Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Securities registered under Section 12(g) of
the Exchange Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes[ ] No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent
filers in response to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition
of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined by Rule 12b-2 of the Exchange Act).
The aggregate value of the voting common equity
held by non-affiliates as of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal
quarter, was approximately $2,239,778 based on the price at which the common stock last sold on such day. This price reflects
inter-dealer prices without retail mark up, mark down, or commissions, and may not represent actual transactions.
The number of shares outstanding of Common Stock, $0.001 par value
as of July 18, 2016 is 77,404,010.
This multi-period comprehensive
Annual Report on Form 10-K of Sitestar Corporation (together with its consolidated subsidiaries, “Sitestar”, the “Company”,
“we”, “us”, and “our”, unless the context indicates otherwise) is for each of the years ended
December 31, 2015 and December 31, 2014, as restated, and for each of the quarterly periods of 2015 and 2014, all six quarterly
periods as restated, and is in lieu of filing separate reports for each of those periods. In this Annual Report, we are restating
certain items and making other corrective adjustments to certain of our previously filed historical financial statements and related
information resulting from the accounting reviews and internal investigation referenced below. More specifically, in this Annual
Report, the Company, among other things:
(a) restates its Consolidated
Balance Sheets as of December 31, 2014 and the related Consolidated Statements of Comprehensive Income, Stockholders’ Equity
and Cash Flows for the fiscal year ended December 2014;
(b) amends its Management’s
Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) as it relates to the fiscal
year ended December 31, 2014 and the interim quarterly periods of 2014 and 2015, generally;
(c) restates its Unaudited
Quarterly Financial Data for each fiscal quarter in the fiscal year ended December 31, 2014 and the three fiscal quarters in the
fiscal year ended December 31, 2015
On December 3, 2015 Sitestar’s
former auditor notified the independent Directors of the Company of his concerns about several related party transactions and
what the former auditor considered to be former management’s inadequate responses regarding these matters. The former auditor
had not previously disclosed these concerns to the independent Directors and had not included the independent Directors in previous
communications on the matter.
The independent Directors
requested information from former management on December 7, 2015 and believed that the responses from former management to be
inadequate. The independent Directors provided former management with an additional opportunity to explain the issues on December
14, 2015 and again found the responses to be lacking. Accordingly, the Board of Directors voted to terminate the former CEO and
place the now former CFO on probation. An independent Director, Steven L. Kiel, was appointed as the interim CEO during that meeting.
Directors also voted to
form an Audit Committee at the December 14, 2015 meeting and appointed two independent Directors to the Committee. Among other
things, the Audit Committee was tasked with reviewing and approving the engagement with an outside auditor.
Also at the December 14,
2015 meeting, Directors agreed to engage outside legal counsel to lead an investigation into the allegations by the Company’s
former auditor. Legal counsel engaged an accounting firm to carry out an analysis of a range of transactions over the previous
five years. The information above was originally detailed in 8-K filings on December 15, 2015 and December 29, 2015. A final investigation
report was delivered to management in February 2016. This report served as the basis for a lawsuit filed by the Company against
the former CEO, Mr. Erhartic, in April 2016. This lawsuit is described more fully in Item 3.
The results of the investigation,
along with the problematic items identified by the former auditor and the accounting firm engaged to conduct the investigation,
led the Company to make the decision that it was necessary to restate the 2014 10-K as well as the interim reports for 2014 and
2015.
This decision was strengthened
by the former auditor’s resignation on February 11, 2016 following communications with the Company that the former auditor
had not been selected as the Company’s independent auditor for 2016. As detailed in an 8-K filed on March 7, 2016, Cherry
Bekaert, LLP was selected as the Company’s new independent auditor on March 3, 2016. After concerns were raised by the Company’s
outside legal counsel about the former auditor’s independence, it was determined that Cherry Bekaert, LLP should carry out
an audit for 2014 in addition to 2015.
Adjustments made as a
result of the restatement are more fully discussed in the Significant Information for Investors section below. To further review
the effects of the accounting errors identified and the restatement adjustments, see Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report. For a description
of the control deficiencies identified by management as a result of the investigation and our internal reviews, and management’s
plan to remediate those deficiencies, see Part II, Item 9A, “Controls and Procedures”.
Our previously filed Annual
Report on Form 10-K and quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. Accordingly,
as previously disclosed in our Current Reports on Form 8-K dated December 23, 2015, February 18, 2016 and March 18, 2016, investors
should no longer rely upon the consolidated financial statements and related financial information contained in previously filed
financial reports for these periods and any earnings releases or other communications relating to these periods. See Note 13,
Restated Unaudited Quarterly Financial Data, of the Notes to the Consolidated Financial Statements in this Annual Report for the
impact of these adjustments on each of the quarterly periods in fiscal 2014 and for the three quarters of fiscal 2015. Our quarterly
reports for fiscal 2016 will include results for the corresponding interim periods of fiscal 2015, as restated herein. All amounts
in this Annual Report on Form10-K affected by the restatement adjustments reflect such amounts as restated.
The Company believes that
the clearest way to present the restated information to investors is to provide a comprehensive filing on all matters restated
since January 1, 2014. We want to highlight the information we view as significant to investors in this section. While there are
several items where changes were made, we do not consider the amounts individually or collectively material.
Shortly after the change
in management, we requested a shareholder report from our transfer agent and attempted to reconcile the number of shares outstanding.
We determined that the Company had previously been inaccurately reporting the number of shares outstanding and the number of treasury
shares. We adjusted this as of January 1, 2014 by restating the number of outstanding common shares to 77,404,010 from 74,085,705
and by restating the number of treasury shares to 13,922,453 from 17,240,758. We also adjusted the paid-in capital and accumulated
deficit as of January 1, 2014. In plain language, there are more shares outstanding than before and outside investors saw their
ownership in the company diluted by approximately 4% because of the previous error.
We adjusted the opening
balance of total equity beginning January 1, 2014 to $3,546,099. This was a $152,558 decrease from the closing balance of December
31, 2013. This change was primarily the result of errors in the deferred tax calculations, the timing of accruals, state taxes
payable, and the valuation of real estate owned.
After reviewing the details
of each property owned in each period beginning on January 1, 2014, we adjusted the amounts listed as real estate held for investment
and for resale. For the year ended December 31, 2014 we changed real estate held for resale to $2,079,514 from $2,293,061 and
real estate held for investment to $1,185,588 from $1,107,402.
We also removed the previously
listed tax expense of $74,275 from 2014. This tax expense was not supportable and was previously listed in error.
The Company historically
has listed a liability of $900,615 as a note payable related to the historical purchase of customers from USA Telephone. This
amount was in dispute and ultimately was settled for $90,000 in December 2015. To more accurately reflect the liability, we adjusted
the note payable to $90,000 in the year ended December 31, 2014. In addition to affecting the liabilities portion of the balance
sheet, it also is reflected as other income on the income statement. This resulted in the biggest change in the full year 2014
figures. The restated comprehensive income for 2014 is $1,120,085 where previously it was reported as $384,183. Additionally,
the $90,000 note payable remained on the balance sheet in the year ended December 31, 2015 despite the settlement in December
2015 because payments associated with the settlement were not paid until 2016.
We have also adjusted
several cost of revenue items in the interim 2014 and 2015 periods. These were primarily the result of an improved analysis of
the timing of accruals and a more accurate analysis of real estate expenses. The end results when looking at the change in the
full year 2014 numbers are minor. Cost of revenues for 2014 were restated as $1,244,241 from $1,106,083. Ultimately some SG&A
items were reduced as well, so the restated income from operations for full year 2014 decreased $19,591.
We made the decision to present the restated
interim periods and full year 2014 financials as part of the 2015 10-K in order to provide clarity on information that is relevant
at the time of the release of this 10-K. We would like to focus shareholders on the current condition of the company while also
providing accurate historical information. While not required because of our smaller reporting company status, we decided to include
a fairly extensive section of risk factors to ensure that shareholders understand the risks associated with owning shares in our
company. We urge you to carefully consider these risks when determining if an investment is appropriate.
This Annual Report on
Form 10-K, including, without limitation, Part I, Item 1, “Business” and Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” herein, contains statements that constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,”
“expect,” “intend,” “anticipate,” “plan” and similar expressions and variations
thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake
no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events,
or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve
risks and uncertainties which may affect the Company's business and prospects, including changes in economic and market conditions,
acceptance of the Company’s products, maintenance of strategic alliances and other factors discussed elsewhere in this Form
10-K, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various
factors.
PART I
ITEM 1. BUSINESS
Overview
Sitestar Corporation (together
with its consolidated subsidiaries, “Sitestar”, the “Company”, “we”, “us”, and
“our”, unless the context indicates otherwise) is a Nevada corporation, incorporated December 17, 1992, having its
headquarters in Lynchburg, Virginia and carrying out its business strategy in two segments: Internet Operations and Real Estate
Operations. Prior to 2010, the Company primarily focused on providing services through its internet segment. This focus involved
the purchase of customers from other Internet Service Providers located throughout parts of the United States and Canada. The
services offered to these acquired customers were primarily dial-up and DSL internet access, Web hosting, and other ancillary
services. From 2002 to 2010 the Company acquired various internet access-related companies and customers. Ultimately, this acquisition
strategy proved not to be viable.
In 2008 the Company’s
management implemented a program to purchase real estate with the Company’s surplus cash flows. The first acquisition occurred
in 2010. The strategy involved purchasing residential properties, often from foreclosure, at prices that prior management deemed
to be attractive. Efforts were then made to repair and upgrade the properties to make them ready for rental or sale. Despite the
fact that the internet segment generated the vast majority of revenue during this time period, prior management’s primary
focus from 2010 until the dismissal of the prior CEO on December 14, 2015 was on the real estate segment.
When new management was
appointed on December 14, 2015, we determined that it was unlikely that an acceptable return could be made by continuing to pursue
the real estate acquisition strategy. Accordingly, we intend to pursue efforts in this segment to an orderly liquidation of our
real estate assets. It is likely that this liquidation will take several years to fully complete.
