CROSSINGBRIDGE ADVISORS, LLC This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related footnotes for the quarterly period endedSeptember 30, 2022 appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in other reports we file with theSEC from time to time. The discussion of results, causes, and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. Additionally, it should be noted that a uniform comparative analysis cannot be performed for all segments, as a segment's limited financial history or restructuring results in less comparable financial performance. As a result of the Business Combination that was consummated onAugust 11, 2022 , and the determination that the Business Combination would be accounted for as a reverse business combination, all historic activity for the three- and nine-month periods endedSeptember 30, 2021 , and for the year endedDecember 31, 2021 , represents only the financial activity ofCrossingBridge Advisors, LLC . Activity presented for the current three- and nine-month periods endedSeptember 30, 2022 , includes CrossingBridge financial activity, which was then consolidated with the activity ofEnterprise Diversified, Inc. and its subsidiaries as of the Closing Date onAugust 11, 2022 , through the current period endedSeptember 30, 2022 . All amounts in this report are inU.S. dollars, unless otherwise noted. Overview
During the quarterly period ended
? CrossingBridge Operations - this segment includes revenue and expenses
derived from investment advisory and sub-advisory services offered
through various SEC registered mutual funds and an ETF through
CrossingBridge Advisors, LLC ;
? Willow Oak Operations - this segment includes revenue and expenses
derived from our various joint ventures, service offerings, and
initiatives undertaken in the asset management industry through Willow
? Internet Operations - this segment includes revenue and expenses related
to our sale of internet access, hosting, storage, and other ancillary
services through Sitestar.net, Inc.; and
? Other Operations - this segment includes any revenue and expenses from
nonrecurring or one-time strategic funding or similar activity that is
not considered to be one of our primary lines of business, 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.
The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
CrossingBridge OperationsCrossingBridge Advisors, LLC was formed as a limited liability company onDecember 23, 2016 , under the laws of theState of Delaware . CBA derives its revenue and net income from investment advisory services. CBA is a registered investment adviser under the Investment Advisers Act of 1940, as amended. CBA provides investment advisory services to investment companies (including mutual funds and exchange-traded funds) registered under the Investment Company Act of 1940, as amended, both as an adviser and a sub-adviser. CBA has served as a sub-adviser to theDestinations Low Duration Fixed Income Fund and theDestinations Global Fixed Income Opportunities Fund since their inception in 2017. Fees generated from these activities serve as a core revenue stream for CBA. Given the strong demand for conservative, low duration strategies in this ultra-low-to-rising-interest rate environment, theCrossingBridge Low Duration High Yield Fund has experienced strong growth and is a strong and growing revenue source for CBA. The funds launched by CBA in 2021 (CrossingBridge Ultra-Short Duration Fund , theCrossingBridge Responsible Credit Fund , and the CrossingBridge Pre-Merger SPAC ETF) currently represent less than 10% of CBA's assets under management ("AUM"), but CBA believes they have the ability to continue to grow and become a core contributor of AUM and revenue for CBA. 22
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CBA's investment strategies with associated advised and/or sub-advised mutual funds and the ETF are as follows:
Ultra-Short Duration Strategy
? Primarily invest in investment grade fixed income securities with an
ultra-short portfolio duration target of typically 1 year or less.
?
Low Duration Strategy
Low Duration High Yield
? Primarily invest in below investment grade fixed income securities with a
short portfolio duration target of 3 years or less.
? CrossingBridge Low Duration High Yield Fund is advised
? Destinations Low Duration Fixed Income Fund is sub-advised
Pre-Merger Special Purpose Acquisition Companies ("SPACs")? Primarily invest in purchasing common stock and units of SPACs that are
trading at or below their pro rata share of the collateral trust account
with the intent of disposing the shares prior to business combination.
? Aims to capture the fixed income nature of pre-merger SPACs along with the
potential equity upside that they present.
? CrossingBridge Pre-Merger SPAC ETF is advised
? Other CrossingBridge investment strategies may employ pre-merger SPACs
as part of their portfolios
Strategic Income Strategy
? A flexible investment and duration mandate without restrictions as to issuer
credit quality, capitalization, or security maturity.
?
Responsible Investing Strategy
? Primarily invest in corporate debt of issuers that portray a mindfulness
toward environment, social, and governance ("ESG") practices. The strategy
has a flexible investment and duration mandate without restrictions as to
issuer credit quality, capitalization, or security maturity. Further, the
strategy may have concentrated holdings.
