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, 20172020
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | Not applicable | Not applicable |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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 |
| ☒ | Smaller reporting company |
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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
The number of shares outstanding of the issuer’s Common Stock, $0.001$0.125 par value, as of November 9, 201711, 2020 is 282,830,163.2,602,240.
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | 30 | |
30 | ||
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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds | 31 | |
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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
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| September 30, 2017 (unaudited) |
|
| December 31, 2016 |
| September 30, 2020 (unaudited) | December 31, 2019 | ||||||||
Assets |
|
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|
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| ||||||||
Current Assets |
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|
| ||||||||
Cash and cash equivalents |
| $ | 151,867 |
|
| $ | 2,607,370 |
| $ | 337,149 | $ | 666,810 | ||||
Accounts receivable, net |
|
| 481,123 |
|
|
| 212,751 |
| 49,824 | 52,889 | ||||||
Investments, at fair value |
|
| 133,989 |
|
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| 599,500 |
| ||||||||
Other current assets |
|
| 135,248 |
|
|
| 2,554,861 |
| 17,000 | 29,555 | ||||||
Other current assets - held for resale | 261 | 428 | ||||||||||||||
Total current assets |
|
| 902,227 |
|
|
| 5,974,482 |
| 404,234 | 749,682 | ||||||
Real estate - held for resale |
|
| 337,481 |
|
|
| 1,399,280 |
| ||||||||
Long-term Assets | ||||||||||||||||
Real estate - held for investment, net |
|
| 502,368 |
|
|
| 506,011 |
| 244,789 | 380,515 | ||||||
Real estate - held for resale, net | 133,909 | 98,910 | ||||||||||||||
Property and equipment, net |
|
| 371,497 |
|
|
| 143,464 |
| 14,719 | 17,753 | ||||||
Goodwill, net |
|
| 1,991,994 |
|
|
| 1,553,745 |
| 212,445 | 212,445 | ||||||
Note receivable |
|
| 226,000 |
|
|
| — |
| 206,918 | 195,121 | ||||||
Non-current investments, at fair value |
|
| 12,067,983 |
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|
| — |
| ||||||||
Long-term investments | 11,135,580 | 10,126,204 | ||||||||||||||
Lease right-of-use assets | — | 45,056 | ||||||||||||||
Other assets |
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| 69,625 |
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| 264,250 |
| 73,429 | 73,958 | ||||||
|
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| 15,566,948 |
|
|
| 3,866,750 |
| ||||||||
Total long-term assets | 12,021,789 | 11,149,962 | ||||||||||||||
Total assets |
| $ | 16,469,175 |
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| $ | 9,841,232 |
| $ | 12,426,023 | $ | 11,899,644 | ||||
Liabilities and Stockholders' Equity |
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Liabilities and Stockholders’ Equity | ||||||||||||||||
Current Liabilities |
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Accounts payable | $ | 63,573 | $ | 157,934 | ||||||||||||
Accrued compensation | 143,953 | 175,259 | ||||||||||||||
Accrued expenses | 32,951 | 23,115 | ||||||||||||||
Deferred revenue |
| $ | 239,748 |
|
| $ | 214,898 |
| 213,498 | 204,960 | ||||||
Lease liability, current | — | 46,435 | ||||||||||||||
Notes payable, current |
|
| 449,363 |
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| 240,000 |
| 17,043 | 11,453 | ||||||
Accounts payable |
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| 180,692 |
|
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| 77,918 |
| ||||||||
Accrued bonus |
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| 110,000 |
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| 51,855 |
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Accrued expenses |
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| 108,294 |
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| 71,532 |
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Other current liabilities - held for resale | 147,113 | 146,958 | ||||||||||||||
Total current liabilities |
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| 1,088,097 |
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| 656,203 |
| 618,131 | 766,114 | ||||||
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 | 482,635 | 499,572 | ||||||||||||||
Total long-term liabilities |
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| 209,272 |
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| 25,000 |
| 482,635 | 499,572 | ||||||
Total liabilities |
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| 1,297,369 |
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| 681,203 |
| 1,100,766 | 1,265,686 | ||||||
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 |
|
| 294,527 |
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| 204,152 |
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Additional paid-in-capital |
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| 23,538,493 |
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| 19,096,858 |
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Treasury stock, at cost, 11,696,658 and 13,822,453 common shares |
|
| (544,571 | ) |
|
| (637,561 | ) | ||||||||
Accumulated other comprehensive (loss) income |
|
| (16,928 | ) |
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| 39,343 |
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Common stock, $0.125 par value, 2,800,000 shares authorized; 2,602,240 and 2,566,646 shares issued and outstanding | 325,280 | 320,831 | ||||||||||||||
Additional paid-in capital | 27,439,334 | 27,313,734 | ||||||||||||||
Accumulated other comprehensive income | — | — | ||||||||||||||
Accumulated deficit |
|
| (8,099,715 | ) |
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| (9,542,763 | ) | (16,439,357 | ) | (17,000,607 | ) | ||||
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 |
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Total liabilities and stockholders' equity |
| $ | 16,469,175 |
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| $ | 9,841,232 |
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Total stockholders’ equity | 11,325,257 | 10,633,958 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 12,426,023 | $ | 11,899,644 |
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
|
| 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 |
|
|
| 939,932 |
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Revenues - real estate |
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| 324,044 |
|
|
| 404,923 |
|
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| 1,216,190 |
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|
| 1,992,371 |
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Revenues - asset management |
|
| 715,598 |
|
|
| — |
|
|
| 1,320,808 |
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|
| — |
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Total revenues |
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| 2,686,083 |
|
|
| 1,667,217 |
|
|
| 7,041,540 |
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|
| 4,000,586 |
|
Cost of revenues - internet operations |
|
| 81,144 |
|
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| 70,290 |
|
|
| 237,098 |
|
|
| 290,043 |
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Cost of revenues - HVAC |
|
| 875,991 |
|
|
| 619,881 |
|
|
| 2,307,902 |
|
|
| 633,053 |
|
Cost of revenues - real estate |
|
| 306,537 |
|
|
| 402,285 |
|
|
| 1,264,602 |
|
|
| 1,918,603 |
|
Cost of revenues - asset management |
|
| — |
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| — |
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|
| — |
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|
| — |
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Total cost of revenues |
|
| 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 |
|
|
| 778,240 |
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Gross profit - HVAC |
|
| 456,248 |
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|
| 287,029 |
|
|
| 1,219,011 |
|
|
| 306,879 |
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Gross profit (loss) - real estate |
|
| 17,507 |
|
|
| 2,638 |
|
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| (48,412 | ) |
|
| 73,768 |
|
Gross profit - asset management |
|
| 715,598 |
|
|
| — |
|
|
| 1,320,808 |
|
|
| — |
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Total gross profit |
|
| 1,422,411 |
|
|
| 574,761 |
|
|
| 3,231,938 |
|
|
| 1,158,887 |
|
Selling, general and administrative expenses |
|
| 606,378 |
|
|
| 634,338 |
|
|
| 1,909,650 |
|
|
| 1,152,715 |
|
Total operating expenses |
|
| 606,378 |
|
|
| 634,338 |
|
|
| 1,909,650 |
|
|
| 1,152,715 |
|
Income from operations |
|
| 816,033 |
|
|
| (59,577 | ) |
|
| 1,322,288 |
|
|
| 6,172 |
|
Other (expense) income, net |
|
| (8,877 | ) |
|
| 93,779 |
|
|
| 120,760 |
|
|
| 98,350 |
|
Income before income taxes |
|
| 807,156 |
|
|
| 34,202 |
|
|
| 1,443,048 |
|
|
| 104,522 |
|
Income tax benefit (expense) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income |
|
| 807,156 |
|
|
| 34,202 |
|
|
| 1,443,048 |
|
|
| 104,522 |
|
Less: net income attributable to the noncontrolling interest |
|
| — |
|
|
| 14,102 |
|
|
| — |
|
|
| 16,955 |
|
Net income attributable to Sitestar Corporation stockholders |
| $ | 807,156 |
|
| $ | 20,100 |
|
| $ | 1,443,048 |
|
| $ | 87,567 |
|
Earnings per share, basic and diluted |
|
| 0.00 |
|
|
| 0.00 |
|
|
| 0.01 |
|
|
| 0.00 |
|
Weighted average number of shares, basic and diluted |
|
| 282,830,163 |
|
|
| 122,794,725 |
|
|
| 272,315,145 |
|
|
| 92,644,688 |
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For the three months ended | For the nine months ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues - asset management | $ | 1,607,150 | $ | (159,085 | ) | $ | 1,130,815 | $ | 1,127,075 | |||||||
Revenues - real estate | 16,129 | 19,359 | 219,772 | 420,464 | ||||||||||||
Revenues - internet operations | 242,237 | 265,171 | 741,011 | 805,990 | ||||||||||||
Revenues - other | — | — | — | 212,631 | ||||||||||||
Total revenues | 1,865,516 | 125,445 | 2,091,598 | 2,566,160 | ||||||||||||
Cost of revenues - real estate | 12,157 | 30,753 | 151,480 | 358,126 | ||||||||||||
Cost of revenues - internet operations | 85,412 | 83,517 | 251,829 | 254,373 | ||||||||||||
Total cost of revenues | 97,569 | 114,270 | 403,309 | 612,499 | ||||||||||||
Gross profit (loss) - asset management | 1,607,150 | (159,085 | ) | 1,130,815 | 1,127,075 | |||||||||||
Gross profit (loss) - real estate | 3,972 | (11,394 | ) | 68,292 | 62,338 | |||||||||||
Gross profit - internet operations | 156,825 | 181,654 | 489,182 | 551,617 | ||||||||||||
Gross profit - other | — | — | — | 212,631 | ||||||||||||
Total gross profit (loss) | 1,767,947 | 11,175 | 1,688,289 | 1,953,661 | ||||||||||||
Selling, general, and administrative expenses: | ||||||||||||||||
Insurance | 11,737 | (963 | ) | 40,560 | 68,630 | |||||||||||
Professional fees | 122,102 | 88,295 | 466,351 | 395,452 | ||||||||||||
Salaries and wages | 164,733 | 135,916 | 492,329 | 565,328 | ||||||||||||
Travel and meals | 121 | 9,458 | 3,256 | 31,942 | ||||||||||||
Other operating expenses | 42,019 | 45,465 | 147,016 | 383,155 | ||||||||||||
Total selling, general and administrative expenses | 340,712 | 278,171 | 1,149,512 | 1,444,507 | ||||||||||||
Income (loss) from operations | 1,427,235 | (266,996 | ) | 538,777 | 509,154 | |||||||||||
Loss on sale of subsidiary | — | — | — | (4,157,809 | ) | |||||||||||
Impairment expense | — | (3,040 | ) | — | (228,405 | ) | ||||||||||
Interest expense | (5,771 | ) | (13,473 | ) | (19,787 | ) | (293,202 | ) | ||||||||
Other income (loss), net | 7,632 | 28,420 | 26,498 | 67,369 | ||||||||||||
Total other income (loss) | 1,861 | 11,907 | 6,711 | (4,612,047 | ) | |||||||||||
Income (loss) from continuing operations before income taxes | 1,429,096 | (255,089 | ) | 545,488 | (4,102,893 | ) | ||||||||||
Income tax benefit (expense) | — | — | — | — | ||||||||||||
Income (loss) from continuing operations | 1,429,096 | (255,089 | ) | 545,488 | (4,102,893 | ) | ||||||||||
Income (loss) from discontinued operations, net of taxes | 1,857 | (31,151 | ) | 15,762 | (1,441,156 | ) | ||||||||||
Net income (loss) | $ | 1,430,953 | $ | (286,240 | ) | $ | 561,250 | $ | (5,544,049 | ) | ||||||
Net income (loss) per share, basic and diluted | 0.55 | (0.11 | ) | 0.22 | (2.18 | ) | ||||||||||
Net income (loss) per share from continuing operations, basic and diluted | 0.55 | (0.10 | ) | 0.21 | (1.61 | ) | ||||||||||
Net income (loss) per share from discontinued operations, basic and diluted | 0.00 | (0.01 | ) | 0.01 | (0.57 | ) | ||||||||||
Weighted average number of shares, basic | 2,602,240 | 2,544,776 | 2,596,541 | 2,544,776 | ||||||||||||
Weighted average number of shares, diluted | 2,602,908 | 2,544,776 | 2,597,136 | 2,544,776 |
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 |
|
| 2016 |
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| 2017 |
|
| 2016 |
| ||||
Net income |
| $ | 807,156 |
|
| $ | 34,202 |
|
| $ | 1,443,048 |
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| $ | 104,522 |
|
Other comprehensive income (loss), net of tax: |
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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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|
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|
|
|
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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 | For the nine months ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income (loss) | $ | 1,430,953 | $ | (286,240 | ) | $ | 561,250 | $ | (5,544,049 | ) | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Change in foreign currency translation adjustments | — | — | — | — | ||||||||||||
Comprehensive income (loss) | $ | 1,430,953 | $ | (286,240 | ) | $ | 561,250 | $ | (5,544,049 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF STOCKHOLDERS'CHANGES IN STOCKHOLDERS’ EQUITY
|
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|
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|
|
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|
|
|
|
|
| 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 | Stockholders’ | |||||||||||||||||||||||
Stock | Amount | Capital | Stock | Income | Deficit | Equity | ||||||||||||||||||||||
Balance December 31, 2019 | 2,566,646 | $ | 320,831 | $ | 27,313,734 | $ | — | $ | — | $ | (17,000,607 | ) | $ | 10,633,958 | ||||||||||||||
Net income (loss) | — | — | — | — | — | (1,971,168 | ) | (1,971,168 | ) | |||||||||||||||||||
Stock issuance | 35,594 | 4,449 | 125,600 | — | — | — | 130,049 | |||||||||||||||||||||
Balance March 31, 2020 | 2,602,240 | 325,280 | 27,439,334 | — | — | (18,971,775 | ) | 8,792,839 | ||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 1,101,465 | 1,101,465 | |||||||||||||||||||||
Balance June 30, 2020 | 2,602,240 | 325,280 | 27,439,334 | — | — | (17,870,310 | ) | 9,894,304 | ||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 1,430,953 | 1,430,953 | |||||||||||||||||||||
Balance September 30, 2020 | 2,602,240 | $ | 325,280 | $ | 27,439,334 | $ | — | $ | — | $ | (16,439,357 | ) | $ | 11,325,257 |
Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
Common | Paid-in | Treasury | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||||||||||
Stock | Amount | Capital | Stock | Income | Deficit | Equity | ||||||||||||||||||||||
Balance December 31, 2018 | 2,544,776 | $ | 328,160 | $ | 27,718,308 | $ | (511,901 | ) | $ | 3,054 | $ | (11,621,970 | ) | $ | 15,915,651 | |||||||||||||
Net income (loss) | — | — | — | — | — | 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) | — | — | — | — | — | (5,631,585 | ) | (5,631,585 | ) | |||||||||||||||||||
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 |
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, 20172020 and 20162019
|
| 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 |
|
2020 | 2019 | |||||||
Cash flows from (used in) operating activities: | ||||||||
Net income (loss) from continuing operations | $ | 545,488 | $ | (4,102,893 | ) | |||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
Loss on sale of subsidiary | — | 4,157,809 | ||||||
Deconsolidation of assets and liabilities from sale of subsidiary | — | (149,425 | ) | |||||
Impairment of long-term assets | — | 170,858 | ||||||
Depreciation and amortization | 16,424 | 155,708 | ||||||
Gain on long-term investments | (992,789 | ) | (1,218,399 | ) | ||||
Bad debt expense | 322 | 95,756 | ||||||
Gain on sale of real estate | (73,165 | ) | (16,932 | ) | ||||
Loss on disposal of property and equipment | — | 11,931 | ||||||
(Increase) decrease in: | ||||||||
Accounts receivable, net | 2,743 | 100,545 | ||||||
Notes receivable | (11,797 | ) | (11,754 | ) | ||||
Other current assets | 12,555 | (11,589 | ) | |||||
Increase (decrease) in: | ||||||||
Accounts payable | (94,361 | ) | (60,107 | ) | ||||
Accrued expenses | 107,200 | (113,240 | ) | |||||
Deferred revenue | 8,538 | 7,599 | ||||||
Accrued interest | — | 103,909 | ||||||
Net cash flows (used in) continuing operations | (478,842 | ) | (880,224 | ) | ||||
Net cash flows (used in) from discontinued operations | 16,084 | (269,458 | ) | |||||
Net cash flows (used in) operating activities | (462,758 | ) | (1,149,682 | ) | ||||
Cash flows from (used in) investing activities: | ||||||||