The Board of Directors
and management are focused on maximizing the free cash flow generated by the internet segment and maximizing the net sale price
of the real estate properties currently owned. Going forward, we are likely to reinvest the proceeds from these two segments into
alternatives unrelated to the historical activities of the company. Subsequent to the 2015 year end, we have made investments
in both marketable securities and, as previously reported in our Current Report of Form 8-K filed with the SEC on June 14, 2016,
in an acquisition vehicle focused on the HVAC industry.
Background on the New Board of Directors
and Management
In December 2014, Jeffrey
Moore, Steven Kiel, and Jeremy Gold (collectively The Moore Shareholder Group) filed a preliminary proxy statement in order to
force the Company to hold a special shareholder meeting to elect Directors. There had been no record of prior management holding
a shareholder meeting since the Company had been public. Prior management reacted to the filing of the proxy statement by filing
suit against The Moore Shareholder Group. In February 2015 the Company agreed to drop its lawsuit, increase the number of Directors
to six, appoint Mr. Kiel and Mr. Gold as Directors, and appoint Roger Malouf as a management chosen Director. Mr. Moore had previously
been appointed as a director in 2013. The Company and The Moore Shareholder Group also agreed to a “standstill agreement”
for a one-year period to end in February 2016.
As previously reported
in our Current Report of Form 8-K filed with the SEC on December 15, 2015 and December 29, 2015, the Company’s former CEO,
Frank Erhartic, was terminated by the Board of Directors on December 14, 2015 after the Company’s former auditor notified
the Directors about several related party transactions that the former auditor deemed to be problematic. Mr. Ehartic resigned
as a Director at the request of the Board. Mr. Erhartic was replaced as CEO by Mr. Kiel, first on an interim basis on December
14, 2015, and then on a permanent basis effective March 1, 2016. Mr. Kiel manages an investment partnership that has held an investment
in the Company since 2012. Mr. Kiel has been a Director since 2015. Mr. Kiel is also a Judge Advocate in the Army Reserves. He
is a veteran of Operation Iraqi Freedom and currently holds the rank of Major.
Steps Taken by
New Board of Directors
and Management Since the Termination of the Former CEO
Immediately after being
appointed, new management engaged outside legal counsel to lead an investigation into the allegations by the Company’s former
auditor. Legal counsel engaged an accounting firm to carry out an analysis of a range of transactions over the previous five years.
A final report was delivered to management in February 2016. This report served as the basis for a lawsuit filed by the Company
against Mr. Erhartic in April 2016. This lawsuit is described more fully in Item 3.
At the Board of Directors
meeting on December 14, 2015 the Company’s former CFO, Dan Judd, was placed on probation in light of the circumstances that
had led to the termination of the former CEO. New management engaged an outside financial consultant to review the Company’s
accounting practices and to assist Mr. Judd in carrying out his duties. As previously reported in our Current Report of Form 8-K
filed with the SEC on March 7, 2016, Mr. Judd subsequently was terminated on March 3, 2016. The Board has requested that he resign
as a Director, but Mr. Judd has not responded favorably to that request and has not participated in Board meetings since his dismissal
as CFO.
Also at the Board of Directors
meeting on December 14, 2015, the Company formed an Audit Committee. Jeff Moore and Jeremy Gold were appointed to serve on the
Audit Committee. Mr. Gold was elected to be the Chairman of the Audit Committee at the December 14, 2015 meeting. A charter was
adopted on January 5, 2016.
As previously reported
in our Current Report of Form 8-K filed with the SEC on February 23, 2016, effective February 2, 2016 Mr. Malouf resigned as a
Director and was replaced by Chris Payne. Mr. Payne is considered an Audit Committee Financial Expert and was appointed to serve
on the Audit Committee.
As previously reported
in our Current Report of Form 8-K filed with the SEC on February 18, 2016, on February 11, 2016, the Company’s former auditor
resigned. This resignation followed communications between the former auditor and the Company in which the Company informed the
former auditor, among other things, that (i) the former auditor had not been selected as the Company’s independent auditor
for 2016; and (ii) following receipt of the former auditor’s letter of December 21, 2015 stating that the Company should
take action to prevent reliance on the previously issued financial statements for the year ended December 31, 2014 as contained
in the Annual Report on Form 10-K as of and for the year ended December 31, 2014, the Company had retained an external accountant
to conduct an investigation based on certain agreed upon procedures.
On February 17, 2016,
Mr. Moore was selected to serve as the Chairman of the Board.
As previously reported
in our Current Report of Form 8-K filed with the SEC on March 7, 2016, on March 3, 2016, Cherry Bekaert LLP was selected as the
Company’s new independent auditor for the year ended December 31, 2015. It was determined that Cherry Bekaert LLP should
carry out an audit for 2014 in addition to 2015.
On April 21, 2016, Mr.
Kiel and representatives from Cherry Bekaert LLP and the Company’s outside legal counsel met with the Enforcement Division
of the Securities and Exchange Commission (SEC) at the SEC’s request. We detailed the steps taken to confront the accounting,
internal control, and other issues created by the Company’s former management. We have proactively complied with all requests
by the SEC. We are committed to fully cooperating with the SEC on all matters, and will assist them if they decide to pursue a
formal investigation or enforcement action against the Company or any currently or previously associated person.
New management has aggressively
moved to implement policies that will prevent risks associated with related party transactions. We immediately abandoned a storage
facility owned by the former CEO. Within a month of the management change, we moved out of the former headquarters office claimed
to be owned by the former CEO. We have engaged several outside service providers to supplement the staff members already in place.
The new management and Board of Directors are focused on aggressively defending the interests of the Company and its shareholders.
Products and Services
Internet Operations
Sitestar is an Internet
Service Provider (ISP) that offers consumer and business-grade internet access, wholesale managed modem services for downstream
ISPs, Web hosting, and various ancillary services. We provide services to customers in the United States and Canada.
This segment markets and
sells narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic and wireless). Additionally, we market and sell
web hosting and related services to consumers and businesses. We also offer broadband services within our regional and national
footprint.
In addition to our operations,
we also own the domain, First.com. We are currently marketing First.com for sale.
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. 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. Competitors are often offered incentives for customers to purchase internet access by offering discounts
for bundled service offerings (i.e., phone, television, Internet). While we are a reseller of broadband services including DSL
and fiber services, our profit margin is heavily influenced by these competitive forces.
There are currently laws
and regulations directly applicable to access or commerce on the internet, covering issues such as user privacy, freedom of expression,
pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with Internet communications. We may be positively or
negatively affected by the repeal, modification, or adoption of various laws and regulations. These changes may occur at the international,
federal, state, and local levels, and may cover a wide range of issues such as user privacy, freedom of expression, pricing, characteristics
and quality of products and services, taxation, advertising, intellectual property rights, and information security.
Real Estate Operations
Sitestar owns a real estate
investment portfolio that includes residential properties, vacant land, and one commercial property. Our real estate portfolio
is primarily focused in the Roanoke and Lynchburg areas of Virginia.
Pursuant to the approval
of the Board of Directors subsequent to December 31, 2015, we are pursuing an orderly liquidation of our real estate portfolio.
We do not have an estimate for how long it will take to complete this liquidation, if ever.
Beginning immediately
after the change in management in 2015, we engaged several real estate agents to assess the marketability of the properties we
were not holding as rentals. We have examined each property on an individual basis to determine a strategy to maximize the net
sale price. Where appropriate, we have and will reinvest resources into a property to increase its marketability and sale price.
We have listed and, subsequent to December 31, 2015, sold, properties both directly and through real estate agents. In 2016, we
engaged a property manager to manage the rental properties that we own in Roanoke, Virginia.
State and municipal laws
and regulations govern the real estate industry and do not vary significantly from one community to another. State laws, including
the Virginia Residential Landlord and Tenant Act, in addition to local ordinances govern rental properties and also do not vary
significantly throughout our real estate holding areas.
Employees
As of July 18, 2016, we
employed four full-time individuals and one part-time individual. We also utilize outside contractors as necessary to assist
with bookkeeping, financial reporting, technical support, and customer service. Our employees are not unionized and we consider
relations with employees to be favorable.
Available Information
Sitestar files annual,
quarterly, and current reports and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange
Act. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an internet web site that contains reports, proxy and information statements,
and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain
any documents that the Company files with the SEC at
http://www.sec.gov
. The Company also has available through EDGAR
and XBRL its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments
to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act as soon as reasonably practicable
after the Company electronically files such material with, or furnishes it to, the SEC.
ITEM 1A. RISK FACTORS
This
Item 1A “Risk Factors” is not required for smaller reporting companies. However, notwithstanding this, we believe
that it is in the best interests of the Company, our shareholders and the public, generally, to selectively disclose and illustratively
overview the following certain risk factors, which we have identified as being among many risks particularly material to the current
and future prospects of our Company, given the Company’s current circumstances as we understand them. This Item 1A “Risk
Factors” is neither an exhaustive nor complete presentation of risks. Our presentation of these certain risk factors below
is not organized in any particular order of magnitude or significance. In addition to the other information included in this Annual
Report on Form 10-K, the following risk factors should be carefully considered in connection with evaluating our business and
any forward-looking statements contained herein.
Our business, financial condition, results of operations and cash
flows could be harmed by any of the risk factors described below, or other risks that have not been identified or included herein
or which we believe are immaterial or unlikely. If one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, our business, financial condition, operating results and cash flows could be materially
adversely affected.
RISKS RELATED
TO OUR BUSINESS
The uncertainty
as to our future strategies, and any failure in pursuing or executing new business initiatives, could have a material adverse
impact on our business and future prospects.
Prior to 2010,
we were primarily focused on providing services through our internet segment. This focus purchasing customers from other Internet
Service Providers located throughout parts of the United States and Canada. The services offered to these acquired customers were
primarily dial-up and DSL internet access, Web hosting, and other ancillary services. From 2002 to 2010, we acquired various internet
access-related companies and customers. Ultimately, this acquisition strategy was not viable. In 2010, prior management ceased
the previous acquisition strategy within the internet segment and redirected cash flow generated by the internet segment to an
acquisition strategy focused on residential real estate. The strategy involved purchasing residential properties, often from foreclosure,
at prices that prior management deemed to be attractive. Efforts were then made to repair and upgrade the properties to make them
ready for rental or sale. Despite the fact that the internet segment generated the vast majority of revenue during this time period,
prior management’s primary focus from 2010 until the dismissal of the prior CEO on December 14, 2015 was on the real estate
segment to the neglect of the internet segment. When new management took over on December 14, 2015, we determined that it was
not possible to make an acceptable return by continuing to pursue the real estate acquisition strategy. Accordingly, we intend
to pursue efforts in this segment to an orderly liquidation of our real estate assets.
