syte-10q_20180630.htm

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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes ☐ No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

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 by Rule 12b-2 of the Exchange Act). ☐ Yes [X] No

The number of shares outstanding of Common Stock, $0.125 par value as of August 10, 2018 is 2,544,500.

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.

	June 30, 2018
	(unaudited)			December 31, 2017
Assets
Current Assets
Cash and cash equivalents	$	280,958		$	3,297,059
Accounts receivable, net		439,904			396,880
Note receivable		—			226,000
Other current assets		264,420			150,390
Total current assets		985,282			4,070,329
Real estate - held for investment, net		11,095,516			616,374
Real estate - held for resale		90,085			199,117
Property and equipment, net		3,611,817			331,299
Goodwill, net		1,991,994			1,991,994
Note receivable		161,483			—
Non-current investments, at fair value		10,200,149			10,008,902
Other assets		69,625			98,788
		27,220,669			13,246,474
Total assets	$	28,205,951		$	17,316,803
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	454,221		$	262,065
Accrued bonus		30,171			188,947
Accrued expenses		183,115			141,126
Deferred revenue		227,476			269,134
Notes payable, current		1,587,589			370,802
Total current liabilities		2,482,572			1,232,074
Notes payable		6,366,681			194,074
Total long-term liabilities		6,366,681			194,074
Total liabilities		8,849,253			1,426,148
Stockholders' equity
Preferred stock, $0.001 par value, 30,000,000 shares authorized; none issued		—			—
Common stock, $0.125 par value, 2,800,000 and 2,400,000 shares authorized; 2,625,006 and 2,356,246 shares issued; 2,531,432 and 2,262,672 shares outstanding		328,126			294,527
Additional paid-in-capital		27,570,729			23,538,493
Treasury stock, at cost, 93,574 common shares		(544,571	)		(544,571	)
Accumulated other comprehensive income		3,054			3,054
Accumulated deficit		(7,798,403	)		(7,400,848	)
Total stockholders' equity attributable to Enterprise Diversified, Inc. Stockholders		19,558,935			15,890,655
Noncontrolling interest in consolidated subsidiaries		(202,237	)		—
Total stockholders' equity		19,356,698			15,890,655
Total liabilities and stockholders' equity	$	28,205,951		$	17,316,803

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

	For the three months ended June 30						For the six months ended June 30
	2018			2017			2018			2017
Revenues - asset management	$	(92,773	)	$	454,316		$	191,932		$	605,210
Revenues - real estate		197,466			—			371,984			—
Revenues - home services		1,019,667			1,299,282			1,645,506			2,194,674
Revenues - internet operations		297,587			328,341			599,323			663,427
Revenues - other		20,952			25,602			100,097			892,146
Total revenues		1,442,899			2,107,541			2,908,842			4,355,457
Cost of revenues - asset management		—			—			—			—
Cost of revenues - real estate		94,062			—			234,922			—
Cost of revenues - home services		634,308			837,340			1,122,983			1,431,911
Cost of revenues - internet operations		80,580			76,145			151,727			155,954
Cost of revenues - other		49,568			27,345			124,931			958,065
Total cost of revenues		858,518			940,830			1,634,563			2,545,930
Gross profit (loss) - asset management		(92,773	)		454,316			191,932			605,210
Gross profit - real estate		103,404			—			137,062			—
Gross profit - home services		385,359			461,942			522,523			762,763
Gross profit - internet operations		217,007			252,196			447,596			507,473
Gross profit (loss) - other		(28,616	)		(1,743	)		(24,834	)		(65,919	)
Total gross profit		584,381			1,166,711			1,274,279			1,809,527
Selling, general and administrative expenses		884,824			697,658			1,873,628			1,303,272
Total operating expenses		884,824			697,658			1,873,628			1,303,272
(Loss) income from operations		(300,443	)		469,053			(599,349	)		506,255
Other (loss) income, net		(96,128	)		(1,789	)		(170,041	)		129,637
(Loss) income before income taxes		(396,571	)		467,264			(769,390	)		635,892
Income tax benefit (expense)		—			—			—			—
Net (loss) income		(396,571	)		467,264			(769,390	)		635,892
Less: net loss attributable to the noncontrolling interest		(142,388	)		—			(371,835	)		—
Net (loss) income attributable to Enterprise Diversified, Inc. stockholders	$	(254,183	)	$	467,264		$	(397,555	)	$	635,892
(Loss) earnings per share, basic		(0.11	)		0.21			(0.17	)		0.30
(Loss) earnings per share, diluted		(0.11	)		0.21			(0.16	)		0.30
Weighted average number of shares, basic		2,384,902			2,262,672			2,378,096			2,135,932
Weighted average number of shares, diluted		2,389,432			2,262,672			2,434,712			2,135,932

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

	For the three months ended June 30						For the six months ended June 30
	2018			2017			2018			2017
Net (loss) income	$	(396,571	)	$	467,264		$	(769,390	)	$	635,892
Other comprehensive income (loss), net of tax:
Change in foreign currency translation adjustments		—			—			—			—
Change in unrealized gains related to available-for-sale securities:
Change in fair value of available-for-sale securities		—			(19,811	)		—			10,596
Adjustment for net (gains)/losses realized and included in net income		—			2,430			—			(76,935	)
Total change in unrealized gains/losses on available-for-sale securities		—			(17,381	)		—			(66,339	)
Other comprehensive loss		—			(17,381	)		—			(66,339	)
Comprehensive (loss) income		(396,571	)		449,883			(769,390	)		569,553
Less: comprehensive loss attributable to the non controlling interest		(142,388	)		—			(371,835	)		—
Comprehensive (loss) income attributable to Enterprise Diversified, Inc. stockholders	$	(254,183	)	$	449,883		$	(397,555	)	$	569,553

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

												Accumulated									Total
	Common					Additional			Treasury			Other Comprehensive			Accumulated			Noncontrolling			Stockholders'
	Stock		Amount			Paid In Capital			Stock			Income			Deficit			Interest			Equity
Balance December 31, 2016		1,521,872	$	204,152		$	19,096,858		$	(637,561	)	$	39,343		$	(9,542,763	)	$	—		$	9,160,029
Opening balance adjustment		800		—			—			—			—			—			—			—
Balance December 31, 2016 (restated)		1,522,672		204,152			19,096,858			(637,561	)		39,343			(9,542,763	)		—			9,160,029
Net income		—		—			—			—			—			2,141,915			—			2,141,915
Contributed capital		740,000		92,500			4,532,500			—			—			—			—			4,625,000
Unrealized gain on investments		—		—			—			—			(36,289	)		—			—			(36,289	)
Adjustment for share cancellation		—		(2,125	)		(90,865	)		92,990			—			—			—			—
Balance December 31, 2017		2,262,672		294,527			23,538,493			(544,571	)		3,054			(7,400,848	)		—			15,890,655
Net (loss) income		—		—			—			—			—			(397,555	)		(371,835	)		(769,390	)
Contributed capital		268,760		33,595			4,032,240			—			—			—			—			4,065,835
Initial accounting of VIE		—		—			—			—			—			—			4,047,623			4,047,623
Net equity distribution for asset acquisition		—		—			—			—			—			—			(3,878,025	)		(3,878,025	)
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

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

	2018			2017
Cash flows from operating activities:
Net (loss) income	$	(769,390	)	$	635,892
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		169,549			53,390
Gain on sale of real estate through subsidiary acquisition		—			—
Gain on sale of investments		—			(76,935	)
Gain on non-current investments		(178,530	)		(604,764	)
Bad debt expense		28,367			7,617
Real estate valuation adjustment		40,000			48,741
Loss on sale of real estate		11,931			52,383
(Increase) decrease in:
Accounts receivable, net		(71,391	)		(235,269	)
Other current assets		(176,530	)		(10,111	)
Increase (decrease) in:
Accounts payable		192,156			142,713
Accrued expenses		(116,787	)		72,027
Deferred revenue		(41,658	)		32,975
Accrued mortgage interest		145,583			—
Net cash flows from operating activities		(766,700	)		118,659
Cash flows from investing activities:
Issuance of notes receivable		(98,983	)		—
Collections from notes receivable		226,000			—
Proceeds from sale of marketable securities		—			486,176
Purchases of marketable securities		(12,717	)		—
Net purchases and sales of real estate		(196,445	)		550,270
Improvements to real estate		(1,439,720	)		(86,008	)
Proceeds from sale of domain names		29,163			200,000
Purchases of property and equipment		(951,086	)		(30,352	)
Capitalized loan fees		—			(2,500	)
Subsidiary acquisitions		(552,644	)		(6,211,772	)
Net cash flows from investing activities		(2,996,432	)		(5,094,186	)
Cash flows from financing activities:
Principal payments on note payable		(288,562	)		(25,036	)
Proceeds from notes payable		1,035,593			—
Proceeds from issuance of common stock		—			4,625,000
Net cash flows from financing activities		747,031			4,599,964
Net increase (decrease) in cash		(3,016,101	)		(375,563	)
Cash and cash equivalents at beginning of the period		3,297,059			2,607,370
Cash and cash equivalents at end of the period	$	280,958		$	2,231,807

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

	2018		2017
Non-cash supplemental information:
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	$	1,033,750	$	—
Issuance of note receivable on sale of real estate held for sale	$	—	$	226,000
Transfer of real estate held for resale to real estate held for investment	$	—	$	125,000
Transfer of other current assets to investments	$	—	$	2,500,000
HVAC equipment acquired through debt obligations	$	60,752	$	172,990
HVAC acquisitions through notes payable	$	—	$	100,000
Write-down of goodwill due to seller not meeting carryback obligations	$	—	$	15,000
Unrealized loss on marketable securities reported as other comprehensive income	$	—	$	66,339

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

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 restated its Articles of Incorporation to change the name of the Company to “Enterprise Diversified, Inc.” The name change became effective on July 23, 2018, upon FINRA acceptance. The Company elected to retain its historical trading symbol of “SYTE.” 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.