Proceeds from investments | — | 714,285 | ||||||
Purchases of investments | (16,587 | ) | (49,038 | ) | ||||
Proceeds from sale of real estate | 172,000 | 772,850 | ||||||
Improvements to real estate | (10,969 | ) | (105,186 | ) | ||||
Proceeds from sale of subsidiary | — | 100,000 | ||||||
Proceeds from sale of inventory | — | 4,160 | ||||||
Issuance of line of credit | — | (10,000 | ) | |||||
Net cash flows from continuing operations | 144,444 | 1,427,071 | ||||||
Net cash flows from (used in) discontinued operations | — | — | ||||||
Net cash flows from investing activities | 144,444 | 1,427,071 | ||||||
Cash flows from (used in) financing activities: | ||||||||
Principal payments on note payable | (136,449 | ) | (819,195 | ) | ||||
Proceeds from notes payable | 125,102 | 300,000 | ||||||
Net cash flows (used in) continuing operations | (11,347 | ) | (519,195 | ) | ||||
Net cash flows (used in) from discontinued operations | — | (32,645 | ) | |||||
Net cash flows (used in) financing activities | (11,347 | ) | (551,840 | ) | ||||
Net decrease in cash | (329,661 | ) | (274,451 | ) | ||||
Cash and cash equivalents at beginning of the period | 666,810 | 435,726 | ||||||
Cash and cash equivalents at end of the period | $ | 337,149 | $ | 161,275 |
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, 20172020 and 20162019
|
| 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 |
|
2020 | 2019 | |||||||
Non-cash and other supplemental information: | ||||||||
Transfer of real estate held for investment to held for resale | $ | 177,826 | $ | 944,387 | ||||
Transfer of real estate held for resale to held for investment | $ | 43,992 | $ | 145,000 | ||||
Issuance of common stock per equity compensation plan | $ | 130,049 | $ | — | ||||
Effects of adoption of new lease guidance on continuing operations | $ | — | $ | 59,563 | ||||
Effects of adoption of new lease guidance on discontinued operations | $ | — | $ | 58,127 | ||||
Continuing operations cash paid for interest | $ | 19,787 | $ | 174,951 | ||||
Discontinued operations cash paid for interest | $ | — | $ | 7,754 |
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 three- and nine-month periods ended September 30, 2020, the Company operatesoperated through fivefour reportable segments: Corporate, Internet Operations, HVACAsset Management Operations, Real Estate Operations, Internet Operations, and Asset ManagementOther Operations. Other Operations include corporate operations and nonrecurring or one-time strategic funding or similar activity that is not considered to be one of our primary lines of business. During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, as of the quarter ended September 30, 2020, and for all prior periods presented, Home Services Operations are reported as discontinued operations. The management of the Company also continually reviews various investmentbusiness opportunities for the Company, including those in other lines of business.
Corporate
The Company operates its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”) and Willow Oak Capital Management, LLC.
In 2016, the Company made a strategic determination to fund a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017 by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As of September 30, 2020, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations.
In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement in June 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership managed by Coolidge. Under their agreement concerning Bonhoeffer Fund, LP, Willow Oak paid all start-up expense and pays agreed-upon operating expenses that are not partnership expenses, Coolidge is responsible for all investment management, and Willow Oak receives 50% of all performance and management fees earned.
On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our Board chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak’s Fund Management Services (“FMS”), consisting of the following services: investor relations, marketing, administration, legal, accounting and bookkeeping, annual audit coordination, and liaison to third-party service providers. As consideration for the services, Arquitos pays Willow Oak a monthly fixed fee and an annual performance-based fee.
On October 1, 2019, Willow Oak partnered with Geoff Gannon and Andrew Kuhn to form Focused Compounding Capital Management, LLC (“Focused Compounding”). This joint venture, of which Willow Oak Capital Management is a 10% owner, manages capital through separately managed accounts and a private investment fund launched January 1, 2020. As a member of the general partner, Willow Oak Capital Management provides ongoing FMS and operational support in addition to having covered all one-time expenses associated with the launch of Focused Compounding Fund, LP. As consideration for the arrangement, Willow Oak Capital Management is entitled to 10% of gross management and performance fees earned by Focused Compounding. In addition to hosting a popular investing podcast, the individual principals of Focused Compounding share investment news and advice through a subscription-based service.
On September 29, 2020, Willow Oak, through its newly formed wholly-owned subsidiary, Willow Oak Asset Management Affiliate Management Services, LLC, executed a strategic relationship agreement with SVN Capital, LLC to become a 20% owner of the firm in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak Asset Management Fund Management Services, LLC, another newly formed wholly-owned subsidiary of Willow Oak. SVN Capital’s managing member, Shreekkanth Viswanathan, manages a global, long-only investment portfolio of compounders and special situations through separately managed accounts and a private limited partnership. As a beneficial owner of the general partner, Willow Oak is entitled to 20% of gross management and performance fees earned. Additionally, Willow Oak Asset Management Fund Management Services, LLC earns a direct fee from the private limited partnership for the administrative, compliance and tax and audit liaison services it renders.
Real Estate Operations
In December 2017, ENDI created a wholly-owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), to acquire a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into in December 2017 with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, then an ENDI director. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to Woodmont. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. See Note 4 for more information.
In July 2017, ENDI created a wholly-owned real estate subsidiary named EDI Real Estate, LLC to hold ENDI’s legacy portfolio of real estate. As of September 30, 2020, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes six residential properties and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, 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 operations segment through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operated its home services operations segment through its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.
As has been previously reported, on May 24, 2019, the Company completed its divestiture of the home services operations to Rooter Hero. See Note 3 for more information.
Other Operations
Other operations include nonrecurring or one-time strategic funding or similar activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main activities that comprise other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying unaudited condensed consolidated financial statements.
Huckleberry Real Estate Fund
In January 2017, the Company, through Willow Oak, committed to make a capital contribution to Huckleberry Real Estate Fund II, LLC, a private investment fund, in the aggregate amount of $750,000. In May 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly-owned subsidiary of the Company.
During the quarter ended March 31, 2019, all contributed capital was returned in full and a gain of $212,631 was recognized as revenue through the other operations segment includeson our unaudited condensed consolidated statements of operations for the nine-month period ended September 30, 2019.
Triad DIP Investors
In August 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy in April 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. On November 12, 2019, the Company exercised its warrants and purchased 450,000 shares of Triad Guaranty, Inc. Subsequently, on December 30, 2019, the Company monetized all 450,000 shares. The borrower has requested an extension from the original note repayment date of April 29, 2020, and as of the quarterly period ended September 30, 2020, the Company is evaluating a renegotiation of terms.
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.
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, the Company, 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. Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has 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, 2016 and further described above, the purpose of HVAC Value Fund is to acquire HVAC and plumbing businesses. Accordingly, these six acquisitions were made in 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.
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 focused 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 listed for sale.
10
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Sitestar created a wholly-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 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 investment partnership that was launched on January 1, 2017. Under the operating agreement included in the Form 8-K, the Company may not make any 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 permitted 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 SEC on January 26, 2017, the Company also committed to make a capital contribution to Huckleberry Real Estate Fund II, LLC in the aggregate amount of $750,000. Under the operating agreement included in the Form 8-K, the Managing Member shall have sole discretion regarding the amounts and timing of Distributions 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.
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, also a Sitestar director. Under the Agreement, Willow Oak 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.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, and those entities in which it otherwise has a controlling financial interest, 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 cessation of control resulting from the sale of 65% of the equity in New Mt. Melrose on June 27, 2019 (see Note 4), Specialty Contracting Group, LLC prior to the divestiture transaction on May 24, 2019 (see Note 3), Sitestar.net, Inc., and EDI Real Estate, LLC.
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, 2019 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 previously filed in our Annual Report on Form 10-K for the year ended December 31, 2016 included in2019. In the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s Annual Report on Form 10-K filed withfinancial position as of September 30, 2020 and the SEC on March 24, 2017 (the “2016 Form 10-K”). 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, 2017.2020 and 2019.
Use of Estimates
In accordance with Accounting Principles Generally Accepted in the United State of America (GAAP),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.
11
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, cash equivalents, accounts receivable, and accountsnote 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.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid instruments purchased with a maturity of three months or less.
Investments
The Company currently holds and makes investments in marketable securities through its corporate operations. Marketable securities held are classified 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. The Company holds additional non-currentvarious investments through its asset management operations. Non-currentoperations and real estate operations segments. Additionally, investments may be held and reported under the Company’s “other” segment. Assets held through these segments do not 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 5 for more information.
As of September 30, 2020 and December 31, 2019, the Company also holds its remaining equity investment in Mt Melrose, LLC through its real estate operations segment. The Company has determined that its remaining equity investment does not have a readily determinable fair value, and the Company will account for the investment at cost, less any impairment, as adjusted for changes resulting from observable price changes. When fair value becomes determinable, the investment will be marked to market at the end of each reporting period and revenue is recognized in the condensed consolidated statement of income in the period of adjustment.fair 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 operations 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 operations 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
As of HVAC servicesSeptember 30, 2020 and December 31, 2019, allowances offsetting gross accounts receivable on the accompanying consolidated balance sheets totaled $533 and $307, respectively. For the quarterly periods ended September 30, 2020 and 2019, bad debt expense (recoveries) from continuing operations was $58 and ($147), respectively. For the nine-month periods ended September 30, 2020 and 2019, bad debt expense from continuing operations was $322 and $95,756, respectively.
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
Furniture and fixtures (in years) | 5 | |||
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-Lived Assets
In accordance with GAAP, 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 estimated future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assetsProperty and equipment 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 whenmore often if events and circumstances indicate that those assets might not be recoverable.
No impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2020.
No impairment adjustments were recorded during the three-month period ended September 30, 2019. During the nine-month period ended September 30, 2019, an impairment adjustment of the remaining home services goodwill of $1,024,591 was recognized and reported as a component of the loss on the divestiture of Specialty Contracting Group, LLC's assets.
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 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, 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 was made to goodwill held through the HVAC segment. This adjustment was the result 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.
Other intangibleIntangible 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 assets(other than goodwill) consist of domain names attributed to the internet operations segment. The Company owns 228 domain names, of which 106 are available for sale. These domains are valued at historical cost. When management determines that material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account 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,evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of which 107impairment, then the Company uses estimated future undiscounted cash flows of the related intangible asset or asset grouping over the remaining life in measuring whether the assets are available for sale. These domainsrecoverable. In the event such cash flows are valued at historical cost.not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.
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.
No impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2020.
During the three- and nine-month periods ended September 30, 2019, impairment adjustments of $3,040 and $169,839, respectively, were recorded on a commercial warehouse and various vacant lots held for resale.
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.
Accrued Bonus
During the three- and nine-month periods ended September 30, 2020, $0 and $43,992, respectively, of real estate held for resale was transferred to real estate held for investment and $133,909 and $177,826, respectively, of real estate held for investment was transferred to real estate held for resale. Additionally, $0 and $10,969, respectively, of improvements were made to existing real estate held for investment during the three- and nine-month periods ended September 30, 2020. During the three- and nine-month periods ended September 30, 2019, $0 and $7,435, respectively, of improvements were made to real estate held for resale.
Accrued bonuses represent performance basedCompensation
Accrued compensation represents performance-based incentives that have not yet been paid. Additional compensation can be paid in the form of cash or via the issuance of Company stock. Compensation structures for employees are a pre-approved part of a formal employment agreement or arrangement. Stock based compensation, issued as part of the Company’s 2020 Equity Incentive Plan, is reserved for board members and members of senior management. The compensation accrual amount is based on the final value of Company stock that has been approved to be issued by the Governance, Compensation and Nomination Committee of the Board of Directors. These bonuscompensation amounts are accrued when earned and able to be estimated and are paid or issued 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, vacationpayroll accruals, professional fees, and other payroll accruals.accrued taxes.
