NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Lines of Business
Enterprise Diversified, Inc. (formerly White Dove Systems, Inc., Interfoods Consolidated, Inc., and then Sitestar Corporation) was incorporated in Nevada on December 17, 1992. On June 1, 2018, the Company amended its Articles of Incorporation to change the name of the Company to “Enterprise Diversified, Inc.” Unless the context otherwise requires, and when used in this Report, the “Company,” “ENDI,” “we,” “our,” or “us” refers to Enterprise Diversified, Inc. and its subsidiaries.
During the three- and nine-month periods ended September 30, 2021, the Company operated through four reportable segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. Other Operations include corporate operations and nonrecurring or one-time strategic funding or similar activity that is not considered to be one of our primary lines of business. During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, for the three- and nine-month periods ended September 30, 2021, and for all prior periods presented, Home Services Operations are reported as discontinued operations. The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
Asset Management Operations
The Company operates its asset management operations business through its wholly owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”) and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”).
In 2016, the Company made a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017, by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC, and its direct investment in Alluvial Fund, were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As a special limited partner, Willow Oak earns a share of management and performance fees earned. On May 31, 2021, however, Willow Oak initiated a liquidating distribution of its investment in Alluvial Fund, which such withdrawal will be fulfilled by the general partner according to a mutually agreed upon cash distribution schedule. During the quarter ended September 30, 2021, Willow Oak initiated its second aggregate cash distribution totaling $5,579,679 in respect of such withdrawal. This brings the total distribution amount to $14,038,574 for the nine-month period ended September 30, 2021. As of September 30, 2021, Willow Oak holds a remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations.
In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement in June 2017 with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership launched by Willow Oak and managed by Coolidge. Under their agreement concerning Bonhoeffer Fund, LP, Willow Oak paid all start-up expenses and pays agreed-upon operating expenses that are not partnership expenses, Coolidge is responsible for all investment management, and Willow Oak receives 50% of all performance and management fees earned. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.
On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our Board chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak’s Fund Management Services (“FMS”) consisting of the following services: strategic planning, investor relations, marketing, operations, compliance and legal coordination, accounting and bookkeeping, annual audit and tax coordination, and liaison to third-party service providers. On November 1, 2020, this agreement was renewed with revised terms that include an exchange of services between Willow Oak and Arquitos. Willow Oak earns monthly and annual fees as consideration for these services.
On October 1, 2019, Willow Oak partnered with Geoff Gannon and Andrew Kuhn to form Focused Compounding Capital Management, LLC (“Focused Compounding”). This joint venture, of which Willow Oak Capital Management is a 10% beneficial owner, manages capital through separately managed accounts and a private investment fund launched January 1, 2020. Willow Oak provides ongoing FMS and operational support in addition to having covered all one-time expenses associated with the launch of Focused Compounding Fund, LP. As consideration for the arrangement, Willow Oak Capital Management is entitled to 10% of gross management and performance fees earned by Focused Compounding. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.
On September 29, 2020, Willow Oak, through Willow Oak AMS, executed a strategic relationship agreement with SVN Capital, LLC to become a 20% beneficial owner of the firm in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak FMS. As a beneficial owner of SVN Capital, LLC, Willow Oak is entitled to 20% of gross management and performance fees earned by the firm. Additionally, Willow Oak FMS earns a direct fee from SVN Capital Fund, LP, a private investment fund launched by the firm’s managing member, for the administrative, compliance, and tax and audit liaison services it renders.
Real Estate Operations
As has been previously reported, in December 2017, ENDI created a wholly owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), to acquire a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into in December 2017 with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, then an ENDI director. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of New Mt Melrose and its real estate portfolio. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. As was previously reported in the Company’s Current Report on Form 8-K filed with the SEC on May 20, 2021, on May 17, 2021, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in New Mt Melrose in conjunction with a cash payment to the Company. As of the prior period ended June 30, 2021, the Company does not hold any remaining interests in the New Mt Melrose entity. See Notes 4 and 11 for more information.
As has been previously reported, in July 2017, ENDI created a wholly owned real estate subsidiary named EDI Real Estate, LLC to hold ENDI’s legacy portfolio of real estate. As of September 30, 2021, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes a single-family home managed by a third-party property management company and various lots of vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia.
Internet Operations
The Company operates its internet operations segment through Sitestar.net, a wholly owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
Other Operations
Other operations include nonrecurring or one-time strategic funding or similar activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main recent activities comprising other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying consolidated financial statements.
Financing Arrangement Regarding Triad Guaranty, Inc.
In August 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy in April 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. On December 31, 2020, the Company accepted a revision of terms to the original promissory note which includes, among other things, an extension of the loan maturity date to December 31, 2022, an increase of interest to the amount of 12% annually, and a provision to settle all currently accrued interest through the issuance of Triad Guaranty, Inc. common shares. In line with the revision of note terms, during the three-month period ended March 31, 2021, the Company was issued 454,097 shares of Triad Guaranty, Inc. in lieu of interest accrued on the note receivable as of December 31, 2020.
