,002,965) | ||||||||||
Long-term portion | $ | 502,525 | $ | 6,518,854 |
HVAC Value Fund typically structures acquisitions where a portion
To further summarize, the remaining notes payable amounts held as of September 30, 2019, were subject to the purchase pricebelow interest rates:
0.00% | $ | 100,000 | ||
5.00% - 5.99% | 376,217 | |||
6.00 - 6.99% | 137,600 | |||
8.00 - 8.99% | 300,000 | |||
10.00% - 13.00% | — | |||
Total | $ | 913,817 |
The timing of future payments of notes payable are as follows as of September 30, 2019:
2019 | $ | 402,792 | ||
2020 | 11,453 | |||
2021 | 12,181 | |||
2022 | 150,491 | |||
2023 and thereafter | 336,900 | |||
Total | $ | 913,817 |
As of September 30, 2019, one line of credit remains open through the home services segment. This line of credit is held backwith Steven L. Kiel, an ENDI director, and is subject to certain conditions. These notes payable may or may not bear interest. HVAC Value Fund made five acquisitions inour principal executive officer. Additional debt held through the year endedhome services segment as of December 31, 20162018, includes loans for various vehicles and one additional acquisition inequipment. Two vehicle loans were entered into during the quarter ended March 31, 2017. Four2018. These loans required monthly payments through May 2023 and hold annual interest rates of 5.99%. As of the five acquisitions made inperiod ended September 30, 2019, all of these loans have been assumed by Rooter Hero, the year ended December 31, 2016 resulted in a note payable topurchaser of the seller. The non-interest bearing note payable was due July 1, 2017 in the amount of $15,000, and was contingent on meeting a revenue target and other operational conditions. As mentioned inhome services assets. See Note 3 the revenue targets and operational conditions were not met, resulting in the note being written off. There were three separate interest bearing notes payable as of the quarter ended June 30, 2017. The first interest bearing note payable accrues interest at 7% annually. $25,000 was payable on June 16, 2017 and $25,000 is payable on June 16, 2018. These payments are contingent on meeting revenue targets and other operational conditions. The second interest bearing note payable is for $100,000 and bears interest at 6% annually. This note was due July 11, 2017 and was contingent on meeting revenue targets and other operational conditions. As mentioned in Note 3, the revenue targets and operational conditions were not met, resulting in the note being written down. The third interest bearing note payable was for $100,000 and bears interest at 7% annually. This note was due July 30, 2017 and was contingent on meeting revenue targets and other operational conditions. As mentioned in Note 3, the revenue targets and operational conditions were exceeded, and per the purchase agreement, resulted in an increased payout. The acquisition made in the quarter ended March 31, 2017 also resulted in a $100,000 note payable to the seller. The payment amounts are contingent on meeting quarterly revenue targets.more information.
During the quarter ended September 30, 2017, EDI Real Estate, LLC entered intoissued 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. Additionally, during the quarter ended September 30, 2018, EDI Real Estate, LLC issued a promissory note secured by additional properties held for investment. This note carries an annual interest rate of 5.6% and fully matures on September 1, 2033, with early payoff permitted. The interest rate on this note is subject to change once each five year period based on an index rate plus a margin of 2.750 percentage points. The index rate is calculated as a monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of five years.
During the quarter ended March 31, 2019, the Company issued a promissory note secured by the commercial warehouse held for resale. The note carries an annual interest rate of 8%, pays interest quarterly, and is due upon successful sale of the warehouse with early payoff permitted.
With respect to the outstanding debt secured by the real properties acquired by Mt Melrose, LLC, these notes began to mature during the previous quarter, with the last note extending until January 2042. Some of these loans are interest only while others accrue interest that is due in full with a final balloon payment. As of December 31, 2018, the debt secured by the real properties has varying annual interest rates from 4.375% to 13%. As mentioned in Note 4, all assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets as of June 27, 2019. This results in zero notes payable reported under Mt Melrose, LLC for the period ended September 30, 2019.
NOTE 9.11. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
For the nine monthsperiod ended September 30, 20172019 and December 31, 2016,2018, bad debt expense from continuing operations was $15,281negative $147 and $34, respectively. For the nine months ended September 30, 2017 and December 31, 2016, accounts receivable were $481,123 and $212,751,positive $8,277, respectively. The increasedecrease in accounts receivable is the result of the formationdiscontinued operations through our home services segment. As of the HVAC subsidiary and a seller financing arrangement for a residential property sold during the nine monthsperiod ended September 30, 2017. As of September 30, 20172019, and for the year ended December 31, 2016,2018, accounts receivable consisted of the following:
|
| 2017 |
|
| 2016 |
| 2019 | 2018 | ||||||||
Gross accounts receivable |
| $ | 483,123 |
|
| $ | 213,624 |
| $ | 35,977 | $ | 85,093 | ||||
Less allowance for doubtful accounts |
|
| (2,000 | ) |
|
| (873 | ) | (331 | ) | (26,830 | ) | ||||
Accounts receivable, net |
| $ | 481,123 |
|
| $ | 212,751 |
| $ | 35,646 | $ | 58,263 |
NOTE 10.12. SEGMENT INFORMATION
As of
During the period ended September 30, 2017,2019, the Company hashad five business units with separate management and reporting infrastructures that offer different products and services. The five business units have been aggregated into fivethe following reportable segments: Corporate,Asset Management, Real Estate, Internet, Home Services, and Other. As of the period ended September 30, 2019, and for all prior periods presented, home services operations are reported as discontinued operations.
In previous periods, the Company reported under the following six business segments: Asset Management, Mt Melrose, HVAC, Internet, Real Estate, and Asset Management.
21
NotesCorporate. In an effort to Unaudited Condensed Consolidated Financial Statements (Continued)highlight the direction of the Company and increase segment transparency, these historical segments were reorganized during the quarter ended June 30, 2018. Additional reorganizations were made as of January 1, 2019, in order to appropriately reflect the similarities in the Company’s real estate operations. The “Mt Melrose” and legacy “Real Estate” segments are now referred to collectively as “Real Estate,” and the “HVAC” segment is now referred to as “Home Services.” “Corporate” and other additional investments now are combined under “Other Operations.” The “Asset Management” and “Internet” segments remain unchanged. See below for additional information on the activity included in each respective segment report.
As mentioned in Note 3, on May 24, 2019, the Company completed an asset sale transaction of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC, to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and conveyed all of the subsidiary’s personal property and customer lists and records, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed the subsidiary’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s customer accounts going forward. The corporatecurrent and comparative results of the home services segment have been reported as discontinued on the accompanying unaudited consolidated financial statements for the period ended September 30, 2019.
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 30, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose; therefore, the Company will no longer consolidate Mt Melrose. All activity prior to the deconsolidation event has been included on the accompanying unaudited condensed consolidated statements of operations for the period ended September 30, 2019, under the real estate segment. As of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets.
The asset management segment includes revenues and expenses derived from various investment opportunities and partnerships and services. The real estate segment includes revenue and expenses related to the management of properties held for investment and held for resale through Mt Melrose (prior to the sale of 65% of our equity in Mt Melrose on June 27, 2019) located in Lexington, Kentucky, and revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia. The internet segment includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The home services segment includes discontinued revenue and expenses derived from our former management of HVAC and plumbing companies in Arizona. The other segment includes revenue and expenses from nonrecurring investment opportunities such as Triad Guaranty, Inc. Additionally, the other segment includes 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. Sitestar also invests in marketable securities through the corporate segment. The internet segment includes revenue and expenses related to the sale
The internet segment includes revenue generated by operations in both the United States and Canada. In the quarterperiod ended September 30, 2017,2019, the internet segment generated revenue of $295,371$251,809 in the United States and revenue of $18,831$13,362 in Canada. This compares to the quarterperiod ended September 30, 20162018, where the internet segment generated revenue of $331,480$273,219 in the United States and revenue of $23,904$15,093 in Canada.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three and nine months endedSeptember 30, 2019 and 2018.
