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.” The name change became effective on July 23, 2018, upon FINRA’s declaration. The Company elected to retain its historical trading symbol of “SYTE.” Unless the context otherwise requires, and when used in this Report, the “Company,” “ENDI,” “we,” “our,” or “us” refers to Enterprise Diversified, Inc. and its subsidiaries.
The Company operates through five reportable segments: Asset Management Operations, Real Estate Operations, Internet Operations, Home Services Operations, and Other Operations. Other Operations include corporate operations and investment activity that is not considered to be one of our primary lines of business. As of January 1, 2019, legacy real estate operations, previously reported under Other Operations, are now being reported under the Real Estate Operations segment. The management of the Company also continually reviews various investment opportunities, including those in other lines of business.
Note that previously, as of the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018, the Company had determined that Old Mt. Melrose (as defined below) was a “variable interest entity” because Jeff Moore’s equity interests in Old Mt. Melrose were not effective in determining whether Moore or New Mt Melrose (as defined below) had a controlling financial interest, and that New Mt Melrose’s rights under the Cash Flow Agreement were deemed to be variable interests in Old Mt. Melrose. As its primary beneficiary, New Mt Melrose previously consolidated Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose had been allocated accordingly on the unaudited condensed consolidated balance sheets for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018.
However, as of November 1, 2018, pursuant to a certain Termination of Master Real Estate Asset Purchase Agreement and Cash Flow Agreement, New Mt Melrose no longer has a controlling financial interest in Old Mt. Melrose and is no longer considered Old Mt. Melrose's primary beneficiary. Consequently, as of November 1, 2018, the Company no longer consolidates the fair values of the assets and liabilities of Old Mt. Melrose and the balance of noncontrolling interest as of December 31, 2018, is appropriately reflected as zero on the accompanying unaudited consolidated statements of stockholders’ equity. See Note 3 for additional information.
Asset Management Operations
Enterprise Diversified, Inc. created a wholly owned asset management subsidiary on October 10, 2016, named Willow Oak Asset Management, LLC (“Willow Oak”). Asset management is a core competency of the Company with many members of management and the board having asset management backgrounds. The asset management segment has been a growth area for the Company since its inception. Capital reallocations continue to be made to the subsidiary with long-term investment strategies being the primary focus.
As previously reported in our Current Reports on Form 8-K filed with the SEC on September 19, 2016, and December 30, 2016, respectively, the Company agreed to make a seed investment totaling $10 million through Willow Oak in Alluvial Fund, LP, a private investment partnership that was launched on January 1, 2017. Under a side letter agreement between Willow Oak, Alluvial Fund, and the fund’s general partner, Willow Oak may not make a full withdrawal from its capital account prior to a date five years after the effective date of the side letter agreement. However, on January 1, 2018, pursuant to an amendment to the side letter agreement dated December 15, 2017, the Company caused $3.0 million to be withdrawn from Alluvial Fund in order to partially fund the Company’s acquisition of real estate from Old Mt. Melrose (as defined below). Alluvial Fund focuses on investing in what it believes are deeply mispriced securities in the United States and abroad. Alluvial Fund focuses on small companies, thinly traded issues, and special situations, seeking to identify value that its management believes the market has yet to recognize.
Willow Oak signed a fee share agreement on June 13, 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, who is also an ENDI director. Under the agreement, Willow Oak and Coolidge are the sole members of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership. Under their agreement, Willow Oak pays all start-up and operating expenses that are not partnership expenses under the limited partnership agreement. Willow Oak receives 50% of all performance and management fees earned by the general partner. Bonhoeffer Fund utilizes a value-oriented approach to invest in undervalued businesses worldwide that are in a state of distress and/or transition but that also exhibit recurring revenue.
On August 1, 2018, Willow Oak, through a newly organized, wholly owned Company subsidiary, Willow Oak Capital Management, LLC (“Willow Oak Capital Management”), launched a newly organized private investment partnership, Willow Oak Select Fund, LP (“Select Fund”). Willow Oak Capital Management serves as the general partner of Select Fund. Select Fund focuses on investing in securities worldwide based upon internally generated ideas and curated “best ideas” submitted by various third-party fund managers comprising the Willow Oak fund manager alliance, some of whom may be affiliated with Willow Oak and/or the Company. Fund managers who have signed a fee share agreement with Willow Oak Capital Management and who have had their investment ideas selected by Select Fund’s investment manager for inclusion in the Select Fund portfolio share in a pool of, and receive allocations of, any performance fees Willow Oak Capital Management receives from limited partners in Select Fund (as determined after the end of each fiscal year of Select Fund), with such allocations being awarded to a fund manager in the form of equity interest in Select Fund (unless the parties mutually agree to a cash payment in lieu thereof), all in accordance with the terms and conditions of the respective fee share agreements. As of March 31, 2019, Willow Oak Capital Management has entered into fee share agreements with each of the following related-party funds or managers:
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Steven L. Kiel, pursuant to a fee share agreement dated June 25, 2018. Under the fee share agreement, Mr. Kiel agreed to allocate all fee share allocations earned, if any, to the Company. Mr. Kiel is a director of the Company, and previously had served as the Company’s Chief Executive Officer and Chief Financial Officer until October 5, 2018.
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JDP Capital Management, LLC, pursuant to a fee share agreement dated June 15, 2018. The counterparty is affiliated with Jeremy Deal, who is a director of the Company.
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Coolidge Capital Management, LLC, pursuant to a fee share agreement dated June 25, 2018. The counterparty is affiliated with Keith Smith, who is a director of the Company.
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These related-party transactions were considered and approved by the Audit Committee of the Board of Directors of the Company, acting unanimously, on May 19, 2018.
On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our director, Steven L. Kiel, to provide Arquitos with Willow Oak Fund Management Services (“FMS”) consisting of the following services: investor relations, marketing, administration, legal, accounting and bookkeeping, annual audit, and liaison to third-party service providers. As considerations for the services, Arquitos will pay Willow Oak a fixed fee and a fee share.
Real Estate Operations
As previously reported in our Current Reports on Form 8-K filed with the SEC on December 11, 2017, January 17, 2018, March 2, 2018, March 28, 2018, and July 12, 2018, respectively, ENDI created a wholly owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), on January 10, 2018, which has acquired a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into on December 10, 2017, with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, formerly an ENDI director. As set forth in our Form 8-K filed on January 17, 2018, on January 10, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a first acquisition from Old Mt. Melrose of 44 residential and other income-producing real properties located in Lexington, Kentucky. As further set forth in our Form 8-K filed on July 12, 2018, on June 29, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a second acquisition from Old Mt. Melrose of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky. The Company accounted for the first and second purchases of properties as an asset acquisition (consisting of a concentrated group of similar identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01 “Clarifying the Definition of a Business” (Topic 805). See Note 3 for more information.
As previously reported in our Current Report on Form 8-K filed with the SEC on November 5, 2018, pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose, the parties mutually agreed to terminate the Master Real Estate Asset Purchase Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the Master Real Estate Asset Purchase Agreement. A third-party property manager has been engaged as of November 1, 2018, to manage certain of the real properties previously acquired. Management has determined that it is necessary to right-size New Mt Melrose operations to reduce its level of high-interest debt. Accordingly, New Mt Melrose has begun to sell various properties with an emphasis on selling properties that have high-interest-rate loans and do not produce income. As of March 31, 2019, approximately
$1.8 million
of debt is secured by properties intended for sale. Upon completion of its right-sizing efforts, management expects New Mt Melrose to continue to own a sizable portfolio of income-producing properties in Lexington, Kentucky.
ENDI created a wholly owned real estate subsidiary on July 10, 2017, named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of March 31, 2019, through EDI Real Estate, LLC, ENDI owns a real estate investment portfolio that includes nine residential properties and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily focused in the Roanoke area of Virginia. The portfolio includes single-family homes that are currently rented and managed through a third-party property manager, as well as a vacant property being prepared for rent.
Internet Operations
The Company operates its internet segment through Sitestar.net, a wholly owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
Home Services Operations
The Company operates its home services segment through HVAC Value Fund, LLC. HVAC Value Fund is focused on the management of HVAC and plumbing companies in Arizona. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, the Company, along with JNJ Investments, LLC, an unaffiliated third party, organized and launched HVAC Value Fund, LLC on June 13, 2016. On May 18, 2018, the Company terminated its operating agreement with JNJ Investments, LLC, dated June 13, 2016. The Company has a 100% voting interest in HVAC Value Fund. Although the operating agreement provided JNJ Investments with the opportunity to earn non voting profits interests, JNJ Investments did not earn any non voting profits interests during the term of the operating agreement because HVAC Value Fund did not exceed the profit thresholds under the operating agreement necessary for JNJ Investments to earn any such interests.