? CBA uses its "responsible investing criteria" (i.e., specific exclusionary
and inclusionary criteria based on ESG standards) when making investment
decisions for this strategy. To the extent an issuer's business generates
10% or more of its revenues from certain businesses considered by CBA to be
incompatible with its ESG criteria, then such business will be deemed
"primarily engaged" in such business and excluded from the portfolio.
Generally, issuers primarily engaged in weapons, tobacco, alcohol, gambling,
pornography, or other categories are excluded. After applying the initial
exclusionary screen, CBA applies an inclusionary screen based on
environmental objectives (such as reduction of carbon emissions), social
objectives (such as treating all constituencies in a proper and ethical
manner) and governance objectives (such as diversification of backgrounds,
skills, and philosophy among an issuers board or executive officers). CBA
utilizes a proprietary matrix to measure an issuer's ESG engagement. CBA's
proprietary matrix sets a minimum threshold level that must be achieved for
an issuer's securities or other instruments to satisfy the fund's
responsible investing criteria. Ratings are based on positive and negative
attributes found, both of which can have an impact on the final score given
for an issuer. CBA sources information relating to its responsible investing
criteria from publicly-available resources such as financial filings,
presentations, news articles, and management discussions. CBA monitors an
issuer's conformity to its responsible investing criteria and each holding
will be formally reviewed by the CBA at least annually.
? CrossingBridge Responsible Credit Fund is advised
Management believes that the greatest negative impact on portfolio returns is
the failure of a large position to perform according to the original thesis,
which results in loss of capital. We attempt to mitigate this risk through
investment analysis, portfolio construction, and hedging of risks with respect
to individual positions and/or the overall portfolio as we see fit. In most
cases, our investment analysis begins with a fundamental understanding of an
issuer's business model and management objectives followed by an analysis of the
capital structure. Depending on the nature of the investment, the analysis may
continue with a more in-depth study of legal aspects, pending transactions, and
processes that may impact the issuer. A good investment in a bad business is not
a recipe for enduring success.
CBA has seen interest in its funds continuing to grow in the registered
investment adviser, bank/trust company, and family office segments of the
market. The marketing environment remains strong as attractive options to invest
cash or to invest generally in fixed income securities without substantial
interest rate and credit risk have become scarce. CBA's investment thesis for
its funds is expected to become stronger as expectations for interest rate hikes
and low duration strategies are topics of interest in 2022. CBA expects demand
for the CrossingBridge Low Duration High Yield Fund to continue to increase as
CBA has developed a strong and more established track record. For the two new
mutual funds (CrossingBridge Ultra-Short Duration Fund and the CrossingBridge
Responsible Credit Fund ), although they do not have established track records as
individual funds, CBA believes that the market environment paired with its
long-standing reputation in the fixed income space will be helpful in continuing
to raise assets for those funds. As for the CrossingBridge Pre-Merger SPAC ETF,
which was launched on September 20, 2021 , CBA believes this will grow into a
core AUM/revenue source as investors become more comfortable with the strategy
as a complement or alternative to traditional fixed income allocations.
CBA's primary objective is to fulfill its fiduciary duty to its clients. CBA's secondary objective is to grow its intrinsic value to achieve an adequate long-term return for our member.
