UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from _______ to _______
Commission
File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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. ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | ☐ |
| ☒ | Smaller reporting company | ||
| 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 in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
The number of shares outstanding of the issuer’s Class A Common Stock, $0.0001 par value, as of November 10, 2023 is and the number of shares outstanding of the issuer’s Class B Common Stock, $0.0001 par value, as of November 10, 2023 is .
Table of Contents
| -2- |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA AND TRADEMARKS
This Quarterly Report on Form 10-Q contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Words such as “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan,” “project,” “will,” “may,” and similar expressions and variations thereof, including the negative of these terms, identify such forward-looking statements which speak only as of the dates on which they were made. The forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations expressed or implied by these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties that may cause actual results, events or performance to differ materially from the plans, intentions and expectations expressed or implied by these forward-looking statements, including, but not limited to the following factors:
| ● | changes in economic and market conditions; | |
| ● | loss of a significant amount of our assets under management; | |
| ● | changes in the competitive landscape for investment managers, including as a result of the introduction of new technologies or regulatory changes; | |
| ● | loss of key employees and the ability to retain and attract key personnel; | |
| ● | lack of acceptance of our products and services; | |
| ● | our ability to innovate and develop new products and services; | |
| ● | maintenance of strategic alliances; | |
| ● | loss of one or more significant partners or customers; | |
| ● | occurrence of a material cybersecurity incident affecting our information systems, technology or data; | |
| ● | evolving government regulations applicable to our business and the potential for unfavorable changes to, or failure by us to comply with, applicable laws, rules and regulatory requirements; | |
| ● | difficulties in achieving cost savings, operating efficiencies and revenue opportunities as a result of the Mergers (as defined below); | |
| ● | failure to maintain effective internal controls; | |
| ● | adequacy of our risk management framework; | |
| ● | our and our licensors’ ability to obtain, establish, maintain, protect and enforce intellectual property and proprietary protection for our products and technologies and to avoid claims of infringement, misappropriation or other violation of third-party intellectual property and proprietary rights; | |
| ● | effects of war, terrorism, public health emergencies and other catastrophic events; | |
| ● | volatility of the trading price of our common stock; and | |
| ● | other factors discussed in our filings with the Securities and Exchange Commission (the “SEC”). |
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 30, 2023 (“Annual Report”), or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the SEC could materially and adversely affect our business, prospects, financial condition and results of operations. Accordingly, you should not place undue reliance on any forward-looking statement. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Therefore, you should not rely on the forward-looking statements contained in this Quarterly Report on Form 10-Q as representing our views as of any date after the date of this report. We qualify all of our forward-looking statements by these cautionary statements.
This Quarterly Report on Form 10-Q may include market data and industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles, and surveys. Industry surveys, publications, consultant surveys, and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data and forecasts from third-party sources.
All brand names or trademarks appearing in this report are the property of their respective owners. Solely for convenience, trademarks and trade names used in this report may be referred to without the symbols “®” and “™”, but such references should not be construed as any indication that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
INTRODUCTORY NOTE
ENDI Corp. (“ENDI”) was incorporated in Delaware on December 23, 2021. On August 11, 2022 (the “Closing Date”), the Company (as defined herein) completed its mergers (the “Mergers”) pursuant to that certain Agreement and Plan of Merger dated December 29, 2021 (as amended, the “Merger Agreement”) by and among ENDI, Enterprise Diversified, Inc. (“Enterprise Diversified”), Zelda Merger Sub 1, Inc., Zelda Merger Sub 2, LLC, CrossingBridge Advisors, LLC (“CrossingBridge” or “CBA”) and Cohanzick Management, LLC (“Cohanzick”). As a result of the Mergers, Enterprise Diversified and CrossingBridge merged with wholly owned subsidiaries of ENDI and now operate as wholly owned subsidiaries of the Company. The Company is the successor registrant to Enterprise Diversified’s SEC registration effective as of the Closing Date of the Mergers.
The reporting periods covered by this Quarterly Report on Form 10-Q for the period ended September 30, 2023 reflect the standalone business of CrossingBridge prior to the Closing Date of the Mergers and the consolidated business of the Company, including CrossingBridge and Enterprise Diversified, as of and after the Closing Date.
On the Closing Date, Enterprise Diversified and CrossingBridge became wholly owned subsidiaries of ENDI as a result of the Mergers (collectively with the other transactions described in the Merger Agreement, the “Business Combination”). The Business Combination is accounted for as a reverse acquisition using the acquisition method of accounting in accordance with Accounting Standards Codification 805, Business Combinations, with CrossingBridge representing the accounting acquiror. Following Financial Accounting Standards Board guidance related to the accounting for reverse acquisitions, CrossingBridge’s historical carve-out financial statements replaced the Company’s (as the successor registrant to Enterprise Diversified) historical financial statements. Accordingly, the capital structure, and per share amounts presented in CrossingBridge’s historical carve-out financial statements for the periods prior to the Closing Date were recast to reflect the capital activity in accordance with the Merger Agreement.
The CrossingBridge carve-out for activity prior to the Closing Date is part of the Cohanzick financial statements. Prior to the consummation of the Mergers, CBA was a 100%, wholly owned subsidiary of Cohanzick. The historical financial carve-out statements of CBA reflect the assets, liabilities, revenue, and expenses directly attributable to CBA, as well as allocations deemed reasonable by management, to present the financial position, statements of operations, statements of changes in stockholders’ equity, and statements of cash flows of CBA on a stand-alone basis and do not necessarily reflect the financial position, statements of operations, statements of changes in stockholders’ equity, and statements of cash flows of CBA in the future or what they would have been had CBA been a separate, stand-alone entity during the periods presented that include activity prior to the Closing Date.
Unless the context otherwise requires, and when used in this Quarterly Report on Form 10-Q, the “Company,” “ENDI,” “ENDI Corp.,” “we,” “our,” or “us” refers to ENDI Corp. individually, or as the context requires, collectively with its subsidiaries as of and after the Closing Date, and to CrossingBridge for the periods up to the Closing Date, due to the determination that CrossingBridge represents the accounting acquiror.
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PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
ENDI CORP.
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
| September
30, 2023 (unaudited) | December 31, 2022 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investments in securities, at fair value | ||||||||
| Accounts receivable, net | ||||||||
| Prepaids | ||||||||
| Note receivable | ||||||||
| Due from affiliate | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Long-term Assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Investments in private companies, at cost | ||||||||
| Investment in preferred shares and warrants, at cost | ||||||||
| Investment in limited partnership, at net asset value | ||||||||
| Deferred tax assets, net | ||||||||
| Total long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Earn-out liability, current | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term Liabilities | ||||||||
| Earn-out liability, net of current portion | ||||||||
| Class W-1 Warrant and redeemable Class B Common Stock | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ par value, shares authorized; issued and outstanding | ||||||||
| Class A common stock, $ par value, shares authorized; shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| -4- |
ENDI CORP.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | ||||||||||||||||
| Revenues - CrossingBridge | $ | $ | $ | $ | ||||||||||||
| Revenues - Willow Oak | ||||||||||||||||
| Revenues - internet | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of Revenues | ||||||||||||||||
| Cost of revenues - internet | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Gross profit - CrossingBridge | ||||||||||||||||
| Gross profit - Willow Oak | ||||||||||||||||
| Gross profit - internet | ||||||||||||||||
| Total gross profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Compensation and benefits | ||||||||||||||||
| Stock compensation expenses | ||||||||||||||||
| Amortization and depreciation | ||||||||||||||||
| Computer expenses | ||||||||||||||||
| Fund distribution, custody, and administrative expenses | ||||||||||||||||
| Insurance | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Travel and entertainment | ||||||||||||||||
| Transaction expenses | ||||||||||||||||
| Other operating expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income from operations before income taxes | ( | ) | ||||||||||||||
| Other Income (Expenses) | ||||||||||||||||
| W-1 Warrant mark-to-market | ( | ) | ( | ) | ||||||||||||
| Note receivable revaluation | ||||||||||||||||
| Interest and dividend income | ||||||||||||||||
| Net investment gains (losses) | ( | ) | ( | ) | ||||||||||||
| Other income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Total other income | ||||||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net income per share, basic and diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average number of shares, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| -5- |
ENDI CORP.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Common Stock | Amount | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | $ | ||||||||||||||||
| Net income | - | |||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||
| Balance March 31, 2023 | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||
| Balance June 30, 2023 | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||
| Balance September 30, 2023 | $ | $ | $ | $ | ||||||||||||||||
| Common Stock | Amount | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance March 31, 2022 | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance June 30, 2022 | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Distributions | - | ( | ) | ( | ) | |||||||||||||||
| Stock issued pursuant to Merger Agreement | ||||||||||||||||||||
| Additional stock purchased pursuant to Merger Agreement | ||||||||||||||||||||
| Stock compensation expense for W-2 Warrant and additional stock purchases | - | |||||||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| -6- |
ENDI CORP.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2023 and 2022
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash flows from operating activities: | ||||||||
| Note receivable revaluation | ( | ) | ||||||
| Other income from W-1 Warrant mark-to-market | ( | ) | ||||||
| Stock based compensation | ||||||||
| Amortization and depreciation | ||||||||
| Deferred tax assets, net | ( | ) | ||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaids | ( | ) | ( | ) | ||||
| Other current assets | ||||||||
| Increase (decrease) in: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued compensation | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Other current liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Increase in investments | ( | ) | ( | ) | ||||
| Investment in private company | ( | ) | ( | ) | ||||
| Purchase of preferred stock and warrants | ( | ) | ||||||
| Collection of note receivable | ||||||||
| Purchase of RiverPark Strategic Income Fund | ( | ) | ||||||
| Investment in limited partnership | ( | ) | ||||||
| Cash from Business Combination | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Decrease (increase) in due from affiliate | ( | ) | ||||||
| Earn-outs paid | ( | ) | ||||||
| Distributions paid | ( | ) | ||||||
| Issuance of Class A Common Stock | ||||||||
| Decrease in due to affiliate | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash and cash equivalents at beginning of the period - January 1 | ||||||||
| Cash and cash equivalents at end of the period - September 30 | $ | $ | ||||||
| Non-cash and other supplemental information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| -7- |
ENDI CORP.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Organization and Lines of Business
ENDI Corp. (“ENDI”) was incorporated in Delaware on December 23, 2021. On August 11, 2022 (the “Closing Date”), the Company (as defined herein) completed its mergers (the “Mergers”) pursuant to that certain Agreement and Plan of Merger dated December 29, 2021 (as amended, the “Merger Agreement”) by and among ENDI, Enterprise Diversified, Inc. (“Enterprise Diversified”), Zelda Merger Sub 1, Inc., Zelda Merger Sub 2, LLC, CrossingBridge Advisors, LLC (“CrossingBridge” or “CBA”) and Cohanzick Management, LLC (“Cohanzick”). As a result of the Mergers, Enterprise Diversified and CrossingBridge merged with wholly owned subsidiaries of ENDI and now operate as wholly owned subsidiaries of the Company. The Company is the successor registrant to Enterprise Diversified’s Securities and Exchange Commission (“SEC”) registration effective as of the Closing Date of the Mergers.
The reporting periods covered by this Quarterly Report on Form 10-Q for the period ended September 30, 2023 reflect the standalone business of CrossingBridge prior to the Closing Date of the Mergers and the consolidated business of the Company, including CrossingBridge and Enterprise Diversified, as of and after the Closing Date.
On the Closing Date, Enterprise Diversified and CrossingBridge became wholly owned subsidiaries of ENDI as a result of the Mergers (collectively with the other transactions described in the Merger Agreement, the “Business Combination”). The Business Combination is accounted for as a reverse acquisition using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, with CrossingBridge representing the accounting acquiror.
Prior to the Closing Date, the Company operated through a single reportable segment, CrossingBridge operations. Beginning on the Closing Date through the year ended December 31, 2022, the post-Merger period, and continuing through the current period ended September 30, 2023, the Company operated through four reportable segments: CrossingBridge operations, Willow Oak operations, internet operations, and other operations. The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
Unless the context otherwise requires, and when used herein, the “Company,” “ENDI,” “ENDI Corp.,” “we,” “our,” or “us” refers to ENDI Corp. individually, or as the context requires, collectively with its subsidiaries as of and after the Closing Date, and to CrossingBridge for the periods up to the Closing Date, due to the determination that CrossingBridge represents the accounting acquiror.
CrossingBridge Operations
CBA was formed as a limited liability company on December 23, 2016, under the laws of the State of Delaware. CBA derives its revenue and net income from investment advisory services. CBA is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”), and it provides investment advisory services to investment companies (including mutual funds and exchange-traded funds (“ETFs”)) registered under the Investment Company Act of 1940, as amended (“1940 Act”), both as an adviser and as a sub-adviser.