Deferred Revenue
DeferredLeases
On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases” (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840 and established ASC Topic 842. ASU No. 2016-02 requires an entity to 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 adopted this guidance using the following 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 12 months or less) and (ii) combines lease and non-lease elements of our leases.
Upon adoption of the new guidance on January 1, 2019, the Company recorded an ROU asset of approximately $184,000 (net of existing deferred rent liability) and recognized a lease liability of approximately $186,000, with no resulting cumulative effect adjustment to retained earnings.
Revenue Recognition
Asset Management Operations and Other Investment Revenue
The Company earns revenue represents collections from customersinvestments and through various fee share and consulting agreements, including realized and unrealized gains and losses, which may result in advancenegative period or quarterly revenues. Management fees earned are recorded monthly and are included in revenue on the accompanying unaudited condensed consolidated statements of internet servicesoperations. 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, paid, and recorded on a monthly basis. Long-term investments are marked to be performed. Revenue ismarket 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 participation in various private investment funds, primarily the Alluvial Fund. This results in the realized and unrealized gains and losses within a fund such as the Alluvial Fund being recognized as revenue, or a decrease in revenue, on the accompanying unaudited condensed consolidated statements of operations.
A summary of revenue earned through asset management operations for the three- and nine-month periods ended September 30, 2020 and 2019 is included below:
For the three months ended | For the nine months ended | |||||||||||||||
Asset Management Operations Revenue | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | ||||||||||||
Realized and unrealized gains (losses) on investment activity | $ | 1,545,239 | $ | (197,306 | ) | $ | 989,609 | $ | 1,005,969 | |||||||
Management and performance fee revenue | 37,858 | 13,672 | 69,153 | 44,645 | ||||||||||||
Fund management services revenue | 24,053 | 24,549 | 72,053 | 76,461 | ||||||||||||
Total revenue | $ | 1,607,150 | $ | (159,085 | ) | $ | 1,130,815 | $ | 1,127,075 |
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. Contract liabilities (deferred revenue) were recognized in the amount of collections received in advance of services to be performed. No contract assets were recognized or incurred.
The Company generates revenue in its internet operations segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, third-party software as a reseller, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), web hosting, and additional related services to consumers and businesses. Customers may also subscribe to web hosting plans to include email access and storage. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.
HVAC Operations
TheDiscontinued Revenue - Home Services Revenue
Prior to the divestiture transaction on May 24, 2019, the Company performsperformed HVAC and plumbing service repairs and installsinstalled HVAC units for its customers.customers through its home services operations 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. accounting. Contract progress was measured by comparing materials and labor hours incurred to materials and labor hours expected per the contract. These types of contracts were typically completed within one month’s time. A small portion of revenue was from the sale of annual service agreements. Revenue attributable to these agreements was recognized over the life of the agreement.
If payment 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 has acknowledged that these performance obligations were recognized at designated points in time during the contract, including the completion of the contract. As the customer controlled the asset and had the right to use it during the contract, the Company had the right to payment for performance completed to date. Contract liabilities (deferred revenue) were recognized in the amount of collections received in advance of services to be performed. No contract assets were recognized or incurred.
Deferred Revenue
Deferred revenue represents collections from real estate held for resalecustomers in advance of internet or home services to be performed. Revenue 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 charged to cost of revenue at that time.
Rental revenue from real estate held for investment 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 service is provided. Total deferred revenue from continuing operations increased from $204,960 at December 31, 2019 to $213,498 at September 30, 2020. During the quarterly periods ended September 30, 2020 and 2019, $21,733 and $24,287, respectively, of adjustment.
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)revenue from continuing operations was recognized from prior-year contract liabilities (deferred revenue). For the nine-month periods ended September 30, 2020 and 2019, $193,408 and $196,840, respectively, of revenue from continuing operations was recognized from prior-year contract liabilities.
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements. 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, 2016,2019, December 31, 2015,2018, and December 31, 2014,2017, are open to potential IRS examination.
Income (Loss) Per Share
The basic
Basic income (loss) per common share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.
In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potentially dilutive common shares is anti-dilutive. In periods of net income, diluted earnings per share is computed using the more dilutive of the “two class method” or the “treasury method.” Dilutive earnings per share under the “two class method” is calculated by dividing net income available to common stockholders as adjusted for the participating securities, by the weighted-average number of shares outstanding plus the dilutive impact of all other potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives. Dilutive earnings per share under the “treasury method” are calculated by dividing net income available to common stockholders by the weighted averageweighted-average number of shares outstanding plus the dilutive impact of all potentially dilutive common shares, consisting primarily of common shares outstanding. Diluted income perunderlying common share is computed similar to basic income per common share except thatstock equity incentives.
None of the denominator is increased to includepotentially dilutive securities had a dilutive impact during the three- and nine-month periods ended September 30, 2020 after rounding was applied. No potentially dilutive securities existed for the three- and nine-month periods ended September 30, 2019.
The number of additionalanti-dilutive shares for the three- and nine-month periods ended September 30, 2020, consisting of common shares that would have been outstanding if the potentialunderlying common shares had been issued and if the additional common shares were dilutive. The Company has no potentially dilutive securities. stock equity incentives, was 668.
Other Comprehensive Income
Other comprehensive income is the result of two items: the 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.
Recently Issued Accounting Pronouncements
In February 2016,August 2018, the FASB issued ASU 2016-02, “Leases”No. 2018-13, “Fair Value Measurement” (Topic 842)820). The guidance in ASU 2016-02 supersedesintends to improve the lease recognition requirements in ASC Topic 842, Leases. ASU 2016-02 requires an entityeffectiveness of the disclosures relating to recognize assetsrecurring and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02nonrecurring fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2018, with early2019. Portions of the guidance are to be adopted prospectively while other portions are to be adopted retroactively. Early adoption is permitted. The Company is required to adoptadopted this standard in the first quarterguidance on January 1, 2020. The adoption of 2019. The Company is currently evaluating the effect this standard willguidance did not have a material impact on its Consolidated Financial Statements.our 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 comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods 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 required to adopt this standard in the first quarter of 2018.
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 JanuaryJune 2016, the FASB issued ASU No. 2016-01 "Financial2016-13, “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 is permitted under certain criteria. The Company is currently evaluating the impact of 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)
In January 2017, the FASB issued ASU No. 2017-04 “Simplifying the Test for Goodwill Impairment”Credit Losses” (Topic 326). The guidance eliminates the requirementprobable initial recognition threshold that was previously required prior to calculate “impliedrecognizing a credit loss on financial instruments. The credit loss estimate should now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. In April 2019, the FASB further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments. In May 2019, the FASB issued further guidance to provide entities with an option to irrevocably elect the fair value of goodwill” (previously Step 2) fromoption applied on an instrument-by-instrument basis for eligible financial instruments. In November 2019, the goodwill impairment analysis. Companies are requiredFASB issued further guidance on expected recoveries for purchased financial assets with credit deterioration, and transition refiled for troubled debt restructurings, disclosures related to calculate the impairment of their goodwill based solely on the excess of the carrying value of the reporting unit over its fair value (previously Step 1). Companies are still allowed to perform an initial qualitative assessment for a reporting unit to determine if the quantitative assessment is necessary. Thisaccrued interest receivables, and financial assets secured by collateral maintenance provisions. The guidance is required to be adopted ineffective for fiscal years beginning after December 15, 2019 and early2022, including interim periods within those fiscal years. Early adoption is permitted.permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. The Company currently expects that the adoption of this guidance may change the way we assess the collectability of our receivables and recoverability of other financial instruments. The Company will adopt this new guidance for its 2017 goodwill impairment analysis.as of January 1, 2023. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying unaudited consolidated financial statements.
NOTE 3. BUSINESS CONBINATIONS OR ACQUISITIONSHOME SERVICES SUBSIDIARY ASSET SALE
As of June 17, 2016 and June 30, 2016, HVAC Value Fund completed 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
On May 24, 2019, as reported in ourthe Current Report on Form 8-K filed with the SEC on June 14, 2016 and described further herein,May 28, 2019, the purposeCompany completed a divestiture 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 remaining customer accounts going forward. No cash consideration was exchanged in the ordinary coursetransaction. Rather, as consideration for the transaction, Rooter Hero agreed to pay monthly royalties for the sixty (60) months following the closing, calculated on the basis of business and consistent withany revenue received from the customs and practices (including with respect to nature, scope, magnitude, quantity, frequency, and contemplated purpose)customer accounts transferred. Under such royalty arrangements, the Company will receive 7.5% of HVAC Value Fund, and, in turn, the Company.
On a pro forma basis, the business acquired on January 20, 2017 contributed revenues of $225,112, net income of $1,353, and additional selling, general and administrative expenses to HVAC Value Fundany monthly revenue generated from qualified sales during the quarter ended September 30, 2017. The following unaudited pro forma summaries present consolidated informationfirst year, and 5% of HVAC Value Fund as if the current and previous year business combinations had occurred on January 1 of each respective fiscal year. Some of the pro forma informationany monthly revenue during years two through five. Royalties received will be reduced by pre-approved warranty-related costs for the year ended December 31, 2016 was calculated using annualized, unaudited 2015 financial information, and pro forma information for the period ended September 30, 2017 was calculated using annualized, unaudited 2016 information, as information for the period from January 1, 2016 through the applicable subsidiary closing date is unavailable.
As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has the ability to earn profit interests. Pro forma earnings for the quarter ended September 30, 2017 and for the year ended December 31, 2016 are reported as gross without deducting the profits share that otherwise would be attributable to JNJ Investments in accordance with the operating agreement between Sitestar Corporation and JNJ Investments.
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.select customers.
As previously mentionedreported in Note 2prior periods, the home services subsidiary had failed to meet approved budgets and ashad underperformed since its inception in 2016. Management noted above,that the largely decentralized management approach was not a good fit for this industry, and the extensive operating requirements were not conducive to smaller company capacities. The cyclical nature of the business also resulted in unpredictable cash flows, which created immediate and significant needs for additional Company resources. Due to the July 8, 2016 and July 15, 2016 acquisitions a net downward adjustmentpast performance of $14,504the company, management determined that additional resources should not be allocated to this subsidiary.
The decision was made to goodwill duringexit the quarter ended September 30, 2017. Part of the considerations paid for the July 2016 acquisitions were seller carryback notes. The notes were payable 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 acquisition were not met, therefore, the payable amount decreased 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, a downward adjustment of $15,000 was made to goodwillbusiness during the quarter ended June 30, 2017. Part2019. The operations of Specialty Contracting Group, LLC were considered a component of, and the divestiture reflected a strategic shift in, the Company’s business. As such, Specialty Contracting Group, LLC’s historical operations have been classified as discontinued operations in the Company’s financial statements. The loss from discontinued operations has been determined using a loss recovery approach, as the collection of future royalties is uncertain and a reasonable estimate could not be made. This approach requires that the contingent consideration, the future royalties to be received, be valued at the lesser of the amount of the “probable,” defined as a greater than 50% likelihood, future proceeds or the carrying value of the disposed assets. Due to the unpredictability of the contingent consideration, paidand management’s inherent lack of control over the buyer’s operations, management determined it would not be reasonable to attempt to value the contingent consideration. This resulted in assigning the contingent consideration a current valuation of zero. As and to the extent any royalties are deemed probable, they will be subsequently recognized as a “recovery from discontinued operations” on the statements of operations and will offset, or recover, the initial loss recorded. Accordingly, during the three- and nine-month periods ended September 30, 2020, an offsetting $1,887 and $18,143 recovery on discontinued operations was recognized within the reported $1,857 and $15,762 of net income from discontinued operations, respectively.
A breakdown of discontinued assets and liabilities as reported on the face of the accompanying condensed consolidated balance sheets for the periods ended September 30, 2020 and December 31, 2019, is as follows:
September 30, 2020 | December 31, 2019 | |||||||
Cash and cash equivalents | $ | 261 | $ | 428 | ||||
Total current assets - held for resale | 261 | 428 | ||||||
Accounts payable | 97,003 | 96,848 | ||||||
Lease liabilities | 50,110 | 50,110 | ||||||
Total current liabilities - held for resale | $ | 147,113 | $ | 146,958 |
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, 2020 and 2019, is as follows:
For the three months ended | For the nine months ended | |||||||||||||||
September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
Revenues | $ | — | $ | — | $ | — | $ | 675,963 | ||||||||
Cost of revenues | — | — | — | 427,215 | ||||||||||||
Gross profit | — | — | — | 248,748 | ||||||||||||
Selling, general, and administrative expenses | 30 | 25,342 | 2,381 | 515,156 | ||||||||||||
Income (loss) on sale of subsidiary, net of recoveries | 1,887 | 12,183 | 18,143 | (1,134,810 | ) | |||||||||||
Other income (expense), net | — | (17,992 | ) | — | (39,938 | ) | ||||||||||
Net income (loss) reported as discontinued operations | $ | 1,857 | $ | (31,151 | ) | $ | 15,762 | $ | (1,441,156 | ) |
NOTE 4. SALE OF CONTROLLING INTEREST IN REAL ESTATE SUBSIDIARY
Transaction
On June 2016 acquisitions27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC, a Delaware limited liability company (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio. The Company retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest. Subsequent to the transaction, however, Woodmont, as the manager of Mt Melrose, has purported that the Company’s membership interest in Mt Melrose has been diluted to 20.8%. The Company disputes this assertion and maintains that it has retained its 35% membership interest.
Prior to this transaction, the Company had grown uncomfortable with the extreme amounts of high-priced debt that the Mt Melrose subsidiary had taken on. There were significant principal payments due over the next 12 months at the subsidiary level that the portfolio’s cash flows could not offset and the Company was unwilling to subsidize. As reported in previous quarterly and annual reports, in November 2018 management implemented a $15,000 seller carryback note.right-sizing strategy for the Mt Melrose portfolio. This strategy included the hiring of a dedicated third-party property manager, a restructuring of overhead expenses, the divestiture of non-cash-flowing properties, and a focus on refinancing high-interest debt. The noteproperty manager was payableresponsible for all day-to-day operations including, but not limited to: tenant relations and communications, property repairs and renovations, vacancy marketing, and turnover procedures. This allowed management to remain passive operationally and focus on property sales and refinancing opportunities. Subsequent to the sale on June 27, 2019, the property manager continued to fulfill the day-to-day operational responsibilities, and, to management’s knowledge, Woodmont continues to act on management’s previous right-sizing efforts by liquidating non-cash-flowing properties and pursuing refinancing options.
