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.
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Yes
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No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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Yes
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No
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.
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Yes
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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).
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Yes
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No
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.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
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Yes
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No
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $13,773,282 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 March 30, 2018 is 297,905,346.
Portions of the 2018 Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held on May 19, 2018, are incorporated by reference into Part III of this Form 10-K.
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 and services, 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.
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.
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
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 five reportable segments: Corporate, Internet Operations, HVAC Operations, Real Estate Operations, and Asset Management Operations. The management of the Company also continually reviews various investment opportunities, including those in other lines of business.
Corporate
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.
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.
HVAC Operations
The Company operates its HVAC segment through HVAC Value Fund, LLC. HVAC Value Fund is focused on the acquisition and management of HVAC and plumbing companies in Arizona and throughout the Southwest United States. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, the Company, 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 profit interests. Under the operating agreement, the Company has first claim to a portion of net income, with the remainder being allocated between the Company and JNJ Investments. JNJ Investments shall also be subject to a Loss Carryforward limitation in the event of a net loss.
As of December 31, 2017, HVAC Value Fund had closed on six acquisitions for an aggregate purchase price of $2.02 million which includes estimated earn-outs of approximately $350,000. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, and further described above, the purpose of HVAC Value Fund is to acquire HVAC and plumbing businesses. Accordingly, these six 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.
Real Estate Operations
Sitestar created a wholly owned real estate subsidiary on July 10, 2017, named EDI Real Estate, LLC to hold Sitestar’s legacy portfolio of real estate. Through EDI Real Estate, LLC, Sitestar owns a real estate investment portfolio that includes ten residential properties, vacant land, and one commercial property. Our real estate portfolio under EDI Real Estate, LLC 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.
As previously reported in our Current Reports on Form 8-K filed with the SEC on December 11, 2017 and January 17, 2018, respectively, Sitestar created a wholly owned subsidiary named Mt Melrose, LLC, which currently is engaged in an acquisition of a portfolio of residential and other income-producing real estate in Lexington, Kentucky pursuant to a certain Master Real Estate Asset Purchase Agreement entered into on December 10, 2017 with a like-named seller, Mt. Melrose, LLC, a Kentucky limited liability company owned by Jeff Moore, also a Sitestar director. Unlike EDI Real Estate, LLC, which is a legacy business that we do not intend to grow, Mt Melrose is a real estate business that the Company expects will grow significantly over time. Mt Melrose will have its
30
Notes to Consolidated Financial Statements
(Continued)
own management team, led by our Chairman, Jeffrey Moore. Mr.
Moore has extensive experience acquiring and operating real estate in the Lexington, KY region where Mt Melrose is focused. The Mt Melrose management team will be responsible for growing this business.
Asset Management Operations
Sitestar created a wholly owned asset management subsidiary on October 10, 2016, named Willow Oak Asset Management, LLC (“Willow Oak”). The asset management segment did not produce revenue in 2016. Any expenses incurred in 2016 were allocated to the corporate segment. Starting January 1, 2017, all revenue earned and expenses incurred by this segment were allocated as such.
As previously reported in our Current Reports on Form 8-K filed with the SEC on September 19, 2016, and December 30, 2016, respectively, the Company agreed to make a seed investment totaling $10 million through Willow Oak in Alluvial Fund, LP, a private investment partnership that was launched on January 1, 2017. Under a side letter agreement between Willow Oak, Alluvial Fund and the fund’s general partner, Willow Oak may not make a full withdrawal from its capital account prior to a date five years after the effective date of the side letter agreement. The Alluvial Fund focusses on investing in deeply mis-priced securities in the United States and abroad. Alluvial Fund focuses on small companies, thinly-traded issues and special situations, seeking to identify value that the market has yet to recognize.
As previously reported in our Current Report on Form 8-K filed with the SEC on January 30, 2017, the Company, through Willow Oak, also committed to make a capital contribution to Huckleberry Real Estate Fund II, LLC, a private investment fund, in the aggregate amount of $750,000. Under the operating agreement included in the Form 8-K, the fund’s managing member shall have sole discretion regarding the amounts and timing of any distributions to the members of the fund.
Willow Oak signed a fee share agreement on May 11, 2017, with Lizard Head, LLC, the general partner of Bridge Reid Fund I, LP, a private investment partnership (also known as “Ironwood Capital Allocation Partners” or “Ironwood Fund”). Under the agreement, Willow Oak became a special limited partner to Bridge Reid, providing fund advisory services to Bridge Reid in exchange for payments equal to 33% of the management fees accrued quarterly by the general partner and 33% of the incentive fees accrued annually, on investors who become limited partners after May 11, 2017. The Ironwood Fund utilizes a value investing methodology focused on: companies it believes will compound at a superior rate over the long term, special situations and companies it believes are valued by the market significantly below its estimate of their intrinsic value.