As
of September 30, 2023, CBA serves as an adviser to its five proprietary products and sub-adviser to two additional products. As of September
30, 2023, the assets under management (“AUM”) for CBA, including advised and sub-advised funds, were in excess of $
Willow Oak Operations
Beginning on August 12, 2022, the start of the post-Merger period (“Post-Merger”), the Company operates its Willow Oak operations business through its wholly owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”) and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”).
| -8- |
Willow Oak is an asset management platform focused on partnering with independent asset managers throughout various phases of their firm’s lifecycle to provide comprehensive operational services that support the growth of their businesses. Through minority ownership stakes and bespoke service-based contracts, Willow Oak offers affiliated managers strategic consulting, operational support, and growth opportunities. Services to date include consulting, fund launching, investor relations and marketing, accounting and bookkeeping, compliance program monitoring, and business development support. The Company intends to actively expand its Willow Oak platform and services to independent managers across the investing community.
Internet Operations
Beginning Post-Merger, the Company operates its internet operations segment through Sitestar.net, its wholly owned subsidiary. Sitestar.net is an internet service provider that offers consumer and business-grade internet access, e-mail hosting and storage, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada. In addition, the Company owns a portfolio of domain names.
Other Operations
Beginning Post-Merger, the Company operates its other operations segment which includes nonrecurring or one-time strategic funding or similar activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the primary activities comprising other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying condensed consolidated financial statements.
Enterprise Diversified, Inc.
On
July 14, 2023, through Enterprise Diversified, Inc., the Company invested $
On
June 12, 2023, through Enterprise Diversified, Inc., the Company invested $
eBuild Ventures, LLC
Pursuant to the Merger Agreement, the Company was transferred interests of eBuild Ventures, LLC (“eBuild”) on the Closing Date. eBuild acquires, or provides growth equity to, consumer product businesses in the digital or brick and mortar marketplaces.
Through eBuild, the Company also operates SPACinformer.com (“SPACinformer”), an electronic newsletter service focusing primarily on the aggregation and distribution of publicly available SPAC data, news, and analytics. During the period ended September 30, 2023, SPACinformer did not contribute material revenue or expenses to eBuild under the other operations segment.
On
September 8, 2022, through eBuild, the Company made a capital contribution of $
On
March 16, 2023, through eBuild, the Company made a capital contribution of $
Financing Arrangement Regarding Triad Guaranty, Inc.
In
August 2017, Enterprise Diversified entered into an agreement with several independent third parties to provide debtor-in-possession
financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. Triad Guaranty, Inc. exited bankruptcy
in April 2018, and Enterprise Diversified was subsequently issued an amended and restated promissory note. As of December 31, 2022, Enterprise
Diversified reported $
On
January 9, 2023, Enterprise Diversified was issued a second amended and restated promissory note by Triad DIP Investors, LLC. Amended
terms to the promissory note include an increase in the interest rate from
As of September 30, 2023, the Company attributed no value to its shares of Triad Guaranty, Inc. common stock held due to the stocks’ general lack of marketability. See Note 6 for more information.
| -9- |
Corporate Operations
Corporate
operations include any revenue or expenses derived from the Company’s corporate office operations, as well as expenses related
to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company. Also included under corporate
operations is investment activity earned through the reinvestment of corporate cash. Corporate investments are typically short-term,
highly liquid investments, including vehicles such as mutual funds, ETFs, commercial paper, and corporate and municipal bonds. During
the year ended December 31, 2022, through Enterprise Diversified under the other operations segment, the Company invested a total of
$
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and those entities in which it otherwise has a controlling financial interest as of and for the period ended September 30, 2023, including: CrossingBridge Advisors, LLC, Bonhoeffer Capital Management, LLC, eBuild Ventures, LLC, Enterprise Diversified, Inc., Sitestar.net, Inc., Willow Oak Asset Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC, Willow Oak Asset Management Fund Management Services, LLC, and Willow Oak Capital Management, LLC.
All intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the SEC for interim financial information. Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any other interim period or for the entire fiscal year. The accompanying unaudited financial information should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 30, 2023, from which the condensed consolidated balance sheet as of December 31, 2022 has been derived.
Following Financial Accounting Standards Board guidance related to the accounting for reverse acquisitions, CrossingBridge’s historical carve-out financial statements replaced the Company’s (as the successor registrant to Enterprise Diversified) historical financial statements. Accordingly, the capital structure, and per share amounts presented in CrossingBridge’s historical carve-out financial statements for the periods prior to the Closing Date were recast to reflect the capital activity in accordance with the Merger Agreement.
The CrossingBridge Advisors, LLC carve-out for activity prior to the Closing Date is part of the Cohanzick financial statements. Prior to the Closing Date of the Mergers, CBA was a wholly owned subsidiary of Cohanzick. The historical financial carve-out statements of CBA reflect the assets, liabilities, revenue, and expenses directly attributable to CBA, as well as allocations deemed reasonable by management, to present the financial position, statements of operations, statements of changes in stockholders’ equity, and statements of cash flows of CBA on a stand-alone basis and do not necessarily reflect the financial position, statements of operations, statements of changes in stockholders’ equity, and statements of cash flows of CBA in the future or what they would have been had CBA been a separate, stand-alone entity during the periods presented that include activity prior to the Closing Date.
| -10- |
Use of Estimates
In accordance with GAAP, the preparation of these condensed consolidated 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, among other items, those related to fair value of investments, revenue recognition, accrued expenses, financing operations, fair value of goodwill, fixed asset lives and impairment, lease right-of-use assets and impairment, deferred tax assets, liabilities and valuation allowance, other assets, the present value of lease liabilities, 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 unaudited condensed consolidated financial statements.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash, cash equivalents, accounts receivable, and notes receivable. The Company places its cash with high-quality financial institutions and, at times, exceeds 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.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid instruments purchased with a maturity and/or liquidation option of three months or less.
Investments
The Company holds various investments through its other operations segment. Investments are typically short-term, highly liquid investments, including vehicles such as: mutual funds, ETFs, commercial paper, and corporate and municipal bonds. Occasionally, the Company also invests in comparably less liquid, opportunistic investments. Investments held at fair value are remeasured to fair value on a recurring basis. Certain assets held through the other operations segment do not have a readily determinable value as these investments are either not publicly traded, do not have published sales records, or do not routinely make current financial information available. Assets that do not have a readily determinable value are remeasured when additional valuation inputs become observable. See Note 6 for more information.
Accounts Receivable
The Company’s CrossingBridge operations segment records receivable amounts for management fee shares earned on a monthly basis. Management fee shares are calculated and collected on a monthly basis. The Company historically has had no collection issues with management fee shares and the overall possibility for non-collection is extremely low. For these reasons, management has determined that it is not necessary to record an allowance against these receivables.
The Company’s Willow Oak operations segment records receivable amounts for management fee shares and fund management services revenue earned on a monthly basis. Management fee shares and fund management services fees are calculated and collected on either a monthly or quarterly basis as dictated by the respective partnership agreement. The Company historically has had no collection issues with management fee shares and fund management receivables and the overall possibility for non-collection is extremely low. For these reasons, management has determined that it is not necessary to record an allowance against these receivables.
The Company’s Willow Oak operations segment also records receivable amounts for performance fee shares earned on an annual basis. Performance fee shares are dependent upon exceeding specified relative or absolute investment return thresholds, which vary by affiliate relationship, and typically include annual measurement periods. The Company historically has had no collection issues with performance fee shares and the overall possibility for non-collection is extremely low. For these reasons, management has determined that it is not necessary to record an allowance against these receivables.
| -11- |
The Company grants credit in the form of unsecured accounts receivable to its customers through its internet operations segment. The current expected credit loss methodology is based on management’s assessment of the net amount expected to be collected from each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are written off from the allowance for credit losses when an account or invoice is individually determined to be uncollectible. The internet operations segment attempts to reduce the risk of non-collection 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.
As
of September 30, 2023 and December 31, 2022, allowances offsetting gross accounts receivable on the accompanying condensed consolidated
balance sheets totaled $
Notes Receivable
The Company does not routinely acquire notes receivable in the ordinary course of business, but when a business opportunity arises, a subsidiary may acquire a note if it appears to be favorable to the Company. Notes receivable are recorded at their principal amount and interest is accrued quarterly based on the applicable interest rate. The Company makes an assessment of the ultimate collectability of each note receivable on an annual basis based upon the financial condition of the borrower and adjusts the carrying value of the note receivable as deemed appropriate.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. Depreciation is computed using the straight-line method based on the estimated useful lives for each of the following asset classifications.
| Furniture and fixtures (in years) | ||||
| Equipment (in years) |
The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Property and equipment to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell.
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 tests its goodwill annually as of December 31, or more often if events and circumstances
indicate that those assets might not be recoverable. As of September 30, 2023 and December 31, 2022, the Company reported $
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.
Intangible assets (other than goodwill) consist of customer relationships, trade names, investment management agreements, a non-compete, and domain names held amongst the CrossingBridge, Willow Oak and internet operations segments. When management determines that material intangible assets are acquired in conjunction with the purchase of a business or asset, the Company determines the fair values of the identifiable intangible assets by taking into account internal and external appraisals. Intangible assets determined to have definite lives are amortized over their estimated useful lives. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated future undiscounted cash flows of the related intangible asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. As of the periods ended September 30, 2023 and December 31, 2022, the Company reported the following intangible assets, net of amortization and excluding goodwill, under the respective operating segment.
| -12- |
| September 30, 2023 | December 31, 2022 | |||||||
| CrossingBridge | $ | $ | ||||||
| Willow Oak | ||||||||
| Internet | ||||||||
| Intangible assets, net | $ | $ | ||||||
As
of September 30, 2023, the Company owned
As a result of the Company’s impairment testing of goodwill and other intangible assets on December 31, 2022, the Company determined that there was no impairment adjustment necessary.
Earn-Out Liability
The Company may enter into contingent payment arrangements in connection with the Company’s business combinations or asset purchases. In contingent payment arrangements, the Company agrees to pay transaction consideration to the seller based on future performance. The Company estimates the value of future payments of these potential future obligations at the time the business combination or asset purchase is consummated. The liabilities related to contingent payment arrangements are recorded under the earn-out liability line on the condensed consolidated balance sheets.
Contingent payment obligations related to asset purchases, if estimable and probable of payment, are initially recorded at their estimated value. When the contingency is ultimately resolved, any additional contingent consideration issued or issuable over the amount that was initially recognized as a liability is considered an additional cost of the acquisition. These additional costs would then be allocated to the qualifying assets on a relative fair value basis. See Note 5 for more information on the Company’s asset acquisition of the RiverPark Strategic Income Fund.
W-1 Warrant and Redeemable Class B Common Stock
Pursuant to the Merger Agreement, the Company issued Class B Common Shares (as defined in Note 4) that are mandatorily redeemable upon exercise of the W-1 Warrant (as defined in Note 4), which provides the holder the ability to purchase Class A Common Shares (as defined in Note 4) at certain terms. Management has determined that the W-1 Warrant represents an embedded equity-linked feature within the Class B Common Shares, and therefore is valued in conjunction with the Class B Common Shares. The value of the W-1 Warrant and Class B Common Shares is determined using a Black-Scholes pricing model and is classified as a long-term liability on the condensed consolidated balance sheets. The value is remeasured at each reporting date with the change in value flowing through the unaudited condensed consolidated statements of operations for the relevant period under the “mark-to-market” line item. See Note 4 for additional terms of the W-1 Warrant and Class B Common Shares.
Accrued Compensation
Accrued compensation represents performance-based bonuses that have not yet been paid. Bonuses are subjective and are based on numerous factors including, but not limited to, individual performance, the underlying funds’ performance, and profitability of the firm, as well as the consideration of future outlook. Accrued bonus amounts can fluctuate due to a future perceived change in any one or more of these factors. Additionally, differences between historical, current, and future personnel allocations could significantly impact the comparability of bonus expenses period over period.
Other Accrued Expenses
Other accrued expenses represent incurred but not-yet-paid expenses from payroll accruals, professional fees, and other accrued taxes.
