10-Q 1 syte-10q_20180630.htm 2018 2Q 10-Q syte-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the Quarterly Period Ended June 30, 2018

 

ENTERPRISE DIVERSIFIED, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Commission file number 000-27763

 

Nevada

 

88-0397234

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1518 Willow Lawn Drive, Richmond, VA

 

23230

(Address of Principal Executive Offices)

 

(Zip Code)

(434) 382-7366

(Issuer’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Smaller reporting company

 

[X]

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined 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.

 

 

 

 


 

Table of Contents

 

 

 

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

 

2


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

3


 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ENTERPRISE DIVERSIFIED, INC.

And Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

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.

4


 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

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.

 

5


 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

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.

 

 

 

6


 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

 

 

7


 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2018 and 2017

 

 

 

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.


8


 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Six Months Ended June 30, 2018 and 2017

 

 

 

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.

 

 

 

9


 

ENTERPRISE DIVERSIFIED, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Lines of Business

Enterprise Diversified, Inc. (formerly White Dove Systems, Inc., Interfoods Consolidated, Inc., and then Sitestar Corporation) was incorporated in Nevada on December 17, 1992. On June 1, 2018, the Company 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.

Asset Management Operations

Enterprise Diversified, Inc. created a wholly owned asset management subsidiary on October 10, 2016, named Willow Oak Asset Management, LLC (“Willow Oak”). 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.

Real Estate Operations

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, 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,

10


Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

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.

Home Services Operations

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.

Internet Operations

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

Other Operations

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.

EDI Real Estate

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.

 

11


Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

Huckleberry Real Estate Fund

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.

Triad DIP Investors

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.

Corporate

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.

Principles of Consolidation

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.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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.

12


Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

Use of Estimates

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

On an ongoing basis, management evaluates its estimates and judgments, including 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.

Concentration of Credit Risk

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

Investments

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.

Accounts Receivable

The Company grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is charged off 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.

13


Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

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 and Other Intangible Assets

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

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.

Revenue Recognition

Asset Management and Other Investment Revenue

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.

14


Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

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.

Real Estate Revenue

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

Rental revenue from real estate held for investment is recognized when it is 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.

Home Services Revenue

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.

Internet Revenue

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

The Company generates revenue in its internet segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, 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.

15


Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

Income Taxes

Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax 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.

Income Per Share

The basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed 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

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

Recently Issued Accounting Pronouncements

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.

16


Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

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.

NOTE 3. ASSET ACQUISITION OF REAL ESTATE PROPERTIES

Acquisition

On December 10, 2017, the Company entered into a certain Master Real Estate Asset Purchase Agreement (the “Purchase Agreement”) with Mt. Melrose, LLC, a Kentucky limited liability company (“Old Mt. Melrose”), that 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:

 

Land

$797,565

Buildings

$3,190,262

Total Value

$3,987,827

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.

17


Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

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:

 

Land

$1,036,423

Buildings

$4,145,693

Total Value

$5,182,116

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.

Variable Interests

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.

NOTE 4. INVESTMENTS

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.

 

 

 

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

 

18


Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

 

 

 

Cost Basis

 

 

Accrued Fees

 

 

Unrealized Gain

 

 

Fair Value

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alluvial Fund, LP

 

$

7,000,000

 

 

$

2,077

 

 

$

2,256,825

 

 

$

9,258,902

 

Huckleberry Real Estate Fund II, LLC

 

 

750,000