Note 4 - Merger and Business Combination with CrossingBridge Advisors, LLC and Enterprise Diversified, Inc.

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Business Combination Disclosure [Text Block]

NOTE 4. MERGER AND BUSINESS COMBINATION WITH CROSSINGBRIDGE ADVISORS, LLC AND ENTERPRISE DIVERSIFIED, INC.

Overview

As previously announced on December 29, 2021, ENDI entered into the Merger Agreement with Enterprise Diversified, Zelda Merger Sub 1, Inc., a Delaware corporation (“First Merger Sub”), Zelda Merger Sub 2, LLC, a Delaware limited liability company (“Second Merger Sub”), CrossingBridge and Cohanzick. 

Pursuant to the terms of the Merger Agreement, Enterprise Diversified merged with First Merger Sub, a wholly owned subsidiary of the Company, with Enterprise Diversified being the surviving entity, and CrossingBridge merged with Second Merger Sub, a wholly owned subsidiary of the Company, with CrossingBridge being the surviving entity. In connection with the Mergers, each share of common stock of Enterprise Diversified was converted into the right to receive one share of Class A common stock, par value $0.0001 per share, of the Company (the “Class A Common Shares” or the “Class A Common Stock”), and Cohanzick, as the sole member of CrossingBridge, received 2,400,000 Class A Common Shares and 1,800,000 shares of Class B common stock, par value $0.0001 per share, of the Company (the “Class B Common Shares” or the “Class B Common Stock”, and together with the Class A Common Shares, the “Common Shares”), a Class W-1 Warrant to purchase 1,800,000 Class A Common Shares (“Class W-1 Warrant” or “W-1 Warrant”) and a Class W-2 Warrant to purchase 250,000 Class A Common Shares (“Class W-2 Warrant” or “W-2 Warrant”). The Class A Common Shares and Class B Common Shares are identical other than the Class B Common Shares: (i) have the right to designate directors (as described below); (ii) shall not be entitled to participate in earnings, dividends or other distributions with respect to the Class A Common Shares; and (iii) shall not receive any assets of the Company in the event of a liquidation and (iv) shall be subject to redemption in certain circumstances. The Class W-1 Warrant and the Class W-2 Warrant issued to Cohanzick may be exercised in whole or in part at any time prior to the date that is five years after the Closing Date, at an exercise price of $8.00 per Class A Common Share, subject to certain adjustments. Each of the warrants may also be exercised on a “cashless” basis at any time at the election of the holder and if not fully exercised prior to the expiration date of the warrant, shall be automatically exercised on a “cashless” basis. In addition, pursuant to the terms of a Securities Purchase Agreement dated as of August 18, 2022, certain designees of Cohanzick and certain officers, directors and employees of Enterprise Diversified purchased an aggregate of 405,000 Class A Common Shares at a price of $5.369 per share.

Pursuant to the Merger Agreement, Enterprise Diversified agreed to reimburse Cohanzick certain fees and expenses, which amount to $470,329. These fees were reimbursed during the year ended December 31, 2022 and were reported on the consolidated statements of operations as transaction expenses for the year ended December 31, 2022. On the Closing Date, the Company also entered into a registration rights agreement, (as amended, the “Registration Rights Agreement” or “RRA”), with certain stockholders that are deemed to be affiliates of ENDI immediately following the closing of the Mergers, pursuant to which such stockholders’ Class A Common Shares, including the Class A Common Shares underlying any warrants issued in connection with the Mergers, will be registered for resale on a registration statement to be filed by the Company with the SEC under the Securities Act of 1933, as amended.

The holders of the Class B Common Stock, voting together as a single class, have the right to designate a number of directors of the Company’s board of directors (rounded up to the nearest whole number) equal to the percentage of the Company’s common shares beneficially owned by the holders of Class B Common Stock and their affiliates at the time of such designation, provided however, that for purposes of this designation right, the holders of the Company’s Class B Common Stock, voting together as a single class, shall have the right to designate not more than a majority of the members of the Company’s board of directors then in office, and, provided further that so long as holders of Class B Common Stock and their affiliates beneficially own at least 5.0% of the total outstanding common shares of the Company, holders of Class B Common Stock, voting together as a single class, shall have the right to designate at least one director. Any director elected to the Company’s board of directors pursuant to the above provisions of the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) will be referred to as a “Class B Director” and may only be removed by the holders of a majority of the Class B Common Stock.

On the Closing Date, the Company also entered into a stockholder agreement (the “Stockholder Agreement”) with Cohanzick pursuant to which from and after the date that the holders of Class B Common Shares are no longer entitled to elect at least one director to our board of directors pursuant to the Certificate of Incorporation as described above, the following provisions apply: so long as David Sherman, Cohanzick and any of their successors or assigns (collectively, the “Principal Stockholder”) and their Affiliates (as defined in the Stockholder Agreement) beneficially own at least 5% of the Company’s outstanding shares, the Principal Stockholder has the right to designate a number of the Company’s directors of the Company’s board of directors (rounded up to the nearest whole number) equal to the percentage of the Company’s common shares beneficially owned by the Principal Stockholder and its Affiliates at the time of such designation, provided however that for purposes of this designation right, the Principal Stockholder and its Affiliates shall have the right to designate not more than a majority of the members of the Company’s board of directors then in office and, provided further, that so long as the Principal Stockholder and its Affiliates beneficially owns at least 5% of the total outstanding common shares of the Company, its shall have the right to designate at least one director.

