10-Q 1 syte20190930b_10q.htm FORM 10-Q syte20190630_10q.htm
 

 

Table of Contents

 

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, 2019

 

ENTERPRISE DIVERSIFIED, INC.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Commission file number 000-27763

 

Nevada

88-0397234

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

1518 Willow Lawn Drive, Richmond, VA

23230

(Address of Principal Executive Offices)

(Zip Code)

 

(434) 336-7737

(Registrant’s telephone number, including area code)

 

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    [X]  Yes  ☐ No

 

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

[X]

Smaller reporting company

[X]

 

 

 

 

Emerging growth company

 

 

 

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

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

Not applicable

Not applicable

 

The number of shares outstanding of the issuer’s Common Stock, $0.125 par value, as of November 8, 2019 is 2,544,776.

 

 

 

Table of Contents

 

 

Page No.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

 

 

PART I

Item 1. Financial Statements 

4

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

4

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018

5

Unaudited Condensed Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018

6

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Three and Nine Months ended September 30, 2019 and 2018

7

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018  

8

Notes to Unaudited Condensed Consolidated Financial Statements

10

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

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

34

Item 4. Controls and Procedures

34

 

 

PART II

Item 1. Legal Proceedings

35

Item 1A. Risk Factors

35

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

35

Item 3. Defaults Upon Senior Securities

35

Item 4. Mine Safety Disclosures

 

Item 5. Other Information

35

Item 6. Exhibits

36

 

 

Signatures

37

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

ENTERPRISE DIVERSIFIED, INC.

And Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

September 30, 2019

   

December 31, 2018 (audited)

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 161,275     $ 435,726  

Accounts receivable, net

    35,646       58,263  

Inventory

          120,940  

Other current assets

    30,164       95,095  

Current assets - held for sale

    135,589       232,363  

Total current assets

    362,674       942,387  

Long-term Assets

               

Real estate - held for investment, net

    440,575       9,492,877  

Real estate - held for resale

    971,633       2,318,912  

Property and equipment, net

    10,522       1,019,742  

Property and equipment - held for resale

          73,212  

Goodwill, net

    212,445       212,445  

Note receivable

    191,160       169,406  

Long-term investments, at fair value or net asset value

    9,522,236       8,915,238  

Lease right-of-use assets

    59,563        

Other assets

    74,135       74,664  

Long-term assets - held for sale

          1,300,569  

Total long-term assets

    11,482,269       23,577,065  

Total assets

  $ 11,844,943     $ 24,519,452  

Liabilities and Stockholders' Equity

               

Current Liabilities

               

Accounts payable

  $ 66,584     $ 165,495  

Accrued bonus

    33,966       90,444  

Accrued expenses

    17,737       112,983  

Accrued interest

          134,623  

Deferred revenue

    217,811       210,212  

Lease liability, current

    61,402        

Notes payable, current

    311,292       1,002,965  

Other current liabilities - held for sale

    262,031       317,487  

Total current liabilities

    970,823       2,034,209  

Long-term Liabilities

               

Notes payable, net of current portion

    502,525       6,518,854  

Other long-term liabilities - held for sale

          50,738  

Total long-term liabilities

    502,525       6,569,592  

Total liabilities

    1,473,348       8,603,801  

Stockholders' Equity

               

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

           

Common stock, $0.125 par value, 2,800,000 shares authorized; 2,625,282 shares issued; 2,544,776 shares outstanding

    328,160       328,160  

Additional paid-in-capital

    27,718,308       27,718,308  

Treasury stock, at cost, 80,506 common shares

    (511,901 )     (511,901 )

Accumulated other comprehensive income

    3,054       3,054  

Accumulated deficit

    (17,166,026 )     (11,621,970 )

Total stockholders' equity

    10,371,595       15,915,651  

Total liabilities and stockholders' equity

  $ 11,844,943     $ 24,519,452  

 

 

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

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

    For the three months ended September 30     For the nine months ended September 30  
   

2019

   

2018

   

2019

   

2018

 

Revenues - asset management

  $ (159,085 )   $ 330,112     $ 1,127,075     $ 522,044  

Revenues - real estate

    19,359       220,600       420,464       592,583  

Revenues - internet operations

    265,171       288,312       805,990       887,635  

Revenues - other

          20,934       212,631       121,031  

Total revenues

    125,445       859,958       2,566,160       2,123,293  
                                 

Cost of revenues - real estate

    30,753       107,527       358,126       342,449  

Cost of revenues - internet operations

    83,517       86,658       254,373       238,385  

Cost of revenues - other

          31,800             156,731  

Total cost of revenues

    114,270       225,985       612,499       737,565  
                                 

Gross profit (loss) - asset management

    (159,085 )     330,112       1,127,075       522,044  

Gross profit - real estate

    (11,394 )     113,073       62,338       250,134  

Gross profit - internet operations

    181,654       201,654       551,617       649,250  

Gross profit - other

          (10,866 )     212,631       (35,700 )

Total gross profit

    11,175       633,973       1,953,661       1,385,728  
                                 

Selling, general and administrative expenses

    278,171       572,301       1,444,507       1,776,036  

Income (loss) from operations

    (266,996 )     61,672       509,154       (390,308 )
                                 
Loss on sale of subsidiary                 (3,519,053 )      

Impairment expense

    (3,040 )           (228,405 )      

Interest expense

    (13,473 )     (147,412 )     (293,202 )     (390,526 )

Other income, net

    28,420       23,468       67,362       94,940  

Total other income (loss)

    11,907       (123,944 )     (3,973,298 )     (295,586 )
                                 

Income (loss) from continuing operations before income taxes

    (255,089 )     (62,272 )     (3,464,144 )     (685,894 )

Income tax benefit

                       

Income (loss) from continuing operations

    (255,089 )     (62,272 )     (3,464,144 )     (685,894 )
                                 

Income (loss) from discontinued operations, net of taxes

    (31,151 )     83,254       (1,441,156 )     (62,518 )

Net income (loss)

    (286,240 )     20,982       (4,905,300 )     (748,412 )
                                 

Less: net income (loss) attributable to the noncontrolling interest

          (8,601 )           (380,437 )

Net income (loss) attributable to Enterprise Diversified, Inc. stockholders

  $ (286,240 )   $ 29,583     $ (4,905,300 )   $ (367,975 )

Earnings (loss) per share from continuing operations, basic and diluted

    (0.11 )     0.00       (1.93 )     (0.15 )
Earnings (loss) per share from discontinued operations, basic and diluted     (0.01 )     0.03       (0.57 )     0.00  

Weighted average number of shares, basic

    2,544,776       2,540,416       2,544,776       2,433,340  

Weighted average number of shares, diluted

    2,544,776       2,540,416       2,544,776       2,433,340  

 

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

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   

For the three months ended September 30

   

For the nine months ended September 30

 
   

2019

   

2018

   

2019

   

2018

 

Net income (loss)

  $ (286,240 )   $ 20,982     $ (4,905,300 )   $ (748,412 )

Other comprehensive income (loss), net of tax:

                       

Comprehensive income (loss)

    (286,240 )     20,982       (4,905,300 )     (748,412 )

Less: comprehensive loss attributable to the noncontrolling interest

          (8,601 )           (380,437 )

Comprehensive income (loss) attributable to Enterprise Diversified, Inc. stockholders

  $ (286,240 )   $ 29,583     $ (4,905,300 )   $ (367,975 )

 

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

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 

                   

Additional

            Accumulated Other                    

Total

 
   

Common

           

Paid In

   

Treasury

   

Comprehensive

   

Accumulated

   

Noncontrolling

   

Stockholders'

 
   

Stock

   

Amount

   

Capital

   

Stock

   

Income

   

Deficit

   

Interest

   

Equity

 

Balance December 31, 2018

    2,544,776     $ 328,160     $ 27,718,308     $ (511,901 )   $ 3,054     $ (11,621,970 )   $     $ 15,915,651  

Net income (loss)

                                  373,769             373,769  
Balance March 31, 2019     2,544,776       328,160       27,718,308       (511,901 )     3,054       (11,248,201 )           16,289,420  
Net income (loss)                                   (4,992,836 )           (4,992,836 )
Effects of deconsolidation                                   (638,749 )           (638,749 )
Balance June 30, 2019     2,544,776       328,160       27,718,308       (511,901 )     3,054       (16,879,786 )           10,657,835  
Net income (loss)                                             (286,240 )             (286,240 )

Balance September 30, 2019

    2,544,776     $ 328,160     $ 27,718,308     $ (511,901 )   $ 3,054     $ (17,166,026 )   $     $ 10,371,595  

 

 

                   

