SYTE Enterprise Diversified Inc (QB)

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Lines of Business

Enterprise Diversified, Inc. (formerly White Dove Systems, Inc., Interfoods Consolidated, Inc., and then Sitestar Corporation) was incorporated in Nevada on December 17, 1992. On June 1, 2018, the Company amended its Articles of Incorporation to change the name of the Company to “Enterprise Diversified, Inc.” Unless the context otherwise requires, and when used in this Report, the “Company,” “ENDI,” “we,” “our,” or “us” refers to Enterprise Diversified, Inc. and its subsidiaries.

During the period ended June 30, 2019, the Company operated through five reportable segments : Asset Management Operations, Real Estate Operations, Internet Operations, Home Services Operations, and Other Operations. Other Operations include corporate operations and investment activity that is not considered to be one of our primary lines of business. As of January 1, 2019, legacy real estate operations, previously reported under Other Operations, are now being reported under the Real Estate Operations segment. As of the period ended June 30, 2019, and for all prior periods presented, home services operations are reported as discontinued operations. The management of the Company also continually reviews various investment opportunities, including those in other lines of business.

Note Regarding Recent Transactions

On May 24, 2019, as per the Current Report on Form 8-K filed with the SEC on May 28, 2019, the Company completed an asset sale transaction 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 customer accounts going forward. As consideration for the transaction, Rooter Hero will pay monthly royalties for the next sixty months following the closing, calculated on the basis of revenue received from the customer accounts sold. Under such royalty arrangements, the Company will receive 7.5% of monthly revenue generated from qualified sales during the first year, and 5% of monthly revenue during years two through five. The operations of Specialty Contracting Group, LLC are considered a component of, and the sale reflects a major strategic shift in, the Company’s business.  As such, Specialty Contracting Group, LLC historical operations are now classified as “discontinued operations” in the Company’s financial statements. See Note 3 for more information.

Additionally, on June 27, 2019, as per 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.  The Company has retained a 35% membership interest in Mt Melrose, with Woodmont now owning the other 65% membership interest. While the operations of Mt Melrose, LLC are considered a component of the Company’s business, the sale did not represent a major strategic shift in the Company’s business. While we deconsolidated the operations of Mt Melrose LLC on June 27, 2019 as a result of no longer having a controlling financial interest, Mt Melrose LLC’s historical operations continue to be reflected as “continuing operations” in the Company’s financial statements. See Note 4 for more information.

Note Regarding Historic Consolidation of Old Mt. Melrose

Previously, as of the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018, the Company had determined that Old Mt. Melrose (as defined below) was a “variable interest entity” because the seller’s equity interests in Old Mt. Melrose were not effective in determining whether the seller or New Mt Melrose (as defined below) had a controlling financial interest, and that New Mt Melrose’s rights under the Cash Flow Agreement were deemed to be variable interests in Old Mt. Melrose. As its primary beneficiary, New Mt Melrose previously consolidated Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose had been allocated accordingly on the unaudited condensed consolidated balance sheets for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018.

However, as of November 1, 2018, pursuant to a certain Termination of Master Real Estate Asset Purchase Agreement and Cash Flow Agreement, New Mt Melrose no longer had a controlling financial interest in Old Mt. Melrose and was no longer considered Old Mt. Melrose’s primary beneficiary. Consequently, as of November 1, 2018, the Company no longer consolidates the fair values of the assets and liabilities of Old Mt. Melrose, and the balance of noncontrolling interest as of December 31, 2018 , is appropriately reflected as zero on the accompanying unaudited consolidated statements of stockholders’ equity. See Note 5 for additional information.

Asset Management Operations

Enterprise Diversified, Inc. created a wholly owned asset management subsidiary on October 10, 2016, named Willow Oak Asset Management, LLC (“Willow Oak”).

In 2016, the Company agreed to make a seed investment totaling $10 million through Willow Oak in Alluvial Fund, LP, a private investment partnership that was launched on January 1, 2017. Under a side letter agreement between Willow Oak, Alluvial Fund, and the fund’s general partner, Willow Oak may not make a full withdrawal from its capital account prior to a date five years after the effective date of the side letter agreement. However, on January 1, 2018, pursuant to an amendment to the side letter agreement dated December 15, 2017, the Company caused $3.0 million to be withdrawn from Alluvial Fund in order to partially fund the Company’s acquisition of real estate from Old Mt. Melrose (as defined below). Alluvial Fund focuses on investing in what it believes are deeply mispriced securities in the United States and abroad. Alluvial Fund focuses on small companies, thinly traded issues, and special situations, seeking to identify value that its management believes the market has yet to recognize.

Willow Oak signed a fee share agreement on June 13, 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, who is also 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. Under their agreement, Willow Oak pays all start-up and operating expenses that are not partnership expenses under the limited partnership agreement and Willow Oak receives 50% of all performance and management fees earned by the general partner. Bonhoeffer Fund utilizes a value-oriented approach to invest in undervalued businesses worldwide that show evidence of compound mispricings, miscategorized business classifications, or are in a state of distress and/or transition exhibiting recurring revenue.

On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak Fund Management Services (“FMS”) consisting of the following services: investor relations, marketing, administration, legal, accounting and bookkeeping, annual audit, and liaison to third-party service providers. As consideration for the services, Arquitos pays Willow Oak a fixed fee and a fee share.

Real Estate Operations

ENDI created a wholly owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), on January 10, 2018, which has acquired 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 on December 10, 2017, with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, formerly an ENDI director. On January 10, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a first acquisition from Old Mt. Melrose of 44 residential and other income-producing real properties located in Lexington, Kentucky. On June 29, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a second acquisition from Old Mt. Melrose of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky. The Company accounted for the first and second purchases of properties as an asset acquisition (consisting of a concentrated group of similar identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01 “Clarifying the Definition of a Business” (Topic 805). On June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC.  The Company deconsolidated the operations of Mt Melrose, LLC on June 27, 2019 as a result of no longer having a controlling financial interest.  See Notes 4 and 5 for more information.

Pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose, the parties mutually agreed to terminate the Master Real Estate Asset Purchase Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the Master Real Estate Asset Purchase Agreement. A third-party property manager was engaged as of November 1, 2018, to manage certain of the real properties previously acquired. Management determined that it was necessary to right-size New Mt Melrose operations to reduce its level of high-interest debt. Accordingly, New Mt Melrose began to immediately sell various properties with an emphasis on selling properties that h ave high-interest-rat e loans and do not produce income.

In an effort to expedite the optimization of the Mt Melrose portfolio, management determined that a dedicated operator was necessary to manage the subsidiary. On June 27, 2019, as per 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.  The Company has retained a 35% membership interest in Mt Melrose, with Woodmont now owning the other 65% membership interest .  See Note 4 for more information.