The Company operates through five reportable segments: Asset Management Operations, Real Estate Operations, Home Services Operations, Internet Operations, and Other Operations. Other Operations include corporate, legacy real estate, and investment activity that is not considered to be one of our primary lines of business. The management of the Company also continually reviews various investment opportunities, including those in other lines of business.

Enterprise Diversified, Inc. created a wholly owned asset management subsidiary on October 10, 2016, named Willow Oak Asset Management, LLC (“Willow Oak”). The asset management segment did not produce revenue in 2016. Any expenses incurred in 2016 were allocated to the corporate segment. Starting January 1, 2017, all revenue earned and expenses incurred by this segment were allocated as such.

As previously reported in our Current Reports on Form 8-K filed with the SEC on September 19, 2016, and December 30, 2016, respectively, the Company agreed to make a seed investment totaling $10 million through Willow Oak in Alluvial Fund, LP, 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. Alluvial Fund focuses on investing in 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 the market has yet to recognize.

Willow Oak signed a fee share agreement on May 11, 2017, with Lizard Head, LLC, the general partner of Bridge Reid Fund I, LP, a private investment partnership (also known as “Ironwood Capital Allocation Partners” or “Ironwood Fund”). Under the agreement, Willow Oak became a special limited partner to Bridge Reid, providing fund advisory services to Bridge Reid in exchange for payments equal to 33% of the management fees accrued quarterly by the general partner and 33% of the incentive fees accrued annually, on investors who became limited partners after May 11, 2017. Willow Oak and Lizard Head mutually agreed to terminate the fee share agreement, effective June 30, 2018.

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. Under the agreement, Willow Oak and Coolidge are the sole members of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership. Under their agreement, Willow Oak pays all start-up and operating expenses that are not partnership expenses under the limited partnership agreement. Willow Oak receives 50% of all performance and management fees earned by the general partner. Bonhoeffer Fund utilizes a value-oriented approach to invest in undervalued businesses worldwide that are in a state of distress and/or transition but also exhibit recurring revenue.

2018, New Mt Melrose, LLC, consistent with the terms of the Purchase Agreement, completed a second acquisition from Seller of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the Purchase Agreement. 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) following the guidance contained in ASU 2017-01. See Note 3 for more information.

Unlike EDI Real Estate, LLC, which is a legacy business that we do not intend to grow, Mt Melrose is a real estate business that the Company expects will grow significantly over time. Mt Melrose has its own management team, led by our Chairman, Jeffrey Moore. Mr. Moore has extensive experience acquiring and operating real estate in the Lexington, Kentucky, region where Mt Melrose is focused. The Mt Melrose management team is responsible for growing this business. Additionally, unlike EDI Real Estate, LLC, Mt Melrose does not outsource property management services and has developed an internal property management team to handle those functions and responsibilities.

The Company operates its home services segment through HVAC Value Fund, LLC. HVAC Value Fund is focused on the acquisition and management of HVAC and plumbing companies in Arizona. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, the Company, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized and launched this subsidiary on June 13, 2016. On May 18, 2018, the Company terminated its operating agreement with JNJ Investments, LLC, dated June 13, 2016. ENDI has a 100% voting interest in HVAC Value Fund. The Company does not believe JNJ Investments earned any non-voting profit interests during the term of the operating agreement since HVAC Value Fund did not exceed the profit thresholds under the operating agreement necessary for JNJ Investments to earn non-voting profit interests.

As of June 30, 2018, HVAC Value Fund had closed on six acquisitions for an aggregate purchase price of $2.02 million, which includes estimated earn-outs of approximately $350,000. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, and further described above, the purpose of HVAC Value Fund is to acquire and operate HVAC and plumbing businesses. Accordingly, these six acquisitions were made in the ordinary course of business and consistent with the customs and practices (including with respect to nature, scope, magnitude, quantity, frequency, and contemplated purpose) of HVAC Value Fund, and, in turn, the Company.

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

Other operations include legacy real estate, investment activity, and other corporate activity that is 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 is included in the unaudited consolidated financial statements that is not specifically mentioned below.

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. Through EDI Real Estate, LLC, ENDI owns a real estate investment portfolio that includes nine residential properties, vacant land, and one commercial property. Our real estate portfolio under EDI Real Estate, LLC is primarily focused in the Roanoke and Lynchburg areas of Virginia. The portfolio includes single-family homes that are currently rented and managed through a third-party property manager, as well as vacant properties being prepared or currently listed for sale.

As previously reported in our Current Report on Form 8-K filed with the SEC on January 30, 2017, the Company, through Willow Oak, also 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 operating agreement included in the Form 8-K, the fund’s managing member shall have sole discretion regarding the amounts and timing of any distributions to the members of the fund.

On August 24, 2017 the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to 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, LLC 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.

The corporate 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 accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries including: Willow Oak Asset Management, LLC, Mt Melrose LLC (“New Mt Melrose”), HVAC Value Fund, LLC, Sitestar.net, Inc., and EDI Real Estate, LLC.

Additionally, the Company has determined that New Mt Melrose is the primary beneficiary of Old Mt. Melrose. As such, the accompanying unaudited consolidated financial statements include the accounts of Old Mt. Melrose. While New Mt Melrose consolidated Old Mt. Melrose as its primary beneficiary, because it does not hold all the equity interests in Old Mt. Melrose, the equity interests of the noncontrolling party are separately presented in the accompanying unaudited consolidated balance sheets and unaudited consolidated statements of operations. See Note 3 for more information.

All intercompany accounts and transactions have been eliminated on consolidation.

The unaudited condensed consolidated financial statements have been prepared by Enterprise Diversified, Inc., pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2018 (the “2017 Form 10-K”). The results for the six months ended June 30, 2018, are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.

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 those related to fair value of investments, revenue recognition, accrued expenses, financing operations, goodwill valuation, other assets, 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.

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.

The Company holds various reoccurring investments through its asset management segment. 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 4 for more information.

During the year ended December 31, 2017, the Company also held and made investments in marketable securities through its corporate operations. Marketable securities held were classified as available-for-sale based on management’s intent. The classification of the investments in the marketable securities was assessed upon purchase and reassessed at each reporting period. These investments were recorded at fair value and were classified as marketable securities in the accompanying consolidated balance sheets. Unrealized gains (losses) were categorized as Other Comprehensive Income. Realized gains (losses) on marketable securities were determined by specific identification. Interest was recognized on an accrual basis; dividends were recorded as earned on the ex-dividend date. No securities of these kind were held at June 30, 2018, as all securities were sold prior to the year ended December 31, 2017.

The Company grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is charged off to 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 charged off to the allowance for doubtful accounts when an account is individually determined to be uncollectible.

Mt Melrose and EDI Real Estate rental services are typically paid via cash or check no later than the fifth of the month. Any services collected after the fifth are charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If services remain uncollected, standard operating procedures are followed to commence a notice process for the tenant to either pay the amount due or vacate the property. These procedures ensure low amounts of past due receivables.

Sales of home services are typically paid via credit card or check upon completion of service. Sales that are not collected upon completion are generally to existing and repeat customers who have established a track record of timely payments. Historically, the Company has not encountered issues with collectability of customer accounts. Accounts receivable more than 60 days are considered past due.

Sales of internet services, which are not automatically processed via credit card or bank account drafts, have been the Company’s highest exposure to collection risk. The Company attempts to reduce this risk 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.

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company does not amortize goodwill. The Company tests its goodwill annually during the fourth quarter of its fiscal year 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.

The Company performs an analysis of its goodwill as of December 31 annually, or whenever events or changes in circumstances indicate that the assigned values may no longer be appropriate. No impairment was recorded in 2016. During the year ended December 31, 2017, a net downward adjustment of $29,504 was made to goodwill held through the home services segment. This adjustment was the result of two previous sellers not meeting or exceeding the operational terms of carryback notes that were previously included as consideration for these acquisitions.

