The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, SIGNIFICANT
ACCOUNTING POLICIES, AND BACKGROUND ON THE 2015 RESTATEMENT
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.”
Unless the context otherwise requires, and when used in this Report, the “Company,” “Sitestar,” “we,”
“our” or “us” refers to Sitestar Corporation and its subsidiaries.
The Company operates through
four reportable segments: Corporate and Marketable Securities, Internet Operations, Real Estate Operations, and HVAC Operations.
The management of the Company is also currently reviewing investment opportunities in the public and private markets, including
in other lines of business.
Corporate and Marketable Securities
The corporate segment
includes any revenue or expenses derived from corporate office operations as well as expenses related to public company reporting,
the oversight of subsidiaries, and other items that affect the overall Company. Sitestar also invests in marketable securities
through the corporate segment.
Internet Operations
The Company operates its
internet operations through Sitestar.net, a wholly owned subsidiary that offers consumer and business-grade internet access, wholesale
managed modem services, Web hosting, and various ancillary services. Sitestar.net provides services to customers in the United
States and Canada.
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. The portfolio includes single family homes that are currently
rented and managed through a third-party property manager, as well as vacant properties being prepared or currently listed for
sale. Pursuant to the approval of the Board of Directors, 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.
HVAC Operations
The Company operates its
HVAC operations through HVAC Value Fund, LLC. HVAC Value Fund is focused on the acquisition and management of HVAC companies in
Arizona and throughout the Southwest. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14,
2016, we, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized and launched
this subsidiary on June 13, 2016. Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has the ability to
earn a profits interests.
As of September 6, 2016, HVAC Value Fund has closed on four acquisitions
for an aggregate purchase price of $1.14 million, two of which occurred in the quarter ended June 30, 2016. As previously
reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, the purpose of HVAC Value Fund is to acquire HVAC
businesses. Accordingly, these four acquisitions were made in the ordinary course of business and consistent with the customs
and practices (including with respect to nature, scope, magnitude, quantity, frequency and contemplated purpose) of HVAC Value
Fund, and, in turn, the Company.
Principles of Consolidation
The accompanying unaudited
condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including: Sitestar.net,
Inc., FRE Enterprises, Inc., Advanced Internet Services, Inc. NetRover Inc., and HVAC Value Fund, LLC. All intercompany accounts
and transactions have been eliminated.
Background on the 2015 restatement
As previously reported
in our Annual Report on Form 10-K filed with the SEC on July 18, 2016, 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 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 Part II, Item 1, “Legal Proceedings”.
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.
Results in this quarterly
report include the restated comparison figures for the corresponding interim periods of fiscal 2015. Adjustments to asset and
liability balances for the quarter ended June 30, 2015 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 cost of
revenue for the quarter ended June 30, 2015 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. Adjustments to other income are related to errors
in the reporting of currency translations.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The unaudited condensed
consolidated financial statements have been prepared by Sitestar Corporation, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals
and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in
accordance with U.S. Generally Accepted Accounting Principles (GAAP) have been omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the audited consolidated financial statements and notes for the
year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on July 18, 2016 (the
“2015 Form 10-K”). The comparative results for the three months and six months ended June 30, 2015 included in the
unaudited condensed consolidated financial statements in this Form 10-Q reflect restated amounts, as described in and reported
under the 2015 Form 10-K. The results for the three months and six months ended June 30, 2016 are not necessarily indicative of
the results to be expected for the full year ending December 31, 2016.
Use of Estimates
In accordance with Accounting
Principles Generally Accepted in the United State of America (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, other assets, 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.
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.
Investments
The Company currently
holds and makes investments in marketable securities through its corporate operations. Marketable securities held are classified
as available-for-sale based on management’s intent. The classification of the investments in these marketable securities
is assessed upon purchase and reassessed at each reporting period. These investments are recorded at fair value and are classified
as marketable securities in the accompanying consolidated balance sheets. Unrealized gains (losses) are categorized as Other Comprehensive
Income. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on
an accrual basis; Dividends are recorded as earned on the ex-dividend date. Interest and dividend income are recorded in the accompanying
consolidated statements of income in interest expense, net.
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.
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.
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.
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 performs an
analysis of its goodwill as of December 31 annually.
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
115 domain names. These domains are valued at historical cost.
Real Estate
Real estate held for resale
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 of internet services to be performed. Revenue is recognized 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
this change can be significant. Internet revenue is affected by the changing composition of revenue sources.