ENDI created a wholly owned real estate subsidiary on July 10, 2017, named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of  June 30, 2019 , through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes nine residential properties and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily focused in the Roanoke area of Virginia. The portfolio includes single-family homes that are currently rented and managed through a third-party property manager, as well as a vacant property being prepared for rent.

Internet Operations

The Company operates its internet segment through Sitestar.net, a wholly owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.

Home Services Operations

Prior to May 24, 2019, Company operated its home services segment through its wholly owned subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona. The Company, along with JNJ Investments, LLC, an unaffiliated third party, organized and launched Specialty Contracting Group, LLC on June 13, 2016. On May 18, 2018, the Company terminated its operating agreement with JNJ Investments, LLC, dated June 13, 2016.

As of December 31, 2017, Specialty Contracting Group had closed on six acquisitions for an aggregate purchase price of approximately $2.02 million, which included earn-outs of approximately $325,000. For all six acquisitions, all asset allocations made by management are final and all earn-outs have been paid in full as of December 31, 2018. 

On May 24, 2019, as per the Current Report on Form 8-K filed with the SEC on May 28, 2019, the Company completed an asset sale transaction of its Home Services Operations to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, the Company sold and conveyed all of Specialty Contracting Group’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 customer accounts going forward. As consideration for the transaction, Rooter Hero will pay monthly royalties for the next sixty months following the closing, calculated on the basis of revenue received from the customer accounts sold. Under such royalty arrangements, the Company will receive 7.5% of monthly revenue generated from qualified sales during the first year, and 5% of monthly revenue during years two through five.  See Note 3 for more information.

Other Operations

Other operations include investment activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main business units that comprise other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying unaudited consolidated financial statements.

Huckleberry Real Estate Fund Investment

On January 30, 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. On May 14, 2018, Willow Oak transferred the Huckleberry investment to EDI Real Estate, LLC, another wholly owned subsidiary of the Company. Under the fund’s operating agreement, the fund’s managing member shall have sole discretion regarding the amounts and timing of any distributions to the members of the fund. The carrying value of this investment included in the accompanying unaudited condensed consolidated balance sheets as of June 30, 2019 , and December 31, 2018 , is $0 and $468,750, respectively. The decrease in carrying value period over period was due to return of capital that was received prior to June 30, 2019. During the quarter ended March 31, 2019, a gain of $212,631 was recognized as revenue through other segments on the accompanying unaudited condensed consolidated statements of operations.

Triad DIP Investors Investment

On August 24, 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 originally contributed $100,000. Triad Guaranty, Inc. exited bankruptcy on April 27, 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 on May 18, 2018. The terms of the promissory note provide for interest in the amount of 10% annually, a repayment date no later than April 29, 2020, and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. Accordingly, on April 28, 2018, the Company was issued warrants to purchase 450,000 shares for $0.01 per share.

Corporate Operations

The corporate segment includes 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.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries including: Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Mt Melrose, LLC (“New Mt Melrose”) prior to the loss of control resulting from the sale of 65% of the equity in New Mt. Melrose on June 27, 201 9 (see Note 4), Specialty Contracting Group, LLC prior to its asset sale on May 24, 2019 (see Note 3), Sitestar.net, Inc., and EDI Real Estate, LLC. Additionally, during the period from January 10, 2018, through September 30, 2018, the accompanying unaudited consolidated financial statements include the accounts of Old Mt. Melrose, which was, at that time, determined to be a variable interest entity.

All intercompany accounts and transactions have been eliminated in consolidation.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The  December 31, 2018 consolidated balance sheet included herein was derived from audited consolidated financial statements as of that date. Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously filed in our Annual Report on Form 10-K for the year ended December 31, 2018 . In the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of June 30, 2019 and the results of operations for the three and  six months ended June 30, 2019  and 2018 .

Use of Estimates

In accordance with GAAP in the United State of America, the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.

On an ongoing basis, management evaluates its estimates and judgments, including, among other items, those related to fair value of investments, revenue recognition, accrued expenses, financing operations, fair value of goodwill, fixed asset lives and impairment, lease right-of-use assets and impairment, deferred tax assets, liabilities and valuation allowance, other assets, the present value of lease liabilities, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and accounts receivable. The Company places its cash with high-quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid instruments purchased with a maturity of three months or less.

Investments

The Company holds various recurring investments through its asset management and real estate segments. Additionally, one-time investments can be held and reported under the Company’s “other” segment. Assets held through these segments do not have a readily determinable value as these investments are not publicly traded, nor do they have published sales records. These investments are remeasured to fair value on a recurring basis. See Note 6 for more information.

As of June 30, 2019, the Company also holds its remaining 35% investment in Mt Melrose, LLC through its real estate segment. The Company has determined that its remaining equity investment does not have a readily determinable fair value and will account for the investment at cost, less any impairment, as adjusted for changes resulting from observable price changes. When fair value becomes determinable, the investment will be marked to fair value on a periodic basis.

Accounts Receivable

The Company grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is the recorded allowance for doubtful accounts and bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are written off from the allowance for doubtful accounts when an account or invoice is individually determined to be uncollectible.

Real estate segment rental accounts are typically paid by tenants via cash or check no later than the fifth of the month. Any accounts collected after the fifth are charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If payments are not provided in a timely manner, then the amount due is designated as an account receivable. If accounts remain uncollected, then standard operating procedures are followed to commence a notice process for the tenant to either pay the amount due or vacate the property. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. These procedures typically result in low amounts of past due receivables.

The internet segment attempts to reduce the risk of non-collection by including a late-payment fee and a manual-processing-payment fee to customer accounts. Receivables more than 90 days past due are no longer included in accounts receivable and are turned over to a collection agency. Accounts receivable more than 30 days are considered past due. 

Sales of home services are typically paid via credit card or check upon completion of service. Sales that are not collected upon completion are generally to existing and repeat customers who have established a track record of timely payments. Generally, accounts receivable more than 60 days are considered past due. 

Inventory

Inventory is carried on the balance sheet at either the lower of purchased cost or net realizable value. Inventory is evaluated periodically for any obsolete or damaged stock.

Property and Equipment

Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. Depreciation is computed using the straight-line method based on the estimated useful lives for each of the following asset classifications:

Impairment of Long-Lived Assets

Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell.

Goodwill and Other Intangible Assets

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company tests its goodwill annually during the fourth quarter of its fiscal year or when events and circumstances indicate that those assets might not be recoverable.