23
--------------------------------------------------------------------------------Willow Oak Operations
Beginning on
Willow Oak is party to a fee share arrangement withCoolidge Capital Management, LLC ("Coolidge"), whose sole member isKeith D. Smith . Willow Oak and Coolidge are the members ofBonhoeffer Capital Management, LLC , the general partner toBonhoeffer Fund, LP , a private investment partnership launched by Willow Oak in 2017 and managed by Coolidge. Under their agreement concerningBonhoeffer 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 program management, and tax and audit liaison services it renders. Willow Oak is also party to a fund management services agreement withArquitos Investment Manager, LP,Arquitos Capital Management, LLC ,Arquitos Epicus, LP , andArquitos Capital Offshore Master, Ltd. (collectively "Arquitos"), which are managed by our director,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 program management and legal coordination, accounting and bookkeeping, annual audit and tax coordination, and liaison to third-party service providers. In exchange for these services,Steven Kiel , through Arquitos, has been contracted to perform ongoing consulting services for the benefit of Willow Oak in the following areas: strategic development, marketing, networking, and fundraising. In addition to this exchange of services, Willow Oak also earns an annual performance fee share. Willow Oak, throughWillow Oak Capital Management, LLC , also partners withGeoff Gannon andAndrew Kuhn throughFocused Compounding Capital Management, LLC ("Focused Compounding").Willow Oak Capital Management is a 10% beneficial owner of Focused Compounding, which manages capital through separately managed accounts and a private investment fund which launched inJanuary 2020 . Willow Oak provides ongoing FMS and operational support to both the separately managed accounts and the private investment fund. 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 program management, and tax and audit liaison services it renders. Willow Oak, through Willow Oak AMS and Willow Oak FMS, is also party to a strategic relationship agreement withSVN Capital, LLC ("SVN Capital "), whereby Willow Oak receives certain economic rights in exchange for the provision of certain ongoing FMS and operational services. Pursuant to these economic rights, Willow Oak is entitled to 20% of gross management and performance fees earned bySVN Capital .SVN Capital manages separately managed accounts as well as a private investment fund,SVN Capital Fund, LP , which was launched bySVN Capital's managing member inJanuary 2020 . Willow Oak FMS also earns a direct fee fromSVN Capital Fund, LP , for the administrative, compliance program management, and tax and audit liaison services it renders. Internet Operations Beginning onAugust 12, 2022 , the start of the post-Merger period, the Company operates its internet operations segment through Sitestar.net, a wholly owned subsidiary. Sitestar.net is an internet service provider ("ISP") that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. We provide services to customers inthe United States andCanada . This segment markets and sells narrow-band (dial-up and ISDN) and broadband services (Digital Subscriber Line ("DSL"), fiber-optic, and wireless), as well as web hosting and related services to consumers and businesses.
Our primary competitors include regional and national cable and telecommunications companies that have substantially greater market presence, brand-name recognition, and financial resources compared to Sitestar.net. Secondary competitors include local and regional ISPs.
The residential broadband internet access market is dominated by cable and telecommunications companies. These companies offer internet connectivity through the use of cable modems, DSL programs, and fiber. These competitors have extensive scale and significantly more resources than Sitestar.net. Competitors often offer incentives for customers to purchase internet access by offering discounts for bundled service offerings (i.e., phone, television, and internet). While we are a reseller of broadband services including DSL and fiber services, our profit margin is heavily influenced by these competitive forces. There are currently laws and regulations directly applicable to access or commerce on the internet, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security, and the convergence of traditional telecommunications services with internet communications. We may be positively or negatively affected by the repeal, modification, or adoption of various laws and regulations. These changes may occur at the international, federal, state, and local levels, and may cover a wide range of issues. As ofSeptember 30, 2022 , the focus of our internet operations segment is to generate cash flow, work to make our costs variable, and reinvest in our operations when an acceptable return is available. We did not make significant reinvestments into the internet operations segment during the quarterly period endedSeptember 30, 2022 . Management routinely endeavors to identify the market value for domain names owned by the Company in order to assess potential income opportunities. Management evaluates these domain names for third-party sales potential, as well as for other marketing opportunities that could generate new revenue from current customers who utilize the domains. Other Operations