Additional

            Accumulated Other                    

Total

 
   

Common

           

Paid In

   

Treasury

   

Comprehensive

   

Accumulated

   

Noncontrolling

   

Stockholders'

 
   

Stock

   

Amount

   

Capital

   

Stock

   

Income

   

Deficit

   

Interest

   

Equity

 

Balance December 31, 2017

    2,262,672     $ 294,527     $ 23,538,493     $ (544,571 )   $ 3,054     $ (7,400,848 )   $     $ 15,890,655  

Net income (loss)

                                  (143,372 )     (87,559 )     (230,931 )

Contributed capital

    120,601       15,075       1,643,196                               1,658,271  

Initial accounting of VIE

                                        4,047,623       4,047,623  

Net equity distribution for asset acquisition

                                        (2,158,270 )     (2,158,270 )
Balance March 31, 2018     2,383,273       309,602       25,181,689       (544,571 )     3,054       (7,544,220 )     1,801,794       19,207,348  
Net income (loss)                                   (254,183 )     (142,388 )     (396,571 )
Contributed capital     148,159       18,520       2,389,044                               2,407,564  
Net equity distribution for asset acquisition                                         (1,861,643 )     (1,861,643 )
Adjustment for rounding of reverse stock split           4       (4 )                              
Balance June 30, 2018     2,531,432       328,126       27,570,729       (544,571 )     3,054       (7,798,403 )     (202,237 )     19,356,698  
Net income (loss)                                   29,583       (8,601 )     20,982  
Sale of treasury stock     13,068             147,613       32,670                         180,283  
Adjustment for rounding of reverse stock split     276       34       (34 )                              
Balance September 30, 2018     2,544,776     $ 328,160     $ 27,718,308     $ (511,901 )   $ 3,054     $ (7,768,820 )   $ (210,838 )   $ 19,557,963  

 

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

 

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2019 and 2018

 

   

2019

   

2018

 

Cash flows (used in) from operating activities:

               

Net income (loss) from continuing operations

  $ (3,464,144 )   $ (685,894 )
Net income (loss) from discontinued operations     (1,441,156 )     (62,518 )

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

               

Deconsolidation of assets and liabilities from sale of subsidiary

    (149,425 )      
Loss on sale of subsidiary     3,519,053        
Impairment of long-term assets     170,858       64,038  

Depreciation and amortization

    155,708       203,186  

Gain on long-term investments

    (1,218,399 )     (493,480 )

Bad debt expense

    95,756       24,306  
Collection of operating notes receivable           226,000  

(Gain) loss on sale of real estate

    (16,932 )     11,931  
(Gain) loss on disposal of property and equipment     11,938        

(Increase) decrease in:

               

Accounts receivable, net

    100,545       (63,991 )

Notes receivable

    (11,754 )      

Other current assets

    (11,589 )     (96,900 )

Increase (decrease) in:

               

Accounts payable

    (60,107 )     93,491  

Accrued expenses

    (113,240 )     (80,840 )

Deferred revenue

    7,599       (6,701 )

Accrued interest

    103,909       167,899  
Net cash flows (used in) continuing operations     (880,224 )     (636,955 )
Net cash flows (used in) from discontinued operations     (269,458 )     38,987  

Net cash flows (used in) operating activities

    (1,149,682 )     (597,968 )

Cash flows from (used in) investing activities:

               
Proceeds from sale of investments     32,904        
Proceeds from maturity of investments     681,381        

Purchases of investments

    (49,038 )     (17,162 )

Net purchases and sales of real estate

    772,850       (202,975 )

Improvements to real estate

    (105,186 )     (1,911,635 )
Proceeds from sale of subsidiary     100,000        
Proceeds from sale of inventory     4,160        
Proceeds from sale of property and equipment            

Proceeds from sale of domain names

          29,163  
Issuance of line of credit     (10,000 )      
Issuance of notes receivable           (165,444 )

Purchases of property and equipment

          (949,743 )

Subsidiary acquisitions

          (552,644 )
Net cash flows (used in) from continuing operations     1,427,071       (3,770,440 )
Net cash flows (used in) from discontinued operations           (7,717 )

Net cash flows from (used in) from investing activities

    1,427,071       (3,778,157 )

Cash flows from financing activities:

               

Principal payments on note payable

    (819,195 )     (267,117 )

Proceeds from notes payable

    300,000       1,721,573  
Proceeds from issuance of common stock           180,283  

Capitalized loan fees

          (10,591 )
Net cash flows (used in) from continuing operations     (519,195 )     1,624,148  
Net cash flows (used in) from discontinued operations     (32,645 )     (260,489 )

Net cash flows (used in) from financing activities

    (551,840 )     1,363,659  

Net increase (decrease) in cash

    (274,451 )     (3,012,466 )

Cash and cash equivalents at beginning of the period

    435,726       3,297,059  

Cash and cash equivalents at end of the period

  $ 161,275     $ 284,593  

 

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

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Nine Months Ended September 30, 2019 and 2018

 

   

2019

   

2018

 

Non-cash and other supplemental information:

               
Transfer of property, plant and equipment to held for resale   $ 822,829     $  
Transfer of land to held for investment   $ 145,000     $ 145,406  

Transfer of real estate held for investment to held for resale

  $ 121,558     $  

Effects of adoption of new lease guidance

  $ 59,563     $  

Continuing operations cash paid for interest

  $ 174,951     $ 254,028  

Discontinued operations cash paid for interest

  $ 7,754     $ 12,112  
Effects of adoption of new lease guidance on discontinued operations   $ 58,127     $  

Assets and debt consolidated as part of subsidiary acquisition

  $     $ 1,006,600  

Assumption of debt in subsidiary acquisition

  $     $ 4,565,277  

Asset acquisition equity activity

  $     $ 4,065,834  

Real estate held for investment acquired through debt obligations

  $     $ 1,383,339  
Equipment acquired through debt obligations of discontinued operations   $     $ 60,752  

 

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

 

 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Lines of Business

 

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

 

During the period ended September 30, 2019, the Company operated through five reportable segments: Asset Management Operations, Real Estate Operations, Internet Operations, Home Services Operations, and Other Operations. Other Operations include corporate operations and investment activity that is not considered to be one of our primary lines of business. As of January 1, 2019, legacy real estate operations, previously reported under Other Operations, are now being reported under the Real Estate Operations segment. As of the period ended September 30, 2019, and for all prior periods presented, home services operations are reported as discontinued operations. The management of the Company also continually reviews various investment opportunities, including those in other lines of business.

 

Note Regarding Recent Transactions

 

On May 24, 2019, as per the Current Report on Form 8-K filed with the SEC on May 28, 2019, the Company completed an asset sale transaction of its Home Services Operations, 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 customer accounts going forward. No cash consideration was exchanged in the transaction. As consideration for the transaction, Rooter Hero will pay monthly royalties for the next 60 months following the closing, calculated on the basis of revenue received from the customer accounts sold. Under such royalty arrangements, the Company will receive 7.5% of monthly revenue generated from qualified sales during the first year, and 5% of monthly revenue during years two through five. The operations of Specialty Contracting Group, LLC are considered a component of, and the sale reflects a major strategic shift in, the Company’s business.  As such, Specialty Contracting Group, LLC historical operations are now classified as “discontinued operations” in the Company’s financial statements. See Note 3 for more information.

 

Additionally, on June 27, 2019, as per the Current Report on Form 8-K filed with the SEC on July 3, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio.  The Company has retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest. While the operations of Mt Melrose, LLC are considered a component of the Company’s business, the sale did not represent a major strategic shift in the Company’s business. While we deconsolidated the operations of Mt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest, Mt Melrose, LLC’s historical operations continue to be reflected as “continuing operations” in the Company’s financial statements. See Note 4 for more information.

 

Note Regarding Historic Consolidation of Old Mt. Melrose

 

Previously, as of the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018, the Company had determined that Old Mt. Melrose (as defined below) was a “variable interest entity” because the seller’s equity interests in Old Mt. Melrose were not effective in determining whether the seller or New Mt Melrose (as defined below) had a controlling financial interest, and that New Mt Melrose’s rights under the Cash Flow Agreement were deemed to be variable interests in Old Mt. Melrose. As its primary beneficiary, New Mt Melrose previously consolidated Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose had been allocated accordingly on the unaudited condensed consolidated balance sheets for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018.

 

However, as of November 1, 2018, pursuant to a certain Termination of Master Real Estate Asset Purchase Agreement and Cash Flow Agreement, New Mt Melrose no longer had a controlling financial interest in Old Mt. Melrose and was no longer considered Old Mt. Melrose’s primary beneficiary. Consequently, as of November 1, 2018, the Company no longer consolidates the assets and liabilities of Old Mt. Melrose, and the balance of noncontrolling interest as of December 31, 2018, is appropriately reflected as zero on the accompanying unaudited consolidated statements of stockholders’ equity. See Note 5 for additional information.

