NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Lines of Business
Enterprise Diversified, Inc. (formerly White Dove Systems, Inc., Interfoods Consolidated, Inc., and then Sitestar Corporation) was incorporated in Nevada on December 17, 1992. On June 1, 2018, the Company amended its Articles of Incorporation to change the name of the Company to “Enterprise Diversified, Inc.” Unless the context otherwise requires, and when used in this Report, the “Company,” “ENDI,” “we,” “our,” or “us” refers to Enterprise Diversified, Inc. and its subsidiaries.
During the three-month period ended March 31, 2022, the Company operated through four reportable segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. Other Operations include corporate operations and nonrecurring or one-time strategic funding or similar activity that is not considered to be one of our primary lines of business. The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
Asset Management Operations
The Company operates its asset management operations business through its wholly-owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”) and Willow Oak Capital Management, LLC.
Willow Oak is an asset management platform focused on growing and enhancing the alternative investment landscape. Willow Oak seeks partnerships with alternative investment managers in the early stages of growth in order to build a network of unique investment opportunities for investors and scalable, professional operations for managers. Willow Oak offers affiliated managers strategic consulting, operational support, and growth opportunities through minority partnerships and other bespoke relationships. Affiliations to date include fund reinvestments, fund launching, investor relations, and fund management administrative support. The Company intends to actively expand its Willow Oak platform with additional offerings that enhance the value of the Willow Oak platform to managers and funds across the investing community.
In 2016, the Company made a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017, by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As a special limited partner, Willow Oak earned a share of management and performance fees earned. On May 31, 2021, however, Willow Oak initiated a series of liquidating distributions of its investment in Alluvial Fund according to a mutually agreed upon cash distribution schedule with the general partner. On December 31, 2021, Willow Oak initiated its third and final liquidating cash distribution in respect of such schedule, and during the three-month period ended March 31, 2022, the Company received a corresponding partial cash distribution of $1,680,208. As of December 31, 2021, and subsequently as of March 31, 2022, Willow Oak no longer holds any remaining investment in Alluvial Fund. In accordance with the partnership terms of Alluvial Fund, however, a portion of Willow Oak’s capital account was retained by the general partner until the fund’s activities for the year ended December 31, 2021, were finalized through an independent audit. The retained amount was not actively invested and was not subject to investment gains or losses. The retained amount is represented by the investment redemption receivable amount on the accompanying consolidated balance sheets; however it has been fully collected subsequent to the three-month period ended March 31, 2022. Investment gains and losses for activity during the prior periods presented are reported as revenue on the accompanying unaudited consolidated statements of operations.
In August 2020, Willow Oak created two wholly-owned entities, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”) and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”), to support the Willow Oak platform and partnership model in perpetuity. Willow Oak AMS earns gross revenue shares commensurate with ownership stakes in investment management firms in exchange for the provision of benefits of affiliation and ongoing fund management services (“FMS”). Willow Oak FMS earns a direct fee from affiliated limited partnerships for rendering administrative, compliance program management, and tax and audit liaison services.
Real Estate Operations
As has been previously reported, in December 2017, ENDI created New Mt Melrose, a wholly-owned subsidiary at that time, to acquire a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into in December 2017 with the seller, Old Mt. Melrose. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to Woodmont, which agreed to assume full responsibility for the management and operation of New Mt Melrose and its real estate portfolio. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. As was previously reported in the Company’s Current Report on Form 8-K filed with the SEC on May 20, 2021, on May 17, 2021, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in New Mt Melrose in conjunction with a cash payment to the Company. As of the quarterly period ended June 30, 2021, and for all subsequent reporting periods, the Company does not hold any remaining interests in the New Mt Melrose entity. See Notes 3 and 8 for more information.
As has been previously reported, in July 2017, ENDI created a wholly-owned real estate subsidiary named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. During the three-month period ended March 31, 2022, the Company sold the sole residential property remaining in the portfolio. As a result of this sale, the Company no longer maintains any residential rental properties or rental leases. As of March 31, 2022, through EDI Real Estate, LLC, ENDI owns two vacant lots located in Roanoke, Virginia, comprising the entirety of the Company’s remaining real estate portfolio.
Internet Operations
The Company operates its internet operations segment through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, 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.
