NOTE

12.

COMMITMENTS AND CONTINGENCIES

Leases

As of

December 31, 2019,

the Company has

three

leases classified as operating leases and

finance leases. The previously reported finance leases as of the period ended

March 31, 2019,

were assumed by Rooter Hero as part of the home services divestiture that took place on

May 24, 2019.

See Note

for more information.

The operating leases correspond to the warehouse and office facilities for Specialty Contracting Group, LLC, which did

not

convey with the divestiture; office space for Willow Oak Asset Management, LLC; and warehouse space for corporate matters. The lease for warehouse space for corporate matters is a short-term lease, under

months, and in accordance with ongoing accounting policy elections, the Company does

not

recognize right-of-use (ROU) assets or lease liabilities for short-term leases. The leases have remaining terms expiring from

2019

through

2021

and a weighted average remaining lease term of

1.2

years

. The right-of-use assets and corresponding lease liabilities for the Company’s operating leases are reported separately on the accompanying consolidated balance sheets. Discount rates used in the calculation of our lease liability was approximately

6.7%.

With respect to the leased facilities for Specialty Contracting Group, LLC, possession of the premises was surrendered to the landlord, in connection with the dissolution and winding up of Specialty Contracting Group, in default of that lease. In addition, the Company is the lessor for facility space in New York that it sublets to other tenants; the remaining

two

subleases of which expired on

December 31, 2019.

Lease costs for the year ended

December 31, 2019

consisted of the following:

Finance lease costs:
Amortization of ROU assets	$	—
Interest on lease liabilities		—
Operating lease cost		64,092
Sublease income		(28,405	)
Total lease costs from continuing operations		35,687
Total lease costs from discontinued operations		64,901
Total lease costs	$	100,588

A maturity analysis of our operating leases is as follows:

2020	$	86,380
2021		16,634
2022		—
Total		103,014

Discount factor		(6,469	)
Lease liability		96,545
Less lease liability from discontinuing operations		(50,110	)
Amounts due within 12 months		(46,435	)
Long-term lease liability	$	—

Other Commitments

As mentioned in Note

June 27, 2019,

the Company sold

65%

of its membership interest in Mt Melrose, LLC to an unaffiliated

third

-party purchaser, Woodmont Lexington, LLC. As consideration for the 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. Under the terms of the parties’ membership interest purchase agreement, the Company agreed to indemnify Woodmont against any losses actually incurred as a result of breaches of the Company’s representations and warranties made under the agreement. To date, Woodmont has made

four

claims for indemnification under the agreement, all of which have been rejected and disputed by the Company.

Litigation

Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.

April 12, 2016,

the Company filed a civil action complaint against Frank Erhartic, Jr. (the “Former Erhartic CEO”), the Company’s former CEO and director (prior to

December 14, 2015)

and currently an owner of record or beneficially of more than

of the Company’s Common Stock, alleging, among other things, that the Former Erhartic CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized and wrongful related party transactions, including causing the Company to borrow certain amounts from the Former Erhartic CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments to the Former Erhartic CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former Erhartic CEO, causing the Company to pay certain amounts to the Former Erhartic CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former Erhartic CEO, causing the Company to pay rent on its corporate headquarters owned by the Former Erhartic CEO’s ex-wife in amounts commercially unreasonable and excessive, and to make real estate tax payments thereon for the personal benefit of the Former Erhartic CEO, converting to the Former Erhartic CEO and/or absconding with

five

motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by the Former Erhartic CEO, causing the Company to pay personal credit card debt of the Former Erhartic CEO, causing the Company to significantly overpay the Former Erhartic CEO’s health and dental insurance for the benefit of the Former Erhartic CEO, and causing the Company to pay the Former Erhartic CEO’s personal automobile insurance. The Company is seeking, among other relief available, monetary damages in excess of

$350,000.

This litigation matter is currently pending in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia).

Other: Mt Melrose-related Proceedings

Various disputes have arisen and are continuing between the Company and Woodmont Lexington, LLC (“

Woodmont

”), the entity to whom the Company sold, on

June 27, 2019,

65%

of the Company’s membership interest in Mt Melrose, LLC (“

Mt Melrose

”).

In undertaking a sale of its membership interests in Mt Melrose, the Company had sought to partner with an operator who, in exchange for being granted a substantial equity interest at a significant discount to the amounts the Company had invested in Mt Melrose, would assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio and endeavor in good faith to generate favorable returns inuring to the long-term best interests of the Company and its shareholders.