Impairment testing of goodwill is required at the reporting-unit level (operating segment or one level below operating segment). The impairment test involves calculating the impairment of goodwill based solely on the excess of the carrying value of the reporting unit over the fair value of the reporting unit. Prior to performing the impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment to determine whether a detailed quantitative analysis is required. The Company estimates the fair value of its reporting units using discounted expected future cash flows.

During the year ended December 31, 2018 , an impairment adjustment of $754,958 was recorded to goodwill held through the home services segment. As noted above, various qualitative factors were considered before preparing a quantitative analysis. Qualitatively, a general under performance of previously acquired home services businesses triggered the quantitative analysis. As part of the quantitative analysis, management estimated the fair value of the home services segment at the enterprise level using a discounted cash flow approach. The results were then tested for reasonableness using a market approach by analyzing comparable firms’ growth rates, margins, capital expenditures, and working capital requirements. During the period ended June 30, 2019 , included in the amount recorded as a loss on the sale of Specialty Plumbing Group, LLC’s assets, is an additional goodwill write-down in the amount of $1,024,592. This write-down eliminated all remaining goodwill previously held under the home services segment.

Intangible assets consist of domain names attributed to the internet segment. The Company owns 228 domain names, of which 106 are available for sale. These domains are valued at historical cost. When management determines material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account internal and external appraisals. Intangible assets determined to have definite lives are amortized over their estimated useful lives.

Real Estate

Real estate properties held for resale are carried at the lower of cost or fair market value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area in which the real estate is located. Fair value is evaluated annually by management or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable.

During the year ended December 31, 2018 , an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for sale” from “held for investment” as part of a portfolio redirection.  See Note 5 for more information. Recent tax assessments, valuations, and local real estate agents were used to value this portfolio of held-for-sale properties. During the period ended June 30, 2019 , prior to the loss of control and deconsolidation of Mt Melrose, LLC (see Note 4), an impairment adjustment of $126,827 was recorded on the commercial warehouse in Lexington, Kentucky in order to properly reflect market value for a pending sale as of the period ended June 30, 2019.

During the year ended December 31, 2018 , an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management in 1998. During the period ended June 30, 2019 , an impairment adjustment of $39,972 was recorded on the remaining vacant lots held for sale through EDI Real Estate, LLC in order to properly reflect market value as of the period ended June 30, 2019.  The geographic location and lack of surrounding infrastructure has significantly hindered sales efforts of these lots.

Real estate properties held for investment are carried at the cost basis plus additional costs where the cost extended the life of or added value to the property. Otherwise, the cost is expensed as incurred. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management.

Accrued Bonus

Accrued bonuses represent performance-based incentives that have not yet been paid. The bonus structures are a pre-approved part of a formal employment agreement. These bonus amounts are accrued when earned and able to be estimated, and are paid annually after financial records are finalized.

Other Accrued Expenses

Other accrued expenses represent incurred but not yet paid expenses from payroll accruals, vacation accruals, professional fees, and other accrued taxes.

Leases

As of the period ended March 31, 2019 the Company adopted ASU No. 2016-02, “Leases” (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. Accordingly, at the inception of a contract we determine if the arrangement is, or contains, a lease. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  Rent expense is recognized on a straight-line basis over the lease term; for finance leases, a portion of rent expense is classified as interest expense.

The Company has made certain accounting policy elections whereby it (i) does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12 months or less) and (ii) combines lease and non-lease elements of their leases.  Lease ROU assets are included in other long-term assets, financed lease assets are included in property and equipment, and lease liabilities are included in other current and long-term liabilities in the unaudited condensed consolidated balance sheets.

Revenue Recognition

Asset Management and Other Investment Revenue

The Company earns revenue from investments through various fee share and consulting agreements, as well as through realized and unrealized gains and losses, which may result in negative period or quarterly revenues. Management fees earned are recorded and paid out monthly and are included in revenue on the accompanying unaudited condensed consolidated statements of operations. Performance fees earned are accrued monthly, paid out annually, and are also included in revenue on the accompanying unaudited condensed consolidated statements of operations. Consulting fees are billed out monthly after services have been performed. As long-term investments do not qualify as available-for-sale securities, long-term investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized as revenue in the period of adjustment.

Management notes that the structure of these arrangements leaves a very low possibility for nonperformance. While the amount of revenue varies from month to month, collectability is very high. No contract assets or liabilities are recognized or incurred.

Additionally, the Company earns revenue from direct investments in various funds, primarily the Alluvial Fund.  Due to the nature of the investment, the company follows investment company GAAP rules for revenue recognition.  This results in the unrealized gains and losses within the fund being recognized as revenue, or a decrease in revenue, on the accompanying unaudited condensed consolidated statements of operations.

Real Estate Revenue

The Company earns real estate revenue through rental agreements on real estate held for investment, as well as through the sale of real estate held for resale.

Rental revenue from real estate held for investment is recognized when it is earned, generally on the last day of each month or at another regular period agreed upon by the Company and the tenant. Tenants generally provide a security deposit at the time of possession. This deposit is held separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. Management has concluded that the nature of the performance obligation is cyclical and predictable with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.

Revenue from real estate held for resale is recognized upon closing of the sale (transfer of control), as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time.

Internet Revenue

The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.

The Company generates revenue in its internet segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, third-party software as a reseller, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), web hosting, and additional related services to consumers and businesses. Customers may also subscribe to web hosting plans to include email access and storage. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.

Home Services Revenue

Prior to the sale on May 24, 2019, the Company performs HVAC and plumbing service repairs and installs HVAC units for its customers through its home services segment. Revenue is recognized upon completion of the installation or service call. Sales are adjusted for any returns or allowances. A return or allowance situation would arise based on the two-year workmanship warranty that typically conveys with the installation of a new unit. There is also a two-year assurance warranty on newly installed parts and equipment that is honored by the manufacturer. If an installation is performed over multiple days, then it is accounted for using work-in-process (WIP) accounting in accordance with GAAP. Contract progress is measured by comparing materials and labor hours incurred to materials and labor hours expected per the contract. These types of contracts are typically completed within one month’s time. A small portion of revenue is from the sale of annual service agreements. Revenue attributable to these agreements is appropriately recognized over the life of the agreement.

If payment is received prior to contract completion, then the amount of revenue attributable to the unperformed work is designated as unearned revenue. If payment is not provided in advance or at the time of service or installation completion, then the amount due is recognized as revenue and as an account receivable.

Management acknowledges that these performance obligations are recognized at the completion of each contract, whether it be at a point in time or over a period of time. As the customer controls the asset and has the right to use during the contract, the Company has the right to payment for performance completed to date. No contract assets or liabilities are recognized or incurred.

