NOTE

HOME SERVICES SUBSIDIARY DIVESTITURE

May 24, 2019,

as per the Current Report on Form

-K filed with the SEC on

May 28, 2019,

the Company completed a divestiture of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC), to an unaffiliated

third

-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and conveyed all of the subsidiary’s personal property and customer lists and records, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed the subsidiary’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s remaining customer accounts going forward.

cash consideration was exchanged in the transaction. As consideration for the transaction, Rooter Hero will pay monthly royalties for the

sixty

(

) months following the closing, calculated on the basis of any revenue received from the customer accounts transferred. Under such royalty arrangements, the Company will receive

7.5%

of any monthly revenue generated from qualified sales during the

first

year, and

of any monthly revenue during years

two

through five. Royalties received will be reduced by pre-approved warranty-related costs for select customers.

As reported in prior periods, the home services subsidiary had failed to meet approved budgets and had underperformed since its inception in

2016.

Management noted that the largely decentralized management approach was

not

a good fit for this industry, and the extensive operating requirements were

not

conducive to smaller company capacities. The cyclical nature of the business also resulted in unpredictable cash flows, which created immediate and significant needs for additional Company resources. Due to the past performance of the company, management determined that additional resources should

not

be allocated to this subsidiary.

The decision was made to exit the business during the quarter ended

June 30, 2019.

The operations of Specialty Contracting Group, LLC were 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 divestiture of the home services subsidiary resulted in an initial pre-tax loss of

$1,158,732,

which has been included on the accompanying consolidated statements of operations in discontinued operations and under the home services segment for the year ended

December 31, 2019.

The loss from discontinued operations has been determined using a loss recovery approach, as the collection of future royalties is uncertain and a reasonable estimate could

not

be made. This approach requires that the contingent consideration, the future royalties to be received, be valued at the lesser of the amount of the “probable,” defined as a greater than

50%

likelihood, future proceeds or the carrying value of the disposed assets. Due to the unpredictability of the contingent consideration, and management’s inherent lack of control over the buyer’s operations, management determined it would

not

be reasonable to attempt to value the contingent consideration. This resulted in assigning the contingent consideration a current valuation of zero. As and to the extent any royalties are deemed probable, they will be subsequently recognized as a “gain from discontinued operations” on the statements of operations and will offset, or recover, the initial loss recorded. Accordingly, during the year ended

December 31, 2019,

an offsetting

$21,629

gain on discontinued operations is included within the

$1,510,475

reported loss on discontinued operations.

A breakdown of discontinued assets and liabilities as reported on the face of the accompanying consolidated financial statements for the years ended

December 31, 2019

and

2018,

is as follows:

	December 31, 2019		December 31, 2018
Cash and cash equivalents	$	428	$	23,954
Accounts receivable		—		136,785
Other current assets		—		71,624
Total current assets - held for resale		428		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		96,848		75,208
Accrued expenses		—		81,213
Lease liabilities		50,110		—
Other current liabilities		—		2,368
Notes payable, current		—		158,698
Total current liabilities - held for resale		146,958		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 consolidated statements of operations as of the year ended

December 31, 2019

is presented below. Asset and liability values used in the calculation represent the Company’s carrying value as of the date of sale,

May 24, 2019.

Sale of vehicles, equipment, and furniture, net of depreciation	$	230,578
Impairment of remaining goodwill		1,024,591
Total carrying value of assets sold		1,255,169

Vehicle and equipment notes payable assumed by the buyer		76,791
Service agreements assumed by the buyer		19,646
Total carrying value of liabilities assumed		96,437

Net loss on sale of subsidiary, pre-tax	$	1,158,732

A reconciliation of discontinued operations as reported on the accompanying consolidated statements of operations for the years ended

December 31, 2019

and

2018,

is as follows:

	For the year ended
	December 31, 2019			December 31, 2018
Revenues	$	675,963		$	3,077,631
Cost of revenues		432,872			2,003,876
Gross profit		243,091			1,073,755
Selling, general, and administrative expenses		535,650			1,235,346
Loss on sale of subsidiary, net of recoveries		(1,125,364	)		—
Other income (expense), net		(92,552	)		(753,572	)
Net income (loss) reported as discontinued operations	$	(1,510,475	)	$	(915,163	)