Corporate Operations
Corporate operations include any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operated a home services operations segment through its former subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.
As has been previously reported, on May 24, 2019, the Company completed a divestiture of the home services operations to Rooter Hero. See Note 3 for more information.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and those entities in which it otherwise has a controlling financial interest, including: Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC, Willow Oak Asset Management Fund Management Services, LLC, Bonhoeffer Capital Management, LLC, Sitestar.net, Inc., and EDI Real Estate, LLC.
All intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The December 31, 2020, 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, 2020. 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 September 30, 2021, and the results of operations for the three and nine months ended September 30, 2021, and 2020.
Use of Estimates
In accordance with GAAP, the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments, including, among other items, those related to fair value of investments, revenue recognition, accrued expenses, financing operations, fair value of goodwill, fixed asset lives and impairment, lease right-of-use assets and impairment, deferred tax assets, liabilities and valuation allowance, other assets, the present value of lease liabilities, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash, cash equivalents, accounts receivable, and notes receivable. The Company places its cash with high-quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid instruments purchased with a maturity of three months or less.
Investments
The Company holds various investments through its asset management operations and real estate operations segments. Additionally, investments may be held and reported under the Company’s “other” segment. Assets held through these segments do not have a readily determinable value as these investments are either not publicly traded, do not have published sales records, or do not routinely make current financial information available. Investments held through the asset management operations segment are remeasured to fair value on a recurring basis. Investments held under the real estate operations and other operations segments are remeasured when additional valuation inputs become observable. See Note 5 for more information.
During the nine-month period ended September 30, 2021, and as of December 31, 2020, the Company also held its remaining equity investment in Mt Melrose, LLC through its real estate operations segment. The Company determined that its remaining equity investment did not have a readily determinable fair value, and the Company accounted for the investment at cost, less any impairment, as adjusted for changes resulting from observable price changes. As mentioned previously, on May 17, 2021, however, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in New Mt Melrose in conjunction with a cash payment to the Company. As of the prior period ended June 30, 2021, the Company does not hold any remaining interests in the New Mt Melrose entity.
Accounts Receivable
The Company’s asset management operations segment records receivable amounts for fee shares and fund management services revenue earned on a monthly basis. Performance fee shares crystalize and are collected on an annual basis while management fee shares crystalize and are collected on either a monthly or quarterly basis as dictated by the respective partnership agreement. For these reasons, performance fee shares are designated as contract assets until they crystalize annually on December 31. As of December 31, all performance fees are fully collectible and are no longer classified as contract assets. Fund management services receivables are billed monthly in line with ongoing performance. The Company historically has had no collection issues with fee share and fund management receivables, and the overall possibility for non-collection is extremely low. For these reasons, management has determined that it is not necessary to record an allowance against these receivables. A breakout of contract assets as of September 30, 2021 is noted below:
|
|
September 30, 2021
|
|
Accrued contract assets per Willow Oak fee share arrangements
|
|
$
|
265,819
|
|
Operating accounts receivable, net of allowance
|
|
|
36,729
|
|
Total accounts receivable, net
|
|
$
|
302,548
|
|
The Company also 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 operations 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 operations segment attempts to reduce the risk of non-collection by including a late-payment fee and a manual-processing-payment fee to customer accounts. Receivables more than 90 days past due are no longer included in accounts receivable and are turned over to a collection agency. Accounts receivable more than 30 days are considered past due.
As of September 30, 2021, and December 31, 2020, allowances offsetting gross accounts receivable on the accompanying condensed consolidated balance sheets totaled $423 and $421, respectively. For the quarterly periods ended September 30, 2021, and 2020, bad debt expenses from continuing operations totaled $59 and $58, respectively. For the nine-month periods ended September 30, 2021, and 2020, bad debt expenses (recoveries) from continuing operations totaled ($8) and $322, respectively.
Notes Receivable
The Company does not routinely issue notes receivable in the ordinary course of business, but when a business opportunity arises, a subsidiary may issue a note if it appears to be favorable to the Company. Notes receivable are recorded at their principal amount and interest is accrued quarterly based on the applicable interest rate. The Company makes an assessment of the ultimate collectability of each note receivable on an annual basis based upon the financial condition of the borrower.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. Depreciation is computed using the straight-line method based on the estimated useful lives for each of the following asset classifications:
Furniture and fixtures (in years)
|
|
|
5
|
|
Equipment (in years)
|
|
|
7
|
|
Building improvements (in years)
|
|
|
15
|
|
Buildings (in years)
|
|
|
27.5
|
|
The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Property and equipment to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell.
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company tests its goodwill annually as of December 31, or more often if events and circumstances indicate that those assets might not be recoverable.
Impairment testing of goodwill is required at the reporting-unit level (operating segment or one level below operating segment). The impairment test involves calculating the impairment of goodwill based solely on the excess of the carrying value of the reporting unit over the fair value of the reporting unit. Prior to performing the impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment to determine whether a detailed quantitative analysis is required. The Company estimates the fair value of its reporting units using discounted expected future cash flows.
No impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2021, and 2020.