 

Asset Management Operations

 

Enterprise Diversified, Inc. created a wholly owned asset management subsidiary on October 10, 2016, named Willow Oak Asset Management, LLC (“Willow Oak”). While not considered an investment company under the Investment Company Act of 1940, Willow Oak follows specialized accounting guidance for investment companies.

 

In 2016, the Company agreed to make a seed investment totaling $10 million through Willow Oak in Alluvial Fund, LP, a private investment partnership that was launched on January 1, 2017. Under a side letter agreement between Willow Oak, Alluvial Fund, and the fund’s general partner, Willow Oak may not make a full withdrawal from its capital account prior to a date five years after the effective date of the side letter agreement. However, on January 1, 2018, pursuant to an amendment to the side letter agreement dated December 15, 2017, the Company caused $3.0 million to be withdrawn from Alluvial Fund in order to partially fund the Company’s acquisition of real estate from Old Mt. Melrose (as defined below). Alluvial Fund 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.

 

Willow Oak signed a fee share agreement on June 13, 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, who is also an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership. Under their agreement, Willow Oak pays all start-up and operating expenses that are not partnership expenses under the limited partnership agreement and Willow Oak receives 50% of all performance and management fees earned by the general partner. Bonhoeffer Fund utilizes a value-oriented approach to invest in undervalued businesses worldwide that show evidence of compound mispricings, miscategorized business classifications, or are in a state of distress and/or transition exhibiting recurring revenue.

 

On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak Fund Management Services (“FMS”) consisting of the following services: investor relations, marketing, administration, legal, accounting and bookkeeping, annual audit, and liaison to third-party service providers. As consideration for the services, Arquitos pays Willow Oak a fixed fee.

 

 

Real Estate Operations

 

ENDI created a wholly owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), on January 10, 2018, which acquired a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into on December 10, 2017, with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, formerly an ENDI director. On January 10, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a first acquisition from Old Mt. Melrose of 44 residential and other income-producing real properties located in Lexington, Kentucky. On June 29, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a second acquisition from Old Mt. Melrose of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky. The Company accounted for the first and second purchases of properties as an asset acquisition (consisting of a concentrated group of similar identifiable assets, including land, buildings, improvements, and in-place leases). On June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose, LLC.  The Company deconsolidated the operations of New Mt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest.  See Notes 4 and 5 for more information.

 

Pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose, the parties mutually agreed to terminate the Master Real Estate Asset Purchase Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the Master Real Estate Asset Purchase Agreement. A third-party property manager was engaged as of November 1, 2018, to manage certain of the real properties previously acquired. Management determined that it was necessary to right-size New Mt Melrose operations to reduce its level of high-interest debt. Accordingly, New Mt Melrose began to immediately sell various properties with an emphasis on selling properties that have high-interest-rate loans and do not produce income.

 

In an effort to expedite the optimization of the Mt Melrose portfolio, management determined that a dedicated operator was necessary to manage the subsidiary. On June 27, 2019, as per the Current Report on Form 8-K filed with the SEC on July 3, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio.  The Company has retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest.  See Note 4 for more information.

 

ENDI created a wholly owned real estate subsidiary on July 10, 2017, named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of September 30, 2019, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes nine residential properties and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily focused in the Roanoke area of Virginia. The portfolio includes single-family homes, both rented and vacant, that are managed by a third-party property management company.

 

Internet Operations

 

The Company operates its internet segment through Sitestar.net, a wholly owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.

 

Home Services Operations

 

Prior to May 24, 2019, the Company operated its home services segment through its wholly owned subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona. The Company, along with JNJ Investments, LLC, an unaffiliated third party, organized and launched Specialty Contracting Group, LLC on June 13, 2016. On May 18, 2018, the Company terminated its operating agreement with JNJ Investments, LLC, dated June 13, 2016.

 

As of December 31, 2017, Specialty Contracting Group had closed on six acquisitions for an aggregate purchase price of approximately $2.02 million, which included earn-outs of approximately $325,000. For all six acquisitions, all asset allocations made by management were final and all earn-outs had been paid in full as of December 31, 2018. 

 

On May 24, 2019, as per the Current Report on Form 8-K filed with the SEC on May 28, 2019, the Company completed an asset sale transaction of its Home Services Operations to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and conveyed all of Specialty Contracting Group’s personal property and customer lists and records, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed the subsidiary’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s customer accounts going forward. No cash consideration was exchanged in the transaction. As consideration for the transaction, Rooter Hero will pay monthly royalties for the next sixty months following the closing, calculated on the basis of revenue received from the customer accounts sold. Under such royalty arrangements, the Company will receive 7.5% of monthly revenue generated from qualified sales during the first year, and 5% of monthly revenue during years two through five.  See Note 3 for more information.

 

Other Operations

 

Other operations include investment activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main business units that comprise other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying unaudited consolidated financial statements.

 

Huckleberry Real Estate Fund Investment

 

On January 30, 2017, the Company, through Willow Oak, committed to make a capital contribution to Huckleberry Real Estate Fund II, LLC, a private investment fund, in the aggregate amount of $750,000. On May 14, 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly owned subsidiary of the Company. Under the fund’s operating agreement, the fund’s managing member shall have sole discretion regarding the amounts and timing of any distributions to the members of the fund. The carrying value of this investment included in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2019, and December 31, 2018, is $0 and $468,750, respectively. The decrease in carrying value period over period was due to return of capital that was received prior to June 30, 2019. During the quarter ended March 31, 2019, a gain of $212,631 was recognized as revenue through other segments on the accompanying unaudited condensed consolidated statements of operations.

 

 

Triad DIP Investors Investment

 

On August 24, 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company originally contributed $100,000. Triad Guaranty, Inc. exited bankruptcy on April 27, 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 on May 18, 2018. The terms of the promissory note provide for interest in the amount of 10% annually, a repayment date no later than April 29, 2020, and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. Accordingly, on April 28, 2018, the Company was issued warrants to purchase 450,000 shares for $0.01 per share. Due to a lack of available financial data, these warrants have not been valued on the accompanying unaudited condensed consolidated balance sheets.

 

Corporate Operations

 

Corporate operations include any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries including: Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Mt Melrose, LLC (“New Mt Melrose”) prior to the loss of control resulting from the sale of 65% of the equity in New Mt. Melrose on June 27, 2019 (see Note 4), Specialty Contracting Group, LLC prior to its asset sale on May 24, 2019 (see Note 3), Sitestar.net, Inc., and EDI Real Estate, LLC. Additionally, during the period from January 10, 2018, through September 30, 2018, the accompanying unaudited consolidated financial statements include the accounts of Old Mt. Melrose, which was, at that time, determined to be a variable interest entity.

 

All intercompany accounts and transactions have been eliminated in consolidation.

 

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying interim consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The December 31, 2018 consolidated balance sheet included herein was derived from audited consolidated financial statements as of that date. Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously filed in our Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2019 and the results of operations for the three and nine months ended September 30, 2019 and 2018.

 

Use of Estimates

 

In accordance with GAAP in the United State of America, the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.

 

On an ongoing basis, management evaluates its estimates and judgments, including, among other items, those related to fair value of investments, revenue recognition, accrued expenses, financing operations, fair value of goodwill, fixed asset lives and impairment, lease right-of-use assets and impairment, deferred tax assets, liabilities and valuation allowance, other assets, the present value of lease liabilities, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements.

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and accounts receivable. The Company places its cash with high-quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.

 

Cash and Cash Equivalents

 

The Company defines cash equivalents as all highly liquid instruments purchased with a maturity of three months or less.

 

Investments

 

The Company holds various recurring investments through its asset management and real estate segments. Additionally, one-time investments can be held and reported under the Company’s “other” segment. Assets held through these segments do not have a readily determinable value as these investments are not publicly traded, nor do they have published sales records. These investments are remeasured to fair value on a recurring basis. See Note 6 for more information.

 

As of September 30, 2019, the Company also holds its remaining 35% investment in Mt Melrose, LLC through its real estate segment. The Company has determined that its remaining equity investment does not have a readily determinable fair value and will account for the investment at cost, less any impairment, as adjusted for changes resulting from observable price changes. When fair value becomes determinable, the investment will be marked to 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 the recorded allowance for doubtful accounts and bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are written off from the allowance for doubtful accounts when an account or invoice is individually determined to be uncollectible.