Willow Oak signed a fee share agreement on June 13, 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, also a Sitestar director. Under the agreement, Willow Oak and Coolidge are the sole members of Bonhoeffer Capital Management LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership. Under their agreement, Willow Oak pays all start-up and operating expenses that are not partnership expenses under the limited partnership agreement. Willow Oak receives 50% of all performance and management fees earned by the general partner. The Bonhoeffer Fund utilizes a value-oriented approach to invest in
undervalued businesses worldwide that are in a state of distress and/or transition, but also exhibit recurring revenue.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries including: Sitestar.net, Inc., HVAC Value Fund, LLC, EDI Real Estate, LLC, and Willow Oak Asset Management, LLC. 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 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.
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Notes to Consolidated Financial Statements
(Continued)
On an ongoing basis, management evaluates it
s estimates and judgments, including those related to fair value of investments, revenue recognition, accrued expenses, financing operations, goodwill valuation, other assets, and contingencies and litigation. Management bases its estimates and judgments o
n historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements.
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, exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
Investments
During the year ended December 31, 2017, the Company held and made investments in marketable securities through its corporate operations. Marketable securities held were classified as available-for-sale based on management’s intent. The classification of the investments in the marketable securities was assessed upon purchase and reassessed at each reporting period. These investments were recorded at fair value and were classified as marketable securities in the accompanying consolidated balance sheets. Unrealized gains (losses) were categorized as Other Comprehensive Income. Realized gains (losses) on marketable securities were determined by specific identification. Interest was recognized on an accrual basis; dividends were recorded as earned on the ex-dividend date. No securities of these kind were held at December 31, 2017, as all securities were sold prior to year end.
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 an account is individually determined to be 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 customer accounts. Receivables more than 90 days past due are no longer included in accounts receivable and are turned over to a collection agency. Accounts receivable more than 30 days are considered past due.
Sales of HVAC services are typically paid via credit card or check upon completion of service. Sales that are not collected upon completion are generally to existing and repeat customers who have established a track record of timely payments. Historically, HVAC has not encountered issues with collectability of customer accounts. Accounts receivable more than 60 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.
32
Notes to Consolidated Financial Statements
(Continued)
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 recorded at cost. Depreciation is computed using the straight-line method based on estimated useful lives from three to seven years for equipment and vehicles, 15 years for building improvements, and 39 years for buildings. Assets held through capital leases are amortized over the life of the related lease. 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). The impairment test involves calculating the impairment of goodwill based solely on the excess of the carrying value of the reporting unit over the fair value of the reporting unit. Prior to performing the impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment to determine whether a detailed quantitative analysis is required. The Company estimates the fair value of its reporting units using discounted expected future cash flows.
The Company performs an analysis of its goodwill as of December 31 annually, or whenever events or changes in circumstances indicate that the assigned values may no longer be appropriate. No impairment was recorded in 2016. During the year ended December 31, 2017, a net downward adjustment of $29,504 was made to goodwill held through the HVAC segment. This adjustment was the result of two previous sellers not meeting or exceeding the operational terms of carryback notes that were previously included as consideration for these acquisitions. See Note 3 for more information.
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. As of December 31, 2017, these intangible assets have been fully amortized. The remaining intangible assets consist of domain names attributed to the internet segment. 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 634 domain names, of which 107 are available for sale. These domains are valued at historical cost.
Real Estate
Real estate properties held for resale are carried at the lower of cost or fair market value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area in which the real estate is located and tax assessed values. Fair value is evaluated annually by management, or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable.
Real estate properties 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.
33
Notes to Consolidated Financial Statements
(Continued)
Accrued Bonus
Accrued bonuses represent performance-based incentives that have not yet been paid. The bonus structures are a pre-approved part of a formal salary package. These bonus amounts are paid annually after financial records are finalized.
Other Accrued Expenses
Other accrued expenses represent incurred but not yet paid expenses from Sales and Use taxes for ISP services, vacation accruals, professional fees, and other payroll accruals.
Deferred Revenue
Deferred revenue represents collections from customers in advance of internet or HVAC 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. Domain name registration revenue is recognized at the point of registration. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for non-performance. No contract assets or liabilities are recognized or incurred.
The Company generates revenue in its internet segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), web hosting, and additional related services to consumers and businesses. Customers may also subscribe to web hosting plans to include email access and storage. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.
HVAC Operations
The Company performs HVAC and plumbing service repairs and installs HVAC units for its customers. Revenue is recognized upon completion of the installation or service call. Sales are adjusted for any returns or allowances. A return or allowance situation would arise based on the two-year workmanship warranty that typically conveys with the installation of a new unit. There is also a two-year warranty on newly installed parts and equipment that is honored by the manufacturer. If an installation is performed over multiple days, it is accounted for using work in process (WIP) accounting in accordance with GAAP. Contract progress is measured by comparing materials and labor hours incurred to materials and labor hours expected per the contract. A small portion of revenue is from the sale of annual service agreements. Revenue attributable to these agreements is appropriately recognized over the life of the agreement.
If payment is received prior to contract completion, the amount of revenue attributable to the unperformed work is designated as unearned revenue. If payment is not provided in advance or at the time of service or installation completion, the amount due is designated as an account receivable.
Management acknowledges that these performance obligations are recognized at the completion of each contract, whether it be at a point in time or over a period of time. As the customer controls the asset and has the right to use during the contract, the Company has the right to payment for performance completed to date. No contract assets or liabilities are recognized or incurred.