Intangible assets (other than goodwill) consist of domain names attributed to the internet operations segment. The Company owns 225 domain names, of which 105 are available for sale. These domains are valued at historical cost. When management determines that material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account internal and external appraisals. Intangible assets determined to have definite lives are amortized over their estimated useful lives. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated future undiscounted cash flows of the related intangible asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.
No impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2021, and 2020.
Real Estate
Real estate properties held for resale are carried at the lower of cost or fair value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, then the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area in which the real estate is located. Fair value is evaluated annually by management or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable.
No impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2021, and 2020.
Real estate properties held for investment are carried at the cost basis plus additional costs where the cost extended the life of or added value to the property. Otherwise, the cost is expensed as incurred. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management.
During the three- and nine-month periods ended September 30, 2021, $0 and $211,213, respectively, of real estate held for investment was transferred to real estate held for resale. During the three- and nine-month periods ended September 30, 2020, $133,909 and $177,826 of real estate held for investment was transferred to real estate held for resale. Additionally, during the three- and nine-month periods ended September 30, 2020, $0 and $43,992, respectively, of real estate held for resale was transferred to real estate held for investment. No improvements were made to existing real estate held for investment during the three- and nine-month periods ended September 30, 2021. Improvements of $0 and $10,969, respectively, were made to real estate then held for investment during the three- and nine-month periods ended September 30, 2020.
Accrued Compensation
Accrued compensation represents performance-based incentives that have not yet been paid. Additional compensation can be paid in the form of cash or via the issuance of Company stock. Compensation structures for employees are a pre-approved part of a formal employment agreement or arrangement. Stock-based compensation, issued as part of the Company’s 2020 Equity Incentive Plan, is reserved for board members and members of senior management. The compensation accrual amount is based on the final value of Company stock that has been approved to be issued by the Governance, Compensation, and Nomination Committee of the Board of Directors. These compensation amounts are accrued when earned and able to be estimated and are paid or issued annually after financial records are finalized.
Other Accrued Expenses
Other accrued expenses represent incurred but not-yet-paid expenses from payroll accruals, professional fees, and other accrued taxes.
Leases
The Company records right-of-use (ROU) assets and lease liabilities arising from both financing and operating leases that contain terms extending longer than one year. The Company does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12 months or less). In making our determinations, the Company combines lease and non-lease elements of our leases.
Revenue Recognition
Asset Management Operations and Other Investment Revenue
The Company earns revenue from investments and through various fee share and service agreements, including realized and unrealized gains and losses, which may result in negative period or quarterly revenues. Management fees earned are recorded monthly and are included in revenue on the accompanying unaudited condensed consolidated statements of operations. Performance fees earned are accrued monthly, paid out annually, and are also included in revenue on the accompanying unaudited condensed consolidated statements of operations. Fund management service fees are billed, paid, and recorded according to a monthly schedule. 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. Accrued monthly performance fee shares are designated as contract assets until they crystalize annually on December 31. As of December 31, all performance fees are fully collectible and are no longer classified as contract assets. No contract liabilities are recognized or incurred.
Additionally, the Company earns revenue from direct participation in various private investment funds, primarily the Alluvial Fund. This results in the realized and unrealized gains and losses within a fund such as the Alluvial Fund being recognized as revenue, or a decrease in revenue, on the accompanying unaudited condensed consolidated statements of operations.
A summary of revenue earned through the asset management operations segment for the three- and nine-month periods ended September 30, 2021, and 2020 is included below:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
Asset Management Operations Revenue
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Realized and unrealized gains (losses) on investment activity
|
|
$
|
829,579
|
|
|
$
|
1,545,239
|
|
|
$
|
4,167,650
|
|
|
$
|
989,609
|
|
Management and performance fee revenue
|
|
|
(44,539
|
)
|
|
|
37,858
|
|
|
|
325,815
|
|
|
|
69,153
|
|
Fund management services revenue
|
|
|
21,274
|
|
|
|
24,053
|
|
|
|
62,708
|
|
|
|
72,053
|
|
Total revenue
|
|
$
|
806,314
|
|
|
$
|
1,607,150
|
|
|
$
|
4,556,173
|
|
|
$
|
1,130,815
|
|
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 hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for nonperformance. Contract liabilities (deferred revenue) were recognized in the amount of collections received in advance of services to be performed. No contract assets are recognized or incurred.
The Company generates revenue in its internet operations segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, third-party software as a reseller, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), web hosting, and additional related services to consumers and businesses. Customers may also subscribe to web hosting plans to include email access and storage. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.
Deferred Revenue
Deferred revenue represents collections from customers in advance of services to be performed. Revenue is recognized in the period service is provided. Total deferred revenue from continuing operations increased from $192,088 at December 31, 2020, to $198,199 at September 30, 2021. During the three-month periods ended September 30, 2021, and 2020, $15,412 and $21,733, respectively, of revenue from continuing operations was recognized from prior-year contract liabilities (deferred revenue). During the nine-month periods ended September 30, 2021, and 2020, $173,292 and $193,408, respectively, of revenue from continuing operations was recognized from prior-year contract liabilities.