Other intangible assets consist of customer relationships, developed technology and software, trade names, and other assets acquired in conjunction with the purchases of businesses or purchases of assets from other companies. As of December 31, 2017, these intangible assets have been fully amortized. The remaining intangible assets consist of domain names attributed to the internet segment. When management determines material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account management’s own analysis and an independent third-party valuation specialist’s appraisal. Intangible assets determined to have definite lives are amortized over their estimated useful lives.

The Company owns 634 domain names, of which 107 are available for sale. These domains are valued at historical cost.

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, the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area in which the real estate is located and tax assessed values. 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.

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.

The Company earns revenue from investments through various fee share 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 condensed consolidated statement of income. Performance fees earned are accrued monthly, paid out yearly, and are also included in revenue on the condensed consolidated statement of income. As non-current investments do not qualify as available-for-sale securities, non-current investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized as revenue in the period of adjustment.

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.

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 due, generally on the first of each month or at another regular period agreed upon by the Company and the tenant. If payments are not provided in a timely manner, the amount due is designated as an account receivable. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. Tenants generally provide a security deposit at the time of possession. This deposit is held 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, 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.

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

If payment is received prior to contract completion, then the amount of revenue attributable to the unperformed work is designated as unearned revenue. If payment is not provided in advance or at the time of service or installation completion, then the amount due is designated as an account receivable.

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

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, 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.

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 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 bases 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 ending December 31, 2017, December 31, 2016, and December 31, 2015, are open to potential IRS examination.

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 similar 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 plans to issue approximately 4,530 additional common shares, subject to closing adjustments, to complete the Mt Melrose acquisition. These additional common shares to be issued will be dilutive to existing common stockholders.

Other comprehensive income is the result of unrealized gains (losses) from marketable securities classified as available-for-sale.

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU 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 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is required to adopt this standard in the first quarter of 2019. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements.

In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs and requires new disclosures. Early adoption is not permitted. The Company has adopted this standard in the first quarter of 2018. Management has evaluated the impact of this standard on customer contracts based on the modified retrospective method and determined that no adjustment was deemed necessary. There were no significant departures from the Company’s previous revenue recognition procedures.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes” (Topic 740). The ASU provides guidance related to the classifications of deferred income tax assets and liabilities into current and noncurrent amounts in a classified statement of financial position. Deferred tax assets and liabilities are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax assets and liabilities that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. The Company has adopted this standard in the first quarter of 2018. The initial application of the standard has not significantly impacted the Company.

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 is permitted under certain criteria. The Company has adopted this standard in the first quarter of 2018. The initial application of the standard has not significantly impacted the Company.

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 is 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 Mt Melrose LLC in January 2018 was an asset acquisition. See Note 3 for additional information.

In January 2017, the FASB issued ASU No. 2017-04 “Simplifying the Test for Goodwill Impairment” (Topic 350). The guidance eliminates the requirement to calculate “implied fair value of goodwill” (previously Step 2) from the goodwill impairment analysis. Companies are required to calculate the impairment of their goodwill based solely on the excess of the carrying value of the reporting unit over its fair value (previously Step 1). Companies are still allowed to perform an initial qualitative assessment for a reporting unit to determine if the quantitative assessment is necessary. This guidance is required to be adopted in fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company has adopted this new guidance for its 2017 goodwill impairment analysis.

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 owns and manages a portfolio of residential real estate in Lexington, Kentucky. Old Mt. Melrose is owned by Jeffrey I. Moore (“Moore”), the Company’s Chairman of the Board.

Pursuant to the Purchase Agreement, the Company, through a newly formed, wholly owned limited liability company subsidiary Mt Melrose, LLC (“New Mt Melrose”), is in the process of acquiring, in a series of closings, substantially all of the business assets of Old Mt. Melrose. The assets primarily consist of 145 residential properties currently owned by Old Mt. Melrose and an undetermined number of additional residential properties under contract for purchase by Old Mt. Melrose, along with Old Mt. Melrose’s rights and ongoing obligations, as lessor/landlord, under all leases covering such real properties. Pursuant to the Purchase Agreement, the Company will assume, as of each closing, any outstanding indebtedness secured by the real properties then being conveyed at such closing.

On January 10, 2018, New Mt Melrose completed the first acquisition of 44 residential and other income-producing real properties 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 $1,798,713 of existing debt.

The Company accounted for the initial purchase of properties as an asset acquisition (consisting of a concentrated group of similar identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contain in ASU 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:

On June 29, 2018, New Mt Melrose completed the second acquisition of 69 residential and other income-producing real properties 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 initial purchase of properties as an asset acquisition (consisting of a concentrated group of similar identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contain in ASU 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:

The buildings will be amortized over their estimated useful lives of 39 years. The Company determined that the assumed leases and service contracts were not favorable or unfavorable based on their terms relative to their fair values.

In connection with the initial closing, the Company and Old Mt. Melrose entered into a Cash Flow Agreement pursuant to which the Company is entitled to all net cash flows of Old Mt. Melrose relating to properties closed subsequently.

Additionally, at the initial closing, Moore was appointed as New Mt Melrose’s president and executed an employment agreement with New Mt Melrose. Subject to the terms of the employment agreement, in certain limited situations that are deemed to be within the Company’s control, Moore has a right to acquire New Mt Melrose for fair value.

The Company has determined that Old Mt. Melrose is a “variable interest entity” because Moore’s equity interests in Old Mt. Melrose are not effective in determining whether Moore or New Mt Melrose has a controlling financial interest, and that New Mt Melrose’s rights under the Cash Flow Agreement are deemed to be variable interests in Old Mt. Melrose. The Company has determined that New Mt Melrose is the primary beneficiary of Old Mt. Melrose since substantially all of Old Mt. Melrose’s activities are now conducted on behalf of New Mt Melrose and because New Mt Melrose may be required to provide financial support to Old Mt. Melrose under the Cash Flow Agreement. As its primary beneficiary, New Mt Melrose consolidates Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose have been allocated accordingly on the unaudited condensed consolidated balance sheets for the period ended June 30, 2018. As noted on the unaudited consolidated statements of stockholders’ equity, the ending noncontrolling interest allocated to the variable interest entity represents the remaining equity held by Old Mt. Melrose for properties yet to be acquired. The ending noncontrolling interest amount also includes any income or loss generated by the remaining properties to be acquired for the period ended June 30, 2018.

As of June 30, 2018, Old Mt. Melrose’s total assets were approximately $1 million and its total liabilities were approximately $850,000. These amounts have been consolidated in the accompanying unaudited consolidated financial statements.

Certain assets held through Willow Oak Asset Management, LLC or Enterprise Diversified, Inc. do not have a Readily Determinable Value as these investments are not publicly traded, nor do they have published sales records. Alluvial Fund is measured using net asset value (NAV) as the practical expedient and is exempt from the fair value hierarchy in accordance with FASB ASC 820-10. 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 Huckleberry Real Estate Fund II, LLC investment, the investment is measured at cost basis as cost approximates fair value until additional inputs and measurements become available. As the inputs for this investment are not readily observable, this investment is valued using Level 3 inputs. The following non-current investments are 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.

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:

The Company valued its marketable securities at fair value at the end of each reporting period. See description of these investments in Note 4 above.

The Company analyzes goodwill on an annual basis or whenever events or changes in circumstances indicate potential impairments. During the year ended December 31, 2017, a net downward adjustment of $29,504 was made to goodwill held through the home services segment. This adjustment was the result of previous sellers not meeting or exceeding the revenue targets of carryback notes that were previously included as consideration for the acquisition.

The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate a change in their fair market value. For the period ended June 30, 2018, the Company adjusted the carrying value of properties held downward by $40,000. For the year ended December 31, 2017, the Company adjusted the carrying value of properties held downward by $101,694. These adjustments were the result of repair and improvement expenses exceeding the current market value of the property, fluctuating market conditions, and write downs of previously capitalized improvements made by prior management.

As discussed in Note 3, in January 2018, Mt Melrose completed the 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 completed the 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 was determined using Level 3 inputs, namely comparable properties within the Lexington, Kentucky, region. The remaining acquisitions will be measured in a similar way using similar inputs.

The cost of property and equipment at June 30, 2018 and December 31, 2017 consisted of the following:

Depreciation expense was $44,038 for the three months ended June 30, 2018, and $89,516 for the year ended December 31, 2017. Increased buildings, vehicles, computers, and equipment are the result of the Mt Melrose acquisitions that occurred on January 10, 2018 and June 29, 2018.

The building held through Mt Melrose, LLC is a multi-purpose office and warehouse space located in Lexington, Kentucky, that will ultimately serve as Mt Melrose’s headquarters. The building is currently under renovation to repurpose existing spaces and make improvements to the structure and function of the building.