Three months ended September 30, 2019 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
Revenues | $ | (159,085 | ) | $ | 19,359 | $ | 265,171 | $ | — | $ | — | $ | 125,445 | |||||||||||
Cost of revenue | — | 30,753 | 83,517 | — | — | 114,270 | ||||||||||||||||||
Operating expenses | 81,906 | 11,827 | 43,168 | 141,270 | — | 278,171 | ||||||||||||||||||
Other income (expense) | 4,983 | (13,709 | ) | 384 | 20,249 | — | 11,907 | |||||||||||||||||
Comprehensive income (loss) from continuing operations | (236,008 | ) | (36,930 | ) | 138,870 | (121,021 | ) | — | (255,089 | ) | ||||||||||||||
Comprehensive income (loss) from discontinued operations | — | — | — | — | (31,151 | ) | (31,151 | ) | ||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | ||||||||||||||||||
Identifiable assets | 9,571,808 | 638,298 | 392,131 | 1,107,117 | 135,589 | 11,844,943 |
Three months ended September 30, 2018 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
Revenues | $ | 330,112 | $ | 220,600 | $ | 288,312 | $ | 20,934 | $ | — | $ | 859,958 | ||||||||||||
Cost of revenue | — | 107,527 | 86,658 | 31,800 | — | 225,985 | ||||||||||||||||||
Operating expenses | 107,538 | 275,414 | 58,475 | 130,874 | — | 572,301 | ||||||||||||||||||
Other income (expense) | 11,075 | (137,406 | ) | 479 | 1,908 | — | (123,944 | ) | ||||||||||||||||
Comprehensive income (loss) from continuing operations | 233,649 | (299,747 | ) | 143,658 | (139,832 | ) | — | (62,272 | ) | |||||||||||||||
Comprehensive income (loss) from discontinued operations | — | — | — | — | 83,254 | 83,254 | ||||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | ||||||||||||||||||
Identifiable assets | 9,806,271 | 14,707,356 | 381,262 | 1,738,533 | 2,577,014 | 29,210,436 |
Nine months ended September 30, 2019 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
Revenues | $ | 1,127,075 | $ | 420,464 | $ | 805,990 | $ | 212,631 | $ | — | $ | 2,566,160 | ||||||||||||
Cost of revenue | — | 358,126 | 254,373 | — | — | 612,499 | ||||||||||||||||||
Operating expenses | 309,896 | 327,671 | 165,457 | 641,483 | — | 1,444,507 | ||||||||||||||||||
Other income (expense) | 19,074 | (494,311 | ) | 4,317 | (3,502,378 | ) | — | (3,973,298 | ) | |||||||||||||||
Comprehensive income (loss) from continuing operations | 836,253 | (759,644 | ) | 390,477 | (3,931,230 | ) | — | (3,464,144 | ) | |||||||||||||||
Comprehensive income (loss) from discontinued operations | — | — | — | — | (1,441,156 | ) | (1,441,156 | ) | ||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | ||||||||||||||||||
Identifiable assets | 9,571,808 | 638,298 | 392,131 | 1,107,117 | 135,589 | 11,844,943 |
Nine months ended September 30, 2018 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
Revenues | $ | 522,044 | $ | 592,583 | $ | 887,635 | $ | 121,031 | $ | — | $ | 2,123,293 | ||||||||||||
Cost of revenue | — | 342,449 | 238,385 | 156,731 | — | 737,565 | ||||||||||||||||||
Operating expenses | 170,979 | 762,074 | 191,443 | 651,540 | — | 1,776,036 | ||||||||||||||||||
Other income (expense) | 33,225 | (368,800 | ) | 32,898 | 7,091 | — | (295,586 | ) | ||||||||||||||||
Comprehensive income (loss) from continuing operations | 384,290 | (880,740 | ) | 490,705 | (680,149 | ) | — | (685,894 | ) | |||||||||||||||
Comprehensive income (loss) from discontinued operations | — | — | — | — | (62,518 | ) | (62,518 | ) | ||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | ||||||||||||||||||
Identifiable assets | 9,806,271 | 14,707,356 | 381,262 | 1,738,533 | 2,577,014 | 29,210,436 |
NOTE 13. COMMITMENTS AND CONTINGENCIES
Leases
As of the period ended September 30, 2019, we have two leases classified as operating leases and no finance leases. The previously reported finance leases as of the period ended March 31, 2019, were assumed by Rooter Hero as part of the home services asset sale that took place on May 24, 2019. See Note 3 for more information.
Our operating leases are for warehouse and office facilities for Specialty Contracting Group, LLC, which did not convey with the asset sale, and for office space for Willow Oak Asset Management, LLC. The leases have remaining terms expiring from 2019 through 2021 and a weighted average remaining lease term of 1.4 years. The right-of-use assets and corresponding lease liabilities for the Company’s operating leases are reported separately on the accompanying unaudited condensed consolidated balance sheets. Discount rates used in the calculation of our lease liability was approximately 6.7%. In addition, the Company is the lessor for facility space in New York that it sublets to other tenants; the sublease expires in 2020 with the operating lease.
Lease costs for the three months ended September 30, 2019 consisted of the following:
Finance lease costs: | ||||
Amortization of ROU assets | $ | 14,264 | ||
Interest on lease liabilities | — | |||
Operating lease cost | 15,455 | |||
Sublease income | (7,053 | ) | ||
Total lease costs from continuing operations | $ | 22,666 |
A maturity analysis of our operating leases is as follows:
2019 | $ | 25,384 | ||
2020 | 86,380 | |||
2021 | 13,005 | |||
Total | 124,769 | |||
Discount factor | (5,572 | ) | ||
Lease liability | 119,197 | |||
Less lease liability from discontinuing operations | (57,795 | ) | ||
Amounts due within 12 months | (61,402 | ) | ||
Long-term lease liability | $ | — |
Other Commitments
On September 19, 2016, the Company, through Willow Oak, announced that it had entered into a letter of intent agreement with Alluvial Capital Management, LLC (“Alluvial Capital”) to make a seed investment through Willow Oak Asset Management in Alluvial Fund, LP, a private investment partnership that was launched by Alluvial Capital on January 1, 2017 (“Alluvial Fund”). Alluvial Capital acts as the general partner and the Company, through Willow Oak Asset Management, has invested in Alluvial Fund as a limited partner.
The Company agreed to make capital contributions to Alluvial Fund in the aggregate amount of $10 million to be provided over four equal tranches on January 1, 2017, April 1, 2017, July 1, 2017, and October 1, 2017. As of September 30, 2017, the Company satisfied its obligation to provide $10 million in accordance with the contribution schedule. On January 1, 2018, pursuant to an amendment to the Alluvial Side Letter Agreement, dated December 15, 2017, Willow Oak Asset Management, LLC withdrew $3,000,000 from its $10,000,000 investment in Alluvial Fund, LP in order to partially fund the first close of the Mt Melrose Transaction. Arquitos Capital Partners, LP, which is managed by our director and 2016principal executive officer Steven L. Kiel, simultaneously invested $3,000,000 in Alluvial to temporarily replace the amount withdrawn by Willow Oak. The Arquitos investment into Alluvial counts toward Willow Oak’s seed investment total for purposes of Willow Oak’s agreement with Alluvial.
ENDI created a wholly owned subsidiary named Mt Melrose, LLC (“New Mt Melrose”) on January 10, 2018, which has acquired 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 on December 10, 2017, with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, a former ENDI director.
On January 10, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a first acquisition from Old Mt. Melrose of 44 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the purchase agreement. This first tranche of real properties was acquired for total consideration of $3,956,389, which was payable as follows:
● | by payment of $500,000 to Old Mt. Melrose in cash; | |
● | by New Mt Melrose’s assumption of $1,798,119 of outstanding indebtedness secured by the acquired real properties; and | |
● | the balance by issuance to Old Mt. Melrose of 120,602 shares of the Company’s common stock. |
On June 29, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a second acquisition from Old Mt. Melrose of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the purchase agreement. This second tranche of real properties was acquired for total consideration of $5,174,722, which was payable as follows:
● | by New Mt Melrose’s assumption of $2,767,158 of outstanding indebtedness secured by the acquired real properties; and | |
● | the balance by issuance to Old Mt. Melrose of 148,158 shares of the Company’s common stock. |
Pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose, the parties mutually agreed to terminate the above-discussed purchase agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the purchase agreement.
On January 10, 2018, New Mt Melrose and Old Mt. Melrose entered into the Cash Flow Agreement, pursuant to which, in connection with the parties’ anticipated consummation of all of the real property purchase transactions under the purchase agreement described above, the parties agreed that as of and from and after January 10, 2018, until such time as the parties consummated the relevant closing as to each real property under the purchase agreement, Old Mt. Melrose would assign to New Mt Melrose all of the income, rents, receivables, and revenues arising from or issuing out of such real property, and New Mt Melrose would assume Old Mt. Melrose’s responsibility for payment of certain of the costs and expenses attributable to such real property.
Under the Cash Flow Agreement, New Mt Melrose was responsible for: Old Mt. Melrose’s monthly payments of interest and/or principal under the outstanding debt secured by the real properties; Old Mt. Melrose’s real property taxes with respect to the real properties due and attributable to the periods from and after the effective date; and Old Mt. Melrose’s ordinary expenses of operating the real properties, actually incurred, to the extent attributable to de minimis repairs, recurring maintenance services, and/or water, electricity, sewer, gas, telephone, or other similar utility charges.
Based on the number of properties then outstanding for purchase under the purchase agreement at September 30, 2018, New Mt Melrose was obligated under the Cash Flow Agreement as of September 30, 2018, for (i) monthly payments of interest and/or principal under the outstanding debt secured by such real properties in the aggregate amount of $10,568 per month, (ii) insurance of $1,073 per month, (iii) estimated annualized obligations for real property taxes with respect to such real properties in the aggregate amount of approximately $7,461 per year, and (iv) ordinary recurring expenses of operating such real properties that are expected to be immaterial in aggregate. However, as previously reported in our Current Report on Form 8-K filed with the SEC on November 5, 2018, pursuant to that certain Termination of Cash Flow Agreement entered into effective November 1, 2018, between New Mt Melrose and Old Mt. Melrose, the parties mutually agreed to terminate the above-discussed Cash Flow Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations under the Cash Flow Agreement.