Other Operations
Other operations include 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 main recent activities comprising other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying consolidated financial statements.
Financing Arrangement Regarding Triad Guaranty, Inc.
In August 2017, the Company 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. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy in April 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. On December 31, 2020, the Company accepted a revision of terms to the original promissory note, which includes, among other things, an extension of the loan maturity date to December 31, 2022, an increase of interest to the amount of 12% annually, and a provision to settle all currently accrued interest through the issuance of Triad Guaranty, Inc. common shares. In line with the revision of note terms, during the three-month period ended March 31, 2021, the Company was issued 454,097 shares of Triad Guaranty, Inc. in lieu of interest accrued on the note receivable as of December 31, 2020.
On December 27, 2021, the Company completed the purchase of a comparable investment consisting of (i) another Triad Guaranty Inc. promissory note in the original principal sum of $155,000, having the same terms as the December 31, 2020, financing agreement, along with (ii) 393,750 common shares of Triad Guaranty, Inc., for $25,000 from a related party. The value of this purchase is reflective of the implied collectability of the promissory note and the relative illiquidity of Triad Guaranty, Inc. stock. The Company determined that the December 27, 2021, transaction represents an active market transaction of similar assets to the Company’s existing Triad Guaranty, Inc. assets. As a result, the Company recorded a total $189,515 impairment on December 31, 2021, to its existing Triad Guaranty, Inc. promissory note and common stock to reflect the market value implied by the December 27, 2021, transaction. As of December 31, 2021, and subsequently as of March 31, 2022, the Company holds its interests in both promissory notes at $50,000 under notes receivable on the accompanying consolidated balance sheets and has attributed no value to its 847,847 aggregate shares of Triad Guaranty, Inc. common stock. See Note 4 for more information.
Corporate Operations
Corporate operations include any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Principles of Consolidation
The accompanying unaudited 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, including: Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC, Willow Oak Asset Management Fund Management Services, LLC, Bonhoeffer Capital Management, LLC, Sitestar.net, Inc., and EDI Real Estate, LLC.
All intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The December 31, 2021, consolidated balance sheet included herein was derived from audited consolidated financial statements as of that date. Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously filed in our Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of March 31, 2022, and the results of operations for the three months ended March 31, 2022 and 2021.
Use of Estimates
In accordance with GAAP, the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments, including, 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 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, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
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 of three months or less.
Investments
The Company can hold various investments through its asset management operations and real estate operations segments. Additionally, investments may be held and reported under the Company’s “other” segment. Assets held through these segments do not have a readily determinable value as these investments are either not publicly traded, do not have published sales records, or do not routinely make current financial information available. Investments held through the asset management operations segment are remeasured to fair value on a recurring basis. Investments held under the real estate operations and other operations segments are remeasured when additional valuation inputs become observable. See Note 4 for more information.
Accounts Receivable
The Company grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is the recorded allowance for doubtful accounts and bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are written off from the allowance for doubtful accounts when an account or invoice is individually determined to be uncollectible.
The Company’s asset management 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 asset management 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.
Real estate operations segment rental accounts were typically paid by tenants via cash or check no later than the fifth of the month. Any accounts collected after the fifth were charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If payments were not provided in a timely manner, then the amount due was designated as an account receivable. If accounts remained uncollected, then standard operating procedures were followed to commence a notice process for the tenant to either pay the amount due or vacate the property. Accounts receivable from rental revenue were generally considered unrecoverable after 90 days unless the Company reasonably believed that recovery was probable. These procedures typically resulted in low amounts of past due receivables.
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 March 31, 2022, and December 31, 2021, allowances offsetting gross accounts receivable on the accompanying condensed consolidated balance sheets totaled $2,388 and $474, respectively. For the quarterly periods ended March 31, 2022, and 2021, bad debt expenses totaled $6,832 and $89, respectively.
Notes Receivable
The Company does not routinely issue notes receivable in the ordinary course of business, but when a business opportunity arises, a subsidiary may issue 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.
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) | | | 5 | |
| Equipment (in years) | | | 7 | |
| Building improvements (in years) | | | 15 | |
| Buildings (in years) | | | 27.5 | |
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.
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.