The board of directors of the Company adopted the ENDI Corp. 2022 Omnibus Equity Incentive Plan, dated December 19, 2022 (the “2022 Plan”), which was subsequently approved by the Company’s stockholders at the 2023 annual meeting of stockholders held on May 22, 2023 (“2023 Annual Meeting”) and became effective on that date. On February 28, 2023, subject to the approval of the 2022 Plan by our stockholders, the Company granted (i) restricted stock units, and (ii) restricted Class A Common Stock. If the 2022 Plan had not been approved by the Company’s stockholders at the 2023 Annual Meeting, then the awards granted on February 28, 2023 would have been forfeited. Vested restricted stock unit awards will be settled by the Company in the form of cash or the issuance and delivery of shares of Company Class A Common Stock in the year following the year the awards have become vested, but no later than March 15 of the following year. The Company has elected to ratably recognize the stock compensation expense associated with its outstanding equity awards over each award’s respective vesting period. Equity awards are valued on their respective grant date at fair market value, the then current trading value of the Company’s Class A Common Stock, and are not subject to future revaluation. On February 28, 2023, the closing stock price of the Company’s Class A Common Stock was $.
| -13- |
The table below further details the awards granted on February 28, 2023, and represents the number of outstanding awards and the relevant income statement impact as of and during the three- and nine-month periods ended September 30, 2023. There were no comparable equity awards or income statement impacts as of and during the three- and nine-month periods ended September 30, 2022.
| Income Statement Impact for the | ||||||||||||||
| Award Type | Number of Awards Outstanding | Vesting Schedule | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | ||||||||||
| Restricted stock units | $ | $ | ||||||||||||
| Restricted stock units | ||||||||||||||
| Restricted stock | ||||||||||||||
| Total outstanding awards | $ | $ | ||||||||||||
Leases
The Company records right-of-use assets and lease liabilities arising from both financing and operating leases that contain terms extending longer than one year. The Company does not recognize right-of-use assets or lease liabilities for short-term leases (those with original terms of 12 months or less). In making its determinations, the Company combines lease and non-lease elements of its leases.
Concentration of Revenue
CBA
is the adviser to five registered investment companies under the CrossingBridge Family of Funds. The advised funds are the CrossingBridge
Low Duration High Yield Fund, CrossingBridge Ultra-Short Duration Fund, RiverPark Strategic Income Fund, CrossingBridge Responsible Credit
Fund, and the CrossingBridge Pre-Merger SPAC ETF. The combined AUM for these advised funds was approximately $
CBA fee revenues earned from advised funds, sub-advised funds, and services agreement for the three- and nine-month periods ended September 30, 2023 and 2022 included in the accompanying unaudited condensed consolidated statements of operations are detailed below.
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| CrossingBridge Operations Revenue | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Advised fund fee revenue | $ | $ | $ | $ | ||||||||||||
| Sub-advised fund fee revenue | ||||||||||||||||
| Service fee revenue | ||||||||||||||||
| Total fee revenue | $ | $ | $ | $ | ||||||||||||
Total
revenue from the CrossingBridge operations was approximately
Revenue Recognition
CrossingBridge Operations Revenue
Management fee shares earned through the CrossingBridge operations segment are recorded on a monthly basis and are included in revenue on the accompanying unaudited condensed consolidated statements of operations. The Company has performed an assessment of its revenue contracts under the CrossingBridge operations segment and has not identified any contract assets or liabilities.
Willow Oak Operations Revenue
Management fee shares and fund management services fees earned through the Willow Oak operations segment are recorded on a monthly basis and are included in revenue on the accompanying unaudited condensed consolidated statements of operations. Performance fee shares are dependent upon exceeding specified relative or absolute investment return thresholds, which vary by affiliate relationship, and typically include annual measurement periods. Performance fee shares are recognized only when it is determined that there is no longer potential for significant reversal, such as when a fund’s performance exceeds a contractual threshold at the end of a specified measurement period. Consequently, a portion of the performance fee shares recognized may be partially or wholly related to services performed in prior periods.
| -14- |
Fund management services revenue earned through the Willow Oak operations segment is also generally recorded on a monthly basis, which is in line with the timing of when services are provided. Occasionally, fund management services revenue is earned through bespoke consulting contracts performed over the course of multiple periods. In this instance, Willow Oak will only record and collect revenue for services received through the end of each monthly or quarterly period, as appropriate.
The Company has performed an assessment of its revenue contracts under the Willow Oak operations segment and has not identified any contract assets or liabilities.
A summary of revenue earned through Willow Oak operations during the three- and nine-month periods ended September 30, 2023 and included in the accompanying unaudited condensed consolidated statements of operations is detailed below:
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| Willow Oak Operations Revenue | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Management fee revenue | $ | $ | $ | $ | ||||||||||||
| Fund management services revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Internet Operations Revenue
The Company generates revenue through its internet operations segment from consumer and business-grade internet access, e-mail hosting and storage, wholesale managed modem services, e-mail and web hosting, third-party software as a reseller, 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. Customer contracts through the internet operations segment can be structured as monthly or annual contracts. Under annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under 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 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. Contract liabilities (deferred revenue) are recognized in the amount of collections received in advance of services to be performed. No contract assets are recognized or incurred.
Deferred Revenue
Deferred
revenue represents collections from customers in advance of internet services to be performed. Revenue is recognized in the period service
is provided. Total deferred revenue recorded under the internet operations segment as of September 30, 2023 and December 31, 2022 was
$
Income Taxes
Income taxes for ENDI Corp. are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the condensed 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 basis 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. ENDI Corp. filed its first tax return for the year ended December 31, 2021, which is open to potential examination by the Internal Revenue Service for three years.
| -15- |
As
of September 30, 2023, the Company reported $
In as much as CBA had a single member prior to the Closing Date, it had historically been treated as a disregarded entity for income tax purposes. Consequently, Federal and state income taxes have not been provided for periods ended prior to the Closing Date, as its single member was taxed directly on CBA’s earnings. CBA activity subsequent to the Closing Date was consolidated within ENDI Corp.’s tax return that was filed for the year ended December 31, 2022 and was included in the income tax provision for the year ended December 31, 2022.
During
the three- and nine-month periods ended September 30, 2023, the Company reported $
Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Included in the basic income (loss) per share for the three- and nine-month periods ended September 30, 2023, in addition to the number of shares of common stock outstanding, are shares underlying common stock equity incentives awarded pursuant to the Company’s 2022 Plan which vested immediately in full upon approval by the Company’s stockholders of the 2022 Plan at the 2023 Annual Meeting. These shares represent equity awards in the form of restricted stock units.
In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potentially dilutive common shares is anti-dilutive. In periods of net income, diluted earnings per share is computed using the more dilutive of the “two-class method” or the “treasury method.” Dilutive earnings per share under the “two-class method” is calculated by dividing net income available to common stockholders as adjusted for the participating securities, by the weighted-average number of shares outstanding plus the dilutive impact of all other potentially dilutive common shares, consisting primarily of common shares underlying the Class W-1 and W-2 Warrants (as defined in Note 4) issued pursuant to the Merger Agreement. Dilutive earnings per share under the “treasury method” is calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the dilutive impact of all potentially dilutive common shares, consisting primarily of common shares underlying the Class W-1 and W-2 Warrants issued pursuant to the Merger Agreement.
The number of potentially dilutive shares for the period ended September 30, 2023 and 2022, consisting of the Class W-1 and W-2 Warrants issued pursuant to the Merger Agreement, was . of the potentially dilutive securities had a dilutive impact during the three- and nine-month periods ended September 30, 2023.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate should now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. In April 2019, the FASB further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments. In May 2019, the FASB issued further guidance to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible financial instruments. In November 2019, the FASB issued further guidance on expected recoveries for purchased financial assets with credit deterioration, and transition refiled for troubled debt restructurings, disclosures related to accrued interest receivables, and financial assets secured by collateral maintenance provisions. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. The Company currently expects that the adoption of this guidance may change the way it assesses the collectability of its receivables and recoverability of other financial instruments. The Company adopted this guidance as of January 1, 2023. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
| -16- |
In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)”. This update simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in the ASU also simplify the guidance in ASC 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. This new guidance is required to be adopted by public entities in years beginning after December 15, 2023, with early adoption permitted. The Company adopted this guidance as of January 1, 2022. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.
NOTE 3. RELATED PARTY TRANSACTIONS
CrossingBridge Advisors, LLC
RiverPark Strategic Income Fund Asset Acquisition
On November 18, 2022, CBA entered into a Purchase and Assignment and Assumption Agreement, as amended on December 28, 2022 (as amended, the “RiverPark Agreement”), with RiverPark Advisors, LLC and Cohanzick, the Company’s majority stockholder and historical sole member of CBA that is majority owned by the Company’s CEO and director, David Sherman, pursuant to which RiverPark Advisors, LLC intended to sell to CBA certain assets and CBA intended to assume certain liabilities, including certain rights and responsibilities under the RiverPark Advisory Agreement (as defined herein) and the RiverPark Expense Limitation Agreement (as defined herein) relating to the provision of investment advisory services for the mutual fund known as RiverPark Strategic Income Fund (the “RiverPark Fund”), subject to certain terms and conditions set forth in the agreement.
Pursuant
to the RiverPark Agreement, no consideration was paid upon closing; however,
In connection with the RiverPark Agreement, Cohanzick and CBA entered into an agreement which prohibits Cohanzick from competing with a substantially similar strategic income strategy as the RiverPark Fund as an adviser or sub-adviser to a fund registered under the 1940 Act or any Undertakings for the Collective Investment in Transferable Securities (“UCITS”) products.
During
the three- and nine-month periods ended September 30, 2023, payments made by CBA to Cohanzick in accordance with the RiverPark Agreement
totaled $
Historical Shared Expenses Prior to Consummation of the Mergers
The Company, through CrossingBridge, and Cohanzick, shared certain staff, office facilities, and administrative services. The parties involved had agreed to allocate these expenses based on the AUM of each party for activity occurring prior to the consummation of the Mergers. These allocated expenses are reported under the CrossingBridge operations segment in the accompanying unaudited condensed consolidated statements of operations in the categories for which the utilization of services relates. A summary of the expenses allocated from Cohanzick to CBA for the three- and nine-month periods ended September 30, 2022 is noted below. There is no comparable activity for the three- and nine-month periods ended September 30, 2023, because Post-Merger there were no CBA expenses allocated in this manner.
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| Cohanzick Management Expense Allocation | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Employee compensation and benefit expenses allocated | $ | $ | $ | $ | ||||||||||||
| Owner compensation and benefit expenses allocated | ||||||||||||||||
| Other allocated expenses | ||||||||||||||||
| Total allocated expenses | $ | $ | $ | $ | ||||||||||||
There
was no due to affiliate balance between CBA and Cohanzick reported on the Company’s condensed consolidated balance sheets as of
the periods ended September 30, 2023 and December 31, 2022. Any due to affiliate balance is due 13 months after the calendar year-end
upon 60 days’ written notice. If no notice is given, the date payment is due would extend for another 12 months with
| -17- |
Services Agreement with Cohanzick
In
connection with the closing of the Mergers, CrossingBridge entered into a Services Agreement (the “Services Agreement”) with
Cohanzick pursuant to which CrossingBridge will make available to Cohanzick certain of its employees to provide investment advisory,
portfolio management and other services to Cohanzick and, through Cohanzick, to Cohanzick’s clients. Any such individuals will
be subject to the oversight and control of Cohanzick, and any services so provided to Cohanzick or a client of Cohanzick will be provided
by such CBA employees in the capacity of a supervised person of Cohanzick. Cohanzick additionally may use the systems of CBA or its affiliates
for its daily operations; provided that appropriate policies, procedures, and other safeguards are established to assure that (a) the
books and records of each of CBA and Cohanzick are created and maintained in a manner so as to be clearly separate and distinct from
those of the other person and the clients of such person, and (b) confidential client and/or other material non-public information relating
to the investment advisory activities of CBA or Cohanzick, as applicable, or other proprietary information regarding either such person
or its clients, is safeguarded and maintained for the benefit of such person. As consideration for its services, Cohanzick will pay CBA
a quarterly fee equal to
During
the three- and nine-month periods ended September 30, 2023, CBA reported $
During
the three- and nine-month periods ended September 30, 2023, CBA earned $
License Agreement between CBA and Cohanzick
Pursuant to the Merger Agreement, the Company, through CBA, and Cohanzick entered into a license agreement. The license agreement provides CBA with the right to use and occupy certain office space originally leased by Cohanzick from a third-party landlord pursuant to a lease agreement dated November 23, 2018. The initial term of the license agreement runs through the first anniversary of the commencement date of the license agreement and will automatically renew for subsequent one-year terms unless otherwise earlier terminated pursuant to the terms thereof. Pursuant to the license agreement, CBA shall pay Cohanzick a fee equal to Licensee’s Share (as defined herein) of the following charges: a monthly base rental and increases in certain taxes and operating expenses. “Licensee’s Share” means for a calendar month that occurs in whole or in part during the term, the fraction, expressed as a percentage, the numerator of which is the number of CBA employees that occupied the licensed premises as of the first business day of such calendar month, and the denominator of which is the number of Cohanzick and CBA employees that occupied the premises as of the first business day of such calendar month, as reasonably determined by Cohanzick.
During
the three- and nine-month periods ended September 30, 2023, CBA paid $
Enterprise Diversified, Inc.
Due from Affiliate
Pursuant
to the Merger Agreement, Enterprise Diversified agreed to reimburse Cohanzick for certain fees and expenses, comprising primarily of
legal and accounting fees incurred as part of the share registration process. These fees were initially recorded and reimbursed for a
total of $
| -18- |
NOTE 4. MERGER AND BUSINESS COMBINATION WITH CROSSINGBRIDGE ADVISORS, LLC AND ENTERPRISE DIVERSIFIED, INC.