As mentioned in Note 4, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC. As consideration for the nine months ended 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 has retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest. 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 three claims for indemnification under the agreement, all of which have been rejected and disputed by the Company.
We have no other meaningful long-term debt obligations, purchase obligations, or other long-term liabilities as of September 30, 2017 and 2016. No comparable financial information exists for2019, other than those previously mentioned related to the asset management segment, because it did not commence operations until January 1, 2017. Also notehome services, and real estate segments.
Litigation
Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.
On April 12, 2016, the Company filed a civil action complaint against Frank Erhartic, Jr. (the “Former Erhartic CEO”), the Company’s former CEO and director (prior to December 14, 2015) and currently an owner of record or beneficially of more than 5% of the Company’s Common Stock, alleging, among other things, that the HVAC segment did not commence operations until June 14, 2016.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).
|
| Corporate |
|
| Internet |
|
| HVAC |
|
| Real Estate |
|
| Asset Management |
|
| Consolidated |
| ||||||
Three months ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | — |
|
| $ | 314,202 |
|
| $ | 1,332,239 |
|
| $ | 324,044 |
|
| $ | 715,598 |
|
| $ | 2,686,083 |
|
Cost of revenue |
| $ | — |
|
| $ | 81,144 |
|
| $ | 875,991 |
|
| $ | 306,537 |
|
| $ | — |
|
| $ | 1,263,672 |
|
Net income (loss) before income taxes |
| $ | (167,120 | ) |
| $ | 172,415 |
|
| $ | 119,681 |
|
| $ | 8,126 |
|
| $ | 674,054 |
|
| $ | 807,156 |
|
Goodwill |
| $ | — |
|
| $ | 212,445 |
|
| $ | 1,779,549 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,991,994 |
|
Identifiable assets |
| $ | 201,291 |
|
| $ | 315,754 |
|
| $ | 2,787,303 |
|
| $ | 1,072,849 |
|
| $ | 12,091,978 |
|
| $ | 16,469,175 |
|
|
| Corporate |
|
| Internet |
|
| HVAC |
|
| Real Estate |
|
| Asset Management |
|
| Consolidated |
| ||||||
Three months ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | — |
|
| $ | 355,384 |
|
| $ | 906,910 |
|
| $ | 404,923 |
|
| $ | — |
|
| $ | 1,667,217 |
|
Cost of revenue |
| $ | — |
|
| $ | 70,290 |
|
| $ | 619,881 |
|
| $ | 402,285 |
|
| $ | — |
|
| $ | 1,092,456 |
|
Net income (loss) before income taxes |
| $ | (315,062 | ) |
| $ | 285,847 |
|
| $ | 66,370 |
|
| $ | (2,953 | ) |
| $ | — |
|
| $ | 34,202 |
|
Goodwill |
| $ | — |
|
| $ | 212,445 |
|
| $ | 1,053,851 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,266,296 |
|
Identifiable assets |
| $ | 3,840,647 |
|
| $ | 614,610 |
|
| $ | 1,921,609 |
|
| $ | 2,117,404 |
|
| $ | — |
|
| $ | 8,494,270 |
|
| Corporate |
|
| Internet |
|
| HVAC |
|
| Real Estate |
|
| Asset Management |
|
| Consolidated |
| |||||||
Nine months ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | — |
|
| $ | 977,629 |
|
| $ | 3,526,913 |
|
| $ | 1,216,190 |
|
| $ | 1,320,808 |
|
| $ | 7,041,540 |
|
Cost of revenue |
| $ | — |
|
| $ | 237,098 |
|
| $ | 2,307,902 |
|
| $ | 1,264,602 |
|
| $ | — |
|
| $ | 3,809,602 |
|
Net income (loss) before income taxes |
| $ | (403,869 | ) |
| $ | 585,930 |
|
| $ | 88,774 |
|
| $ | (68,810 | ) |
| $ | 1,241,023 |
|
| $ | 1,443,048 |
|
Goodwill |
| $ | — |
|
| $ | 212,445 |
|
| $ | 1,779,549 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,991,994 |
|
Identifiable assets |
| $ | 201,291 |
|
| $ | 315,754 |
|
| $ | 2,787,303 |
|
| $ | 1,072,849 |
|
| $ | 12,091,978 |
|
| $ | 16,469,175 |
|
| Corporate |
|
| Internet |
|
| HVAC |
|
| Real Estate |
|
| Asset Management |
|
| Consolidated |
| |||||||
Nine months ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | — |
|
| $ | 1,068,283 |
|
| $ | 939,932 |
|
| $ | 1,992,371 |
|
| $ | — |
|
| $ | 4,000,586 |
|
Cost of revenue |
| $ | — |
|
| $ | 290,043 |
|
| $ | 633,053 |
|
| $ | 1,918,603 |
|
| $ | — |
|
| $ | 2,841,699 |
|
Net income (loss) before income taxes |
| $ | (645,927 | ) |
| $ | 614,670 |
|
| $ | 74,922 |
|
| $ | 60,857 |
|
| $ | — |
|
| $ | 104,522 |
|
Goodwill |
| $ | — |
|
| $ | 212,445 |
|
| $ | 1,053,851 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,266,296 |
|
Identifiable assets |
| $ | 3,840,647 |
|
| $ | 614,610 |
|
| $ | 1,921,609 |
|
| $ | 2,117,404 |
|
| $ | — |
|
| $ | 8,494,270 |
|
22
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)NOTE 14. SHARE ADJUSTMENT, CANCELLATION AND SALE OF TREASURY SHARES, AND REVERSE STOCK SPLIT
NOTE 11. ADJUSTMENT TO OPENING BALANCE NUMBER OF SHARES AND CANCELLATION OF TREASURY SHARESCancellation and Sale of Treasury Shares
During
On May 26, 2018, the quarter ended MarchCompany signed a stock purchase agreement with an unaffiliated third party to sell 1,633,500 shares of the Company’s common stock held as treasury shares to such party for $0.11036586 per share. The settlement date for the sale was July 31, 2017, management was made aware of a clerical error that affected the reported2018. The number of treasuryshares transferred on the settlement date was adjusted for the Company’s reverse stock split to 13,068 shares. To the extent that this sale of previously registered shares held as of December 31, 2016. It was discovered that the number of treasury shares heldrequired an exemption from registration, this sale of shares of common stock of the Company was overstatedexempt from registration under the Securities Act of 1933 (“Securities Act”), in reliance upon Section 4(2) of the Securities Act and Regulation D Rule 506, as a transaction by 100,000an issuer not involving a public offering.
Reverse Stock Split
As previously reported in our Current Report on Form 8-K filed with the SEC on June 7, 2018, the Board of Directors of the Company previously approved, on March 29, 2018, a reverse stock split of all of the Company’s Common Stock, pursuant to which every 125 shares whichof Common Stock of the Company were reverse split, reconstituted, and converted into one (1) share of Common Stock of the Company (the “Reverse Stock Split”). To effectuate the aforesaid Reverse Stock Split, the Company previously filed on May 23, 2018, a Certificate of Change Pursuant to Nevada Revised Statutes (“NRS”) Section 78.209 (the “Certificate of Change”) with the Secretary of State of the State of Nevada, with a specified effective filing date of June 1, 2018.
The Company submitted an Issuer Company Related Action Notification regarding the Reverse Stock Split to the Financial Industry Regulatory Authority (“FINRA”) on May 22, 2018. FINRA declared the Reverse Stock Split effective in turn understatedthe marketplace July 23, 2018 (the “FINRA Effective Date”). Accordingly, while the Certificate of Change became effective under Nevada state corporate law on June 1, 2018, the Reverse Stock Split did not become effective as to shareholders or the marketplace until the FINRA Effective Date.
Split Adjustment
On the FINRA Effective Date, the total number of shares outstanding by the same amount. The Company has concluded that a full restatement is not necessary as the total misstatement accounts for 0.035% of the totalCompany’s Common Stock held by each stockholder converted automatically into the number of whole shares of Common Stock equal to (i) the number of shares outstandingof Common Stock held by such stockholder immediately prior to the Reverse Stock Split, divided by (ii) one hundred twenty five (125). No fractional shares were issued, and no percash or other consideration was paid. Rather, any fraction of a share metricsof Common Stock that otherwise would have resulted from the Reverse Stock Split were effected. This error dates backrounded up to records kept by prior management, but has sincethe next whole share of Common Stock. That is, stockholders who otherwise would have been reconciled and corrected. Further, management is actively workingentitled to cancel existing treasury shares. As noted on the condensed consolidated balance sheets and the condensed consolidated statementsreceive fractional shares because they held a number of stockholders’ equity, aspre-Reverse Stock Split shares of the quarter ended September 30, 2017, 2,125,795 treasuryCompany’s Common Stock not evenly divisible by one hundred twenty five (125), had the number of post-Reverse Stock Split shares have been cancelled.