As of December 31, 2017, HVAC Value Fund had closed on six acquisitions for an aggregate purchase price of approximately $2.02 million, which included earn-outs of approximately $325,000. For all six acquisitions, all asset allocations made by management are final and all earn-outs have been paid in full as of December 31, 2018. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, and further described above, the purpose of HVAC Value Fund is to operate HVAC and plumbing businesses. Accordingly, these six acquisitions were made in the ordinary course of business and consistent with the customs and practices (including with respect to nature, scope, magnitude, quantity, frequency, and contemplated purpose) of HVAC Value Fund and, in turn, the Company.
Other Operations
Other operations include investment activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main business units that comprise other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying unaudited consolidated financial statements.
Huckleberry Real Estate Fund Investment
As previously reported in our Current Report on Form 8-K filed with the SEC on January 30, 2017, the Company, through Willow Oak, also committed to make a capital contribution to Huckleberry Real Estate Fund II, LLC, a private investment fund, in the aggregate amount of $750,000. On May 14, 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly owned subsidiary of the Company. Under the operating agreement included in the Form 8-K, the fund’s managing member shall have sole discretion regarding the amounts and timing of any distributions to the members of the fund. The carrying value of this investment included in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2019, and December 31, 2018, is $681,381 and $468,750, respectively. The decrease in carrying value period over period was due to return of capital that was received prior to December 31, 2018. During the quarter ended March 31, 2019, a gain of $212,631 was recognized as revenue through other segments on the accompanying unaudited condensed consolidated statements of operations.
Triad DIP Investors
Investment
On August 24, 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 originally contributed $100,000. Triad Guaranty, Inc. exited bankruptcy on April 27, 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 on May 18, 2018. The terms of the promissory note provide for interest in the amount of 10% annually, a repayment date no later than April 29, 2020, and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. Accordingly, on April 28, 2018, the Company was issued warrants to purchase 450,000 shares for $0.01 per share.
Corporate Operations
The corporate segment includes any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries including: Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Mt Melrose, LLC (“New Mt Melrose”), HVAC Value Fund, LLC, Sitestar.net, Inc., and EDI Real Estate, LLC. Additionally, note that during the period from January 10, 2018, through March 31, 2018, the accompanying unaudited consolidated financial statements include the accounts of Old Mt. Melrose, which was, at that time, determined to be a variable interest entity.
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, 2018 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, 2018. 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, 2019 and the results of operations for the three months ended March 31, 2019 and 2018.
Use of Estimates
In accordance with GAAP in the United State of America, the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments, including, 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 and accounts receivable. The Company places its cash with high-quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
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 holds various recurring investments through its asset management segment. Additionally, one-time investments can be held and reported under the Company’s “other” segment. Assets held through these segments do not have a readily determinable value as these investments are not publicly traded, nor do they have published sales records. These investments are remeasured to fair value on a recurring basis. See Note 4 for more information.
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.
Real estate segment rental accounts are typically paid by tenants via cash or check no later than the fifth of the month. Any accounts collected after the fifth are charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If payments are not provided in a timely manner, then the amount due is designated as an account receivable. If accounts remain uncollected, then standard operating procedures are followed to commence a notice process for the tenant to either pay the amount due or vacate the property. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. These procedures typically result in low amounts of past due receivables.
The internet 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.
Sales of home services are typically paid via credit card or check upon completion of service. Sales that are not collected upon completion are generally to existing and repeat customers who have established a track record of timely payments. Generally, accounts receivable more than 60 days are considered past due.
Inventory
Inventory is carried on the balance sheet at either the lower of purchased cost or net realizable value. Inventory is evaluated periodically for any obsolete or damaged stock.
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:
Equipment and vehicles
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1 - 7 years
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Building improvements
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15 years
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Buildings
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27.5 - 39 years
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Impairment of Long-Lived Assets
Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
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 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. Long-lived assets 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 during the fourth quarter of its fiscal year or when events and circumstances indicate that those assets might not be recoverable.
Impairment testing of goodwill is required at the reporting-unit level (operating segment or one level below operating segment). The impairment test involves calculating the impairment of goodwill based solely on the excess of the carrying value of the reporting unit over the fair value of the reporting unit. Prior to performing the impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment to determine whether a detailed quantitative analysis is required. The Company estimates the fair value of its reporting units using discounted expected future cash flows.
During the year ended December 31, 2018, an impairment adjustment of $754,958 was recorded to goodwill held through the home services segment. As noted above, various qualitative factors were considered before preparing a quantitative analysis. Qualitatively, a general under performance of previously acquired home services businesses triggered the quantitative analysis. As part of the quantitative analysis, management estimated the fair value of the home services segment at the enterprise level using a discounted cash flow approach. The results were then tested for reasonableness using a market approach by analyzing comparable firms’ growth rates, margins, capital expenditures, and working capital requirements. As of the period ended March 31, 2019, management has not identified any additional events or changes in circumstances that would require additional evaluation since the year ended December 31, 2018.
Intangible assets consist of domain names attributed to the internet segment. The Company owns 634 domain names, of which 107 are available for sale. These domains are valued at historical cost. When management determines material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account internal and external appraisals. Intangible assets determined to have definite lives are amortized over their estimated useful lives.
Real Estate
Real estate properties held for resale are carried at the lower of cost or fair market value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area in which the real estate is located. 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.
During the year ended December 31, 2018, an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for sale” from “held for investment” as part of a portfolio redirection. See Note 3 for more information. Recent tax assessments, valuations, and local real estate agents were used to value this portfolio of held-for-sale properties. During the period ended March 31, 2019, management did not identify any events or changes in circumstances that may indicate that the carrying value of the Mt Melrose properties may not be recoverable; therefore, no impairments were recorded during the period ended March 31, 2019.
During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management in 1998. During the period ended March 31, 2019, management did not identify any events or changes in circumstances that may indicate the carrying value of the EDI Real Estate properties may not be recoverable; therefore, no impairments were recorded during the period ended March 31, 2019.
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.
Accrued Bonus
Accrued bonuses represent performance-based incentives that have not yet been paid. The bonus structures are a pre-approved part of a formal employment agreement. These bonus amounts are accrued when earned and able to be estimated, and are paid annually after financial records are finalized.
Other Accrued Expenses
Other accrued expenses represent incurred but not yet paid expenses from payroll accruals, vacation accruals, professional fees, and other accrued taxes.
Leases
As of the period ended March 31, 2019, the Company adopted ASU No. 2016-02, “Leases” (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. Accordingly, at the inception of a contract we determine if the arrangement is, or contains, a lease. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Rent expense is recognized on a straight-line basis over the lease term; for finance leases, a portion of rent expense is classified as interest expense.
We have made certain accounting policy elections whereby we (i) do not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12 months or less) and (ii) combine lease and non-lease elements of our leases. Lease ROU assets are included in other long-term assets, financed lease assets are included in property and equipment, and lease liabilities are included in other current and long-term liabilities in the unaudited condensed consolidated balance sheets.
Revenue Recognition
Asset Management and Other Investment Revenue
The Company earns revenue from investments through various fee share and consulting agreements, as well as through realized and unrealized gains and losses, which may result in negative period or quarterly revenues. Management fees earned are recorded and paid out monthly and are included in revenue on the accompanying unaudited consolidated statement of operations. Performance fees earned are accrued monthly, paid out annually, and are also included in revenue on the accompanying unaudited consolidated statement of operations. Consulting fees are billed out monthly after services have been performed. As long-term investments do not qualify as available-for-sale securities, long-term investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized as revenue in the period of adjustment.
Management notes that the structure of these arrangements leaves a very low possibility for nonperformance. While the amount of revenue varies from month to month, collectability is very high. No contract assets or liabilities are recognized or incurred.
Real Estate Revenue
The Company earns real estate revenue through rental agreements on real estate held for investment, as well as through the sale of real estate held for resale.