Overview
As discussed in Note 1, 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 $ 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 Class A Common Shares and shares of Class B common stock, par value $ 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
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
Pursuant
to the Merger Agreement, Enterprise Diversified agreed to reimburse Cohanzick certain fees and expenses, which amount to $
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
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 the Company’s
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
| -19- |
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
Purchase Price Allocation
The following table summarizes the fair values of assets acquired and liabilities assumed as of the Closing Date:
| Cash | $ | |||
| Accounts receivable, net | ||||
| Note receivable | ||||
| Prepaid expenses | ||||
| Other current assets | ||||
| Fixed assets | ||||
| Goodwill | ||||
| Intangible assets | ||||
| Deferred tax assets, net | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Other current liabilities | ( | ) | ||
| Total consideration | $ |
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 were based on management’s estimates and assumptions and were subject to change as additional information was received. The primary areas where provisional amounts were used related 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 $
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 allocated the balance of the residual goodwill to the CrossingBridge operations segment as of December 31, 2022.
| -20- |
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 | $ | |||||||
| Customer relationships - Willow Oak | $ | |||||||
| Trade Name - Sitestar.net | $ | |||||||
| Trade Name - Willow Oak | $ | |||||||
| Internet Domains - Sitestar.net | $ | |||||||
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- and nine-month periods ended September 30, 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 September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||
| Revenue | $ | $ | ||||||
| Net income (loss) | ( | ) | ||||||
| Net income (loss) per share | $ | ( | ) | $ | ||||
NOTE 5. RIVERPARK STRATEGIC INCOME FUND ASSET ACQUISITION
As discussed in Note 3, on November 18, 2022, CBA, entered into the RiverPark Agreement with RiverPark Advisors, LLC and Cohanzick pursuant to which RiverPark Advisors, LLC intended to sell to CBA certain assets and CBA intended to assume certain liabilities, including certain rights and responsibilities under the RiverPark Advisory Agreement (as defined herein) and the RiverPark Expense Limitation Agreement (as defined herein) relating to the provision of investment advisory services for the mutual fund known as the RiverPark Fund, subject to certain terms and conditions set forth in the agreement.
On May 10, 2023, the board of trustees of the RiverPark Fund and holders of a majority of the outstanding voting securities of RiverPark Fund approved the RiverPark Agreement and the transactions contemplated thereby. On May 12, 2023 (the “Closing Date”), as contemplated by the RiverPark Agreement, CBA assumed (i) the advisory services role under that certain Amended and Restated Investment Advisory Agreement (the “RiverPark Advisory Agreement”) dated February 14, 2012 by and between RiverPark and RiverPark Funds Trust (“RiverPark Trust”) pursuant to which RiverPark provided investment advisory services to the RiverPark Fund and (ii) the Operating Expense Limitation Agreement (“RiverPark Expense Limitation Agreement”) dated as of July 1, 2019 by and between RiverPark and RiverPark Trust. Furthermore, pursuant to the RiverPark Agreement, on the Closing Date, the parties to that certain Sub-Advisory Agreement dated as of August 1, 2012 by and among RiverPark, Cohanzick and the RiverPark Trust, on behalf of the RiverPark Fund, have terminated such agreement and made CrossingBridge a party to the RiverPark Expense Limitation Agreement. Furthermore, in connection with the RiverPark Agreement, Cohanzick and CBA entered into an agreement which prohibits Cohanzick from competing with a substantially similar strategic income strategy as the RiverPark Fund as an adviser or sub-adviser to a fund registered under 1940 Act or any UCITS products.
| -21- |
Pursuant
to the RiverPark Agreement, no consideration was paid upon closing; however,
The RiverPark Fund transaction is classified as an asset acquisition, and the costs of the acquisition were allocated to the assets acquired on the basis of their relative fair values. Assets acquired primarily consisted of customer relationships, investment contracts, and a noncompete agreement.
By
applying the guidance in ASC 323-10-25-2A and ASC 323-10-25-2B to an asset acquisition, as the fair value of the group of assets exceeds
the initial consideration, the consideration is recorded as the lesser of the maximum amount of contingent consideration or the excess
of the fair value of the net assets acquired over the initial consideration paid. As the initial consideration of the transaction was
$
The acquisition-date fair value of the consideration transferred and the allocation of cost to the assets acquired and liabilities assumed at the acquisition date are as follows:
| Acquisition-date fair value of variable cash payments | $ | |||
| Transaction costs | ||||
| Total purchase price | $ | |||
| Allocation of cost to assets acquired: | ||||
| Customer relationships | $ | |||
| Investment management agreements | ||||
| Noncompete agreement | ||||
| Total cost of assets acquired | $ |
NOTE 6. FAIR VALUE OF ASSETS AND LIABILITIES
GAAP 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 and 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:
| ● | Level I - inputs are quoted prices in active markets as of the measurement date for identical assets and liabilities that the Company has the ability to access. This category includes exchange-traded mutual funds and equity securities; | |
| ● | Level II - inputs are inputs other than quoted prices included in Level I that are observable for the asset or liability, either directly or indirectly. Level II inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates or yield curves, that are observable at commonly quoted intervals; this category includes mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, commercial paper, U.S. agency and municipal debt securities, U.S. Treasury securities, and derivative contracts; and | |
| ● | Level III - inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The measurements are highly subjective. |
The availability of observable inputs can vary and is affected by a variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is the greatest for assets or liabilities categorized in Level III.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
| -22- |
The following table presents information about the Company’s assets and liabilities measured at fair value as of the periods ended September 30, 2023 and December 31, 2022.
| Level I | Level II | Level III | (a) | |||||||||||||
| September 30, 2023 | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Excluded (a) | ||||||||||||
| Investments in securities, at fair value (cost $ | $ | $ | $ | $ | ||||||||||||
| W-1 Warrant and Class B Common Stock liability, at fair value | ||||||||||||||||
| Investment in limited partnership, at net asset value | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Level I | Level II | Level III | (a) | |||||||||||||
| December 31, 2022 | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Excluded (a) | ||||||||||||
| Investments
in securities, at fair value (cost $ | $ | $ | $ | $ | ||||||||||||
| W-1 Warrant and Class B Common Stock liability, at fair value | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| (a) |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As
discussed previously, through Enterprise Diversified, the Company holds Level I investments, among which include shares of CrossingBridge
Ultra-Short Duration Fund, CrossingBridge Low Duration High Yield Fund, RiverPark Strategic Income Fund, and CrossingBridge Responsible
Credit Fund, which are SEC registered mutual funds for which CBA is the adviser, as well as shares of CrossingBridge Pre-Merger SPAC
ETF, which is an ETF also advised by CBA. As of September 30, 2023, Level I investments held by the Company in investment products advised
by CBA totaled $
The
Company’s investment in the commodity-based limited partnership is measured using NAV as the practical expedient and is exempt
from the fair value hierarchy. 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. The Company’s investment in this limited partnership is remeasured to fair value
on a recurring basis and realized and unrealized gains and losses are recognized as investment income in the period of adjustment.
As of the period ended September 30, 2023, the Company carried its investment in the commodity-based limited partnership at $
As discussed previously, pursuant to the Merger Agreement, the Company issued Class B Common Shares that are mandatorily redeemable upon exercise of the W-1 Warrant. Management has determined that the W-1 Warrant represents an embedded equity-linked feature within the Class B Common Shares, and therefore is valued in conjunction with the Class B Common Shares as a long-term liability on the condensed consolidated balance sheets. The value of the W-1 Warrant and Class B Common Shares is determined using a Black-Scholes pricing model, resulting in a Level III classification. The pricing model considers a variety of inputs at each measurement date including, but not exclusively, the Company’s closing stock price, the Company’s estimated equity volatility over the remaining warrant term, the warrant exercise price, the Company’s annual rate of dividends, the bond equivalent yield, and remaining term of the W-1 Warrant. Additionally, a discount is applied based on an analysis of the underlying marketability of the Company’s Class A Common Stock with respect to Rule 144 restrictions. This value is remeasured at each reporting date with the change in value flowing through the unaudited condensed consolidated statements of operations for the relevant period. The table below represents the relevant inputs used in the value determination as of September 30, 2023 and change in value from the Closing Date to September 30, 2023.
| -23- |
| W-1 Warrant and Class B Common Stock | ||||
| Inputs below are as of September 30, 2023 | ||||
| ENDI Corp. closing stock price | $ | |||
| Warrant exercise price | $ | |||
| Estimated equity volatility over remaining term | % | |||
| ENDI Corp. annual rate of dividends | % | |||
| Bond equivalent yield | % | |||
| Remaining term of W-1 Warrant | ||||
| Discount for lack of marketability | % | |||
| August 11, 2022 | $ | |||
| Less: Unrealized gains reported in other income | ( | ) | ||
| December 31, 2022 | ||||
| Plus: Unrealized losses reported in other income | ||||
| March 31, 2023 | ||||
| Less: Unrealized gains reported in other income | ( | ) | ||
| June 30, 2023 | ||||
| Plus: Unrealized losses reported in other income | ||||
| September 30, 2023 | $ | |||
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company analyzes its intangible assets — goodwill, customer relationships, trade names, investment management agreements, non-compete agreement, and domain names — on an annual basis or more often if events or changes in circumstances indicate potential impairments. No impairments were recorded during the three- and nine-month periods ended September 30, 2023. No comparable analysis was performed during the three- and nine-month periods ended September 30, 2022 as the Company did not hold any intangible assets prior to the Closing Date.
As
discussed previously, the Company entered into a contingent consideration arrangement pursuant to the RiverPark Agreement, which is included
on the condensed consolidated balance sheets on September 30, 2023 for $
As
discussed previously, Enterprise Diversified held a promissory note receivable from Triad DIP Investors, LLC and aggregate shares
of Triad Guaranty, Inc. common stock. During the three-month period ended March 31, 2023, Enterprise Diversified was issued a second
amended and restated promissory note by Triad DIP Investors, LLC and was further notified that Triad had successfully secured a new financing
resource that would permit a full repayment of Enterprise Diversified’s promissory note. On April 27, 2023, the Company received
repayment of the full historical principal balance and accrued interest related to the amended and restated promissory note receivable,
which was greater than the Company’s historical recorded carrying amount of $
NOTE 7. INTANGIBLE ASSETS
The Company’s intangible assets as of September 30, 2023 and December 31, 2022 are included below.
| September 30, 2023 | December 31, 2022 | |||||||
| Customer relationships | $ | $ | ||||||
| Domain names | ||||||||
| Trade names | ||||||||
| Investment management agreements | ||||||||
| Noncompete | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
Amortization
expenses on intangible assets during the three- and nine-month periods ended September 30, 2023 totalled $
| -24- |
NOTE 8. SEGMENT INFORMATION
Prior
to the Closing Date, including during the period ended September 30, 2022, the Company operated through a single reportable segment,
CrossingBridge operations. Beginning on the Closing Date through the year ended December 31, 2022, the Post-Merger period, and continuing
through the current period ended September 30, 2023, the Company operated through
The CrossingBridge operations segment includes revenue and expenses derived from investment management and advisory and sub-advisory services.
Beginning on August 12, 2022, the Willow Oak operations segment includes revenues and expenses derived from various joint ventures, service offerings, and initiatives undertaken in the asset management industry.
Beginning
on August 12, 2022, the internet operations segment includes revenue and expenses related to the Company’s sale of internet access,
e-mail and hosting, storage, and other ancillary services. The Company’s internet segment includes revenue generated by operations
in both the United States and Canada. Included in unaudited condensed consolidated statements of operations for the three- and nine-month
periods ended September 30, 2023, the internet operations segment generated revenue of $
Beginning on August 12, 2022, the other operations segment includes revenue and expenses from nonrecurring or one-time strategic funding or similar activity and 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.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three- and nine-month periods ended September 30, 2023 and 2022.
Three-Month Period Ended September 30, 2023 | CrossingBridge | Willow Oak | Internet | Other | Consolidated | |||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Other income (expenses) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | |||||||||||||||
Three-Month Period Ended September 30, 2022 | CrossingBridge | Willow Oak | Internet | Other | Consolidated | |||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Other income (expenses) | ( | ) | ( | ) | ||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | |||||||||||||||
Nine-Month Period Ended September 30, 2023 | CrossingBridge | Willow Oak | Internet | Other | Consolidated | |||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Other income (expenses) | ( | ) | ||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | |||||||||||||||
Nine-Month Period Ended September 30, 2022 | CrossingBridge | Willow Oak | Internet | Other | Consolidated | |||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Other income (expenses) | ( | ) | ( | ) | ||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | |||||||||||||||
| -25- |
NOTE 9. COMMITMENTS AND CONTINGENCIES
Leases
As of September 30, 2023 and December 31, 2022, the Company had no long-term leases that required right-of-use assets or lease liabilities to be recognized.