As of November 9, 2017, the correctCompany’s Common Stock to which they were entitled rounded up to the next whole number of shares outstanding is 282,830,163of the Company’s Common Stock. Stockholders’ equity and all references to share and per-share amounts in the correctaccompanying unaudited condensed consolidated financial statements have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.
Ownership Unchanged
Immediately after the Reverse Stock Split, each stockholder’s percentage ownership interest in the Company and proportional voting power remained unchanged except for minor adjustments resulting from the Company’s election to round up any fraction of a share of Common Stock that otherwise would have resulted from the Reverse Stock Split. The rights and privileges of the holders of shares of Common Stock of the Company were substantially unaffected by the Reverse Stock Split.
Capitalization
Immediately prior to the Certificate of Change becoming effective, the aggregate number of treasury shares heldwhich the Company had the authority to issue was three hundred fifty million (350,000,000) shares of Common Stock at $.001 par value, and thirty million (30,000,000) shares of Serial Preferred Stock at $.001 par value. As a result of the Certificate of Change and Reverse Stock Split, the aggregate number of shares which the Company has the authority to issue is 11,696,658.two million eight hundred thousand (2,800,000) shares of Common Stock at $.125 par value, and thirty million (30,000,000) shares (unchanged) of Serial Preferred Stock at $.001 par value.
NOTE 12.15. SUBSEQUENT EVENTS
On October 1, 2019, the Company, through its asset management subsidiary, formed Focused Compounding Capital Management, LLC. This new partnership, of which Willow Oak Capital Management, LLC will be a 10% owner, expects to launch a new private investment fund, Focused Compounding Fund, LP, set to begin investing January 1, 2020, in addition to advising managed accounts. Presently, this initiative is in its preparatory, “pre-launch” phase.
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 believes that Specialty Contracting Group’s continued existence is not reasonably practicable or financially feasible. Management expects that all of Specialty Contracting Group’s cash on hand will be paid out ratably to its creditors and claimants.
Management has evaluated all other subsequent events from September 30, 20172019, through November 9, 2017, the date the unaudited condensed consolidated financial statements were issued. Management concluded that no additional subsequent events have occurred that would require recognition or disclosure in the unaudited condensed consolidated financial statements.
|
This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related footnotes for the quarter ended September 30, 2017.2019. The discussion of results, causes, and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. Additionally, it should be noted that a uniform comparative analysis cannot be performed for all segments, as a segment’s limited financial history or recent restructuring results in less comparable financial performance.
Overview
Sitestar Corporation
During the period ended September 30, 2019, Enterprise Diversified, Inc. (“Sitestar,ENDI,” the “Company,” or “we”) operatesoperated under five reportable segments: Asset Management Operations, Real Estate Operations, Internet Operations, Home Services Operations, and Other Operations. Other Operations include corporate and investment activity that is not considered to be one of our primary lines of business. As of the period ended September 30, 2019, and for all prior periods presented, home services operations are reported as discontinued operations. The management of the Company also continually reviews various investment opportunities, including those in other lines of business.
In previous periods, the Company reported under the following six business segments: Asset Management, Mt Melrose, HVAC, Internet, Real Estate, and Corporate. In an effort to highlight the direction of the Company and increase segment transparency, these historical segments were reorganized during the quarter ended June 30, 2018. Additional reorganizations were made as of January 1, 2019, in order to appropriately reflect the similarities in the Company’s real estate operations. The “Mt Melrose” and legacy “Real Estate” segments are now referred to collectively as “Real Estate,” with the “HVAC” segment being referred to as “Home Services.” “Corporate” and other additional investments now are combined under “Other Operations.” The “Asset Management” and “Internet” segments remain unchanged. See below for additional information on the activity included in each respective segment report.
Corporate:
The asset management segment includes revenues and expenses derived from various investment opportunities and partnerships and services. The real estate segment includes revenue and expenses related to the management of properties held for investment and held for resale through Mt Melrose (prior to the sale of 65% of our equity in Mt Melrose on June 27, 2019) located in Lexington, Kentucky, and revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia. The internet segment includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The home services segment includes discontinued revenue and expenses derived from our former management of HVAC and plumbing companies in Arizona. The other segment includes revenue and expenses from nonrecurring investment opportunities, such as Triad Guaranty, Inc. Additionally, the other segment includes 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. Sitestar may
Asset Management Operations
ENDI created a wholly owned asset management subsidiary on October 10, 2016, named Willow Oak Asset Management, LLC (“Willow Oak”). Willow Oak is an asset management platform oriented to the value-investing community. Value investing and knowledge of the global value-investing community are core competencies of the Company. Willow Oak intends to apply its core competencies to become a hub for the value-investing community, offering various forms of affiliations with respected value investment managers. Such affiliations to date include fund seeding and reinvestments, fund launching, portfolio management, and fund management. The Company intends to actively expand its Willow Oak platform with additional affiliations and services that enhance the value of the Willow Oak platform to all affiliated funds.
Willow Oak launched its fund management services (“FMS”) offering to external funds on November 1, 2018, when it signed a consulting services agreement with Arquitos Capital, a domestic and an offshore private investment fund controlled by Steven Kiel, a Company director and our principal executive officer. Willow Oak also investprovides FMS to the Bonhoeffer Fund. FMS consists of services not typically provided by traditional third-party providers to the hedge fund industry, including: access to the Willow Oak network, investor relations and marketing, administration and compliance, interface to traditional service providers, standard tools and best practices repository, and access to Willow-Oak-vetted third-party service providers.
Real Estate Operations
The Company operates its real estate operations through EDI Real Estate, LLC and, indirectly, Mt Melrose, LLC. Mt Melrose, LLC is a partially owned subsidiary that currently owns and operates a portfolio of residential and other income-producing real estate in marketable securitiesLexington, Kentucky, that was acquired pursuant to a certain Master Real Estate Asset Purchase Agreement entered into on December 10, 2017, with a like-named seller, Mt Melrose, LLC, a Kentucky limited liability company (“Old Mt. Melrose”). On January 10, 2018, Mt Melrose, LLC (“New Mt Melrose”) completed its first acquisition of 44 real properties under the agreement, and on June 29, 2018, Mt Melrose, LLC completed its second acquisition of 69 additional real properties under the agreement. However, during the quarterly period then ended December 31, 2018, the parties mutually agreed to terminate the Master Real Estate Asset Purchase Agreement and no further acquisitions were consummated. A third-party property manager was engaged as of November 1, 2018, to manage certain of the real properties previously acquired. Management determined that it was necessary to right-size New Mt Melrose operations to reduce its level of high-interest debt. In an effort to expedite the optimization of the Mt Melrose portfolio, management further determined that a dedicated operator was necessary to manage the subsidiary. Accordingly, 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”). 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 has retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest.
Our other real estate operations include activity from a legacy real estate investment portfolio held through EDI Real Estate, LLC. The portfolio, primarily located in the corporate segment. Roanoke area of Virginia, includes residential properties and vacant land. The portfolio includes single-family homes that are currently rented and managed through a third-party property manager, as well as additional properties currently listed for sale.
Internet Operations: Operations
The Company operates its internet operations 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 and support to customers in the United States and Canada.
HVAC Operations:
Home Services Operations
The Company operatesoperated its HVAC Operationshome services operations through Specialty Contracting Group, LLC (formerly HVAC Value Fund, LLC,LLC), a wholly-ownedwholly owned subsidiary focused on the acquisition and management of HVAC and plumbing companies in Arizona and throughout the Southwest. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, we, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized and launched this subsidiary on June 13, 2016.Arizona. As of September 30,December 31, 2017, HVAC Value Fundthe subsidiary had closed on six acquisitions totaling $2,015,000, plus estimated earn outsfor an aggregate purchase price of approximately $350,000.
Real Estate Operations: Sitestar owns a real estate investment portfolio through EDI Real Estate, LLC that includes residential properties, vacant land,$2.02 million, which included earn-outs of approximately $325,000. For all six acquisitions, all asset allocations made by management are final and one commercial property. Our real estate portfolio is primarily focusedall earn-outs have been paid in full as of December 31, 2018. On May 24, 2019, the Company completed an asset sale transaction of its home services operations to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and conveyed all of the subsidiary’s personal property and customer lists and records, excluding stock inventory and other current assets. No cash consideration was exchanged in the Roanoketransaction. As part of the transaction, Rooter Hero assumed the subsidiary’s obligations under lease and/or loan agreements for all outstanding vehicles and Lynchburg areas of Virginia. The portfolio includes single family homes that are currently rented and managed through a third-party property manager,equipment, as well as vacant properties being prepared or currently listedthe obligations to service all of the subsidiary’s customer accounts going forward. As of the period ended September 30, 2019, and for sale.