 

Real estate segment rental accounts are typically paid by tenants via cash or check no later than the fifth of the month. Any accounts collected after the fifth are charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If payments are not provided in a timely manner, then the amount due is designated as an account receivable. If accounts remain uncollected, then standard operating procedures are followed to commence a notice process for the tenant to either pay the amount due or vacate the property. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. These procedures typically result in low amounts of past due receivables.

 

The internet segment attempts to reduce the risk of non-collection by including a late-payment fee and a manual-processing-payment fee to customer accounts. Receivables more than 90 days past due are no longer included in accounts receivable and are turned over to a collection agency. Accounts receivable more than 30 days are considered past due. 

 

Inventory

 

Inventory is carried on the balance sheet at either the lower of purchased cost or net realizable value. Inventory is evaluated periodically for any obsolete or damaged stock.

 

Property and Equipment

 

Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. Depreciation is computed using the straight-line method based on the estimated useful lives for each of the following asset classifications:

 

Equipment (in years)

    7  

Building improvements (in years)

    15  

Buildings (in years)

    27.5  

 

Impairment of Long-lived Assets

 

Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

 

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

 

Goodwill and Other Intangible Assets

 

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company tests its goodwill annually as of December 31st or when events and circumstances indicate that those assets might not be recoverable.

 

Impairment testing of goodwill is required at the reporting-unit level (operating segment or one level below operating segment). The impairment test involves calculating the impairment of goodwill based solely on the excess of the carrying value of the reporting unit over the fair value of the reporting unit. Prior to performing the impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment to determine whether a detailed quantitative analysis is required. The Company estimates the fair value of its reporting units using discounted expected future cash flows.

 

During the year ended December 31, 2018, an impairment adjustment of $754,958 was recorded to goodwill held through the home services segment. As noted above, various qualitative factors were considered before preparing a quantitative analysis. Qualitatively, a general underperformance of previously acquired home services businesses triggered the quantitative analysis. As part of the quantitative analysis, management estimated the fair value of the home services segment at the enterprise level using a discounted cash flow approach. The results were then tested for reasonableness using a market approach by analyzing comparable firms’ growth rates, margins, capital expenditures, and working capital requirements. During the period ended June 30, 2019, an additional impairment of the remaining home services segment goodwill of $1,024,592 was recognized and reported as a component of the loss on the sale of Specialty Contracting Group, LLC’s assets.

 

Intangible assets consist of domain names attributed to the internet segment. The Company owns 228 domain names, of which 106 are available for sale. These domains are valued at historical cost. When management determines material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account internal and external appraisals. Intangible assets determined to have definite lives are amortized over their estimated useful lives.

 

 

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. Fair value is evaluated annually by management or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable.

 

During the year ended December 31, 2018, an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for resale” from “held for investment” as part of a portfolio redirection. See Note 5 for more information. Recent tax assessments, valuations, and local real estate agents were used to value this portfolio of held-for-sale properties.

 

During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management in 1998. During the period ended September 30, 2019, impairment adjustments of $42,407 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect pending sales activity as of the period ended September 30, 2019. 

 

Real estate properties held for investment are carried at the cost basis plus additional costs where the cost extended the life of or added value to the property. Otherwise, the cost is expensed as incurred. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management. During the period ended September 30, 2019, two residential rental properties within the EDI Real Estate, LLC portfolio were transferred from “held for investment” to “held for resale” based on management’s intents.

 

Accrued Bonus

 

Accrued bonuses represent performance-based incentives that have not yet been paid. The bonus structures are a preapproved part of a formal employment agreement. These bonus amounts are accrued when earned and able to be estimated, and are paid annually after financial records are finalized.

 

Other Accrued Expenses

 

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

 

Leases

 

On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases” (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. Accordingly, at the inception of a contract we determine if the arrangement is, or contains, a lease. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term; and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  Rent expense is recognized on a straight-line basis over the lease term; for finance leases, a portion of rent expense is classified as interest expense.

 

The Company has made certain accounting policy elections whereby it (i) does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12 months or less) and (ii) combines lease and non-lease elements of their leases.  In the unaudited condensed consolidated balance sheets: lease ROU assets are included in other long-term assets; financed lease assets are included in property and equipment; and lease liabilities are included in other current and long-term liabilities.

 

Revenue Recognition

 

Asset Management and Other Investment Revenue

 

The Company earns revenue from investments through various fee share and consulting agreements, as well as through realized and unrealized gains and losses, which may result in negative period or quarterly revenues. Management fees earned are recorded and paid out monthly and are included in revenue on the accompanying unaudited condensed consolidated statements of operations. Performance fees earned are accrued monthly, paid out annually, and are also included in revenue on the accompanying unaudited condensed consolidated statements of operations. Consulting fees are billed out monthly after services have been performed. As long-term investments do not qualify as available-for-sale securities, long-term investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized as revenue in the period of 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 very high. No contract assets or liabilities are recognized or incurred.

 

Additionally, the Company earns revenue from direct investments in various funds, primarily the Alluvial Fund.  Due to the nature of the investment, the asset management segment recognizes revenue using specialized accounting guidance for investment companies.  This results in the unrealized gains and losses within the fund being recognized as revenue, or a decrease in revenue, on the accompanying unaudited condensed consolidated statements of operations.

 

 

Real Estate Revenue

 

The Company earns real estate revenue through rental agreements on real estate held for investment, as well as through the sale of real estate held for resale.

 

Rental revenue from real estate held for investment is recognized when it is earned, generally on the last day of each month or at another regular period agreed upon by the Company and the tenant. Tenants generally provide a security deposit at the time of possession. This deposit is held separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. Management has concluded that the nature of the performance obligation is cyclical and predictable with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.

 

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

 

Internet Revenue

 

The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.

 

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

 

Home Services Revenue

 

Prior to the sale on May 24, 2019, the Company performed HVAC and plumbing service repairs and installed HVAC units for its customers through its home services segment. Revenue was recognized upon completion of the installation or service call. Sales were adjusted for any returns or allowances. A return or allowance situation would arise based on the two-year workmanship warranty that typically conveyed with the installation of a new unit. There was also a two-year assurance warranty on newly installed parts and equipment that was honored by the manufacturer. If an installation was performed over multiple days, then it was accounted for using work-in-process (WIP) accounting in accordance with GAAP. Contract progress was measured by comparing materials and labor hours incurred to materials and labor hours expected per the contract. These types of contracts were typically completed within one month’s time. A small portion of revenue was from the sale of annual service agreements. Revenue attributable to these agreements was appropriately recognized over the life of the agreement.

 

If payment was 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 was recognized as revenue and as an account receivable.

 

Management acknowledged that these performance obligations were recognized at the completion of each contract, whether it be at a point in time or over a period of time. As the customer controlled the asset and had the right to use it during the contract, the Company had the right to payment for performance completed to date. No contract assets or liabilities were recognized or incurred.

 

Deferred Revenue

 

Deferred revenue represents collections from customers in advance of internet or real estate rental services to be performed. Revenue is recognized when performance obligations have been met.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment, inclusive of the recent tax reform act. The most recent three tax years, fiscal years ended December 31, 2018, December 31, 2017, and December 31, 2016, are open to potential IRS examination.

 

 

Income Per Share

 

The basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similarly to basic income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company has no potentially dilutive securities.

 

Other Comprehensive Income

 

Other comprehensive income is the result of the previous impact of foreign currency translations related to the Company’s operations in Canada.

  

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU No. 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted this guidance, effective January 1, 2019, 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.  

 

In January 2016, the FASB issued ASU No. 2016-01 “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 was permitted under certain criteria. The Company adopted this standard in the first quarter of 2018. Subsequent to the adoption of this standard, the Company's investments in equity securities are not carried at fair value with change in fair value being reflected in income.

 

In January 2017, the FASB issued ASU No. 2017-01 “Clarifying the Definition of a Business” (Topic 805). The amendments in the update provide a screen to determine when a set is not a business. If the screen is not met, the amendments in the update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. Lastly, the amendments in the update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017; earlier adoption was permitted under certain criteria. The Company adopted this ASU on January 1, 2018. While this ASU did not have a material effect on the Company’s financial statements on the date of adoption, the Company did follow the new guidance in determining that its acquisition of properties from Old Mt. Melrose in January 2018 was an asset acquisition. See Note 5 for additional information.