Income Taxes
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment, inclusive of the recent tax reform act. The most recent three tax years, fiscal years ended December 31, 2020, December 31, 2019, and December 31, 2018, are open to potential IRS examination.
During the three- and nine-month periods ended September 30, 2021, the Company reported income tax expenses of $360,000. No comparable income tax expenses were reported during the three- and nine-month periods ended September 30, 2020. The current year income tax expenses are primarily attributable to the current period distribution activities related to the Company’s investment in Alluvial Fund. The current period income tax expense amounts were calculated after applying historical net operating loss carryforwards, which are subject to certain limitations.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.
In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potentially dilutive common shares is anti-dilutive. In periods of net income, diluted earnings per share is computed using the more dilutive of the “two-class method” or the “treasury method.” Dilutive earnings per share under the “two-class method” is calculated by dividing net income available to common stockholders as adjusted for the participating securities, by the weighted-average number of shares outstanding plus the dilutive impact of all other potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives. Dilutive earnings per share under the “treasury method” are calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the dilutive impact of all potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives.
There were no potentially dilutive shares for the three-month period ended September 30, 2021. The number of potentially dilutive shares for the nine-month period ended September 30, 2021 and the three- and nine-month periods ended September 30, 2020, consisting of common shares underlying common stock equity incentives, was 668. These potentially dilutive shares were reversed during the current three-month period as certain vesting requirements were not met and the shares are no longer available to be issued under the Company’s common stock equity incentive plan. None of the potentially dilutive securities had a dilutive impact after rounding was applied.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate should now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. In April 2019, the FASB further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments. In May 2019, the FASB issued further guidance to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible financial instruments. In November 2019, the FASB issued further guidance on expected recoveries for purchased financial assets with credit deterioration, and transition refiled for troubled debt restructurings, disclosures related to accrued interest receivables, and financial assets secured by collateral maintenance provisions. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. The Company currently expects that the adoption of this guidance may change the way we assess the collectability of our receivables and recoverability of other financial instruments. The Company will adopt this guidance as of January 1, 2023. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying consolidated financial statements.
NOTE 3. HISTORICAL HOME SERVICES SUBSIDIARY ASSET SALE
On May 24, 2019, as has been previously reported, the Company completed a divestiture of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC), to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, all of Specialty Contracting Group’s personal property and customer lists and records were conveyed to Rooter Hero, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed Specialty Contracting Group’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s then-remaining customer accounts going forward. No cash consideration was exchanged in the transaction. Rather, as consideration for the transaction, Rooter Hero agreed to pay monthly royalties for the sixty (60) months following the closing calculated on the basis of any revenue actually received from the customer accounts transferred (7.5% of any monthly revenue generated from qualified sales during the first year, and 5% of any such monthly revenue during years two through five; in each case subject to reduction for pre-approved warranty-related costs concerning select customers).
The operations of Specialty Contracting Group, LLC had been considered a component of, and the divestiture reflected a strategic shift in, the Company’s business. As such, Specialty Contracting Group, LLC’s historical operations have been classified as discontinued operations in the Company’s financial statements. The loss from discontinued operations has been determined using a loss recovery approach, as the collection of future royalties is uncertain and a reasonable estimate could not be made. This approach requires that the contingent consideration, the future royalties to be received, be valued at the lesser of the amount of the “probable,” defined as a greater than 50% likelihood, future proceeds or the carrying value of the disposed assets. Due to the unpredictability of the contingent consideration, and management’s inherent lack of control over the buyer’s operations, management determined it would not be reasonable to attempt to value the contingent consideration. This resulted in assigning the contingent consideration a current valuation of zero. As and to the extent any royalties are deemed probable, they will be subsequently recognized as a “recovery from discontinued operations” on the statements of operations and will offset, or recover, the initial loss recorded. During the three- and nine-month periods ended September 30, 2021, there were no material royalties or other activity from discontinued operations. Comparatively, during the three- and nine-month periods ended September 30, 2020, an offsetting $1,887 and $18,143, respectively, of royalties on discontinued operations were recognized within the reported $1,857 and $15,762 of recoveries from discontinued operations, respectively.
As of December 31, 2020, discontinued assets reported on the face of the accompanying condensed consolidated balance sheets totaled $231. No discontinued liabilities were reported as of December 31, 2020. This compares to September 30, 2021, when no discontinued assets or discontinued liabilities are reported on the face of the accompanying condensed consolidated balance sheets.
A reconciliation of discontinued operations as reported on the accompanying unaudited condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2021, and 2020, is as follows:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cost of revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Selling, general, and administrative expenses
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
|
|
2,381
|
|
Recoveries from sale of subsidiary
|
|
|
—
|
|
|
|
1,887
|
|
|
|
—
|
|
|
|
18,143
|
|
Other income (expense), net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income (loss) reported as discontinued operations
|
|
$
|
—
|
|
|
$
|
1,857
|
|
|
$
|
—
|
|
|
$
|
15,762
|
|
NOTE 4. HISTORICAL SALE OF CONTROLLING INTEREST IN REAL ESTATE SUBSIDIARY
Historical Transaction
As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC, a Delaware limited liability company (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio. The Company retained a 35% membership interest in Mt Melrose.