34
Notes to Consolidated Financial Statements
(Continued)
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 by 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 separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. Management has concluded that the nature of the performance obligation is cyclical and predictable with a very low possibility for non-performance. No contract assets or liabilities are recognized or incurred.
Asset Management Operations
The Company earns revenue from investments held through the asset management segment through various fee share agreements, as well as through realized and unrealized gains and losses. Management fees earned are recorded and paid out monthly and are included in revenue on the condensed consolidated statement of income. Performance fees earned are accrued monthly, paid out yearly and are also included in revenue on the condensed consolidated statement of income. As non-current investments do not qualify as available-for-sale securities, non-current investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized as revenue in the period of adjustment.
Management notes that the structure of these arrangements leaves a very low possibility for non-performance. While the amount of revenue varies from month to month, collectability is very high. No contract assets or liabilities are recognized or incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The most recent three tax years, fiscal years ending December 31, 2017, December 31, 2016, and December 31, 2015, 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.
Other Comprehensive Income
Other 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.
35
Notes to Consolidated Financial Statements
(Continued)
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. The Company is 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. The Company is required to adopt this standard in the first quarter of 2018. Management has evaluated the impact of this standard on customer contracts and does not expect significant departures from current revenue recognition procedures.
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. The Company is 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 January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” Although the ASU retains many of the current requirements for financial instruments, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017; earlier adoption is permitted under certain criteria. The initial application of the standard is not expected to significantly impact the Company.
In January 2017, the FASB issued ASU No. 2017-01 “Clarifying the Definition of a Business” (Topic 805). The amendments in the update provide a screen to determine when a set is not a business. If the screen is not met, the amendments in the update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. Lastly, the amendments in the update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017; earlier adoption is permitted under certain criteria. The Company will adopt this ASU for the first interim period after the effective date.
In January 2017, the FASB issued ASU No. 2017-04 “Simplifying the Test for Goodwill Impairment” (Topic 350). The guidance eliminates the requirement to calculate “implied fair value of goodwill” (previously Step 2) from the goodwill impairment analysis. Companies are required to calculate the impairment of their goodwill based solely on the excess of the carrying value of the reporting unit over its fair value (previously Step 1). Companies are still allowed to perform an initial qualitative assessment for a reporting unit to determine if the quantitative assessment is necessary. This guidance is required to be adopted in fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company has adopted this new guidance for its 2017 goodwill impairment analysis.
36
Notes to Consolidated Financial Statements
(Continued)
NOTE 3. BUSINESS COMBINATIONS OR ACQUISITIONS
As of June 17, 2016, and June 30, 2016, HVAC Value Fund completed the 100% acquisition of two HVAC subsidiaries. As of July 8, 2016, HVAC Value Fund completed the 100% acquisition of a third subsidiary. As of July 15, 2016, HVAC Value Fund completed the 100% acquisition of a fourth subsidiary. As of October 1, 2016, HVAC Value Fund completed the 100% acquisition of a fifth subsidiary. As of January 20, 2017, HVAC Value Fund completed the 100% acquisition of a sixth subsidiary. These subsidiaries engage in providing heating, ventilation, plumbing, and air conditioning services, installation, and repairs to residential and commercial customers. As a result of the acquisitions, HVAC Value Fund offers heating, ventilation, plumbing, and air conditioning services to customers in Arizona. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, and described further herein, the purpose of HVAC Value Fund is to acquire HVAC and plumbing businesses. Accordingly, these six 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.
On a pro forma basis, the business acquired on January 20, 2017, contributed revenues of $1,100,211, net income of $86,941, and additional selling, general and administrative expenses to HVAC Value Fund during the year ended December 31, 2017. The following unaudited pro forma summaries present consolidated information of HVAC Value Fund as if the current and previous year business combinations had occurred on January 1 of each respective fiscal year. Some of the pro forma information for the year ended December 31, 2016, was calculated using annualized, unaudited 2015 financial information, and pro forma information for the year ended December 31, 2017, was calculated using annualized, unaudited 2016 information, as information for the period from January 1, 2016, through the applicable subsidiary closing date is unavailable.
As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has the ability to earn profit interests. Pro forma earnings for the year ended December 31, 2017, and for the year ended December 31, 2016, are reported as gross without deducting the profits share that otherwise would be attributable to JNJ Investments in accordance with the operating agreement between Sitestar Corporation and JNJ Investments.
Pro forma year ended December 31, 2017 (unaudited)
|
|
With January 20, 2017 acquisition
|
|
Revenue
|
|
$
|
4,365,403
|
|
Earnings
|
|
$
|
(97,358
|
)
|
Pro forma year ended December 31, 2016
(unaudited)
|
|
With 2016 acquisitions
(in aggregate)
|
|
|
With 2017 acquisition
|
|
|
Consolidated pro forma year ended
December 31, 2016 (unaudited)
|
|
Revenue
|
|
$
|
3,781,167
|
|
|
$
|
1,456,685
|
|
|
$
|
5,237,852
|
|
Earnings
|
|
$
|
517,495
|
|
|
$
|
295,886
|
|
|
$
|
813,381
|
|
HVAC Value Fund did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.