In connection with this transaction, the Company and Woodmont entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC (the “A&R LLC Agreement”). The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members. The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont is designated as the sole manager. In addition, the Company has expressly agreed to a three-year “standstill” arrangement, during which time the Company will not in fullany 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, Woodmont, determines; provided, however, that any such distributions will be made in accordance with the following priorities: (i) distribution of amounts up to a cumulative total of $2,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement); (ii) then, distribution of cumulative amounts in excess of $2,000,000 and up to $3,000,000 will be made 67% to the Company and 33% to Woodmont; and (iii) thereafter, distribution of cumulative amounts in excess of $3,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement).
Deconsolidation Due to Transfer of Control
Prior to the sale of 65% of its Mt Melrose interest, the Company owned 100% of the membership interests in Mt Melrose, LLC and controlled the entity by virtue of its voting interests. As a result, the Company consolidated Mt Melrose under the “voting interests” (VOE) consolidation model.
By virtue of the A&R LLC Agreement, and the aforementioned standstill agreement, Woodmont is the sole “manager” responsible for all management and operating decisions of Mt Melrose. Management determined that as of June 27, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose and will no longer consolidate Mt Melrose. Furthermore, the Company has concluded that Mt Melrose does not qualify as a “variable interest entity” as Mt Melrose has sufficient equity at risk to permit operations and the Company is not the primary beneficiary of Mt Melrose’s activities. All activity prior to the deconsolidation event has been included on July 1, 2017 contingent on certain revenue targetsour consolidated statements of operations for given prior reporting periods in continuing operations, and other operational conditions.under the real estate segment. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our consolidated balance sheets. The Company’s membership interest in Mt Melrose is now accounted for as an investment in the quarter ended June 30, 2017 it was determined by management that neitherequity of Mt Melrose in the revenue targets nor the operational conditions had been met, therefore, the payable was no longer due and total consideration paidCompany’s reported financial statements.
Accounting for the acquisition decreased.Remaining Mt Melrose Investment
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 and January 20, 2017 acquisitions remain open for subsequent management adjustment.
NOTE 4. INVESTMENTS
The Company holds variousadopted ASU 2016-01 effective January 1, 2018. ASU 2016-01 generally requires entities to measure equity investments through Willow Oak, LLC throughat 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 asset management segment and may invest excess cashequity investment in marketable securities through its corporate segment.Mt Melrose does not have a readily determinable fair value at the time of deconsolidation. The fair valuesCompany’s inability to “exercise significant influence” due to the previously mentioned standstill agreement, also supports the use of the Company’s marketable securities are determined in accordance with GAAP, withmeasurement alternative. Under this alternative, the Company will measure the Mt Melrose investment at its implied fair value being defined as the amount that would be received to sell an assetand assess it for impairment at each reporting date, or paid to transfermore often if indication of a liability in an orderly transaction between market participants. As such,potential impairment exists. When fair value is a market-based measurement that shouldbecomes determinable, from observable price changes in orderly transactions, the Company’s investment will be determined based on assumptions that market participants would use in pricing an asset or liability. The following available-for-sale securities are re-measuredmarked to fair value on a recurring basisperiodic basis. Future dividends will be recognized as income and are valued using Level 1 inputs, which are quoted prices (unadjusted) for identical assetsreturns of capital recognized as a reduction 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 threeCompany’s investment when and nine month period ended September 30, 2017, the Company recognized no realized gains or losses and $76,935 of realized gains, respectively. This compares to the three and nine month period ended September 30, 2016 when the Company recognized no realized gains or losses.if received.
Non-currentUsing the $100,000 transaction price for a 65% interest in Mt Melrose, LLC, the implied value of the retained 35% interest at the time of the transaction is $53,846. This amount is included under the long-term investment amount on the accompanying consolidated balance sheet as of September 30, 2020 and December 31, 2019.
NOTE 5. INVESTMENTS
Certain assets held through the Company, Willow Oak Asset Management, LLC, or EDI Real Estate, LLC do not have a Readily Determinable Valuereadily determinable value, as these investments are not publicly traded, nor do they have published sales records. The investment in Alluvial Fund, LP is measured using net asset value (NAV) as the practical expedient and is exempt from the fair value hierarchy in accordance with FASB ASC 820-10.(see Note 6). The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and allocated based on total fund contributions. Due toThe Company’s investment in the nature of the Huckleberry Real EstateAlluvial Fund II, LLC investment, the investment is measured at cost basis as cost approximates fair value until additional inputs and measurements become available. As the inputs for this investment are not readily observable, this investment is valued using Level 3 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 inDue to the nature of the Mt Melrose, LLC investment (subsequent to the loss of control (see Note 4)), the investment is measured at cost basis as fair value is the cost basis of the investment as well as any accrued management fees.not determinable until additional inputs and measurements become available.
Cost Basis | Unrealized Gain | Carrying Value | ||||||||||
September 30, 2020 | ||||||||||||
Alluvial Fund, LP (at fair value) | $ | 7,059,319 | $ | 4,022,415 | $ | 11,081,734 | ||||||
Mt Melrose, LLC (at cost) | 53,846 | — | 53,846 | |||||||||
Total | $ | 7,113,165 | $ | 4,022,415 | $ | 11,135,580 |
18
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
| Cost Basis |
|
| Accrued Fees |
|
| Unrealized Gain |
|
| Fair Value |
| |||||
September 30, 2017 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP |
| $ | 10,000,000 |
|
| $ | 702 |
|
| $ | 1,317,281 |
|
| $ | 11,317,983 |
|
Huckleberry Real Estate Fund II, LLC |
|
| 750,000 |
|
|
| — |
|
|
| — |
|
|
| 750,000 |
|
Total |
| $ | 10,750,000 |
|
| $ | 702 |
|
| $ | 1,317,281 |
|
| $ | 12,067,983 |
|
Cost Basis | Unrealized Gain | Carrying Value | ||||||||||
December 31, 2019 | ||||||||||||
Alluvial Fund, LP (at fair value) | $ | 7,042,732 | $ | 3,029,626 | $ | 10,072,358 | ||||||
Mt Melrose, LLC (at cost) | 53,846 | — | 53,846 | |||||||||
Total | $ | 7,096,578 | $ | 3,029,626 | $ | 10,126,204 |
Alluvial Fund is a private investment fund that focuses on investing in what it believes are deeply mispriced securities in the United States and abroad. Alluvial Fund focuses on small companies, thinly traded issues, and special situations, seeking to identify value that its management believes the market has yet to recognize. During the three- and nine-month periods ended September 30, 2020 and 2019, the Company did not withdraw management or performance fees earned through the Alluvial Fund. For the quarterly periods ended September 30, 2020 and 2019, the total amounts of these reinvested fees were $4,304 and $4,862, respectively. For the nine-month periods ended September 30, 2020 and 2019, the total amounts of these reinvested fees were $16,587 and $14,126, respectively.
NOTE 5.6. FAIR VALUE OF ASSETS AND LIABILITIES
The Company has adopted FASB ASC 820, Fair Value Measurements. ASC 820
GAAP defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820date, and establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:
Level 1 - Inputs are quoted prices in active markets as of the measurement date for identical assets and liabilities that the Company has the ability to access. This category includes exchange-traded mutual funds and equity securities.
● | Level 1 - inputs are quoted prices in active markets as of the measurement date for identical assets and liabilities that the Company has the ability to access; this category includes exchange-traded mutual funds and equity securities; | |
● | Level 2 - inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates or yield curves, that are observable at commonly quoted intervals; this category includes mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, commercial paper, U.S. agency and municipal debt securities, U.S. Treasury securities, and derivative contracts; and | |
● | Level 3 - inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability; the measurements are highly subjective. |
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 45 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, 2020 | ||||||||||||||||||||
Alluvial Fund, LP | $ | — | $ | — | $ | — | $ | 11,081,734 | $ | 11,081,734 | ||||||||||
Total investments | $ | — | $ | — | $ | — | $ | 11,081,734 | $ | 11,081,734 |
|
| (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, 2019 | ||||||||||||||||||||
Alluvial Fund, LP | $ | — | $ | — | $ | — | $ | 10,072,358 | $ | 10,072,358 | ||||||||||
Total investments | $ | — | $ | — | $ | — | $ | 10,072,358 | $ | 10,072,358 |
| (a) |
|
19
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company analyzes goodwill on an annual basis or more often if events or changes in circumstances indicate potential impairments. No impairments were recorded during the three- and nine-month periods ended September 30, 2020.
During the three- and nine-month periods ended September 30, 2019, impairment adjustments of the remaining home services goodwill of $0 and $1,024,591, respectively, were recognized and reported as a component of the loss on the divestiture of Specialty Contracting Group, LLC's assets.
The Company evaluates real estate held on the balance sheet for potential impairment on an annual basis or whenever events or changes in circumstances indicate potential impairments. Foran impairment may have occurred. No impairment adjustments were recorded during the yearthree- and nine-month periods ended December 31, 2016, goodwill held at year end was determined to be valued appropriately and no impairment existed. September 30, 2020.
During the quarterthree- and nine-month periods ended September 30, 2017,2019, impairment adjustments of $3,040 and $169,839, respectively, were recorded on a net downward adjustment of $14,504 was made to goodwillcommercial warehouse and various vacant lots held throughfor resale.
As discussed in Note 4, the HVAC segment. This adjustment wasCompany’s ongoing equity investment in Mt Melrose, LLC is carried at its implied cost under the result of previous sellers not meeting or exceeding the revenue targets of carryback notes that were previously included as considerationalternative approach and will be assessed for the acquisition. See Note 3 for more information.
The Company values real estate held on theimpairment at each 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. For the year ended December 31, 2016, the Company adjusted the carrying value of properties held downward by $152,411. These adjustments were the result of repair and improvement expenses exceeding the current market value of the property.date.
NOTE 6.7. PROPERTY AND EQUIPMENT
The cost of property and equipment at September 30, 20172020, and December 31, 20162019, consisted of the following:
|
| 2017 |
|
| 2016 |
| 2020 | 2019 | ||||||||
Automobile |
| $ | 264,778 |
|
| $ | 115,688 |
| ||||||||
Computers and equipment |
|
| 178,341 |
|
|
| 36,030 |
| $ | 17,330 | $ | 17,330 | ||||
Furniture and fixtures |
|
| 25,206 |
|
|
| 25,206 |
| 10,850 | 10,850 | ||||||
|
|
| 468,325 |
|
|
| 176,924 |
| 28,180 | 28,180 | ||||||
Less accumulated depreciation |
|
| (96,828 | ) |
|
| (33,460 | ) | (13,461 | ) | (10,427 | ) | ||||
Property and equipment, net |
| $ | 371,497 |
|
| $ | 143,464 |
| $ | 14,719 | $ | 17,753 |
Depreciation expense from continuing operations was $65,258$1,012 for the nine monthsquarterly period ended September 30, 20172020, and $10,172$619 for the yearquarterly period ended December 31, 2016. Increased automobile, computers,September 30, 2019. Depreciation expense from continuing operations was $3,034 for the nine-month period ended September 30, 2020, and equipment$17,355 for the nine-month period ended September 30, 2019. Included in these amounts are $0 and $6,809 for the resultnine-month periods ended September 30, 2020 and 2019, respectively, of acquisitionsdepreciation expense related to personal property used in real estate segment rental operations. The depreciation expense related to personal property is included in the HVAC operations and new servers purchased related toreal estate segment cost-of-goods-sold amount on the internet segment.accompanying unaudited condensed consolidated statements of operations.
NOTE 7.8. 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 $299,9002020 and net proceeds of $271,037. The carrying value ofDecember 31, 2019, 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
EDI Real Estate | September 30, 2020 | December 31, 2019 | ||||||
Units occupied or available for rent | 4 | 6 | ||||||
Vacant units being prepared for rent | — | — | ||||||
Vacant lots | 3 | — | ||||||
Total units held for investment | 7 | 6 | ||||||
Units held for resale | 2 | 2 | ||||||
Vacant lots held for resale | — | 3 | ||||||
Total units held for resale | 2 | 5 |
Units held for investment. investment consist of single-family residential rental units.
The leases in effect as of the quarter ended September 30, 20172020, 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, 2020 | December 31, 2019 | ||||||
Total real estate held for investment | $ | 303,158 | $ | 484,590 | ||||
Accumulated depreciation | (58,369 | ) | (104,075 | ) | ||||
Real estate held for investment, net | 244,789 | 380,515 | ||||||
Total real estate held for resale | 192,476 | 98,910 | ||||||
Accumulated depreciation | (58,567 | ) | — | |||||
Real estate held for resale, net | $ | 133,909 | $ | 98,910 |
For the three- and nine-month periods ended September 30, 2020, depreciation expense totaled $17,051on the EDI Real Estate portfolio of properties was $4,431 and $12,861, respectively. This compares to depreciation expense for the nine monthsthree- and nine-month periods ended September 30, 2017. Total accumulated2019, when depreciation as of September 30, 2017 totaled $81,057. These properties held for investment were carriedexpense on the balance sheet at $502,368.
EDI Real Estate Held for Resaleportfolio of properties was $6,116 and $17,536, respectively.
As of
During the quarterly periods ended September 30, 2017,2020 and 2019, EDI Real Estate did not purchase or sell any properties. During the Company accounted fornine-month period ended September 30, 2020, two residential properties, one commercial property, and several lots as held for resale. These properties held for resale were carriedsold for gross proceeds of $172,000 and net proceeds totaled $34,749. Subsequent to the quarterly period ended September 30, 2020, the Company sold one property held for resale. During the nine-month period ended September 30, 2019, EDI Real Estate did not purchase or sell any properties.