Beginning on
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.
24
--------------------------------------------------------------------------------Summary of Financial Performance
Stockholders' equity increased from$591,909 atDecember 31, 2021 to$19,844,405 atSeptember 30, 2022 . This change was attributable to$2,615,655 of net income in the CrossingBridge operations segment for the nine-month period endedSeptember 30, 2022 ,$45,393 of net income in the internet operations segment, a net loss of$33,834 in the Willow Oak operations segment, and a net loss of$782,917 in other segments for the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 . Corporate expenses for the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 included in the net loss from other operations totaled$1,705,512 . Total comprehensive net income for the nine-month period endedSeptember 30, 2022 equaled$1,844,297 . Balance Sheet Analysis This section provides an overview of changes in our assets, liabilities, and equity and should be read together with our accompanying condensed consolidated financial statements, including the accompanying notes to the financial statements. The table below provides a balance sheet summary for the periods presented and is designed to provide an overview of the balance sheet changes from quarter to quarter. Ending balances forEnterprise Diversified, Inc. and its subsidiaries have been consolidated as of the quarterly period endedSeptember 30, 2022 , the period in which the Mergers occurred. September 30, December 31, September 2022 June 30, 2022 March 31, 2022 2021 30, 2021 Assets Cash and cash equivalents$ 11,685,819 $ 1,062,375 $ 642,672 $ 1,272,924 $ 470,552 Investments in securities, at fair value 5,721,047 2,248,556 2,262,239 2,265,088 2,250,000 Accounts receivable, net 726,841 506,593 649,854 511,248 301,275 Intangible assets, net 2,977,869 - - - - Deferred tax assets, net 400,283 - - - - Other assets 959,162 11,416 - 4,567 - Total assets$ 22,471,021 $ 3,828,940 $ 3,554,765 $ 4,053,827 $ 3,021,827 Liabilities and Stockholders' Equity Accounts payable$ 21,381 $ - $ - $ - $ - Accrued compensation 1,239,929 763,750 381,875 - 591,885 Accrued expenses 233,857 8,829 24,469 84,627 57,593 Deferred revenue 175,552 - - - - Class W-1 Warrant and Class B Common Stock 954,000 - - - - Due to affiliate - 939,950 1,794,895 3,377,291 2,264,563 Other liabilities 1,898 - - - - Total liabilities 2,626,617 1,712,529 2,201,239 3,461,918 2,914,041 Total stockholders' equity 19,844,405 2,116,411 1,353,526 591,909 107,786 Total liabilities and stockholders' equity$ 22,471,021 $ 3,828,940 $
3,554,765$ 4,053,827 $ 3,021,827 As of the period endedSeptember 30, 2022 , the Company reported an increase in cash and cash equivalents of approximately$10.4 million , an increase in investments in securities of approximately$3.5 million , and an increase in net intangible assets of approximately$3.0 million when compared to the year endedDecember 31, 2021 . As ofSeptember 30, 2022 , the Company also reported an increase of approximately$1.2 million of accrued compensation expenses, a decrease of approximately$3.4 million in its due to affiliate balance, and an increase of approximately$0.9 million in a liability associated with the issuance of the W-1 Warrant when compared to the year endedDecember 31, 2021 . These period-over-period changes are largely due to the purchase accounting of the Business Combination and the consolidation of the assets and liabilities of Enterprise Diversified. 25
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Results of Operations CrossingBridge Operations Revenue attributed to the CrossingBridge operations segment for the three-month period endedSeptember 30, 2022 , was$1,993,772 , representing an increase of$835,098 compared to the three-month period endedSeptember 30, 2021 . This increase was primarily due to a corresponding increase in the AUM period over period. The increase in revenue was offset by an increase of$178,090 in operating expenses, which totaled$934,584 for the three-month period endedSeptember 30, 2022 . The increase in operating expenses for the three-month period endedSeptember 30, 2022 , compared to the three-month period endedSeptember 30, 2021 , was primarily associated with an increase in employee compensation expenses and mutual fund expenses. Net profit margin increased from 35% for the three-month period endedSeptember 30, 2021 , to 55% for the three-month period endedSeptember 30, 2022 . This was largely due to the increase in AUM and corresponding increase in revenue. Compensation and related costs are typically comprised of salaries, bonuses, and benefits. Salary compensation and bonuses are generally the largest expenses for the CBA segment. Bonuses are subjective and based on individual performance, the underlying funds' performance, and profitability of the firm, as well as the consideration of future outlook. Compensation and related costs increased by$252,932 for the three-month period endedSeptember 30, 2022 compared to the three-month period endedSeptember 30, 2021 . This increase was due to an increase in allocated compensation expenses from Cohanzick due to the relative increase in AUM period over period for