The Board of Directors
and management are focused on maximizing the free cash flow generated by our internet segment and maximizing the net sale price
of our real estate properties currently owned. However, going forward, we are likely to reinvest the proceeds from these two segments
into alternatives unrelated to the historical activities of the Company. We are currently reviewing investment opportunities in
the public and private markets.
Accordingly, to
date, we are uncertain as to any of the specific opportunities and future strategies the Company may undertake, as a going concern.
We face significant risks that viable opportunities toward which the Company could redirect its resources and attention will not
exist or be readily apparent to management, that management might not reach any consensus regarding the future strategies of the
Company, and that any opportunities and strategies, even if identified and resolved to be pursued by the Company, could be successfully
undertaken or executed.
Evaluating, considering
and effectively executing new business initiatives can be difficult. Management may not properly ascertain or assess the risks
of new initiatives, and subsequent events may alter the risks that were evaluated at the time we decided to execute any new initiative.
Entering into any new initiatives can also divert our management’s attention from other business issues and opportunities.
Failure to effectively identify, pursue and execute new business initiatives likely will adversely affect our reputation, business,
financial condition and results of operations.
Unless and until
our management effectively identifies and consummates our pursuit of one or more alternative business strategies, we and any of
our shareholders may be subject to heightened risks in respect of our prospects as a going concern.
We are under
leadership of new management and a new Board of Directors, who collectively have a limited operating history with the Company.
Our current management
and Board of Directors, with the exception of Daniel Judd, who remains a director but who the Company terminated as our former
Chief Financial Officer on March 3, 2016, is comprised of individuals who invested in, as holders of our common stock, and were
elected or appointed as officers and/or Directors, respectively, of, our Company during the periods subsequent to 2013. Accordingly,
as to our current President and Chief Executive Officer (and interim Chief Financial Officer), who was appointed to his office
as of December 14, 2015, and the other individuals constituting our executive suite and Board, we are under new leadership. While
we expect that our new leadership will prove to be a positive development for the Company given our allegations against prior
management regarding misconduct and the resulting detrimental impacts to the Company, our new members of management have limited
experience with us and our business and have limited perspective as to our historical operations and practices, especially with
respect to any periods predating 2014. We cannot assure you that they will fully integrate themselves into our business or that
they will effectively manage our business affairs. Our failure to assimilate the new members of management, the failure of the
new members of management to perform effectively, the failure of our new management to reach consensus as to our current and future
strategies or the loss of any of new members of management could have a material adverse effect on our business, financial condition
and results of operations and our future prospects.
Our profitability
depends significantly on local economic conditions.
Our success depends
primarily on the general economic conditions of the primary local markets in Virginia and, with respect to our internet segment,
across the United States and Canada, in which we operate and where our internet operations and real property holdings are concentrated.
Unlike our competitors, which include, as to our internet segment, nationwide telecommunications and broadband providers that
are more geographically diversified and have nationally-recognized branding, the Company’s offerings of consumer and business-grade
internet access, wholesale managed modem services for downstream ISPs, Web hosting and various ancillary services are, and historically
have been, limited in penetration to smaller local and regional communities and pockets of market penetration across the United
States and Canada. As to our real property investment holdings, with limited exceptions, the entirety of our real estate segment
is focused on properties located within Central Virginia, and namely the Roanoke and Lynchburg, Virginia metropolitan statistical
area.
Regarding both
of our business segments, the particular local economic conditions in these areas have a significant impact on the Company’s
results of operations and prospects, generally. If the Company’s market areas experience a downturn or a recession for any
prolonged period of time, the Company could experience significant increases in delinquencies by real property tenants, decreases
in revenues generated from residential and business internet segment customers, and impairment of its real property assets, all
of which could lead to operating losses, impaired liquidity and eroding capital. A significant decline in general economic conditions,
caused by inflation, recession, acts of terrorism, outbreaks of hostilities or other international or domestic calamities, unemployment,
monetary and fiscal policies of the federal government or other factors could impact these local economic conditions and could
negatively affect the Company’s financial condition, results of operations and cash flows.
Our overall
business may be adversely affected by conditions in the financial markets and economic conditions generally.
The Company’s
financial performance generally is highly dependent upon the business environment in the markets where the Company operates and
in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic
growth, efficient capital markets, low inflation, high business and investor confidence and strong business earnings. Unfavorable
or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business
confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest
rates; natural disasters; or a combination of these or other factors.
The United States
has not returned to the level of growth typical prior to the severe economic recession in 2008 and 2009. Our real estate investment
portfolio quality is impacted by weak general economic conditions, which hamper prospects for realizing any return on investments
in the properties we hold and pressure the value of the “rent roll” we’re able to realize from tenants of our
properties. Accordingly, we remain vulnerable to adverse changes affecting the real estate market and business conditions. Such
conditions or a significant weakening in general economic conditions such as inflation, recession, unemployment or other factors
beyond our control, or both, could negatively impact the Company and our prospects.
We may not
be able to generate sufficient free cash flow from our Internet Segment to support the Company during the periods in which we
attempt to liquidate our real estate investment portfolio and we reach consensus as to alternative future strategies the Company
will pursue.
As mentioned, prior
to 2010, we were primarily focused on providing services through our internet segment. This focus involved a strategy of purchasing
customers from other Internet Service Providers located throughout parts of the United States and Canada. The services offered
to these acquired customers were primarily dial-up and DSL internet access, Web hosting, and other ancillary services. From 2002
to 2010 we acquired various internet access-related companies and customers. However, in 2010, prior management ceased the previous
acquisition strategy within the internet segment and redirected cash flow generated by the internet segment to an acquisition
strategy focused on residential real estate, and despite the fact that the internet segment generated the vast majority of revenue
during this time period, prior management’s primary focus from 2010 until the dismissal of the prior CEO on December 14,
2015 was on the real estate segment to the neglect of the internet segment.
Going forward,
the Company intends to pursue an orderly liquidation of the entirety of its real estate holdings, and we currently are evaluating
opportunities and new strategies for the Company’s future, which such alternatives may be unrelated to the historical activities
of the Company.
However, unless
and until we successfully liquidate our real estate investments and reach consensus as to the most appropriate and beneficial
strategy for the Company’s future prospects, we will depend heavily upon the proceeds generated by our Internet Segment
to sustain the Company for the foreseeable future. As prior management neglected, and did not reinvest in, our Internet Strategy
and as we face an ever-increasing amount of competition from larger regional and national cable and telecommunications companies
that have substantially greater market presence, brand-name recognition, and financial resources compared to Sitestar for our
offerings in this segment, we face significant risks that our historical internet businesses may not be able to sustain our Company
throughout any transition period.
We may not
be able to liquidate our real estate holdings within the timeframe we project or under terms and conditions that are favorable,
or provide any return on investment, to us.
We are subject
to risks associated with our investments in real estate. Real estate investments are relatively illiquid. Pursuant to our current
plan of liquidation, we expect to liquidate the entirety of the Company’s real estate assets within the next 12 to 24 months;
however, due to the illiquid nature of real estate, the transaction costs associated with marketing and selling real property
and the short timeframe that we have to sell our real estate assets given our need for capital to re-invest, we may not recoup
the estimated fair value of, or even the amount of our initial investments in, our real property assets within this estimated
timeframe, or at all. Accordingly, we cannot provide assurance that we will be able to dispose of our real property assets within
the next 12 to 24 months, or at all, or under terms and conditions that are favorable, or provide any return on investment, to
us – any of the foregoing of which would adversely impact our financial condition and prospects.
Events that
negatively impact the real estate market, and changes in the financial markets, could hurt and impair the value of our real estate
investment portfolio.
Because most of
our real estate holdings are concentrated in the area surrounding the Cities of Roanoke and Lynchburg, Virginia, a decline in
local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger companies
whose real estate portfolios are more geographically diverse. A weakening of the real estate market in Central Virginia or across
the greater U.S. economy could result in an increase in the number of tenants of our properties who default on their lease agreements
with us and, more so, a reduction in the value of the real properties, themselves. Additionally, acts of nature, including hurricanes,
tornados, earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate, may also negatively
impact our financial condition.
Our plans
for future growth and continued operation will depend, in many instances, on factors beyond our control, and an unsuccessful attempt
to achieve growth would have a material adverse effect on our business, financial condition, results of operations and future
prospects.
We expect to engage
the Company in new markets and businesses outside of and unrelated to its historical businesses. Our future pursuit of new opportunities
involves many risks, including, without limitation:
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·
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the
time and costs of evaluating new markets and business opportunities, and possibly hiring
experienced personnel for the same, and opening new operations;
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·
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the
time lags between these activities and the generation of sufficient assets and revenues
to support the costs of any of our new markets and businesses;
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·
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our
entrance into new markets or operations where we lack experience, relationships and business
perspective and acumen;
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·
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the
introduction of new products and services with which we have no prior experience into
our existing business;
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·
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failure
to culturally integrate any acquisition target or to identify and select optimal candidates
and business partners for any integration or new expansion; and
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·
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failure
to comply with new laws, rules and regulations applicable to any new markets or operations
with which we have no prior experience.
|
We are subject
to liquidity risk, generally.
Liquidity risk
is the potential that we will be unable to meet our obligations as they become due, capitalize on growth opportunities as they
arise or continue to operate because of an inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable
cost and within acceptable risk tolerances. A failure to adequately manage our liquidity risk could adversely affect our business,
financial condition or operating results.
If we fail
to maintain an effective system of internal and disclosure controls, we may not be able to accurately report our financial results
or prevent or detect fraud.
We have historically
lacked proper internal controls and procedures.
We maintain disclosure
controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules
and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer,
who is also our interim Chief Financial Officer, to allow timely decisions regarding required disclosure based on the definition
of “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. In designing
and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We have previously
disclosed in numerous prior period and current reports filed with the SEC our identification of material weaknesses relating to
our internal controls and procedures, some or all of which have persisted throughout recent history. Furthermore, during the course
of our preparation of our December 31, 2015 and December 31, 2014 financial statements, we identified certain additional material
weaknesses relating to our internal controls and procedures. Some of these internal control deficiencies may also constitute deficiencies
in our disclosure and internal controls. Reference is made to Item 9A “Controls and Procedures” herein.