In
accordance with ongoing accounting policy elections, the Company does not recognize right-of-use assets or lease liabilities for short-term
or month-to-month leases. Total rental expenses attributed to short-term leases, including its membership agreement through ENDI Corp.
and its license agreement through CBA, for the three- and nine-month periods ended September 30, 2023 and 2022 were $
There are no other operating lease costs for the three- and nine-month periods ended September 30, 2023 and 2022.
Other Commitments
Registration Rights Agreement
As discussed in Note 4, on the Closing Date, the Company entered into the 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. On May 1, 2023, the Company entered into a second amendment to the RRA pursuant to which the parties extended the deadline by which the Company shall prepare and file or cause to be prepared and filed with the SEC a registration statement to on or before August 1, 2023, and on August 1, 2023, the Company entered into a third amendment to the RRA pursuant to which the parties extended the deadline by which the Company shall prepare and file or cause to be prepared and filed with the SEC a registration statement to on or before March 31, 2024.
Litigation & Legal Proceedings
Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.
On April 12, 2016, Enterprise Diversified filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”), Enterprise Diversified’s former CEO and director (prior to December 14, 2015) and an owner of record of Enterprise Diversified’s common stock, alleging, among other things, that the Former CEO engaged in, and caused Enterprise Diversified to engage in, to its detriment, a series of unauthorized and wrongful related party transactions, including: causing Enterprise Diversified to borrow certain amounts from the Former CEO’s mother unnecessarily and at a commercially unreasonable rate of interest; converting certain funds of Enterprise Diversified for personal rent payments to the Former CEO; commingling in land trusts certain real properties owned by Enterprise Diversified and real properties owned by the Former CEO; causing Enterprise Diversified 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 Enterprise Diversified to pay rent on its corporate headquarters owned by the Former CEO’s ex-wife in amounts commercially unreasonable and excessive, and making 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 Enterprise Diversified; causing Enterprise Diversified to pay real property and personal property taxes on numerous properties owned personally by the Former CEO; causing Enterprise Diversified to pay personal credit card debt of the Former CEO; causing Enterprise Diversified to significantly overpay the Former CEO’s health and dental insurance for the benefit of the Former CEO; and causing Enterprise Diversified to pay the Former CEO’s personal automobile insurance.
The
lawsuit was tried to a jury in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia) in September 2023, and
the jury returned a unanimous verdict in favor of Enterprise Diversified and against Frank Erhartic, Jr. On September 25, 2023, the Court
entered a civil judgment in favor of Enterprise Diversified in the amount of $
NOTE 10. STOCKHOLDERS’ EQUITY
Classes of Shares
As of September 30, 2023, the Company’s Certificate of Incorporation authorizes the issuance of an aggregate of shares of capital stock of the Company consisting of authorized shares of Class A Common Stock, par value of $ per share, authorized shares of Class B Common Stock, par value of $ per share, and shares of preferred stock, par value of $ per share (“Preferred Stock”).
| -26- |
Class A Common Stock
As of September 30, 2023, shares of the Company’s Class A Common Stock were issued and outstanding.
Holders
of the Company’s Class A Common Stock are entitled to
Subject to applicable law and the rights, if any, of the holders of any outstanding series of Preferred Stock or any other outstanding class or series of stock of the Company, having a preference over or the right to participate with the Class A Common Stock with respect to the payment of dividends and other distributions in cash, property or shares of stock of the Company, holders of the Company’s Class A Common Stock are entitled to receive such dividends and other distributions in cash, property or shares of ENDI Corp. stock when, as and if declared thereon by the Company’s board of directors from assets or funds legally available therefor. Upon a liquidation, dissolution or winding up of the Company’s affairs, after payment or provision for payment of the debts and other liabilities of the Company and of the preferential and other amounts, if any, to which the holders of ENDI Corp. Preferred Stock shall be entitled, the holders of all outstanding shares of ENDI Corp.’s Class A Common Stock will be entitled to receive, on a pro rata basis, the remaining assets of the Company available for distribution ratably in proportion to the number of shares held by each such stockholder.
Class B Common Stock
As of September 30, 2023, shares of the Company’s Class B Common Stock were issued and outstanding.
Holders
of the Company’s Class B Common Stock are entitled to
Preferred Stock
As of September 30, 2023, the Company had issued shares of Preferred Stock.
The voting, dividend, distribution, and any other rights of holders of any series of the Company’s Preferred Stock will be as described in the applicable Certificate of Designation designating such series of Preferred Stock.
NOTE 11. SUBSEQUENT EVENTS
On October 23, 2023, CrossingBridge Advisors launched an UCITS fund, the CrossingBridge Low Duration High Income Fund (the “CB UCITS Fund”), as a global expansion of CrossingBridge’s product offering. The CB UCITS Fund was launched as a sub-Fund within the Universal Investment Ireland UCITS Platform ICAV, in order to leverage their operational and administrative infrastructure. The CB UCITS Fund was designed to be managed substantially similar to the CrossingBridge Low Duration High Yield Fund, however, there will be differences between the two funds as a result of specific UCITS regulations.
Management has evaluated all subsequent events from September 30, 2023, through November 13, 2023, the date the condensed consolidated financial statements were issued. Management concluded that no additional subsequent events have occurred that would require recognition or disclosure in the condensed consolidated financial statements.
| -27- |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This section is intended to provide readers of our financial statements with information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis of financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related footnotes as of and for the three- and nine-month periods ended September 30, 2023 appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in Item 1A of Part II of this report, Item 1A of Part I of our Annual Report, and other reports we file with the SEC from time to time. 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 restructuring results in less comparable financial performance. As a result of the Business Combination that was consummated on August 11, 2022, and the determination that the Business Combination would be accounted for as a reverse acquisition, historic activity prior to the Closing Date for the three- and nine-month periods ended September 30, 2022 represents only the financial activity of CrossingBridge Advisors, LLC. Activity as of and after the Closing Date presented for and as of the three- and nine-month periods ended September 30, 2023 and 2022 and as of the year ended December 31, 2022, includes CrossingBridge financial activity, which has been consolidated with the activity of Enterprise Diversified, Inc. and its subsidiaries as of August 11, 2022 through the period ended September 30, 2023. All amounts are in U.S. dollars, unless otherwise noted.
Overview
We operate through four reportable segments.
CrossingBridge Operations
This segment includes revenue and expenses derived from our investment advisory and sub-advisory services offered through various SEC registered mutual funds and an exchange-traded fund (“ETF”) through CrossingBridge Advisors, LLC. As of September 30, 2023, CBA serves as an adviser to its five proprietary products and sub-adviser to two additional products. As of September 30, 2023, the assets under management (“AUM”) for CBA, including advised and sub-advised funds, were in excess of $1.7 billion.
The investment strategies for CBA include: ultra-short duration, low duration high yield, strategic income, responsible credit, and special purpose acquisition companies (“SPACs”). These strategies primarily employ investment grade and high yield corporate debt, as well as credit opportunities in event-driven securities, post reorganization investments, and stressed and distressed debt. Details of CBA’s products are included below:
| Product Name | Ticker Symbol | Inception Date | Advisory Role | AUM as of September 30, 2023 (in dollars) | ||||||
| CrossingBridge Low Duration High Yield Fund | CBLDX | January 31, 2018 | Adviser | 605,455,646 | ||||||
| CrossingBridge Ultra-Short Duration Fund | CBUDX | June 30, 2021 | Adviser | 94,759,832 | ||||||
| RiverPark Strategic Income Fund | RSIIX | September 30, 2013* | Adviser | 371,219,107 | ||||||
| CrossingBridge Responsible Credit Fund | CBRDX | June 30, 2021 | Adviser | 27,251,906 | ||||||
| CrossingBridge Pre-Merger SPAC ETF | SPC | September 20, 2021 | Adviser | 68,981,711 | ||||||
| Destinations Low Duration Fixed Income Fund | DLDFX | March 20, 2017 | Sub-adviser | 246,166,799 | ||||||
| Destinations Global Fixed Income Opportunities Fund | DGFFX | March 20, 2017 | Sub-adviser | 358,352,195 | ||||||
*CrossingBridge became the adviser to the RiverPark Strategic Income Fund as of the close of business on May 12, 2023 pursuant to that certain Purchase and Assignment and Assumption Agreement dated as of November 18, 2022 and subsequently amended on December 28, 2022, by and between CBA, RiverPark Advisors, LLC and Cohanzick.
During the third quarter of 2023, CBA’s AUM increased by approximately 8.8% to approximately $1.773 billion, and CBA’s AUM increased by approximately $296 million, or approximately 20.1%, from September 30, 2022 compared to September 30, 2023. The overall net increase in AUM was primarily the result of CBA becoming the adviser to the RiverPark Strategic Income Fund, which added approximately $371 million in AUM as of September 30, 2023 compared to September 30, 2022. Excluding the RiverPark Strategic Income Fund, net outflows period over period are primarily attributable to a reduction in assets in the Destinations Low Duration Fixed Income sub-advised account. Every proprietary CrossingBridge advised fund, as well as the sub-advised account for the Destinations Global Fixed Income Opportunities Fund, increased their AUM period over period. The AUM of CBA’s proprietary advised funds, having higher management fee rates than CBA’s sub-advised funds, grew by approximately 67.6% compared to the AUM of advised funds as of September 30, 2022. CBA’s advised fund AUM represented approximately 65.9% of total AUM as of September 30, 2023 in comparison to 47.3% of total AUM as of September 30, 2022.
All five of CBA’s proprietary advised products generated positive returns for investors during the nine-month period ended September 30, 2023 and during the year ended December 31, 2022. During the three and nine-month periods ended September 30, 2023, CBA believes its contributions to the performance of Destinations Low Duration Fixed Income Fund and the Destinations Global Fixed Income Opportunities Fund were accretive as CBA continues to be a steward of a significant allocation within these funds.
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CBA has seen interest in its funds continuing to grow in the registered investment adviser, bank/trust company, and family office segments of the market and believes that widening credit spreads may also help drive momentum for additional AUM growth. CBA expects demand for the CrossingBridge Low Duration High Yield Fund to continue to increase as the fund has recently attained a strong five-year track record and a five-out-of-five star rating from a leading provider of independent financial research, as of January 31, 2023. In addition, the RiverPark Strategic Income Fund celebrated its 10-year anniversary on September 30, 2023, which established a 10-year track record for the fund. CBA believes this will also help drive continued demand.
For the two newer mutual funds (CrossingBridge Ultra-Short Duration Fund and the CrossingBridge Responsible Credit Fund), although they do not have established track records as individual funds, CBA believes that the market environment paired with its long-standing reputation in the fixed income space will be helpful in continuing to raise assets for those funds. As for the CrossingBridge Pre-Merger SPAC ETF, which was launched on September 20, 2021, we believe the fund remains a viable ultra-short, fixed income alternative. The size of the opportunity set, however, has significantly decreased from peak levels as a substantial amount of SPACs have either completed deals or liquidated, paired with a slowdown in new issuance/capital market activity over the past year. Looking forward, we believe the size of the SPAC market may continue to fluctuate and will be dependent upon a number of factors, including the number and size of mergers and/or liquidations as well as new issues. CBA will continue to closely monitor developments in the market.
On November 18, 2022, CBA entered into a Purchase and Assignment and Assumption Agreement, as amended on December 28, 2022 with RiverPark Advisors, LLC and Cohanzick (as amended, the “RiverPark Agreement” pursuant to which RiverPark Advisors, LLC intended to sell to CBA certain assets and CBA intended to assume certain liabilities, including certain rights and responsibilities under the RiverPark Advisory Agreement (as defined in Note 5 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q) and the RiverPark Expense Limitation Agreement (as defined in Note 5 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q) relating to the provision of investment advisory services for the mutual fund known as RiverPark Strategic Income Fund (“RSIIX”), subject to certain terms and conditions set forth in the agreement. The transactions contemplated by such agreement closed on May 12, 2023. See Note 5 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information. Since the RiverPark Agreement was announced on November 28, 2022, which proposed CBA assuming the role as the adviser to the RiverPark Strategic Income Fund, RSIIX has grown by approximately $183 million, or approximately 98%, with ending AUM as of September 30, 2023 totaling approximately $371 million. RSIIX attained a five-out-of-five star rating from a leading provider of independent financial research for both a three- and five-year period.
On October 23, 2023, CrossingBridge Advisors launched an Undertaking for the Collective Investment in Transferable Securities (“UCITS”) fund, the CrossingBridge Low Duration High Income Fund (the “CB UCITS Fund”), as a global expansion of CrossingBridge’s product offering. The CB UCITS Fund was launched as a sub-Fund within the Universal Investment Ireland UCITS Platform ICAV, in order to leverage their operational and administrative infrastructure. The CB UCITS Fund was designed to be managed substantially similar to the CrossingBridge Low Duration High Yield Fund, however, there will be differences between the two funds as a result of specific UCITS regulations. CrossingBridge believes that there is reasonable demand for the CB UCITS Fund throughout Europe, the Middle East, and South America.