Asset Management Operations: Sitestar created a wholly-owned asset management subsidiaryall prior periods presented, all revenue and expenses related to home services operations have been reported as discontinued operations on October 10, 2016 named Willow Oak Asset Management, LLC (“Willow Oak”). As previously reportedthe accompanying unaudited condensed consolidated statements of operations.
Other Operations
Other operations include investment activity and corporate activity that is not considered to be one of the Company’s primary lines of business.Investment activity includes activity from various nonrecurring investment opportunities, such as the Company’s investment in our Current Reports on Form 8-K filed with the SEC on September 19, 2016 and December 30, 2016, respectively, the Company agreed to make a seed investment totaling $10 million through Willow Oak in Alluvial Fund, LP, an unrelated private partnership that was launched on January 1, 2017. As previously reported in our Current Report on Form 8-K filed with the SEC on January 30, 2017, on January 24, 2017 Willow Oak entered into a certain Limited Liability Company Operating Agreement of Huckleberry Real Estate Fund II, LLC, (“Huckleberry Fund”) datedand its financing arrangement with Triad Guaranty, Inc.
Corporate operations include any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of January 24, 2017. Future investments of this nature will operate under Willow Oaksubsidiaries, and all related revenues and expenses will be allocated toother items that affect the asset management segment accordingly. Sitestar,overall Company. ENDI may also invest in marketable securities through its wholly-owned subsidiary, Willow Oak signed a fee share agreement on May 11, 2017 with Lizard Head, LLC, the general partner of Bridge Reid Fund I, LP. Under the agreement, Willow Oak became a special limited partner to Bridge Reid, providing fund advisory services to Bridge Reid in exchange for payments equal to 33% of the management fees accrued quarterly by the general partner and 33% of the incentive fees accrued annually, on investors who become limited partners after May 11, 2017. Willow Oak signed a fee share agreement on June 13, 2017 with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, also a Sitestar director. Under the Agreement, Willow Oak Asset and Coolidge are the sole members 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.corporate operations.
Summary of Financial Performance
Common stockholders’ equity increaseddecreased from $9,160,029$15,915,651 at December 31, 20162018, to $15,171,806 $10,371,595 at September 30, 2017. The change was mostly attributable to $4,625,000 of additional common stock issued.2019. This change was also driven by $585,930attributable to $836,253 of comprehensive income in the internet segment, $88,774 of comprehensive income in the HVAC segment, $68,810 of comprehensive loss from the real estate segment, $1,241,023 of comprehensivenet income in the asset management segment and $460,140$390,477 of comprehensivenet income in the internet segment, and was offset by a net loss of $3,931,230 in the other segments, $759,644 of net loss in the corporatereal estate segment, and $1,441,156 of loss resulting from discontinued operations under the home services segment. The comprehensive loss attributable to the corporate segment was offset by realized capital gains from investments in marketable securities of $76,940. Corporate expenses for the nine months ended September 30, 20172019 totaled $482,561.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)$641,474.
This section provides an overview of changes in our assets, liabilities, and equity and should be read together with our unaudited condensed consolidated financial statements, including the accompanying notes to the financial statements. The table below provides a balance sheet summary for the periods presented and is designed to provide an overview of the balance sheet changes from quarter to quarter.
|
| September 30, 2017 |
|
| June 30, 2017 |
|
| March 31, 2017 |
|
| December 31, 2016 |
| September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | |||||||||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Cash and equivalents |
| $ | 151,867 |
|
| $ | 2,231,807 |
|
| $ | 4,573,708 |
|
| $ | 2,607,370 |
| $ | 161,275 | $ | 542,856 | $ | 519,525 | $ | 435,726 | |||||||||
Accounts receivables, net | 35,646 | 20,212 | 65,614 | 58,263 | |||||||||||||||||||||||||||||
Investments, at fair value |
|
| 12,201,972 |
|
|
| 8,978,684 |
|
|
| 6,075,884 |
|
|
| 599,500 |
| 9,522,236 | 9,735,274 | 9,821,054 | 8,915,238 | |||||||||||||
Real estate, total |
|
| 839,849 |
|
|
| 1,102,158 |
|
|
| 1,098,758 |
|
|
| 1,905,291 |
| 1,412,208 | 1,421,364 | 11,691,075 | 11,811,789 | |||||||||||||
Accounts receivables, net |
|
| 481,123 |
|
|
| 440,403 |
|
|
| 260,051 |
|
|
| 212,751 |
| |||||||||||||||||
Goodwill and other assets |
|
| 2,794,364 |
|
|
| 2,763,402 |
|
|
| 2,976,470 |
|
|
| 4,516,320 |
| 713,578 | 769,570 | 3,353,607 | 3,298,436 | |||||||||||||
Total assets |
| $ | 16,469,175 |
|
| $ | 15,516,454 |
|
| $ | 14,984,871 |
|
| $ | 9,841,232 |
| $ | 11,844,943 | $ | 12,489,276 | $ | 25,450,875 | $ | 24,519,452 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Deferred revenue |
| $ | 239,748 |
|
| $ | 247,873 |
|
| $ | 238,941 |
|
| $ | 214,898 |
| |||||||||||||||||
Accounts payable |
|
| 180,692 |
|
|
| 220,631 |
|
|
| 92,953 |
|
|
| 77,918 |
| $ | 66,584 | $ | 161,357 | $ | 168,147 | $ | 165,495 | |||||||||
Accrued expenses |
|
| 218,294 |
|
|
| 195,414 |
|
|
| 219,602 |
|
|
| 123,387 |
| 51,703 | 80,761 | 453,657 | 338,050 | |||||||||||||
Deferred revenue | 217,811 | 217,020 | 213,288 | 210,212 | |||||||||||||||||||||||||||||
Notes payable and other liabilities |
|
| 658,635 |
|
|
| 497,954 |
|
|
| 528,676 |
|
|
| 265,000 |
| 1,137,250 | 1,372,303 | 8,326,363 | 7,890,044 | |||||||||||||
Total liabilities |
|
| 1,297,369 |
|
|
| 1,161,872 |
|
|
| 1,080,172 |
|
|
| 681,203 |
| 1,473,348 | 1,831,441 | 9,161,455 | 8,603,801 | |||||||||||||
Total stockholders’ equity |
|
| 15,171,806 |
|
|
| 14,354,582 |
|
|
| 13,904,699 |
|
|
| 9,160,029 |
| 10,371,595 | 10,657,835 | 16,289,420 | 15,915,651 | |||||||||||||
Total liabilities and stockholders’ equity |
| $ | 16,469,175 |
|
| $ | 15,516,454 |
|
| $ | 14,984,871 |
|
| $ | 9,841,232 |
| $ | 11,844,943 | $ | 12,489,276 | $ | 25,450,875 | $ | 24,519,452 |
Results of operationsOperations
Corporate
InAsset Management Operations
The Company operates its asset management business through a wholly owned subsidiary, Willow Oak Asset Management, LLC. This subsidiary was formed on October 10, 2016. As of December 31, 2016, this subsidiary did not have material operations. Effective January 1, 2017, Willow Oak Asset Management made its first investment. 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.
As of the quarter ended September 30, 20172019, Willow Oak holds a direct investment in the corporate segment producedAlluvial Fund, LP. In accordance with GAAP, for financial reporting purposes, these unrealized investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations. This treatment can result in reporting negative revenue figures for a total of $97,029 of comprehensive loss. This includes $10,068 of other comprehensive income which was generatedgiven period. Willow Oak continues to earn revenue through the remaining fee share arrangements, as a result of unrealized capital gains from the ownership of marketable securities. Expenses totaled $108,849. This compares to corporate expenses of $315,301 incurred duringwell as through fund management services.
During the quarter ended September 30, 2016. Expenses were higher during2019, the asset management segment produced negative $159,085 of revenue. Cost of revenue was $0 and operating expenses totaled $81,906. Other income attributable to the asset management segment totaled $4,983. The net loss for the quarter ended September 30, 2016 compared2019, totaled $236,008. This compares to the quarter ended September 30, 20172018, when the asset management segment produced $330,112 of revenue, cost of revenue was $0, and operating expenses totaled $107,538. Additionally, other income for the quarter ended September 30, 2018, was $11,075, and total net income for the quarter ended September 30, 2018, was $233,649. The decrease in revenue is due to market volatility and the application of specific GAAP revenue recognition rules as noted above. The decrease in operating expenses is primarily due to increased accountinglower payroll expenses. Other income for the segment is primarily due to sub-lease rental income earned through the Company's New York office space.
As of the quarter ended September 30, 2019, the fair value of long-term investments held through the asset management segment totaled $9,468,390. This compares to the fair value of long-term investments held at December 31, 2018, which totaled $8,446,488. This increase in investments is attributable to positive Alluvial Fund performance during the nine-month period ended September 30, 2019.