Effective internal
control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports
and effectively prevent or detect fraud and to operate successfully as a public company.
The Company faces
the risk that the design of its controls and procedures, including those to mitigate the risk of fraud by employees or outsiders,
may prove to be inadequate or are circumvented, thereby causing delays in detection of errors or inaccuracies in data and information.
We plan to regularly review and update the Company’s internal controls, disclosure controls and procedures and corporate
governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions
and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention
of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could
have a material adverse effect on the Company’s business, results of operations and financial condition. In addition, given
that we are a small company with a limited number of employees, we may be limited in our ability to assert effective controls,
including, without limitation, controls related to appropriate segregation of duties, and there can be no assurance that we will
be able to mitigate any of our internal control weaknesses.
Any failure to
maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could hinder our
ability to accurately report our operating results or cause us to fail to meet our reporting obligations, which could affect our
ability to remain quoted on the OTC Markets Group exchanges. Ineffective internal and disclosure controls could also harm our
reputation, negatively impact our operating results or cause investors to lose confidence in our reported financial information,
which likely would have a negative effect on the trading price of our securities.
Although we have
implemented remedial measures expected to address the identified material weaknesses, our assessment of the impact of these measures
has not been completed as of the filing date of this report and we cannot assure you that these measures are adequate. Moreover,
we cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be
identified in the future. If we are unable to conclude that our internal control over financial reporting is effective, or if
we are required to further restate our financial statements as a result of ineffective internal control over financial reporting,
we would lose investor confidence in the accuracy and completeness of our financial reports, which likely would cause the price
of our common stock to decline.
REGULATORY
AND LEGAL RISKS
We are subject
to extensive regulation as a registered public company that could limit or restrict our activities and impose financial requirements
and expenses or limitations on the conduct of our business, which limitations or restrictions could adversely affect our profitability
and our ability to continue as a going concern.
As a public company,
we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley
Act, or SOX, the listing requirements of the OTC Markets Group and other applicable securities rules and regulations. Compliance
with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, and has
made and will continue to make some activities more difficult, time-consuming or costly, and increase demand on our systems and
resources. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to
our business and results of operations. SOX requires, among other things, that we maintain effective disclosure controls and procedures
and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures
and internal control over financial reporting to meet this standard, significant resources and management oversight may be required.
As a result, management’s attention likely may be diverted from our core business concerns, which likely would harm our
business and results of operations. Although our new management has already hired a number of professional service advisors, including
reputable outside legal counsel and independent public accountants, to assist us with complying with these requirements going
forward, we may need to hire additional employees in the future or engage additional outside consultants, which will increase
our costs and expenses.
Historically, we
chronically have failed to timely file our annual and quarterly reports, as required by the Exchange Act. New management and Board
of Directors is committed to getting the Company back on track regarding compliance and reporting obligations, among other things.
Nonetheless, the occurrence of certain items or happenings of certain events could result in the late filing of our periodic reports,
which in turn could result in the pool of potential investors being exhausted or investors losing confidence in the accuracy or
completeness of our financial resorts. In either case the market price of our common stock would likely be impacted. A sample
of these items and events is as follows: if additional material weaknesses in our internal control over financial reporting are
identified; if we discover additional historical misconduct or improprieties by our former CEO or other terminated officers; if
we are unable to comply with the requirements of SOX 404 in a timely manner; or if we are unable to assert, going forward, that
our internal control over financial reporting is effective, or in the event our independent registered public accounting firm
(which is not required to attest as to our internal controls over financial reporting) ever should notify us that any of our financial
statements should no longer be relied upon because of ineffectiveness of our internal control over financial reporting.
The laws
and regulations applicable to the internet services and real estate investment industries could change at any time, and these
changes may adversely affect our business and profitability.
We are subject
to federal and state regulation that impacts our businesses in both our Internet Segment and our Real Estate Segment. Because
government regulation greatly affects the business and financial results of all companies operating in these segments, our cost
of compliance could adversely affect our ability to operate profitably. The increased scope, complexity, and cost of corporate
governance, reporting, and disclosure practices are proportionately higher for a company of our size and will affect our profitability
more than that of some of our larger competitors. We expect to experience increasing compliance costs related to this supervision
and regulation.
If we become
subject to an SEC Enforcement Action as a result of our previous operations, prior management’s misconduct or our SEC filings
(or delinquencies or errors related thereto), the Company’s future prospects would be materially adversely affected.
On April 4, 2016,
the Company’s outside legal counsel had a discussion with representatives of the Enforcement Division of the Securities
and Exchange Commission, who posed informally a number of varied questions regarding the current and historical activities of
the Company and the Company’s Exchange Act reporting obligations and filings. Based on this and other discussions and subsequent
events, the Company understands that it currently is the subject of an “informal investigation” by the SEC concerning
matters that, to date, have not been disclosed by the SEC to the Company or its counsel. On April 21, 2016, our CEO, along with
representatives from the Company’s independent registered public accounting firm and the Company’s outside legal counsel,
met with the SEC’s Enforcement Division at its Philadelphia, Pennsylvania offices at the SEC’s request to answer informally
numerous and varied questions posed by the Staff. The Company has detailed, and will continue to detail, to the SEC the steps
undertaken to confront the accounting, internal control and other issues created, directly or indirectly, by the Company’s
former management and its prior advisors. The Company has proactively complied with all requests by the SEC, and the new management
of the Company is committed to fully cooperating with the SEC Staff on all matters concerning their informal investigation and
will assist the Staff if they should decide to pursue a formal investigation or enforcement action against the Company or any
associated persons, or if they should make any recommendations or stipulate any mandates to us as to how the Company should or
must correct further any of the information it previously has filed with or furnished to the SEC, so as to further the long term
best interests of the Company, its shareholders and the public, generally.
However, in the
event the SEC initiates an administrative “enforcement action” proceeding against the Company, the SEC could move
to suspend or revoke the registration of our common stock under the Exchange Act. We cannot predict the outcome of any of the
foregoing unresolved proceedings or whether we will face additional government inquiries, investigations, or other actions related
to these or other matters. An adverse ruling in any SEC enforcement action or other regulatory proceeding could impose upon us
fines, penalties, or other remedies, including the suspension or revocation of the registration of our common stock as discussed
above, which could have a material adverse effect on our results of operations and financial condition. Even if we are successful
in defending against an SEC enforcement action or other regulatory proceeding, such an action or proceeding may be time consuming,
expensive, and distracting from the conduct of our business and could have a material adverse effect on our business, financial
condition, and results of operations. In the event of any such action or proceeding, we may also become subject to costly indemnification
obligations to current or former officers, directors, or employees, which may or may not be covered by any D&O insurance accessible
to us.
RISKS RELATED
TO OUR STOCK
A limited
market exists for our common stock.
Our common stock
is quoted on the OTC PINK “OTCPINK” market. Our common stock was previously quoted on the OTC QB “OTCQB”
market, but was downgraded due to our inability to timely file appropriate disclosures. OTCQB and OTCPINK may not provide investors
with a meaningful degree of liquidity. Bid quotations for our common stock are available on the OTC Markets Group, an electronic
quotation service for securities traded over-the-counter. Bid quotations on OTCPINK can be sporadic and may not provide any meaningful
liquidity to investors. An investor may find it difficult to dispose of shares or obtain accurate quotations as to the market
value of our common stock. Trading volumes in recent history have been low as compared to other larger companies or companies
listed on other exchanges. The limited trading market for our common stock may cause fluctuations in the market value of our common
stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. Accordingly,
holders of our common stock may have difficulty selling our common stock at prices which holders find acceptable or which accurately
reflect the value of the Company.
Any investment
in our common stock is subject to complete loss.
An investment in
our common stock is inherently risky for the reasons described in these “Risk Factors” and the Company’s filings
with the SEC, among other reasons. While our common stock is subject to the same market forces that affect the price of common
stock in any company, you should carefully consider any investment in our common stock in light of our Company’s particular
circumstances and challenges. If you acquire, or currently own, our common stock, you may lose some or all of your investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
As of December 31, 2015,
the Company conducts its operations from two locations, both of which we lease. The following table describes the location and
general character of our operating facilities:
Location
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Sq.
Ft.
|
Monthly
Cost
|
Use
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Lynchburg,
VA
|
7,200
|
$4,000
|
Primary
U.S. Headquarters: Customer service; technical support; corporate accounting; billing; and houses internet equipment
|
Chatham,
ON Canada
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2,000
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$1,500
(CAD)
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Primary
Canadian Headquarters: Customer service; technical support; and houses internet equipment
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Subsequent to December
31, 2015 the Company vacated the Lynchburg, Virginia office and terminated the lease at the Chatham, Ontario office.
We also own a 12,000 square
foot office building located at 29 West Main Street, Martinsville, Virginia. This property was acquired in 1998 by Neocom Microspecialists,
Inc., a company we later acquired. This facility was closed in 2010. It is currently vacant and being marketed for sale.
As of December 31, 2015,
we owned 42 residential properties, one commercial property, and interests in several lots. Subsequent to December 31, 2015, 21
residential properties have been sold.
ITEM 3. LEGAL PROCEEDINGS
On December 8, 2015, Sitestar
settled a breach of contract claim with United Systems Access, Inc., et al. in connection with the matter, United Systems Access,
Inc., et al. v. Sitestar Corporation, Civil Action, Docket No. CV-13-161, (York County, Maine Superior Court), previously commenced
against the Company and whereby the plaintiff had alleged that the Company had failed to pay certain amounts owed on a promissory
note. The settlement required Sitestar to pay $90,000 to United Systems Access. The Company paid the settlement amount in three
installments on January 4, 2016, January 15, 2016, and February 11, 2016. The matter has been stricken from the docket. This claim
by United Systems Access is accrued as a note payable in the amount of $900,615. Because the payments were made after December
31, 2015, $90,000 continues to be listed as a note payable in the year ended December 31, 2015.