Willow Oak Operations
This segment includes revenue and expenses derived from our various joint ventures, service offerings, and initiatives undertaken in the asset management industry through Willow Oak Asset Management, LLC and its subsidiaries. During the three-month period ended September 30, 2023, Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak”) entered into two new fund management services agreements with independently managed investment firms to provide ongoing consulting, investor relations and marketing, accounting and bookkeeping, compliance program monitoring, and business development support services.
Internet Operations
This segment includes revenue and expenses related to our sale of internet access, e-mail and hosting, storage, and other ancillary services through Sitestar.net, Inc.
Other Operations
This segment includes any revenue and expenses from our nonrecurring or one-time strategic funding or similar activity and other corporate operations that is not considered to be one of our primary lines of business, and any expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business. Our primary focus is on generating cash flow so that we have the flexibility to pursue opportunities as they present themselves. We intend to only invest cash in a segment if we believe that the return on the 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 the foregoing segments nor our historical operations.
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Enterprise Diversified, Inc.
On July 14, 2023, through Enterprise Diversified, Inc., we invested $500,000 in a private placement transaction for which we received 500 restricted preferred shares of a private company issuer as well as 100,000 warrants of the issuer’s public parent company. Neither the preferred shares nor the warrants are registered or freely tradable and are currently subject to further transfer limitations. The preferred shares have a liquidation preference equal to the fair market value of the consideration paid at issuance, plus accrued and unpaid dividends. All dividends are payable quarterly in arrears. Each warrant entitles the holder to acquire one subordinate voting share of common stock of the issuer’s parent. Our investment does not provide a controlling interest in the issuer or the issuer’s parent. This investment is carried at its cost basis as of September 30, 2023, with dividend income recognized quarterly pursuant to the terms of the restricted preferred shares.
On June 12, 2023, through Enterprise Diversified, Inc. (“Enterprise Diversified”), we invested $172,512 in a commodity-based limited partnership managed by a third-party general partner. The general partner is entitled to certain management fees and profit allocations and our investment is subject to a two-year lockup from the date of the initial investment. As of the period ended September 30, 2023, this investment is carried at its reported net asset value (“NAV”) of $179,610. During the three- and nine-month periods ended September 30, 2023, we recognized $15,264 of net investment losses and $7,099 of net investment gains related to this investment, respectively. No comparable activity exists for the three- and nine-month periods ended September 30, 2022.
eBuild Ventures, LLC
On March 16, 2023, through eBuild Ventures, LLC (“eBuild”), we made a capital contribution of $955,266, representing approximately a 3% ownership stake, in a private company that operates in the consumer products e-commerce space fulfilled by Amazon. This investment is carried at its cost basis of $955,266 as of September 30, 2023.
Financing Arrangement - Triad Guaranty, Inc.
In August 2017, Enterprise Diversified entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. Triad Guaranty, Inc. exited bankruptcy in April 2018, and Enterprise Diversified was subsequently issued a second amended and restated promissory note. On April 27, 2023, we received repayment of the full historical principal balance and accrued interest related to such note. Enterprise Diversified also holds shares of Triad Guaranty, Inc. common stock, which were received as consideration for certain amounts of accrued interest earned pursuant to the amended and restated promissory note. As of September 30, 2023, we attribute no value to the shares of Triad Guaranty, Inc. common stock held due to the stocks’ general lack of marketability.
Summary of Financial Performance
Stockholders’ equity increased from $20,382,693 at December 31, 2022 to $21,865,121 at September 30, 2023. This change was primarily attributed to $2,166,113 of net income in the CrossingBridge operations segment, $207,027 of net income in the internet operations segment, a net loss of $207,991 in the Willow Oak operations segment, and a net loss of $843,867 in the other operations segment for the nine-month period ended September 30, 2023. Corporate expenses for the nine-month period ended September 30, 2023 included in the net loss from the other operations segment totaled $1,333,633. Total comprehensive net income for all segments for the nine-month period ended September 30, 2023 was $1,321,282.
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Balance Sheet Analysis
This section provides an overview of changes in our assets, liabilities, and stockholders’ equity and should be read together with our condensed consolidated financial statements, including the accompanying notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q. The table below provides a balance sheet summary as of the end of the periods presented and is designed to provide an overview of the balance sheet changes as of the quarter ended September 30, 2023 compared to the year ended as of December 31, 2022.
| September 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 9,060,281 | $ | 10,690,398 | ||||
| Investments in securities, at fair value | 8,321,151 | 5,860,688 | ||||||
| Accounts receivable, net | 955,215 | 744,638 | ||||||
| Goodwill | 737,869 | 737,869 | ||||||
| Intangible assets, net | 3,323,259 | 1,223,926 | ||||||
| Investments in private companies, at cost | 1,405,266 | 450,000 | ||||||
| Investment in preferred shares and warrants, at cost | 500,000 | - | ||||||
| Investment in limited partnership, at net asset value | 179,610 | - | ||||||
| Deferred tax assets, net | 1,289,582 | 1,441,234 | ||||||
| Other assets | 241,664 | 322,742 | ||||||
| Total assets | $ | 26,013,897 | $ | 21,471,495 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Accounts payable | $ | 9,903 | $ | 71,306 | ||||
| Accrued compensation | 1,336,125 | 23,342 | ||||||
| Accrued expenses | 235,863 | 260,185 | ||||||
| Deferred revenue | 164,499 | 156,859 | ||||||
| Earn-out liability | 1,755,870 | - | ||||||
| Class W-1 Warrant and redeemable Class B Common Stock | 645,000 | 576,000 | ||||||
| Due to affiliate | - | - | ||||||
| Other liabilities | 1,516 | 1,110 | ||||||
| Total liabilities | 4,148,776 | 1,088,802 | ||||||
| Total stockholders’ equity | 21,865,121 | 20,382,693 | ||||||
| Total liabilities and stockholders’ equity | $ | 26,013,897 | $ | 21,471,495 | ||||
As of September 30, 2023, we reported a decrease in cash and cash equivalents of approximately $1,630,000 which was primarily the product of an increase in investments in securities, at fair value, of approximately $2,460,000. We also reported an increase in net intangible assets of approximately $2,099,000, an increase in investments in private companies, at cost, of approximately $955,000, and an increase in investment in preferred shares and warrants, at cost, of approximately $500,000 compared to December 31, 2022. As of September 30, 2023, we also reported an increase in accrued compensation expenses of approximately $1,313,000 and an increase in earn-out liabilities of approximately $1,756,000 compared to December 31, 2022. Changes in net intangible assets and earn-out liabilities were primarily the product of the RiverPark Strategic Income Fund transaction with the remainder of the changes primarily attributed to the result of operating and investing activities that management consider to be within our normal course-of-business during the nine-month period ended September 30, 2023.
Results of Operations
CrossingBridge Operations
Revenue attributed to the CrossingBridge operations segment for the three-month period ended September 30, 2023 was $2,343,247, representing an increase of $349,475 compared to the three-month period ended September 30, 2022. This increase was primarily due to the current period revenue attributed to CBA’s Services Agreement with Cohanzick entered into in connection with the Mergers (see Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q) and additional management fees earned from the RiverPark Strategic Income Fund. The increase in revenue was offset by an increase of $482,864 in operating expenses, which totaled $1,417,448 for the three-month period ended September 30, 2023. The increase in operating expenses for the three-month period ended September 30, 2023, compared to the three-month period ended September 30, 2022, was primarily associated with an increase in employee compensation expenses, amortization expenses, and professional fees. Net profit margin decreased to 40% for the three-month period ended September 30, 2023 from 55% for the three-month period ended September 30, 2022. This was largely due to the relative increase in operating expenses period over period.
Revenue attributed to the CrossingBridge operations segment for the nine-month period ended September 30, 2023 was $6,112,979, representing an increase of $649,726 compared to the nine-month period ended September 30, 2022. This increase was also primarily due to the current period revenue attributed to CBA’s Services Agreement with Cohanzick and additional management fees earned from the RiverPark Strategic Income Fund. The increase in revenue was offset by an increase of $1,110,810 in operating expenses, which totaled $3,973,856 for the nine-month period ended September 30, 2023. The increase in operating expenses for the nine-month period ended September 30, 2023, compared to the nine-month period ended September 30, 2022, was again primarily associated with an increase in employee compensation expenses, amortization expenses, and professional fees. Net profit margin decreased to 35% for the nine-month period ended September 30, 2023 from 48% for the nine-month period ended September 30, 2022. This was largely due to the relative increase in operating expenses period over period.
Compensation and related costs are typically comprised of salaries, bonuses, and benefits. Salary compensation and bonuses are generally the largest expenses for the CBA operations segment. Bonuses are subjective and based on individual performance, the underlying funds’ performance, and profitability of the Company, as well as the consideration of future outlook. Compensation and related costs increased by $224,009 and $632,419 for the three- and nine-month periods ended September 30, 2023, respectively, compared to the three- and nine-month periods ended September 30, 2022. These increases were due to salary increases that took effect at the beginning of the current year, a relative increase in accrued but unpaid annual bonus amounts, and the hiring of an additional employee in the current year. Compensation expenses can fluctuate period over period as management evaluates investment performance, individual performance, Company performance, and other factors.
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Further, increases in amortization expenses for the CrossingBridge operations segment are the product of intangible assets recorded pursuant to the RiverPark Strategic Income Fund transaction, which occurred during May 2023, and increases in professional fees are the product of legal and consulting fees incurred as part of new product research and development.
CBA expects that its net margin will fluctuate from period to period based on various factors, including: revenues, investment results, and the development of investment strategies, products, and/or channels.
Assets Under Management
CBA derives its revenue from its investment advisory fees. Investment advisory fees paid to CBA are based on the value of the investment portfolios it manages and fluctuate with changes in the total value of its AUM.
CBA’s revenues are highly dependent on both the value and composition of AUM. The following is a summary of CBA’s AUM by product and investment strategy as of September 30, 2023 and September 30, 2022.