 

 

NOTE 3. HOME SERVICES SUBSIDIARY ASSET SALE

 

On May 24, 2019, as per the Current Report on Form 8-K filed with the SEC on May 28, 2019, the Company completed an asset sale transaction of its Home Services Operations, 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 customer accounts going forward. No cash consideration was exchanged in the transaction. As consideration for the transaction, Rooter Hero will pay monthly royalties for the next sixty months following the closing, calculated on the basis of revenue received from the customer accounts sold. Under such royalty arrangements, the Company will receive 7.5% of monthly revenue generated from qualified sales during the first year, and 5% of monthly revenue during years two through five.

 

As reported in prior periods, the home services subsidiary had failed to meet approved budgets and had underperformed since its inception in 2016. Management noted that the largely decentralized management approach was not a good fit for this industry, and the extensive operating requirements were not conducive to smaller company capacities. The cyclical nature of the business also resulted in unpredictable cash flows, which created immediate and significant needs for additional Company resources. Due to the past performance of the company, management determined that additional resources should not be allocated to this subsidiary. 
 

The decision was made to exit the business during the quarter ended June 30, 2019. The operations of Specialty Contracting Group, LLC are considered a component of, and the sale reflects a strategic shift in, the Company’s business.  As such, Specialty Contracting Group, LLC's historical operations are now classified as discontinued operations in the Company’s financial statements. The asset sale of the home services subsidiary resulted in an initial pre-tax loss of $1,158,733, which has been included on the accompanying unaudited condensed consolidated statements of operations in discontinued operations and under the home services segment for the nine-month period ended September 30, 2019. The loss from discontinued operations has been determined using the “Loss Recovery Approach.”  This approach requires that the contingent consideration, the future royalties to be received, be valued at the lesser of the amount of the “probable,” defined as a greater than 50% likelihood, future proceeds or the carrying value of the disposed assets.  Due to the unpredictability of the contingent consideration, and management’s inherent lack of control over the buyer’s operations, management determined it would be most prudent not to attempt to value the contingent consideration.  This resulted in assigning the contingent consideration a current valuation of zero.  As the royalties are deemed probable, they will be subsequently recognized as a “gain from discontinued operations” on the statements of operations and will offset, or recover, the initial loss recorded. Accordingly, during the period ended September 30, 2019, an offsetting $12,183 gain on discontinued operations is included within the $31,151 reported loss on discontinued operations.

 

A breakdown of discontinued assets and liabilities as reported on the face of the accompanying unaudited condensed financial statements for the periods ended September 30, 2019, and December 31, 2018, is as follows:
 
    September 30, 2019     December 31, 2018  
Cash and cash equivalents    $ 39,222      $ 23,954  
Accounts receivable     18,693       136,785  
Other current assets     77,674       71,624  
Total current assets - held for resale     135,589       232,363  
                 
Property and equipment, net           270,603  
Goodwill           1,024,591  
Other long-term assets           5,375  
Total long-term assets - held for resale           1,300,569  
                 
Accounts payable     104,475       75,208  
Accrued expenses           81,213  
Other current liabilities     57,556       2,368  
Notes payable, current     100,000       158,698  
Total current liabilities - held for resale     262,031       317,487  
                 
Notes payable, long term - held for resale           50,738  
Total long-term liabilities - held for resale   $     $ 50,738  

 

A breakdown of the initial recorded pre-tax loss as reported on the accompanying unaudited condensed consolidated statements of operations as of the nine-month period ended September 30, 2019 is presented below.  Asset and liability values used in the calculation represent the company's carrying value as of the date of sale, May 24, 2019.

 

Sale of vehicles, equipment, and furniture, net of depreciation    $ 230,578  
Impairment of remaining goodwill     1,024,592  
Total carrying value of assets sold     1,255,170  
         
Vehicle and equipment notes payable assumed by the buyer     76,791  
Service agreements assumed by the buyer     19,646  
Total carrying value of liabilities assumed     96,437  
         
Net loss on sale of subsidiary, pre-tax    $ 1,158,733  

 

A reconciliation of discontinued operations as reported on the accompanying unaudited condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2019, and September 30, 2018, is as follows:

 

    For the three months ended September 30     For the nine months ended September 30  
    2019     2018     2019     2018  
Revenues    $  —      $ 995,867      $ 675,963      $ 2,641,373  
Cost of revenues      —       608,767       427,215       1,731,750  
Gross profit      —       387,100       248,748       909,623  
Selling, general, and administrative expenses     25,342       302,233       515,156       972,118  
Recovery (loss) on sale of subsidiary     12,183        —       (1,134,810 )      —  
Other income (expense), net     (17,992 )     (1,613 )     (39,938 )     (12 )
Net income (loss) reported as discontinued operations    $ (31,151 )    $ 83,254      $ (1,441,156 )    $ (62,507 )

 

 

 

NOTE 4. SALE OF CONTROLLING INTEREST IN REAL ESTATE SUBSIDIARY

 

Transaction

 

On June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC, a Delaware limited liability company (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio.  The Company has retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest. 

 
The Company had grown uncomfortable with the extreme amounts of high-priced debt that the 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’s corporate entity was unwilling to subsidize. As reported in previous quarterly and annual reports, on November 1, 2018, management implemented a right-sizing strategy for the Mt Melrose portfolio. This strategy included the hiring of a dedicated third-party property manager, a restructuring of overhead expenses, the divestiture of non-cash-flowing properties, and a focus on refinancing high-interest debt. The property manager was responsible for all day-to-day operations including, but not limited to: tenant relations and communications, property repairs and renovations, vacancy marketing, and turnover procedures. This allowed management to remain passive operationally and focus on property sales and refinancing opportunities. Subsequent to the sale on June 27, 2019, the property manager continues to fulfill the day-to-day operational responsibilities, and Woodmont continues to act on management’s previous right-sizing efforts by liquidating non-cash-flowing properties and pursuing refinancing options.

 

In connection with the transaction, the Company and Woodmont entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC dated June 27, 2019 (the “A&R LLC Agreement”).  The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members.  The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont is designated as the sole manager.  In addition, the Company has expressly agreed to a three-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose; and with respect to any matters requiring a vote of the members, the Company will vote with (i.e., the same as) Woodmont. This arrangement allows the Company to maintain its passive management structure, while still owning a significant portion of the partnership.

 

Under the terms of the A&R LLC Agreement, distributions of cash, from whatever source, may be made to the members at such times, and in such amounts, as the manager determines; provided, however, that any such distributions will be made in accordance with the following priorities: (i) distribution of amounts up to a cumulative total of $2,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement); (ii) then, distribution of cumulative amounts in excess of $2,000,000 and up to $3,000,000 will be made 67% to the Company and 33% to Woodmont; and (iii) thereafter, distribution of cumulative amounts in excess of $3,000,000 will be made pro rata in accordance with the members’ respective percentage interests (as expressly specified in the A&R LLC Agreement).    

 

Deconsolidation Due to Transfer of Control

 

Prior to the sale of Mt Melrose interest, the Company owed 100% of the membership interests in Mt Melrose, LLC and controlled the entity by virtue of its voting interests. As a result, the Company consolidated Mt Melrose under the “voting interests” (“VOE”) consolidation model.

 

By virtue of the revised LLC operating agreement, and the aforementioned standstill agreement, Woodmont is the sole “manager” responsible for all management and operating decisions of Mt Melrose. Management determined that as of June 30, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose and will no longer consolidate Mt Melrose. All activity prior to the deconsolidation event has been included on the accompanying unaudited condensed consolidated statements of operations for the period ended September 30, 2019, in continuing operations, and under the real estate segment. As of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets. The Company’s 35% membership interest in Mt Melrose will now be accounted for as an investment in the equity of Mt Melrose in the Company’s reported financial statements.

 

Accounting for Remaining Mt Melrose Investment

 

The Company adopted ASU 2016-01 effective January 1, 2018. ASU 2016-01 generally requires entities to measure equity investments at fair value and recognize any changes in fair value in net income. However, entities are able to elect a measurement alternative for equity investments that do not have a “readily determinable fair value.” The Company has determined that its equity investment in Mt Melrose does not have a readily determinable fair value at the time of deconsolidation. Under this alternative, the Company will measure the Mt Melrose investment at its implied fair value and assess it for impairment at each reporting date, or more often if indication of a potential impairment exists.  When fair value becomes determinable, from observable price changes in orderly transactions, the Company’s investment will be marked to fair value on a periodic basis.  Future dividends will be recognized as income and returns of capital recognized as a reduction in the Company’s investment when and if received.

 

Using the $100,000 transaction price for a 65% interest in Mt Melrose, LLC, the implied value of the retained 35% interest is $53,846.  This amount is included under the long-term investment amount on the accompanying unaudited condensed consolidated balance sheet for the period ended September 30, 2019.