On April 12, 2016,
Sitestar filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”), the Company’s former
CEO and director and currently an owner of record or beneficially of more than five percent of the Company’s Common Stock.
This complaint alleges, among other things, that the Former CEO engaged in, and caused the Company to engage in to its detriment,
a series of unauthorized and wrongful related party transactions, including:
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causing
the Company to borrow certain amounts from the former CEO’s mother unnecessarily
and at a commercially unreasonable rate of interest;
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converting
certain funds of the Company for personal rent payments to the Former CEO;
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commingling
in land trusts certain real properties owned by the Company and real properties owned
by the Former CEO;
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causing
the Company to pay certain amounts to the Former CEO for lease payments under an unauthorized
lease as to a storage facility owned by the Former CEO;
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causing
the Company to pay rent on its corporate headquarters owned by the Former 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 CEO;
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converting
to the Former CEO several motor vehicles owned by the Company;
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causing
the Company to pay real property and personal property taxes on numerous properties owned
personally by the Former CEO;
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causing
the Company to pay personal credit card debt of the Former CEO;
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causing
the Company to significantly overpay the Former CEO’s health and dental insurance
for the benefit of the Former CEO; and
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causing
the Company to pay the Former CEO’s personal automobile insurance.
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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).
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING
POLICIES
Organization and Lines of Business
Sitestar Corporation (formerly
White Dove Systems, Inc., and then Interfoods Consolidated, Inc.) was incorporated in Nevada on December 17, 1992. On July 26,
1999 the Company restated its Articles of Incorporation to change the name of the Company to “Sitestar Corporation.”
The Company formerly was in the International specialty foods distribution business. In 1999, through the acquisition of two Internet
Service Providers, the Company changed from a food distribution company to an internet holding company. The Company services
customers throughout the U.S. and Canada with multiple sites of operation. Effective October 15, 2008 pursuant to the approval
of the board of directors, the Company’s management implemented a program to purchase real estate with the Company’s
surplus cash flows.
Principles of Consolidation
The accompanying consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries including: Sitestar.net, Inc. (formerly
known as Neocom Microspecialists, Inc.), FRE Enterprises, Inc., Advanced Internet Services, Inc. and NetRover Inc. All intercompany
accounts and transactions have been eliminated.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Use of Estimates
In accordance with Generally
Accepted Accounting Principles (GAAP), 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 those related to revenue recognition, accrued expenses, financing operations,
goodwill valuation, 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. The most significant accounting estimates inherent
in the preparation of the Company’s financial statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant
sections in the notes to the consolidated financial statements.
Fair Value of Financial Instruments
For certain of the Company's
assets and liabilities, including cash, accounts receivable, accounts payable, accrued expenses and deferred revenue, the carrying
amounts approximate fair value due to their short maturities.
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.
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 the 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.
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 charged
off to 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 charged off to the allowance for doubtful accounts when determined uncollectible.
Sales of Internet services,
which are not automatically processed via credit card or bank account drafts, have been the Company’s highest exposure to
collection risk. The Company attempts to reduce this risk by including a late payment fee and a manual processing payment
fee to accounts. Receivables more than ninety days past due are no longer included in accounts receivable and are turned over
to a collection agency. Accounts more than 30 days are considered past due.
Property and Equipment
Property and equipment
are stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives from three to
seven years for equipment, fifteen years for building improvements, and thirty-nine years for buildings. 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.
Impairment of Long-Lived Assets
In accordance with GAAP,
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, 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 does not amortize goodwill. 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) and involves a two-step
process. Prior to performing the two-step impairment test, the Company may make a qualitative assessment of the likelihood of
goodwill impairment in order to determine whether a detailed quantitative analysis is required. The first step of the impairment
test involves comparing the estimated fair values of the Company's reporting units with the reporting units' carrying amounts,
including goodwill. The Company estimates the fair value of its reporting units using discounted expected future cash flows. If
the carrying amount of the reporting unit exceeds its fair value, a second step is performed to compare the carrying amount of
goodwill to the implied fair value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to the excess.
The Company completed
an analysis of its goodwill as of December 31, 2015 and 2014 (as restated). For the year ended December 31, 2015 we recorded a
goodwill impairment of $954,049. No impairment was recorded in 2014 (as restated). This non-cash expense was the result of revenue
and cash flow declines in the internet segment. Additionally, new management implemented changes to the annual goodwill impairment
analysis to more accurately reflect the value of the Company’s goodwill in 2015.
Other intangible assets
consist of customer relationships, developed technology and software, trade names and other assets acquired in conjunction with
the purchases of businesses or purchases of assets from other companies. 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 management's own analysis and an independent third party valuation specialist's appraisal. Intangible
assets determined to have definite lives are amortized over their estimated useful lives.
The Company owns approximately
100 domain names, including first.com, first.net, and forsalebyowner.net. These domains are valued at historical cost.
Real Estate
Real estate held for sale
properties 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 the real estate is located and
tax assessed values, and is evaluated annually, or when events or changes in circumstances indicate the carrying value of the
real estate may not be recoverable.
Real estate held for investment
are carried at the cost basis plus additional expenses where the expense extended the life or added value to the property. Otherwise,
the expense is not capitalized and is charged to expense. 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 Expenses
Accrued expenses represent
accrued but not yet paid expenses from Sales and Use taxes for ISP services, vacation accruals, and other payroll accruals.
Deferred Revenue
Deferred revenue represents
collections from customers in advance for services not yet performed and are recognized as revenue in the period service is provided.
Revenue Recognition
Internet Operations
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. 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.
The Company generates
revenue in its internet segment from consumer and business-grade internet access, wholesale managed modem services for downstream
ISPs, Web hosting, 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 related services to consumers and businesses and broadband
services. Customers may downgrade from internet access to web hosting plans, to include email access and storage. In some years
the customer changes can be significant. Internet revenue is affected by the changing composition of revenue sources.
Real Estate Operations
Revenue from real estate
is recognized upon closing of the sale, 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.
Rental revenue from real
estate is recognized when it is due, generally on the first of each month or at another regular period agreed upon between the
Company and the tenant. If payments are not provided in a timely manner, the amount due is designated as an account receivable.
Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes
that recovery is probable. Tenants generally provide a security deposit at the time of possession. This deposit is held separate
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.
Income Taxes
Deferred taxes are provided
on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. 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. The last three tax years
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 similar 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.
Comprehensive Income
The comprehensive income
is the result of foreign currency translations related to the Company’s operations in Canada.
Recently Issued Accounting Pronouncements
In February 2016, the
FASB issued ASU 2016-02, “Leases” (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements
in ASC Topic 842, Leases. ASU 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 2016-02 is effective for fiscal years
beginning after December 15, 2018, with early adoption permitted. We are required to adopt this standard in the first quarter
of 2019. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements.
In August 2015, the FASB
issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic
606)” by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those years, beginning
after December 15, 2017. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising
from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires
new disclosures. Early adoption is not permitted. We are required to adopt this standard in the first quarter of 2017. The initial
application of the standard is not expected to significantly impact the Company.
In November 2015, the
FASB issued ASU No. 2015-17, “Income Taxes” (Topic 740). The ASU provides guidance related to the classifications
of deferred income tax assets and liabilities into current and noncurrent amounts in a classified statement of financial position.
Deferred tax assets and liabilities are classified as current or noncurrent based on the classification of the related asset or
liability for financial reporting. Deferred tax assets and liabilities that are not related to an asset or liability for financial
reporting are classified according to the expected reversal date of the temporary difference. The ASU is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We are required
to adopt this standard in the first quarter of 2018. The initial application of the standard is not expected to significantly
impact the Company.
NOTE 3 – REAL ESTATE
As of December 31, 2015, the Company owned
42 residential properties, one commercial property, and interests in several lots.
The Company acquired three
residential real estate properties in 2015 for a total gross purchase amount of $147,684. The Company acquired two residential
real estate properties and land in 2014 for a total gross purchase amount of $168,092. The Company made no sales of assets in
the year ended December 31, 2015. The Company sold two pieces of residential real estate for gross proceeds of $303,209 in the
year ended December 31, 2014 (as restated).
The real estate valuation
was adjusted downward on December 31, 2015 and 2014 in the amounts of $228,352 and $18,941, respectively. These downward revisions
were made to reflect the fair market value of the assets.
Depreciation expense totaled $44,770 for
the year ended December 31, 2015 and $33,344 for the year ended December 31, 2014 (as restated). Total accumulated depreciation
as of December 31, 2015 and 2014 totaled $92,627 and $70,479, respectively. In 2015 certain real estate held for investment assets
were transferred to real estate held for resale, and as a result decreased accumulated depreciation by $22,513.
Real Estate Held for Investment
As of December 31, 2015,
the Company held 14 residential properties and several lots as held for investments. Of these, nine properties had tenants and
were current with regards to tenant payments as of December 31, 2015. Properties held for investment were carried on the balance
sheet at $911,162. Four other properties that were available to rent were held in real estate for resale.
As of December 31, 2014
(as restated), the Company held 18 residential properties and several lots as held for investments. These properties held for
investment were carried on the balance sheet at $1,185,588.
The leases in effect as
of the year ended December 31, 2015 are based on either annual or multi-year time periods and include month-to-month provisions
after the completion of the initial term. An outside property management company has been engaged subsequent to the year-end.
The property management company has introduced updated and renewed leases for existing rental properties.
The future anticipated minimum rental revenue
based on leases in place as of December 31, 2015 is as follows:
2016
|
$ 108,900
|
2017
|
36,800
|
2018
|
2,520
|
|
|
Total
|
$ 148,220
|
Real Estate Held for Resale
As of December 31, 2015,
the Company held 28 residential properties and one commercial property as held for resale. These properties held for resale were
carried on the balance sheet at $2,671,311. During the course of 2015, we adjusted the carrying value of these properties downward
by $228,352 to reflect their fair market value.
As of December 31, 2014
(as restated), the Company held 23 residential properties as held for resale. These properties held for resale were carried on
the balance sheet at $2,079,514. During the course of 2014, we adjusted the carrying value of these properties downward by $18,941
to reflect the fair market value.
In the year ended December,
31 2015 the Company transferred land and buildings, which were reported as property and equipment as of December 31, 2014, to
real estate held for resale. The property has been marked to fair market value of $100,000, and is being marketed for sale.