No impairment adjustments were recorded during the three-month periods ended March 31, 2022, and 2021.
Intangible assets (other than goodwill) consist of domain names attributed to the internet operations segment. The Company owns 236 domain names, of which 108 are available for sale. These domains are valued at historical cost. When management determines that material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account 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.
No impairment adjustments were recorded during the three-month periods ended March 31, 2022, and 2021.
Amortization expense on domain names used for internet operations during the three-month period ended March 31, 2022 totaled $1,924. There was no comparable amortization expense on domain names for the three-month period ended March 31, 2021.
Real Estate
Real estate properties held for resale are carried at the lower of cost or fair value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, then the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area in which the real estate is located. Fair value is evaluated annually by management or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable.
No impairment adjustments were recorded during the three-month periods ended March 31, 2022, and 2021.
Real estate properties held for investment are carried at the cost basis plus additional costs where the cost extended the life of or added value to the property. Otherwise, the cost is expensed as incurred. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management.
During the three-month period ended March 31, 2021, $169,181 of real estate held for investment was transferred to real estate held for resale. No improvements were made to real estate held for investment or held for resale during the three-month periods ended March 31, 2022, and 2021.
Accrued Compensation
Accrued compensation represents performance-based incentives that have not yet been paid. Additional compensation can be paid in the form of cash or via the issuance of Company stock. Compensation structures for employees are a pre-approved part of a formal employment agreement or arrangement. Compensation issued as part of the Company’s 2020 Equity Incentive Plan is reserved for board members and members of senior management. The compensation accrual amount is based on the final value of Company stock that has been approved to be issued by the Governance, Compensation, and Nomination Committee of the Board of Directors. These compensation amounts are accrued when earned and able to be estimated and are paid or issued annually after financial records are finalized.
Other Accrued Expenses
Other accrued expenses represent incurred but not-yet-paid expenses from payroll accruals, professional fees, and other accrued taxes.
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 our determinations, the Company combines lease and non-lease elements of our leases.
Revenue Recognition
Asset Management Operations and Other Investment Revenue
Management fee shares and fund management services fees are earned and recorded on a monthly basis and are included in revenue on the accompanying unaudited 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.
Long-term investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized in the period of adjustment. During periods prior to the Company’s final liquidating withdrawal from Alluvial Fund on December 31, 2021, the Company earned revenue from investments, including realized and unrealized gains and losses, which may have resulted in negative revenues for a given period.
Management notes that the structure of these arrangements leaves a very low possibility for nonperformance. While the amount of revenue can vary from month to month, collectability is very high. No contract assets or liabilities are recognized or incurred.
A summary of revenue earned through asset management operations for the three-month periods ended March 31, 2022, and 2021 is included below:
| Asset Management Operations Revenue | | Quarterly Period Ended March 31, 2022 | | | Quarterly Period Ended March 31, 2021 | |
| Unrealized gains on investment activity | | $ | — | | | $ | 2,054,471 | |
| Performance fee revenue | | | — | | | | 99,579 | |
| Management fee revenue | | | 16,745 | | | | 19,264 | |
| Fund management services revenue | | | 21,750 | | | | 20,540 | |
| Total revenue | | $ | 38,495 | | | $ | 2,193,854 | |
Real Estate Revenue
Prior to the sale of its sole remaining residential rental property during the three-month period ended March 31, 2022, the Company earned real estate revenue through rental agreements on real estate held for investment, as well as through the sale of real estate held for resale.
Rental revenue from real estate held for investment was recognized when it was earned, generally on the last day of each month or at another regular period agreed upon by the Company and the tenant. Tenants generally provided a security deposit at the time of possession. This deposit was held separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount was not provided in a timely manner and was considered unlikely to be recovered. Otherwise, the security deposit was returned in a timely manner after the property was surrendered back to the Company. Management had concluded that the nature of the performance obligation was cyclical and predictable with a very low possibility for nonperformance. No contract assets or liabilities were recognized or incurred.
Revenue from real estate held for resale was recognized upon closing of the sale (transfer of control), as all conditions for full revenue recognition were met at that time. All costs associated with the property sold were removed from the consolidated balance sheets and were charged to cost of revenue at that time.
Internet Revenue
The Company sells internet and email services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of 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.