| Assets Under Management by Product | September 30, 2023 | September 30, 2022 | % Change | |||||||||
| (in millions, except percentages) | ||||||||||||
| Advised funds | 1,168 | 697 | 67.6 | % | ||||||||
| Sub-advised funds | 605 | 779 | (22.3 | )% | ||||||||
| Total AUM | 1,773 | 1,476 | 20.1 | % | ||||||||
| Assets Under Management by Investment Strategy | September 30, 2023 | September 30, 2022 | % Change | |||||||||
| (in millions, except percentages) | ||||||||||||
| Ultra-Short Duration | 95 | 68 | 39.7 | % | ||||||||
| Low Duration | 921 | 1,060 | (13.1 | )% | ||||||||
| Responsible Investing | 27 | 21 | 28.6 | % | ||||||||
| Strategic Income | 730 | 327 | 123.2 | % | ||||||||
| Total AUM | 1,773 | 1,476 | 20.1 | % | ||||||||
CrossingBridge Low Duration High Yield Fund (in dollars)
| Beginning Balance | Gross Inflows | Gross Outflows | Market Appreciation (Depreciation) | Ending Balance | ||||||||||||||||
| 3Q 2022 | 551,334,618 | 64,761,170 | (72,441,879 | ) | 1,154,842 | 544,808,751 | ||||||||||||||
| 4Q 2022 | 544,808,751 | 64,535,197 | (171,525,452 | ) | 9,774,294 | 447,592,790 | ||||||||||||||
| 1Q 2023 | 447,592,790 | 136,950,544 | (47,248,479 | ) | 6,961,617 | 544,256,472 | ||||||||||||||
| 2Q 2023 | 544,256,472 | 73,497,502 | (57,721,948 | ) | 8,557,702 | 568,589,728 | ||||||||||||||
| 3Q 2023 | 568,589,728 | 74,359,065 | (47,683,277 | ) | 10,190,130 | 605,455,646 | ||||||||||||||
CrossingBridge Ultra-Short Duration Fund (in dollars)
| Beginning Balance | Gross Inflows | Gross Outflows | Market Appreciation (Depreciation) | Ending Balance | ||||||||||||||||
| 3Q 2022 | 63,102,681 | 9,219,316 | (4,567,382 | ) | 462,466 | 68,217,081 | ||||||||||||||
| 4Q 2022 | 68,217,081 | 19,355,710 | (7,395,986 | ) | 1,101,691 | 81,278,496 | ||||||||||||||
| 1Q 2023 | 81,278,496 | 14,713,171 | (7,428,835 | ) | 860,680 | 89,423,512 | ||||||||||||||
| 2Q 2023 | 89,423,512 | 5,804,730 | (7,026,250 | ) | 1,020,039 | 89,222,031 | ||||||||||||||
| 3Q 2023 | 89,222,031 | 11,258,332 | (7,246,212 | ) | 1,525,681 | 94,759,832 | ||||||||||||||
RiverPark Strategic Income Fund (in dollars)
| Beginning Balance | Gross Inflows | Gross Outflows | Market Appreciation (Depreciation) | Ending Balance | ||||||||||||||||
| 2Q 2023 | 241,973,732 | 40,372,611 | (24,849,475 | ) | 8,154,583 | 265,651,451 | ||||||||||||||
| 3Q 2023 | 265,651,451 | 124,482,080 | (23,665,750 | ) | 4,751,326 | 371,219,107 | ||||||||||||||
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CrossingBridge Responsible Credit Fund (in dollars)
| Beginning Balance | Gross Inflows | Gross Outflows | Market Appreciation (Depreciation) | Ending Balance | ||||||||||||||||
| 3Q 2022 | 16,343,523 | 6,301,617 | (1,749,280 | ) | 266,748 | 21,162,608 | ||||||||||||||
| 4Q 2022 | 21,162,608 | 3,378,563 | (1,884,885 | ) | 429,010 | 23,085,296 | ||||||||||||||
| 1Q 2023 | 23,085,296 | 1,948,211 | (2,030,345 | ) | 441,004 | 23,444,166 | ||||||||||||||
| 2Q 2023 | 23,444,166 | 3,218,353 | (1,741,322 | ) | 110,993 | 25,032,190 | ||||||||||||||
| 3Q 2023 | 25,032,190 | 2,610,494 | (1,149,249 | ) | 758,471 | 27,251,906 | ||||||||||||||
CrossingBridge Pre-Merger SPAC ETF (in dollars)
| Beginning Balance | Gross Inflows | Gross Outflows | Market Appreciation (Depreciation) | Ending Balance | ||||||||||||||||
| 3Q 2022 | 61,360,531 | 9,217,570 | (7,642,075 | ) | 375,499 | 63,311,525 | ||||||||||||||
| 4Q 2022 | 63,311,525 | 1,660,044 | (4,173,316 | ) | 1,029,348 | 61,827,601 | ||||||||||||||
| 1Q 2023 | 61,827,601 | 4,146,350 | (1,678,392 | ) | 1,133,484 | 65,429,043 | ||||||||||||||
| 2Q 2023 | 65,429,043 | 5,294,435 | (7,199,642 | ) | 1,067,438 | 64,591,274 | ||||||||||||||
| 3Q 2023 | 64,591,274 | 3,449,665 | - | 940,772 | 68,981,711 | |||||||||||||||
Destinations Low Duration Fixed Income Fund (in dollars)
| Beginning Balance | Gross Inflows | Gross Outflows | Market Appreciation (Depreciation) | Ending Balance | ||||||||||||||||
| 3Q 2022 | 457,417,825 | - | (5,000,000 | ) | (815,114 | ) | 451,602,711 | |||||||||||||
| 4Q 2022 | 451,602,711 | - | (140,000,000 | ) | 7,644,667 | 319,247,378 | ||||||||||||||
| 1Q 2023 | 319,247,378 | - | (52,500,000 | ) | 5,335,112 | 272,082,490 | ||||||||||||||
| 2Q 2023 | 272,082,490 | - | (21,000,000 | ) | 4,546,336 | 255,628,826 | ||||||||||||||
| 3Q 2023 | 255,628,826 | - | (14,000,000 | ) | 4,537,973 | 246,166,799 | ||||||||||||||
Destinations Global Fixed Income Opportunities Fund (in dollars)
| Beginning Balance | Gross Inflows | Gross Outflows | Market Appreciation (Depreciation) | Ending Balance | ||||||||||||||||
| 3Q 2022 | 338,371,875 | - | (8,000,000 | ) | (3,429,003 | ) | 326,942,872 | |||||||||||||
| 4Q 2022 | 326,942,872 | 17,000,000 | - | 1,268,523 | 345,211,395 | |||||||||||||||
| 1Q 2023 | 345,211,395 | - | - | 9,048,695 | 354,260,090 | |||||||||||||||
| 2Q 2023 | 354,260,090 | - | (4,000,000 | ) | 9,599,374 | 359,859,464 | ||||||||||||||
| 3Q 2023 | 359,859,464 | - | (8,000,000 | ) | 6,492,731 | 358,352,195 | ||||||||||||||
In the tables above, gross inflows include reinvested dividends and gross outflows include dividends paid/withdrawn from the funds.
Performance
Although performance is a key metric to measure an adviser’s success, there are other metrics that CBA believes are more meaningful to its investors, including downside protection during difficult environments, sensitivity to rising interest rates, upside/downside capture, and the risk-adjusted return. Although CBA does not manage to benchmarks, CBA does provide benchmarks to investors as a frame of reference, which are set forth below:
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| 3Q 2023 | 2Q 2023 | 1Q 2023 | 4Q 2022 | 3Q 2022 | ||||||||||||||||
| CrossingBridge Low Duration High Yield Fund | 1.77 | % | 1.55 | % | 1.56 | % | 1.96 | % | 0.21 | % | ||||||||||
| ICE BofA 0-3 Year US HY Index ex Financials | 1.83 | % | 2.09 | % | 3.22 | % | 2.17 | % | 1.02 | % | ||||||||||
| ICE BofA 1-3 Year Corporate Bond Index | 0.91 | % | 0.28 | % | 1.29 | % | 1.40 | % | (1.29 | )% | ||||||||||
| ICE BofA 0-3 Year US Treasury Index | 0.94 | % | (0.03 | )% | 1.42 | % | 0.78 | % | (0.99 | )% | ||||||||||
| CrossingBridge Ultra-Short Duration Fund | 1.68 | % | 1.14 | % | 1.02 | % | 1.50 | % | 0.72 | % | ||||||||||
| ICE BofA 0-1 Year US Corporate Index | 1.41 | % | 1.23 | % | 1.19 | % | 1.12 | % | 0.31 | % | ||||||||||
| ICE BofA 0-1 Year US Treasury Index | 1.31 | % | 0.95 | % | 1.18 | % | 0.85 | % | 0.16 | % | ||||||||||
| ICE BofA 0-3 Year US Fixed Rate Asset Backed Securities Index | 1.21 | % | 0.53 | % | 1.49 | % | 0.70 | % | (0.53 | )% | ||||||||||
| RiverPark Strategic Income Fund Inst. Class | 1.71 | % | 2.41 | % | 1.98 | % | 0.30 | % | (1.36 | )% | ||||||||||
| RiverPark Strategic Income Fund Retail Class | 1.65 | % | 2.36 | % | 1.92 | % | 0.24 | % | (1.42 | )% | ||||||||||
| ICE BofA US High Yield Index | 0.53 | % | 1.63 | % | 3.72 | % | 3.98 | % | (0.68 | )% | ||||||||||
| ICE BofA US Corporate Index | (2.70 | )% | (0.21 | )% | 3.45 | % | 3.53 | % | (5.11 | )% | ||||||||||
| ICE BofA 3-7 Year US Treasury Index | (1.14 | )% | (1.44 | )% | 2.53 | % | 1.30 | % | (3.94 | )% | ||||||||||
| CrossingBridge Responsible Credit Fund | 2.89 | % | 0.47 | % | 1.93 | % | 1.98 | % | 1.77 | % | ||||||||||
| ICE BofA US High Yield Index | 0.53 | % | 1.63 | % | 3.72 | % | 3.98 | % | (0.68 | )% | ||||||||||
| ICE BofA US Corporate Index | (2.70 | )% | (0.21 | )% | 3.45 | % | 3.53 | % | (5.11 | )% | ||||||||||
| ICE BofA 3-7 Year US Treasury Index | (1.14 | )% | (1.44 | )% | 2.53 | % | 1.30 | % | (3.94 | )% | ||||||||||
| CrossingBridge Pre-Merger SPAC ETF (Price) | 1.52 | % | 1.69 | % | 1.74 | % | 1.63 | % | 0.44 | % | ||||||||||
| CrossingBridge Pre-Merger SPAC ETF (NAV) | 1.42 | % | 1.66 | % | 1.74 | % | 1.64 | % | 0.60 | % | ||||||||||
| ICE BofA 0-3 Year US Treasury Index | 0.94 | % | (0.03 | )% | 1.42 | % | 0.78 | % | (0.99 | )% | ||||||||||
With respect to both Destinations Low Duration Fixed Income Fund and Destinations Global Fixed Income Opportunities Fund (collectively, the “Destination Funds”), CBA serves as one sub-adviser as part of a manager of managers strategy. As one of multiple sub-advisers, CBA does not select the benchmarks, and does not have a license to use, the benchmark performance information for the Destination Funds. CBA believes that the benchmark performance information is not material in this context because CBA’s advisory services with respect to the Destination Funds involves only a portion of the assets of the Destination Funds while the benchmarks are selected as an appropriate comparison based on the entire portfolio of the Destination Funds across all of the relevant sub-advisers.
Willow Oak Operations
Willow Oak generates its revenue through various fee share and consulting agreements with private investment firms and partnerships in exchange for providing operational services. Willow Oak does not manage, direct, or invest any capital itself, but rather earns fee shares based on its service agreements and the AUM and periodic performance of the investment firms and partnerships with which it partners. Fee shares earned on AUM, management fee shares, and fund management services revenue are recognized and recorded on a monthly or quarterly basis in alignment with the underlying terms of each investment partnership. Revenue fee shares earned on performance are recognized and recorded only when the underlying investment partnership’s performance crystalizes, which is typically on an annual, calendar-year basis. As performance fee shares are based on investments returns, these fee shares have the potential to be highly variable.
During the three-month periods ended September 30, 2023 and 2022, the Willow Oak operations segment generated $35,996 and $21,975 of revenue, respectively. Operating expenses totaled $85,339 and $54,547 and other expenses totaled $483 and $1,262, respectively. Willow Oak’s net loss for the three-month periods ended September 30, 2023 and 2022 totaled $49,826 and $33,834, respectively. Compensation and related payroll costs represent Willow Oak’s most significant operating expense during the three-month periods ended September 30, 2023 and 2022.
During the nine-month periods ended September 30, 2023 and 2022, the Willow Oak operations segment generated $132,749 and $21,975 of revenue, respectively. Operating expenses totaled $340,567 and $54,547, other expenses totaled $173 and $1,262, respectively. The segment’s net loss totaled $207,991 and $33,834, respectively. Again, compensation and related payroll costs represent Willow Oak’s most significant operating expense during the nine-month periods ended September 30, 2023 and 2022.
Willow Oak activity for the three- and nine-month periods ended September 30, 2022 only includes activity occurring on and after August 12, 2022, the start of the post-Merger period (“Post-Merger”), so comparability may be limited. See Note 4 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
The table below provides a summary of revenue amounts for Willow Oak, which are included in the unaudited condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2023.
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| Willow Oak Operations Revenue | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Management fee revenue | $ | 16,697 | $ | 8,206 | $ | 47,400 | $ | 8,206 | ||||||||
| Fund management services revenue | 19,299 | 13,769 | 85,349 | 13,769 | ||||||||||||
| Total revenue | $ | 35,996 | $ | 21,975 | $ | 132,749 | $ | 21,975 | ||||||||
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Internet Operations
As of September 30, 2023, the internet operations segment had a total of 5,347 customer accounts across the U.S. and Canada. As of September 30, 2023, approximately 91% of our customer accounts are U.S.-based, while 9% are Canada-based. During the three- and nine-month periods ended September 30, 2023, approximately 46% of our revenue was driven by internet access services, with the remaining 54% being earned though web hosting, email, and other web-based services.
Revenue generated by our U.S. customers totaled $175,844 and $526,173, and revenue generated by our Canadian customers totaled $9,296 and $27,696 during the three- and nine-month periods ended September 30, 2023, respectively.
Revenue attributed to the internet operations segment during the three-month periods ended September 30, 2023 and 2022 totaled $185,140 and $111,659 and cost of revenue totaled $54,075 and $33,563, respectively. Operating expenses for the segment totaled $61,416 and $32,012 for the three-month periods ended September 30, 2023 and 2022 and other income (expenses) totaled $7,536 and ($691), respectively. Total net income for the internet operations segment was $77,185 and $45,393 for the three-month periods ended September 30, 2023 and 2022, respectively.
During the nine-month periods ended September 30, 2023 and 2022, the internet operations segment generated $553,869 and $111,659 of revenue, cost of revenue totaled $169,848 and $33,563, operating expenses totaled $185,513 and $32,012, other income (expenses) totaled $8,519 and ($691), and net income totaled $207,027 and $45,393, respectively.