NOTE 4 – PROPERTY AND EQUIPMENT
The cost of property and
equipment at December 31, 2015 and December 31, 2014 (as restated) consisted of the following:
|
|
2015
|
|
2014
As Restated
|
Land
|
|
$
|
—
|
|
|
$
|
10,000
|
|
Building
|
|
|
—
|
|
|
|
213,366
|
|
Automobile
|
|
|
9,500
|
|
|
|
9,500
|
|
Computer equipment
|
|
|
—
|
|
|
|
—
|
|
Furniture and fixtures
|
|
|
13,788
|
|
|
|
13,788
|
|
|
|
|
23,288
|
|
|
|
246,654
|
|
Less accumulated depreciation
|
|
|
(23,288
|
)
|
|
|
(116,904
|
)
|
Property and equipment, net
|
|
$
|
—
|
|
|
$
|
129,750
|
|
Depreciation expense was
$5,518 and $6,020
for the years ended December 31, 2015 and 2014 (as restated), respectively.
In the year ended December,
31 2015 we transferred all land and building assets to real estate held for resale.
NOTE 5 – 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:
|
·
|
Level
1 inputs are quoted prices in active markets as of the measurement date for identical
assets and liabilities that the Company has the ability to access. This category includes
exchange-traded mutual funds and equity securities.
|
|
·
|
Level
2 inputs are inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2 inputs include quoted
prices for similar assets and liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability, such as interest rates or yield
curves, that are observable at commonly quoted intervals. This category includes mortgage-backed
securities, asset-backed securities, corporate debt securities, certificates of deposit,
commercial paper, U.S. agency and municipal debt securities, U.S. Treasury securities
and derivative contracts.
|
|
·
|
Level
3 inputs are unobservable inputs for the asset or liability, and include situations where
there is little, if any, market activity for the asset or liability. The measurements
are highly subjective.
|
Following is a description of the valuation
methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2015
and 2014 (as restated).
Assets and Liabilities Measured at Fair
Value on a Recurring Basis
The Company had no significant assets or liabilities that were measured at fair
value on a recurring basis during 2015 or 2014.
Non-Financial Assets and Liabilities Measured
at Fair Value on a Non-Recurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis;
that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments
in certain circumstances (e.g., when there is evidence of impairment). Asset fair values are measured as Level 3 using a
market approach. Market values are derived from the most recent tax assessed value on an individual asset basis. The
carrying values and fair values of the Company’s real estate – held for resale and real estate – held for investment
values as of December 31, 2015 and 2014 (as restated), respectively, are as follows:
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
Significant
Other Observable Inputs
|
|
Significant
Unobservable Inputs
|
|
Total
at
|
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Fair
Value
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Real
estate held for investment
|
$
|
-
|
$
|
-
|
$
|
911,162
|
$
|
911,162
|
Real
estate held for sale
|
|
-
|
|
-
|
|
2,671,311
|
|
2,671,311
|
Goodwill,
net
|
|
|
|
|
|
212,445
|
|
212,445
|
Total
|
|
-
|
|
-
|
|
3,794,918
|
|
3,794,918
|
|
|
|
|
|
|
|
|
|
December
31, 2014 (As restated)
|
|
|
|
|
|
|
|
|
Real
estate held for investment
|
|
-
|
|
-
|
|
1,185,588
|
|
1,185,588
|
Real
estate held for sale
|
|
-
|
|
-
|
|
2,079,514
|
|
2,079,514
|
Goodwill,
net
|
|
-
|
|
-
|
|
1,166,494
|
|
1,166,494
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
-
|
$
|
-
|
$
|
4,431,596
|
$
|
4,431,596
|
NOTE 6 –
NOTES PAYABLE
Notes payable at December 31, 2015 and 2014
(as restated) consist of the following:
|
|
2015
|
|
|
2014
(As
Restated)
|
|
Non-interest
bearing amount due on acquisition of USA Telephone payable in thirty-six monthly installments starting January 2008.
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
Less
current portion
|
|
|
90,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
90,000
|
|
On December 8, 2015, Sitestar
settled a breach of contract claim with United Systems Access, Inc., et al. in connection with the matter, United Systems Access,
Inc., et al. v. Sitestar Corporation, Civil Action, Docket No. CV-13-161, (York County, Maine Superior Court), previously commenced
against the Company and whereby the plaintiff had alleged that the Company had failed to pay certain amounts owed on a promissory
note. The settlement required Sitestar to pay $90,000 to United Systems Access. This claim by United Systems Access was accrued
as a note payable in the amount of $900,615 as of December 31, 2013. Upon settlement of the agreement, the liability was marked
to $90,000 as of December 31, 2014. The Company paid the settlement amount in three installments on January 4, 2016, January 15,
2016, and February 11, 2016.
NOTE 7 – NOTES PAYABLE - STOCKHOLDERS
Notes payable - stockholders at December 31,
2015 and 2014 (as restated) consist of the following:
|
|
2015
|
|
|
2014
(As Restated)
|
Note payable to stockholder. The note is payable on January 1, 2020 and bears interest at an annual rate of 6.0%.
|
|
$
|
—
|
|
|
|
|
50,000
|
|
|
|
|
—
|
|
|
|
|
|
|
Less current portion
|
|
|
—
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
The Company previously
entered into a promissory note dated March 1, 2013 with the former CEO’s mother, Linda Erhartic, who is also a former employee
of the Company. Mrs. Erhartic loaned the Company $50,000 at an interest rate of 6% annually. This promissory note was not approved
by the process required by the Company’s Code of Ethics. Additionally, the Company only possesses an unsigned copy of this
promissory note. Furthermore, the interest rate paid to Mrs. Erhartic did not conform to the terms in the promissory note and
did not conform to previous disclosures made by the Company. This promissory note was repaid completely by the Company during
the period ended September 30, 2014. This transaction is the subject of litigation involving the former CEO. Additional information
can be found in item 3.
NOTE 8 – ACCOUNTS RECEIVABLE AND
BAD DEBT EXPENSE
For the years ended December 31, 2015 and 2014
(as restated), bad debt expense was $27,163 and $1,413 as of December 31, 2015 and 2014 as restated, accounts receivable consists
of the following:
|
|
2015
|
|
2014
(As Restated)
|
Gross accounts receivable
|
|
$
|
20,692
|
|
|
$
|
22,934
|
|
Less allowance for doubtful accounts
|
|
|
(6,264
|
)
|
|
|
(1,123
|
)
|
Accounts receivable, net
|
|
$
|
14,428
|
|
|
$
|
21,811
|
|
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Leases
The Company previously
leased certain facilities for its corporate offices and a storage facility from a related party. Total rent expense for the years
ended December 31, 2015 and 2014 (as restated) was $56,100 and $44,545, respectively. The Company also rented an office in Chatham,
Ontario in Canada. Total rent expense for this facility for the years ended December 31, 2015 and 2014 (as restated) was $18,000
CAD. These three facilities have been vacated as of July 18, 2016 and the Company has no future rent commitments.
Litigation
On April 12, 2016, Sitestar
filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”), the Company’s former CEO and
director 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 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 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 CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former
CEO, causing the Company to pay certain amounts to the Former CEO for lease payments under an unauthorized lease as to a storage
facility owned by the Former CEO, causing the Company to pay rent on its corporate headquarters owned by the Former 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 CEO, converting to the Former 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 CEO, causing the
Company to pay personal credit card debt of the Former CEO, causing the Company to significantly overpay the Former CEO’s
health and dental insurance for the benefit of the Former CEO, and causing the Company to pay the Former 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 10 – STOCKHOLDERS' EQUITY
Classes of Shares
The Company's Articles
of Incorporation authorize 310,000,000 shares, consisting of 10,000,000 shares of preferred stock, which have a par value of $0.001
per share and 300,000,000 shares of common stock, which have a par value of $0.001.
Preferred Stock
Preferred stock, any series,
shall have the powers, preferences, rights, qualifications, limitations and restrictions as fixed by the Company's Board of Directors
in its sole discretion. As of December 31, 2015, the Company's Board of Directors has not issued any Preferred Stock.
Common Stock
The Company has 300,000,000
authorized shares of Common Stock. As of December 31, 2015, 91,326,463 shares were issued and 77,404,010 shares were outstanding.
Shortly after the change
in management, we requested a shareholder report from our transfer agent and attempted to reconcile the number of shares outstanding.
The Company determined that the Company had been inaccurately reporting the number of shares outstanding and the number of treasury
shares. The Company adjusted the opening balance as of January 1, 2014 by restating the number of outstanding common shares to
77,404,010 from 74,085,705 and by restating the number of treasury shares to 13,922,453 from 17,240,758.
NOTE 11 - INCOME TAXES
The provision for federal
and state income taxes for the years ended December 31, 2015 and 2014 included the following:
|
|
2015
|
|
2014
(As Restated)
|
Current benefit (provision):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(318,594
|
)
|
|
|
114,529
|
|
State
|
|
|
(5,359
|
)
|
|
|
21,815
|
|
Valuation allowance
|
|
|
323,953
|
|
|
|
(136,344
|
)
|
Total income tax provision
|
|
$
|
—
|
|
|
|
—
|
|
Deferred tax assets and liabilities
reflect the net effect of temporary differences between the carrying amount of assets and liabilities used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2015 and 2014 are as follows:
|
|
2015
|
|
2014
(As Restated)
|
Net operating loss carryforward
|
|
$
|
560.137
|
|
|
|
287,099
|
|
Amortizations of intangible assets
|
|
|
1,383,166
|
|
|
|
1,331,837
|
|
Accrued vacation
|
|
|
293
|
|
|
|
707
|
|
Valuation allowance
|
|
|
(1,943,596
|
)
|
|
|
(1,619,643
|
)
|
Deferred tax asset, net
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 12 - RELATED PARTY TRANSACTIONS
As of the year ended December
31, 2015, the Company previously purported to lease its office building in Lynchburg, Virginia from the former CEO of the Company.
Public records indicate that the owner of this property from at least January 1, 2014 through December 31, 2015 was the former
CEO’s ex-wife. We have filed a lawsuit against the former CEO in order to recover the payments made to the former CEO. Additional
information on this lawsuit can be found in item 3. We vacated the building as of January 15, 2016.