During the three- and nine-month periods ended September 30, 2020, $0 and $43,992, respectively, of real estate held for resale was transferred to real estate held for investment and $133,909 and $177,826, respectively, of real estate held for investment was transferred to real estate held for resale. During the three- and nine-month periods ended September 30, 2019, $121,558 of real estate held for investment was transferred to real estate held for resale. Additionally, $0 and $10,969, respectively, of improvements were made to existing real estate held for investment during the three- and nine-month periods ended September 30, 2020. During the three- and nine-month periods ended September 30, 2019, $0 and $7,435, respectively, of improvements were made to real estate held for resale.
There were no impairment adjustments recorded during the three- and nine-month periods ended September 30, 2020. During the three- and nine-month periods ended September 30, 2019, impairment adjustments of $3,040 and $43,012, respectively, were recorded on various vacant lots held for resale within the EDI Real Estate portfolio.
Mt Melrose, LLC
As described in Note 4, management previously has determined that the Company no longer has a controlling financial interest in Mt Melrose. All activity prior to the deconsolidation event has been included on our unaudited condensed consolidated statements of operations for given prior reporting periods under the real estate segment. No Mt Melrose activity is included on the unaudited condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2020 or the three-month period ended September 30, 2019. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our condensed consolidated balance sheet at $337,481.
20
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)sheets. Accordingly, there are no consolidated Mt Melrose assets as of the periods ended September 30, 2020 and December 31, 2019 included on the accompanying condensed consolidated balance sheets.
For the nine-month period ended September 30, 2019, depreciation expense on the Mt Melrose portfolio of properties was $114,020.
During the nine-month period ended September 30, 2019, Mt Melrose sold 21 residential properties and five vacant lots for gross proceeds of $775,850 and net proceeds of $151,671. This compares to their carrying value of $755,918, which resulted in a net gain of $19,932. Mt Melrose did not purchase any properties during the nine-month period ended September 30, 2019.
During the nine-month period ended September 30, 2019, an impairment adjustment of $126,827 was recorded on a commercial warehouse held for resale within the Mt Melrose portfolio.
Future Minimum Rental Revenues
The future anticipated minimum rental revenues based on leases in place as of September 30, 2020, for EDI Real Estate, LLC are as follows:
2020 | $ | 6,970 | ||
2021 | 15,130 | |||
Total | $ | 22,100 |
NOTE 8.9. NOTES PAYABLE
Notes payable at September 30, 20172020, and December 31, 20162019, 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 | 2020 | 2019 | ||||||||||
Interest-bearing amount due on PPP loan through Enterprise Diversified, Inc. | 1.00% | 2 years | $ | 125,102 | $ | — | |||||||
Interest-bearing amount due on promissory note through EDI Real Estate, LLC | 5.60% | 15 years | 278,576 | 373,425 | |||||||||
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC | 6.00% | 5 years | 96,000 | 137,600 | |||||||||
Less current portion | (17,043 | ) | (11,453 | ) | |||||||||
Long-term portion | $ | 482,635 | $ | 499,572 |
HVAC Value Fund typically structures acquisitions where a portion
The timing of the purchase price is held back and is subject to certain conditions. Thesefuture payments of notes payable may or may not bear interest. HVAC Value Fund made five acquisitions inare as follows as of September 30, 2020:
2020 | $ | 2,862 | ||
2021 | 17,285 | |||
2022 | 239,395 | |||
2023 | 19,359 | |||
2024 and thereafter | 220,777 | |||
Total | $ | 499,678 |
During the yearquarterly period ended December 31, 2016 and one additional acquisition inJune 30, 2020, the quarter ended March 31, 2017. Four of the five acquisitions made in the year ended December 31, 2016 resulted in a note payable to the seller. The non-interest bearing note payable was due July 1, 2017Company received loan proceeds in the amount of $15,000,$125,102 under the Paycheck Protection Program, as amended (the “PPP”), administered by the U.S. Small Business Administration. The PPP, established as part of the U.S. Coronavirus Aid, Relief, and was contingent on meeting a revenue target and other operational conditions. As mentioned in Note 3, the revenue targets and operational conditions were not met, resultingEconomic Security Act of 2020 (the “CARES Act”), generally provides for economic assistance in the note being written off. There were three separate interest bearing notes payable asway of loans to qualifying business for amounts up to two-and-a-half times the average monthly payroll expenses of the quarterqualifying business. Under the PPP, amounts of loan principal and accrued interest are eligible for forgiveness after a period, as selected by the borrower, of either eight or twenty-four weeks, provided the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the selected time period.
PPP loan amounts that are not forgiven will be payable over two years at an interest rate of 1%, with a deferral of payment for the first six months. The Company intends to use the proceeds of its PPP loan for purposes consistent with the eligible purposes enumerated under the PPP. However, while the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot make assurances that we will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.
During the quarterly period ended JuneSeptember 30, 2017. The first interest bearing2018, EDI Real Estate, LLC, as a borrower, issued a promissory 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 issecured by additional properties held for $100,000 and bears interest at 6% annually.investment. This note was due July 11, 2017carries an annual interest rate of 5.6% and was contingentfully matures on meeting revenue targets and other operational conditions. As mentioned in Note 3,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 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 quarterquarterly period ended March 31, 2017 also resulted in a $100,000 note payable to2020, one property from the seller. The payment amounts are contingent on meeting quarterly revenue targets.original loan package was sold and the corresponding principal balance of $83,296 was paid down.
During the quarterquarterly period ended September 30, 2017, EDI Real Estate, LLC, entered intoas a borrower, issued two promissory notes, each secured by a property held for investment. These notes carry annual interest rates of 6%, pay interest quarterly, and are due September 15, 2022, with early payoff permitted.
NOTE 9. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
For During the nine monthsquarterly period ended September 30, 2017 and DecemberMarch 31, 2016, bad debt expense2020, one note totaling $41,600 was $15,281 and $34, respectively. Forpaid in full as the nine months ended September 30, 2017 and December 31, 2016, accounts receivable were $481,123 and $212,751, respectively. The increase in accounts receivable is the result of the formation of the HVAC subsidiary and a seller financing arrangement for a residentialsecured property sold during the nine months ended September 30, 2017. As of September 30, 2017 and December 31, 2016, accounts receivable consisted of the following:was sold.
|
| 2017 |
|
| 2016 |
| ||
Gross accounts receivable |
| $ | 483,123 |
|
| $ | 213,624 |
|
Less allowance for doubtful accounts |
|
| (2,000 | ) |
|
| (873 | ) |
Accounts receivable, net |
| $ | 481,123 |
|
| $ | 212,751 |
|
NOTE 10. SEGMENT INFORMATION
As of
During the three- and nine-month periods ended September 30, 2017,2020, the Company has fiveoperated through four business unitssegments with separate management and reporting infrastructures that offer different products and services. The four business unitssegments are as follows: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, as of the quarter ended September 30, 2020, and for all prior periods presented, Home Services Operations are reported as discontinued operations.
As mentioned in Note 3, on May 24, 2019, the Company completed a divestiture of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC, to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). The current and comparative results of the home services segment have been aggregated into five reportable segments: Corporate, Internet, HVAC,reported as discontinued on the accompanying unaudited condensed consolidated financial statements for the quarterly period ended September 30, 2020.
As mentioned in Note 4, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC.
Management determined that as of June 27, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose; therefore, the Company no longer consolidates Mt Melrose. All activity prior to the deconsolidation event has been included on our consolidated statements of operations for given prior reporting periods under the real estate segment. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our consolidated balance sheets.
The asset management operations segment includes revenues and expenses derived from various joint ventures, service offerings, and initiatives undertaken in the asset management industry. The real estate operations segment includes 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 and Asset Management.
21
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
located in Roanoke, Virginia. The corporateinternet operations segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services. The home services operations segment includes discontinued revenue and expenses derived from our former operation of HVAC and plumbing companies in Arizona. The other operations segment includes revenue and expenses from nonrecurring or one-time strategic funding or similar activity and any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company. Sitestar also invests in marketable securities through the corporate segment. The internet segment includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The HVAC segment includes revenue and expenses derived from the acquisition and management of HVAC and plumbing companies in Arizona and throughout the Southwest. The real estate segment includes revenue and expenses related to the management of properties held for investment and revenue and expenses involving the preparation and sale of properties held for resale. The asset management segment includes revenues and expenses derived from various investment opportunities and partnerships.
The internet operations segment includes revenue generated by operations in both the United States and Canada. InDuring the quarterquarterly period ended September 30, 2017,2020, the internet operations segment generated revenue of $295,371$230,714 in the United States and revenue of $18,831$11,523 in Canada. This compares to the quarterquarterly period ended September 30, 2016 where2019, when the internet operations segment generated revenue of $331,480$251,809 in the United States and revenue of $23,904$13,362 in Canada. During the nine-month period ended September 30, 2020, the internet operations segment generated revenue of $703,335 in the United States and revenue of $37,676 in Canada. This compares to the nine-month period ended September 30, 2019, when the internet operations segment generated revenue of $764,327 in the United States and revenue of $41,663 in Canada. All assets reported under the internet operations segment for the periods ended September 30, 2020 and December 31, 2019, are located within the United States.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three monthsthree- and nine-month periods ended September 30, 20172020 and 20162019.
Three Months Ended September 30, 2020 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
Revenues | $ | 1,607,150 | $ | 16,129 | $ | 242,237 | $ | — | $ | — | $ | 1,865,516 | ||||||||||||
Cost of revenue | — | 12,157 | 85,412 | — | — | 97,569 | ||||||||||||||||||
Operating expenses | 120,368 | 5,940 | 49,239 | 165,165 | — | 340,712 | ||||||||||||||||||
Other income (expense) | — | (5,456 | ) | 777 | 6,540 | — | 1,861 | |||||||||||||||||
Income (loss) from continuing operations | 1,486,782 | (7,424 | ) | 108,363 | (158,625 | ) | — | 1,429,096 | ||||||||||||||||
Income (loss) from discontinued operations | — | — | — | — | 1,857 | 1,857 | ||||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | ||||||||||||||||||
Identifiable assets | $ | 11,170,904 | $ | 452,357 | $ | 470,667 | $ | 331,834 | $ | 261 | $ | 12,426,023 |
Nine Months Ended September 30, 2020 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
Revenues | $ | 1,130,815 | $ | 219,772 | $ | 741,011 | $ | — | $ | — | $ | 2,091,598 | ||||||||||||
Cost of revenue | — | 151,480 | 251,829 | — | — | 403,309 | ||||||||||||||||||
Operating expenses | 323,351 | 23,651 | 143,521 | 658,989 | — | 1,149,512 | ||||||||||||||||||
Other income (expense) | 2,283 | (13,454 | ) | 3,900 | 13,982 | — | 6,711 | |||||||||||||||||
Income (loss) from continuing operations | 809,747 | 31,187 | 349,561 | (645,007 | ) | — | 545,488 | |||||||||||||||||
Income (loss) from discontinued operations | — | — | — | — | 15,762 | 15,762 | ||||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | ||||||||||||||||||
Identifiable assets | $ | 11,170,904 | $ | 452,357 | $ | 470,667 | $ | 331,834 | $ | 261 | $ | 12,426,023 |
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 | |||||||||||||||||
Income (loss) from continuing operations | (236,008 | ) | (36,930 | ) | 138,870 | (121,021 | ) | — | (255,089 | ) | ||||||||||||||
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 |
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 | (4,652,120 | ) | 4,317 | 16,682 | — | (4,612,047 | ) | ||||||||||||||||
Income (loss) from continuing operations | 836,253 | (4,917,453 | ) | 390,477 | (412,170 | ) | — | (4,102,893 | ) | |||||||||||||||
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 |
NOTE 11. COMMITMENTS AND CONTINGENCIES
Leases
As of September 30, 2020, the Company has no remaining leases classified as operating leases and no finance leases.
The previously reported operating lease corresponds to the office space for Willow Oak Asset Management, LLC. This lease expired on September 30, 2020. The right-of-use asset and corresponding lease liability for the nine monthsCompany’s previous operating lease have been reduced to zero on the accompanying consolidated balance sheets.
Lease costs for the quarterly period ended September 30, 20172020 consisted of the following:
Finance lease costs: | ||||
Amortization of ROU assets | $ | — | ||
Interest on lease liabilities | — | |||
Operating lease cost | 15,149 | |||
Total lease costs from continuing operations | 15,149 | |||
Total lease costs from discontinued operations | — | |||
Total lease costs | $ | 15,149 |
With respect to the former leased facilities for Specialty Contracting Group, LLC, possession of the premises was surrendered to the landlord, in connection with the dissolution and 2016. No comparable financial information existswinding up of Specialty Contracting Group, in default of that lease. The outstanding lease liability amount remains on the Company’s balance sheet under other liabilities - held for resale as of the quarterly period ended September 30, 2020. The discount rate used in the calculation of the lease liability held for resale was approximately 6.7%.
A maturity analysis of the lease related to discontinued operations, is as follows:
2020 | $ | 38,635 | ||
2021 | 14,832 | |||
2022 | — | |||
Total | 53,467 | |||
Discount factor | (3,357 | ) | ||
Lease liability | 50,110 | |||
Less lease liability from discontinuing operations | (50,110 | ) | ||
Amounts due within 12 months | — | |||
Long-term lease liability | $ | — |
Other Commitments
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 assettransaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management segment because it did not commence operations until January 1, 2017. Also noteand operation of Mt Melrose and its real estate portfolio. 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 four claims for indemnification under the agreement, all of which have been rejected and disputed by the Company.
Litigation & Legal Proceedings
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)Other: Mt Melrose-related Proceedings
NOTE 11. ADJUSTMENT TO OPENING BALANCE NUMBER OF SHARES AND CANCELLATION OF TREASURY SHARESVarious disputes have arisen and are continuing between the Company and Woodmont Lexington, LLC (“Woodmont”), the entity to whom the Company sold, on June 27, 2019, 65% of the Company’s membership interest in Mt Melrose, LLC (“Mt Melrose”).
During
In undertaking a sale of its membership interests in Mt Melrose, the quarter ended March 31, 2017,Company had sought to partner with an operator who, in exchange for being granted a substantial equity interest at a significant discount to the amounts the Company had invested in Mt Melrose, would assume full responsibility for the management was made awareand operation of a clerical error that affectedMt Melrose and its real estate portfolio and endeavor in good faith to generate favorable returns inuring to the reported numberlong-term best interests of treasury shares heldthe Company and its shareholders.