Rental revenue from real estate held for investment is recognized when it is earned, generally on the last day of each month or at another regular period agreed upon by the Company and the tenant. Tenants generally provide a security deposit at the time of possession. This deposit is held separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. Management has concluded that the nature of the performance obligation is cyclical and predictable with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.
Revenue from real estate held for resale is recognized upon closing of the sale (transfer of control), as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time.
Internet Revenue
The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.
The Company generates revenue in its internet segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, 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.
Home Services Revenue
The Company performs HVAC and plumbing service repairs and installs HVAC units for its customers through its home services segment. Revenue is recognized upon completion of the installation or service call. Sales are adjusted for any returns or allowances. A return or allowance situation would arise based on the two-year workmanship warranty that typically conveys with the installation of a new unit. There is also a two-year assurance warranty on newly installed parts and equipment that is honored by the manufacturer. If an installation is performed over multiple days, then it is accounted for using work-in-process (WIP) accounting in accordance with GAAP. Contract progress is measured by comparing materials and labor hours incurred to materials and labor hours expected per the contract. These types of contracts are typically completed within one month’s time. A small portion of revenue is from the sale of annual service agreements. Revenue attributable to these agreements is appropriately recognized over the life of the agreement.
If payment is received prior to contract completion, then the amount of revenue attributable to the unperformed work is designated as unearned revenue. If payment is not provided in advance or at the time of service or installation completion, then the amount due is recognized as revenue and as an account receivable.
Management acknowledges that these performance obligations are recognized at the completion of each contract, whether it be at a point in time or over a period of time. As the customer controls the asset and has the right to use during the contract, the Company has the right to payment for performance completed to date. No contract assets or liabilities are recognized or incurred.
Deferred Revenue
Deferred revenue represents collections from customers in advance of internet or home services to be performed. Revenue is recognized when performance obligations have been met.
Income Taxes
Income taxes are accounted for under the 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 ending December 31, 2018, December 31, 2017, and December 31, 2016, are open to potential IRS examination.
Income Per Share
The basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similarly to basic income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company has no potentially dilutive securities.
Other Comprehensive Income
Other comprehensive income is the result of the previous impact of foreign currency translations related to the Company's operations in Canada.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU No. 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted this guidance, effective January 1, 2019, using the following practical expedients:
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We did not reassess if any expired or existing contracts are leases or contain leases
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We did not reassess the classification of any expired or existing leases
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We did not reassess whether the classification of existing costs associated with expired or existing leases should be classified as initial direct costs
|
Additionally, we made ongoing accounting policy elections whereby we (i) do not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12 months or less) and (ii) combine lease and non-lease elements of our leases.
Upon adoption of the new guidance on January 1, 2019, we recorded a right-of-use (ROU) asset of approximately $184,000 (net of existing deferred rent liability) and recognized a lease liability of approximately $186,000, with no resulting cumulative effect adjustment to retained earnings.
In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs and requires new disclosures. Early adoption was not permitted. The Company adopted this standard in the first quarter of 2018. The adoption of this standard did not result in a significant impact to revenue recognition.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes” (Topic 740). The ASU simplifies the presentation of deferred taxes by requiring that deferred tax assets and liabilities be classified as noncurrent in any classified balance sheet rather than being separated into current and long-term amounts. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard in the first quarter of 2018. The application of the standard has not significantly impacted the Company.
In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” Although the ASU retains many of the current requirements for financial instruments, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017; earlier adoption was permitted under certain criteria. The Company adopted this standard in the first quarter of 2018. The application of the standard has not significantly impacted the Company.
In January 2017, the FASB issued ASU No. 2017-01 “Clarifying the Definition of a Business” (Topic 805). The amendments in the update provide a screen to determine when a set is not a business. If the screen is not met, the amendments in the update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. Lastly, the amendments in the update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017; earlier adoption was permitted under certain criteria. The Company adopted this ASU on January 1, 2018. While this ASU did not have a material effect on the Company’s financial statements on the date of adoption, the Company did follow the new guidance in determining that its acquisition of properties from Old Mt. Melrose in January 2018 was an asset acquisition. See Note 3 for additional information.
NOTE 3. ASSET ACQUISITION OF REAL ESTATE PROPERTIES
Acquisition
On December 10, 2017, the Company entered into a certain Master Real Estate Asset Purchase Agreement (the “Purchase Agreement”) with Mt. Melrose, LLC, a Kentucky limited liability company (“Old Mt. Melrose”), that owns and manages a portfolio of residential real estate in Lexington, Kentucky. Old Mt. Melrose is owned by Jeffrey I. Moore (“Moore”), a former Company director.
Pursuant to the Purchase Agreement, the Company, through a wholly owned limited liability company subsidiary Mt Melrose, LLC (“New Mt Melrose”), agreed to acquire, in a series of closings, substantially all of the business assets of Old Mt. Melrose. The assets primarily consisted of 145 residential properties owned by Old Mt. Melrose and an undetermined number of additional residential properties under contract for purchase by Old Mt. Melrose, along with Old Mt. Melrose’s rights and ongoing obligations, as lessor/landlord, under all leases covering such real properties. Pursuant to the Purchase Agreement, the Company, through New Mt Melrose, agreed to assume, as of each closing, any outstanding indebtedness secured by the real properties then being conveyed at such closing.
On January 10, 2018, New Mt Melrose completed the first acquisition of 44 residential and other income-producing real properties for a total purchase price of $3,956,389, which consisted of $500,000 in cash, 120,602 shares of common stock valued at $1,658,270, and the assumption of $1,798,713 of existing debt.
The Company accounted for the initial purchase of properties as an asset acquisition (consisting of a concentrated group of similarly identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01. The total purchase price, along with approximately $45,250 of transaction expenses, was allocated to the land and buildings acquired based on their relative fair values, as follows:
Land
|
|
$
|
800,328
|
|
Buildings
|
|
|
3,201,311
|
|
Total Value
|
|
$
|
4,001,639
|
|
On June 29, 2018, New Mt Melrose completed the second acquisition of 69 residential and other income-producing real properties for a total purchase price of $5,174,722, which consisted of 148,158 shares of common stock valued at $2,407,564, and the assumption of $2,767,158 of existing debt.
The Company accounted for the second purchase of properties as an asset acquisition (consisting of a concentrated group of similarly identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01. The total purchase price, along with approximately $7,394 of transaction expenses, was allocated to the land and buildings acquired based on their relative fair values, as follows:
Land
|
|
$
|
1,036,423
|
|
Buildings
|
|
|
4,145,692
|
|
Total Value
|
|
$
|
5,182,115
|
|
The buildings will be amortized over their estimated useful lives of 39 years. The Company determined that the assumed leases and service contracts were not favorable or unfavorable based on their terms relative to their fair values.
As previously reported in our Current Report on Form 8-K filed with the SEC on January 17, 2018, in connection with the initial closing, New Mt Melrose and Old Mt. Melrose entered into a certain Cash Flow Agreement on January 10, 2018 (the “Cash Flow Agreement”), pursuant to which the parties agreed that until such time as the parties consummated the relevant closing as to each real property under the Purchase Agreement, Old Mt. Melrose would assign to New Mt Melrose all of the income, rents, receivables, and revenues arising from or issuing out of such real property, and New Mt Melrose would assume Old Mt. Melrose’s responsibility for payment of certain of the costs and expenses attributable to such real property.
Additionally, in connection with the initial closing, Moore was appointed as New Mt Melrose’s president and executed an employment agreement with New Mt Melrose, as previously reported in our Current Report on Form 8-K filed with the SEC on March 2, 2018.
As previously reported in our Current Report on Form 8-K filed with the SEC on November 5, 2018, pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose, the parties mutually agreed to terminate the above-discussed Purchase Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the Purchase Agreement. A third-party property manager has been engaged as of November 1, 2018, to manage certain of the real properties previously acquired. Management has determined that it is necessary to right-size New Mt Melrose operations to reduce its level of high-interest debt. Accordingly, New Mt Melrose has begun to sell various properties with an emphasis on selling properties that have high-interest-rate loans and do not produce income. As of March 31, 2019, approximately
$1.8 million
of debt is secured by properties intended for sale. Upon completion of its right-sizing efforts, management expects New Mt Melrose to continue to own a sizable portfolio of income-producing properties in Lexington, Kentucky.