Real Estate Operations
EDI Real Estate Operations
Through EDI Real Estate, as of September 30, 2019, the Company owns a total of 12 units consisting of nine units held for investment and legalthree vacant lots held for resale as noted below:
EDI Real Estate | September 30, 2019 | December 31, 2018 | ||||||
Units occupied or available for rent | 5 | 6 | ||||||
Vacant units being prepared for rent | 2 | 3 | ||||||
Total units held for investment | 7 | 9 | ||||||
Occupied units held for resale | 2 | — | ||||||
Vacant lots held for resale | 3 | 3 | ||||||
Total units held for resale | 5 | 3 |
Units held for investment consist of single-family residential rental units.
The leases in effect, as of the period ended September 30, 2019, are based on either annual or multi-year time periods and typically include month-to-month provisions after the completion of the initial term. An outside property management company manages these rental properties on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties.
EDI Real Estate | September 30, 2019 | December 31, 2018 | ||||||
Total real estate held for investment | $ | 556,867 | $ | 710,022 | ||||
Accumulated depreciation | (116,292 | ) | (107,576 | ) | ||||
Real estate held for investment, net | $ | 440,575 | $ | 602,446 | ||||
Real estate held for resale | $ | 971,633 | $ | 40,047 |
For the period ended September 30, 2019, depreciation expense on the EDI Real Estate portfolio of properties was $6,116. This compares to depreciation expense for the period ended September 30, 2018, when depreciation expense on the EDI Real Estate portfolio of properties was $5,304.
EDI Real Estate did not purchase or sell any properties during the periods ending September 30, 2019 and 2018.
During the period ended September 30, 2019, two residential rental properties were transferred from “held for investment” to “held for resale.” The carrying value of these two properties totaled $121,558. EDI Real Estate did not transfer any properties during the period ended September 30, 2018.
During the period ended September 30, 2019, impairment adjustments of $42,407 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect pending sales activity as of the period ended September 30, 2019. During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management in 1998.
For the period ended September 30, 2019, the real estate segment generated rental revenue of $19,359. The cost of rental revenue totaled $30,753. Operating expenses relatedfor the period ended September 30, 2019, were $11,827. Other expenses totaled $13,709 and the net loss for the period ended September 30, 2019, totaled $36,930. This compares to outsourced accounting rolesthe period ended September 30, 2018, when revenue was $220,600, and legacy legal matters. Accountingcost of revenue totaled $107,527. Operating expenses were $275,414, other expenses totaled $137,406, and legal rolestotal net loss was $299,747. Other expenses incurred during the periods ended September 30, 2019 and 2018, were primarily interest-related expenses.
Mt Melrose Operations
Management has determined that the Company no longer has a controlling financial interest in Mt Melrose and is no longer the primary beneficiary as of June 30, 2019. All activity prior to the deconsolidation event has been included on the accompanying unaudited condensed consolidated statements of operations for the period ended September 30, 2019, under the real estate segment. Simultaneously, as of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have since been brought in-house.removed from the accompanying unaudited condensed consolidated balance sheets. Note that this deconsolidation event is separate from the deconsolidation event that took place on November 1, 2018. As of December 31, 2018, however, Mt Melrose did have a controlling financial interest and was the primary beneficiary. The consolidated Mt Melrose assets as of December 31, 2018, included the following units:
Mt Melrose | December 31, 2018 | |||
Units occupied or available for rent | 98 | |||
Vacant units being prepared for rent | 15 | |||
Total units held for investment | 113 | |||
Residential and commercial units | 48 | |||
Vacant lots | 9 | |||
Total units held for resale | 57 |
As of December 31, 2018, units held for investment consist of single-family and multi-family residential rental units. The leases in effect for the occupied Mt Melrose units as of the year ended December 31, 2018, are based on either annual or multi-year time periods. Month-to-month leases are reserved for special circumstances. Units held for resale consist of single-family units, multi-family units, commercial properties, and undeveloped lots of land.
As of the year ended December 31, 2018, the Mt Melrose portfolio of properties was carried at the following amounts on the accompanying unaudited condensed consolidated balance sheets:
Mt Melrose | December 31, 2018 | |||
Total real estate held for investment | $ | 9,049,945 | ||
Accumulated depreciation | (159,514 | ) | ||
Real estate held for investment, net | $ | 8,890,431 | ||
Real estate held for resale | $ | 2,278,865 |
For the period ended September 30, 2019, depreciation expense on the Mt Melrose portfolio of properties was $64,908.
Mt Melrose did not purchase or sell any properties in the period ended September 30, 2018.
During the period ended September 30, 2018, Mt Melrose transferred one property with a carrying value of $145,406 from “held for investment” to “held for resale.”
During the year ended December 31, 2018, an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for resale” from “held for investment” as part of a portfolio redirection intended to reduce high-interest debt.
Effective on June 27, 2019, the Company recognized a loss on the partial sale of Mt Melrose in the amount of $3,519,053, which has been reported separately on the accompanying unaudited condensed consolidated statements of operations under the other segment for the nine-month period ended September 30, 2019. The amount of the loss is based upon the value of the Company’s remaining interest in the subsidiary, less the Company’s previous carrying value of the subsidiary.
Internet Operations
As of September 30, 2017,2019, the focus of our internet segment isremains 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 segment during 2018 or during the three monthsperiod ended September 30, 2017. Additionally, competitive pressures have negatively affected our ongoing revenue. Accordingly, revenue has continued to decline, though at a slower pace than previous years, as noted below.2019.
Revenue attributed to the internet segment during the quarterperiod ended September 30, 2019, totaled $265,171 and cost of revenue totaled $83,517. Operating expenses for the segment totaled $43,168 for the period ended September 30, 2019, and other income totaled $384. Total net income for the internet segment was $138,870 for the period ended September 30, 2019. This compares to the period ended September 30, 20172018, when revenue totaled $314,202. While this$288,312, cost of revenues totaled $86,658, operating expenses were $58,475, other income was a decrease of $41,182 when compared to revenue generated in this segment during the quarter ended September 30, 2016 totaling $355,384,$479, and net income from operations reportedwas $143,658. Other income for the segment decreased by only $19,426 during the same time period. The year over year revenue decline from the quarters ended September 30, 2017 and 2016 was 11.6%. This was a slight improvement from the year over decline of 11.7% reported at the year ended December 31, 2016 compared to the year ended December 31, 2015. The year over year revenue decline is the result of fewer customer renewals and the absence of new customers.
The cost of revenue during the quarter ended September 30, 2017 totaled $81,144. This was an increase of $10,854 when compared to the cost of revenue in this segment during the quarter ended September 30, 2016 totaling $70,290. This increase was the result of a temporary contract price decrease experienced during the quarter ended September 30, 2016.
As noted in the quarterly report filed on August 8, 2017, during the quarter ended June 30, 2017, the internet segment closed on the sale of First.com, a domain name that has been actively marketed since the first quarter of 2016. The domain name had a cost basis of $200,000 and was sold for net proceeds of $200,000, which includes broker and commission fees paid. This transaction was reported in other income during the quarter ended June 30, 2017.credit card reward programs.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The table below provides a summary of income statement figures over time. These figures are specific to the internet segment and are presented for the quarterly periods designated below.
|
| September 30, 2017 |
|
| June 30, 2017 |
|
| March 31, 2017 |
|
| December 31, 2016 |
| ||||
Revenues |
| $ | 314,202 |
|
| $ | 328,341 |
|
| $ | 335,086 |
|
| $ | 347,005 |
|
Cost of revenue |
|
| 81,144 |
|
|
| 76,145 |
|
|
| 79,809 |
|
|
| 79,471 |
|
Operating expenses |
|
| 61,299 |
|
|
| 68,214 |
|
|
| 94,024 |
|
|
| 66,375 |
|
Other income |
|
| 656 |
|
|
| 2,771 |
|
|
| 54,309 |
|
|
| 6,382 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (258 | ) |
Comprehensive income (loss) |
| $ | 172,415 |
|
| $ | 186,753 |
|
| $ | 215,562 |
|
| $ | 207,283 |
|
Management is currently identifying the market value for domain names owned by the Company in order to assess potential income opportunities. Management also evaluates these domain names available for purchase in order tothird-party sales potential, as well as for other marketing opportunities that could generate new revenue from current customers who utilize the domains.
Effective January 1, 2016,
As of September 30, 2019, we have improveda total of 7,622 customer accounts across the U.S. and restructuredCanada. This compares to the period ended September 30, 2018, when we had a total of 8,997 customer accounts. As of September 30, 2019, approximately 63% of our internal reporting in the internet segment. Our current sales mix of customers consists of approximately 69%revenue is driven by internet access and 31%services, with the remaining 37% being earned though web hosting and storage. Approximately 91%other storage services.
Approximately 92% of our customer accounts are managed by our U.S. operations and 9% of our customer accountsbased, while 8% are managed by our Canada operations.based. Revenue generated by our U.S. operations totaled $295,371customers totaled $251,809 and revenue generated by our Canada operationsCanadian customers totaled $18,831 during$13,362 during the quarterperiod ended September 30, 2017.2019. This compares to revenue generated by our U.S. operationscustomers of $330,480$273,219 and revenue generated by our Canada operationsCanadian customers of $23,904$15,093 during the quarterperiod ended September 30, 2016.2018.