Shortly following the closing of the Mt Melrose transaction, however, the relationship between the Company and Woodmont soured. Woodmont, by its representative, Tice Brown, unexpectedly proceeded to make numerous claims and demands upon the Company, which the Company determined to be unfounded and frivolous, if not disingenuous to the parties’ understandings. Woodmont also has submitted four formal claims for indemnification under the parties’ purchase agreement, each of which were considered by the Company and then rejected and disputed in short order as unfounded.
In addition, Woodmont, acting as the sole manager of Mt Melrose, purported to unilaterally amend and restate as of December 31, 2016. It was discovered thatAugust 29, 2019 the numberMt Melrose limited liability company agreement among the parties, purporting to change the terms of treasury shares held was overstated by 100,000 shares, whichthe distribution waterfall the parties had expressly agreed to and purporting to reallocate the parties’ respective interests in turn understatedMt Melrose – unilaterally reducing the total number of shares outstanding by the same amount.Company’s percentage membership interest from 35% to 20.8% while increasing Woodmont’s percentage membership interest from 65% to 79.2%. The Company has concludedrejected and disputed these purported changes and Woodmont’s conduct.
In connection with the primary disputes between the Company and Woodmont and following the Company’s Delaware Action (as defined below), on December 5, 2019, Woodmont also filed a verified complaint in the Fayette County, Kentucky Circuit Court against the Company and a third party who was then-under contract with the Company for such party’s purchase of the Company’s warehouse and associated real property located in Lexington, Kentucky – seeWoodmont Lexington, LLC, et al. v. Enterprise Diversified, et al., Fayette Circuit Court, Civil Action No. 19-CI-04304 (the “Kentucky Action”). The Court in the Kentucky Action enjoined the Company and the warehouse purchaser from removing or cleaning out the various items of building materials and salvage owned by Mt Melrose that had been placed in the warehouse premises, and required the Company and the warehouse purchaser to provide rent-free access so that Woodmont and Mt Melrose could realize “full value” on their liquidation of the stored personal property until February 1, 2020. The Company believed that Woodmont’s attempt to hold up the sale of an $850,000 warehouse and property because it wanted to store spare toilets, doors, floor tiles and other residential building materials there, rent free, for more than six months, was disingenuous and intentionally injurious to the Company. On December 27, 2019, the Company filed verified counter-claims in the Kentucky Action against Woodmont, alleging, among other things, Woodmont’s tortious interference with the Company’s business and Woodmont’s unjust enrichment. The Company was seeking, among other relief available against Woodmont, declaratory relief; trial by jury on all issues; money damages, including all special and consequential damages, in amounts to be determined at trial; and the Company’s costs and expenses, including attorneys’ fees; together with pre- and post-judgement interest.The parties to the Kentucky Action had engaged in settlement negotiations, although they had not been successful. On August 3, 2020, the Company voluntarily dismissed its verified counter-claims against Woodmont without prejudice, but may re-file them (whether in Kentucky or Delaware) at a full restatement islater time. The voluntary dismissal effectively terminated the Kentucky Action for the time being.
All the while, since the closing of the Mt Melrose transaction, Woodmont, by its representative, Tice Brown, has made repeated “low ball” offers to buy out the Company’s remaining interest in Mt Melrose, insisting that the Company relinquish its Mt Melrose interest in order to avoid further claims and demands and in order to avoid threatened public disparagement (including by way of statements made on various social media by Woodmont’s representative, Tice Brown). All such offers have been rejected or not necessaryresponded to by the Company, as being unfavorable, undesirable and not in the long-term best interests of the Company and its shareholders.
On January 7, 2020, Woodmont, acting as the total misstatement accounts for 0.035%sole manager of Mt Melrose, also caused Mt Melrose to distribute a $600,000 cash dividend directly to Woodmont. Woodmont expressly excluded the Company from receiving any portion of this distribution. The Company has rejected and disputed the propriety of this distribution and Woodmont’s conduct.
The Company believes that Woodmont, directly and by its representative, Tice Brown, has engaged, and continues to engage, in intentionally injurious and harassing conduct concerning Mt Melrose that runs counter to the long-term best interests of the total numberCompany and its shareholders. Accordingly, as previously reported in the Company’s Current Report on Form 8-K filed with the SEC on November 20, 2019, the Company filed a verified complaint in the Court of shares outstanding and no per share metrics were effected. This error dates back to records kept by prior management, but has since been reconciled and corrected. Further, management is actively working to cancel existing treasury shares. As noted on the condensed consolidated balance sheets and the condensed consolidated statements of stockholders’ equity, asChancery of the quarter ended September 30, 2017, 2,125,795 treasury shares have been cancelled.State of Delaware on November 20, 2019, commencing a civil action against Woodmont – seeCivil Action No. 2019-0928-JTL (the “Delaware Action”). The Delaware Action was filed by the Company in response to the repeated claims and demands and injurious conduct by Woodmont and its representative, Tice Brown. On March 9, 2020, the Company filed further an amended verified complaint against Woodmont in the Delaware Action, expanding its claims against Woodmont. On April 6, 2020, Woodmont filed an answer to the complaint in the Delaware Action, along with verified counter-claims against the Company for Woodmont’s previously-asserted claims for indemnification under the parties’ purchase agreement. The Company is seeking, among other relief available against Woodmont, injunctive, declaratory and equitable relief, and relief for, among other things, Woodmont’s breaches of contract and unjust enrichment, along with attorneys’ fees and expenses. On July 24, 2020, the Company filed its reply to the counterclaims asserted by Woodmont in which it denied Woodmont’s allegations. This action remains pending in the Delaware Court of Chancery.
Management intends to vigorously prosecute the Company’s claims, and defend the Company’s rights, against Woodmont and its representative, Tice Brown, in these Mt Melrose-related proceedings.
NOTE 12. STOCKHOLDERS’EQUITY
Classes of Shares
As of November 9, 2017,September 30, 2020, the correct numberCompany’s Articles of Incorporation, as amended, authorize 32,800,000 shares outstanding is 282,830,163of capital stock of the Company, consisting of 30,000,000 authorized shares of serial preferred stock, par value of $0.001 per share, and 2,800,000 authorized shares of common stock, par value of $0.125 per share.
Preferred Stock
Preferred stock, any series, shall have the correct numberpowers, preferences, rights, qualifications, limitations, and restrictions as from time to time fixed by the Company’s Board of Directors in its sole discretion.
As previously reported in the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2020, the Company has adopted a certain stockholder rights agreement styled as the Tax Benefit Preservation Plan, dated as of July 24, 2020, by and between the Company and Colonial Stock Transfer Company, Inc., as rights agent. The Tax Benefit Preservation Plan was adopted as a means designed to safeguard against inadvertent diminution or limitation of the Company’s valuable tax assets. As previously reported, pursuant to the Tax Benefit Preservation Plan, as of July 24, 2020, the Company has designated a series of its preferred stock as the Series A Preferred Stock, consisting of 250,000 shares so designated.
As of September 30, 2020, the Company has not issued any shares of its preferred stock (including, without limitation, its Series A Preferred Stock).
Common Stock
As of September 30, 2020, 2,602,240 shares of the Company’s common stock were issued and outstanding.
Cancellation of Treasury Shares
On December 30, 2019, the Company completed the cancellation of 80,506 treasury shares held is 11,696,658.of its common stock then-remaining, upon resolution from the Board of Directors.
NOTE 12.13. SUBSEQUENT EVENTS
Management has evaluated all subsequent events from September 30, 20172020, through November 9, 2017, the date the unaudited condensed consolidated financial statements were issued. Management concluded that no 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 quarterquarterly period ended September 30, 2017.2020. The discussion of results, causes, and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. Additionally, it should be noted that a uniform comparative analysis cannot be performed for all segments, as a segment’s limited financial history or recent restructuring results in less comparable financial performance.
Overview
Sitestar Corporation
During the quarterly period ended September 30, 2020, Enterprise Diversified, Inc. (“Sitestar,ENDI,” the “Company,” or “we”) operated under four reportable segments:
● | Asset Management Operations - this segment includes revenue and expenses derived from our various joint ventures, service offerings, and initiatives undertaken in the asset management industry; |
● | Real Estate Operations - this segment includes 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; |
● | Internet Operations - this segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services; and |
● | Other Operations - this segment includes any revenue and expenses from nonrecurring or one-time strategic funding or similar opportunities previously undertaken, and any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company. |
During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. This segment now includes discontinued revenue and expenses derived from our former operation of HVAC and plumbing companies in Arizona. As of the quarterly period ended September 30, 2020, and for all prior periods presented, Home Services Operations are reported as discontinued operations.
Management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
Note that as of May 24, 2019, as reported in the Current Report on Form 8-K filed with the SEC on May 28, 2019, the Company completed a divestiture of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC), to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, 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 remaining customer accounts going forward. No cash consideration was exchanged in the transaction. Rather, as consideration for the transaction, Rooter Hero agreed to pay monthly royalties for the sixty (60) months following the closing, calculated on the basis of any revenue received from the customer accounts transferred. Under such royalty arrangements, the Company will receive 7.5% of any monthly revenue generated from qualified sales during the first year, and 5% of any monthly revenue during years two through five. Royalties received will be reduced by pre-approved warranty-related costs for select customers.
Additionally, on June 27, 2019, as reported in 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.
Asset Management Operations
The Company operates under five segments:its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”) and Willow Oak Capital Management, LLC.
In 2016, the Company made a strategic determination to fund a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017 by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As of September 30, 2020, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations.
In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement in June 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership launched by Willow Oak and managed by Coolidge. Under their agreement concerning Bonhoeffer Fund, LP, Willow Oak paid all start-up expenses and pays agreed-upon operating expenses that are not partnership expenses, Coolidge is responsible for all investment management, and Willow Oak receives 50% of all performance and management fees earned.
On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our Board chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak’s Fund Management Services (“FMS”) consisting of the following services: investor relations, marketing, operations, legal, accounting and bookkeeping, annual audit coordination, and liaison to third-party service providers. As consideration for the services, Arquitos pays Willow Oak a monthly fixed fee and an annual performance-based fee.
On October 1, 2019, Willow Oak partnered with Geoff Gannon and Andrew Kuhn to form Focused Compounding Capital Management, LLC (“Focused Compounding”). This joint venture, of which Willow Oak Capital Management is a 10% owner, manages capital through separately managed accounts and a private investment fund launched January 1, 2020. As a member of the general partner, Willow Oak Capital Management provides ongoing FMS and operational support in addition to having covered all one-time expenses associated with the launch of Focused Compounding Fund, LP. As consideration for the arrangement, Willow Oak Capital Management is entitled to 10% of gross management and performance fees earned by Focused Compounding.
On September 29, 2020, Willow Oak, through its newly formed wholly-owned subsidiary, Willow Oak Asset Management Affiliate Management Services, LLC, executed a strategic relationship agreement with SVN Capital, LLC to become a 20% owner of the firm in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak Asset Management Fund Management Services, LLC, another newly formed wholly-owned subsidiary of Willow Oak. As a beneficial owner of the general partner, Willow Oak is entitled to 20% of gross management and performance fees earned. Additionally, Willow Oak Asset Management Fund Management Services, LLC earns a direct fee from the private limited partnership for the administrative, compliance and tax and audit liaison services it renders.
Corporate:
Real Estate Operations
In December 2017, ENDI created a wholly-owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), to acquire a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into in December 2017 with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, then an ENDI director. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to Woodmont. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. See Note 4 for more information.
In July 2017, ENDI created a wholly-owned real estate subsidiary named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of September 30, 2020, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes six residential properties and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia. The portfolio includes occupied single-family homes that are managed by a third-party property management company. The leases in effect as of September 30, 2020, are based on annual time periods and include month-to-month provisions after the completion of the initial term.
State and municipal laws and regulations govern the real estate industry and do not vary significantly from one community to another. State laws, including the Virginia Residential Landlord and Tenant Act, in addition to local ordinances, govern rental properties and also do not vary significantly throughout our real estate holding areas.
Internet Operations
The Company operates its internet operations segment through Sitestar.net, a wholly-owned subsidiary. Sitestar.net is an Internet Service Provider (ISP) that offers consumer and business-grade internet access, web hosting, and various ancillary services. We provide services to customers in the United States and Canada. This segment markets and sells narrow-band (dial-up and ISDN) and broadband services (DSL and fiber-optic). Additionally, we market and sell web hosting and related services to consumers and businesses.
Our primary competitors include regional and national cable and telecommunications companies that have substantially greater market presence, brand-name recognition, and financial resources compared to Sitestar.net. Secondary competitors include local and regional ISPs.
The residential broadband internet access market is dominated by cable and telecommunications companies. These companies offer internet connectivity through the use of cable modems, Digital Subscriber Line (DSL) programs, and fiber. These competitors have extensive scale and significantly more resources than Sitestar.net. Competitors often offer incentives for customers to purchase internet access by offering discounts for bundled service offerings (i.e., phone, television, Internet). While we are a reseller of broadband services including DSL and fiber services, our profit margin is heavily influenced by these competitive forces.
There are currently laws and regulations directly applicable to access or commerce on the internet, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security, and the convergence of traditional telecommunications services with Internet communications. We may be positively or negatively affected by the repeal, modification, or adoption of various laws and regulations. These changes may occur at the international, federal, state, and local levels, and may cover a wide range of issues.
As of September 30, 2020, the focus of our internet operations segment is to generate cash flow, work to make our costs variable, and reinvest in our operations when an acceptable return is available. We did not make significant reinvestments into the internet operations segment during the current quarter.
Management is currently identifying the market value for domain names owned by the Company in order to assess potential income opportunities. Management evaluates these domain names for third-party sales potential, as well as for other marketing opportunities that could generate new revenue from current customers who utilize the domains.
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operated its home services operations segment through its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.
As has been previously reported, on May 24, 2019, the Company completed its divestiture of the home services operations to Rooter Hero. See Note 3 for more information.
Other Operations
Other operations include nonrecurring or one-time strategic funding or similar activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main activities that comprise other operations.