In addition, as previously reported in our Current Report on Form 8-K filed with the SEC on November 5, 2018, pursuant to that certain Termination of Cash Flow Agreement entered into effective November 1, 2018, between New Mt Melrose and Old Mt. Melrose, the parties mutually agreed to terminate the above-discussed Cash Flow Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations under the Cash Flow Agreement. As also previously reported in such Current Report on Form 8-K, pursuant to that certain Termination of Employment Agreement entered into effective November 1, 2018, between Moore and New Mt Melrose, the parties mutually agreed to terminate the above-discussed employment agreement of Moore as of November 1, 2018. Accordingly, Moore’s employment by and with New Mt Melrose was terminated, and Moore was removed as an officer of New Mt Melrose, all effective as of November 1, 2018.
Variable Interests
As of the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018, the Company had determined that Old Mt. Melrose was a “variable interest entity” because Moore’s equity interests in Old Mt. Melrose were not effective in determining whether Moore or New Mt Melrose had a controlling financial interest, and that New Mt Melrose’s rights under the Cash Flow Agreement were deemed to be variable interests in Old Mt. Melrose. At those times, the Company had determined that New Mt Melrose was the primary beneficiary of Old Mt. Melrose since substantially all of Old Mt. Melrose’s activities had been conducted on behalf of New Mt Melrose and because New Mt Melrose may have been required to provide financial support to Old Mt. Melrose under the Cash Flow Agreement. As its primary beneficiary, New Mt Melrose previously consolidated Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose had been allocated accordingly on the unaudited condensed consolidated balance sheets for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018. As noted on the unaudited condensed consolidated statements of stockholders’ equity during those quarters, the ending noncontrolling interest allocated to the variable interest entity represented the remaining equity held by Old Mt. Melrose for properties that had not yet been acquired under the Purchase Agreement. The ending noncontrolling interest amount also included any income or loss generated by the remaining properties that were to be acquired under the Purchase Agreement for the period then ended.
As of November 1, 2018, pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement and Cash Flow Agreement noted above, New Mt Melrose is no longer the primary beneficiary of Old Mt. Melrose. Additionally, as of November 1, 2018, New Mt Melrose no longer has a controlling financial interest in Old Mt. Melrose. Consequently, as of November 1, 2018, the Company no longer consolidates the fair values of the assets and liabilities of Old Mt. Melrose and the balance of noncontrolling interest as of March 31, 2019 and December 31, 2018, is appropriately reflected as zero on the accompanying unaudited consolidated statements of stockholders’ equity.
NOTE 4. INVESTMENTS
Certain assets held through Willow Oak Asset Management, LLC, Enterprise Diversified, Inc., or EDI Real Estate, LLC do not have a readily determinable value, as these investments are not publicly traded, nor do they have published sales records. The investments in Alluvial Fund, LP, Bonhoeffer Fund, LP, and Willow Oak Select Fund, LP are measured using net asset value (NAV) as the practical expedient and is exempt from the fair value hierarchy in accordance with FASB ASC 820-10. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and allocated based on total fund contributions. Due to the nature of the Huckleberry Real Estate Fund II, LLC investment, the investment is measured at cost basis as cost approximates fair value until additional inputs and measurements become available. As the inputs for this investment are not readily observable, this investment is valued using Level 3 inputs. The following investments are remeasured to fair value on a recurring basis and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Included in the fair value is the cost basis of the investment, as well as any accrued management fees.
|
|
Cost Basis
|
|
|
Accrued Fees
|
|
|
Unrealized Gain
|
|
|
Fair Value
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP
|
|
$
|
7,028,297
|
|
|
$
|
—
|
|
|
$
|
2,078,383
|
|
|
$
|
9,106,680
|
|
Bonhoeffer Fund, LP
|
|
|
12,479
|
|
|
|
|
|
|
|
146
|
|
|
|
12,625
|
|
Willow Oak Select Fund, LP
|
|
|
20,368
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,368
|
|
Huckleberry Real Estate Fund II, LLC
|
|
|
468,750
|
|
|
|
—
|
|
|
|
212,631
|
|
|
|
681,381
|
|
Total
|
|
$
|
7,529,894
|
|
|
$
|
—
|
|
|
$
|
2,291,160
|
|
|
$
|
9,821,054
|
|
|
|
Cost Basis
|
|
|
Accrued Fees
|
|
|
Unrealized Gain
|
|
|
Fair Value
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP
|
|
$
|
7,023,676
|
|
|
$
|
—
|
|
|
$
|
1,422,812
|
|
|
$
|
8,446,488
|
|
Huckleberry Real Estate Fund II, LLC
|
|
|
468,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
468,750
|
|
Total
|
|
$
|
7,492,426
|
|
|
$
|
—
|
|
|
$
|
1,422,812
|
|
|
$
|
8,915,238
|
|
During the three months ended March 31, 2019, the Company recognized $212,631 of realized gains. These realized gains were the result of the Company's investment in the Huckleberry Real Estate Fund II, LLC. These gains are included in the other segment revenue on the accompanying unaudited consolidated statement of operations. This compares to the period ended March 31, 2018, when the Company recognized
$229 of realized gains. These realized gains were the result of reinvested management fee shares earned through various fee share agreements.
NOTE 5. FAIR VALUE OF ASSETS AND LIABILITIES
The Company has adopted FASB ASC 820,
Fair Value Measurements
. ASC 820 defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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 valued its investments at fair value at the end of each reporting period. See description of these investments in Note 4 above.
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Excluded) (a)
|
|
|
Total at Fair Value
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huckleberry Real Estate Fund II, LLC
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
681,381
|
|
|
$
|
—
|
|
|
$
|
681,381
|
|
Alluvial Fund, LP
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,106,680
|
|
|
|
9,106,680
|
|
Bonhoeffer Fund, LP
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,625
|
|
|
|
12,625
|
|
Willow Oak Select Fund, LP
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,368
|
|
|
|
20,368
|
|
Total investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
681,381
|
|
|
$
|
9,139,673
|
|
|
$
|
9,821,054
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Excluded) (a)
|
|
|
Total at Fair Value
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huckleberry Real Estate Fund II, LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
468,750
|
|
|
|
—
|
|
|
|
468,750
|
|
Alluvial Fund, LP
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,446,488
|
|
|
|
8,446,488
|
|
Total investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
468,750
|
|
|
$
|
8,446,488
|
|
|
$
|
8,915,238
|
|
|
(a)
|
In accordance with Subtopic 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company analyzes goodwill on an annual basis or whenever events or changes in circumstances indicate potential impairments. During the year ended December 31, 2018, an impairment adjustment of $754,958 was recorded to goodwill held in the home services segment. As described further in Note 1, this adjustment was the result of a general under performance of previously acquired HVAC and plumbing businesses.
The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate a change in their fair market value. During the year ended December 31, 2018, an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for sale” from “held for investment” as part of a portfolio redirection that will reduce high-interest debt. See Note 3 for more information.
During the year ended December 31, 2018, an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management in 1998. This adjustment was the result of repair and improvement expenses exceeding the current market value of the property and write downs of previously capitalized improvements made by prior management.
As discussed in Note 3, in January 2018, Mt Melrose, LLC completed its first acquisition of 44 residential and other income-producing real properties for a total purchase price of $3,956,389. Additionally, in June 2018, Mt Melrose, LLC completed its second acquisition of 69 residential and other income-producing real properties for a total purchase price of $5,174,722. The total purchase price, along with transaction expenses, was allocated to the land and buildings acquired based on their relative fair values. The fair values of the land and buildings were determined using Level 3 inputs, namely comparable properties within the Lexington, Kentucky, region.
The Company analyzes the carrying value of property and equipment and lease right-of-use assets on an annual basis or whenever events or changes in circumstances indicate potential impairments.
NOTE 6. PROPERTY AND EQUIPMENT
The cost of property and equipment at March 31, 2019, and December 31, 2018, consisted of the following:
|
|
2019
|
|
|
2018
|
|
Automobile
|
|
$
|
294,029
|
|
|
$
|
294,029
|
|
Building
|
|
|
836,827
|
|
|
|
836,827
|
|
Computers and equipment
|
|
|
172,068
|
|
|
|
172,068
|
|
Furniture and fixtures
|
|
|
102,337
|
|
|
|
102,337
|
|
Land
|
|
|
145,000
|
|
|
|
145,000
|
|
|
|
|
1,550,261
|
|
|
|
1,550,261
|
|
Less accumulated depreciation
|
|
|
(299,816
|
)
|
|
|
(259,916
|
)
|
Property and equipment, net
|
|
$
|
1,250,445
|
|
|
$
|
1,290,345
|
|
As the Company continues to right-size real estate operations, as of March 31, 2019, and as of December 31, 2018, management has identified $73,212 of Mt Melrose vehicles and equipment as held for sale.