 

Effective on June 27, 2019, the Company recognized a loss on the partial sale of Mt Melrose in the amount of $3,519,053, which has been reported separately on the accompanying unaudited condensed consolidated statements of operations in continuing operations and under the other segment for the nine-month period ended September 30, 2019. The amount of the loss is based upon the value of the Company’s remaining interest in the subsidiary, less the Company’s previous carrying value of the subsidiary. 

 

 

 

 

NOTE 5. ASSET ACQUISITION OF REAL ESTATE PROPERTIES

 

Historical Acquisition

 

On December 10, 2017, the Company entered into a certain Master Real Estate Asset Purchase Agreement (the “Purchase Agreement”) with Mt. Melrose, LLC, a Kentucky limited liability company (“Old Mt. Melrose”), that owned and managed a portfolio of residential real estate in Lexington, Kentucky. Old Mt. Melrose was owned by Jeffrey I. Moore (“Moore”), a former Company director.

 

On January 10, 2018, the Company’s wholly owned subsidiary, Mt Melrose, LLC (“New Mt Melrose”), completed the first acquisition of 44 residential and other income-producing real properties under the Purchase Agreement for a total purchase price of $3,956,389, which consisted of $500,000 in cash, 120,602 shares of common stock valued at $1,658,270, and the assumption of $1,798,119 of existing debt.

 

The Company accounted for the initial purchase of properties as an asset acquisition (consisting of a concentrated group of similarly identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01. The total purchase price, along with approximately $45,250 of transaction expenses, was allocated to the land and buildings acquired based on their relative fair values, as follows:

 

 

Land

  $ 800,328  

Buildings

    3,201,311  

Total Value

  $ 4,001,639  

 

On June 29, 2018, New Mt Melrose completed the second acquisition of 69 residential and other income-producing real properties under the Purchase Agreement for a total purchase price of $5,174,722, which consisted of 148,158 shares of common stock valued at $2,407,564, and the assumption of $2,767,158 of existing debt.

 

The Company accounted for the second purchase of properties as an asset acquisition (consisting of a concentrated group of similarly identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01. The total purchase price, along with approximately $7,394 of transaction expenses, was allocated to the land and buildings acquired based on their relative fair values, as follows:

 

 

Land

  $ 1,036,423  

Buildings

    4,145,692  

Total Value

  $ 5,182,115  

 

Pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose, the parties mutually agreed to terminate the Purchase Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the Purchase Agreement. A third-party property manager was engaged as of November 1, 2018, to manage certain of the real properties previously acquired. Management determined that it was necessary to right-size New Mt Melrose operations to reduce its level of high-interest debt. Accordingly, New Mt Melrose began to immediately sell various properties with an emphasis on selling properties that have high-interest-rate loans and do not produce income. 

 

In an effort to expedite the optimization of the Mt Melrose portfolio, management determined that a dedicated operator was necessary to manage the subsidiary. On June 27, 2019, as per the Current Report on Form 8-K filed with the SEC on July 3, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio.  The Company has retained a 35% membership interest in Mt Melrose, with Woodmont owning the other 65% membership interest.  See Note 4 for more information.
 

Historical Variable Interests

 

As of the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018, the Company had determined that Old Mt. Melrose was a “variable interest entity” because Moore’s equity interests in Old Mt. Melrose were not effective in determining whether Moore or New Mt Melrose had a controlling financial interest, and that New Mt Melrose’s rights under a certain Cash Flow Agreement that had been entered into on January 10, 2018 with Old Mt. Melrose (the “Cash Flow Agreement”) were deemed to be variable interests in Old Mt. Melrose. At those times, the Company had determined that New Mt Melrose was the primary beneficiary of Old Mt. Melrose since substantially all of Old Mt. Melrose’s activities had been conducted on behalf of New Mt Melrose and because New Mt Melrose may have been required to provide financial support to Old Mt. Melrose under the Cash Flow Agreement. As its primary beneficiary, New Mt Melrose previously consolidated Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose had been allocated accordingly on the unaudited condensed consolidated balance sheets for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018. As noted on the unaudited condensed consolidated statements of stockholders’ equity during those quarters, the ending noncontrolling interest allocated to the variable interest entity represented the remaining equity held by Old Mt. Melrose for properties that had not yet been acquired under the Purchase Agreement. The ending noncontrolling interest amount also included any income or loss generated by the remaining properties that were to be acquired under the Purchase Agreement for the period then ended.

 

As of November 1, 2018, pursuant to the termination of the Master Real Estate Asset Purchase Agreement and Cash Flow Agreement noted above, New Mt Melrose was no longer the primary beneficiary of Old Mt. Melrose. Additionally, as of November 1, 2018, New Mt Melrose no longer had a controlling financial interest in Old Mt. Melrose. Consequently, as of November 1, 2018, the Company no longer consolidates the fair values of the assets and liabilities of Old Mt. Melrose, and the balance of noncontrolling interest as of September 30, 2019, and December 31, 2018, is appropriately reflected as zero on the accompanying unaudited consolidated statements of stockholders’ equity.

 

 

 

NOTE 6. INVESTMENTS

 

Certain assets held through Willow Oak Asset Management, LLC, Enterprise Diversified, Inc., or EDI Real Estate, LLC do not have a readily determinable value, as these investments are not publicly traded, nor do they have published sales records. The investments in Alluvial Fund, LP, Bonhoeffer Fund, LP, and Willow Oak Select Fund, LP are measured using net asset value (NAV) as the practical expedient and are exempt from the fair value hierarchy. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and allocated based on total fund contributions. Due to the nature of the Mt Melrose, LLC (subsequent to the loss of control resulting from the sale of 65% of the equity in New Mt Melrose on June 27, 2019 (see Note 4)) and Huckleberry Real Estate Fund II, LLC investments, the investments are measured at cost basis as cost approximates fair value until additional inputs and measurements become available. As the inputs for these investments are not readily observable, these investments are valued using Level 3, as defined in Note 7, inputs. The following investments are remeasured to fair value on a recurring basis, and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Included in the fair value is the cost basis of the investment, as well as any accrued management fees.

 

 

   

Cost Basis

   

Unrealized Gain

   

Fair Value

 

September 30, 2019

                       

Alluvial Fund, LP

  $ 7,037,798     $ 2,428,589     $ 9,466,387  

Willow Oak Select Fund, LP

    1,313       690       2,003  
Mt Melrose, LLC     53,846             53,846  

Total

  $ 7,092,957     $ 2,429,279     $ 9,522,236  

 

 

   

Cost Basis

   

Unrealized Gain

   

Fair Value

 

December 31, 2018

                       

Alluvial Fund, LP

  $ 7,023,676     $ 1,422,812     $ 8,446,488  

Huckleberry Real Estate Fund II, LLC

    468,750             468,750  

Total

  $ 7,492,426     $ 1,422,812     $ 8,915,238  

 

 

NOTE 7. FAIR VALUE OF ASSETS AND LIABILITIES

 

The Company has adopted FASB ASC 820, Fair Value Measurements. ASC 820 defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:

 

 

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

     
 

Level 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 investments at fair value at the end of each reporting period. See description of these investments in Note 6 above.

 

   

(Level 1)

   

(Level 2)

   

(Level 3)

   

(Excluded) (a)

   

Total at Fair Value

 

September 30, 2019

                                       

Alluvial Fund, LP

  $     $     $     $ 9,466,387     $ 9,466,387  

Willow Oak Select Fund, LP

                      2,003       2,003  
Total   $     $     $     $ 9,468,390     $ 9,468,390  

 

 

   

(Level 1)

   

(Level 2)

   

(Level 3)

   

(Excluded) (a)

   

Total at Fair Value

 

December 31, 2018

                                       

Huckleberry Real Estate Fund II, LLC

  $     $     $ 468,750     $     $ 468,750  

Alluvial Fund, LP

                      8,446,488       8,446,488  

Total

  $     $     $ 468,750     $ 8,446,488     $ 8,915,238  

 

 

(a)

Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.

  

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

The Company analyzes goodwill on an annual basis or whenever events or changes in circumstances indicate potential impairments. During the year ended December 31, 2018, an impairment adjustment of $754,958 was recorded to goodwill held in the home services segment. As described further in Note 1, this adjustment was the result of a general underperformance of previously acquired HVAC and plumbing businesses.

 

The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate a change in their fair market value. During the year ended December 31, 2018, an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for resale” from “held for investment” as part of a portfolio redirection intended to reduce high-interest debt. See Note 5 for more information.

 

During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management in 1998. This adjustment was the result of repair and improvement expenses exceeding the current market value of the property and write downs of previously capitalized improvements made by prior management. During the period ended September 30, 2019, impairment adjustments of $42,407 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect pending sales activity as of the period ended September 30, 2019. 