HVAC
Home Services Operations
The Company operates its HVAC
As noted previously, Specialty Contracting Group, LLC’s historical operations through HVAC Value Fund, LLC, a wholly-owned subsidiary focused on the acquisition and management of HVAC and plumbing companies in Arizona and throughout the Southwest. After gaining experience with HVAC acquisitions, management noted the complementary nature of plumbing providers and completed two acquisitions where a significant amount of their revenue originated from plumbing services. As previously reportedare now classified as “discontinued operations” in our Current Report on Form 8-K filed withfinancial statements, and all presented prior periods have also been reclassed to discontinued operations for comparability. The net loss reported from discontinued operations related to the SEC on June 14, 2016, we, along with JNJ Investments, LLC, an unaffiliated third party and memberhome services segment, as of HVAC Value Fund, LLC, organized and launched this subsidiary on June 13, 2016. HVAC Value Fund closed on five acquisitions totaling $1,455,000 during the year ended December 31, 2016. During the nine monthsperiod ended September 30, 2017, HVAC Value Fund closed2019, was $31,151. Included in this amount is an offsetting $12,183 loss recovery on one additional acquisition totaling $560,000. As previously reporteddiscontinued operations that represents royalties earned in our Current Report on Form 8-K filedaccordance with the SEC on June 14, 2016 and discussed further herein,Rooter Hero royalty arrangement mentioned previously. This compares to net income of $83,254 reported from discontinued operations related to the purpose of HVAC Value Fund is to acquire HVAC and plumbing businesses. Accordingly, all of our acquisitions were made inhome services segment for the ordinary course of business and consistent with the customs and practices (including with respect to nature, scope, magnitude, quantity, frequency and contemplated purpose) of HVAC Value Fund, and, in turn, the Company.
Our HVAC operations generated revenue of $1,332,239 during the quarterperiod ended September 30, 2017. Cost2018.
Other Operations
In the period ended September 30, 2019, the other segments did not produce any revenue or cost of revenue totaled $875,991 and operating expenses totaled $322,639. Other expenses totaled $13,928. Thegoods sold, but the segment earned $20,249 of other expenses areincome primarily related to the interest portionreversal of the notes payable incurred by HVAC Value Fund as well as a legal expense. Additionally, corporate operating expenses totaled $141,270. This resulted in a net loss incurred on the disposal of an asset. Comprehensive income$121,021 for the quarterperiod ended September 30, 2019. This compares to revenue of $20,934, cost of revenue of $31,800, operating expenses of $130,874, and other income produced of $1,908 for the period ended September 30, 20172018. Corporate expenses totaled $119,681. This compares$126,828, and the segment recorded a net loss of $139,832 during the period ended September 30, 2018. Revenue and cost of goods sold were higher due to the quarterlegacy EDI Real Estate, LLC activity being reported, as noted previously, under the other segment for the period ended September 30, 2016, when HVAC operations generated revenue of $906,910, cost of revenue totaled $619,881, operating2018. Corporate expenses totaled $219,537 and comprehensive income forwere slightly higher during the quarter totaled $66,370. Management notes that for the quarterperiod ended September 30, 2016, HVAC Value Fund had closed only four of the six currently held acquisitions.
Real Estate Operations
As of September 30, 2017, we owned 10 residential properties, one commercial property,2019 due to additional legal and interests in several lots. In 2008, the Company had implemented a program to redirect cash generated from the internet operations into the purchase and renovation of real estate. This program was abolished with the change in management on December 14, 2015. From December 14, 2015 through the end of 2015, several real estate agents and investors were engaged to determine the marketability of our properties. Repair work ceased until a more thorough review for each property could be completed to determine the most profitable course forward. Prior to year-end 2015, a list of properties was assigned to a real estate agent. Additionally, during 2015, we entered into negotiations with several investors to sell various properties. Many of these properties were held for resale by prior management, but prior marketing activity was poor.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)accounting fees.
The Company sold three residential properties in the quarter ended September 30, 2017 for gross proceeds of $299,900 and net proceeds of $271,037. The carrying value of the three properties sold was $275,541. Two of these properties were previously held for sale, while the other property was held for investment and sold through a tenant purchase option. No properties were acquired during this time period or subsequent to the quarter ending. We continue to market for sale or prepare to market for sale each property in the held for resale category. Properties have either sold as-is or have been repaired and upgraded before being listed for sale. Several real estate agents have been engaged to market the remaining properties listed for resale.
We own several rental properties managed by a third-party property management company. As of September 30, 2017, we had eight properties available for rent. All rental properties were occupied. The leases in effect as of the quarter ended September 30, 2017 are based on either annual or multi-year time periods and include month-to-month provisions after the completion of the initial term. The property management company has introduced updated and renewed leases for existing rental properties. All eight properties were current with regard to tenant payments as of September 30, 2017. This is comparable to the quarter ended September 30, 2016 when we also had eight properties available for rent with all of the properties occupied and current with regard to tenant payments.
During the quarter ended September 30, 2017, the Company generated rental revenue of $24,144, net of bad debt expense. The cost of revenue totaled $6,081. This compared to rental revenue of $27,023, net of bad debt during the quarter ended September 30, 2016. The cost of revenue during the comparison period totaled $11,104. The decrease in cost of revenue was the result of improved maintenance of the rental properties by our third-party property manager.
Depreciation expense totaled $5,304 for the quarter ended September 30, 2017. Total accumulated depreciation as of September 30, 2017 totaled $81,057.
Asset Management Operations
The Company operates its asset management business through a wholly-owned subsidiary, Willow Oak Asset Management, LLC (“Willow Oak”). This subsidiary was formed on October 10, 2016. As of the quarter ended September 30, 2017, all four $2.5 million payments of the $10 million seed investment in Alluvial Fund, as previously described, have been made. Willow Oak earns revenues through a fee share arrangement with Alluvial Fund, LP. In accordance with GAAP, for financial reporting purposes, all Alluvial Fund investment gains and losses are reported as revenue on the condensed consolidated statement of income. For tax purposes, the realized portion of these gains will be taxable. Fees earned from the fee share agreement specific to management fees are paid monthly and reported as revenue. Fees earned from the fee share agreement specific to performance are accrued monthly and reported as revenue. These fees are paid out annually and may fluctuate throughout the year.
Willow Oak entered into a certain Limited Liability Company Operating Agreement of Huckleberry Real Estate Fund II, LLC (“Huckleberry Fund”) dated as of January 24, 2017 (the “Operating Agreement”). In connection with entering into the Operating Agreement, Willow Oak also entered into a certain Side Letter Agreement dated January 23, 2017 (the “Side Letter”) with Huckleberry Fund and Huckleberry Capital Management, LLC (“Huckleberry Management”), an unaffiliated and unrelated New Jersey limited liability company and registered investment adviser. Under the terms of the Operating Agreement and the Side Letter, Willow Oak subscribed for a membership interest in Huckleberry Fund, a Delaware limited liability company and private investment fund managed by Huckleberry Management and organized to invest in the Oak Street properties real estate project in Lakewood, New Jersey. In connection with our subscription for a membership interest in Huckleberry Fund, Willow Oak committed to make a capital contribution to Huckleberry Fund in an aggregate amount of at least $750,000, which was made during the quarter ended March 31, 2017.
Willow Oak signed a fee share agreement on May 11, 2017 with Lizard Head, LLC, the general partner of Bridge Reid Fund I, LP. Under the agreement, Willow Oak became a special limited partner to Bridge Reid, providing fund advisory services to Bridge Reid in exchange for payments equal to 33% of the management fees accrued quarterly by the general partner and 33% of the incentive fees accrued annually, on investors who become limited partners after May 11, 2017.
Willow Oak signed a fee share agreement on June 13, 2017 with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, also a Sitestar director. Under the Agreement, Willow Oak Asset and Coolidge are the sole members 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.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
In the quarter ended September 30, 2017 the asset management segment produced a total of $674,054 of comprehensive income which was generated as a result of unrealized capital gains recognized as revenue from its partnership with Alluvial Fund, LP. As previously noted, these non-current securities are marked to market at the end of each reporting period and unrealized gains and losses are recognized as revenue in the period of adjustment. Expenses totaled $41,544. These expenses were primarily legal and consulting fees related to the launch of the Bonhoeffer Fund, LP. No comparable figures exist for the quarter ended September 30, 2016 as the asset management subsidiary did not commence activities until January 1, 2017.
