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 three- and nine-month periods
ended September 30, 2021. 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 three-month period ended September 30, 2021, Enterprise Diversified,
Inc. ("ENDI," the "Company," or "we") operated through 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 (i) prior to its sale on
May 17, 2021, our equity in Mt Melrose, LLC, which manages 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;
? 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 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.
During periods prior to the quarter ended June 30, 2019, the Company also
operated through a fifth reportable segment, Home Services Operations, comprised
of former subsidiary Specialty Contracting Group, LLC's operation of HVAC and
plumbing companies in Arizona. 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. 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.
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Real Estate Operations
As has been previously reported, in December 2017, ENDI created New Mt Melrose,
a wholly owned subsidiary at that time, to acquire a portfolio of residential
and other income-producing real estate in Lexington, Kentucky, pursuant to a
certain Master Real Estate Asset Purchase Agreement entered into in
December 2017 with the seller, Old Mt. Melrose. During January and June 2018,
New Mt Melrose, consistent with the terms of the purchase agreement, completed
two bundled acquisitions from Old Mt. Melrose of residential and other
income-producing real properties located in Lexington, Kentucky. As has been
previously reported, on June 27, 2019, the Company sold 65% of its membership
interest in New Mt Melrose to Woodmont, which agreed to assume full
responsibility for the management and operation of New Mt Melrose and its real
estate portfolio. As a result of no longer having a controlling financial
interest, the Company deconsolidated the operations of New Mt Melrose as of June
27, 2019. As was previously reported in the Company's Current Report on Form 8-K
filed with the SEC on May 20, 2021, on May 17, 2021, the Company entered into an
agreement with Woodmont that terminated and effected a sale to Woodmont of the
Company's remaining membership interests in New Mt Melrose in conjunction with a
cash payment to the Company. As of the 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 one residential
property and vacant land. Our real estate portfolio under EDI Real Estate, LLC
is primarily located in Roanoke, Virginia. The portfolio includes an occupied
single-family home that is managed by a third-party property management company.
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.
State and municipal laws and regulations govern the real estate industry in
general and do not vary significantly throughout our real estate holding areas.
State laws, including the Virginia Residential Landlord and Tenant Act, in
addition to local ordinances, govern our 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, wholesale managed modem
services, web hosting, third-party software as a reseller, 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, 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, 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, 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 of September 30, 2021, 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 three-month period
ended September 30, 2021.
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
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.
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 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.
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Summary of Financial Performance
Common stockholders' equity increased from $14,043,411 at December 31, 2020, to
$18,391,494 at September 30, 2021. This change was attributable to $4,212,365 of
net income in the asset management operations segment, $818,350 of net income in
the real estate operations segment, and $339,287 of net income in the internet
operations segment, and was partially offset by a net loss of $1,261,919 in
other segments. There was no reportable income attributed to discontinued
operations for the nine-month period ended September 30, 2021. Corporate
expenses for the nine-month period ended September 30, 2021, included in the net
loss from other operations, totaled $925,832. Total comprehensive net income for
the nine-month period ended September 30, 2021, equaled $4,108,083.
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. 
