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 the Company's unaudited condensed consolidated
financial statements and related footnotes for the quarterly period ended
September 30, 2020. 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 recent restructuring results in less comparable
financial performance.
Overview
During the quarterly period ended September 30, 2020, Enterprise Diversified,
Inc. ("ENDI," the "Company," or "we") operated under four reportable segments:
? Asset Management Operations - this segment includes revenue and expenses
derived from our various joint ventures, service offerings, and
initiatives undertaken in the asset management industry;
? Real Estate Operations - this segment includes revenue and expenses
related to the management of properties held for investment and held for
resale through Mt Melrose (prior to the sale of 65% of our equity in Mt
Melrose on June 27, 2019) located in Lexington, Kentucky, and revenue
and expenses related to the management of legacy properties held for
investment and held for resale through EDI Real Estate located in
Roanoke, Virginia;
? Internet Operations - this segment includes revenue and expenses related
to our sale of internet access, hosting, storage, and other ancillary
services; and
? Other Operations - this segment includes any revenue and expenses from
nonrecurring or one-time strategic funding or similar opportunities
previously undertaken, 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.
During periods prior to the quarter ended June 30, 2019, the Company also
operated through a fifth reportable segment, Home Services Operations. This
segment now includes discontinued revenue and expenses derived from our former
operation of HVAC and plumbing companies in Arizona. As of the quarterly period
ended September 30, 2020, and for all prior periods presented, Home Services
Operations are reported as discontinued operations.
Management of the Company also continually reviews various business
opportunities for the Company, including those in other lines of business.
Note that as of May 24, 2019, as reported in the Current Report on Form 8-K
filed with the SEC on May 28, 2019, 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, the
Company sold and conveyed all of the subsidiary's personal property and customer
lists and records, excluding stock inventory and other current assets. As part
of the transaction, Rooter Hero assumed the subsidiary'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 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 received from the customer accounts transferred. Under such
royalty arrangements, the Company will receive 7.5% of any monthly revenue
generated from qualified sales during the first year, and 5% of any monthly
revenue during years two through five. Royalties received will be reduced by
pre-approved warranty-related costs for select customers.
Additionally, on June 27, 2019, as reported in the Current Report on Form 8-K
filed with the SEC on July 3, 2019, the Company sold 65% of its membership
interest in Mt Melrose, LLC 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 Mt Melrose and its real estate portfolio.
Asset Management Operations
The Company operates its asset management operations business through its
wholly-owned subsidiaries, Willow Oak Asset Management, LLC ("Willow Oak") and
Willow Oak Capital Management, LLC.
In 2016, the Company made a strategic determination to fund 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 of September 30, 2020,
Willow Oak continues to hold its 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.
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: investor relations, marketing, operations, legal, accounting and
bookkeeping, annual audit coordination, and liaison to third-party service
providers. As consideration for the services, Arquitos pays Willow Oak a monthly
fixed fee and an annual performance-based fee.
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% owner,
manages capital through separately managed accounts and a private investment
fund launched January 1, 2020. As a member of the general partner, Willow Oak
Capital Management 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.
On September 29, 2020, Willow Oak, through its newly formed wholly-owned
subsidiary, Willow Oak Asset Management Affiliate Management Services, LLC,
executed a strategic relationship agreement with SVN Capital, LLC to become a
20% owner of the firm in exchange for the provision of certain ongoing FMS and
operational services offered through Willow Oak Asset Management Fund Management
Services, LLC, another newly formed wholly-owned subsidiary of Willow Oak. As a
beneficial owner of the general partner, Willow Oak is entitled to 20% of gross
management and performance fees earned. Additionally, Willow Oak Asset
Management Fund Management Services, LLC earns a direct fee from the private
limited partnership for the administrative, compliance and tax and audit liaison
services it renders.
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Real Estate Operations
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 Woodmont. 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. See Note 4 for more
information.
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,
2020, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment
portfolio that includes six residential properties and vacant land. Our real
estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke,
Virginia. The portfolio includes occupied single-family homes that are managed
by a third-party property management company. The leases in effect as of
September 30, 2020, are based on annual time periods and include month-to-month
provisions after the completion of the initial term.
State and municipal laws and regulations govern the real estate industry and do
not vary significantly from one community to another. State laws, including the
Virginia Residential Landlord and Tenant Act, in addition to local ordinances,
govern rental properties and also do not vary significantly throughout our real
estate holding areas.
Internet Operations
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, web hosting, and various
ancillary services. We provide services to customers in the United States and
Canada. This segment markets and sells narrow-band (dial-up and ISDN) and
broadband services (DSL and fiber-optic). Additionally, we market and sell 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, Digital Subscriber Line (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, 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 of September 30, 2020, 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 current quarter.
Management is currently identifying 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.
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operated its home services operations segment
through its 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 its
divestiture of the home services operations to Rooter Hero. See Note 3 for more
information.
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 activities that comprise
other operations.
Huckleberry Real Estate Fund
In January 2017, the Company, through Willow Oak, committed to make a capital
contribution to Huckleberry Real Estate Fund II, LLC, a private investment fund,
in the aggregate amount of $750,000. In May 2018, Willow Oak transferred the
Huckleberry investment to EDI Real Estate, LLC, another wholly-owned subsidiary
of the Company. During the quarter ended March 31, 2019, all contributed capital
was returned in full and a gain of $212,631 was recognized as revenue through
the other operations segment on our unaudited condensed consolidated statements
of operations for the nine-month period ended September 30, 2019.
Triad DIP Investors
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 November 12, 2019, the Company exercised its warrants
and purchased 450,000 shares of Triad Guaranty, Inc. Subsequently, on December
30, 2019, the Company monetized all 450,000 shares. The borrower has requested
an extension from the original note repayment date of April 29, 2020, and as of
the quarterly period ended September 30, 2020, the Company is evaluating a
renegotiation of terms.
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.
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Summary of Financial Performance
Common stockholders' equity increased from $10,633,958 at December 31, 2019, to
$11,325,257 at September 30, 2020. This change was attributable to $809,747 of
net income in the asset management operations segment, $349,561 of net income in
the internet operations segment, and $31,187 of net income in the real estate
operations segment, and was partially offset by a net loss of $645,007 in other
segments, and $15,762 of net income resulting from discontinued operations under
the home services operations segment. Corporate expenses for the nine-month
period ended September 30, 2020, included in the net loss from other
operations, totaled $658,989. Total comprehensive net income (all attributable
to Enterprise Diversified, Inc. stockholders) for the nine-month period ended
September 30, 2020 equaled $561,250.
Balance Sheet Analysis
This section provides an overview of changes in our assets, liabilities, and
equity and should be read together with our accompanying unaudited 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.
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ENTERPRISE DIVERSIFIED, INC. 