Depreciation expense was
$39,900
for the three months ended March 31, 2019, and
$41,967 for the period ended March 31, 2018. Included in these amounts are $6,388 and $7,804 for the periods ended March 31, 2019 and 2018, respectively, of depreciation expense related to personal property used in real estate segment rental operations. The depreciation expense related to personal property is included in the real estate segment cost of goods sold amount on the accompanying unaudited condensed consolidated statements of income. The decrease in depreciation expense is due to the transfer of various Mt Melrose vehicles and equipment to
“
held for sale
”
, which resulted in them no longer being actively depreciated.
The building held through Mt Melrose, LLC is a multipurpose warehouse space located in Lexington, Kentucky. As of the three month period ended March 31, 2019, the cost basis of the warehouse and land it sits on is
$981,827
. In the quarterly period ended December 31, 2018, our management concluded it would adopt an outsourced property management model for New Mt Melrose. Management, therefore, determined that the warehouse was no longer needed for operations and should be divested. It is currently held for sale.
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Mt Melrose - real estate held for sale
|
|
$
|
2,047,927
|
|
|
$
|
2,278,865
|
|
Mt Melrose - equipment and vehicles held for sale
|
|
|
73,212
|
|
|
|
73,212
|
|
EDI Real Estate - real estate held for sale
|
|
|
40,047
|
|
|
|
40,047
|
|
Total assets held for sale
|
|
$
|
2,161,186
|
|
|
$
|
2,392,124
|
|
NOTE 7. REAL ESTATE
Mt Melrose, LLC
As of the period ended March 31, 2019, and as of the year ended December 31, 2018, the Mt Melrose portfolio of properties included the
following units
:
Mt Melrose
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Units occupied or available for rent
|
|
|
98
|
|
|
|
98
|
|
Vacant units being prepared for rent
|
|
|
15
|
|
|
|
15
|
|
Total units held for investment
|
|
|
113
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
Residential and commercial units
|
|
|
43
|
|
|
|
48
|
|
Vacant lots
|
|
|
5
|
|
|
|
9
|
|
Total units held for resale
|
|
|
48
|
|
|
|
57
|
|
Units held for investment consist of single-family and multi-family residential rental units. The leases in effect for the occupied Mt Melrose units as of the period ended March 31, 2019, are based on either annual or multi-year time periods. Month-to-month leases are reserved for special circumstances. Units held for sale consist of single-family units, multi-family units, commercial properties, and undeveloped lots of land. Note that as of December 31, 2018, some of the Mt Melrose multi unit properties were reported in aggregate based on management's intention with the property as a whole. In the table above, the December 31, 2018 unit numbers have been updated for comparison purposes to the March 31, 2019 unit numbers, and to reflect management's current intentions with each unit.
As of the period ended March 31, 2019, and as of the year ended December 31, 2018, the Mt Melrose portfolio of properties was carried at the following amounts on the accompanying unaudited condensed consolidated balance sheets:
Mt Melrose
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Total real estate held for investment
|
|
$
|
9,209,666
|
|
|
$
|
9,049,945
|
|
|
Accumulated depreciation
|
|
|
(211,141
|
)
|
|
|
(159,514
|
)
|
|
Real estate held for investment, net
|
|
$
|
8,998,525
|
|
|
$
|
8,890,431
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate held for resale
|
|
$
|
2,047,927
|
|
|
$
|
2,278,865
|
|
|
For the period ended March 31, 2019, depreciation expense on the Mt Melrose portfolio of properties was
$51,627.
This compares to depreciation expense for the period ended March 31, 2018, when depreciation expense on the Mt Melrose portfolio of properties was
$39,802
.
During the period ended March 31, 2019, Mt Melrose so
ld five residential properties and four vacant lots for gross proceeds of $121,850. This compares to their carrying value of $85,938, which resulted in a net gain of $35,912. Mt Melrose did not sell any properties in the period ended March
31, 2018.
Mt Melrose did not purchase any properties during the period ended March 31, 2019. The increase in real estate held for investment from December 31, 2018, was due to the transfer of land from real estate held for sale, as well as through capital improvements made during the period ended March 31, 2019. This compares to the period ended March 31, 2018, when Mt Melrose purchased a total of 17 properties for a gross purchase price of $1,282,500. The majority of these purchases resulted in a note payable.
Subsequent to March 31, 2019, Mt Melrose sold ten residential properties and one vacant lot for a gross sales price of
$494,249. Compared to the cost basis of these properties at the time of sale, this resulted in an approximate net gain of $29,444.
As previously reported in our Current Report on Form 8-K filed with the SEC on November 5, 2018, pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose (as defined in Note 3 above), the parties mutually agreed to terminate the above-discussed Master Real Estate Asset Purchase Agreement as of November 1, 2018. Accordingly, neither the Company nor Mt Melrose, LLC have any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the Master Real Estate Asset Purchase Agreement. A third-party property manager has been engaged, as of November 1, 2018, to manage certain of the real properties previously acquired. Management has determined that it is necessary to right-size New Mt Melrose operations to reduce its level of high-interest debt. Accordingly, New Mt Melrose has begun to sell various properties with an emphasis on selling properties that have high-interest-rate loans and do not produce income.
EDI Real Estate, LLC
As of the period ended March 31, 2019, and as of the year ended December 31, 2018, the EDI Real Estate portfolio of properties included the following units:
EDI Real Estate
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Units occupied or available for rent
|
|
|
6
|
|
|
|
6
|
|
Vacant units being prepared for rent
|
|
|
3
|
|
|
|
3
|
|
Total units held for investment
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Vacant lots held for resale
|
|
|
3
|
|
|
|
3
|
|
The leases in effect, as of the period ended March 31, 2019, are based on either annual or multi-year time periods and typically include month-to-month provisions after the completion of the initial term. An outside property management company manages these rental properties on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties.
EDI Real Estate
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Total real estate held for investment
|
|
$
|
717,456
|
|
|
$
|
710,022
|
|
|
Accumulated depreciation
|
|
|
(112,880
|
)
|
|
|
(107,576
|
)
|
|
Real estate held for investment, net
|
|
$
|
604,576
|
|
|
$
|
602,446
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate held for resale
|
|
$
|
40,047
|
|
|
$
|
40,047
|
|
|
For the period ended March 31, 2019, depreciation expense on the EDI Real Estate portfolio of properties was
$5,304.
This compares to depreciation expense for the period ended March 31, 2018, when depreciation expense on the EDI Real Estate portfolio of properties was also
$5,304.
During the period ended March 31, 2019, EDI Real Estate did not sell any properties. This compares to the period ended March 31, 2018, when EDI Real Estate sold two residential properties for gross proceeds of $62,000. This compares to their carrying value of $69,033, which resulted in a net loss of $7,033.
EDI Real Estate did not purchase any properties in the period ended March 31, 2019 or March 31, 2018. The increase in real estate held for investment from December 31, 2018, was due to capital improvements made during the period ended March 31, 2019.