In connection with this transaction, the Company and Woodmont also entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC (the “A&R LLC Agreement”). The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members, including as to any distributions of cash to the members. The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont was designated as the sole manager. In addition, the Company expressly agreed to a three-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose; and with respect to any matters requiring a vote of the members, the Company will vote with (i.e., the same as) Woodmont. This arrangement was intended to allow the Company to maintain a passive management structure, while still owning a significant portion of the partnership.
While the operations of Mt Melrose, LLC were considered a component of the Company’s business, the June 27, 2019, sale did not represent a major strategic shift in the Company’s business. While we deconsolidated the operations of Mt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest, Mt Melrose, LLC’s historical operations continued to be reflected as “continuing operations” in the Company’s financial statements. That is, all activity prior to the deconsolidation event was included on our consolidated statements of operations for given prior reporting periods in continuing operations, and under the real estate segment. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC were removed from our consolidated balance sheets, and the Company’s membership interest in Mt Melrose then became accounted for as an investment in the equity of Mt Melrose, LLC in the Company’s reported financial statements.
Accounting for Then-Remaining Mt Melrose Investment
The Company adopted ASU 2016-01 effective January 1, 2018. ASU 2016-01 generally requires entities to measure equity investments at fair value and recognize any changes in fair value in net income. However, entities are able to elect a measurement alternative for equity investments that do not have a “readily determinable fair value.” The Company determined that its equity investment in Mt Melrose did not have a readily determinable fair value at the time of deconsolidation. The Company’s inability to “exercise significant influence” due to previously reported contractual agreements, also supported the use of the measurement alternative. Under this alternative, the Company had measured the Mt Melrose investment at its implied fair value and assessed it for impairment at each reporting date.
Using the $100,000 transaction price for a 65% interest in Mt Melrose, LLC on June 27, 2019, the implied value of the Company’s retained 35% equity interest at the time of the transaction was $53,846. This amount has been included under the long-term investment amount on the accompanying consolidated balance sheets as of the end of given prior reporting periods, including as of March 31, 2021, and December 31, 2020.
However, as mentioned previously, on May 17, 2021, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in Mt Melrose, LLC in conjunction with an $850,000 cash payment to the Company. Accordingly, as of the prior period ended June 30, 2021, the Company does not hold any remaining interests in Mt Melrose, LLC. During the prior period ended June 30, 2021, the Company recognized a gain of $778,872 on the May 17, 2021, sale, which is included as a separate line item on the accompanying unaudited condensed consolidated statements of operations for the nine-month period ended September 30, 2021. This gain is representative of the difference between the Company’s most recent carrying value of its Mt Melrose equity investment, various other intercompany reimbursements, and the final sale price represented by the May 17, 2021, transaction.
NOTE 5. INVESTMENTS
Certain assets held through the Company, Willow Oak Asset Management, LLC, 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 investment in Alluvial Fund, LP is measured using net asset value (NAV) as the practical expedient and is exempt from the fair value hierarchy (see Note 6). The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and allocated based on total fund contributions. The Company’s investment in Alluvial Fund is remeasured to fair value on a recurring basis and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Due to the nature of the Mt Melrose, LLC investment (subsequent to the Company’s transfer, relinquishment of control, and subsequent sale (see Note 4)), the investment was measured at cost basis, as fair value was not determinable until additional inputs and measurements became available. Due to the illiquid nature of Triad Guaranty, Inc. stock and the lack of available current financial information for the entity, the Company has measured its investment at cost basis, as fair value is not determinable until additional inputs and measurements become available.
|
|
Cost Basis
|
|
|
Unrealized Gain
|
|
|
Carrying Value
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP (at fair value)
|
|
$
|
1,431,139
|
|
|
$
|
2,289,285
|
|
|
$
|
3,720,424
|
|
Triad Guaranty, Inc. stock (at cost)
|
|
|
45,410
|
|
|
|
—
|
|
|
|
45,410
|
|
Total
|
|
$
|
1,476,549
|
|
|
$
|
2,289,285
|
|
|
$
|
3,765,834
|
|
|
|
Cost Basis
|
|
|
Unrealized Gain
|
|
|
Carrying Value
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP (at fair value)
|
|
$
|
7,064,758
|
|
|
$
|
6,455,858
|
|
|
$
|
13,520,616
|
|
Mt Melrose, LLC (at cost)
|
|
|
53,846
|
|
|
|
—
|
|
|
|
53,846
|
|
Total
|
|
$
|
7,118,604
|
|
|
$
|
6,455,858
|
|
|
$
|
13,574,462
|
|
Alluvial Fund is a private investment fund that 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. During the three- and nine-month periods ended September 30, 2021, the Company withdrew $5,579,679 and $14,038,574, respectively, from the Alluvial Fund. The Company did not withdraw any funds from the Alluvial Fund during the three- and nine-month periods ended September 30, 2020. For the three- and nine-month periods ended September 30, 2021, the Company also reinvested certain management and performance fees earned through the Alluvial Fund. The total amounts of these reinvested fees were $3,354 and $72,367, respectively. For the three- and nine-month periods ended September 30, 2020, the total amounts of these reinvested fees were $4,304 and $16,587, respectively.