Huckleberry Real Estate Fund
In January 2017, the Company, through Willow Oak, committed to make a capital contribution to Huckleberry Real Estate Fund II, LLC, a private investment fund, in the aggregate amount of $750,000. In May 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly-owned subsidiary of the Company. During the quarter ended March 31, 2019, all contributed capital was returned in full and a gain of $212,631 was recognized as revenue through the other operations segment includeson our unaudited condensed consolidated statements of operations for the nine-month period ended September 30, 2019.
Triad DIP Investors
In August 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy in April 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. On November 12, 2019, the Company exercised its warrants and purchased 450,000 shares of Triad Guaranty, Inc. Subsequently, on December 30, 2019, the Company monetized all 450,000 shares. The borrower has requested an extension from the original note repayment date of April 29, 2020, and as of the quarterly period ended September 30, 2020, the Company is evaluating a renegotiation of terms.
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. Sitestar may also invest in marketable securities through the corporate segment.
Internet 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, and various ancillary services. Sitestar.net provides services and support to customers in the United States and Canada.
HVAC Operations: The Company operates its HVAC 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. 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. As of September 30, 2017, HVAC Value Fund had closed on six acquisitions totaling $2,015,000, plus estimated earn outs 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, and one commercial property. Our real estate portfolio is primarily focused 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 listed for sale.
Asset Management Operations: Sitestar created a wholly-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 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”) dated as of January 24, 2017. Future investments of this nature will operate under Willow Oak and all related revenues and expenses will be allocated to the asset management segment accordingly. Sitestar, 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.
Summary of Financial Performance
Common stockholders’ equity increased from $9,160,029$10,633,958 at December 31, 20162019, to $15,171,806$11,325,257 at September 30, 2017. The change was mostly attributable to $4,625,000 of additional common stock issued.2020. This change was also driven by $585,930attributable to $809,747 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 operations segment, $349,561 of net income in the internet operations segment, and $460,140$31,187 of comprehensive lossnet income in the corporate segment. The comprehensive loss attributable to the corporatereal estate operations segment, and was partially offset by realized capital gainsa net loss of $645,007 in other segments, and $15,762 of net income resulting from investments in marketable securities of $76,940.discontinued operations under the home services operations segment. Corporate expenses for the nine monthsnine-month period ended September 30, 20172020, included in the net loss from other operations, totaled $482,561.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)$658,989. Total comprehensive net income (all attributable to Enterprise Diversified, Inc. stockholders) for the nine-month period ended September 30, 2020 equaled $561,250.
This section provides an overview of changes in our assets, liabilities, and equity and should be read together with our accompanying 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, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | ||||||||||||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Cash and equivalents |
| $ | 151,867 |
|
| $ | 2,231,807 |
|
| $ | 4,573,708 |
|
| $ | 2,607,370 |
| $ | 337,149 | $ | 425,985 | $ | 553,468 | $ | 666,810 | $ | 161,275 | |||||||||||
Accounts receivables, net | 49,824 | 28,394 | 35,298 | 52,889 | 35,646 | ||||||||||||||||||||||||||||||||
Investments, at fair value |
|
| 12,201,972 |
|
|
| 8,978,684 |
|
|
| 6,075,884 |
|
|
| 599,500 |
| 11,135,580 | 9,586,178 | 8,354,270 | 10,126,204 | 9,522,236 | ||||||||||||||||
Real estate, total |
|
| 839,849 |
|
|
| 1,102,158 |
|
|
| 1,098,758 |
|
|
| 1,905,291 |
| 378,698 | 383,128 | 376,499 | 479,425 | 1,412,208 | ||||||||||||||||
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 |
| 524,772 | 545,407 | 548,725 | 574,316 | 713,578 | ||||||||||||||||
Total assets |
| $ | 16,469,175 |
|
| $ | 15,516,454 |
|
| $ | 14,984,871 |
|
| $ | 9,841,232 |
| $ | 12,426,023 | $ | 10,969,092 | $ | 9,868,260 | $ | 11,899,644 | $ | 11,844,943 | |||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Deferred revenue |
| $ | 239,748 |
|
| $ | 247,873 |
|
| $ | 238,941 |
|
| $ | 214,898 |
| |||||||||||||||||||||
Accounts payable |
|
| 180,692 |
|
|
| 220,631 |
|
|
| 92,953 |
|
|
| 77,918 |
| $ | 63,573 | $ | 77,670 | $ | 188,732 | $ | 157,934 | $ | 66,584 | |||||||||||
Accrued expenses |
|
| 218,294 |
|
|
| 195,414 |
|
|
| 219,602 |
|
|
| 123,387 |
| 176,904 | 119,839 | 124,255 | 198,374 | 51,703 | ||||||||||||||||
Deferred revenue | 213,498 | 210,671 | 201,430 | 204,960 | 217,811 | ||||||||||||||||||||||||||||||||
Notes payable and other liabilities |
|
| 658,635 |
|
|
| 497,954 |
|
|
| 528,676 |
|
|
| 265,000 |
| 646,791 | 666,608 | 561,004 | 704,418 | 1,137,250 | ||||||||||||||||
Total liabilities |
|
| 1,297,369 |
|
|
| 1,161,872 |
|
|
| 1,080,172 |
|
|
| 681,203 |
| 1,100,766 | 1,074,788 | 1,075,421 | 1,265,686 | 1,473,348 | ||||||||||||||||
Total stockholders’ equity |
|
| 15,171,806 |
|
|
| 14,354,582 |
|
|
| 13,904,699 |
|
|
| 9,160,029 |
| 11,325,257 | 9,894,304 | 8,792,839 | 10,633,958 | 10,371,595 | ||||||||||||||||
Total liabilities and stockholders’ equity |
| $ | 16,469,175 |
|
| $ | 15,516,454 |
|
| $ | 14,984,871 |
|
| $ | 9,841,232 |
| $ | 12,426,023 | $ | 10,969,092 | $ | 9,868,260 | $ | 11,899,644 | $ | 11,844,943 |
Results of operationsOperations
Corporate
InAsset Management Operations
The Company operates its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”) and Willow Oak Capital Management, LLC. These subsidiaries were formed on October 10, 2016 and May 24, 2018, respectively. During the quartersegment’s first year of operations, Willow Oak entered into three fee share agreements with multiple private investment partnerships and made an additional investment through another partnership arrangement. During the year ended December 31, 2018, two new partnerships were formed, multiple fee share agreements were entered into, and a new service offering, Fund Management Services, was launched. During the year ended December 31, 2019, one new joint venture was formed in which Willow Oak Capital Management is a non-managing owner. During the nine-month period ended September 30, 2017 the corporate segment produced2020, one new private partnership was launched and two new wholly-owned entities were formed to advance strategic relationships with external investment firms. Additionally, Willow Oak Asset Management formalized a totalnew relationship to become a non-managing member of $97,029 of comprehensive loss. This includes $10,068 of other comprehensive income which was generated 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 during the quarter ended September 30, 2016. Expenses were higher during the quarter ended September 30, 2016 compared to the quarter ended September 30, 2017 primarily due to increased accounting and legal expenses related to outsourced accounting roles and legacy legal matters. Accounting and legal roles have since been brought in-house.an affiliate firm.
Internet Operations
As of September 30, 2017,2020, Willow Oak continues to hold a direct investment in the focusAlluvial Fund, LP. The realized and unrealized investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of our internetoperations. This treatment can result in reporting negative revenue figures for a given period. Willow Oak continues to earn revenue through the remaining fee share arrangements, as well as through fund management services.
During the quarterly period ended September 30, 2020, the asset management operations segment produced $1,607,150 of revenue. Cost of revenue was $0 and operating expenses totaled $120,368. Net income for the quarterly period ended September 30, 2020, totaled $1,486,782. This compares to the quarterly period ended September 30, 2019, when the asset management operations segment produced negative $159,085 of revenue, cost of revenue was $0, and operating expenses totaled $81,906. Additionally, other income for the quarterly period ended September 30, 2019, was $4,983, and the total net loss was $236,008. The increase in revenue for the quarterly period ended September 30, 2020 is primarily due to generate cash flow, workmarket volatility and the application of specific GAAP revenue recognition rules as noted above. The increase in operating expenses is primarily due to make our costs variable, and reinvest in our operations when an acceptable return is available. We did not make significant reinvestments intohigher payroll expenses. Other income for the internet segment during the three monthsquarterly period ended September 30, 2017. Additionally, competitive pressures have negatively affected our ongoing revenue. Accordingly, revenue has continued2019, was primarily due to decline, though at a slower pace than previous years, as noted below.sub-lease rental income earned through the Company’s New York office space.
Revenue attributed
As of September 30, 2020, the fair value of long-term investments held through the asset management operations segment totaled $11,081,734. This compares to the internet segment during the quarter endedfair value of long-term investments held at September 30, 20172019, which totaled $314,202. While this was a decrease of $41,182 when compared to revenue generated in this segment during the quarter ended September 30, 2016 totaling $355,384, income from operations reported 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.$9,468,390. This increase wasin investments is primarily attributable to positive Alluvial Fund performance. Management notes that, while short-term market volatility can have a significant effect on reported revenue for a given period, 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.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)Company’s overall investment strategy is ultra-long-term focused.
The table below provides a summary of incomerevenue statement figuresamounts over time. These figures are specific to the internetasset management operations segment and are presented for the quarterlythree- and nine-month periods designated below.
For the three months ended | For the nine months ended | |||||||||||||||
Asset Management Operations Revenue | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | ||||||||||||
Realized and unrealized gains (losses) on investment activity | $ | 1,545,239 | $ | (197,306 | ) | $ | 989,609 | $ | 1,005,969 | |||||||
Management and performance fee revenue | 37,858 | 13,672 | 69,153 | 44,645 | ||||||||||||
Fund management services revenue | 24,053 | 24,549 | 72,053 | 76,461 | ||||||||||||
Total revenue | $ | 1,607,150 | $ | (159,085 | ) | $ | 1,130,815 | $ | 1,127,075 |
|
| 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 identifyingReal Estate Operations
For the market value for domain names in order to assess potential income opportunities. Management also evaluates domain names available for purchase in order to generate new revenue from customers who utilize the domains.
Effective January 1, 2016, we have improved and restructured our internal reporting in the internet segment. Our current sales mix of customers consists of approximately 69% internet access and 31% web hosting and storage. Approximately 91% of our customer accounts are managed by our U.S. operations and 9% of our customer accounts are managed by our Canada operations. Revenue generated by our U.S. operations totaled $295,371 and revenue generated by our Canada operations totaled $18,831 during the quarterquarterly period ended September 30, 2017. This compares to2020, the real estate operations segment generated rental revenue generated by our U.S. operations of $330,480 and$16,129. The cost of rental revenue generated by our Canada operations of $23,904 duringtotaled $12,157. Operating expenses for the quarterquarterly period ended September 30, 2016.
HVAC Operations
The Company operates its HVAC operations through HVAC Value Fund, LLC, a wholly-owned subsidiary focused on2020, were $5,940. Other expenses totaled $5,456 and the acquisition and management of HVAC and plumbing companies in Arizona and throughoutnet loss for 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 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. HVAC Value Fund closed on five acquisitions totaling $1,455,000 during the year ended December 31, 2016. During the nine monthsquarterly period ended September 30, 2017, HVAC Value Fund closed on one additional acquisition totaling $560,000. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016 and discussed further herein, the purpose of HVAC Value Fund is to acquire HVAC and plumbing businesses. Accordingly, all of our acquisitions were made in 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 quarter ended September 30, 2017. Cost of revenue2020, totaled $875,991 and operating expenses totaled $322,639. Other expenses totaled $13,928. The other expenses are related to the interest portion of the notes payable incurred by HVAC Value Fund as well as a loss incurred on the disposal of an asset. Comprehensive income for the quarter ended September 30, 2017 totaled $119,681.$7,424. This compares to the quarterquarterly period ended September 30, 2016,2019, when HVACthe real estate operations segment generated rental revenue of $906,910,$19,359 and cost of rental revenue totaled $619,881, operating$30,753. Operating expenses totaled $219,537 and comprehensive income for the quarter totaled $66,370. Management notes that for the quarterquarterly period ended September 30, 2016, HVAC Value Fund had closed only four2019 were $11,827, other expenses totaled $13,709, and the total loss reported was $36,960. Other expenses incurred during the quarterly periods ended September 30, 2020 and 2019, were primarily interest-related expenses. The current period decreases in rental revenue, cost of rental revenue, operating expenses and interest expense are primarily due to the six currentlysale of certain real estate properties held acquisitions. historically as rental properties.
EDI Real Estate Operations
As of September 30, 2017, we owned 10 residential properties, one commercial property,2020 and interests in several lots. In 2008,December 31, 2019, 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 listEDI Real Estate portfolio 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)included the following units:
EDI Real Estate | September 30, 2020 | December 31, 2019 | ||||||
Units occupied or available for rent | 4 | 6 | ||||||
Vacant units being prepared for rent | — | — | ||||||
Vacant lots | 3 | — | ||||||
Total units held for investment | 7 | 6 | ||||||
Units held for resale | 2 | 2 | ||||||
Vacant lots held for resale | — | 3 | ||||||
Total units held for resale | 2 | 5 |
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
Units 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.consist of single-family residential rental units.
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, 20172020, 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. All eight properties were current with regard to tenant payments as of September 30, 2017. This is comparable to
EDI Real Estate | September 30, 2020 | December 31, 2019 | ||||||
Total real estate held for investment | $ | 303,158 | $ | 484,590 | ||||
Accumulated depreciation | (58,369 | ) | (104,075 | ) | ||||
Real estate held for investment, net | 244,789 | 380,515 | ||||||
Total real estate held for resale | 192,476 | 98,910 | ||||||
Accumulated depreciation | (58,567 | ) | — | |||||
Real estate held for resale, net | $ | 133,909 | $ | 98,910 |
For the quarterquarterly period ended September 30, 20162020, depreciation expense on the EDI Real Estate portfolio of properties was $4,431. This compares to depreciation expense for the quarterly period ended September 30, 2019, when we also had eightdepreciation expense on the EDI Real Estate portfolio of properties availablewas $6,116.
There were no properties sold or purchased during the quarterly periods ended September 30, 2020 and 2019 within the EDI Real Estate portfolio. Subsequent to the quarterly period ended September 30, 2020, the Company sold one property held for rent with all of the properties occupied and current with regard to tenant payments.resale.