The Company generates revenue in its internet operations segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, 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. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.
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 increased from $171,194 at December 31, 2021, to $191,501 at March 31, 2022. During the three-month periods ended March 31, 2022, and 2021, $98,632 and $119,312, respectively, of revenue was recognized from prior-year contract liabilities (deferred revenue).
Income Taxes
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax 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. The most recent three tax years, fiscal years ended December 31, 2021, December 31, 2020, and December 31, 2019, are open to potential IRS examination.
During the three-month periods ended March 31, 2022 and 2021, the Company did not report any income tax expenses. The current and prior year three-month periods did not produce positive taxable income after applying historical net operating loss carryforwards, which are subject to certain limitations.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.
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 common stock equity incentives. 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 common stock equity incentives.
There were no potentially dilutive shares for the three-month period ended March 31, 2022. The number of potentially dilutive shares for the three-month period ended March 31, 2021, consisting of common shares underlying common stock equity incentives, was 668. None of the potentially dilutive securities had a dilutive impact during the three-month period ended March 31, 2021 after rounding was applied.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued 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 we assess the collectability of our receivables and recoverability of other financial instruments. The Company will adopt this guidance as of January 1, 2023. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (Topic 805). This update provided that an acquirer no longer records deferred revenue of the acquiree based on its acquisition date fair value. Rather, the acquirer accounts for contract assets and liabilities in accordance with ASC 606 as if it had originated the contract (i.e., continue to account for such assets and liabilities as has historically been done by the acquiree in accordance with ASC 606). This new guidance is required to be adopted by public entities in years beginning after December 15, 2022 on a prospective basis. Early adoption is permitted. The Company has adopted this guidance as of December 31, 2021. The adoption of this guidance did not have a material impact on our 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 consolidated financial statements.
NOTE 3. HISTORICAL SALE OF REMAINING INTEREST IN REAL ESTATE SUBSIDIARY
As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC, a Delaware limited liability company (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio. The Company retained a 35% membership interest in Mt Melrose.
However, as has been previously reported, on May 17, 2021, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in Mt Melrose, LLC in conjunction with an $850,000 cash payment to the Company. Accordingly, as of the quarterly period ended June 30, 2021, and subsequently as of December 31, 2021, the Company does not hold any remaining interests in Mt Melrose, LLC. During the quarterly period ended June 30, 2021, the Company recognized a gain of $778,872 on the May 17, 2021, sale, which was included as a separate line item on the unaudited condensed consolidated statements of operations for the quarterly period ended June 30, 2021. This gain was representative of the difference between the Company’s carrying value of its Mt Melrose equity investment, various other intercompany reimbursements, and the final sale price represented by the May 17, 2021 transaction.
NOTE 4. 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 1 - 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; |
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| | ● | Level 2 - inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; Level 2 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 |
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| | ● | Level 3 - 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. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company does not hold any assets or liabilities measured at fair value on a recurring basis as of the quarterly period ended March 31, 2022, or as of the year ended December 31, 2021.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company analyzes goodwill on an annual basis or more often if events or changes in circumstances indicate potential impairments. No impairments were recorded during the three-month periods ended March 31, 2022, and 2021.
The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate an impairment may have occurred. No impairments were recorded during the three-month periods ended March 31, 2022, and 2021.
As discussed previously, the Company holds common stock in Triad Guaranty, Inc. This stock was received in accordance with the December 31, 2020 revisions to the original promissory note, which included Triad stock to be issued in lieu of accrued interest. The Company historically measured its investment in the stock at its cost basis, which was equal to the amount of accrued interest on the promissory note as of December 31, 2020. On December 27, 2021, the Company purchased additional Triad Guaranty, Inc. common stock along with another promissory note from a related party. Due to the illiquid nature of Triad Guaranty, Inc. stock, as well as the lack of available financial information for the entity, on December 31, 2021, the Company impaired the full historical value, $45,410, of its investment in Triad Guaranty, Inc. stock. Additionally, on December 31, 2021, the Company recorded an impairment of $144,105 on its historical promissory note from Triad Guaranty, Inc. due to concerns regarding its ultimate collectability. The total impairment recorded on the Triad Guaranty, Inc. stock and promissory note was $189,515. As of December 31, 2021, and subsequently as of March 31, 2022, the Company holds its interests in both promissory notes at $50,000 under notes receivable on the accompanying consolidated balance sheets and has attributed no value to its aggregate shares of Triad Guaranty, Inc. common stock.