Shortly following the closing of the Mt Melrose transaction, however, the relationship between the Company and Woodmont soured. Woodmont, by its representative, Tice Brown, unexpectedly proceeded to make numerous claims and demands upon the Company, which the Company determined to be unfounded and frivolous, if

not

disingenuous to the parties’ understandings. During the year ended

December 31, 2019,

Woodmont also has submitte

three

rmal claims for indemnification under the parties’ purchase agreement, each of which were considered by the Company and then rejected and disputed in short order as unfounded. An additional claim has been submitted, considered, and disputed subsequent to

December 31, 2019.

In addition, Woodmont, acting as the sole manager of Mt Melrose, purported to unilaterally amend and restate as of

August 29, 2019

the Mt Melrose limited liability company agreement among the parties, purporting to change the terms of the distribution waterfall the parties had expressly agreed to and purporting to reallocate the parties’ respective interests in Mt Melrose – unilaterally reducing the Company’s percentage membership interest from

35%

20.8%

while increasing Woodmont’s percentage membership interest from

65%

79.2%.

The Company has rejected and disputed these purported changes and Woodmont’s conduct.

In connection with the primary disputes between the Company and Woodmont and following the Company’s Delaware Action (as defined below), on

December 5, 2019,

Woodmont also filed a verified complaint in the Fayette County, Kentucky Circuit Court against the Company and a

third

party who was then-under contract with the Company for such party’s purchase of the Company’s warehouse and associated real property located in Lexington, Kentucky –

see

Woodmont Lexington, LLC, et al. v. Enterprise Diversified, et al.

, Fayette Circuit Court, Civil Action

No.

-CI-

04304

(the “

Kentucky Action

”). The Court in the Kentucky Action enjoined the Company and the warehouse purchaser from removing or cleaning out the various items of building materials and salvage owned by Mt Melrose that had been placed in the warehouse premises, and required the Company and the warehouse purchaser to provide rent-free access so that Woodmont and Mt Melrose could realize “full value” on their liquidation of the stored personal property until

February 1, 2020.

The Company believes that Woodmont’s attempt to hold up the sale of an

$850,000

warehouse and property because it wanted to store spare toilets, doors, floor tiles and other residential building materials there, rent free, for more than

six

months, was disingenuous and intentionally injurious to the Company. On

December 27, 2019,

the Company filed verified counter-claims in the Kentucky Action against Woodmont, alleging, among other things, Woodmont’s tortious interference with the Company’s business and Woodmont’s unjust enrichment. The Company is seeking, among other relief available against Woodmont, declaratory relief; trial by jury on all issues; money damages, including all special and consequential damages, in amounts to be determined at trial; and the Company’s costs and expenses, including attorneys’ fees; together with pre- and post-judgement interest.

The parties to the Kentucky Action have recently engaged in settlement negotiations, although they have

not

been successful. This action remains pending in the Fayette County, Kentucky Circuit Court.

All the while, since the closing of the Mt Melrose transaction, Woodmont, by its representative, Tice Brown, has made repeated “low ball” offers to buy out the Company’s remaining interest in Mt Melrose, insisting that the Company relinquish its Mt Melrose interest in order to avoid further claims and demands and in order to avoid threatened public disparagement (including by way of statements made on various social media by Woodmont’s representative, Tice Brown). All such offers have been rejected or

not

responded to by the Company, as being unfavorable, undesirable and

not

in the long-term best interests of the Company and its shareholders.

January 7, 2020,

Woodmont, acting as the sole manager of Mt Melrose, also caused Mt Melrose to distribute a

$600,000

cash dividend directly to Woodmont. Woodmont expressly excluded the Company from receiving any portion of this distribution. The Company has rejected and disputed the propriety of this distribution and Woodmont’s conduct.

The Company believes that Woodmont, directly and by its representative, Tice Brown, has engaged, and continues to engage, in intentionally injurious and harassing conduct concerning Mt Melrose that runs counter to the long-term best interests of the Company and its shareholders. Accordingly, as previously reported in the Company’s Current Report on Form

-K filed with the SEC on

November 20, 2019,

the Company filed a verified complaint in the Court of Chancery of the State of Delaware on

November 20, 2019,

commencing a civil action against Woodmont –

see

Civil Action

No.

2019

0928

-JTL

(the “

Delaware Action

”). The Delaware Action was filed by the Company in response to the repeated claims and demands and injurious conduct by Woodmont and its representative, Tice Brown. On

March 9, 2020,

the Company filed further an amended verified complaint against Woodmont in the Delaware Action, expanding its claims against Woodmont. The Company is seeking, among other relief available against Woodmont, injunctive, declaratory and equitable relief, and relief for, among other things, Woodmont’s breaches of contract and unjust enrichment, along with attorneys’ fees and expenses. This action remains pending in the Delaware Court of Chancery.

Management intends to vigorously prosecute the Company’s claims, and defend the Company’s rights, against Woodmont and its representative, Tice Brown, in all of these Mt Melrose-related proceedings.