 

As discussed in Note 5, in January 2018, Mt Melrose, LLC completed its first acquisition of 44 residential and other income-producing real properties for a total purchase price of $3,956,389. Additionally, in June 2018, Mt Melrose, LLC completed its second acquisition of 69 residential and other income-producing real properties for a total purchase price of $5,174,722. The total purchase price, along with transaction expenses, was allocated to the land and buildings acquired based on their relative fair values. The fair values of the land and buildings were determined using Level 3 inputs, namely comparable properties within the Lexington, Kentucky, region.

 

As discussed in Note 4, the Company’s ongoing equity investment in Mt Melrose, LLC is carried at cost under the alternative approach and will be assessed for impairment at each balance sheet date.

 

The Company analyzes the carrying value of property and equipment and lease right-of-use assets on an annual basis or whenever events or changes in circumstances indicate potential impairments.

 

 

NOTE 8. PROPERTY AND EQUIPMENT

 

The cost of property and equipment at September 30, 2019, and December 31, 2018, consisted of the following:

 

 

   

2019

   

2018

 

Building

  $     $ 836,827  

Computers and equipment

    17,330       17,330  

Furniture and fixtures

    3,000       90,919  

Land

          145,000  
      20,330       1,090,076  

Less accumulated depreciation

    (9,808 )     (70,334 )

Property and equipment, net

  $ 10,522     $ 1,019,742  

 

Depreciation expense was $619 for the three months ended September 30, 2019, and $39,130 for the period ended September 30, 2018. Included in these amounts are $0 and $7,807 for the periods ended September 30, 2019 and 2018, respectively, of depreciation expense related to personal property used in real estate segment rental operations. The depreciation expense related to personal property is included in the real estate segment cost-of-goods-sold amount on the accompanying unaudited condensed consolidated statements of income. The decrease in depreciation expense is due to the sale of the home services vehicles and equipment during the period ended June 30, 2019, as well as the deconsolidation of Mt Melrose, LLC financial activity as of June 30, 2019.

 

As of the period ended September 30, 2019, management has identified the commercial warehouse, along with two other residential real estate properties, as real estate held for resale. These properties are carried at $971,633 on the accompanying unaudited condensed consolidated balance sheets as of the period ended September 30, 2019. This compares to the year ended December 31, 2018, when management reported $73,212 of vehicles and equipment as held for resale and $2,318,912 of real estate as held for resale.

 

The building owned by the Company is a multipurpose warehouse space located in Lexington, Kentucky. This building was previously owned by Mt Melrose, LLC, but was excluded from the June 27, 2019, sale and remains with the Company. During the period ended June 30, 2019, management reclassified the building as “held for resale” based on management's intentions given the Mt Melrose equity sale that occurred on June 27, 2019. In the quarterly period ended December 31, 2018, management concluded it would adopt an outsourced property management model for New Mt Melrose. Management, therefore, determined that the warehouse was no longer needed for operations and should be divested.

 

A summary of total assets held for resale as of September 30, 2019, and December 31, 2018, is as follows:

 

   

September 30, 2019

   

December 31, 2018

 

Real estate held for resale

  $ 971,633     $ 2,318,912  

Equipment and vehicles held for resale

          73,212  

Total assets held for resale

  $ 971,633     $ 2,392,124  

 

 

 

NOTE 9. REAL ESTATE

 

EDI Real Estate, LLC

 

As of September 30, 2019 and December 31, 2018, the EDI Real Estate portfolio of properties included the following units:

 

 

EDI Real Estate

 

September 30, 2019

   

December 31, 2018

 

Units occupied or available for rent

    5       6  

Vacant units being prepared for rent

    2       3  

Total units held for investment

    7       9  
                 
Occupied units held for resale     2        

Vacant lots held for resale

    3       3  
Total units held for resale     5       3  

 

The leases in effect, as of the period ended September 30, 2019, are based on either annual or multi-year time periods and typically include month-to-month provisions after the completion of the initial term. An outside property management company manages these rental properties on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties.

 

EDI Real Estate

 

September 30, 2019

   

December 31, 2018

 

Total real estate held for investment

  $ 556,867     $ 710,022  

Accumulated depreciation

    (116,292 )     (107,576 )

Real estate held for investment, net

  $ 440,575     $ 602,446  
                 

Real estate held for resale

  $ 971,633     $ 40,047  

 

For the period ended September 30, 2019, depreciation expense on the EDI Real Estate portfolio of properties was $6,116. This compares to depreciation expense for the period ended September 30, 2018, when depreciation expense on the EDI Real Estate portfolio of properties was $5,304.

 

EDI Real Estate did not purchase or sell any properties during the periods ending September 30, 2019 and 2018.

 

During the period ended September 30, 2019, two residential rental properties were transferred from “held for investment” to “held for resale”.  The carrying value of these two properties totaled $121,558. EDI Real Estate did not transfer any properties during the period ended September 30, 2018.

 

During the period ended September 30, 2019, impairment adjustments of $42,407 were recorded on real estate held for resale through EDI Real Estate, LLC in order to properly reflect pending sales activity as of the period ended September 30, 2019. During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management.

 

Mt Melrose, LLC
 

As described in Note 4, management determined that the Company no longer has a controlling financial interest in Mt Melrose. All activity prior to the deconsolidation event has been included on the accompanying unaudited condensed consolidated statements of operations for the period ended September 30, 2019, under the real estate segment. Simultaneously, as of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2018, however, the Company did have a controlling financial interest in Mt Melrose. The consolidated Mt Melrose assets as of December 31, 2018, included the following units:

 

Mt Melrose

 

December 31, 2018

 

Units occupied or available for rent

    98  

Vacant units being prepared for rent

    15  

Total units held for investment

    113  
         

Residential and commercial units

    48  

Vacant lots

    9  

Total units held for resale

    57  

 

As of December 31, 2018, units held for investment consist of single-family and multi-family residential rental units. The leases in effect for the occupied Mt Melrose units as of the year ended December 31, 2018, are based on either annual or multi-year time periods. Month-to-month leases are reserved for special circumstances. Units held for resale consist of single-family units, multi-family units, commercial properties, and undeveloped lots of land.

 

As of the year ended December 31, 2018, the Mt Melrose portfolio of properties was carried at the following amounts on the accompanying unaudited condensed consolidated balance sheets:

 

Mt Melrose

 

December 31, 2018

 

Total real estate held for investment

  $ 9,049,945  

Accumulated depreciation

    (159,514 )

Real estate held for investment, net

  $ 8,890,431  
         

Real estate held for resale

  $ 2,278,865  

 

 

For the period ended September 30, 2019, depreciation expense on the Mt Melrose portfolio of properties was $64,908. Mt Melrose did not purchase or sell any properties during the period ended September 30, 2019.
 

During the period ended September 30, 2018, Mt Melrose transferred one property with a carrying value of $145,406 from “held for investment” to “held for resale”.

 

During the year ended December 31, 2018, an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for resale” from “held for investment” as part of a portfolio redirection that was intended to reduce high-interest debt. 
 

Future Minimum Rental Revenues

 

The future anticipated minimum rental revenues based on leases in place as of September 30, 2019, for EDI Real Estate, LLC are as follows:

 

2019

  $ 14,565  

2020

    28,180  

2021

     

Total

  $ 42,745  

 

 

NOTE 10. NOTES PAYABLE

 

Notes payable at September 30, 2019, and December 31, 2018, consist of the following:

 

   

Interest Rates

 

Average Term

 

2019

   

2018

 

Interest-bearing amounts due on traditional mortgages on real estate held through Mt Melrose, LLC

  4.38% - 5.75%  

14 years

  $  —     $  4,505,139  

Interest-bearing amounts due on hard money loans on real estate held through Mt Melrose, LLC

  10.00% - 13.00%  

2 years

          2,379,851  

Interest-bearing amount due on promissory note on warehouse

  8.00%  

1 year

    300,000        

Interest-bearing amounts due on promissory notes

  10.00%  

1 year

          131,279  

Non-interest-bearing amount due on promissory notes

  0.00%  

1 year

    100,000       218,270  

Equipment and vehicle capital leases and loans acquired by HVAC Value Fund, LLC

  0.00% - 4.90%  

5 years

          55,797  

Vehicle loans through HVAC Value Fund, LLC

  5.99%  

5 years

          53,638  

Interest-bearing amount due on promissory note through EDI Real Estate, LLC

  5.60%  

15 years

    376,217       384,304  

Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC

  6.00%  

5 years

    137,600       137,600  
Less notes related to discontinued operations             (100,000)       (209,436)  

Less accrued interest

                  (134,623)  

Less current portion

            (311,292)       (1,002,965)  

Long-term portion

          $  502,525     $  6,518,854  

 

To further summarize, the remaining notes payable amounts held as of September 30, 2019, were subject to the below interest rates:

 

 

0.00%   $ 100,000  
5.00% - 5.99%     376,217  
6.00 - 6.99%     137,600  
8.00 - 8.99%     300,000  
10.00% - 13.00%      

Total

  $ 913,817  

 

The timing of future payments of notes payable are as follows as of September 30, 2019:

 

 

2019

  $ 402,792  

2020

    11,453  

2021

    12,181  

2022

    150,491  

2023 and thereafter

    336,900  

Total

  $ 913,817  

 

 

As of September 30, 2019, one line of credit remains open through the home services segment. This line of credit is held with Steven L. Kiel, an ENDI director, and our principal executive officer. Additional debt held through the home services segment as of December 31, 2018, includes loans for various vehicles and equipment. Two vehicle loans were entered into during the quarter ended March 31, 2018. These loans required monthly payments through May 2023 and hold annual interest rates of 5.99%. As of the period ended September 30, 2019, all of these loans have been assumed by Rooter Hero, the purchaser of the home services assets.  See Note 3 for more information.