The following tables summarize the consideration transferred to acquire each subsidiary and the amounts of identified assets acquired and liabilities assumed at the acquisition dates. Management continues to evaluate the valuation components of each acquisition on an ongoing basis.
June 2016 acquisitions (in aggregate)
|
|
|
|
|
|
|
Fair
value of consideration transferred:
|
|
Cash
|
|
$
|
160,000
|
|
Notes payable
|
|
$
|
65,000
|
|
|
|
Fair value of assets acquired:
|
|
Vehicles
|
|
$
|
35,000
|
|
Equipment
|
|
$
|
13,700
|
|
Total identifiable assets
|
|
$
|
48,700
|
|
Goodwill
|
|
$
|
176,300
|
|
Subsequent adjustments
|
|
$
|
(15,000
|
)
|
Adjusted goodwill
|
|
$
|
161,300
|
|
37
Notes to Consolidated Financial Statements
(Continued)
July 8, 2016 acquisition
|
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
Cash
|
|
$
|
375,000
|
|
Notes payable
|
|
$
|
100,000
|
|
|
|
Fair value of assets acquired:
|
|
Goodwill
|
|
$
|
475,000
|
|
Subsequent adjustments
|
|
$
|
3,276
|
|
Adjusted goodwill
|
|
$
|
478,276
|
|
July 15, 2016 acquisition
|
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
Cash
|
|
$
|
340,000
|
|
Notes payable
|
|
$
|
100,000
|
|
|
|
Fair value of assets acquired:
|
|
Vehicles
|
|
$
|
40,000
|
|
Total identifiable assets
|
|
$
|
40,000
|
|
Goodwill
|
|
$
|
400,000
|
|
Subsequent adjustments
|
|
$
|
(17,780
|
)
|
Adjusted goodwill
|
|
$
|
382,220
|
|
October 1, 2016 acquisition
|
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
Cash
|
|
$
|
315,000
|
|
|
|
Preliminary fair value of assets acquired:
|
|
Vehicles
|
|
$
|
20,000
|
|
Equipment
|
|
$
|
5,000
|
|
Total identifiable assets
|
|
$
|
25,000
|
|
Goodwill
|
|
$
|
290,000
|
|
January 20, 2017 acquisition
|
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
Cash
|
|
$
|
460,000
|
|
Notes payable
|
|
$
|
100,000
|
|
Assumed obligations
|
|
$
|
169,255
|
|
|
|
Preliminary fair value of assets acquired:
|
|
Equipment
|
|
$
|
119,684
|
|
Leased Vehicles
|
|
$
|
143,590
|
|
Total identifiable assets
|
|
$
|
263,274
|
|
Goodwill
|
|
$
|
465,981
|
|
The goodwill amounts noted above are attributable to the workforce of the acquired subsidiaries and the significant efficiencies expected to arise after acquisition by HVAC Value Fund. All of the goodwill was assigned to the HVAC segment.
As previously mentioned in Note 2 and as noted above, in the July 8, 2016 and July 15, 2016 acquisitions a net downward adjustment of $14,504 was made to goodwill during the quarter ended September 30, 2017. Part of the considerations paid for the July 2016 acquisitions were
seller carryback notes. The notes were payable in full on July 11, 2017 and July 30, 2017 and were contingent on certain revenue targets and other operational conditions. As of the quarter ended September 30, 2017, it was determined by management that the revenue targets for the July 8, 2016 acquisition were exceeded; therefore, the payable amount increased and total consideration paid for the acquisition increased. As of the quarter ended September 30, 2017, it was also determined by management that the revenue targets for the July 15, 2016 acquisition were not met; therefore, the payable amount decreased and total consideration paid for the acquisition decreased.
38
Notes to Consolidated Financial Statements
(Continued)
As previously report
ed in the quarterly reported filed with the SEC on August 8, 2017, and as noted above, in the June 2016 acquisitions, a downward adjustment of $15,000 was made to goodwill during the quarter ended June 30, 2017. Part of the consideration paid for the June
2016 acquisitions was a $15,000 seller carryback note. The note was payable in full on July 1, 2017, contingent on certain revenue targets and other operational conditions. As of the quarter ended June 30, 2017, it was determined by management that neither
the revenue targets nor the operational conditions had been met, therefore, the payable was no longer due and total consideration paid for the acquisition decreased.
These adjustments net to a $29,504 downward adjustment of goodwill for the year ended December 31, 2017.
The purchase price allocations above are deemed preliminary for valuation purposes, and management may adjust the allocations for the one-year period allotted. Allocations for the January 20, 2017 acquisition remain open for subsequent management adjustment.
NOTE 4. INVESTMENTS
The Company holds various investments through Willow Oak Asset Management, LLC and previously invested excess cash in marketable securities through its corporate segment. The fair values of the Company’s marketable securities were 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 of 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:
|
|
Cost Basis
|
|
|
Unrealized Gain
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock available for sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Cost Basis
|
|
|
Unrealized Gain
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock available for sale
|
|
$
|
563,211
|
|
|
$
|
36,289
|
|
|
$
|
—
|
|
|
$
|
599,500
|
|
During the year ended December 31, 2017, the Company recognized $61,350 of realized gains. This compares to the year ended December 31, 2016, when the Company recognized $47,610 of realized gains.