Future Minimum Rental Revenues
The future anticipated minimum rental revenues based on leases in place as of March 31, 2019, for both Mt Melrose, LLC and EDI Real Estate, LLC are as follows:
2019
|
|
$
|
242,355
|
|
2020
|
|
|
16,034
|
|
2021
|
|
|
—
|
|
Total
|
|
$
|
258,389
|
|
NOTE 8. NOTES PAYABLE
Notes payable at March 31, 2019, and December 31, 2018, consist of the following:
|
|
Interest Rates
|
|
Average Term
|
|
2019
|
|
|
2018
|
|
Interest-bearing amounts due on traditional mortgages on real estate held through Mt Melrose, LLC
|
|
|
4.38% - 5.75%
|
|
14 years
|
|
$
|
4,469,150
|
|
|
$
|
4,505,139
|
|
Interest-bearing amounts due on hard money loans on real estate held through Mt Melrose, LLC
|
|
|
10.00% - 13.00%
|
|
2 years
|
|
|
2,385,327
|
|
|
|
2,379,851
|
|
Interest-bearing amount due on promissory note on Mt Melrose warehouse
|
|
|
8.00%
|
|
1 year
|
|
|
300,000
|
|
|
|
—
|
|
Interest-bearing amounts due on promissory notes through Mt Melrose, LLC
|
|
|
10.00%
|
|
1 year
|
|
|
134,404
|
|
|
|
131,279
|
|
Non-interest-bearing amount due on promissory notes through Mt Melrose, LLC
|
|
|
0.00%
|
|
1 year
|
|
|
118,270
|
|
|
|
118,270
|
|
Non-interest-bearing amount due on promissory note through HVAC Value Fund, LLC
|
|
|
0.00%
|
|
1 year
|
|
|
100,000
|
|
|
|
100,000
|
|
Equipment and vehicle capital leases and loans acquired by HVAC Value Fund, LLC
|
|
|
0.00% - 4.90%
|
|
5 years
|
|
|
40,408
|
|
|
|
55,797
|
|
Vehicle loans through HVAC Value Fund, LLC
|
|
|
5.99%
|
|
5 years
|
|
|
50,896
|
|
|
|
53,638
|
|
Interest-bearing amount due on promissory note through EDI Real Estate, LLC
|
|
|
5.60%
|
|
15 years
|
|
|
381,569
|
|
|
|
384,304
|
|
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC
|
|
|
6.00%
|
|
5 years
|
|
|
137,600
|
|
|
|
137,600
|
|
Less accrued interest
|
|
|
|
|
|
|
|
(179,909
|
)
|
|
|
(134,623
|
)
|
Less current portion
|
|
|
|
|
|
|
|
(1,690,934
|
)
|
|
|
(1,161,663
|
)
|
Long-term portion
|
|
|
|
|
|
|
$
|
6,246,781
|
|
|
$
|
6,569,592
|
|
To further summarize, the remaining notes payable amounts held as of March 31, 2019, were subject to the below interest rates:
0.00%
|
|
|
$
|
232,133
|
|
4.00% - 4.99%
|
|
|
|
1,981,060
|
|
5.00% - 5.99%
|
|
|
|
2,947,100
|
|
6.00 - 6.99%
|
|
|
|
137,600
|
|
8.00 - 8.99%
|
|
|
|
300,000
|
|
10.00% - 13.00%
|
|
|
|
2,519,731
|
|
Total
|
|
|
$
|
8,117,624
|
|
The timing of future payments of notes payable are as follows as of March 31, 2019:
2019
|
|
$
|
1,572,677
|
|
2020
|
|
|
1,725,291
|
|
2021
|
|
|
171,021
|
|
2022
|
|
|
317,936
|
|
2023 and thereafter
|
|
|
4,330,699
|
|
Total
|
|
$
|
8,117,624
|
|
HVAC Value Fund typically structures acquisitions where a portion of the purchase price is held back and is subject to certain conditions. These notes payable may or may not bear interest. Of the six acquisitions made by HVAC Value Fund during 2016 and 2017, five resulted in notes payable to the seller. As of December 31, 2018, all of these notes have been paid in full. As of March 31, 2019, one line of credit remains open through the home services segment. This line of credit is held with Steven L. Kiel, an ENDI director. Additional debt held through the home services segment includes loans for various vehicles and equipment. Two vehicle loans were entered into during the quarter ended March 31, 2018. These loans require monthly payments through May 2023 and hold annual interest rates of 5.99%.
During the quarter ended September 30, 2017, EDI Real Estate, LLC issued two promissory notes, each secured by a property held for investment. These notes carry annual interest rates of 6%, pay interest quarterly, and are due September 15, 2022, with early payoff permitted. Additionally, during the quarter ended September 30, 2018, EDI Real Estate, LLC issued a promissory note secured by additional properties held for investment. This note carries an annual interest rate of 5.6% and fully matures on September 1, 2033, with early payoff permitted. The interest rate on this note is subject to change once each five year period based on an index rate plus a margin of 2.750 percentage points. The index rate is calculated as a monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of five years.
During the quarter ended March 31, 2019, the Company issued a promissory note secured by the Mt Melrose commercial warehouse. The note carries an annual interest rate of 8%, pays interest quarterly, and is due upon successful sale of the warehouse with early payoff permitted.
Under the Cash Flow Agreement described under Note 3 above, the Company’s wholly owned subsidiary, Mt Melrose, LLC, assumed responsibility for Old Mt. Melrose’s (as defined in Note 3 above) monthly payments of interest and/or principal under the outstanding debt secured by the real properties acquired under the above-described Master Real Estate Asset Purchase Agreement, among other operating expenses. These notes began to mature during the current quarter, with the last note extending until January 2042. Some of these loans are interest only while others accrue interest that is due in full with a final balloon payment. The debt secured by the real properties has varying annual interest rates from 4.375% to 13%. Additionally, the interest rates on $2,934,495 of the debt secured by the real properties are subject to change not more than once each year or once each five-year period (based on the individual debt agreement) based on an index rate plus a margin ranging from 0.25 to 3.25 percentage points. For annually adjusted interest rates, the index rate is calculated as the highest or the lenders' Prime Rate as published in the Wall Street Journal. For rates adjusted each five-year period, the index rate is calculated as the average yield of the five-year U.S. Treasury Securities adjusted to a constant maturity as published in the Federal Reserve Statistical Release. As of the period ended March 31, 2019, a total of $6,854,477 of debt is secured by real properties through Mt Melrose, LLC.
As previously reported in our Current Report on Form 8-K filed with the SEC on November 5, 2018, pursuant to that certain Termination of Cash Flow Agreement entered into effective November 1, 2018, between Mt Melrose, LLC and Old Mt. Melrose, the parties mutually agreed to terminate the above-discussed Cash Flow Agreement as of November 1, 2018. Accordingly, neither the Company nor Mt Melrose, LLC have any further rights or obligations under the Cash Flow Agreement. However, termination of the Cash Flow Agreement does not affect Mt Melrose, LLC’s obligations with respect to debt secured by the real properties it has already acquired, where such debt was assumed at the time of acquisition.
NOTE 9. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
For the period ended March 31, 2019 and 2018, bad debt expense was
$8,540
and $9,661, respectively.
The decrease in accounts receivable is the result of decreased sales through our home services segment.
As of the period ended March 31, 2019, and for the year ended December 31, 2018, accounts receivable consisted of the following:
|
|
2019
|
|
|
2018
|
|
Gross accounts receivable
|
|
$
|
217,318
|
|
|
$
|
245,096
|
|
Less allowance for doubtful accounts
|
|
|
(59,133
|
)
|
|
|
(50,048
|
)
|
Accounts receivable, net
|
|
$
|
158,185
|
|
|
$
|
195,048
|
|
NOTE 10. SEGMENT INFORMATION
As of March 31, 2019, the Company has five business units with separate management and reporting infrastructures that offer different products and services. The five business units have been aggregated into the following reportable segments: Asset Management, Real Estate, Internet, Home Services, and Other.
In previous periods, the Company reported under the following six business segments: Asset Management, Mt Melrose, HVAC, Internet, Real Estate, and Corporate. In an effort to highlight the direction of the Company and increase segment transparency, these historical segments were reorganized during the quarter ended June 30, 2018. Additional reorganizations were made as of January 1, 2019, in order to appropriately reflect the similarities in the Company's real estate operations. The “Mt Melrose” and Legacy “Real Estate” segments are now referred to collectively as “Real Estate”, and the “HVAC” segment is now referred to as “Home Services.” “Corporate”, and other additional investments now are combined under “Other Operations.” The “Asset Management” and “Internet” segments remain unchanged. See below for additional information on the activity included in each respective segment report.
The asset management segment includes revenues and expenses derived from various investment opportunities and partnerships. The real estate segment includes revenue and expenses related to the management of properties held for investment and held for resale through Mt Melrose located in Lexington, Kentucky, and 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. The internet segment includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The home services segment includes revenue and expenses derived from the management of HVAC and plumbing companies in Arizona. The other segment includes revenue and expenses from nonrecurring investment opportunities such as Huckleberry Real Estate Fund II, LLC. Additionally, the other segment includes any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
The internet segment includes revenue generated by operations in both the United States and Canada. In the period ended March 31, 2019, the internet segment generated revenue of
$260,258
in the United States and revenue of $14,644 in Canada. This compares to the period ended March 31, 2018, where the internet segment generated revenue of $282,459 in the United States and revenue of $19,277 in Canada.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three months ended March 31, 2019 and 2018.