The Company also leased
a storage facility in Salem, Virginia from the former CEO. We are attempting to recover the payments made to the former CEO related
to this facility. The lease was not approved by the process required by the Company’s Code of Ethics. The former CEO has
refused to provide access to the storage facility to the management and has not returned Company-owned equipment located at the
storage facility. The value of this equipment is also included in the lawsuit. Additional information can be found in item 3.
The Company paid a total
of $56,100 in rent to the former CEO related to the office building in Lynchburg, Virginia and the storage facility in Salem,
Virginia for the year ended December 31, 2015.
The Company paid a total
of $44,545 in rent to the former CEO related to the office building in Lynchburg, Virginia and the storage facility in Salem,
Virginia for the year ended December 31, 2014.
The Company previously
entered into a promissory note dated March 1, 2013 with the former CEO’s mother, Linda Erhartic, who is also a former employee
of the Company. Mrs. Erhartic loaned the Company $50,000 at an interest rate of 6% annually. This promissory note was not approved
by the process required by the Company’s Code of Ethics. Additionally, the Company only possesses an unsigned copy of this
promissory note. Furthermore, the interest rate paid to Mrs. Erhartic did not conform to the terms in the promissory note and
did not conform to previous disclosures made by the Company. This promissory note was repaid completely by the Company during
the period ended September 30, 2014. This transaction is the subject of litigation involving the former CEO. Additional information
can be found in item 3.
The former CEO created
several land trusts and designated the Company as the trustee. The former CEO and, we believe, the former CFO placed personally
owned properties within these land trusts. This activity was not approved by the process required by the Company’s Code
of Ethics. This activity is the subject of litigation involving the former CEO. Additional information can be found in item 3.
NOTE 13 - SEGMENT INFORMATION
The Company has three
business units with separate management and reporting infrastructures that offer different products and services. The business
units have been aggregated into three reportable segments: Corporate, Real estate and Internet. The Corporate group is the holding
company which oversees the operating of the Internet group and arranges financing. The real estate group invests in, refurbishes
and markets real estate for resale. The Internet group provides internet access to customers throughout the U.S. and Canada.
The Company evaluates the performance of its operating segments based on income from operations, before income taxes, accounting
changes, non-recurring items, and interest income and expense.
In 2015 the Company generated
revenue of $1,621,516 in the United States and $113,687 USD in Canada. In 2014 the Company generated revenue of $2,242,952 in
the United States and $148,244 USD in Canada.
Summarized financial information
concerning the Company's reportable segments is shown in the following table for the years ended December 31, 2015 and 2014:
As of December 31, 2015
|
|
Corporate
|
|
Real Estate
|
|
Internet
|
|
Consolidated
|
Revenues
|
|
$
|
—
|
|
|
$
|
132,680
|
|
|
$
|
1,602,523
|
|
|
$
|
1,735,203
|
|
Cost of revenue
|
|
|
—
|
|
|
|
346,998
|
|
|
|
539,934
|
|
|
|
886,932
|
|
Gross profit
|
|
|
—
|
|
|
|
(214,318
|
)
|
|
|
1,062,589
|
|
|
|
848,271
|
|
Operating expenses
|
|
|
428,244
|
|
|
|
48,079
|
|
|
|
284,437
|
|
|
|
760,759
|
|
Income (loss) from operations
|
|
|
(428,244
|
)
|
|
|
(262,397
|
)
|
|
|
778,152
|
|
|
|
87,511
|
|
Other income (expense)
|
|
|
(48,601
|
)
|
|
|
—
|
|
|
|
(954,049
|
)
|
|
|
(1,002,650
|
)
|
Net income
|
|
$
|
(476,845
|
)
|
|
$
|
(262,397
|
)
|
|
$
|
(175,897
|
)
|
|
$
|
(915,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
184,786
|
|
|
$
|
3,582,473
|
|
|
$
|
427,954
|
|
|
$
|
4,195,213
|
|
As of December 31, 2014 (As restated)
|
|
Corporate
|
|
Real Estate
|
|
Internet
|
|
Consolidated
|
Revenues
|
|
$
|
—
|
|
|
$
|
468,751
|
|
|
$
|
1,922,292
|
|
|
$
|
2,391,043
|
|
Cost of revenue
|
|
|
—
|
|
|
|
576,291
|
|
|
|
667,950
|
|
|
|
1,244,241
|
|
Gross profit
|
|
|
—
|
|
|
|
(107,540
|
)
|
|
|
1,254,495
|
|
|
|
1,146,955
|
|
Operating expenses
|
|
|
266,974
|
|
|
|
15,181
|
|
|
|
424,181
|
|
|
|
706,336
|
|
Income (loss) from operations
|
|
|
(266,974
|
)
|
|
|
(122,721
|
)
|
|
|
830,314
|
|
|
|
440,619
|
|
Other income (expense)
|
|
|
(68,771
|
)
|
|
|
—
|
|
|
|
810,615
|
|
|
|
679,466
|
|
Net income
|
|
$
|
(335,745
|
)
|
|
$
|
(122,721
|
)
|
|
$
|
1,640,929
|
|
|
$
|
1,120,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
348,477
|
|
|
$
|
3,265,102
|
|
|
$
|
1,517,349
|
|
|
$
|
5,130,927
|
|
NOTE 14 – RESTATED UNAUDITED INTERIM
FINANCIAL DATA
Adjustments to asset and
liability balances are related primarily to previous errors related to the fair value analysis and capitalization policy for real
estate properties held for investment and resale, errors in the revenue recognition criteria, errors in the calculation of depreciation,
errors in the calculation of tax expenses, and cut-off deficiencies related to quarter-end accruals.
Adjustments to revenue
are related to previous errors to internet billings, errors in the calculation of accounts receivables, and errors in the calculation
of real estate rent and security deposits.
Adjustments to cost of
revenue are related to previous errors in the accrual of expenses. Adjustments to operating expenses are related to errors in
the accrual of salaries, errors in the accrual of expenses, errors in the calculation of bad debts, errors in the calculation
of depreciation in the real estate segment and in property and equipment, reclassifications of expenses related to disputed use
of funds by the former CEO, and clerical errors specific to the quarters ending March 31, 2015, June 30, 2015 and September 30,
2015.
Adjustments to other income
are related to errors in the reporting of currency translations. Adjustments to taxes are related to errors in the calculation
of deferred tax assets and liabilities.
For the three months ended as of September 30, 2015
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
Assets
|
|
$
|
5,421,737
|
|
|
$
|
(118,499
|
)
|
|
$
|
5,303,238
|
|
Liabilities
|
|
|
1,241,247
|
|
|
|
(738,419
|
)
|
|
|
502,828
|
|
Stockholders' equity
|
|
|
4,180,490
|
|
|
|
619,920
|
|
|
|
4,800,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
424,957
|
|
|
|
—
|
|
|
|
424,957
|
|
Cost of revenue
|
|
|
171,007
|
|
|
|
(91,086
|
)
|
|
|
79,921
|
|
Gross profit
|
|
|
253,950
|
|
|
|
91,086
|
|
|
|
345,036
|
|
Operating expenses
|
|
|
196,851
|
|
|
|
(31,723
|
)
|
|
|
165,128
|
|
Income from operations
|
|
|
57,099
|
|
|
|
122,809
|
|
|
|
179,908
|
|
Other income (expense)
|
|
|
1,302
|
|
|
|
(11,369
|
)
|
|
|
(10,067
|
)
|
Income before taxes
|
|
|
58,401
|
|
|
|
111,440
|
|
|
|
169,841
|
|
Tax (expense) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
$
|
58,401
|
|
|
$
|
111,440
|
|
|
$
|
169,841
|
|
For the three months ended as of June 30, 2015
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
Assets
|
|
$
|
5,366,316
|
|
|
$
|
(239,250
|
)
|
|
$
|
5,127,066
|
|
Liabilities
|
|
|
1,267,466
|
|
|
|
(770,970
|
)
|
|
|
496,496
|
|
Stockholders' equity
|
|
|
4,098,850
|
|
|
|
531,719
|
|
|
|
4,630,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
430,902
|
|
|
|
753
|
|
|
|
431,655
|
|
Cost of revenue
|
|
|
145,653
|
|
|
|
3,295
|
|
|
|
148,948
|
|
Gross profit
|
|
|
285,249
|
|
|
|
(2,542
|
)
|
|
|
282,707
|
|
Operating expenses
|
|
|
203,828
|
|
|
|
(69,266
|
)
|
|
|
134,562
|
|
Income from operations
|
|
|
81,421
|
|
|
|
(66,723
|
)
|
|
|
148,144
|
|
Other income (expense)
|
|
|
(452
|
)
|
|
|
(11,489
|
)
|
|
|
(11,941
|
)
|
Income before taxes
|
|
|
80,969
|
|
|
|
55,234
|
|
|
|
136,203
|
|
Tax (expense) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
$
|
80,969
|
|
|
$
|
55,234
|
|
|
$
|
136,203
|
|
For the three months ended as of March 31, 2015
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
Assets
|
|
$
|
5,266,747
|
|
|
$
|
(231,246
|
)
|
|
$
|
5,035,501
|
|
Liabilities
|
|
|
1,312,106
|
|
|
|
(770,971
|
)
|
|
|
541,135
|
|
Stockholders' equity
|
|
|
3,954,641
|
|
|
|
539,725
|
|
|
|
4,494,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
456,949
|
|
|
|
2,000
|
|
|
|
458,949
|
|
Cost of revenue
|
|
|
169,919
|
|
|
|
44,240
|
|
|
|
214,159
|
|
Gross profit
|
|
|
287,030
|
|
|
|
(42,240
|
)
|
|
|
244,790
|
|
Operating expenses
|
|
|
413,306
|
|
|
|
(10,394
|
)
|
|
|
402,912
|
|
Income from operations
|
|
|
(126,276
|
)
|
|
|
(31,846
|
)
|
|
|
(158,122
|
)
|
Other income (expense)
|
|
|
(1,922
|
)
|
|
|
(11,774
|
)
|
|
|
(13,696
|
)
|
Income before taxes
|
|
|
(128,198
|
)
|
|
|
(43,620
|
)
|
|
|
(171,818
|
)
|
Tax (expense) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
$
|
(128,198
|
)
|
|
$
|
(43,620
|
)
|
|
$
|
(171,818
|
)
|
Full year ended December 31, 2014
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
Assets
|
|
$
|
5,306,172
|
|
|
$