Non-current assets held through Willow Oak Asset Management, LLC do not have a Readily Determinable Value as these investments are not publicly traded nor do they have published sales records. The Alluvial Fund is measured using net asset value (NAV) as the practical expedient and is exempt from the fair value hierarchy in accordance with FASB ASC 820-10. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities and allocated based on total fund contributions. Due to the nature of the Huckleberry Real Estate Fund II, LLC investment, the investment is measured at cost basis as cost approximates fair value until additional inputs and measurements become available. As the inputs for this investment are not readily observable, this investment is valued using Level 3 inputs. The following non-current investments are re-measured to fair value on a recurring basis and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Included in the fair value is the cost basis of the investment, as well as any accrued management fees. No comparable information is available for the year ended December 31, 2016.
|
|
Cost Basis
|
|
|
Accrued Fees
|
|
|
Unrealized Gain
|
|
|
Fair Value
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP
|
|
$
|
7,000,000
|
|
|
$
|
2,077
|
|
|
$
|
2,256,825
|
|
|
$
|
9,258,902
|
|
Huckleberry Real Estate Fund II, LLC
|
|
|
750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750,000
|
|
Total
|
|
$
|
7,750,000
|
|
|
$
|
2,077
|
|
|
$
|
2,256,825
|
|
|
$
|
10,008,902
|
|
39
Notes to Consolidated Financial Statements
(Continued)
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.
|
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. See description of these investments in Note 4 above.
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Excluded)
(a)
|
|
|
Total at Fair Value
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huckleberry Real Estate Fund II, LLC
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
750,000
|
|
|
$
|
—
|
|
|
$
|
750,000
|
|
Alluvial Fund, LP
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,258,902
|
|
|
|
9,258,902
|
|
Total investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
750,000
|
|
|
$
|
9,258,902
|
|
|
$
|
10,008,902
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Excluded)
(a)
|
|
|
Total at Fair Value
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
599,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
599,500
|
|
|
(a)
|
In accordance with Subtopic 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.
|
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company analyzes goodwill on an annual basis or whenever events or changes in circumstances indicate potential impairments. During the year ended
December 31
, 2017, a net downward adjustment of $29,504 was made to goodwill held through the HVAC segment. This adjustment was the result of previous sellers not meeting or exceeding the revenue targets of carryback notes that were previously included as consideration for the acquisition. See Note 3 for more information.
For the year ended December 31, 2016, goodwill held at year end was determined to be valued appropriately and no impairment existed.
40
Notes to Consolidated Financial Statements
(Continued)
The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in
circumstances indicate a change in their fair market value. For the year ended December 31, 2017, the Company adjusted the carrying value of properties held downward by $
101
,
694
. For the year ended December 31, 2016, the Company adjusted the carrying value
of properties held downward by $152,411. These adjustments were the result of repair and improvement expenses exceeding the current market value of the property, fluctuating market conditions, and write downs of previously capitalized improvements made by
prior management.
NOTE 6. PROPERTY AND EQUIPMENT
The cost of property and equipment at December 31, 2017, and December 31, 2016, consisted of the following:
|
|
2017
|
|
|
2016
|
|
Automobile
|
|
$
|
264,778
|
|
|
$
|
115,688
|
|
Computers and equipment
|
|
|
162,401
|
|
|
|
36,030
|
|
Furniture and fixtures
|
|
|
25,206
|
|
|
|
25,206
|
|
|
|
|
452,385
|
|
|
|
176,924
|
|
Less accumulated depreciation
|
|
|
(121,086
|
)
|
|
|
(33,460
|
)
|
Property and equipment, net
|
|
$
|
331,299
|
|
|
$
|
143,464
|
|
Depreciation expense was $89,516 for the year ended December 31, 2017, and $10,172 for the year ended December 31, 2016. Increased automobile, computers, and equipment are the result of acquisitions in the HVAC operations and new servers purchased related to the internet segment.
NOTE 7. REAL ESTATE
As of December 31, 2017, the Company owned ten residential properties, one commercial property, and interests in several lots. The Company sold nine residential properties in the year ended December 31, 2017, for gross proceeds of $1,138,000 and net proceeds of $821,217. One residential property was sold during the year that resulted in a $226,000 note receivable from the buyer. This note is expected to be collected in full during the 2018 fiscal year. The carrying value of the nine properties sold was $1,105,914. The Company did not purchase any properties during the year ended December 31, 2017.
As of December 31, 2016, the Company owned 19 residential properties, one commercial property, and interests in several lots. The Company sold 23 residential properties in the year ended December 31, 2016, for gross proceeds of $1,970,009 and net proceeds of $1,799,677. The carrying value of the 23 properties sold was $1,752,622. The Company did not purchase any properties during the year ended December 31, 2016.