the CBA funds. Compensation expense can fluctuate period over period as management evaluates investment performance, individual performance, Company performance, and other factors. Other general and administrative expenses decreased by$74,842 for the three-month period endedSeptember 30, 2022 compared to the three-month period endedSeptember 30, 2021 . This decrease was substantially due to costs associated with marketing two new mutual funds that were launched in 2021 as well as costs associated with the ETF that was launched inSeptember 2021 . CBA expects that its net margin will fluctuate from period to period based on various factors, including: revenues, investment results, and the development of investment strategies, products, and/or channels. Assets Under Management CBA derives its revenue from its investment advisory fees. Investment advisory fees paid to CBA are based on the value of the investment portfolios it manages and fluctuate with changes in the total value of its assets under management AUM. With respect to bothDestinations Low Duration Fixed Income Fund andDestinations Global Fixed Income Opportunities Fund (collectively, the "Destination Funds"), CBA serves as one sub-adviser as part of a manager of managers strategy. As one of many sub-advisers, CBA does not select the benchmarks, and does not have a license to use, the benchmark performance information for the Destination Funds. CBA believes that the benchmark performance information is not material in this context because CBA's advisory services with respect to the Destination Funds involves only a portion of the assets while the benchmarks are selected as an appropriate comparison based on the entire portfolio across all of the relevant sub-advisers. CBA's revenues are highly dependent on both the value and composition of AUM. The following is a summary of CBA's AUM by product and investment strategy, as ofSeptember 30, 2022 andSeptember 30, 2021 : Assets Under Management by Product September 30, 2022 September 30, 2021 % Change (in millions, except percentages) Advised funds 697 385 81.0 % Sub-advised funds 779 831 (6.3 %) Total AUM 1,476 1,216 21.4 % Assets Under Management by Investment Strategy September 30, 2022 September 30, 2021 % Change (in millions, except percentages) Ultra-Short Duration 68 37 83.8 % Low Duration 1,060 774 37.0 % Responsible Investing 21 17 23.5 % Strategic Income 327 388 (15.7 %) Total AUM 1,476 1,216 21.4 % 26
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Market
Appreciation
Beginning Balance Gross Inflows Gross Outflows (Depreciation) Ending Balance
3Q 2021 208,391,848 151,985,791 (41,361,958 ) 5,993,525 325,009,206
4Q 2021 325,009,206 116,793,140 (48,158,802 ) 2,003,010 395,646,554
1Q 2022 395,646,554 246,380,999 (52,333,341 ) 761,371 590,455,583
2Q 2022 590,455,583 81,578,448 (113,049,267 ) (7,650,146 ) 551,334,618
3Q 2022 551,334,618 64,761,170 (72,441,879 ) 1,154,842 551,334,618
Inception Date - Beginning Market Appreciation June 30, 2021 Balance Gross Inflows Gross Outflows (Depreciation) Ending Balance 3Q 2021 - 36,952,935 (11 ) 29,594 36,982,518 4Q 2021 36,982,518 22,647,523 (649,626 ) 74,398 59,054,813 1Q 2022 59,054,814 6,390,858 (2,836,014 ) 1,793 62,611,451 2Q 2022 62,611,451 6,911,112 (6,545,551 ) 125,669 63,102,681 3Q 2022 63,102,681 9,219,316 (4,567,382 ) 462,466 68,217,081
Market
Inception Date - Beginning Appreciation
June 30, 2021 Balance Gross Inflows Gross Outflows (Depreciation) Ending Balance
3Q 2021 - 17,104,851 (298,030 ) 122,216 16,929,037
4Q 2021 16,929,037 744,812 (1,364,539 ) 101,418 16,410,728
1Q 2022 16,410,728 1,279,115 (798,198 ) (46,898 ) 16,844,747
2Q 2022 16,844,747 622,284 (854,348 ) (269,160 ) 16,343,523
3Q 2022 16,343,523 6,301,617 (1,749,280 ) 266,748 21,162,608
CrossingBridge Pre-Merger SPAC ETF (in dollars)
Inception Date - Market September 20, Beginning Appreciation 2021 Balance Gross Inflows Gross Outflows (Depreciation) Ending Balance 3Q 2021 - 5,803,772 - (1,989 ) 5,801,783 4Q 2021 5,801,783 37,690,217 (807,972 ) 319,711 43,003,739 1Q 2022 43,003,739 11,051,749 - 54,845 54,110,333 2Q 2022 54,110,333 8,806,469 (1,436,663 ) (119,608 ) 61,360,531 3Q 2022 61,360,531 9,217,570 (7,642,075 ) 375,499 63,311,525
Market
Appreciation
Beginning Balance Gross Inflows Gross Outflows (Depreciation) Ending Balance
3Q 2021 400,514,823 30,000,000 - 12,327,273 442,842,096
4Q 2021 442,842,096 16,000,000 - 4,078,846 462,920,942
1Q 2022 462,920,942 - - 1,243,070 464,164,012
2Q 2022 464,164,012 - - (6,746,187 ) 457,417,825
3Q 2022 457,417,825 - (5,000,000 ) (815,114 ) 451,602,711
Market
Appreciation
Beginning Balance Gross Inflows Gross Outflows (Depreciation) Ending Balance
3Q 2021 382,218,080 - - 5,908,735 388,126,815
4Q 2021 388,126,815 - (5,000,000 ) 8,515,628 391,642,443
1Q 2022 391,642,443 - (41,000,000 ) 7,203,378 357,845,821
2Q 2022 357,845,821 - (4,000,000 ) (15,473,946 ) 338,371,875
3Q 2022 338,371,875 - (8,000,000 ) (3,429,003 ) 326,942,872
Total AUM of the mutual funds increased by $260.4 million from September 30,
2021 compared to September 30, 2022 . This net AUM increase consisted of $268.2
million of net inflows and $7.8 million of net losses and capital losses which
were retained within the funds. The AUM for all of CBA's strategies increased
during the period with the exception of the strategic income strategy.