Real Estate Operations
Revenue from real estate
held for resale 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 held for investment 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.
HVAC Operations
The company performs HVAC
service repairs and installs HVAC units for its customers. Revenue is recognized at the time of the install or service call. Sales
are adjusted for any returns or allowances. If an install is done over multiple days, it is accounted for using GAAP work in process
(WIP) accounting. If payment is not provided in advance or at the time of service or installation, the amount due is designated
as an account receivable. Accounts receivables are generally considered unrecoverable after 180 days unless the Company reasonably
believes that recovery is possible.
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
Comprehensive income is
the result of two items: The impact of foreign currency translations related to the Company’s operations in Canada, and
the unrealized gains (losses) from marketable securities classified as available-for-sale.
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 2018. 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 – INVESTMENTS
The Company may invest
excess cash in marketable securities through its corporate segment. The fair values of the Company’s marketable securities
are determined in accordance with GAAP, with fair value being defined as the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or liability.
The following available-for-sale
securities, which comprise all the Company’s marketable securities, are re-measured to fair value on a recurring basis and
are valued using Level 1 inputs, which are quoted prices (unadjusted) for identical assets in active markets:
As
of June 30, 2016
|
|
|
Cost
|
|
|
|
Fair
Value
|
|
|
|
Unrealized
Gain
|
|
Common
Stock available for sale
|
|
$
|
199,649
|
|
|
$
|
250,000
|
|
|
$
|
50,351
|
|
|
|
NOTE 4 – 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.
Assets and Liabilities Measured at Fair
Value on a Recurring Basis
The Company valued its marketable securities at fair value
at the end of each reporting period.
|
|
|
|
|
|
|
|
Total
at
|
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Fair
Value
|
June
30, 2016
|
|
|
|
|
|
|
|
|
Marketable
securities
|
$
|
250,000
|
$
|
-
|
$
|
-
|
$
|
250,000
|
|
|
|
|
|
|
|
|
Total
at
|
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Fair
Value
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Marketable
securities
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
NOTE 5 – PROPERTY AND EQUIPMENT
The cost of property and equipment at June
30, 2016 and December 31, 2015 consisted of the following:
|
|
2016
|
|
2015
|
Automobile
|
|
$
|
44,500
|
|
|
$
|
9,500
|
|
Equipment
|
|
|
13,700
|
|
|
|
—
|
|
Furniture
and fixtures
|
|
|
13,788
|
|
|
|
13,788
|
|
|
|
|
71,988
|
|
|
|
23,288
|
|
Less
accumulated depreciation
|
|
|
(23,288
|
)
|
|
|
(23,288
|
)
|
Property
and equipment, net
|
|
$
|
48,700
|
|
|
$
|
—
|
|
Depreciation expense was inconsequential for
the six months ended June 30, 2016 and $5,518 for the year ended December 31, 2015. Increased automobile and equipment assets
are the result of acquisitions in the HVAC operations.
NOTE 6 – REAL ESTATE
As of June 30, 2016, the
Company owned 25 residential properties, one commercial property, and interests in several lots. The Company sold 13 residential
properties in the quarter ended June 30, 2016 for gross proceeds of $1,150,825. Net proceeds totaled $1,042,958. This compares
to their carrying value of $979,383. For the six month period ended June 30, 2016, the Company sold 17 residential properties
for gross proceeds of $1,535,649 and net proceeds of $1,399,021. The carrying value of the 17 properties sold was $1,367,764.
Real Estate Held for Investment
As of June 30, 2016, the
Company held 12 residential properties as held for investments. The leases in effect as of the quarter ended June 30, 2016 are
based on either annual or multi-year time periods and typically include month-to-month provisions after the completion of the
initial term. An outside property management company manages these rental properties on behalf of the Company. The property management
company has introduced updated and renewed leases for existing rental properties.
Depreciation expense totaled
$8,797 and $17,934 for the three months and six months ended June 30, 2016, respectively. Total accumulated depreciation as of
June 30, 2016 totaled $110,561. These properties held for investment were carried on the balance sheet at $769,360.
Real Estate Held for Resale
As of June 30, 2016, the
Company held 13 residential properties, one commercial property, and several lots as held for resale. These properties held for
resale were carried on the balance sheet at $1,566,897.