As previously reported in our Current Reports on Form 8-K filed with the SEC on December 11, 2017, January 17, 2018, and July 12, 2018, respectively, Enterprise Diversified, Inc. created a wholly owned subsidiary named Mt Melrose, LLC (“New Mt Melrose”), which currently is engaged in an acquisition of 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, also an Enterprise Diversified, Inc. director. Unlike EDI Real Estate, LLC, which is a legacy business that we do not intend to grow, New Mt Melrose is a real estate business that the Company expects will grow significantly over time. New Mt Melrose has its own management team, led by our Chairman, Jeffrey Moore. Mr. Moore has extensive experience acquiring and operating real estate in the Lexington, Kentucky region where New Mt Melrose is focused. The New Mt Melrose management team is responsible for growing this business.

All real estate held through Mt Melrose, LLC is classified as held for investment. As of the quarter ended June 30, 2018, this includes 184 units carried on the balance sheet at $10,489,749. Of the 184 units held for investment, 100 of the units are occupied or available to rent, 78 of the units are vacant units being prepared or to be prepared to market to tenants, and six of the units are vacant lots. For the quarter ended June 30, 2018, depreciation expense was $40,938. Accumulated depreciation totaled $80,740 for the quarter ended June 30, 2018.

As of June 30, 2018, the Company accounted for nine residential properties as held for investment. The Company had eight properties available for rent with all eight properties being occupied. One additional property continues to be renovated with the intention to have it ready for rent during 2018. The leases in effect, as of the quarter ended June 30, 2018, are based on either annual or multi-year time periods and typically include month-to-month provisions after the completion of the initial term. An outside property management company manages these rental properties on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties.

Depreciation expense totaled $5,304 for the quarter ended June 30, 2018. Total accumulated depreciation as of June 30, 2018 was $96,968. As of June 30, 2018, these EDI Real Estate, LLC properties held for investment were carried on the balance sheet at $605,767.

As of June 30, 2018, the Company accounted for one commercial property and interests in several lots as held for resale. The Company did not sell or purchase any properties in the quarter ended June 30, 2018. As of June 30, 2018, these EDI Real Estate, LLC properties held for resale were carried on the balance sheet at $90,085.

	2018			2017
Interest bearing amounts due on real estate held for investment through Mt Melrose, LLC	$	7,377,268		$	—
Interest bearing amount due on acquisition through HVAC Value Fund, LLC		17,500			25,000
Non-interest bearing amount due on acquisition through HVAC Value Fund, LLC		—			64,804
Interest bearing amount due on line of credits through HVAC Value Fund, LLC		177,168			220,485
Non-interest bearing amount due on line of credits through HVAC Value Fund, LLC		100,000			—
Equipment and vehicle capital leases and loans acquired by HVAC Value Fund, LLC		86,604			116,987
Vehicle loans through HVAC Value Fund, LLC		58,130			—
Interest bearing amount due on real estate held for investment through EDI Real Estate, LLC		137,600			137,600
Less current portion		(1,587,589	)		(370,802	)
Long-term portion	$	6,366,681		$	194,074

HVAC Value Fund typically structures acquisitions where a portion of the purchase price is held back and is subject to certain conditions. These notes payable may or may not bear interest. Of the six acquisitions made by HVAC Value Fund during 2016 and 2017, five resulted in notes payable to the seller. As of December 31, 2017, two of the five seller notes remained outstanding. The interest-bearing note payable accrues interest at 7% annually. A payment of $17,500 was payable on June 16, 2018. This payment was reduced from its original amount of $25,000 during the quarter ended June 30, 2018, as the revenue targets of the earn out were not fully met. This payment was made when revenue figures for the month were finalized. The non-interest-bearing note payable was paid in full during the quarter ended March 31, 2018. Additional debt held through the home services segment includes lines of credit, as well as loans and leases for various vehicles and equipment. Two vehicle loans were entered into during the quarter ended March 31, 2018. These loans require monthly payments through May 2023 and hold annual interest rates of 5.99%.

During the quarter ended September 30, 2017, EDI Real Estate, LLC entered into two promissory notes, each secured by a property held for investment. These notes pay interest quarterly and are due September 15, 2022 with early payoff permitted.

On January 10, 2018, our new, wholly owned subsidiary, Mt Melrose, LLC (“Purchaser”), a Delaware limited liability company, entered into a certain Cash Flow Agreement with Mt. Melrose, LLC (“Seller”), a Kentucky limited liability company (the “Cash Flow Agreement”), pursuant to which, in connection with the parties’ anticipated consummation of all of the real property purchase transactions under the Mt Melrose Purchase Agreement, the parties agreed after January 10, 2018, until such time as the parties consummate the relevant closing as to each real property under the Mt Melrose Purchase Agreement, Seller assigns to Purchaser all of the income, rents, receivables, and revenues arising from or issuing out of such real property, and Purchaser assumes Seller’s responsibility for payment of certain of the costs and expenses attributable to such real property.

Under the Cash Flow Agreement, Purchaser is responsible for Seller’s monthly payments of interest and/or principal under the outstanding debt secured by the real properties both acquired and to be acquired, among other operating expenses. The debt secured by the real properties have varying annual interest rates from 4.375% to 13%. These notes begin to mature as early as March 2019, 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 the quarter ended June 30, 2018, $7,377,268 of debt is secured by these properties.

For the three months ended June 30, 2018, and for the year ended December 31, 2017, bad debt expense was $18,706 and $28,986, respectively. The increase in accounts receivable is the result of the Mt Melrose acquisition and the inclusion of their accounts receivable activity as of January 10, 2018. As of June 30, 2018 and December 31, 2017, accounts receivable consisted of the following:

As of June 30, 2018, the Company has 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, Home Services, Internet, and Other.

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 have been reorganized during the quarter ended June 30, 2018. The “Mt Melrose” segment is now referred to as “Real Estate” and the “HVAC” segment is now referred to as “Home Services”. Legacy “Real Estate”, “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.

The asset management segment includes revenues and expenses derived from various investment opportunities and partnerships. The real estate segment includes revenue and expenses related to the property management and real estate rental activities of the Mt Melrose portfolio of rental properties located in Lexington, Kentucky. The home services segment includes revenue and expenses derived from the acquisition and management of HVAC and plumbing companies in Arizona. The internet segment includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The other segment includes revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate. The other segment also includes revenue and expenses from nonrecurring investment opportunities such as the Huckleberry Real Estate Fund. Lastly, 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 quarter ended June 30, 2018, the internet segment generated revenue of $278,992 in the United States and revenue of $18,595 in Canada. This compares to the quarter ended June 30, 2017, where the internet segment generated revenue of $307,269 in the United States and revenue of $21,072 in Canada.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three and six months ended June 30, 2018 and 2017.

	Asset Management			Real Estate			Home Services		Internet		Other			Consolidated
Three months ended June 30, 2018
Revenues	$	(92,773	)	$	197,466		$	1,019,667	$	297,587	$	20,952		$	1,442,899
Cost of revenue		—			94,062			634,308		80,580		49,568			858,518
Operating expenses		35,493			282,547			359,015		63,273		144,496			884,824
Other income (expense)		11,075			(123,153	)		6,282		2,623		7,045			(96,128	)
Comprehensive income (loss)		(117,191	)		(302,296	)		32,626		156,357		(166,067	)		(396,571	)
Goodwill		—			—			1,779,549		212,445		—			1,991,994
Identifiable assets		9,481,129			14,161,088			2,491,578		385,833		1,686,323			28,205,951

	Asset Management		Real Estate		Home Services			Internet		Other			Consolidated
Three months ended June 30, 2017
Revenues	$	454,316	$	—	$	1,299,282		$	328,341	$	25,602		$	2,107,541
Cost of revenue		—		—		837,340			76,145		27,345			940,830
Operating expenses		38,048		—		414,579			68,214		176,817			697,658
Other income (expense)		—		—		(4,132	)		2,771		(428	)		(1,789	)
Comprehensive income (loss)		416,268		—		43,231			186,753		(196,369	)		449,883
Goodwill		—		—		1,794,053			212,445		—			2,006,498
Identifiable assets		8,892,040		—		2,737,470			517,398		3,369,546			15,516,454

	Asset Management		Real Estate			Home Services			Internet		Other			Consolidated
Six months ended June 30, 2018
Revenues	$	191,932	$	371,984		$	1,645,506		$	599,323	$	100,097		$	2,908,842
Cost of revenue		—		234,922			1,122,983			151,727		124,931			1,634,563
Operating expenses		63,366		486,660			669,885			133,051		520,666			1,873,628
Other income (expense)		22,150		(231,394	)		1,601			32,419		5,183			(170,041	)
Comprehensive income (loss)		150,716		(580,992	)		(145,761	)		346,964		(540,317	)		(769,390	)
Goodwill		—		—			1,779,549			212,445		—			1,991,994
Identifiable assets		9,481,129		14,161,088			2,491,578			385,833		1,686,323			28,205,951

	Asset Management		Real Estate		Home Services			Internet		Other			Consolidated
Six months ended June 30, 2017
Revenues	$	605,210	$	—	$	2,194,674		$	663,427	$	892,146		$	4,355,457
Cost of revenue		—		—		1,431,911			155,954		958,065			2,545,930
Operating expenses		38,241		—		787,287			151,038		326,706			1,303,272
Other income (expense)		—		—		(6,383	)		57,080		78,940			129,637
Comprehensive income (loss)		566,969		—		(30,907	)		413,515		(380,024	)		569,553
Goodwill		—		—		1,794,053			212,445		—			2,006,498
Identifiable assets		8,892,040		—		2,737,470			517,398		3,369,546			15,516,454

NOTE 11. SHARE ADJUSTMENT, CANCELLATION OF TREASURY SHARES, AND REVERSE STOCK SPLIT

During the quarter ended March 31, 2017, management was made aware of a clerical error that affected the reported number of treasury shares held as of December 31, 2016. It was discovered that the number of treasury shares held was overstated by 800 shares, which in turn understated the total number of shares outstanding by the same amount. The Company has concluded that a full restatement is not necessary as the total misstatement accounts for 0.05% of the total number of shares outstanding and no per share metrics were affected. This error dates back to records kept by prior management but has since been reconciled and corrected.