NOTE 5. PROPERTY AND EQUIPMENT
The cost of property and equipment at March 31, 2022, and December 31, 2021, consisted of the following:
| | | March 31, 2022 | | | December 31, 2021 | |
| Computers and equipment | | $ | 17,330 | | | $ | 17,330 | |
| Furniture and fixtures | | | 10,850 | | | | 10,850 | |
| | | | 28,180 | | | | 28,180 | |
| Less accumulated depreciation | | | (19,530 | ) | | | (18,519 | ) |
| Property and equipment, net | | $ | 8,650 | | | $ | 9,661 | |
Depreciation expense was $1,012 for both three-month periods ended March 31, 2022 and 2021.
NOTE 6. REAL ESTATE
EDI Real Estate, LLC
Through EDI Real Estate, as of March 31, 2022, and December 31, 2021, the Company identified the following units as held for resale or held for investment as noted below:
| EDI Real Estate | | March 31, 2022 | | | December 31, 2021 | |
| Units occupied or available for rent | | | 0 | | | | 1 | |
| Vacant lots held for investment | | | 2 | | | | 2 | |
| Total units held for investment | | | 2 | | | | 3 | |
As of March 31, 2022, the two vacant lots located in Roanoke, Virginia are not assigned a value on the accompanying consolidated balance sheets, as the lots hold limited value due to their rural location and lack of utility and access.
The unit held for investment as of December 31, 2021, consisted of a single-family residential rental unit. This property was sold during the three-month period ended March 31, 2022.
The lease in effect as of December 31, 2021, was based on a month-to-month provision as the initial annual term of the lease had been completed. An outside property management company managed this rental property on behalf of the Company. As this property was sold during the three-month period ended March 31, 2022, there are no reportable future anticipated rental revenues.
| EDI Real Estate | | March 31, 2022 | | | December 31, 2021 | |
| Total real estate held for investment | | $ | — | | | $ | 43,821 | |
| Accumulated depreciation | | | — | | | | (16,910 | ) |
| Real estate held for investment, net | | $ | — | | | $ | 26,911 | |
For the three-month periods ended March 31, 2022 and 2021, depreciation expense on the EDI Real Estate portfolio of properties was $398 and $2,377, respectively.
EDI Real Estate’s sole remaining residential property was sold during the three-month period ended March 31, 2022. Gross proceeds for the sale of the property were $75,000 and net proceeds totaled $69,603. This compares to the property’s carrying value of $26,463, which resulted in a gain of $43,140 on the sale. There were no properties sold during the three-month period ended March 31, 2021. No properties were purchased during the three-month periods ended March 31, 2022 and 2021.
No impairment adjustments were recorded on the EDI Real Estate portfolio during the three-month periods ended March 31, 2022, and 2021.
NOTE 7. SEGMENT INFORMATION
During the three-month period ended March 31, 2022, the Company operated through four business segments with separate management and reporting infrastructures that offer different products and services. The four business segments are as follows: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations.
The asset management operations segment includes revenues and expenses derived from various joint ventures, service offerings, and initiatives undertaken in the asset management industry.
The real estate operations segment includes (i) revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia, and (ii) our equity in Mt Melrose, LLC, prior to the sale of the Company’s remaining membership interests on May 17, 2021, which managed properties held for investment and held for resale located in Lexington, Kentucky.
The internet operations segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services. Our internet segment includes revenue generated by operations in both the United States and Canada. For the three-month periods ended March 31, 2022 and 2021, the internet operations segment generated revenue of $205,877 and $220,280 in the United States and revenue of $10,803 and $11,986 in Canada, respectively. All assets reported under the internet operations segment for the quarterly periods ended March 31, 2022 and 2021, are located within the United States.