 

During the quarter ended September 30, 2017, EDI Real Estate, LLC 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. Additionally, during the quarter ended September 30, 2018, EDI Real Estate, LLC issued a promissory note secured by additional properties held for investment. This note carries an annual interest rate of 5.6% and fully matures on September 1, 2033, with early payoff permitted. The interest rate on this note is subject to change once each five year period based on an index rate plus a margin of 2.750 percentage points. The index rate is calculated as a monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of five years.

 

During the quarter ended March 31, 2019, the Company issued a promissory note secured by the commercial warehouse held for resale.  The note carries an annual interest rate of 8%, pays interest quarterly, and is due upon successful sale of the warehouse with early payoff permitted.

 

With respect to the outstanding debt secured by the real properties acquired by Mt Melrose, LLC, these notes began to mature during the previous quarter, with the last note extending until January 2042. Some of these loans are interest only while others accrue interest that is due in full with a final balloon payment. As of December 31, 2018, the debt secured by the real properties has varying annual interest rates from 4.375% to 13%. As mentioned in Note 4, all assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets as of June 27, 2019.  This results in zero notes payable reported under Mt Melrose, LLC for the period ended September 30, 2019.

 

 

NOTE 11. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE

 

For the period ended September 30, 2019 and 2018, bad debt expense from continuing operations was negative $147 and positive $8,277, respectively. The decrease in accounts receivable is the result of discontinued operations through our home services segment. As of the period ended September 30, 2019, and for the year ended December 31, 2018, accounts receivable consisted of the following: 

 

   

2019

   

2018

 

Gross accounts receivable

  $ 35,977     $ 85,093  

Less allowance for doubtful accounts

    (331 )     (26,830 )

Accounts receivable, net

  $ 35,646     $ 58,263  

 

 

 

 

NOTE 12. SEGMENT INFORMATION

 

During the period ended September 30, 2019, the Company had five business units with separate management and reporting infrastructures that offer different products and services. The five business units have been aggregated into the following reportable segments: Asset Management, Real Estate, Internet, Home Services, and Other. As of the period ended September 30, 2019, and for all prior periods presented, home services operations are reported as discontinued operations.

 

In previous periods, the Company reported under the following six business segments: Asset Management, Mt Melrose, HVAC, Internet, Real Estate, and Corporate. In an effort to highlight the direction of the Company and increase segment transparency, these historical segments were reorganized during the quarter ended June 30, 2018. Additional reorganizations were made as of January 1, 2019, in order to appropriately reflect the similarities in the Company’s real estate operations. The “Mt Melrose” and legacy “Real Estate” segments are now referred to collectively as “Real Estate,” and the “HVAC” segment is now referred to as “Home Services.” “Corporate” and other additional investments now are combined under “Other Operations.” The “Asset Management” and “Internet” segments remain unchanged. See below for additional information on the activity included in each respective segment report.

 

As mentioned in Note 3, on May 24, 2019, the Company completed an asset sale transaction of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC, to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and conveyed all of the subsidiary’s personal property and customer lists and records, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed the subsidiary’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s customer accounts going forward. The current and comparative results of the home services segment have been reported as discontinued on the accompanying unaudited consolidated financial statements for the period ended September 30, 2019.

 

As mentioned in Note 4, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC.

Management determined that as of June 30, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose; therefore, the Company will no longer consolidate Mt Melrose. All activity prior to the deconsolidation event has been included on the accompanying unaudited condensed consolidated statements of operations for the period ended September 30, 2019, under the real estate segment. As of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets.

The asset management segment includes revenues and expenses derived from various investment opportunities and partnerships and services. The real estate segment includes revenue and expenses related to the management of properties held for investment and held for resale through Mt Melrose (prior to the sale of 65% of our equity in Mt Melrose on June 27, 2019) located in Lexington, Kentucky, and revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia. The internet segment includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The home services segment includes discontinued revenue and expenses derived from our former management of HVAC and plumbing companies in Arizona. The other segment includes revenue and expenses from nonrecurring investment opportunities such as Triad Guaranty, Inc. Additionally, the other segment includes any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.

 

 

The internet segment includes revenue generated by operations in both the United States and Canada. In the period ended September 30, 2019, the internet segment generated revenue of $251,809 in the United States and revenue of $13,362 in Canada. This compares to the period ended September 30, 2018, where the internet segment generated revenue of $273,219 in the United States and revenue of $15,093 in Canada.

 

Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three and nine months ended September 30, 2019 and 2018.

 

Three months ended September 30, 2019

 

Asset Management

   

Real Estate

   

Internet

   

Other

    Discontinued Operations - Home Services    

Consolidated

 
                                                 

Revenues

  $ (159,085 )   $ 19,359     $ 265,171     $     $     $ 125,445  

Cost of revenue

          30,753       83,517                   114,270  

Operating expenses

    81,906       11,827       43,168       141,270             278,171  

Other income (expense)

    4,983       (13,709 )     384       20,249             11,907  

Comprehensive income (loss) from continuing operations

    (236,008 )     (36,930 )     138,870       (121,021 )           (255,089 )
Comprehensive income (loss) from discontinued operations                             (31,151 )     (31,151 )

Goodwill

                212,445                   212,445  

Identifiable assets

    9,571,808       638,298       392,131       1,107,117       135,589       11,844,943  

 

 

Three months ended September 30, 2018

 

Asset Management

   

Real Estate

   

Internet

   

Other

    Discontinued Operations - Home Services    

Consolidated

 
                                                 

Revenues

  $ 330,112     $ 220,600     $ 288,312     $ 20,934     $     $ 859,958  

Cost of revenue

          107,527       86,658       31,800             225,985  

Operating expenses

    107,538       275,414       58,475       130,874             572,301  

Other income (expense)

    11,075       (137,406 )     479       1,908             (123,944 )

Comprehensive income (loss) from continuing operations

    233,649       (299,747 )     143,658       (139,832 )           (62,272 )
Comprehensive income (loss) from discontinued operations                             83,254       83,254  

Goodwill

                212,445                   212,445  

Identifiable assets

    9,806,271       14,707,356       381,262       1,738,533       2,577,014       29,210,436  

 

 

Nine months ended September 30, 2019

 

Asset Management

   

Real Estate

   

Internet

   

Other

    Discontinued Operations - Home Services    

Consolidated

 
                                                 

Revenues

  $ 1,127,075     $ 420,464     $ 805,990     $ 212,631     $     $ 2,566,160  

Cost of revenue

          358,126       254,373                   612,499  

Operating expenses

    309,896       327,671       165,457       641,483             1,444,507  

Other income (expense)

    19,074       (494,311 )     4,317       (3,502,378 )           (3,973,298 )

Comprehensive income (loss) from continuing operations

    836,253       (759,644 )     390,477       (3,931,230 )           (3,464,144 )
Comprehensive income (loss) from discontinued operations                             (1,441,156 )     (1,441,156 )

Goodwill

                212,445                   212,445  

Identifiable assets

    9,571,808       638,298       392,131       1,107,117       135,589       11,844,943  

 

 

Nine months ended September 30, 2018

 

Asset Management

   

Real Estate

   

Internet

   

Other

    Discontinued Operations - Home Services    

Consolidated

 
                                                 

Revenues

  $ 522,044     $ 592,583     $ 887,635     $ 121,031     $     $ 2,123,293  

Cost of revenue

          342,449       238,385       156,731