27
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Performance
Although performance is a key metric to measure an advisor's success, there are
other metrics that CBA believes are more meaningful to its investors, including
downside protection during difficult environments, sensitivity to rising
interest rates, upside/downside capture, and the risk-adjusted return. Although
CBA does not manage to benchmarks, CBA does provide benchmarks to investors as a
frame of reference, which are set forth below:
3Q 2021 4Q 2021 1Q 2022 2Q 2022 3Q 2022
CrossingBridge Low Duration High Yield Fund 2.02% 0.55% 0.18% (1.32%) 0.21%
ICE
1.02%
ICE
0.72%
ICE
1.77%
Bloomberg Barclays US Aggregate Bond Index 0.05% 0.01% (5.93%) (4.69%) (4.75%) ICE BofA US High Yield Index
0.94% 0.66% (4.51%) (9.97%) (0.68%)
CrossingBridge Pre-Merger SPAC ETF (Price) 0.20% 2.30% 0.10% (0.15%)
0.44%
CrossingBridge Pre-Merger SPAC ETF (NAV) 0.03% 2.36% 0.09% (0.21%)
0.60%
ICE
28
--------------------------------------------------------------------------------Willow Oak Operations Beginning onAugust 12, 2022 , the start of the post-Merger period, the Company operates its Willow Oak operations business through its wholly owned subsidiaries,Willow Oak Asset Management, LLC ,Willow Oak Capital Management, LLC ,Willow Oak Asset Management Affiliate Management Services, LLC , andWillow Oak Asset Management Fund Management Services, LLC . Willow Oak generates its revenue through various fee share agreements with private investment firms and partnerships in exchange for providing its fund management services. Willow Oak does not manage, direct, or invest any capital itself, but rather earns fee shares based on the AUM and periodic performance of the investment firms and partnerships with which it partners. Fee shares earned on AUM, management fee shares, and fund management services revenue are recognized and recorded on a monthly or quarterly basis in alignment with the underlying terms of each investment partnership. Fee shares earned on performance are recognized and recorded only when the underlying investment partnership's performance crystalizes, which is typically on an annual, calendar-year basis. As performance fee shares are based on investments returns, these fee shares have the potential to be highly variable. During the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 , the Willow Oak operations segment generated$21,975 of revenue. Operating expenses totaled$54,547 and other expenses were$1,262 . The net loss for the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 totaled$33,834 . The tables below provide a summary of Willow Oak revenue amounts included on the condensed consolidated statements of operations for the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 . Three-Month Period Ended Nine-Month Period Ended September 30 September 30 Willow Oak Operations Revenue 2022 2022 Management fee revenue $ 8,206 $ 8,206 Fund management services revenue 13,768 13,768 Performance fee revenue - - Total revenue $ 21,975 $ 21,975
No comparable activity is available or included for the Willow Oak operations
segment for periods presented prior to
Internet Operations Revenue attributed to the internet operations segment during the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 totaled$111,659 and cost of revenue totaled$33,564 . Operating expenses for the segment totaled$32,011 for the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 and other expenses totaled$691 . Total net income for the internet operations segment was$45,393 for the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 . As ofSeptember 30, 2022 , the internet operations segment has a total of 6,185 customer accounts across theU.S. andCanada . As ofSeptember 30, 2022 , approximately 92% of our customer accounts areU.S. -based, while 8% areCanada -based. During the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 , approximately 48% of our revenue was driven by internet access services, with the remaining 52% being earned though web hosting, email, and other web-based storage services.
Revenue generated by our
No comparable activity is available or included for the internet operations
segment for periods presented prior to
Other Operations During the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 , the Company's other operations segment did not produce any revenue or cost of sales. Operating expenses totaled$1,705,512 , and other income totaled$922,595 . Corporate operating expenses accounted for the full$1,705,512 of reported operating expenses for our other operations segment. Included in corporate operating expenses reported for the period are$881,755 of non-cash stock compensation expenses incurred in conjunction with the Business Combination. These expenses were associated with the issuance of Class A common stock and the W-2 Warrant. During the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 , the other operations segment also reported transaction expenses incurred as part of the Business Combination totaling$470,329 . These transaction expenses were offset by$522,000 of other income reported as part of the Company's periodic revaluation of its liability associated with the Class W-1 Warrant and redeemable Class B common stock. This resulted in a net loss of$782,917 for the other operations segment for the post-Merger period fromAugust 12, 2022 throughSeptember 30, 2022 . During the three-month period endedSeptember 30, 2022 , the Company reported$400,283 of income tax benefit. As noted above, due to CBA's disregarded status for periods prior to the Closing Date, no comparable income tax expenses existed for the three-month period endedSeptember 30, 2021 .