Management is actively working to cancel existing treasury shares. As noted on the condensed consolidated balance sheets and the condensed consolidated statements of stockholders’ equity, as of the quarter ended June 30, 2018, 17,007 treasury shares have been cancelled.

As of August 10, 2018, the correct number of shares outstanding is 2,544,500, and the correct number of treasury shares held is 80,506.

The Board of Directors of Sitestar Corporation (the “Company”), previously approved, on March 29, 2018, a reverse stock split of all of the Company’s Common Stock, pursuant to which every 125 shares of Common Stock of the Company shall be reverse split, reconstituted, and converted into one (1) share of Common Stock of the Company (the “Reverse Stock Split”). To effectuate the aforesaid Reverse Stock Split, the Company filed on May 23, 2018, a Certificate of Change Pursuant to Nevada Revised Statutes (“NRS”) Section 78.209 (the “Certificate of Change”) with the Secretary of State of the State of Nevada, with a specified effective filing date of June 1, 2018. Under Nevada law, because the Reverse Stock Split was approved by the Board of Directors of the Company in accordance with NRS Sections 78.207 and 78.209, no stockholder approval was required.

The Company submitted an Issuer Company Related Action Notification regarding the Reverse Stock Split to the Financial Industry Regulatory Authority (“FINRA”) on May 22, 2018. FINRA declared the Reverse Stock Split effective in the marketplace July 23, 2018 (the “FINRA Effective Date”). Accordingly, while the Certificate of Change became effective under Nevada state corporate law on June 1, 2018, the Reverse Stock Split did not become effective as to shareholders or the marketplace until the FINRA Effective Date.

Split Adjustment. On the FINRA Effective Date, the total number of shares of the Company’s Common Stock held by each stockholder converted automatically into the number of whole shares of Common Stock equal to (i) the number of shares of Common Stock held by such stockholder immediately prior to the Reverse Stock Split, divided by (ii) one hundred twenty five (125). No fractional shares were issued, and no cash or other consideration was paid. Rather, any fraction of a share of Common Stock that otherwise would result from the Reverse Stock Split were rounded up to the next whole share of Common Stock. That is, stockholders who otherwise would be entitled to receive fractional shares because they hold a number of pre-Reverse Stock Split shares of the Company’s Common Stock not evenly divisible by one hundred twenty five (125), had the number of post-Reverse Stock Split shares of the Company’s Common Stock to which they are entitled rounded up to the next whole number of shares of the Company’s Common Stock. Stockholders' equity and all references to share and per share amounts in the accompanying unaudited condensed consolidated financial statements have been retroactively adjusted to reflect the reverse stock split for all periods presented.

Ownership Unchanged. Immediately after the Reverse Stock Split, each stockholder’s percentage ownership interest in the Company and proportional voting power remained unchanged except for minor adjustments resulting from the Company’s election to round up any fraction of a share of Common Stock that otherwise would have resulted from the Reverse Stock Split. The rights and privileges of the holders of shares of Common Stock of the Company were substantially unaffected by the Reverse Stock Split.

Capitalization. Immediately prior to the Certificate of Change becoming effective, the aggregate number of shares which the Company had the authority to issue was three hundred fifty million (350,000,000) shares of Common Stock at $.001 par value, and thirty million (30,000,000) shares of Serial Preferred Stock at $.001 par value. As a result of the Certificate of Change and Reverse Stock Split, the aggregate number of shares which the Company has the authority to issue is two million eight hundred thousand (2,800,000) shares of Common Stock at $.125 par value, and thirty million (30,000,000) shares (unchanged) of Serial Preferred Stock at $.001 par value.

CUSIP Number and Trading Symbol. The Company’s CUSIP number changed on the FINRA Effective Date as a result of the Reverse Stock Split. The new CUSIP number is 293706 107. For the 20-business-day period following the FINRA Effective Date, the Company’s trading symbol is “SYTED.” After such 20-day period, the Company’s trading symbol will revert to “SYTE.”

On May 26, 2018 the Company signed a stock purchase agreement with a third party to sell 1,633,500 shares to an unrelated third party for $0.11036586 per share. The settlement date for the sale was July 31, 2018. The number of shares transferred on the settlement date was adjusted for the Company’s reverse stock split to 13,068 shares.

Management has evaluated all other subsequent events from June 30, 2018, through August 10, 2018, the date the unaudited condensed consolidated financial statements were issued. Management concluded that no additional subsequent events have occurred that would require recognition or disclosure in the unaudited condensed consolidated financial statements.

This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements and related footnotes for the quarter ended June 30, 2018. The discussion of results, causes, and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. Additionally, it should be noted that a uniform comparative analysis cannot be performed for all segments, as a segment’s limited financial history or recent restructuring results in less comparable financial performance.

Enterprise Diversified, Inc. (“ENDI,” the “Company,” or “we”) operates under five segments:

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

Common stockholders’ equity increased from $15,890,655 at December 31, 2017, to $19,356,698 at June 30, 2018. The change was mostly attributable to $4,065,834 of additional common stock issued associated with the acquisition of Old Mt. Melrose. This change was also driven by $150,716 of comprehensive income in the asset management segment, $580,992 of comprehensive loss in the real estate segment, $145,761 of comprehensive loss in the home services segment, $346,964 of comprehensive income in the internet segment, and $540,317 of comprehensive loss in other segments. Corporate expenses for the six months ended June 30, 2018 totaled $510,304.

This section provides an overview of changes in our assets, liabilities, and equity and should be read together with our unaudited condensed consolidated financial statements, including the accompanying notes to the financial statements. The table below provides a balance sheet summary for the periods presented and is designed to provide an overview of the balance sheet changes from quarter to quarter.

	June 30, 2018		March 31, 2018		December 31, 2017		September 30, 2017
ASSETS
Cash and equivalents	$	280,958	$	1,446,571	$	3,297,059	$	151,867
Accounts receivables, net		439,904		324,507		396,880		481,123
Investments, at fair value		10,200,149		10,297,532		10,008,902		12,201,972
Real estate, total		11,185,601		9,254,731		815,491		839,849
Goodwill and other assets		6,099,339		5,581,801		2,798,471		2,794,364
Total assets	$	28,205,951	$	26,905,142	$	17,316,803	$	16,469,175
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	454,221	$	329,481	$	262,065	$	180,692
Accrued expenses		213,286		307,675		330,073		218,294
Deferred revenue		227,476		261,017		269,134		239,748
Notes payable and other liabilities		7,954,270		6,799,620		564,876		658,635
Total liabilities		8,849,253		7,697,793		1,426,148		1,297,369
Total stockholders’ equity		19,356,698		19,207,349		15,890,655		15,171,806
Total liabilities and stockholders’ equity	$	28,205,951	$	26,905,142	$	17,316,803	$	16,469,175

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

The Company operates its asset management business through a wholly owned subsidiary, Willow Oak Asset Management, LLC. This subsidiary was formed on October 10, 2016. As of December 31, 2016, this subsidiary did not have material operations. Effective January 1, 2017, Willow Oak Asset Management made its first investment and was subsequently allocated all related expenses.

As of the quarter ended June 30, 2018, Willow Oak holds a direct investment in the Alluvial Fund. In accordance with GAAP, for financial reporting purposes, these investment gains and losses are reported as revenue on the condensed consolidated statement of income. This treatment can result in reporting negative revenue numbers. Willow Oak also continues to earn revenue through fee share arrangements through both Alluvial Fund and Bonhoeffer Capital Management LLC, the general partner to Bonhoeffer Fund.

During the quarter ended June 30, 2018, the asset management segment produced negative $92,773 of revenue. Cost of revenue was $0 and operating expenses totaled $35,493. Other income attributable to the asset management segment totaled $11,075. Other income was primarily attributable to a sublease arrangement for shared office space in New York City. The comprehensive loss for the quarter ended June 30, 2018, totaled $117,191. This compares to the quarter ended June 30, 2017, when the asset management segment produced $454,316 of revenue, cost of revenue was $0, and operating expenses totaled $38,048. Additionally, comprehensive income for the quarter ended June 30, 2017, was $416,268.