NOTE 6. FAIR VALUE OF ASSETS AND LIABILITIES
GAAP defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date, and establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:
|
●
|
Level 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; and
|
|
|
|
|
●
|
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 values its investments at fair value at the end of each reporting period. See description of these investments in Note 5 above.
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Excluded) (a)
|
|
|
Total at Fair Value
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,720,424
|
|
|
$
|
3,720,424
|
|
Total investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,720,424
|
|
|
$
|
3,720,424
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Excluded) (a)
|
|
|
Total at Fair Value
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,520,616
|
|
|
$
|
13,520,616
|
|
Total investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,520,616
|
|
|
$
|
13,520,616
|
|
|
(a)
|
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 consolidated balance sheets.
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company analyzes goodwill on an annual basis or more often if events or changes in circumstances indicate potential impairments. No impairments were recorded during the three- and nine-month periods ended September 30, 2021, and 2020.
The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate an impairment may have occurred. No impairments were recorded during the three- and nine-month periods ended September 30, 2021, and 2020.
As discussed in Note 4, the Company’s previous equity investment in Mt Melrose, LLC was carried at its implied cost under the alternative approach and was assessed for impairment at each balance sheet date. No impairments were recorded during the three-and nine-month periods ended September 30, 2021, and 2020.
As discussed previously, the Company holds stock in Triad Guaranty, Inc. This stock was received in accordance with the December 31, 2020, revisions to the original promissory note, which included Triad stock to be issued in lieu of accrued interest. Due to the illiquid nature of Triad Guaranty, Inc. stock and the lack of available current financial information for the entity, the Company has measured its investment in the stock at cost basis. The Company’s cost basis in the stock is equal to the amount of accrued interest on the promissory note as of December 31, 2020. The Company will assess its investment in Triad for impairment at each balance sheet date or when additional inputs and measurements become available. No impairments were recorded during the three- and nine-month periods ended September 30, 2021.
NOTE 7. PROPERTY AND EQUIPMENT
The cost of property and equipment at September 30, 2021, and December 31, 2020, consisted of the following:
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Computers and equipment
|
|
$
|
17,330
|
|
|
$
|
17,330
|
|
Furniture and fixtures
|
|
|
10,850
|
|
|
|
10,850
|
|
|
|
|
28,180
|
|
|
|
28,180
|
|
Less accumulated depreciation
|
|
|
(17,507
|
)
|
|
|
(14,473
|
)
|
Property and equipment, net
|
|
$
|
10,673
|
|
|
$
|
13,707
|
|
Depreciation expense from continuing operations was $1,012, for the three-month periods ended September 30, 2021, and 2020, and $3,034, for the nine-month periods ended September 30, 2021, and 2020.
NOTE 8. REAL ESTATE
EDI Real Estate, LLC
Through EDI Real Estate, as of September 30, 2021, and December 31, 2020, the Company identified the following units as held for resale or held for investment as noted below:
EDI Real Estate
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Units occupied or available for rent
|
|
|
1
|
|
|
|
4
|
|
Vacant lots held for investment
|
|
|
3
|
|
|
|
3
|
|
Total units held for investment
|
|
|
4
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Units held for resale
|
|
|
—
|
|
|
|
—
|
|
Vacant lots held for resale
|
|
|
—
|
|
|
|
—
|
|
Total units held for resale
|
|
|
—
|
|
|
|
—
|
|
Units held for investment consist of single-family residential rental units.
The lease in effect as of September 30, 2021, is based on a month-to-month provision as the initial annual term of the lease has been completed. An outside property management company manages this rental property on behalf of the Company. There are no reportable future anticipated rental revenues as a result of the month-to-month provision on the remaining existing lease.
EDI Real Estate
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Total real estate held for investment
|
|
$
|
43,846
|
|
|
$
|
303,158
|
|
Accumulated depreciation
|
|
|
(16,512
|
)
|
|
|
(61,282
|
)
|
Real estate held for investment, net
|
|
$
|
27,334
|
|
|
$
|
241,876
|
|
For the three- and nine-month periods ended September 30, 2021, depreciation expense on the EDI Real Estate portfolio of properties was $397 and $3,329, respectively. This compares to the three- and nine-month periods ended September 30, 2020, when depreciation expense on the EDI Real Estate portfolio of properties was $4,431 and $12,861, respectively.
There were no properties sold during the three-month periods ended September 30, 2021, and 2020. Three properties were sold during the nine-month period ended September 30, 2021. Total gross proceeds for the sale of the three properties was $332,000 and net proceeds totaled $75,395. This compares to their carrying value of $211,213, which resulted in a net gain of $120,787 for the period. During the nine-month period ended September 30, 2020, two properties held for resale were sold for gross proceeds of $172,000. Net proceeds totaled $34,749. This compares to their carrying value of $98,835, which resulted in a total gain of $73,165 for the period. No properties were purchased during the three- and nine-month periods ended September 30, 2021, and 2020 for the EDI Real Estate portfolio.