Three months ended March 31, 2019
|
|
Asset Management
|
|
|
Real Estate
|
|
|
Internet
|
|
|
Home Services
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
696,980
|
|
|
$
|
182,506
|
|
|
$
|
274,902
|
|
|
$
|
357,077
|
|
|
$
|
212,631
|
|
|
$
|
1,724,096
|
|
Cost of revenue
|
|
|
—
|
|
|
|
163,143
|
|
|
|
87,613
|
|
|
|
221,488
|
|
|
|
—
|
|
|
|
472,244
|
|
Operating expenses
|
|
|
123,464
|
|
|
|
104,408
|
|
|
|
63,269
|
|
|
|
274,434
|
|
|
|
194,920
|
|
|
|
760,495
|
|
Other income (expense)
|
|
|
7,039
|
|
|
|
(128,126
|
)
|
|
|
392
|
|
|
|
(790
|
)
|
|
|
3,897
|
|
|
|
(117,588
|
)
|
Comprehensive income (loss)
|
|
|
580,555
|
|
|
|
(213,171
|
)
|
|
|
124,412
|
|
|
|
(139,635
|
)
|
|
|
21,608
|
|
|
|
373,769
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
|
|
1,024,591
|
|
|
|
—
|
|
|
|
1,237,036
|
|
Identifiable assets
|
|
|
9,288,203
|
|
|
|
13,056,773
|
|
|
|
405,593
|
|
|
|
1,515,344
|
|
|
|
1,184,962
|
|
|
|
25,450,875
|
|
Three months ended March 31, 2018
|
|
Asset Management
|
|
|
Real Estate
|
|
|
Internet
|
|
|
Home Services
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
284,705
|
|
|
$
|
253,663
|
|
|
$
|
301,736
|
|
|
$
|
625,839
|
|
|
$
|
—
|
|
|
$
|
1,465,943
|
|
Cost of revenue
|
|
|
—
|
|
|
|
216,223
|
|
|
|
71,147
|
|
|
|
488,675
|
|
|
|
—
|
|
|
|
776,045
|
|
Operating expenses
|
|
|
27,873
|
|
|
|
207,441
|
|
|
|
69,778
|
|
|
|
310,870
|
|
|
|
372,841
|
|
|
|
988,803
|
|
Other income (expense)
|
|
|
11,075
|
|
|
|
31,519
|
|
|
|
29,796
|
|
|
|
(4,681
|
)
|
|
|
266
|
|
|
|
67,975
|
|
Comprehensive income (loss)
|
|
|
267,907
|
|
|
|
(138,482
|
)
|
|
|
190,607
|
|
|
|
(178,387
|
)
|
|
|
(372,575
|
)
|
|
|
(230,930
|
)
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
|
|
1,779,549
|
|
|
|
—
|
|
|
|
1,991,994
|
|
Identifiable assets
|
|
|
10,333,980
|
|
|
|
13,426,410
|
|
|
|
415,311
|
|
|
|
2,434,884
|
|
|
|
294,557
|
|
|
|
26,905,142
|
|
NOTE 11. COMMITMENTS AND CONTINGENCIES
Leases
As of the period ended March 31, 2019, we have two leases classified as operating leases and five classified as finance leases. Our operating leases are for warehouse and office facilities for HVAC Value Fund, LLC and for office space for Willow Oak Asset Management, LLC. The leases have remaining terms expiring from 2019 through 2021 and a weighted average remaining lease term of
1.9
years. The right-of-use assets and corresponding lease liabilities for the Company's operating leases are reported separately on the accompanying unaudited condensed consolidated balance sheets. Our finance leases are for home services vehicles and equipment with remaining terms expiring from 2019 through 2020 and a weighted average remaining lease term of 1.1 years. Many of our existing leases have fair value renewal options, none of which have been considered certain of being exercised or included in the minimum lease term. The right-of-use assets and corresponding lease liabilities for the Company's financing leases are recorded within property and equipment and notes payable on the accompanying unaudited condensed consolidated balance sheets, respectively. Discount rates used in the calculation of our lease liability was approximately 6.7%. In addition, the Company is the lessor for facility space in New York that it sublets to other tenants; the sublease expires in 2020 with the operating lease.
Lease costs for the three months ended March 31, 2019 consisted of the following:
Finance lease costs:
|
|
|
|
|
|
Amortization of ROU assets
|
|
$
|
13,107
|
|
|
Interest on lease liabilities
|
|
|
—
|
|
|
Operating lease cost
|
|
|
26,319
|
|
|
Sublease income
|
|
|
(7,039
|
)
|
|
Total lease costs
|
|
$
|
32,387
|
|
|
A maturity analysis of our operating leases is as follows:
2019
|
|
$
|
75,131
|
|
2020
|
|
|
86,380
|
|
2021
|
|
|
13,005
|
|
Total
|
|
|
174,516
|
|
|
|
|
|
|
Discount factor
|
|
|
(10,464
|
)
|
Lease liability
|
|
|
164,052
|
|
Amounts due within 12 months
|
|
|
(100,515
|
)
|
Long-term lease liability
|
|
$
|
63,537
|
|
A maturity analysis of our financing leases is as follows:
2019
|
|
$
|
34,219
|
|
2020
|
|
|
6,190
|
|
Total
|
|
|
40,409
|
|
|
|
|
|
|
Lease liability
|
|
|
40,409
|
|
Amounts due within 12 months
|
|
|
(37,094
|
)
|
Long-term lease liability
|
|
$
|
3,315
|
|
Other Commitments
As previously reported in our Current Reports on Form 8-K filed with the SEC on September 19, 2016, and December 30, 2016, respectively, on September 19, 2016, the Company, through Willow Oak, announced that it had entered into a letter of intent agreement with Alluvial Capital Management, LLC (“Alluvial Capital”) to make a seed investment through Willow Oak Asset Management in Alluvial Fund, LP, a private investment partnership that was launched by Alluvial Capital on January 1, 2017 (“Alluvial Fund”). Alluvial Capital acts as the general partner and the Company, through Willow Oak Asset Management, has invested in Alluvial Fund as a limited partner.
The Company agreed to make capital contributions to Alluvial Fund in the aggregate amount of $10 million to be provided over four equal tranches on January 1, 2017, April 1, 2017, July 1, 2017, and October 1, 2017. As of September 30, 2017, the Company satisfied its obligation to provide $10 million in accordance with the contribution schedule. On January 1, 2018, pursuant to an amendment to the Alluvial Side Letter Agreement, dated December 15, 2017, Willow Oak Asset Management, LLC withdrew $3,000,000 from its $10,000,000 investment in Alluvial Fund, LP in order to partially fund the first close of the Mt Melrose Transaction. Arquitos Capital Partners, LP, which is managed by our director Steven L. Kiel, simultaneously invested $3,000,000 in Alluvial to replace the amount withdrawn by Willow Oak. The Arquitos investment into Alluvial counts toward Willow Oak’s seed investment total for purposes of Willow Oak’s agreement with Alluvial.
As previously reported in our Current Reports on Form 8-K filed with the SEC on December 11, 2017, January 17, 2018, March 2, 2018, March 28, 2018, and July 12, 2018, respectively, ENDI created a wholly owned subsidiary named Mt Melrose, LLC (“New Mt Melrose”) on January 10, 2018, which has acquired a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into on December 10, 2017, with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, a former ENDI director.
As set forth in our Form 8-K filed on January 17, 2018, on January 10, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a first acquisition from Old Mt. Melrose of 44 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the purchase agreement. This first tranche of real properties was acquired for total consideration of $3,956,389, which was payable as follows:
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by payment of $500,000 to Old Mt. Melrose in cash;
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by New Mt Melrose’s assumption of $1,798,713 of outstanding indebtedness secured by the acquired real properties; and
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the balance by issuance to Old Mt. Melrose of 120,602 shares of the Company’s common stock.
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As further set forth in our Form 8-K filed on July 12, 2018, on June 29, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a second acquisition from Old Mt. Melrose of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the purchase agreement. This second tranche of real properties was acquired for total consideration of $5,174,722, which was payable as follows:
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by New Mt Melrose’s assumption of $2,767,158 of outstanding indebtedness secured by the acquired real properties; and
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the balance by issuance to Old Mt. Melrose of 148,158 shares of the Company’s common stock.