On the Closing Date, the Company also entered into a voting agreement (the “Voting Agreement”) with Cohanzick and Steven Kiel and Arquitos Capital Offshore Master, Ltd., in their capacity as the voting party (the “Voting Party”), pursuant to which the Voting Party shall vote all of its securities of the Company entitled to vote in the election of the Company’s directors that such Voting Party or its affiliates own (collectively, the “Voting Shares”) to elect or maintain in office the directors designated by Cohanzick (the “Cohanzick Member Designees”). The Voting Agreement will terminate automatically on the earlier of the date that (i) the holders of the Company’s Class B Common Stock or Cohanzick’s right to designate the Cohanzick Member Designees is terminated or expires for any reason, (ii) Steven Kiel is no longer a member of the Company’s board of directors and (iii) the Voting Party and its affiliates cease to hold any Voting Shares. The Voting Agreement will also terminate automatically with respect to any Voting Shares no longer held by the Voting Party or its affiliates.

The Business Combination is accounted for as a reverse acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with CrossingBridge representing the accounting acquiror. Because the Merger qualifies as a reverse acquisition, and given that CrossingBridge was a private company at the time of the Merger and therefore its value was not readily determinable, the fair value of the Merger consideration was deemed to be equal to the fair value of Enterprise Diversified at the Closing Date. As part of the purchase price allocation, the Company engaged an independent third-party valuation consultant. In determining the total consideration for the ASC 805 analysis, the valuation consultant utilized the volume weighted average price of Enterprise Diversified’s stock from the Merger announcement date, December 30, 2021, through the Closing Date. In doing so, the valuation consultant considered that the Company’s stock was very thinly traded and the public float was only approximately 18.0% of total shares. The consultant also noted the book value of equity was approximately $15.1 million, and composed primarily of short-term assets and liabilities, while the market capitalization as of the Closing Date was approximately $14.5 million based on the closing price of $5.49. As a result of these considerations, the valuation consultant determined that the purchase consideration was estimated to be $18,637,576.

Purchase Price Allocation

The following table summarizes the fair values of assets acquired and liabilities assumed as of the Closing Date:

Cash	$	15,873,598
Accounts receivable, net		35,027
Note receivable		50,000
Prepaid expenses		51,933
Other current assets		119,785
Fixed assets		3,431
Goodwill		737,869
Intangible assets		1,255,000
Deferred tax assets, net		1,249,556
Accounts payable		(20,506	)
Accrued expenses		(513,922	)
Deferred revenue		(203,547	)
Other current liabilities		(648	)
Total consideration	$	18,637,576

The excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill, which is primarily attributed to the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized including expected synergies and the assembled workforce in place. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions and may be subject to change as additional information is received. The primary areas where provisional amounts have been used relate to the fair values of intangible assets acquired, certain tangible assets and liabilities acquired, note receivable, deferred income tax assets and liabilities, and residual goodwill.

During the Post-Merger period, the Company recorded three measurement period adjustments to the preliminary recorded values assigned to certain Company assets acquired as of the Closing Date. The fair value assigned to the Company’s note receivable was reduced from $300,000 to $50,000, the fair value assigned to the Company’s domain names was reduced from $235,000 to $175,000, and the fair value assigned to the Company’s net deferred tax assets was increased from $0 to $1,249,556. The net changes in fair value, totaling an increase of $939,556, proportionally decreased the balance of residual goodwill from $1,677,425 to $737,869 as of December 31, 2022. These adjustments are the product of expanded valuation analyses performed by management and are incorporated within the values noted in the table above. The Company expects to finalize the fair values of assets acquired and liabilities assumed as soon as practicable, but not later than one year from the Closing Date.

While the total amount of residual goodwill remains preliminary, the Company has assigned the residual goodwill based on an internal analysis that compared the anticipated future economic benefit to be generated by each operating segment with the Post-Merger carrying value of the respective operating segment. By way of this analysis, management has allocated the balance of the residual goodwill to the CrossingBridge operations segment as of December 31, 2022.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the Closing Date.

Intangible Assets	Estimated Fair Value		Estimated Useful Life (in Years)
Customer relationships - Sitestar.net	$	490,000		14
Customer relationships - Willow Oak	$	510,000		14
Trade Name - Sitestar.net	$	40,000		7
Trade Name - Willow Oak	$	40,000		7
Internet Domains - Sitestar.net	$	175,000		Indefinite

The estimated fair values of (i) the customer relationships were determined using the multi-period excess earnings method, (ii) the trade names were determined using the relief from royalty income approach, and (iii) the internet domain names were estimated using a market approach. The approaches used to estimate the fair values use significant unobservable inputs including revenue and cash flow forecasts, customer attrition rates, and appropriate discount rates.

Unaudited Pro Forma Information

The unaudited pro forma financial information presented below summarizes the combined results of operations for the Company as though the Merger was completed on January 1, 2021.

The unaudited pro forma financial information for all periods presented includes, among other items, amortization charges from acquired intangible assets, retention and other compensation expenses accounted for separately from the purchase accounting, and the related tax effects, but excludes the impacts of any expected operational synergies. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the Merger actually been completed on January 1, 2021.

The unaudited pro forma financial information for the three-month period ended March 31, 2022 combines the historical results of the Company for those periods, the historical results of Enterprise Diversified for the periods prior to the Closing Date, and the effects of the pro forma adjustments discussed above. The unaudited pro forma financial information is as follows:

	Three Months Ended March 31, 2022
Revenue		$	1,964,099
Net income			1,362,088
Net income per share		$	0.25