Financial Condition, Liquidity, and Capital Resources
During the period ended September 30, 2019, ENDI carried out its business strategy in five operating segments: Asset Management Operations, Real Estate Operations, Internet Operations, Home Services Operations, and Other Operations. As of the period ended September 30, 2019, 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 make reinvestments as opportunities present themselves. We will only reinvest 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 equivalentsequivalents totaled $151,867$161,275 at the quarter end ended September 30, 20172019, compared to $2,607,370$435,726 at year end year-end December 31, 2016.2018. The Company intends to continue to build up cash reserves moving forward. Real estate held for investment decreased to $440,575 at the quarter ended September 30, 2019, compared to $9,492,877 at year-end December 31, 2018, and real estate held for resale decreased to $971,633 at the quarter ended September 30, 2019, compared to $2,318,912 at year-end December 31, 2018. Property and equipment also decreased to $10,522 at the quarter ended September 30, 2019, from $1,019,742 at year-end December 31, 2018. The decreases in real estate and property and equipment are due to the recent asset sale under the home services segment and the equity sale and subsequent deconsolidation under the real estate segment. The Company does not expect to make significant reinvestments into property and equipment used in operating activities at this time. Total notes payable decreased to $813,817 from $7,521,819 during the same time period. This decrease in cash and equivalents is the result of our investments in Alluvial Fund and an acquisition by our HVAC segment. During this time period, net accounts receivable increased to $481,123 from $212,751 due to increased saleswas also primarily related to the HVAC segment duringequity sale and deconsolidation under the quarter ended September 30, 2017.
Accounts payable increased to $180,692 at quarter end September 30, 2017 compared to $77,918 at year end December 31, 2016. Accrued expenses increased to $158,271 from $71,532 during this time period. The increases in accounts payable and accrued expenses are also due to increased activity in the HVAC segment in the quarter ended September 30, 2017. Accrued bonus increased to $110,000 from $51,855 during this time period. Deferred revenue increased to $239,748 from $214,898 during this time period. Fluctuation in accrued bonus and deferred revenue are cyclical differences based on the timing of bonuses paid and the renewal of customer subscriptions in the internetreal estate segment.
We
The Company currently believebelieves that our existing balances of cash, cash equivalents, and cash generated from operations and from the sale of our real estate portfolio will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months and the foreseeable future. The Company does not have significant long-term debt. Our liquidity could be negatively affected if we were to make an acquisition, which may necessitate the need to raise capital through future debt or equity financing. Additional financing may not be available at all or on terms favorable to us.
The aging of accounts receivable as of September 30, 20172019 and December 31, 20162018 is as shown:
September 30, 2019 | December 31, 2018 | |||||||
Current | $ | 33,639 | $ | 58,263 | ||||
30 – 60 days | 1,310 | — | ||||||
60 + days | 697 | — | ||||||
Total | $ | 35,646 | $ | 58,263 |
We have no material capital expenditure requirements.
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Current |
| $ | 291,269 |
|
| $ | 155,224 |
|
30 – 60 days |
| $ | 56,270 |
|
| $ | 14,016 |
|
60 + days |
| $ | 135,584 |
|
| $ | 43,511 |
|
Total |
| $ | 483,123 |
|
| $ | 212,751 |
|
Contractual Obligations
As previously reported in our Current Reports on Form 8-K filed with the SEC on September 19, 2016, and December 30, 2016, respectively, on September 19, 2016, the Company announced that it had entered into a letter of intent agreement with Alluvial Capital Management, LLC (“Alluvial Capital”) to make a seed investment through Willow Oak Asset Management in the Alluvial Fund, LP, a private investment partnership that was launched by Alluvial Capital on January 1, 2017 (“Alluvial Fund”). Alluvial Capital will actacts as the general partner and the Company, through Willow Oak Asset Management, will investhas invested in Alluvial Fund as a limited partner.
The Company, hasthrough Willow Oak, agreed to make capital contributions to Alluvial Fund in the aggregate amount of $10 million to be provided over four equal tranches on January 1, 2017, April 1, 2017, July 1, 2017, and October 1, 2017. As of September 30, 2017, the Company satisfied its obligation to provide $10 million in accordance with the contribution schedule.
Through On January 1, 2018, pursuant to an amendment to the HVAC segment, multiple capital lease obligations were acquired as partAlluvial Side Letter Agreement, dated December 15, 2017, Willow Oak Asset Management, LLC withdrew $3,000,000 from its $10,000,000 investment in Alluvial Fund, LP in order to partially fund the first close of the most recent acquisition that occurred duringMt Melrose Transaction. Arquitos Capital Partners, LP, which is managed by our director and principal executive officer Steven L. Kiel, simultaneously invested $3,000,000 in Alluvial to temporarily replace the quarter ended March 31, 2017. These obligations include leases on various vehicles and equipment that extendamount withdrawn by Willow Oak. The Arquitos investment into Alluvial counts toward Willow Oak’s seed investment total for purposes of Willow Oak’s agreement with Alluvial.
Also through 2020.
Through the asset management segment, aan operating lease on office space in New York City will commencecommenced on October 1, 2017. This lease extends through September 30, 2020. All related expenses
Through the home services segment, an operating lease on warehouse and office space in Scottsdale, Arizona, commenced on May 1, 2018. This lease extends through May 31, 2021. This lease was not conveyed with the asset sale on May 24, 2019.
On June 27, 2019, as per the Current Report on Form 8-K filed with the SEC on July 3, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). 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 three 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 dated June 27, 2019 (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 allocatedmanaged exclusively by one or more managers; and Woodmont is designated as the sole manager. In addition, the Company has expressly agreed to a three-year “standstill” arrangement, during which time the assetCompany will not in any way participate, directly or indirectly, in the management segment.
28
Item 2. Management’s Discussionor control of Mt Melrose; and Analysiswith respect to any matters requiring a vote of Financial Condition and Results of Operations (Continued)the members, the Company will vote with (i.e., the same as) Woodmont.
We have no other meaningful long-term debt obligations, purchase obligations, or other long-term liabilities as of September 30, 20172019, other than those previously mentioned related to the HVAC and asset management, segment. The only operating lease obligations are agreements for leased officehome services, and warehouse space for HVAC Value Fund, LLC, which extend through July 31, 2019, and for leased office space for Willow Oak Asset Management, LLC, which extends through September 30,2020.real estate segments.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements as of September 30, 2017.2019.
This item is not required by smaller reporting companies.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2017,
The Company’s management, with the participation of our Chief Executive Officerprincipal executive officer and Chief Financial Officer, performed an evaluation ofprincipal financial officer, have evaluated the effectiveness of the design and operation of our disclosure“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.Act, as of September 30, 2019. 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 the Chief Executive Officerour principal executive officer and the Chief Financial Officer,principal financial officer, to allow timely decisions regarding required disclosures. Because of inherent limitations, any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objective. Based upon theirthis 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 Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2017. Management is aware of these deficiencies and is working diligently to improve the relevant controls and procedures; provided, however, there can be no assurance that such relevant controls and procedures will be improved or, even if improved, that such improved controls and procedures will be effective.2019.
Changes in Our Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended September 30, 2017,2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date of our most recent evaluation of the Company’s internal control over financial reporting.
PART II. OTHEROTHER INFORMATION
Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.
On April 12, 2016, Sitestarthe 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 five percent5% 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 partyrelated-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).
Other Litigation
From time to time, we are subject to legal proceedings related to the conduct of our business. Based on the information available as of the date of this filing, we believe that the ultimate outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
This item is not required byfor smaller reporting companies.
As previously reported in our Current Report on Form 8-K filed with the SEC on February 6, 2017, the Company accepted and closed upon subscriptions from a private placement of shares of common stock of the Company (the “Private Placement”) in the amount of $4,625,000, and issued 92,500,000 shares of its common stock in connection therewith. Immediately following the Private Placement as of February 6, 2017, the Company had a total of 296,652,616 issued shares of common stock and 282,830,163 outstanding shares of common stock.
The issuance of shares of common stock of the Company pursuant to the Private Placement was a private placement to “accredited investors” (as that term is defined under Rule 501 of Regulation D), and was exempt from registration under the Securities Act of 1933 (“Securities Act”), in reliance upon Section 4(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.None.
None.
Not applicable.
The
On October 1, 2019 the Company, through its asset management subsidiary, formed Focused Compounding Capital Management, LLC. This new partnership, of which Willow Oak Capital Management, LLC will be a 10% owner, expects to launch a new private investment fund, Focused Compounding Fund, LP, set to begin investing January 1, 2020, in addition to advising managed accounts. Presently, this initiative is in its preparatory, “pre-launch” phase.
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 believes that Specialty Contracting Group’s continued existence is not primarily engaged,reasonably practicable or financially feasible. Management expects that all of Specialty Contracting Group’s cash on hand will be paid out ratably to its creditors and does not propose to primarily engage, in the businessclaimants.
Exhibit |
| Description |
| Certification of | |
| Certification of | |
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101 |
| Pursuant to Rule 405 of Regulation S-T, the following materials from |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: November |
| /s/ Steven L. Kiel |
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| Steven L. Kiel |
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(Principal Executive Officer) | ||
Date: November 8, 2019 | /s/ Alea A. Kleinhammer | |
Alea A. Kleinhammer | ||
Chief Financial Officer | ||
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| (Principal |
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