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-month periods ended March 31, 2022, and 2021.
| Quarterly Period Ended March 31, 2022 | | Asset Management | | | Real Estate | | | Internet | | | Other | | | Consolidated | |
| Revenues | | $ | 38,495 | | | $ | 1,800 | | | $ | 216,680 | | | $ | — | | | $ | 256,975 | |
| Cost of revenue | | | — | | | | 445 | | | | 71,194 | | | | — | | | | 71,639 | |
| Operating expenses | | | 119,417 | | | | 209 | | | | 49,844 | | | | 814,776 | | | | 984,246 | |
| Other income (expense) | | | (173 | ) | | | 43,390 | | | | 1,408 | | | | 21,463 | | | | 66,088 | |
| Income (loss) from operations | | | (81,095 | ) | | | 44,536 | | | | 97,050 | | | | (793,313 | ) | | | (732,822 | ) |
| Goodwill | | | — | | | | — | | | | 212,445 | | | | — | | | | 212,445 | |
| Identifiable assets | | $ | 2,422,054 | | | $ | 19,738 | | | $ | 431,742 | | | $ | 14,586,198 | | | $ | 17,459,732 | |
| Quarterly Period Ended March 31, 2021 | | Asset Management | | | Real Estate | | | Internet | | | Other | | | Consolidated | |
| Revenues | | $ | 2,193,854 | | | $ | 9,736 | | | $ | 232,266 | | | $ | — | | | $ | 2,435,856 | |
| Cost of revenue | | | — | | | | 7,644 | | | | 71,963 | | | | — | | | | 79,607 | |
| Operating expenses | | | 117,711 | | | | 6,485 | | | | 46,541 | | | | 207,253 | | | | 377,990 | |
| Other income (expense) | | | — | | | | (4,795 | ) | | | 361 | | | | 4,824 | | | | 390 | |
| Income (loss) from operations | | | 2,076,143 | | | | (9,188 | ) | | | 114,123 | | | | (202,429 | ) | | | 1,978,649 | |
| Goodwill | | | — | | | | — | | | | 212,445 | | | | — | | | | 212,445 | |
| Identifiable assets | | $ | 15,820,688 | | | $ | 312,819 | | | $ | 433,317 | | | $ | 339,926 | | | $ | 16,906,750 | |
NOTE 8. COMMITMENTS AND CONTINGENCIES
Leases
As of March 31, 2022, and December 31, 2021, the Company has no long-term leases that require right-of-use assets or lease liabilities to be recognized.
The previous lease for office space for Willow Oak Asset Management, LLC expired on September 30, 2020, and has been renewed on a month-to-month basis beginning on October 1, 2020. 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 this short-term lease for both three-month periods ended March 31, 2022 and 2021, were $5,250.
There are no other operating lease costs for the three-month periods ended March 31, 2022 and 2021.
As the Company has no remaining leases classified as operating leases or financing leases as of the periods ended March 31, 2022 and December 31, 2021, there are no future liabilities or maturities of lease obligations recognized on the accompanying consolidated balance sheets.
Other Commitments
Agreement and Plan of Merger with CrossingBridge Advisors, LLC, et al
As has been previously reported, on December 29, 2021, the Company, along with CrossingBridge Advisors LLC, a Delaware limited liability company (“CBA”), and Cohanzick Management, LLC, a Delaware limited liability company (the “CBA Member”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Company has agreed to become, subject to stockholder approval and the parties’ satisfaction of various closing conditions, a wholly-owned subsidiary of ENDI Corp., a new parent entity that is a Delaware corporation (the “New Parent”), through a series of mergers (the “Mergers” and, collectively with the other transactions described in the Merger Agreement, the “Business Combination”). Upon closing of the Business Combination, all of the outstanding shares of the Company’s capital stock will be exchanged for and converted into the right to receive shares of New Parent, which will become the Company’s sole stockholder. In order to effect the Mergers and the Business Combination, New Parent will form two merger subsidiaries. Upon the closing of the Merger Agreement, the first merger subsidiary will merge with and into the Company (the “First Merger”), with the Company as the surviving entity. Upon consummation of the First Merger, the Company will become a direct, wholly-owned subsidiary of New Parent. Concurrently with the First Merger, and as part of the same overall transaction, the second merger subsidiary will merge with and into CBA (the “Second Merger”), with CBA as the surviving entity. Upon consummation of the Second Merger, CBA will also become a direct, wholly-owned subsidiary of New Parent.