Deferred Revenue

Deferred revenue represents collections from customers in advance of internet or real estate rental services to be performed. Revenue is recognized when performance obligations have been met.

Income Taxes

Income taxes are accounted for under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment, inclusive of the recent tax reform act. The most recent three tax years, fiscal years ended  December 31, 2018 , December 31, 2017, and December 31, 2016, are open to potential IRS examination.

Income Per Share

The basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similarly to basic income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company has no potentially dilutive securities.

Other Comprehensive Income

Other comprehensive income is the result of the previous impact of foreign currency translations related to the Company’s operations in Canada.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU No. 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted this guidance, effective January 1, 2019, using the following practical expedients:

Additionally, the Company made ongoing accounting policy elections whereby it (i) does not recognize right-of-use (ROU) assets or lease liabilities for short-term leases (those with original terms of 12 months or less) and (ii) combines lease and non-lease elements of our leases. 

Upon adoption of the new guidance on January 1, 2019, the Company recorded a ROU asset of approximately $184,000 (net of existing deferred rent liability) and recognized a lease liability of approximately $186,000, with no resulting cumulative effect adjustment to retained earnings.  

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” Although the ASU retains many of the current requirements for financial instruments, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017; earlier adoption was permitted under certain criteria. The Company adopted this standard in the first quarter of 2018. The application of the standard has not significantly impacted the Company.

In January 2017, the FASB issued ASU No. 2017-01 “Clarifying the Definition of a Business” (Topic 805). The amendments in the update provide a screen to determine when a set is not a business. If the screen is not met, the amendments in the update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. Lastly, the amendments in the update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017; earlier adoption was permitted under certain criteria. The Company adopted this ASU on January 1, 2018. While this ASU did not have a material effect on the Company’s financial statements on the date of adoption, the Company did follow the new guidance in determining that its acquisition of properties from Old Mt. Melrose in January 2018 was an asset acquisition . See Note 5 for additional information.

NOTE 3. HOME SERVICES SUBSIDIARY ASSET SALE

A reconciliation of discontinued operations as reported on the accompanying unaudited condensed consolidated statements of operations for the three and six month periods ended June 30, 2019 and June 30, 2018 is as follows:

NOTE 4. SALE OF CONTROLLING INTEREST IN REAL ESTATE SUBSIDIARY

Transaction

In connection with the transaction, the Company and Woodmont entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC dated June 27, 2019 (the “ A&R LLC Agreement ”).  The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members.  The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont is designated as the sole manager.  In addition, the Company has expressly agreed to a three-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose; and with respect to any matters requiring a vote of the members, the Company will vote with (i.e., the same as) Woodmont. This arrangement allows the Company to maintain its passive management structure, while still owning a significant portion of the partnership.

Under the terms of the A&R LLC Agreement, distributions of cash, from whatever source, may be made to the members at such times, and in such amounts, as the manager determines; provided, however, that any such distributions will be made in accordance with the following priorities: (i) distribution of amounts up to a cumulative total of $2,000,000 will be made pro rata in accordance with the members’ respective membership interests; (ii) then, distribution of cumulative amounts in excess of $2,000,000 and up to $3,000,000 will be made 67% to the Company and 33% to Woodmont; and (iii) thereafter, distribution of cumulative amounts in excess of $3,000,000 will be made pro rata in accordance with the members’ respective membership interests.    

Deconsolidation Due to Transfer of Control

Prior to the sale of Mt Melrose interest, the Company owed 100% of the membership interests in Mt Melrose, LLC and controlled the entity by virtue of its voting interests. As a result, the Company consolidated Mt Melrose under the “voting interests” (“VOE”) consolidation model.

By virtue of the revised LLC operating agreement, and the aforementioned standstill agreement, Woodmont is the sole “manager” responsible for all management and operating decisions of Mt Melrose. Management determined that as of June 30, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose and will no longer consolidate Mt Melrose. All activity prior to the deconsolidation event has been included on the accompanying unaudited condensed consolidated statements of operations for the period ended June 30, 2019 in continuing operations and under the real estate segment. Simultaneously, as of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets. The Company’s remaining 35% interest will now be accounted for as a single investment on the Company’s reported financial statements.

Accounting for Remaining Mt Melrose Investment

The Company adopted ASU 2016-01 effective January 1, 2018. ASU 2016-01 generally requires entities to measure equity investments at fair value and recognize any changes in fair value in net income. However, entities are able to elect a measurement alternative for equity investments that do not have a “readily determinable fair value”. The Company has determined that its equity investment in Mt Melrose does not have a readily determinable fair value at the time of deconsolidation. Under this alternative, the Company will measure the Mt Melrose investment at its implied fair value and assess it for impairment at each reporting date, or more often if indication of a potential impairment exists.  When fair value becomes determinable, from observable price changes in orderly transactions, the Company’s investment will be marked to fair value on a periodic basis.  Future dividends will be recognized as income and returns of capital recognized as a reduction in the Company’s investment when and if received.

Using the $100,000 transaction price for a 65% interest in Mt Melrose, LLC, the inherent value of the retained 35% interest is $53,846.  This amount is included under the long-term investment amount on the accompanying unaudited condensed consolidated balance sheet for the period ended June 30, 2019.

Effective on June 27, 2019, the Company recognized a loss on the partial sale of Mt Melrose in the amount of $3,519,053, which has been reported separately on the accompanying unaudited condensed consolidated statements of operations in continuing operations and under the other segment for the period ended June 30, 2019. The amount of the loss is based upon the value of the Company’s remaining interest in the subsidiary, less the Company’s previous carrying value of the subsidiary. 

NOTE 5. ASSET ACQUISITION OF REAL ESTATE PROPERTIES

Historical Acquisition

On December 10, 2017, the Company entered into a certain Master Real Estate Asset Purchase Agreement (the “Purchase Agreement”) with Mt. Melrose, LLC, a Kentucky limited liability company (“Old Mt. Melrose”), that owned and managed a portfolio of residential real estate in Lexington, Kentucky. Old Mt. Melrose was owned by Jeffrey I. Moore (“Moore”), a former Company director.

On January 10, 2018, the Company's wholly-owned subsidiary, Mt Melrose, LLC (“New Mt Melrose”), completed the first acquisition of 44 residential and other income-producing real properties under the Purchase Agreement for a total purchase price of $3,956,389, which consisted of $500,000 in cash, 120,602 shares of common stock valued at $1,658,270, and the assumption of $1,798,119 of existing debt.