|
(175,245
|
)
|
|
$
|
5,130,927
|
|
Liabilities
|
|
|
1,223,333
|
|
|
|
(758,590
|
)
|
|
|
464,743
|
|
Stockholders' equity
|
|
|
4,082,839
|
|
|
|
583,345
|
|
|
|
4,666,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
2,383,696
|
|
|
|
7,500
|
|
|
|
2,391,196
|
|
Cost of revenue
|
|
|
1,106,083
|
|
|
|
138,158
|
|
|
|
1,244,241
|
|
Gross profit
|
|
|
1,277,613
|
|
|
|
(130,658
|
)
|
|
|
1,146,955
|
|
Operating expenses
|
|
|
817,403
|
|
|
|
(111,067
|
)
|
|
|
706,336
|
|
Income from operations
|
|
|
460,210
|
|
|
|
(19,591
|
)
|
|
|
440,619
|
|
Other income (expense)
|
|
|
(1,752
|
)
|
|
|
681,218
|
|
|
|
679,466
|
|
Income before taxes
|
|
|
458,458
|
|
|
|
661,627
|
|
|
|
1,120,085
|
|
Tax (expense) benefit
|
|
|
(74,275
|
)
|
|
|
74,275
|
|
|
|
—
|
|
Net income
|
|
$
|
384,183
|
|
|
$
|
735,902
|
|
|
$
|
1,120,085
|
|
For the three months ended as of September 30, 2014
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
Assets
|
|
$
|
5,234,370
|
|
|
$
|
(312,168
|
)
|
|
$
|
4,922,202
|
|
Liabilities
|
|
|
1,308,845
|
|
|
|
36,944
|
|
|
|
1,345,789
|
|
Stockholders' equity
|
|
|
3,925,525
|
|
|
|
(349,112
|
)
|
|
|
3,576,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
497,666
|
|
|
|
1,000
|
|
|
|
498,666
|
|
Cost of revenue
|
|
|
158,187
|
|
|
|
22,002
|
|
|
|
180,189
|
|
Gross profit
|
|
|
339,479
|
|
|
|
(21,002
|
)
|
|
|
318,477
|
|
Operating expenses
|
|
|
245,151
|
|
|
|
(34,400
|
)
|
|
|
210,751
|
|
Income from operations
|
|
|
94,328
|
|
|
|
13,398
|
|
|
|
107,726
|
|
Other income (expense)
|
|
|
2,066
|
|
|
|
(65,905
|
)
|
|
|
(63,839
|
)
|
Income before taxes
|
|
|
96,394
|
|
|
|
(52,507
|
)
|
|
|
43,887
|
|
Tax (expense) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
$
|
96,394
|
|
|
$
|
(52,207
|
)
|
|
$
|
43,887
|
|
For the three months ended as of June 30, 2014
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
Assets
|
|
$
|
5,182,957
|
|
|
$
|
(248,773
|
)
|
|
$
|
4,934,184
|
|
Liabilities
|
|
|
1,353,826
|
|
|
|
47,832
|
|
|
|
1,401,658
|
|
Stockholders' equity
|
|
|
3,829,131
|
|
|
|
(296,605
|
)
|
|
|
3,532,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
531,438
|
|
|
|
4,000
|
|
|
|
535,438
|
|
Cost of revenue
|
|
|
189,983
|
|
|
|
81,606
|
|
|
|
271,589
|
|
Gross profit
|
|
|
341,455
|
|
|
|
(77,606
|
)
|
|
|
263,849
|
|
Operating expenses
|
|
|
187,632
|
|
|
|
(13,071
|
)
|
|
|
174,561
|
|
Income from operations
|
|
|
153,823
|
|
|
|
(64,535
|
)
|
|
|
89,288
|
|
Other income (expense)
|
|
|
(1,255
|
)
|
|
|
(14,576
|
)
|
|
|
(15,831
|
)
|
Income before taxes
|
|
|
152,568
|
|
|
|
(79,111
|
)
|
|
|
73,457
|
|
Tax (expense) benefit
|
|
|
74,275
|
|
|
|
(74,275
|
)
|
|
|
—
|
|
Net income
|
|
$
|
78,293
|
|
|
$
|
(4,836
|
)
|
|
$
|
73,457
|
|
For the three months ended as of March 31, 2014
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
Assets
|
|
$
|
5,078,032
|
|
|
$
|
(249,844
|
)
|
|
$
|
4,828,188
|
|
Liabilities
|
|
|
1,327,194
|
|
|
|
41,925
|
|
|
|
1,369,119
|
|
Stockholders' equity
|
|
|
3,750,838
|
|
|
|
(291,769
|
)
|
|
|
3,459,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
679,124
|
|
|
|
—
|
|
|
|
679,124
|
|
Cost of revenue
|
|
|
337,456
|
|
|
|
137,207
|
|
|
|
474,663
|
|
Gross profit
|
|
|
341,668
|
|
|
|
(137,207
|
)
|
|
|
204,461
|
|
Operating expenses
|
|
|
288,908
|
|
|
|
(10,833
|
)
|
|
|
278,075
|
|
Income from operations
|
|
|
52,760
|
|
|
|
(126,374
|
)
|
|
|
(73,614
|
)
|
Other income (expense)
|
|
|
(578
|
)
|
|
|
(12,838
|
)
|
|
|
(13,416
|
)
|
Income before taxes
|
|
|
52,182
|
|
|
|
(139,212
|
)
|
|
|
(87,030
|
)
|
Tax (expense) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
$
|
52,182
|
|
|
$
|
(139,212
|
)
|
|
$
|
(87,030
|
)
|
NOTE 15 - SUBSEQUENT EVENTS
As previously indicated,
an Audit Committee was formed on December 14, 2015. Jeremy Gold was elected to be the Chairman of the Audit Committee at that
meeting. An Audit Committee charter was adopted on January 5, 2016. On February 23, 2016 Mr. Malouf resigned as a Director and
was replaced by Chris Payne. Mr. Payne is considered an Audit Committee Financial Expert and was appointed to serve on the Audit
Committee.
On January 15, 2016 we
vacated the Company’s headquarters located at 7109 Timberlake Rd. in Lynchburg, Virginia.
As previously reported
in our Current Report of Form 8-K filed with the U.S. Securities and Exchange Commission (SEC) on February 18, 2016, on February
11, 2016, the Company’s former auditor resigned. As previously reported, this resignation followed communications between
the former auditor and the Company in which the Company informed the former auditor, among other things, that (i) the former auditor
had not been selected as the Company’s independent auditor for 2016; and (ii) following receipt of the former auditor’s
letter of December 21, 2015 stating that the Company should take action to prevent reliance on the previously issued financial
statements for the year ended December 31, 2014 as contained in the Annual Report on Form 10-K as of and for the year ended December
31, 2014, the Company had retained an external accountant to conduct an investigation based on certain agreed upon procedures.
On February 17, 2016,
Jeff Moore was elected to serve as the Chairman of the Board.
On February 29, 2016 we
vacated our office in Chatham, ON Canada and terminated the employment of two full time employees associated with our Canadian
operations. We have retained one full time employee and one part-time employee in Canada, each of whom are working remotely.
On March 1, 2016, Steven
Kiel was appointed as the permanent President and CEO.
As previously reported
in our Current Report of Form 8-K filed with the SEC on March 7, 2016, on March 3, 2016, Cherry Bekaert LLP was selected as the
Company’s new independent auditor for the year ended December 31, 2015. It was determined that Cherry Bekaert LLP should
carry out an audit for 2014 in addition to 2015.
On March 23, 2016, we
engaged a broker to market for sale the premium domain that we own, First.com. This marketing process is ongoing.
Also at the December 14,
2015 meeting, Directors agreed to engage outside legal counsel to lead an investigation into the allegations by the Company’s
former auditor. Legal counsel engaged an accounting firm to carry out an analysis of a range of transactions over the previous
five years. A final report was delivered to management in February 2016. This report served as the basis for a lawsuit filed by
the Company against the former CEO, Mr. Erhartic, in April 2016.
On April 12, 2016, Sitestar
filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”), the Company’s former CEO and
director 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 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 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 CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former
CEO, causing the Company to pay certain amounts to the Former CEO for lease payments under an unauthorized lease as to a storage
facility owned by the Former CEO, causing the Company to pay rent on its corporate headquarters owned by the Former 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 CEO, converting to the Former CEO 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 CEO, causing the Company to pay personal credit
card debt of the Former CEO, causing the Company to significantly overpay the Former CEO’s health and dental insurance for
the benefit of the Former CEO, and causing the Company to pay the Former 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).
Also at the Board of Directors
meeting on December 14, 2015 the Company’s former CFO, Dan Judd, was placed on probation in light of the circumstances that
had led to the termination of the former CEO. New management engaged an outside financial consultant to review the Company’s
accounting practices and to assist Mr. Judd in carrying out his duties. Mr. Judd subsequently was terminated on March 3, 2016.
The Board has requested that he resign as a Director, but Mr. Judd has not responded favorably to that request and has not participated
in Board meetings since his dismissal as CFO.
Subsequent to December
31, 2015, and as of July 18, 2016, we have sold 21 residential properties including four properties that are pending closing.
Of the 17 properties that have closed, the net proceeds total $1,399,121. This compares to their carrying value as of the year
ended December 31, 2015 of $1,338,495.
Subsequent to December
31, 2015, and as of July 18, 2016, we have engaged the services of a property manager to manage our rental portfolio. We have
eight active rental properties.
All other properties held
for resale are either actively for sale or being prepared for sale.
As previously reported
in our Current Report on Form 8-K filed with the SEC on June 14, 2016, we organized, along with JNJ Investments, LLC, HVAC Value
Fund, LLC. The purpose of this entity is to acquire and manage companies in the Heating, Ventilation, and Air Conditioning (“HVAC”)
industry. As of July 18, 2016, HVAC Value Fund, LLC has consummated or entered into contracts with four acquisitions in the HVAC
industry. It has yet to carry out any material business.