No comparable activity is available or included for the other operations segment
for periods presented prior to
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--------------------------------------------------------------------------------Liquidity and Capital Resources
During the nine-month period endedSeptember 30, 2022 , the Company carried out its business strategy in four operating segments: CrossingBridge operations, Willow Oak operations, internet operations, and other operations. As a result of the Merger that occurred onAugust 11, 2022 and the determination that the Merger would be accounted for as a reverse business combination, activity presented for the current nine-month period endedSeptember 30, 2022 , includes CrossingBridge financial activity for the full nine-month period andEnterprise Diversified, Inc. activity as of the closing of the Merger onAugust 11, 2022 throughSeptember 30, 2022 . Our primary focus is on generating cash flow so that we have the flexibility to pursue opportunities as they present themselves. We intend to only invest cash in a segment if we believe that the return on this invested capital is appropriate for the risk associated with the investment. This consideration is measured against all investment opportunities available to us and is not limited to these particular segments nor the Company's historical operations. The Company's current financial condition is liquid, with a significant amount of its assets comprised of cash and cash equivalents, investments, and accounts receivable. The Company's main source of liquidity is cash flows from operating activities, which are primarily generated from investment advisory fees generated through CrossingBridge operations. Cash and cash equivalents, investments in securities, and accounts receivable represented approximately$11.7 million ,$5.7 million and$0.7 million of total assets as ofSeptember 30, 2022 , respectively, and approximately$1.3 million ,$2.3 million and$0.5 million of total assets as ofDecember 31, 2021 , respectively. The Company believes that these sources of liquidity, as well as its continuing cash flows from operating activities will be sufficient to meet its current and future operating needs for at least the next 12 months. In line with the Company's objectives, it anticipates that its main uses of cash will be for operating expenses and seed capital to fund new and existing investment strategies through its CrossingBridge operations segment. The Company's management regularly reviews various factors to determine whether it has capital in excess of that required for its business, and the appropriate uses of any such excess capital.
The aging of accounts receivable as of
September 30, 2022 December 31, 2021
Current $ 722,157 $ 511,248
30 - 60 days 4,266 -
60+ days 418 -
Total $ 726,841 $ 511,248
We have no material capital expenditure requirements.
Cash Flow Analysis
Cash Flows from Operating Activities
The Company reported$2,496,503 of net cash provided by operating activities for the nine-month period endedSeptember 30, 2022 . Increases in accrued compensation expenses and expenses related to the issuance of the W-2 Warrant and additional share purchases represented significant adjusting items to cash flows generated through operations.
Cash Flows from Investing Activities
The Company reported$11,967,639 of net cash provided by investing activities for the nine-month period endedSeptember 30, 2022 . The majority of this inflow was related to the consolidation of Enterprise Diversified's assets and liabilities pursuant to the Business Combination.
Cash Flows from Financing Activities
The Company reported$4,051,247 of net cash flows used in financing activities for the nine-month period endedSeptember 30, 2022 . Prior to the Closing Date, the Company repaid the balance of its due to affiliate amount and made distributions to CrossingBridge's historical sole member. These outflows were offset by the issuance of Class A common stock pursuant to the Business Combination.