The Company accounted for the initial purchase of properties as an asset acquisition (consisting of a concentrated group of similarly identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01. The total purchase price, along with approximately $45,250 of transaction expenses, was allocated to the land and buildings acquired based on their relative fair values, as follows:

On June 29, 2018, New Mt Melrose completed the second acquisition of 69 residential and other income-producing real properties under the Purchase Agreement for a total purchase price of $5,174,722, which consisted of 148,158 shares of common stock valued at $2,407,564, and the assumption of $2,767,158 of existing debt.

The Company accounted for the second purchase of properties as an asset acquisition (consisting of a concentrated group of similarly identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU No. 2017-01. The total purchase price, along with approximately $7,394 of transaction expenses, was allocated to the land and buildings acquired based on their relative fair values, as follows:

Historical Variable Interests

As of the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018, the Company had determined that Old Mt. Melrose was a “variable interest entity” because Moore’s equity interests in Old Mt. Melrose were not effective in determining whether Moore or New Mt Melrose had a controlling financial interest, and that New Mt Melrose’s rights under a certain Cash Flow Agreement that had been entered into on January 10, 2018 with Old Mt. Melrose (the “Cash Flow Agreement”) were deemed to be variable interests in Old Mt. Melrose. At those times, the Company had determined that New Mt Melrose was the primary beneficiary of Old Mt. Melrose since substantially all of Old Mt. Melrose’s activities had been conducted on behalf of New Mt Melrose and because New Mt Melrose may have been required to provide financial support to Old Mt. Melrose under the Cash Flow Agreement. As its primary beneficiary, New Mt Melrose previously consolidated Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose had been allocated accordingly on the unaudited condensed consolidated balance sheets for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018. As noted on the unaudited condensed consolidated statements of stockholders’ equity during those quarters, the ending noncontrolling interest allocated to the variable interest entity represented the remaining equity held by Old Mt. Melrose for properties that had not yet been acquired under the Purchase Agreement. The ending noncontrolling interest amount also included any income or loss generated by the remaining properties that were to be acquired under the Purchase Agreement for the period then ended.

As of November 1, 2018, pursuant to termination of Master Real Estate Asset Purchase Agreement and Cash Flow Agreement noted above, New Mt Melrose was no longer the primary beneficiary of Old Mt. Melrose. Additionally, as of November 1, 2018, New Mt Melrose no longer had a controlling financial interest in Old Mt. Melrose. Consequently, as of November 1, 2018, the Company no longer consolidates the fair values of the assets and liabilities of Old Mt. Melrose, and the balance of noncontrolling interest as of  June 30, 2019 and December 31, 2018 , is appropriately reflected as zero on the accompanying unaudited consolidated statements of stockholders’ equity.

NOTE 6. INVESTMENTS

Certain assets held through Willow Oak Asset Management, LLC, Enterprise Diversified, Inc., Mt Melrose, LLC (prior to the loss of control resulting from the sale of 65% of the equity in New Mt Melrose on June 27, 2019 (see Note 4)), or EDI Real Estate, LLC do not have a readily determinable value, as these investments are not publicly traded, nor do they have published sales records. The investments in Alluvial Fund, LP, Bonhoeffer Fund, LP, and Willow Oak Select Fund, LP are measured using net asset value (NAV) as the practical expedient and are exempt from the fair value hierarchy in accordance with FASB ASC 820-10. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and allocated based on total fund contributions. Due to the nature of the Mt Melrose, LLC and Huckleberry Real Estate Fund II, LLC investments, the investment is measured at cost basis as cost approximates fair value until additional inputs and measurements become available. As the inputs for these investments are not readily observable, these investments are valued using Level 3 inputs. The following investments are remeasured to fair value on a recurring basis and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Included in the fair value is the cost basis of the investment, as well as any accrued management fees.

NOTE 7. FAIR VALUE OF ASSETS AND LIABILITIES

The Company has adopted FASB ASC 820, Fair Value Measurements . ASC 820 defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company analyzes goodwill on an annual basis or whenever events or changes in circumstances indicate potential impairments. During the year ended December 31, 2018 , an impairment adjustment of $754,958 was recorded to goodwill held in the home services segment. As described further in Note 1, this adjustment was the result of a general under performance of previously acquired HVAC and plumbing businesses.

The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate a change in their fair market value. During the year ended December 31, 2018 , an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for sale” from “held for investment” as part of a portfolio redirection intended to reduce high-interest debt. See Note 5 for more information. During the period ended June 30, 2019 , an impairment adjustment of $126,827 was recorded on the commercial warehouse in Lexington, Kentucky in order to properly reflect market value for a pending sale as of the period ended June 30, 2019.

During the year ended December 31, 2018 , an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management in 1998. This adjustment was the result of repair and improvement expenses exceeding the current market value of the property and write downs of previously capitalized improvements made by prior management. During the period ended June 30, 2019 , an impairment adjustment of $39,972 was recorded on the remaining vacant lots held for sale through EDI Real Estate, LLC in order to property reflect market value as of the period ended June 30, 2019. 

As discussed in Note 5, in January 2018, Mt Melrose, LLC completed its first acquisition of 44 residential and other income-producing real properties for a total purchase price of $3,956,389. Additionally, in June 2018, Mt Melrose, LLC completed its second acquisition of 69 residential and other income-producing real properties for a total purchase price of $5,174,722. The total purchase price, along with transaction expenses, was allocated to the land and buildings acquired based on their relative fair values. The fair values of the land and buildings were determined using Level 3 inputs, namely comparable properties within the Lexington, Kentucky, region.

As discussed in Note 4, the Company’s ongoing equity investment in Mt Melrose, LLC is carried at cost under the alternative approach, and will be assessed for impairment at each balance sheet date.

The Company analyzes the carrying value of property and equipment and lease right-of-use assets on an annual basis or whenever events or changes in circumstances indicate potential impairments.

NOTE 8. PROPERTY AND EQUIPMENT

The cost of property and equipment at June 30, 2019 , and December 31, 2018 , consisted of the following:

Depreciation expense was $23,127 f or the three months ended  June 30, 2019 , and $44,038 for the period ended June 30, 2018. Included in these amounts are  $421  and $13,011 for the periods ended  June 30, 2019 and 2018 , respectively, of depreciation expense related to personal property used in real estate segment rental operations. The depreciation expense related to personal property is included in the real estate segment cost of goods sold amount on the accompanying unaudited condensed consolidated statements of income. The decrease in depreciation expense is due to the sale of the home services vehicles and equipment during the period ended June 30, 2019.

As of the period ended June 30, 2019, management has identified the commercial warehouse, carried at $822,829 as of period end, as real estate held for resale. This compares to the year ended December 31, 2018, when management reported $73,212 of vehicles and equipment as held for resale and $2,318,912 of real estate as held for resale.