As of the quarter ended June 30, 2018, the fair value of investments held through the asset management segment totaled $9,450,149. This compares to the quarter ended June 30, 2017, when the fair value of investments held through the asset management segment totaled $8,854,764. As of June 30, 2017, investments were held through the asset management and corporate segments. Currently, the Alluvial Fund investment is held through the asset management segment, with additional investments being held through other company segments.

As previously reported in our Current Reports on Form 8-K filed with the SEC on December 11, 2017, January 17, 2018, and July 12, 2018, respectively, ENDI created a wholly owned subsidiary named Mt Melrose, LLC (“New Mt Melrose”) on January 10, 2018, which currently is engaged in an acquisition of 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, who is also an ENDI director. As set forth in a Form 8-K filed on January 17, 2018, on January 10, 2018, New Mt Melrose, LLC, consistent with the terms of the Purchase Agreement, completed a first acquisition from Seller of 44 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the Purchase Agreement. As further set forth in a Form 8-K filed on July 12, 2018, on June 29, 2018, New Mt Melrose, LLC, consistent with the terms of the Purchase Agreement, completed a second acquisition from Seller of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the Purchase Agreement. Unlike EDI Real Estate, LLC, which is a legacy business that we do not intend to grow, New Mt Melrose is a real estate business that the Company expects will grow significantly over time. New Mt Melrose has its own management team, led by our Chairman, Jeffrey Moore. Mr. Moore has extensive experience acquiring and operating real estate in the Lexington, Kentucky region where New Mt Melrose is focused. The New Mt Melrose management team is responsible for growing this business. Additionally, unlike EDI Real Estate, LLC, Mt Melrose does not outsource property management services and has developed an internal property management team to handle those functions and responsibilities.

Through Mt Melrose, as of June 30, 2018, we own 184 rental units consisting of single-family properties, multi-family properties, commercial properties, and vacant lots. Of the 184 units held for investment, 100 of the units are occupied or available to rent, 78 of the units are vacant units being prepared or to be prepared to market to tenants, and six of the units are vacant lots. The leases in effect as of the quarter ended June 30, 2018, are based on either annual or multi-year time periods. Month-to-month leases are reserved for special circumstances. Mt Melrose does not intend to purchase, nor does it currently have, any units held for resale. Mt Melrose did, however, purchase a commercial building during the quarter ended March 31, 2018, that will act as the segment’s future headquarters. This property is being renovated over the next year and will offer additional sublease rental opportunities.

During the quarter ended June 30, 2018, Mt Melrose generated rental revenue of $197,466. The cost of rental revenue totaled $94,062. Operating expenses for the quarter ended June 30, 2018, were $282,547. Other expenses totaled $123,153 and comprehensive loss for the quarter ended June 30, 2018 totaled $302,296.

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

As of June 30, 2018, Mt Melrose real estate held for investment was carried on the balance sheet at $10,489,749. No comparable figures exist as Mt Melrose did not commence operations until January 10, 2018. Depreciation expense was $40,938, and accumulated depreciation totaled $80,740 for the quarter ended June 30, 2018.

During the quarter ended June 30, 2018, Mt Melrose purchased a total of 34 rental properties for a gross purchase price of $1,065,229. The majority of these purchases were made with cash, however, 12 of these purchases resulted in a note payable.

The Company operates its home services operations through HVAC Value Fund, LLC, a wholly owned subsidiary focused on the acquisition and management of HVAC and plumbing companies in Arizona. After gaining experience with HVAC acquisitions, management noted the complementary nature of plumbing providers and completed two acquisitions where a significant amount of their revenue originated from plumbing services. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, we, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized and launched this subsidiary on June 13, 2016. On May 18, 2018, the Company terminated its operating agreement with JNJ Investments, LLC, dated June 13, 2016. ENDI has a 100% voting interest in HVAC Value Fund. The Company does not believe JNJ Investments earned any non-voting profit interests during the term of the operating agreement since HVAC Value Fund did not exceed the profit thresholds under the operating agreement necessary for JNJ Investments to earn non-voting profit interests.

HVAC Value Fund closed on five acquisitions totaling $1,455,000 during the year ended December 31, 2016, and one acquisition during the year ended December 31, 2017, totaling $560,000. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, and discussed further herein, the purpose of HVAC Value Fund is to acquire HVAC and plumbing businesses. Accordingly, all of our acquisitions were made in the ordinary course of business and consistent with the customs and practices (including with respect to nature, scope, magnitude, quantity, frequency, and contemplated purpose) of HVAC Value Fund, and, in turn, the Company.

During the quarter ended June 30, 2018, our home services operations generated revenue of $1,019,667, cost of revenue totaled $634,308, and operating expenses totaled $359,015. Other income for the quarter ended June 30, 2018 totaled $6,282. The other income is related to the write-off of an earn-out payable to a past acquisition not meeting specific revenue targets. Comprehensive income for the quarter ended June 30, 2018, totaled $32,626. This compares to the quarter ended June 30, 2017, when the segment generated revenue of $1,299,282, cost of revenue totaled $837,340, operating expenses totaled $414,579, other expenses were $4,132, and comprehensive income for the quarter was $43,231.

As of June 30, 2018, the focus of our internet segment is to generate cash flow, work to make our costs variable, and reinvest in our operations when an acceptable return is available. We did not make significant reinvestments into the internet segment during 2017. Additionally, competitive pressures have negatively affected our ongoing revenue. Accordingly, internet segment revenue is slowly declining, though at a slower pace than previous years, as noted below.

Revenue attributed to the internet segment during the quarter ended June 30, 2018 totaled $297,587, cost of revenue during the quarter ended June 30, 2018 totaled $80,580, and operating expenses totaled $63,273. Other income for the quarter ended June 30, 2018 totaled $2,623 and comprehensive income for the segment totaled $156,357. Other income consisted of credit card rewards and other cash back promotion offers.

This compares to the quarter ended June 30, 2017, when revenue totaled $328,341, cost of revenue totaled $76,145, operating expenses were $68,214, other income was $2,771, and comprehensive income was $186,753.

Management is currently identifying the market value for domain names owned by the Company in order to assess potential income opportunities. Management also evaluates domain names available for purchase in order to generate new revenue from customers who utilize the domains.

Our current sales mix of customers consists of approximately 66% internet access and 34% web hosting and storage. Approximately 93% of our customer accounts are managed by our U.S. operations and 7% of our customer accounts are managed by our Canada operations. Revenue generated by our U.S. operations totaled $278,992, and revenue generated by our Canada operations totaled $18,595 during the quarter ended June 30, 2018. This compares to revenue generated by our U.S. operations of $307,269, and revenue generated by our Canada operations of $21,072 during the quarter ended June 30, 2017.

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

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 June 30, 2018, we owned nine residential properties, one commercial property, and interests in several lots. This compares to June 30, 2017, when we owned 13 residential properties, one commercial property, and interests in several lots. In 2008, the Company had implemented a program to redirect cash generated from the internet operations into the purchase and renovation of real estate. This program was abolished with the change in management on December 14, 2015. As of December 14, 2015, several real estate agents and investors were engaged to determine the marketability of our properties. Repair work ceased until a more thorough review for each property could be completed to determine the most profitable course forward. Prior to year-end 2015, a list of properties was assigned to a real estate agent. Additionally, during 2016 and 2017, we entered into negotiations with several investors to sell various properties. Many of these properties were held for resale by prior management, but prior marketing activity was poor. As of June 30, 2018, the majority of these properties have been successfully sold and monetized. Several real estate agents continue to be engaged to market the remaining properties listed for resale.

Through EDI Real Estate, we own eight rental properties managed by a third-party property management company. As of June 30, 2018, we had eight properties available for rent, with all eight properties being occupied. One additional property continues to be renovated with the intention to have it ready for rent during 2018. The leases in effect as of the quarter ended June 30, 2018, are based on either annual or multi-year time periods and include month-to-month provisions after the completion of the initial term. The property management company has introduced updated and renewed leases for existing rental properties. Eight properties were current with regard to tenant payments as of June 30, 2018. This compares to the quarter ended June 30, 2017, when we had nine properties available for rent, with all nine properties current with regard to tenant payments.

During the quarter ended June 30, 2018, we did not purchase or sell any properties. As of June 30, 2018, real estate held for resale was carried on the balance sheet at $90,085. This compares to the quarter ended June 30, 2017, when real estate held for resale was carried at $482,894. During the quarter ended June 30, 2018, EDI Real Estate generated rental revenue of $20,952, net of bad debt expense. The cost of rental revenue totaled $9,568. This compares to rental revenue of $25,602, net of bad debt expense and cost of rental revenue of $7,288 during the quarter ended June 30, 2017. Operating expenses for the quarter ended June 30, 2018 totaled $7,033. This compares to the quarter ended June 30, 2017, when operating expenses were $9,395. The slight decrease in revenue and expenses is due to having one fewer property available for rent as of the quarter ended June 30, 2018. As of June 30, 2018, EDI real estate held for investment was carried on the balance sheet at $605,767. This compares to the quarter ended June 30, 2017, when EDI real estate held for investment was held at $619,264.