Internet operations activity for the three- and nine-month periods ended September 30, 2022 only includes activity from the Post-Merger period, so comparability may be limited. See Note 4 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
Other Operations
During the three-month period ended September 30, 2023, our other operations segment did not produce any revenue or cost of revenue. During the three-month period ended September 30, 2023, operating expenses totaled $378,409 and other expenses totaled $131,047. Corporate operating expenses accounted for $362,008 of reported operating expenses for our other operations segment during the three-month period ended September 30, 2023. Included in corporate operating expenses for the three-month period ended September 30, 2023 are $132,301 of professional fees, $125,510 of compensation related expenses, and $39,700 of non-cash stock compensation expenses recorded as part of equity awards granted to directors and employees under the Company’s 2022 Omnibus Equity Incentive Plan. During the three-month period ended September 30, 2023, the other operations segment reported $233,114 of interest and dividend income, and $172,000 of other expenses related to our periodic revaluation of our liability associated with the Class W-1 Warrant and Class B Common Stock (as defined in Note 4 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). This resulted in a net loss of $509,456 for the other operations segment for the three-month period ended September 30, 2023.
During the nine-month period ended September 30, 2023, our other operations segment again did not produce any revenue or cost of revenue. During the nine-month period ended September 30, 2023, operating expenses totaled $1,399,646 and other income totaled $555,779. Corporate operating expenses accounted for $1,333,633 of reported operating expenses for our other operations segment during the nine-month period ended September 30, 2023. Included in corporate operating expenses for the nine-month period ended September 30, 2023 are $587,964 of professional fees, $378,897 of compensation related expenses, and $161,146 of non-cash stock compensation expenses recorded as part of equity awards granted to directors and employees under the Company’s 2022 Omnibus Equity Incentive Plan. During the nine-month period ended September 30, 2023, the other operations segment reported $334,400 of other income related to the realized gain on our second amended and restated promissory note issued by Triad DIP Investors, LLC, $434,826 of interest and dividend income, and $231,289 of other net investment income. This resulted in a net loss of $843,867 for the other operations segment for the nine-month period ended September 30, 2023.
This compares to the three- and nine-month periods ended September 30, 2022 when the other operations segment did not produce any revenue or cost of revenue, operating expenses totaled $1,705,512, other income totaled $922,595, and the net loss totaled $782,917.
Other operations activity for the three- and nine-month periods ended September 30, 2022 only includes activity from the Post-Merger period, so comparability may be limited. See Note 4 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
During the three- and nine-month periods ended September 30, 2023, we reported $165,458 and $406,568 of income tax expenses, respectively, which are related to a decrease in net deferred tax assets coupled with an increase in our currently payable income tax liability. As noted above, due to CBA’s disregarded status for periods prior to the Closing Date, no comparable income tax expenses existed prior to the Closing Date. For the Post-Merger period during the three-and nine-month periods ended September 30, 2022, the Company reported $400,283 of income tax benefit.
Liquidity and Capital Resources
During the three- and nine-month periods ended September 30, 2023, we carried out our business strategy in four operating segments: CrossingBridge operations, Willow Oak operations, internet operations, and other operations. As a result of the Business Combination that occurred on August 11, 2022 and the determination that the Business Combination would be accounted for as a reverse acquisition, historical activity presented prior to the Closing Date for the three- and nine-month periods ended September 30, 2022 includes only CrossingBridge financial activity.
Our primary focus is on generating cash flow so that we have the flexibility to pursue opportunities as they present themselves. We intend to only invest cash in a segment if we believe that the return on the 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 particular segments nor our historical operations.
Significant amounts of our assets are comprised of cash and cash equivalents, investments in securities, and accounts receivable. Our main source of liquidity is cash flows from operating activities, which are primarily generated from investment advisory fees generated through our CrossingBridge operations segment. Cash and cash equivalents, investments in securities, and net accounts receivable represented approximately $9.1 million, $8.3 million and $1.0 million of total assets as of September 30, 2023, respectively, and approximately $10.7 million, $5.9 million and $0.7 million of total assets as of December 31, 2022, respectively. We believe that these sources of liquidity, as well as continuing cash flows from operating activities will be sufficient to meet our current and future operating needs for at least the next 12 months from the date of filing of this report.
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In line with our objectives, we anticipate that our main uses of cash will be for operating expenses and seed capital to fund new and existing investment strategies through our CrossingBridge operations segment. Our management regularly reviews various factors to determine whether we have capital in excess of that required for our business, and the appropriate uses of any such excess capital.
The aging of accounts receivable as of September 30, 2023 and December 31, 2022 is as follows:
| September 30, 2023 | December 31, 2022 | |||||||
| Current | $ | 948,975 | $ | 741,363 | ||||
| 30 - 60 days | 4,216 | 3,275 | ||||||
| 60+ days | 2,024 | - | ||||||
| Total | $ | 955,215 | $ | 744,638 | ||||
We have no material capital expenditure requirements.
Cash Flow Analysis
Cash Flows from Operating Activities
We reported $2,542,729 of net cash provided by operating activities for the nine-month period ended September 30, 2023. The realized gain on the note receivable, an increase in accrued compensation expenses, amortization and depreciation expenses, and an increase in accounts receivable represented significant adjusting items to cash flows generated through operations. During the nine-month period ended September 30, 2022, we reported $2,496,503 of net cash provided by operating activities, which was primarily attributed to an increase in accrued compensation expenses, stock based compensation expenses, other income related to the W-1 Warrant mark-to-market adjustment, and net income generated for the period.
Cash Flows from Investing Activities
We reported $3,910,927 of net cash used in investing activities for the nine-month period ended September 30, 2023. This was primarily related to a net increase in investments, an investment made in a private company, and the purchase of preferred stock and warrants during the current period. During the nine-month period ended September 30, 2022, we reported $11,967,639 of net cash provided by investing activities, which was attributed to cash received pursuant to the Business Combination as well as a net decrease in investments for the period.
Cash Flows from Financing Activities
We reported $261,919 of net cash flows used in financing activities for the nine-month period ended September 30, 2023. This was primarily related to the payment of earn-outs related to the RiverPark Strategic Income Fund transaction during the period. During the nine-month period ended September 30, 2022, we reported $4,051,247 of net cash used in financing activities, which was attributed to a decrease in the due to affiliate amount and distributions paid during the period, offset by cash proceeds received pursuant to the issuance of Class A Common Stock.
Summary Discussion of Critical Accounting Estimates
The interim condensed consolidated financial statements included in this report were prepared in accordance with U.S. generally accepted accounting principles, which requires management to make estimates, assumptions and judgments that affect various matters, including our reported amounts of assets and liabilities in our condensed consolidated balance sheets at the dates of the financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and our reported amounts of revenues and expenses in our statements of operations during the reporting periods. These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management’s control. As a result, actual results could materially differ from these estimates.
The SEC defines critical accounting estimates as those that are both most important to the portrayal of a company’s financial condition and results of operations and require management’s most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to current facts and circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues and expenses that are not readily apparent from other sources. See Note 2 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for a discussion of our significant accounting policies. For a discussion of our accounting estimates considered critical see the “Summary Discussion of Critical Accounting Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report.
As disclosed under “Earn-Out Liability” in Note 2 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, contingent payment obligations related to asset purchases, if estimable and probable of payment, are initially recorded at their estimated value. When the contingency is ultimately resolved, any additional contingent consideration issued or issuable over the amount that was initially recognized as a liability is considered an additional cost of the acquisition. These additional costs would then be allocated to the qualifying assets on a relative fair value basis. See Note 6 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information. Pursuant to the RiverPark Agreement, we entered into an earn-out arrangement in which CBA shall pay an amount approximately equal to 50% of RiverPark Fund’s management fees (as set forth in RiverPark Fund’s prospectus) to RiverPark (the prior adviser) and Cohanzick (the prior sub-adviser) for a period of three years after closing on May 12, 2023, and pay an amount approximately equal to 20% of the RiverPark Fund’s management fees in the fourth and fifth years after closing as set forth in the RiverPark Agreement. Management’s initial estimate of fair value of the earn-out liability was calculated based on the terms of the earn-out arrangement and the AUM of the RiverPark Fund at the time of closing on May 12, 2023. As the future AUM of the RiverPark Fund is subject to fluctuation, the amount of contingent consideration ultimately paid could vary from management’s initial estimate, representing a critical accounting estimate. As of September 30, 2023, this liability is reported in total at $1,755,870 on our condensed consolidated balance sheets.
Except as described above, there have been no material changes to our critical accounting estimates from those disclosed in our Annual Report.
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of our principal executive officer and principal financial officer, have evaluated 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, as of September 30, 2023. 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 SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Based upon this 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 as set forth below, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023.
Material Weaknesses in Internal Controls
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.
As a result of our evaluations, we identified the following material weaknesses in our internal control over financial reporting as of September 30, 2023:
Segregation of Duties: We lack segregation of duties. Specifically:
| ● | There is not a formal review of all adjusting journal entries; | |
| ● | There is not a formal procedure for the review and assignment of access rights within certain software systems; and | |
| ● | The individual with responsibility for reviewing journal entries, reviewing bank and credit card payments, and other reconciliations also has a wide range of access within the Company’s systems and is an authorized signatory on bank accounts. |
Financial Close and Reporting: We do not have effective internal controls over all parts of the financial close and reporting process in that one individual is responsible for reconciling significant accounts, preparing the most significant journal entries, evaluating complex transactions and reporting requirements, and is also responsible for the financial statement close, consolidation, and reporting process.
During the year ended December 31, 2022, as a result of the closing of the Merger, we were afforded additional personnel resources that can now be integrated into our internal control processes. We are actively working to restructure our historical internal controls over financial reporting to leverage these resources accordingly. We continue to make efforts to reinforce our internal control environment by engaging third-party consultants to review the accounting and related disclosures for transactions that management and the board of directors determine to be particularly complex and maintaining strict document retention policies and procedures that allow for full visibility of all financial statements and schedules by all of our managers and officers.
In response to the identified material weaknesses, we are developing a phased approach that is intended to increase the effectiveness of the design and operation of our financial reporting controls and processes. In the first phase, we expect to work with a third-party professional consultant to prepare formal documentation for our internal controls over financial reporting, which may include an entity level controls assessment, an IT general controls assessment, and process area flowcharts where necessary. In the second phase, we expect to use our control documentation to identify ineffectively designed and/or control gaps and work to remediate them. Finally, in phase three, we expect to design a systematic monitoring plan to sufficiently test our new key controls over the course of future reporting periods. As of the period ended September 30, 2023, the Company is continuing its work on the first phase of this approach. Notwithstanding the foregoing, there is no guarantee that we will be successful in completing this multi-phased approach and remediating the material weaknesses.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the three-month period ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and regardless of outcome, litigation and other legal proceedings may have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. As of the date of filing this report, there is no material pending legal proceeding to which we are a party or of which any of our property is the subject, and we are not aware of any material proceeding against us contemplated by any governmental authority.
Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.
On April 12, 2016, Enterprise Diversified filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”), Enterprise Diversified’s former CEO and director (prior to December 14, 2015) and an owner of record of Enterprise Diversified’s common stock, alleging, among other things, that the Former CEO engaged in, and caused Enterprise Diversified to engage in, to its detriment, a series of unauthorized and wrongful related party transactions, including: causing Enterprise Diversified to borrow certain amounts from the Former CEO’s mother unnecessarily and at a commercially unreasonable rate of interest; converting certain funds of Enterprise Diversified for personal rent payments to the Former CEO; commingling in land trusts certain real properties owned by Enterprise Diversified and real properties owned by the Former CEO; causing Enterprise Diversified 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 Enterprise Diversified to pay rent on its corporate headquarters owned by the Former CEO’s ex-wife in amounts commercially unreasonable and excessive, and making 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 Enterprise Diversified; causing Enterprise Diversified to pay real property and personal property taxes on numerous properties owned personally by the Former CEO; causing Enterprise Diversified to pay personal credit card debt of the Former CEO; causing Enterprise Diversified to significantly overpay the Former CEO’s health and dental insurance for the benefit of the Former CEO; and causing Enterprise Diversified to pay the Former CEO’s personal automobile insurance. The lawsuit was tried to a jury in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia) in September 2023, and the jury returned a unanimous verdict in favor of Enterprise Diversified and against Frank Erhartic, Jr. On September 25, 2023, the Court entered a civil judgment in favor of Enterprise Diversified in the amount of $243,423, plus interest in the amount of 6% per year until the judgement is paid in full. Mr. Erhartic filed a Notice of Appeal on October 17, 2023. On October 30, 2023, Enterprise Diversified filed a Motion to Dismiss the appeal which is pending.
| Item 1A. | Risk Factors |
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report. There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
| Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 5. | Other Information |
(a) None.
(b) None.
(c) The Company is not required to provide the information required by this item in this report as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
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| Item 6. | Exhibits |
* Filed herewith.
** Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that Section. This exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
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SIGNATURES
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.
| ENDI Corp. | |
| Date: November 13, 2023 | /s/ David Sherman |
| David Sherman | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
| Date: November 13, 2023 | /s/ Alea Kleinhammer |
| Alea Kleinhammer | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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