Notes payable at June 30, 2016 and 2015 (as
restated) consist of the following:
|
|
2016
|
|
2015
(As
Restated)
|
Non-interest
bearing amount due on acquisition of USA Telephone payable in thirty-six monthly installments starting January 2008.
|
|
$
|
—
|
|
|
$
|
90,000
|
|
Interest bearing amount
due on acquisition through HVAC Value Fund, LLC
|
|
|
50,000
|
|
|
|
—
|
|
Non-interest bearing
amount due on acquisition through HVAC Value Fund, LLC
|
|
|
15,000
|
|
|
|
—
|
|
Less
current portion
|
|
|
(25,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion
|
|
$
|
40,000
|
|
|
$
|
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. No additional payments are due.
HVAC Value Fund, LLC typically
structures acquisitions where a portion of the purchase price is held back and is subject to certain conditions. These notes payable
may or may not bear interest. HVAC Value Fund made two acquisitions in the quarter ended June 30, 2016. Each acquisition involved
a note payable to the buyer. The non-interest bearing note payable is due July 1, 2017 in the amount of $15,000, and is contingent
on meeting a revenue target and other operational conditions. The interest bearing note payable accrues interest at 7% annually.
$25,000 is payable on June 16, 2017 and $25,000 is payable on June 16, 2018. These payments are contingent on meeting revenue
targets and other operational conditions.
NOTE 8 – SEGMENT INFORMATION
As of June 30, 2016, the
Company has four business units with separate management and reporting infrastructures that offer different products and services.
The business units have been aggregated into four reportable segments: Corporate, Real Estate, Internet, and HVAC.
The corporate and marketable
securities segment includes any revenue or expenses derived from corporate office operations as well as expenses related to public
company reporting, the oversight of subsidiaries, and other items that affect the overall Company. Sitestar also invests in marketable
securities through the corporate segment. The real estate segment includes revenue and expenses related to the management of properties
held for investment and revenue and expenses involving the preparation and sale of properties held for resale. The internet segment
includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The HVAC
segment includes revenue and expenses derived from the acquisition and management of HVAC companies in Arizona and throughout
the Southwest.
The internet segment includes
revenue generated by operations in both the United States and Canada. In the quarter ended June 30, 2016, the internet segment
generated revenue of $330,890 in the United States and revenue of $25,925 in Canada. This compares to the quarter ended June 30,
2015 where the internet segment generated revenue of $377,638 in the United States and revenue of $30,924 in Canada.
Summarized financial information
concerning the Company’s reportable segments is shown in the following tables for the three months ended June 30, 2016 and
2015 (as restated) and for the six months ended June 30, 2016 and 2015 (as restated). No comparable financial information exists
for the HVAC segment because it commenced operations on June 13, 2016:
As of the three months ended June 30, 2016
|
|
|
Corporate
and Marketable Securities
|
|
|
|
Real
Estate
|
|
|
|
Internet
|
|
|
|
HVAC
|
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
1,179,231
|
|
|
$
|
356,815
|
|
|
$
|
33,022
|
|
|
$
|
1,569,068
|
|
Cost of revenue
|
|
|
—
|
|
|
|
1,080,213
|
|
|
|
93,681
|
|
|
|
13,161
|
|
|
|
1,187,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before income taxes
|
|
$
|
(219,967
|
)
|
|
$
|
94,547
|
|
|
$
|
196,406
|
|
|
$
|
8,561
|
|
|
$
|
79,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
$
|
443,548
|
|
|
$
|
2,336,257
|
|
|
$
|
450,473
|
|
|
$
|
1,075,689
|
|
|
$
|
4,305,967
|
|
As of the three months ended June 30, 2015 (As restated)
|
|
|
Corporate
and Marketable Securities
|
|
|
|
Real
Estate
|
|
|
|
Internet
|
|
|
|
HVAC
|
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
23,823
|
|
|
$
|
407,832
|
|
|
$
|
—
|
|
|
$
|
431,655
|
|
Cost of revenue
|
|
|
—
|
|
|
|
27,760
|
|
|
|
121,188
|
|
|
|
—
|
|
|
|
148,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before income taxes
|
|
$
|
(65,032
|
)
|
|
$
|
(5,437
|
)
|
|
$
|
206,221
|
|
|
$
|
—
|
|
|
$
|
136,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
$
|
196,748
|
|
|
$
|
3,408,052
|
|
|
$
|
1,522,266
|
|
|
$
|
—
|
|
|
$
|
5,127,066
|
|
In the six months ended June 30, 2016, the
internet segment generated revenue of $660,501 in the United States and revenue of $52,398 in Canada. This compares to the six
months ended June 30, 2015 where the internet segment generated revenue of $768,481 in the United States and revenue of $61,055
in Canada.