No impairment adjustments were recorded on the EDI Real Estate portfolio during the three- and nine-month periods ended September 30, 2021, and 2020.
NOTE 9. NOTES PAYABLE
Notes payable at September 30, 2021, and December 31, 2020, consist of the following:
|
|
Interest Rates
|
|
Average Term
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Interest-bearing amount due on promissory note through EDI Real Estate, LLC
|
|
|
5.60%
|
|
15 years
|
|
$
|
—
|
|
|
$
|
154,094
|
|
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC
|
|
|
6.00%
|
|
5 years
|
|
|
—
|
|
|
|
96,000
|
|
Less current portion
|
|
|
|
|
|
|
|
—
|
|
|
|
(5,609
|
)
|
Long-term portion
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
244,485
|
|
During the quarterly period ended September 30, 2018, EDI Real Estate, LLC, as a borrower, issued a promissory note secured by certain 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 quarterly period ended September 30, 2021, the remaining loan balance was paid in full and no future payments are required.
During the quarterly period ended September 30, 2017, EDI Real Estate, LLC, as a borrower, issued a promissory note secured by a property held for investment. This note carries an annual interest rate of 6%, accrues interest quarterly, and is due September 15, 2022, with early payoff permitted. During the prior quarterly period ended June 30, 2021, the balance of this note was paid in full in conjunction with the sale of the property.
NOTE 10. SEGMENT INFORMATION
During the three- and nine-month periods ended September 30, 2021, the Company operated through four business segments with separate management and reporting infrastructures that offer different products and services. The four business segments are as follows: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations.
During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, as mentioned in Note 3, the Company completed a divestiture of its home services operations on May 24, 2019. As a result, as of the three- and nine-month periods ended September 30, 2021, and for all prior periods presented, the Company’s former home services operations segment has been reported as discontinued operations.
The asset management operations segment includes revenues and expenses derived from various joint ventures, service offerings, and initiatives undertaken in the asset management industry.
The real estate operations segment includes (i) our equity in Mt Melrose, LLC, prior to the sale of the Company’s remaining membership interests on May 17, 2021, which managed properties held for investment and held for resale located in Lexington, Kentucky, and (ii) 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 operations segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services. Our internet segment includes revenue generated by operations in both the United States and Canada. For the three-month periods ended September 30, 2021, and 2020, the internet segment generated revenue of $207,678 and $230,714 in the United States and revenue of $10,419 and $11,523 in Canada, respectively. This compares to the nine-month periods ended September 30, 2021, and 2020, where the internet segment generated revenue of $640,470 and $703,335 in the United States and revenue of $33,812 and $37,676 in Canada, respectively. All assets reported under the internet segment for the periods ended September 30, 2021, and December 31, 2020, are located within the United States.
The other operations segment includes revenue and expenses from nonrecurring or one-time strategic funding or similar activity and any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three- and nine-month periods ended September 30, 2021, and 2020.
Three Months Ended September 30, 2021
|
|
Asset Management
|
|
|
Real Estate
|
|
|
Internet
|
|
|
Other
|
|
|
Discontinued Operations - Home Services
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
806,314
|
|
|
$
|
1,800
|
|
|
$
|
218,097
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,026,211
|
|
Cost of revenue
|
|
|
—
|
|
|
|
466
|
|
|
|
61,863
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62,329
|
|
Operating expenses
|
|
|
113,158
|
|
|
|
15,202
|
|
|
|
54,905
|
|
|
|
477,234
|
|
|
|
—
|
|
|
|
660,499
|
|
Other income (expense)
|
|
|
—
|
|
|
|
(332
|
)
|
|
|
19,930
|
|
|
|
14,248
|
|
|
|
—
|
|
|
|
33,846
|
|
Income tax benefit (expense)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(360,000
|
)
|
|
|
—
|
|
|
|
(360,000
|
)
|
Income (loss) from continuing operations, net of taxes
|
|
|
693,156
|
|
|
|
(14,200
|
)
|
|
|
121,259
|
|
|
|
(822,986
|
)
|
|
|
—
|
|
|
|
(22,771
|
)
|
Income from discontinued operations, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
Identifiable assets
|
|
$
|
9,681,756
|
|
|
$
|
43,558
|
|
|
$
|
425,155
|
|
|
$
|
9,332,415
|
|
|
$
|
—
|
|
|
$
|
19,482,884
|
|