During the quarterquarterly period ended September 30, 2017,2020, two residential rental properties were transferred from “held for investment” to “held for resale”. The carrying value of these properties was $133,909. During the quarterly period ended September 30, 2019, two residential rental properties were also transferred from “held for investment” to “held for resale”. The carrying value of these properties was $121,558.
There were no impairment adjustments recorded during the quarterly period ended September 30, 2020. During the quarterly period ended September 30, 2019, net impairment adjustments of $3,040 were recorded on the transfer and sale of various properties held for resale within the EDI Real Estate portfolio.
Mt Melrose Operations
As described in Note 4, management previously has determined that the Company generated rental revenueno longer has a controlling financial interest in Mt Melrose. All activity prior to the deconsolidation event has been included on our unaudited condensed consolidated statements of $24,144,operations for given prior reporting periods under the real estate segment. No Mt Melrose activity is included on the unaudited condensed consolidated statements of operations for the quarterly periods ended September 30, 2020 and 2019 . As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our condensed consolidated balance sheets. Accordingly, there are no consolidated Mt Melrose assets as of the periods ended September 30, 2020 and December 31, 2019 included on the accompanying condensed consolidated balance sheets.
For the periods ended September 30, 2020 and December 31, 2019, the Company’s remaining investment in Mt Melrose is carried on our condensed consolidated balance sheets for $53,846. This carrying value is reflective of the mechanics of the June 27th transaction, rather than management’s perceived value of the Company’s remaining interest. By way of the Mt Melrose transaction, the Company was able to significantly reduce direct and overhead expenses, improve net cash flows, and fully deconsolidate approximately $6.4 million of baddebt. Additionally, the Company was afforded the opportunity to refocus growth opportunities to its asset management operations segment. These circumstances, rather than the cash consideration received, are what strategically prompted the majority sale of the Mt Melrose entity. Additional debt expense. Therestructurings and sales of previously inactive real estate properties have allowed the portfolio to continue its redirection, which management believes will provide long-term returns greater than its current carrying value.
Internet Operations
Revenue attributed to the internet operations segment during the quarterly period ended September 30, 2020, totaled $242,237 and cost of revenue totaled $6,081. This compared to rental revenue of $27,023, net of bad debt during$85,412. Operating expenses for the quartersegment totaled $49,239 for the quarterly period ended September 30, 2016. The2020, and other income totaled $777. Total net income for the internet operations segment was $108,363 for the quarterly period ended September 30, 2020. This compares to the quarterly period ended September 30, 2019, when revenue totaled $265,171, cost of revenue duringrevenues totaled $83,517, operating expenses were $43,168, other income was $384, and net income was $138,870. Other income for the comparison period totaled $11,104. The decrease in cost of revenue wassegment is the result of improved maintenancecredit card rewards and refundable sales tax credits.
As of September 30, 2020, we have a total of 7,119 customer accounts across the rental properties by our third-party property manager.
Depreciation expense totaled $5,304 forU.S. and Canada. This compares to the quarterquarterly period ended September 30, 2017. Total accumulated depreciation as2019, when we had a total of 7,622 customer accounts. As of September 30, 20172020, approximately 62% of our revenue is driven by internet access services, with the remaining 38% being earned though web hosting and other web-based storage services.
Approximately 92% of our customer accounts are U.S.-based, while 8% are Canada-based. Revenue generated by our U.S. customers totaled $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$230,714 and revenue generated by our Canadian customers totaled $11,523 during the quarterquarterly period ended September 30, 2017, all four $2.5 million payments2020. This compares to revenue generated by our U.S. customers 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$251,809 and losses are reported as revenue on the condensed consolidated statementgenerated by our Canadian customers 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$13,362 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 quarterperiod ended September 30, 2017 the asset management segment produced a total of $674,054 of comprehensive2019.
Discontinued Operations - Home Services Operations
As noted previously, Specialty Contracting Group, LLC’s historical operations are now classified as “discontinued operations” in our consolidated financial statements, and all presented prior periods have also been reclassified to discontinued operations for comparability. Net income which was generated as a result of unrealized capital gains recognized as revenuereported 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 feesdiscontinued operations related to the launch of the Bonhoeffer Fund, LP. No comparable figures existhome services operations segment for the quarterquarterly period ended September 30, 2016 as2020 was $1,857. Included in this amount is a $1,887 loss recovery on discontinued operations that represents royalties earned in accordance with the asset management subsidiaryRooter Hero royalty arrangement mentioned previously. This compares to the net income of $15,762 reported from discontinued operations related to the home services operations segment for the quarterly period ended September 30, 2019.
Other Operations
For the quarterly period ended September 30, 2020, our other operations segment did not commence activities until January 1, 2017.produce any revenue or cost of goods sold. Operating expenses totaled $165,165 and other income was $6,540 for the quarterly period ended September 30, 2020. Corporate operating expenses accounted for the full $165,165 of reported operating expenses for our other operations. This resulted in a net loss of $158,625 for the quarterly period ended September 30, 2020. This compares to the quarterly period ended September 30, 2019 when the other operations segment again did not produce any revenue or cost of goods sold, but did incur corporate operating expenses of $141,270, other income of $20,249, and a net loss of $121,021 for the period. Corporate expenses were slightly higher for the quarterly period ended September 30, 2020, primarily due to higher, non-cash director fees.
Financial Condition, Liquidity, and Capital Resources
During the quarterly period ended September 30, 2020, Enterprise Diversified carried out its business strategy in four operating segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, as of the quarterly period ended September 30, 2020, and for all prior periods presented, home services operations are reported as discontinued operations. Our primary focus is on generating cash flow so that we have the flexibility to pursue opportunities as they present themselves. We will only invest cash in each segment if we believe that the return on this invested capital is appropriate for the risk associated with the investment. This consideration is measured against all investment opportunities available to us and is not limited to these particular segments or the Company’s historical operations.
Cash and equivalents totaled $151,867$337,149 at quarter end September 30, 2017 compared to $2,607,370 at year end December 31, 2016. 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 sales related to the HVAC segment during the quarter ended September 30, 2017.
Accounts payable increased to $180,692 at quarter end September 30, 20172020, compared to $77,918$666,810 at year endyear-end December 31, 2016. Accrued expenses increased2019. Real estate held for investment decreased 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$244,789 at the quarter ended September 30, 2017. Accrued bonus2020, compared to $380,515 at year-end December 31, 2019, and real estate held for resale increased to $110,000$133,909 at the quarter ended September 30, 2020, compared to $98,910 at year-end December 31, 2019. The fluctuations in real estate amounts are primarily due to the opportunistic sales of certain EDI Real Estate rental properties. The Company does not expect to make significant reinvestments into property and equipment used in operating activities at this time. Also, our total notes payable decreased to $499,678 from $51,855$511,025 during thisthe same 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 internet 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.months.
The aging of accounts receivable as of September 30, 20172020 and December 31, 20162019 is as shown:
September 30, 2020 | December 31, 2019 | |||||||
Current | $ | 46,637 | $ | 50,909 | ||||
30 – 60 days | 1,976 | 1,495 | ||||||
60 + days | 1,211 | 485 | ||||||
Total | $ | 49,824 | $ | 52,889 |
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
In 2016, the Company made a strategic determination to fund a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017 by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As previouslyof September 30, 2020, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations.
Also through the asset management operations segment, an operating lease on office space in New York City commenced on October 1, 2017. This lease extended through September 30, 2020.
Through the former home services operations segment, an operating lease on warehouse and office space in Scottsdale, Arizona, commenced on May 1, 2018. This lease would have extended through May 31, 2021. This lease was not conveyed with the divestiture on May 24, 2019. Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC) was the lessee party to the lease. However, Specialty Contracting Group, in connection with its dissolution and winding up, surrendered possession of the premises to the landlord, in default of this lease.
On June 27, 2019, as reported in ourthe Current ReportsReport on Form 8-K filed with the SEC on September 19, 2016 and December 30, 2016, respectively, on September 19, 2016,July 3, 2019, the Company announced that it hadsold 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 four 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 lettercertain Amended and Restated Limited Liability Company Agreement of intent agreement with Alluvial Capital Management,Mt Melrose, LLC (“Alluvial Capital”(the “A&R LLC Agreement”). The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members. The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont is designated as the sole manager. In addition, the Company expressly agreed to make a seed investment through Willow Oak Asset Managementthree-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the Alluvial Fund, LP,management or control of Mt Melrose; and with respect to any matters requiring a private investment partnership that was launched by Alluvial Capital on January 1, 2017 (“Alluvial Fund”). Alluvial Capitalvote of the members, the Company will actvote with (i.e., the same as) Woodmont. Subsequent to the transaction, Woodmont, as the general partner andmanager of Mt Melrose, has purported that the Company, through Willow Oak Asset Management, will investCompany’s membership interest in Alluvial Fund as a limited partner.
Mt Melrose has been diluted to 20.8%. The Company disputes this assertion and maintains that it has 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 satisfiedretained its obligation to provide $10 million in accordance with the contribution schedule.
Through the HVAC segment, multiple capital lease obligations were acquired as part of the most recent acquisition that occurred during the quarter ended March 31, 2017. These obligations include leases on various vehicles and equipment that extend through 2020.
Through the asset management segment, a lease on office space in New York City will commence on October 1, 2017. This lease extends through September 30, 2020. All related expenses will be allocated to the asset management segment.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)35% membership interest.
We have no other meaningful long-term debt obligations, purchase obligations or other long-term liabilities as of September 30, 2017 other than those previously mentioned related to the HVAC and asset management segment. The only operating lease obligations are agreements for leased office 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.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements as of September 30, 2017.2020.
Discussion Regarding COVID-19 Potential Impacts
Due to the uncertainty surrounding the COVID-19 pandemic, the Company has experienced, and continues to expect, market volatility as it relates to its investment in the Alluvial Fund. As reported in prior quarters, this volatility can create periods when the asset management operations segment produces negative revenue amounts. Due to the size of the investment, these negative revenue amounts can also have a sizable impact on the Company’s balance sheets at a given point-in-time. The nature of this investment has inherent market risks, and while short-term results can be unpredictable, the Company’s overall investment strategy continues to be ultra-long-term focused.
These periods of volatility do not typically have significant short-term cash flow impacts; however, due to the Company’s relative size, there is an inherent lack of affordable, short-term lending options in the event of an unexpected negative cash flow situation. As previously mentioned, during the quarterly period ended June 30, 2020, the Company received loan proceeds in the amount of $125,102 under the Paycheck Protection Program. The Small Business Administration has determined that companies of our size generally are less likely to have access to adequate sources of liquidity in the current economic environment, and because of this, has established a safe harbor whereby borrowers that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
Management continues to monitor and assess all Company operations for additional potential impacts of the COVID-19 pandemic. As of the quarterly period ended September 30, 2020, the Company has not been forced to make significant operational changes as a result of the pandemic. Management does not anticipate additional challenges in meeting existing obligations, nor do we expect significant customer or vendor interruptions. However, the extent to which the COVID-19 pandemic ultimately may impact our business, financial condition, liquidity and results of operations likely will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on employees, customers and service providers, as well as the U.S. economy, and the actions taken by governmental authorities and other third parties in response to the pandemic.
Quantitative and |
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, 2020. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including 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.2020.
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, 2017,2020, 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
Sitestar v. Frank Erhartic, Jr.
On April 12, 2016, Sitestar filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”),Pursuant to Item 103 of Regulation S-K, as amended, the information required by this item is provided by cross-reference to the Company’s former CEO and director and currently an owner of record or beneficially of more than five percent oflegal proceedings disclosure located under the Company’s Common Stock, alleging, among other things, that the Former CEO engagedLitigation & Legal Proceedings heading 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 CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent paymentsNote 11 to the Former CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former CEO, causing the Company to pay certain amounts to the Former CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former CEO, causing the Company to pay rent on its corporate headquarters owned by the Former 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 CEO, converting to the Former 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 CEO, causing the Company to pay personal credit card debt of the Former CEO, causing the Company to significantly overpay the Former CEO’s health and dental insurance for the benefit of the Former CEO, and causing the Company to pay the Former 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)accompanying unaudited consolidated financial statements (see page 22).
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 Company is not primarily engaged, and does not propose to primarily engage, in the business of investing, reinvesting or trading in securities, and does not propose to operate in a manner that would cause it to acquire ‘investment securities’ (as defined in the Investment Company Act), having a value exceeding 40 percent of the value of its total assets (exclusive of Government securities and cash items), calculated on an unconsolidated basis. The board of the Company has elected to eliminate any uncertainty in regard to the Company’s current status under the Act, and has confirmed pursuant to Rule 3a-2 adopted under the Act that the Company has a bona fide intent to be engaged primarily, as soon as is reasonably possible and in any event by the end of the one-year period beginning June 30, 2017, in various lines of business not constituting investment securities, including, but not necessarily limited to, internet services, HVAC and plumbing services and real estate. This bona fide intent is demonstrated by the Company’s internal operational plan (the ‘Plan’), prepared and submitted by the Company, which sets forth detailed and specific potential steps to use the Company’s capital and assets to grow certain operational lines of business. Pursuant to the Plan, the Company’s holdings of investment securities will constitute less than 40 percent of its total assets on an unconsolidated basis no later than one year from June 30, 2017.
Exhibit |
| Description |
3.1 | Certificate of Designation of Series A Preferred Stock* | |
4.1 | Tax Benefit Preservation Plan, dated as of July 24, 2020, by and between Enterprise Diversified, Inc. and Colonial Stock Transfer Company, Inc., as rights agent** | |
31.1 |
| Certification of |
31.2 |
| Certification of |
32 |
| |
101 |
| Pursuant to Rule 405 of Regulation S-T, the following materials from |
*Filed as Exhibit 3.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 29, 2020, and incorporated herein by reference.
**Filed as Exhibit 4.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 29, 2020, and incorporated herein by reference.
Pursuant to 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.
|
|
|
|
|
|
Date: November |
| /s/Steven L. Kiel |
|
| Steven L. Kiel |
|
|
|
(Principal Executive Officer) | ||
Date: November 13, 2020 | /s/ Alea A. Kleinhammer | |
Alea A. Kleinhammer | ||
Chief Financial Officer | ||
|
| (Principal |
34