As of the six months ended June 30, 2016
|
|
|
Corporate
and Marketable Securities
|
|
|
|
Real
Estate
|
|
|
|
Internet
|
|
|
|
HVAC
|
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
1,587,448
|
|
|
$
|
712,900
|
|
|
$
|
33,022
|
|
|
$
|
2,333,369
|
|
Cost of revenue
|
|
|
—
|
|
|
|
1,516,317
|
|
|
|
219,753
|
|
|
|
13,161
|
|
|
|
1,749,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before income taxes
|
|
$
|
(330,863
|
)
|
|
$
|
63,810
|
|
|
$
|
328,820
|
|
|
$
|
8,561
|
|
|
$
|
70,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
$
|
443,548
|
|
|
$
|
2,336,257
|
|
|
$
|
450,473
|
|
|
$
|
1,075,689
|
|
|
$
|
4,305,967
|
|
As of the six months ended June 30, 2015 (As restated)
|
|
|
Corporate
and Marketable Securities
|
|
|
|
Real
Estate
|
|
|
|
Internet
|
|
|
|
HVAC
|
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
61,798
|
|
|
$
|
828,806
|
|
|
$
|
—
|
|
|
$
|
890,604
|
|
Cost of revenue
|
|
|
—
|
|
|
|
42,170
|
|
|
|
320,937
|
|
|
|
—
|
|
|
|
363,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before income taxes
|
|
$
|
(372,074
|
)
|
|
$
|
8,961
|
|
|
$
|
326,714
|
|
|
$
|
—
|
|
|
$
|
(36,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
$
|
196,748
|
|
|
$
|
3,408,052
|
|
|
$
|
1,522,266
|
|
|
$
|
—
|
|
|
$
|
5,127,066
|
|
NOTE 9 – ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
For the six months ended June 30, 2016 and
2015 (as restated), bad debt expense was $1,224 and $10,435, respectively. The increase in accounts receivable is primarily the
result of the formation of the HVAC subsidiary. As of June 30, 2016 and 2015 (as restated), accounts receivable consists of the
following:
|
|
2016
|
|
2015
(As
Restated)
|
Gross accounts
receivable
|
|
$
|
29,149
|
|
|
$
|
23,456
|
|
Less
allowance for doubtful accounts
|
|
|
(893
|
)
|
|
|
(761
|
)
|
Accounts
receivable, net
|
|
$
|
28,257
|
|
|
$
|
22,695
|
|
NOTE 10 – SUBSEQUENT EVENTS
Subsequent to June 30,
2016, and as of September 6, 2016, we have sold four residential properties including one property that is pending closing. Of
the three properties that have closed, the net proceeds total $326,611. This compares to their carrying value as of the quarter
ended June 30, 2016 of $283,380. We continue to market for sale or prepare to market for sale each property in the held for resale
category. Properties have either sold as-is or have been repaired and upgraded before being listed for sale. Several real estate
agents have been engaged to market the remaining properties listed for resale.
As of September 6, 2016, our subsidiary, HVAC Value Fund, LLC, has
completed four acquisitions in the HVAC (Heating, Ventilation, and Air Conditioning) industry, two of which such acquisitions were
completed subsequent to June 30, 2016. As previously reported in our Current Report on Form 8-K filed with the SEC on June
14, 2016, the purpose of HVAC Value Fund is to acquire HVAC businesses. Accordingly, these four acquisitions were made in
the ordinary course of business and consistent with the customs and practices (including with respect to nature, scope, magnitude,
quantity, frequency and contemplated purpose) of HVAC Value Fund, and, in turn, the Company.
Subsequent to June 30,
2016, the Company filed with the SEC on July 18, 2016 the Company’s Annual Report on Form 10-K for the year ended December
31, 2015. The Company also filed with the SEC on August 8, 2016 the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2016.
As previously reported
in our Current Report on Form 8-K filed with the SEC on August 11, 2016, Sitestar accepted subscriptions from a private placement
of shares of common stock of the Company in the amount of $3,854,719.15, and issued 80,306,649 shares of common stock in connection
therewith. Immediately following the private placement, the Company had a total of 171,633,112 issued shares of common stock and
157,710,659 outstanding shares of common stock.