As previously reported in our Current Reports on Form 8-K filed with the SEC on December 11, 2017 and January 17, 2018, respectively, Sitestar created a wholly owned subsidiary named Mt Melrose, LLC, which currently is engaged in an acquisition of a portfolio of residential and other income-producing real estate in Lexington, Kentucky pursuant to a certain Master Real Estate Asset Purchase Agreement entered into on December 10, 2017 with a like-named seller, Mt. Melrose, LLC, a Kentucky limited liability company owned by Jeff Moore, also a Sitestar director. Unlike EDI Real Estate, LLC, which is a legacy business that we do not intend to grow, Mt Melrose is a real estate business that the Company expects will grow significantly over time. Mt Melrose will have its own management team, led by our Chairman, Jeffrey Moore. Mr. Moore has extensive experience acquiring and operating real estate in the Lexington, KY region where Mt Melrose is focused. The Mt Melrose management team will be responsible for growing this business.
Real Estate Held for Investment
As of December 31, 2017 and 2016, the Company held nine and eight residential properties as held for investment, respectively. The leases in effect as of the year ended December 31, 2017 and 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.
41
Notes to Consolidated Financial Statements
(Continued)
Depreciation expense totaled $22,354 for the year ended December 31, 2017, and $28,544 for the year ended December 31, 2016. Total accumulated depreciation as of De
cember 31, 2017 and 2016 totaled $86,361 and $77,955, respectively. As of December 31, 2017 and 2016, these properties held for investment were carried on the balance sheet at $
616
,
374
and $506,011, respectively.
The future anticipated minimum rental revenues based on leases in place as of December 31, 2017 are as follows:
2018
|
|
$
|
65,581
|
|
2019
|
|
|
6,700
|
|
Total
|
|
$
|
72,281
|
|
Real Estate Held for Resale
As of December 31, 2017, the Company held one residential property, one commercial property, and several lots as held for resale. These properties held for resale were carried on the balance sheet at $199,117.
As of December 31, 2016, the Company held 11 residential properties, one commercial property, and several lots as held for resale. These properties held for resale were carried on the balance sheet at $1,399,280.
NOTE 8. NOTES PAYABLE
Notes payable at December 31, 2017 and 2016 consist of the following:
|
|
2017
|
|
|
2016
|
|
Interest bearing amount due on acquisition through HVAC
Value Fund, LLC
|
|
$
|
25,000
|
|
|
$
|
250,000
|
|
Non-interest bearing amount due on acquisition through
HVAC Value Fund, LLC
|
|
|
64,804
|
|
|
|
15,000
|
|
Interest bearing amount due on line of credit through HVAC Value Fund,
LLC
|
|
|
220,485
|
|
|
|
—
|
|
Equipment and vehicle capital leases acquired by HVAC Value Fund,
LLC
|
|
|
116,987
|
|
|
|
|
|
Interest bearing amount due on real estate held for investment through EDI
Real Estate, LLC
|
|
|
137,600
|
|
|
|
—
|
|
Less current portion
|
|
|
(370,802
|
)
|
|
|
(240,000
|
)
|
Long-term portion
|
|
$
|
194,074
|
|
|
$
|
25,000
|
|
HVAC Value Fund 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 five acquisitions in the year ended December 31, 2016, and one additional acquisition in the quarter ended March 31, 2017. Four of the five acquisitions made in the year ended December 31, 2016, resulted in a note payable to the seller. The acquisition made in the quarter ended March 31, 2017 also resulted in a note payable to the seller. The non-interest-bearing note payable was due July 1, 2017, in the amount of $15,000 and was contingent on meeting a revenue target and other operational conditions. As mentioned in Note 3, the revenue targets and operational conditions were not met, resulting in the note being written off. There were three separate interest-bearing notes payable as of the quarter ended June 30, 2017. The first interest bearing note payable accrues interest at 7% annually. $25,000 was 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. The second interest bearing note payable is for $100,000 and bears interest at 6% annually. This note was due July 11, 2017 and was contingent on meeting revenue targets and other operational conditions. As mentioned in Note 3, the revenue targets and operational conditions were not met, resulting in the note being written down. The third interest-bearing note payable was for $100,000 and bears interest at 7% annually. This note was due July 30, 2017, and was contingent on meeting revenue targets and other operational conditions. As mentioned in Note 3, the revenue targets and operational conditions were exceeded, and per the purchase agreement, resulted in an increased payout. The acquisition made in the quarter ended March 31, 2017, also resulted in a $100,000 note payable to the seller. The payment amounts are contingent on meeting quarterly revenue targets.
During the year ended December 31, 2017, EDI Real Estate, LLC entered into two promissory notes, each secured by a property held for investment. These notes pay interest quarterly and are due September 15, 2022 with early payoff permitted.
42
Notes to Consolidated Financial Statements
(Continued)
NOTE 9.
ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
For the years ended December 31, 2017 and 2016, bad debt expense was $28,986 and $2,537, respectively. The increase in accounts receivable is the result of the formation of the HVAC subsidiary and a seller financing arrangement for a residential property sold during the year ended December 31, 2017. As of December 31, 2017 and 2016, accounts receivable consisted of the following:
|
|
2017
|
|
|
2016
|
|
Gross accounts receivable
|
|
$
|
399,378
|
|
|
$
|
213,624
|
|
Less allowance for doubtful accounts
|
|
|
(2,498
|
)
|
|
|
(873
|
)
|
Accounts receivable, net
|
|
$
|
396,880
|
|
|
$
|
212,751
|
|
NOTE 10. COMMITMENTS AND CONTINGENCIES
Leases
The Company previously leased certain facilities for its corporate offices and a storage facility from a related party. The Company also previously rented an office in Chatham, Ontario in Canada. Beginning on September 1, 2016, the Company rents office and warehouse space for HVAC Value Fund, LLC, and beginning on October 10, 2017, the Company rents office space for Willow Oak Asset Management, LLC. Total rent expense for the years ended December 31, 2017 and 2016 was $69,228 and $12,472, respectively. Total rent expense for the Canadian facility for the year ended December 31, 2016, was $3,000 CAD. This office was not rented at all during the year ended December 31, 2017. Total rent expense for the HVAC office and warehouse space for the years ended December 31, 2017, and December 31, 2016, was $53,473 and $10,251, respectively. Total rent expense for the Willow Oak office space for the year ended December 31, 2017, was $15,755. The HVAC facilities’ leases are in effect until July 31, 2019, and the Willow Oak office lease is in effect until September 30, 2020. The future obligations related to the HVAC facilities and Willow Oak office leases are as follows:
2018
|
|
$
|
109,955
|
|
2019
|
|
|
76,121
|
|
2020
|
|
|
48,641
|
|
Total
|
|
$
|
234,717
|
|
Through the HVAC segment, multiple capital lease obligations were acquired as part of the most recent acquisition that occurred during the quarter ended March 31, 2017. These obligations include leases on various vehicles and equipment that extend through 2020. The future obligations related to the HVAC capital lease obligations are as follows:
2018
|
|
$
|
60,647
|
|
2019
|
|
|
48,085
|
|
2020
|
|
|
8,255
|
|
Total
|
|
$
|
116,987
|
|
As previously reported in our Current Reports on Form 8-K filed with the SEC on September 19, 2016, and December 30, 2016, respectively, on September 19, 2016, the Company announced that it had entered into a letter of intent agreement with Alluvial Capital Management, LLC (“Alluvial Capital”) to make a seed investment through Willow Oak Asset Management in the Alluvial Fund, LP, a private investment partnership that was launched by Alluvial Capital on January 1, 2017 (“Alluvial Fund”). Alluvial Capital acts as the general partner and the Company, through Willow Oak Asset Management, has invested in Alluvial Fund as a limited partner.
The Company agreed to make capital contributions to Alluvial Fund in the aggregate amount of $10 million to be provided over four equal tranches on January 1, 2017, April 1, 2017, July 1, 2017, and October 1, 2017. As of September 30, 2017, the Company satisfied its obligation to provide $10 million in accordance with the contribution schedule.
On January 1, 2018, pursuant to an amendment to the Alluvial Side Letter Agreement, dated December 15, 2017, Willow Oak Asset Management, LLC withdrew $3,000,000 from its $10,000,000 investment in Alluvial Fund, LP in order to partially fund the first close of the Mt Melrose Transaction. Under the terms of the amendment to the Alluvial Side Letter Agreement, to the extent that funds withdrawn by Willow Oak are replaced coincidentally by funds from a third party, Willow Oak is no longer subject to the former “lockup” restrictions, which formerly conditioned any withdrawals upon Willow Oak having a $50,000,000 capital account
43
Notes to Consolidated Financial Statements
(Continued)
balance. Arquitos Capital Partners, LP, which is managed by our Chief Executive Officer, Steven L. Kiel, simultaneously invested $3,000,000 in Alluvial, to replace the
amount withdrawn by Willow Oak. The Arquitos investment into Alluvial counts toward Willow Oak’s seed investment total for purposes of Willow Oak’s agreement with Alluvial.
As previously reported in our Current Reports on Form 8-K filed with the SEC on December 11, 2017 and January 17, 2018, respectively, Sitestar created a wholly owned subsidiary named Mt Melrose, LLC, which currently is engaged in an acquisition of a portfolio of residential and other income-producing real estate in Lexington, Kentucky pursuant to a certain Master Real Estate Asset Purchase Agreement entered into on December 10, 2017 with a like-named seller, Mt. Melrose, LLC, a Kentucky limited liability company owned by Jeff Moore, also a Sitestar director. As set forth in a Form 8-K filed on January 17, 2018, on January 10, 2018, Mt Melrose, LLC, consistent with the terms of the Purchase Agreement, completed a first acquisition from Seller of 44 residential and other income-producing real properties located in Lexington, Kentucky pursuant to the Purchase Agreement. This first tranche of real properties was acquired for total consideration of $3,814,500, which was payable as follows:
|
•
|
By payment of $500,000 to Seller in cash;
|
|
•
|
By Purchaser’s assumption of $1,798,713 of outstanding indebtedness secured by the acquired real properties; and
|
|
•
|
The balance by issuance to Seller of 15,075,183 shares of the Company’s common stock.
|
On January 10, 2018, the Mt Melrose purchase entered into a certain Cash Flow Agreement with the Mt Melrose seller (the “Cash Flow Agreement”), pursuant to which, in connection with the parties’ anticipated consummation of all of the real property purchase transactions under the Purchase Agreement described above, the parties have agreed that as of and from and after January 10, 2018,
until such time as the parties consummate the relevant closing as to each real property under the Purchase Agreement, Seller will assign to Purchaser all of the income, rents, receivables, and revenues arising from or issuing out of such real property, and Purchaser will assume Seller’s responsibility for payment of certain of the costs and expenses attributable to such real property.