The building owned by the Company is a multipurpose warehouse space located in Lexington, Kentucky. This building was previously owned by Mt Melrose, LLC, but was excluded from the June 27, 2019 sale and remains with the Company. During the period ended June 30, 2019, management reclassified the building as "held for resale" based on management's intentions given the Mt Melrose equity sale that occurred on June 27, 2019. During the period ended June 30, 2019 , an impairment adjustment of $126,827 was recorded on the commercial warehouse in Lexington, Kentucky to properly reflect market value for a pending sale as of the period ended June 30, 2019. In the quarterly period ended December 31, 2018 , management concluded it would adopt an outsourced property management model for New Mt Melrose. Management, therefore, determined that the warehouse was no longer needed for operations and should be divested.

NOTE 9. REAL ESTATE

Mt Melrose, LLC

As described in Note 4, management determined that the Company no longer has a controlling financial interest in Mt Melrose. All activity prior to the deconsolidation event has been included on the accompanying unaudited condensed consolidated statements of operations for the period ended June 30, 2019 under the real estate segment. Simultaneously, as of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2018, however, Mt Melrose did have a controlling financial interest. The consolidated Mt Melrose assets as of December 31, 2018 included the following units:

As of December 31, 2018, units held for investment consist of single-family and multi-family residential rental units. The leases in effect for the occupied Mt Melrose units as of the year ended December 31, 2018, are based on either annual or multi-year time periods. Month-to-month leases are reserved for special circumstances. Units held for sale consist of single-family units, multi-family units, commercial properties, and undeveloped lots of land.

As of the year ended December 31, 2018 , the Mt Melrose portfolio of properties was carried at the following amounts on the accompanying unaudited condensed consolidated balance sheets:

For the period ended June 30, 2019 , depreciation expense on the Mt Melrose portfolio of properties was $62,393 . This compares to depreciation expense for the period ended June 30, 2018, when depreciation expense on the Mt Melrose portfolio of properties was $40,938.

During the period ended June 30, 2019 , Mt Melrose sold fourteen residential properties and one vacant lot for gross proceeds of $654,000 and net proceeds of $78,596. This compares to their carrying value of $669,980, which resulted in a net loss of $15,980. Mt Melrose did not sell any properties in the period ended June 30, 2018.

Mt Melrose did not purchase any properties during the period ended June 30, 2019 . The increase in real estate held for investment from December 31, 2018 , was due to the transfer of land from real estate held for sale, as well as through capital improvements made during the period ended June 30, 2019 . This compares to the period ended June 30, 2018, when Mt Melrose purchased a total of 34 properties for a gross purchase price of $1,065,229. Twelve of these purchases resulted in a note payable.

During the year ended December 31, 2018, an impairment adjustment of $964,743 was recorded to real estate held for resale through Mt Melrose, LLC in order to properly reflect market value for those properties held at the end of the year. This adjustment was the result of 62 properties being transitioned to “held for sale” from “held for investment” as part of a portfolio redirection that will reduce high-interest debt. 

EDI Real Estate, LLC

As of the period ended June 30, 2019 , and as of the year ended December 31, 2018 , the EDI Real Estate portfolio of properties included the following units:

The leases in effect, as of the period ended June 30, 2019 , are based on either annual or multi-year time periods and typically include month-to-month provisions after the completion of the initial term. An outside property management company manages these rental properties on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties.

For the period ended June 30, 2019 , depreciation expense on the EDI Real Estate portfolio of properties was $6,116. This compares to depreciation expense for the period ended June 30, 2018, when depreciation expense on the EDI Real Estate portfolio of properties was $5,304.

EDI Real Estate did not purchase or sell any properties during the periods ending June 30, 2019 and 2018.

During the period ended June 30, 2019, an impairment adjustment of $39,972 was recorded on the remaining vacant lots held for sale through EDI Real Estate, LLC in order to property reflect market value as of the period ended June 30, 2019. During the year ended December 31, 2018 , an impairment adjustment of $64,038 was recorded to real estate held for resale through EDI Real Estate, LLC in order to properly reflect market value for those properties held during the year. This adjustment was the result of a deteriorating building that was purchased by prior management.

To further summarize, the remaining notes payable amounts held as of June 30, 2019 , were subject to the below interest rates:

The timing of future payments of notes payable are as follows as of June 30, 2019 :

As of June 30, 2019 , one line of credit remains open through the home services segment. This line of credit is held with Steven L. Kiel, an ENDI director, and our principal executive officer. Additional debt held through the home services segment as of December 31, 2018, includes loans for various vehicles and equipment. Two vehicle loans were entered into during the quarter ended March 31, 2018. These loans required monthly payments through May 2023 and hold annual interest rates of 5.99%. As of the period ended June 30, 2019, all of these loans have been paid off, as they were assumed by Rooter Hero, the purchaser of the home services ass ets.  See Note 3 for more information.

During the quarter ended September 30, 2017, EDI Real Estate, LLC issued two promissory notes, each secured by a property held for investment. These notes carry annual interest rates of 6%, pay interest quarterly, and are due September 15, 2022, with early payoff permitted. Additionally, during the quarter ended September 30, 2018, EDI Real Estate, LLC issued a promissory note secured by additional properties held for investment. This note carries an annual interest rate of 5.6% and fully matures on September 1, 2033, with early payoff permitted. The interest rate on this note is subject to change once each five year period based on an index rate plus a margin of 2.750 percentage points. The index rate is calculated as a monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of five years.

During the quarter ended June 30, 2019 , the Company issued a promissory note secured by the commercial warehouse held for resale.  The note carries an annual interest rate of 8%, pays interest quarterly, and is due upon successful sale of the warehouse with early payoff permitted.

With respect to the outstanding debt secured by the real properties acquired by Mt Melrose, LLC, these notes began to mature during the previous quarter, with the last note extending until January 2042. Some of these loans are interest only while others accrue interest that is due in full with a final balloon payment. As of December 31, 2018, the debt secured by the real properties has varying annual interest rates from 4.375% to 13%. As menti oned in Note 4, all as sets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets as of June 27, 2019.  This results in zero notes payable reported under Mt Melrose, LLC for the period ended June 30, 2019.

NOTE 11. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE

For the period ended  June 30, 2019 and 2018, bad debt expense from continuing operations was $93,749  and $16,029, respectively. The decrease in accounts receivable is the result of discontinued operations through our home services segment. As of the period ended June 30, 2019 , and for the year ended December 31, 2018 , accounts receivable consisted of the following: 

NOTE 12. SEGMENT INFORMATION

During the period ended  June 30, 2019 , the Company had five business units with separate management and reporting infrastructures that offer different products and services. The five business units have been aggregated into the following reportable segments: Asset Management, Real Estate, Internet, Home Services, and Other. As of the period ended June 30, 2019, and for all prior periods presented, home services operations are reported as discontinued operations.