Summary Discussion of Critical Accounting Estimates
The financial statements were prepared in accordance withU.S. generally accepted accounting principles, which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions affect various matters, including our reported amounts of assets and liabilities in our condensed consolidated balance sheets at the dates of the financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and our reported amounts of revenues and expenses in our condensed consolidated carve-out statements of operations during the reporting periods. These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management's control. As a result, actual amounts could materially differ from these estimates. TheSEC defines critical accounting estimates as those that are both most important to the portrayal of a company's financial condition and results of operations and require management's most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In Note 2 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, we discuss our significant accounting policies, including those that do not require management to make difficult, subjective, or complex judgments or estimates. The most significant areas involving management's judgments and estimates are described below. 30 --------------------------------------------------------------------------------
Fair-Value of Long-Term Assets
Goodwill The Company tests its goodwill annually as ofDecember 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. This qualitative assessment and the ongoing evaluation of events and circumstances represent critical accounting estimates. Management considers a variety of factors when making these estimates, which include, but are not limited to, internal changes in the segment's operations, external changes that affect the segment's industry, and overall financial condition of the segment and Company. Management did not identify any events or circumstances during the period endedSeptember 30, 2022 that would indicate potential goodwill impairment, nor did management's qualitative assessment performed onDecember 31 indicate a potential goodwill impairment. Total goodwill reported on the condensed consolidated balance sheets was$1,677,425 as of the period endedSeptember 30, 2022 .Long-Term Investments When investment inputs or publicly available information are limited or unavailable, management estimates the value of certain long-term investment using the limited information it has available, which can include the Company's cost basis. This process, which was used to measure the value of the Company's investment in the private company made through eBuildVentures, LLC , represents a critical accounting estimate. Management utilizes the available inputs to perform an initial valuation estimate and subsequently updates that valuation when additional inputs become available. Management did not identify any events or circumstances during the period endedSeptember 30, 2022 that would indicate potential impairment of the Company's investment in the private company. This investment is reported on the condensed consolidated balance sheet for$450,000 as of the period endedSeptember 30, 2022 . Other Intangible Assets 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. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. These initial appraisals, as well as the subsequent evaluation of events and circumstances that may indicate impairment, represent critical accounting estimates. Management did not identify any events or circumstances during the three-month period endedSeptember 30, 2022 that would indicate potential impairment of the Company's customer lists, trade names, or domain names. The total value of the Company's customer lists, trade names, and domain names, net of amortization, reported under long-term assets on the condensed consolidated balance sheet is$1,300,444 as of the period endedSeptember 30, 2022 .
Deferred Tax Assets and Liabilities
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 condensed consolidated financial statements. 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. Management's analysis of the amount of deferred tax assets that will ultimately be realized represents a critical accounting estimate. As of the period endedSeptember 30, 2022 , the Company recognized a net deferred tax asset of$400,283 . In an effort to remain conservative and limit the potential financial impact of management's estimate, the Company has provided a full valuation allowance against certain historical net deferred tax assets as of the period endedSeptember 30, 2022 . This results in no value being attributed to these historical deferred tax assets on the accompanying condensed consolidated balance sheet as of the period endedSeptember 30, 2022 .
Contingencies, Commitments, and Litigation
Liabilities are recognized when management determines that contingencies, commitments, and/or litigation represent events that are more likely than not to result in a measurable obligation to the Company. Management's analysis of these events represents a critical accounting estimate.
W-1 Warrant and Class B Common Shares
Pursuant to the Merger Agreement, during the three-month period endedSeptember 30, 2022 , the Company issued a Class W-1 Warrant to purchase 1,800,000 of the Company's Class A common stock. The liability associated with the issuance of the such warrant, and the embedded shares of Class B common stock, is based on an independent third-party valuation, which includes a Black-Scholes pricing model. As of the period endedSeptember 30, 2022 , the long-term liability reported on the Company's condensed consolidated balance sheet for the W-1 Warrant and shares of Class B common stock totals$954,000 . See Note 5 for more information. Accrued Compensation The balance reported as accrued compensation expense as of the period endedSeptember 30, 2022 is primarily attributed to management's allocation of estimated pro rata bonus amounts to be paid to employees for services performed during the current period. Bonuses are subjective and are based on numerous factors including, but not limited to, individual performance, the underlying funds' performance, and profitability of the firm, as well as the consideration of future outlook. Accrued bonus amounts can fluctuate due to a future perceived change in any one or more of these factors. Additionally, differences between historical, current, and future personnel allocations could significantly impact the comparability of bonus expenses period over period.
As of the period ended
Discussion Regarding COVID-19 Potential Impacts
Due to the continuing uncertainty surrounding the COVID-19 pandemic, management has continued to regularly monitor and assess all Company operations for potential impacts of the COVID-19 pandemic. As of the quarterly period endedSeptember 30, 2022 , the Company has not been required to make significant operational changes as a result of the pandemic. Management does not anticipate additional challenges in meeting existing obligations, nor do we expect significant customer or vendor interruptions. However, the extent to which the continuing COVID-19 pandemic ultimately may impact our business, financial condition, liquidity, and results of operations likely will continue to depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the continuing pandemic, the direct and indirect impact of the continuing pandemic on our employees, customers, and service providers, as well as theU.S. economy and the actions taken by governmental authorities and other third parties in response to the continuing pandemic. 31
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