Nine Months Ended September 30, 2021
|
|
Asset Management
|
|
|
Real Estate
|
|
|
Internet
|
|
|
Other
|
|
|
Discontinued Operations - Home Services
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
4,556,173
|
|
|
$
|
347,260
|
|
|
$
|
674,282
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,577,715
|
|
Cost of revenue
|
|
|
—
|
|
|
|
244,319
|
|
|
|
203,855
|
|
|
|
—
|
|
|
|
—
|
|
|
|
448,174
|
|
Operating expenses
|
|
|
343,808
|
|
|
|
39,936
|
|
|
|
151,791
|
|
|
|
925,832
|
|
|
|
—
|
|
|
|
1,461,367
|
|
Other income (expense)
|
|
|
—
|
|
|
|
755,345
|
|
|
|
20,651
|
|
|
|
23,913
|
|
|
|
—
|
|
|
|
799,909
|
|
Income tax benefit (expense)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(360,000
|
)
|
|
|
—
|
|
|
|
(360,000
|
)
|
Income (loss) from continuing operations, net of taxes
|
|
|
4,212,365
|
|
|
|
818,350
|
|
|
|
339,287
|
|
|
|
(1,261,919
|
)
|
|
|
—
|
|
|
|
4,108,083
|
|
Income from discontinued operations, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
Identifiable assets
|
|
$
|
9,681,756
|
|
|
$
|
43,558
|
|
|
$
|
425,155
|
|
|
$
|
9,332,415
|
|
|
$
|
—
|
|
|
$
|
19,482,884
|
|
Three Months Ended September 30, 2020
|
|
Asset Management
|
|
|
Real Estate
|
|
|
Internet
|
|
|
Other
|
|
|
Discontinued Operations - Home Services
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
1,607,150
|
|
|
$
|
16,129
|
|
|
$
|
242,237
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,865,516
|
|
Cost of revenue
|
|
|
—
|
|
|
|
12,157
|
|
|
|
85,412
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97,569
|
|
Operating expenses
|
|
|
120,368
|
|
|
|
5,940
|
|
|
|
49,239
|
|
|
|
165,165
|
|
|
|
—
|
|
|
|
340,712
|
|
Other income (expense)
|
|
|
—
|
|
|
|
(5,456
|
)
|
|
|
777
|
|
|
|
6,540
|
|
|
|
—
|
|
|
|
1,861
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
1,486,782
|
|
|
|
(7,424
|
)
|
|
|
108,363
|
|
|
|
(158,625
|
)
|
|
|
—
|
|
|
|
1,429,096
|
|
Income from discontinued operations, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,857
|
|
|
|
1,857
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
Identifiable assets
|
|
$
|
11,170,904
|
|
|
$
|
452,357
|
|
|
$
|
470,667
|
|
|
$
|
331,834
|
|
|
$
|
261
|
|
|
$
|
12,426,023
|
|
Nine Months Ended September 30, 2020
|
|
Asset Management
|
|
|
Real Estate
|
|
|
Internet
|
|
|
Other
|
|
|
Discontinued Operations - Home Services
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
1,130,815
|
|
|
$
|
219,772
|
|
|
$
|
741,011
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,091,598
|
|
Cost of revenue
|
|
|
—
|
|
|
|
151,480
|
|
|
|
251,829
|
|
|
|
—
|
|
|
|
—
|
|
|
|
403,309
|
|
Operating expenses
|
|
|
323,351
|
|
|
|
23,651
|
|
|
|
143,521
|
|
|
|
658,989
|
|
|
|
—
|
|
|
|
1,149,512
|
|
Other income (expense)
|
|
|
2,283
|
|
|
|
(13,454
|
)
|
|
|
3,900
|
|
|
|
13,982
|
|
|
|
—
|
|
|
|
6,711
|
|
Income (loss) from continuing operations, net of taxes
|
|
|
809,747
|
|
|
|
31,187
|
|
|
|
349,561
|
|
|
|
(645,007
|
)
|
|
|
—
|
|
|
|
545,488
|
|
Income from discontinued operations, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,762
|
|
|
|
15,762
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
212,445
|
|
Identifiable assets
|
|
$
|
11,170,904
|
|
|
$
|
452,357
|
|
|
$
|
470,667
|
|
|
$
|
331,834
|
|
|
$
|
261
|
|
|
$
|
12,426,023
|
|
NOTE 11. COMMITMENTS AND CONTINGENCIES
Leases
As of September 30, 2021, and December 31, 2020, the Company has no long-term leases that require right-of-use assets or lease liabilities to be recognized.
The previous lease for office space for Willow Oak Asset Management, LLC expired on September 30, 2020, and has been renewed on a month-to-month basis beginning on October 1, 2020. The previous lease for warehouse space for corporate matters was a short-term lease, under 12 months, and expired in February 2020. In accordance with ongoing accounting policy elections, the Company does not recognize right-of-use (ROU) assets or lease liabilities for short-term or month-to-month leases. Total rental expenses attributed to these short-term leases for the three- and nine-month periods ended September 30, 2021, were $5,250 and $15,750, respectively. This compares to total rental expenses attributed to these short-term leases for the three- and nine-month periods ended September 30, 2020, of $0 and $13,434, respectively.
There were no other operating lease costs from continuing operations for the three- and nine-month periods ended September 30, 2021. This compares to total operating lease costs from continuing operations for the three- and nine-month periods ended September 30, 2020, of $15,149 and $59,492, respectively.
As the Company has no remaining leases classified as operating leases or financing leases as of the periods ended September 30, 2021, and December 31, 2020, there are no future liabilities or maturities of lease obligations recognized on the accompanying consolidated balance sheets.