In previous periods, the Company reported under the following six business segments: Asset Management, Mt Melrose, HVAC, Internet, Real Estate, and Corporate. In an effort to highlight the direction of the Company and increase segment transparency, these historical segments were reorganized during the quarter ended June 30, 2018. Additional reorganizations were made as of January 1, 2019, in order to appropriately reflect the similarities in the Company’s real estate operations. The “Mt Melrose” and Legacy “Real Estate” segments are now referred to collectively as “Real Estate”, and the “HVAC” segment is now referred to as “Home Services.” “Corporate”, and other additional investments now are combined under “Other Operations.” The “Asset Management” and “Internet” segments remain unchanged. See below for additional information on the activity included in each respective segment report.

As mentioned in Note 3, on May 24, 2019, the Company completed an asset sale transaction of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC, to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transactio n, 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 customer accounts going forward. The current and comparative results of the home services segment have been reported as discontinued on the accompanying unaudited consolidated financial statements for the period ended June 30, 2019.

As mention ed in Note 4, o n June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC.

Management determined that as of June 30, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose , therefore, the Company will no longer consolidate Mt Melrose. All activity prior to the deconsolidation event has been included on the accompanying unaudited condensed consolidated statements of operations for the period ended June 30, 2019 under the real estate segment. Simultaneously, as of June 30, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from the accompanying unaudited condensed consolidated balance sheets.

The asset management segment includes revenues and expenses derived from various investment opportunities and partnerships and services. The real estate 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. The internet segment includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The home services segment includes discontinued revenue and expenses derived from our former management of HVAC and plumbing companies in Arizona. The other segment includes revenue and expenses from nonrecurring investment opportunities such as Huckleberry Real Estate Fund II, LLC. Additionally, the other segment includes 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 internet segment includes revenue generated by operations in both the United States and Canada. In the period ended June 30, 2019 , the internet segment generated revenue o f $252,260 in the United States and revenue of $13,657 in Canada. This compares to the period ended June 30, 2018, where the internet segment generated revenue of $278,992 in the United States and revenue of $18,595 in Canada.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three and  six months ended   June 30, 2019 and 2018 .

NOTE 13. COMMITMENTS AND CONTINGENCIES

Leases

As of the period ended  June 30, 2019 , we have two leases classified as operating leases and no finance leases. The previously reported finance leases as of the period ended March 31, 2019, were assumed by Rooter Hero as part of the home services asset sale that took place on May 24, 2019.  Se e Note 3 fo r more information.

Our operating leases are for warehouse and office facilities for Specialty Contracting Group, LLC, which did not convey with the asset sale, and for office space for Willow Oak Asset Management, LLC. The leases have remaining terms expiring from 2019 through 2021 and a weighted average remaining lease term of 1.9 years.  The right-of-use assets and corresponding lease liabilities for the Company’s operating leases are reported separately on the accompanying unaudited condensed consolidated balance sheets. Discount rates used in the calculation of our lease liability was approximately 6.7%.  In addition, the Company is the lessor for facility space in New York that it sublets to other tenants; the sublease expires in 2020 with the operating lease.

Lease costs for the three months ended  June 30, 2019  consisted of the following:

A maturity analysis of our operating leases is as follows:

Other Commitments

On September 19, 2016, the Company, through Willow Oak, announced that it had entered into a letter of intent agreement with Alluvial Capital Management, LLC (“Alluvial Capital”) to make a seed investment through Willow Oak Asset Management in Alluvial Fund, LP, a private investment partnership that was launched by Alluvial Capital on January 1, 2017 (“Alluvial Fund”). Alluvial Capital acts as the general partner and the Company, through Willow Oak Asset Management, has invested in Alluvial Fund as a limited partner.

The Company agreed to make capital contributions to Alluvial Fund in the aggregate amount of $10 million to be provided over four equal tranches on January 1, 2017, April 1, 2017, July 1, 2017, and October 1, 2017. As of September 30, 2017, the Company satisfied its obligation to provide $10 million in accordance with the contribution schedule. On January 1, 2018, pursuant to an amendment to the Alluvial Side Letter Agreement, dated December 15, 2017, Willow Oak Asset Management, LLC withdrew $3,000,000 from its $10,000,000 investment in Alluvial Fund, LP in order to partially fund the first close of the Mt Melrose Transaction. Arquitos Capital Partners, LP, which is managed by our director and principal executive officer Steven L. Kiel, simultaneously invested $3,000,000 in Alluvial to temporarily replace the amount withdrawn by Willow Oak. The Arquitos investment into Alluvial counts toward Willow Oak’s seed investment total for purposes of Willow Oak’s agreement with Alluvial.

ENDI created a wholly owned subsidiary named Mt Melrose, LLC (“New Mt Melrose”) on January 10, 2018, which has acquired 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 on December 10, 2017, with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, a former ENDI director.

On January 10, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a first acquisition from Old Mt. Melrose of 44 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the purchase agreement. This first tranche of real properties was acquired for total consideration of $3,956,389, which was payable as follows:

On June 29, 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed a second acquisition from Old Mt. Melrose of an additional 69 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the purchase agreement. This second tranche of real properties was acquired for total consideration of $5,174,722, which was payable as follows:

Pursuant to that certain Termination of Master Real Estate Asset Purchase Agreement entered into effective November 1, 2018, between the Company and Old Mt. Melrose, the parties mutually agreed to terminate the above-discussed purchase agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations concerning additional acquisitions of real properties from Old Mt. Melrose under the purchase agreement.

On January 10, 2018, New Mt Melrose and Old Mt. Melrose entered into the Cash Flow Agreement, pursuant to which, in connection with the parties’ anticipated consummation of all of the real property purchase transactions under the purchase agreement described above, the parties agreed that as of and from and after January 10, 2018, until such time as the parties consummated the relevant closing as to each real property under the purchase agreement, Old Mt. Melrose would assign to New Mt Melrose all of the income, rents, receivables, and revenues arising from or issuing out of such real property, and New Mt Melrose would assume Old Mt. Melrose’s responsibility for payment of certain of the costs and expenses attributable to such real property.

Under the Cash Flow Agreement, New Mt Melrose was responsible for Old Mt. Melrose’s monthly payments of interest and/or principal under the outstanding debt secured by the real properties; Old Mt. Melrose’s real property taxes with respect to the real properties due and attributable to the periods from and after the effective date; and Old Mt. Melrose’s ordinary expenses of operating the real properties, actually incurred, to the extent attributable to  de minimis  repairs, recurring maintenance services, and/or water, electricity, sewer, gas, telephone, or other similar utility charges.