Depreciation expense totaled $5,304 for the quarter ended June 30, 2018. Total accumulated depreciation as of June 30, 2018, totaled $96,968.

In the quarter ended June 30, 2018, corporate expenses totaled $137,463. This compares to corporate expenses of $167,422 incurred during the quarter ended June 30, 2017. Expenses were lower during the quarter ended June 30, 2018 compared to the quarter ended June 30, 2017, primarily due to the reversal of a bonus accrual. This decrease was offset by increased payroll expenses, legal expenses, and accounting expenses. Since the quarter ended June 30, 2017, the corporate segment has hired three new, full-time employees. Additionally, legal expenses were higher in the quarter ended June 30, 2018 due to the services performed surrounding the Mt Melrose acquisition, as well as services provided in relation to the Company’s name change.

For the quarter ended June 30, 2018, total operating expenses for other business operations were $144,496. This compares to operating expenses of $176,817 for the quarter ended June 30, 2017. Other income for the other business operations was $7,045 for the quarter ended June 30, 2018. This income was related to interest earned on the note receivable through the corporate segment. This compares to other expenses of $428 for the quarter ended June 30, 2017. The comprehensive loss for other business operations for the quarter ended June 30, 2018 was $166,067. This compares to $196,369 of comprehensive income for other business operations for the quarter ended June 30, 2017.

ENDI carries out its business strategy in five operating segments: Asset Management Operations, Real Estate Operations, Home Services Operations, Internet Operations, and Other Operations. Our primary focus is on generating cash flow so that we have the

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

flexibility to make reinvestments as opportunities present themselves. We will only reinvest cash in each segment if we believe that the return on this invested capital is appropriate for the risk associated with the investment. This consideration is measured against all investment opportunities available to us and is not limited to these five segments or the Company’s historical operations.

Cash and equivalents totaled $280,958 at quarter-end June 30, 2018, compared to $3,297,059 at year-end December 31, 2017. This decrease in cash and equivalents is the result of our investment in Mt Melrose, LLC. Real estate held for investment increased to $11,095,516 at quarter-end June 30, 2018, compared to $616,374 at year-end December 31, 2017. Property and equipment also increased from $331,299 at year-end December 31, 2017, to $3,611,817 at quarter-end June 30, 2018. Total notes payable increased to $7,954,270 from $564,876 during the same time period. Additionally, accounts payable increased from $262,065 to $454,221 from December 31, 2017, to June 30, 2018. The increases in these accounts are also due to the acquisition and consolidation of and with Mt. Melrose, LLC.

The Company currently believes that our existing balances of cash, cash equivalents, and cash generated from operations and from the sale of our real estate portfolio will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months and the foreseeable future. The Company did acquire long-term debt with the acquisition of Mt. Melrose, LLC; however, the debt is collateralized by the real properties that were also acquired. Our liquidity could be negatively affected if we were to make another acquisition, which may necessitate the need to raise capital through future debt or equity financing. Additional financing may not be available at all or on terms favorable to us.

The aging of accounts receivable as of June 30, 2018 and December 31, 2017 is as shown:

As previously reported in our Current Reports on Form 8-K filed with the SEC on September 19, 2016, and December 30, 2016, respectively, on September 19, 2016, the Company announced that it had entered into a letter of intent agreement with Alluvial Capital Management, LLC (“Alluvial Capital”) to make a seed investment through Willow Oak Asset Management in Alluvial Fund, LP, a private investment partnership that was launched by Alluvial Capital on January 1, 2017 (“Alluvial Fund”). Alluvial Capital acts as the general partner and the Company, through Willow Oak Asset Management, has invested in Alluvial Fund as a limited partner.

The Company agreed to make capital contributions to Alluvial Fund in the aggregate amount of $10 million to be provided over four equal tranches on January 1, 2017, April 1, 2017, July 1, 2017, and October 1, 2017. As of September 30, 2017, the Company satisfied its obligation to provide $10 million in accordance with the contribution schedule. On January 1, 2018, pursuant to an amendment to the Alluvial Side Letter Agreement, dated December 15, 2017, Willow Oak Asset Management, LLC withdrew $3,000,000 from its $10,000,000 investment in Alluvial Fund, LP in order to partially fund the first close of the Mt Melrose Transaction. Under the terms of the amendment to the Alluvial Side Letter Agreement, to the extent that funds withdrawn by Willow Oak are replaced coincidentally by funds from a third party, Willow Oak is no longer subject to the former “lockup” restrictions, which formerly conditioned any withdrawals upon Willow Oak having a $50,000,000 capital account balance. Arquitos Capital Partners, LP, which is managed by our Chief Executive Officer Steven L. Kiel, simultaneously invested $3,000,000 in Alluvial, to replace the amount withdrawn by Willow Oak. The Arquitos investment into Alluvial counts toward Willow Oak’s seed investment total for purposes of Willow Oak’s agreement with Alluvial.

Also through the asset management segment, a lease on office space in New York City commenced on October 1, 2017. This lease extends through September 30, 2020. All related expenses will be allocated to the asset management segment.

Through the home services segment, multiple capital lease obligations were acquired as part of the most recent acquisition that occurred during the quarter ended March 31, 2017. These obligations include leases on various vehicles and equipment that extend through 2020.

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

As set forth in a Form 8-K filed on January 17, 2018, on January 10, 2018, Mt Melrose, LLC, consistent with the terms of the Purchase Agreement, completed a first acquisition from Seller of 44 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the Purchase Agreement. This first tranche of real properties was acquired for total consideration of $3,814,500, which was payable as follows:

As set forth in a Form 8-K filed on July 12, 2018, on June 29, 2018, Mt Melrose, LLC, consistent with the terms of the Purchase Agreement, completed a second acquisition from Seller of 69 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the Purchase Agreement. This second tranche of real properties was acquired for total consideration of $4,619,130, which was payable as follows:

On January 10, 2018, the Mt Melrose purchase entered into a certain Cash Flow Agreement with the Mt Melrose seller (the “Cash Flow Agreement”), pursuant to which, in connection with the parties’ anticipated consummation of all of the real property purchase transactions under the Purchase Agreement described above, the parties have agreed that as of and from and after January 10, 2018, until such time as the parties consummate the relevant closing as to each real property under the Purchase Agreement, Seller will assign to Purchaser all of the income, rents, receivables, and revenues arising from or issuing out of such real property, and Purchaser will assume Seller’s responsibility for payment of certain of the costs and expenses attributable to such real property.

Under the Cash Flow Agreement, Purchaser is responsible for Seller’s monthly payments of interest and/or principal under the outstanding debt secured by the real properties; Seller’s real property taxes with respect to the real properties due and attributable to the periods from and after the effective date; and Seller’s ordinary expenses of operating the real properties, actually incurred, to the extent attributable to de minimis repairs, recurring maintenance services, and/or water, electricity, sewer, gas, telephone, or other similar utility charges. However, the risk of loss and casualty damage with respect to all or any portion of the real properties will continue to be borne by Seller up to and including the actual time of the relevant closing respecting such real property.

Based on the 16 real properties presently outstanding for purchase under the Purchase Agreement, Purchaser presently is obligated under the Cash Flow Agreement for (i) monthly payments of interest and/or principal under the outstanding debt secured by such real properties in the aggregate amount of $10,568 per month, (ii) insurance of $1,073 per month, (iii) estimated annualized obligations for real property taxes with respect to such real properties in the aggregate amount of approximately $7,461 per year, and (iv) ordinary recurring expenses of operating such real properties that are expected to be immaterial in aggregate.

We have no other meaningful long-term debt obligations, purchase obligations, or other long-term liabilities as of June 30, 2018, other than those previously mentioned related to the home services and asset management segment. The only operating lease obligations are agreements for leased office and warehouse space for HVAC Value Fund, LLC, which extend through July 31, 2019, and for leased office space for Willow Oak Asset Management, LLC, which extends through September 30, 2020.

We are not a party to any material off-balance sheet arrangements as of June 30, 2018.

As of June 30, 2018, management, with the participation of our Chief Executive and Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive and Financial Officer, to allow timely decisions regarding required disclosures. Because of inherent limitations, any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objective. Based upon their evaluation, and based upon material weaknesses in our internal control over financial reporting identified as of the date of our most recent evaluation of internal controls over financial reporting, our Chief Executive and Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2018. Immediately following the quarter ended June 30, 2018, management hired an additional accountant at the corporate level in order to add additional layers of internal review and further segregate employee responsibilities. Management is aware of these deficiencies and is working diligently to improve the relevant controls and procedures; provided, however, there can be no assurance that such relevant controls and procedures will be improved or, even if improved, that such improved controls and procedures will be effective.

