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 consolidated financial statements and
related footnotes for the quarterly period ended March 31, 2022. 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.
Overview
During the quarterly period ended March 31, 2022, 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) 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,
and (ii) prior to its sale on May 17, 2021, our equity in Mt Melrose,
LLC, which managed properties held for investment and held for
resale located in Lexington, Kentucky;
? 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.
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 earned a share of management
and performance fees earned. On May 31, 2021, however, Willow Oak initiated a
series of liquidating distributions of its investment in Alluvial Fund according
to a mutually agreed upon cash distribution schedule with the general partner.
On December 31, 2021, Willow Oak initiated its third and final liquidating cash
distribution in respect of such schedule, and during the three-month period
ended March 31, 2022, the Company received a corresponding partial cash
distribution of $1,680,208. As of December 31, 2021, and subsequently as of
March 31, 2022, Willow Oak no longer holds any remaining investment in Alluvial
Fund. In accordance with the partnership terms of Alluvial Fund, however, a
portion of Willow Oak's capital account was retained by the general partner
until the fund's activities for the year ended December 31, 2021, were finalized
through an independent audit. The retained amount was not actively invested and
was not subject to investment gains or losses. The retained amount is
represented by the investment redemption receivable amount on the accompanying
consolidated balance sheets; however it has been fully collected subsequent to
the three-month period ended March 31, 2022. Investment gains and losses for
activity during the prior periods presented are reported as revenue on the
accompanying unaudited 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 program
management, and tax and audit liaison services it renders.
On November 1, 2018, Willow Oak Asset Management, LLC entered into a fund
management services agreement with Arquitos Investment Manager, LP, Arquitos
Capital Management, LLC, and Arquitos Capital Offshore Master, Ltd.
(collectively "Arquitos"), which are 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 program
management 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 November 1,
2020, this arrangement was renewed with revised terms that include an exchange
of services between Willow Oak and Arquitos. 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. Willow Oak continues to provide ongoing FMS services, and continues
to earn 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 program management, 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 whereby Willow Oak would receive
certain economic and other rights in exchange for the provision of certain
ongoing FMS and operational services offered through Willow Oak FMS. Pursuant to
these economic rights, 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 program management, 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 quarterly period ended June 30, 2021, and
subsequently the year ended December 31, 2021, the Company does not hold any
remaining interests in the New Mt Melrose entity. See Notes 3 and 8 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. During the three-month period ended March 31, 2022, the Company
sold the sole residential property remaining in the portfolio. As a result of
this sale, the Company no longer maintains any residential rental properties or
rental leases. As of March 31, 2022, through EDI Real Estate, LLC, ENDI owns two
vacant lots located in Roanoke, Virginia, comprising the entirety of the
Company's remaining real estate portfolio.
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 March 31, 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
ended March 31, 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
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.
On December 27, 2021, the Company completed the purchase of a comparable
investment consisting of (i) another Triad Guaranty, Inc. promissory note in the
original principal sum of $155,000, having the same terms as the December 31,
2020, financing agreement, along with (ii) 393,750 common shares of Triad
Guaranty, Inc., for $25,000 from a related party. The value of this purchase is
reflective of the implied collectability of the promissory note and the relative
illiquidity of Triad Guaranty, Inc. stock. The Company determined that the
December 27, 2021, transaction represents an active market transaction of
similar assets to the Company's existing Triad Guaranty, Inc. assets. As a
result, the Company recorded a total $189,515 impairment on December 31, 2021,
to its existing Triad Guaranty, Inc. promissory note and common stock to reflect
the market value implied by the December 27, 2021, transaction. As of December
31, 2021, and subsequently as of March 31, 2022, the Company holds its interests
in both promissory notes at $50,000 under notes receivable on the accompanying
consolidated balance sheets and has attributed no value to its 847,847 aggregate
shares of Triad Guaranty, Inc. common stock. See Note 4 for more information.
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 decreased from $17,105,760 at December 31, 2021, to
$16,372,938 at March 31, 2022. This change was attributable to $97,050 of net
income in the internet operations segment and $44,536 of net income in the real
estate operations segment, and was offset by a net loss of $81,095 in the asset
management operations segment and a net loss of $793,313 in other segments.
Corporate expenses for the three-month period ended March 31, 2022, included in
the net loss from other operations, totaled $814,776. Total comprehensive net
loss for the three-month period ended March 31, 2022, equaled $732,822.
Balance Sheet Analysis
This section provides an overview of changes in our assets, liabilities, and
equity and should be read together with our accompanying 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. 