Based on the number of properties then outstanding for purchase under the purchase agreement at September 30, 2018, New Mt Melrose was obligated under the Cash Flow Agreement as of September 30, 2018, for (i) monthly payments of interest and/or principal under the outstanding debt secured by such real properties in the aggregate amount of $10,568 per month, (ii) insurance of $1,073 per month, (iii) estimated annualized obligations for real property taxes with respect to such real properties in the aggregate amount of approximately $7,461 per year, and (iv) ordinary recurring expenses of operating such real properties that are expected to be immaterial in aggregate. However, as previously reported in our Current Report on Form 8-K filed with the SEC on November 5, 2018, pursuant to that certain Termination of Cash Flow Agreement entered into effective November 1, 2018, between New Mt Melrose and Old Mt. Melrose, the parties mutually agreed to terminate the above-discussed Cash Flow Agreement as of November 1, 2018. Accordingly, neither the Company nor New Mt Melrose has any further rights or obligations under the Cash Flow Agreement.

As mentioned in Note 4, o n June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC. As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio.  The Company has retained a 35% membership interest in Mt Melrose, with Woodmont now owning the other 65% membership interest. 

We have no other meaningful long-term debt obligations, purchase obligations, or other long-term liabilities as of June 30, 2019 , other than those previously mentioned related to the asset management segment, home services, and real estate segments.

Litigation

Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.

On April 12, 2016, the Company filed a civil action complaint against Frank Erhartic, Jr. (the “Former Erhartic CEO”), the Company’s former CEO and director (prior to December 14, 2015) and currently an owner of record or beneficially of more than five percent of the Company’s Common Stock, alleging, among other things, that the Former Erhartic CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized and wrongful related-party transactions, including causing the Company to borrow certain amounts from the Former Erhartic CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments to the Former Erhartic CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former Erhartic CEO, causing the Company to pay certain amounts to the Former Erhartic CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former Erhartic CEO, causing the Company to pay rent on its corporate headquarters owned by the Former Erhartic CEO’s ex-wife in amounts commercially unreasonable and excessive, and to make real estate tax payments thereon for the personal benefit of the Former Erhartic CEO, converting to the Former Erhartic CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by the Former Erhartic CEO, causing the Company to pay personal credit card debt of the Former Erhartic CEO, causing the Company to significantly overpay the Former Erhartic CEO’s health and dental insurance for the benefit of the Former Erhartic CEO, and causing the Company to pay the Former Erhartic CEO’s personal automobile insurance. The Company is seeking, among other relief available, monetary damages in excess of $350,000. This litigation matter is currently pending in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia).

NOTE 14. SHARE ADJUSTMENT, CANCELLATION AND SALE OF TREASURY SHARES, AND REVERSE STOCK SPLIT

Cancellation and Sale of Treasury Shares

On May 26, 2018, the Company signed a stock purchase agreement with an unaffiliated third party to sell 1,633,500 shares of the Company’s common stock held as treasury shares to such party for $0.11036586 per share. The settlement date for the sale was July 31, 2018. The number of shares transferred on the settlement date was adjusted for the Company’s reverse stock split to 13,068 shares. To the extent that this sale of previously registered shares held as treasury shares required an exemption from registration, this sale of shares of common stock of the Company was exempt from registration under the Securities Act of 1933 (“Securities Act”), in reliance upon Section 4(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.

Reverse Stock Split

As previously reported in our Current Report on Form 8-K filed with the SEC on June 7, 2018, the Board of Directors of the Company previously approved, on March 29, 2018, a reverse stock split of all of the Company’s Common Stock, pursuant to which every 125 shares of Common Stock of the Company were reverse split, reconstituted, and converted into one (1) share of Common Stock of the Company (the “Reverse Stock Split”). To effectuate the aforesaid Reverse Stock Split, the Company previously filed on May 23, 2018, a Certificate of Change Pursuant to Nevada Revised Statutes (“NRS”) Section 78.209 (the “Certificate of Change”) with the Secretary of State of the State of Nevada, with a specified effective filing date of June 1, 2018.

The Company submitted an Issuer Company Related Action Notification regarding the Reverse Stock Split to the Financial Industry Regulatory Authority (“FINRA”) on May 22, 2018.  FINRA declared the Reverse Stock Split effective in the marketplace July 23, 2018 (the “FINRA Effective Date”).  Accordingly, while the Certificate of Change became effective under Nevada state corporate law on June 1, 2018, the Reverse Stock Split did not become effective as to shareholders or the marketplace until the FINRA Effective Date.   

Split Adjustment

On the FINRA Effective Date, the total number of shares of the Company’s Common Stock held by each stockholder converted automatically into the number of whole shares of Common Stock equal to (i) the number of shares of Common Stock held by such stockholder immediately prior to the Reverse Stock Split, divided by (ii) one hundred twenty five (125). No fractional shares were issued, and no cash or other consideration was paid.  Rather, any fraction of a share of Common Stock that otherwise would have resulted from the Reverse Stock Split were rounded up to the next whole share of Common Stock.  That is, stockholders who otherwise would have been entitled to receive fractional shares because they held a number of pre-Reverse Stock Split shares of the Company’s Common Stock not evenly divisible by one hundred twenty five (125), had the number of post-Reverse Stock Split shares of the Company’s Common Stock to which they were entitled rounded up to the next whole number of shares of the Company’s Common Stock. Stockholders’ equity and all references to share and per share amounts in the accompanying unaudited condensed consolidated financial statements have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.

Ownership Unchanged

Immediately after the Reverse Stock Split, each stockholder’s percentage ownership interest in the Company and proportional voting power remained unchanged except for minor adjustments resulting from the Company’s election to round up any fraction of a share of Common Stock that otherwise would have resulted from the Reverse Stock Split. The rights and privileges of the holders of shares of Common Stock of the Company were substantially unaffected by the Reverse Stock Split.    

Capitalization

Immediately prior to the Certificate of Change becoming effective, the aggregate number of shares which the Company had the authority to issue was three hundred fifty million (350,000,000) shares of Common Stock at $.001 par value, and thirty million (30,000,000) shares of Serial Preferred Stock at $.001 par value.  As a result of the Certificate of Change and Reverse Stock Split, the aggregate number of shares which the Company has the authority to issue is two million eight hundred thousand (2,800,000) shares of Common Stock at $.125 par value, and thirty million (30,000,000) shares (unchanged) of Serial Preferred Stock at $.001 par value.