No change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended June 30, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date of our most recent evaluation of the Company’s internal control over financial reporting.

On April 12, 2016, ENDI filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”), the Company’s former CEO and director and currently an owner of record or beneficially of more than five percent of the Company’s Common Stock, alleging, among other things, that the Former 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 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 CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former CEO, causing the Company to pay certain amounts to the Former CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former CEO, causing the Company to pay rent on its corporate headquarters owned by the Former CEO’s ex-wife in amounts commercially unreasonable and excessive, and to make real estate tax payments thereon for the personal benefit of the Former CEO, converting to the Former CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by the Former CEO, causing the Company to pay personal credit card debt of the Former CEO, causing the Company to significantly overpay the Former CEO’s health and dental insurance for the benefit of the Former CEO, and causing the Company to pay the Former CEO’s personal automobile insurance. The Company is seeking, among other relief available, monetary damages in excess of $350,000. This litigation matter is currently pending in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia).

From time to time, we are subject to legal proceedings related to the conduct of our business. Based on the information available as of the date of this filing, we believe that the ultimate outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

As previously reported in our Current Report on Form 8-K filed with the SEC on February 6, 2017, the Company accepted and closed upon subscriptions from a private placement of shares of common stock of the Company (the “Private Placement”) in the amount of $4,625,000 and issued 740,000 shares of its common stock in connection therewith. Immediately following the Private Placement, as of February 6, 2017, the Company had a total of 2,356,246 issued shares of common stock and 2,262,672 outstanding shares of common stock.

As previously reported in our Current Report on Form 8-K filed with the SEC on January 17, 2018, the Company issued 120,602 shares of the Company’s common stock in connection with the first close of the Mt Melrose acquisition. Following the issuance of the shares of the Company’s common stock on February 14, 2018 for the Mt Melrose first close, the Company had a total of 2,476,848 issued shares of common stock and 2,383,274 outstanding shares of common stock.

As previously reported in our Current Report on Form 8-K filed with the SEC on July 12, 2018, the Company issued 148,158 shares of the Company’s common stock in connection with the second close of the Mt Melrose acquisition. Following the issuance of the shares of the Company’s common stock on June 29, 2018 for the Mt Melrose second close, the Company had a total of 2,625,006 issued shares of common stock and 2,531,432 outstanding shares of common stock.

The issuance of shares of common stock of the Company pursuant to the Private Placement was a private placement to “accredited investors” (as that term is defined under Rule 501 of Regulation D) and was exempt from registration under the Securities Act of 1933 (“Securities Act”), in reliance upon Section 4(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering. The issuance of shares of common stock of the Company pursuant to the first close of the Mt Melrose acquisition was exempt from registration under the Securities Act of 1933 (“Securities Act”), in reliance upon Section 4(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.

As previously reported in its periodic reports beginning with its Form 10-Q for the quarter ended June 30, 2017, as of June 30, 2017 the Company’s “investment securities” (as defined in the Investment Company Act, “Act”) exceeded 40% of the value of its total assets (exclusive of government securities and cash items). The Company is not primarily engaged, and does not presently propose to primarily engage, in the business of investing, reinvesting, or trading in securities. The board of the Company elected to eliminate any uncertainty in regard to the Company’s status under the Act, and confirmed pursuant to Rule 3a-2 adopted under the Act that the Company has a bona fide intent to be engaged primarily, as soon as is reasonably possible and in any event by the end of the one-year period beginning June 30, 2017, in various lines of business not constituting investment securities, including, but not necessarily limited to, internet services, home services and real estate. The Company developed an internal operational plan (the “Plan”). The Plan set forth detailed and specific potential steps to use the Company’s capital and assets to grow certain operational lines of business. The Plan encompassed potential transactions to acquire real estate such as the Mt Melrose acquisition. The Mt Melrose Second Close on June 29, 2018 has resulted in investment securities falling below 40% of our total assets as of June 30, 2018, which is prior to the end of the one-year “safe harbor period” noted in the Act. For further information about the Mt Melrose acquisition, see Note 3 to our Unaudited Condensed Consolidated Financial Statements for the period ended June 30, 2018.

The Board of Directors of Sitestar Corporation (the “Company”), previously approved, on March 29, 2018, a reverse stock split of all of the Company’s Common Stock, pursuant to which every 125 shares of Common Stock of the Company shall be reverse split, reconstituted and converted into one (1) share of Common Stock of the Company (the “Reverse Stock Split”). To effectuate the aforesaid Reverse Stock Split, the Company filed, on May 23, 2018, a Certificate of Change Pursuant to Nevada Revised Statutes (“NRS”) Section 78.209 (the “Certificate of Change”) with the Secretary of State of the State of Nevada, with a specified effective filing date of June 1, 2018. Under Nevada law, because the Reverse Stock Split was approved by the Board of Directors of the Company in accordance with NRS Sections 78.207 and 78.209, no stockholder approval was required.

round up any fraction of a share of Common Stock that otherwise would have resulted from the Reverse Stock Split. The rights and privileges of the holders of shares of Common Stock of the Company were substantially unaffected by the Reverse Stock Split.

CUSIP Number and Trading Symbol. The Company’s CUSIP number changed on the FINRA Effective Date as a result of the Reverse Stock Split. The new CUSIP number is 293706 107. For the 20-business-day period following the FINRA Effective Date the Company’s trading symbol is “SYTED.” After such 20-day period, the Company’s trading symbol will revert to “SYTE.”

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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)

		Page No.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

PART 1
Item 1. Financial Statements		4
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017		4
Unaudited Condensed Consolidated Statements of Income for the Six Months Ended June 30, 2018 and June 30, 2017		5
Unaudited Condensed Statements of Comprehensive Income for the Six Months Ended June 30, 2018 and June 30, 2017		6
Unaudited Consolidated Statements of Stockholders’ Equity as of June 30, 2018 and December 31, 2017		7
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and June 30, 2017		8
Notes to Unaudited Condensed Consolidated Financial Statements		10
Item 2. Management’s Discussions and Analysis of Financial Condition and Results of Operations		26
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		33

PART II
Item 1. Legal Proceedings		34
Item 1A. Risk Factors		34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3. Defaults Upon Senior Securities		35
Item 4. Mine Safety Disclosures		35
Item 5. Other Information		35
Item 6. Exhibits		37

Signatures		38


Land	$797,565
Buildings	$3,190,262
Total Value	$3,987,827


Land	$1,036,423
Buildings	$4,145,693
Total Value	$5,182,116

	Cost Basis		Accrued Fees		Unrealized Gain		Fair Value
June 30, 2018 (unaudited)
Alluvial Fund, LP	$	7,014,793	$	—	$	2,435,356	$	9,450,149
Huckleberry Real Estate Fund II, LLC		750,000		—		—		750,000
Total	$	7,764,793	$	—	$	2,435,356	$	10,200,149

	(Level 1)		(Level 2)		(Level 3)		(Excluded) ^(a)		Total at Fair Value
June 30, 2018 (unaudited)
Huckleberry Real Estate Fund II, LLC	$	—	$	—	$	750,000	$	—	$	750,000
Alluvial Fund, LP		—		—		—		9,450,149		9,450,149
Total investments	$	—	$	—	$	750,000	$	9,450,149	$	10,200,149

	2018			2017
Automobile	$	366,710		$	264,778
Building		580,000			—
Computers and equipment		198,412			162,401
Furniture and fixtures		118,856			25,206
Land		2,547,127			—
		3,811,105			452,385
Less accumulated depreciation		(199,288	)		(121,086	)
Property and equipment, net	$	3,611,817		$	331,299

	2018			2017
Gross accounts receivable	$	457,492		$	399,378
Less allowance for doubtful accounts		(17,588	)		(2,498	)
Accounts receivable, net	$	439,904		$	396,880

	June 30, 2018		December 31, 2017
Current	$	261,276	$	225,114
30 – 60 days		100,296		59,425
60 + days		78,332		112,341
Total	$	439,904	$	396,880

Exhibit		Description
31.1		Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a)
31.2		Certification of Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a)
32		Certification Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Pursuant to Rule 405 of Regulation S-T, the following materials from Enterprise Diversified, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of June 30, 2018 and December 31, 2017; (ii) Consolidated Statements of Income (unaudited) for the six months ended June 30, 2018 and 2017; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the six months ended June 30, 2018 and 2017; (iv) Consolidated Statements of Stockholders’ Equity (unaudited) as of June 30, 2018 and December 31, 2017; (v) Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2018 and 2017; (vi) Notes to Unaudited Consolidated Financial Statements

		ENTERPRISE DIVERSIFIED, INC.

Date: August 10, 2018		/s/ Steven L. Kiel
		Steven L. Kiel
		President, Chief Executive Officer, and Chief Financial Officer
		(Principal Executive Officer and Principal Accounting Officer)