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As previously reported in our Current Report on Form 8-K filed with the SEC on November 5, 2018, pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose, the parties mutually agreed to terminate the above-discussed purchase agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the purchase agreement.
On January 10, 2018, New Mt Melrose and Old Mt. Melrose entered into a certain Cash Flow Agreement (the “Cash Flow Agreement”), pursuant to which, in connection with the parties’ anticipated consummation of all of the real property purchase transactions under the purchase agreement described above, the parties agreed that as of and from and after January 10, 2018, until such time as the parties consummated the relevant closing as to each real property under the purchase agreement, Old Mt. Melrose would assign to New Mt Melrose all of the income, rents, receivables, and revenues arising from or issuing out of such real property, and New Mt Melrose would assume Old Mt. Melrose’s responsibility for payment of certain of the costs and expenses attributable to such real property.
Under the Cash Flow Agreement, New Mt Melrose has been responsible for Old Mt. Melrose’s monthly payments of interest and/or principal under the outstanding debt secured by the real properties; Old Mt. Melrose’s real property taxes with respect to the real properties due and attributable to the periods from and after the effective date; and Old Mt. Melrose’s ordinary expenses of operating the real properties, actually incurred, to the extent attributable to
de minimis
repairs, recurring maintenance services, and/or water, electricity, sewer, gas, telephone, or other similar utility charges. However, the risk of loss and casualty damage with respect to all or any portion of the real properties has continued to be borne by Old Mt. Melrose up to and including the actual time of the relevant closing respecting such real property.
Based on the number of properties then outstanding for purchase under the purchase agreement at September 30, 2018, New Mt Melrose was obligated under the Cash Flow Agreement as of September 30, 2018, for (i) monthly payments of interest and/or principal under the outstanding debt secured by such real properties in the aggregate amount of $10,568 per month, (ii) insurance of $1,073 per month, (iii) estimated annualized obligations for real property taxes with respect to such real properties in the aggregate amount of approximately $7,461 per year, and (iv) ordinary recurring expenses of operating such real properties that are expected to be immaterial in aggregate. However, as previously reported in our Current Report on Form 8-K filed with the SEC on November 5, 2018, pursuant to that certain Termination of Cash Flow Agreement entered into effective November 1, 2018, between New Mt Melrose and Old Mt. Melrose, the parties mutually agreed to terminate the above-discussed Cash Flow Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations under the Cash Flow Agreement.
We have no other meaningful long-term debt obligations, purchase obligations, or other long-term liabilities as of March 31, 2019, other than those previously mentioned related to the asset management segment, home services, and real estate segments.
Litigation
Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.
On April 12, 2016, the Company filed a civil action complaint against Frank Erhartic, Jr. (the “Former Erhartic CEO”), the Company’s former CEO and director (prior to December 14, 2015) and currently an owner of record or beneficially of more than five percent of the Company’s Common Stock, alleging, among other things, that the Former Erhartic CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized and wrongful related-party transactions, including causing the Company to borrow certain amounts from the Former Erhartic CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments to the Former Erhartic CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former Erhartic CEO, causing the Company to pay certain amounts to the Former Erhartic CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former Erhartic CEO, causing the Company to pay rent on its corporate headquarters owned by the Former Erhartic CEO’s ex-wife in amounts commercially unreasonable and excessive, and to make real estate tax payments thereon for the personal benefit of the Former Erhartic CEO, converting to the Former Erhartic CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by the Former Erhartic CEO, causing the Company to pay personal credit card debt of the Former Erhartic CEO, causing the Company to significantly overpay the Former Erhartic CEO’s health and dental insurance for the benefit of the Former Erhartic CEO, and causing the Company to pay the Former Erhartic CEO’s personal automobile insurance. The Company is seeking, among other relief available, monetary damages in excess of $350,000. This litigation matter is currently pending in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia).
NOTE 12. SHARE ADJUSTMENT, CANCELLATION AND SALE OF TREASURY SHARES, AND REVERSE STOCK SPLIT
Cancellation and Sale of Treasury Shares
On May 26, 2018, the Company signed a stock purchase agreement with an unaffiliated third party to sell 1,633,500 shares of the Company’s common stock held as treasury shares to such party for $0.11036586 per share. The settlement date for the sale was July 31, 2018. The number of shares transferred on the settlement date was adjusted for the Company’s reverse stock split to 13,068 shares. To the extent that this sale of previously registered shares held as treasury shares required an exemption from registration, this sale of shares of common stock of the Company was exempt from registration under the Securities Act of 1933 (“Securities Act”), in reliance upon Section 4(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.
Reverse Stock Split
As previously reported in our Current Report on Form 8-K filed with the SEC on June 7, 2018, the Board of Directors of the Company previously approved, on March 29, 2018, a reverse stock split of all of the Company’s Common Stock, pursuant to which every 125 shares of Common Stock of the Company were reverse split, reconstituted, and converted into one (1) share of Common Stock of the Company (the “Reverse Stock Split”). To effectuate the aforesaid Reverse Stock Split, the Company previously filed on May 23, 2018, a Certificate of Change Pursuant to Nevada Revised Statutes (“NRS”) Section 78.209 (the “Certificate of Change”) with the Secretary of State of the State of Nevada, with a specified effective filing date of June 1, 2018.
The Company submitted an Issuer Company Related Action Notification regarding the Reverse Stock Split to the Financial Industry Regulatory Authority (“FINRA”) on May 22, 2018. FINRA declared the Reverse Stock Split effective in the marketplace July 23, 2018 (the “FINRA Effective Date”). Accordingly, while the Certificate of Change became effective under Nevada state corporate law on June 1, 2018, the Reverse Stock Split did not become effective as to shareholders or the marketplace until the FINRA Effective Date.
Split Adjustment
On the FINRA Effective Date, the total number of shares of the Company’s Common Stock held by each stockholder converted automatically into the number of whole shares of Common Stock equal to (i) the number of shares of Common Stock held by such stockholder immediately prior to the Reverse Stock Split, divided by (ii) one hundred twenty five (125). No fractional shares were issued, and no cash or other consideration was paid. Rather, any fraction of a share of Common Stock that otherwise would have resulted from the Reverse Stock Split were rounded up to the next whole share of Common Stock. That is, stockholders who otherwise would have been entitled to receive fractional shares because they held a number of pre-Reverse Stock Split shares of the Company’s Common Stock not evenly divisible by one hundred twenty five (125), had the number of post-Reverse Stock Split shares of the Company’s Common Stock to which they were entitled rounded up to the next whole number of shares of the Company’s Common Stock. Stockholders’ equity and all references to share and per share amounts in the accompanying unaudited condensed consolidated financial statements have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.
Ownership Unchanged
Immediately after the Reverse Stock Split, each stockholder’s percentage ownership interest in the Company and proportional voting power remained unchanged except for minor adjustments resulting from the Company’s election to round up any fraction of a share of Common Stock that otherwise would have resulted from the Reverse Stock Split. The rights and privileges of the holders of shares of Common Stock of the Company were substantially unaffected by the Reverse Stock Split.
Capitalization
Immediately prior to the Certificate of Change becoming effective, the aggregate number of shares which the Company had the authority to issue was three hundred fifty million (350,000,000) shares of Common Stock at $.001 par value, and thirty million (30,000,000) shares of Serial Preferred Stock at $.001 par value. As a result of the Certificate of Change and Reverse Stock Split, the aggregate number of shares which the Company has the authority to issue is two million eight hundred thousand (2,800,000) shares of Common Stock at $.125 par value, and thirty million (30,000,000) shares (unchanged) of Serial Preferred Stock at $.001 par value.
CUSIP Number
The Company’s CUSIP number changed on the FINRA Effective Date as a result of the Reverse Stock Split. The new CUSIP number is 293706 107.
NOTE 13. SUBSEQUENT EVENTS
As previously reported in our Current Report on Form 8-K filed with the SEC on May
6
, 2019, changes concerning certain of the Company's executive officers and a director were made effective on Tuesday, April 30, 2019. Effective on this date, G. Michael Bridge resigned as the Chief Executive Officer and a director of the Company, and Rodney E. Lake resigned as the Chief Operating Officer and the corporate secretary of the Company.
Management has evaluated all subsequent events from March 31, 2019, through the date the unaudited condensed consolidated financial statements were issued. Management concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.