Under the Cash Flow Agreement, Purchaser is responsible for Seller’s monthly payments of interest and/or principal under the outstanding debt secured by the real properties; Seller’s real property taxes with respect to the real properties due and attributable to the periods from and after the effective date; and Seller’s ordinary expenses of operating the real properties, actually incurred, to the extent attributable to
de minimis
repairs, recurring maintenance services, and/or water, electricity, sewer, gas, telephone, or other similar utility charges. However, the risk of loss and casualty damage with respect to all or any portion of the real properties will continue to be borne by Seller up to and including the actual time of the relevant closing respecting such real property.
Based on the 81 real properties presently outstanding for purchase under the Purchase Agreement, Purchaser presently is obligated under the Cash Flow Agreement for (i) monthly payments of interest and/or principal under the outstanding debt secured by such real properties in the aggregate amount of $40,698 per month, (ii) insurance of $4,619 per month, (iii) estimated annualized obligations for real property taxes with respect to such real properties in the aggregate amount of approximately $60,000 per year, and (iv) ordinary recurring expenses of operating such real properties that are expected to be immaterial in aggregate.
We have no other meaningful long-term debt obligations, purchase obligations, or other long-term liabilities as of December 31, 2017, other than those previously mentioned related to the HVAC and asset management segment.
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
44
Notes to Consolidated Financial Statements
(Continued)
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 fo
r 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 th
e Circuit Court for the City of Lynchburg (Lynchburg, Virginia).
NOTE 11. STOCKHOLDERS' EQUITY
Classes of Shares
As of December 31, 2017, the Company’s Articles of Incorporation authorized 330,000,000 shares, consisting of 30,000,000 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.
On January 10, 2018, the Company received the approval from the holders of a majority of the outstanding shares of Common Stock of the Company to amend the Company’s Articles of Incorporation, as amended to date, to increase the authorized shares of Common Stock from Three Hundred Million (300,000,000) shares of Common Stock to Three Hundred Fifty Million (350,000,000) shares of Common Stock. To effectuate the aforesaid amendment, on January 23, 2018, the Company filed its Certificate of Amendment to the Articles of Incorporation of the Company (the “Amendment”) with the Nevada Secretary of State. Following the filing of the Amendment, the aggregate number of shares which the Company shall have the authority to issue is Three Hundred Fifty Million (350,000,000) shares of Common Stock at $0.001 par value, and Thirty Million (30,000,000) shares (unchanged) of Serial Preferred Stock at $0.001 par value.
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, 2017, the Company’s Board of Directors has not issued any Preferred Stock.
Common Stock
As of January 23, 2018, the Company has 350,000,000 authorized shares of Common Stock. As of March 30, 2018, 309,602,004 shares were issued and 297,905,346 shares were outstanding. As of December 31, 2017, 294,526,821 shares were issued and 282,830,163 shares were outstanding. This compares to the year ended December 31, 2016, when 204,152,616 shares were issued and 190,230,163 shares were outstanding.
NOTE 12. INCOME TAXES
The provision for federal and state income taxes for the years ended December 31, 2017 and 2016 included the following:
|
|
2017
|
|
|
2016
|
|
Current benefit (provision):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,271,323
|
|
|
|
16,047
|
|
State
|
|
|
(4,310
|
)
|
|
|
30,535
|
|
Valuation allowance
|
|
|
(1,267,013
|
)
|
|
|
(46,582
|
)
|
Total income tax provision
|
|
$
|
—
|
|
|
$
|
—
|
|
45
Notes to Consolidated Financial Statements
(Continued)
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, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Carrying value differences
|
|
$
|
574,993
|
|
|
$
|
1,092,769
|
|
Net operating loss carryforward
|
|
|
697,681
|
|
|
|
803,637
|
|
Tax credits
|
|
|
6,250
|
|
|
|
—
|
|
Other
|
|
|
827
|
|
|
|
608
|
|
Subtotal
|
|
|
1,279,751
|
|
|
|
1,897,014
|
|
Valuation allowance
|
|
|
(948,917
|
)
|
|
|
(1,897,014
|
)
|
Net deferred tax assets
|
|
|
330,834
|
|
|
|
—
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
(330,834
|
)
|
|
|
—
|
|
Net deferreds
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
ASC 740 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based on the weight of available evidence, which includes the Company’s historical operation performance and the reported cumulative losses in the three-year period preceding 2017, the Company has provided a full valuation allowance against its net deferred tax assets.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affects 2017, including, but not limited to, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also establishes new tax laws that will affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740,
Income Taxes
. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
As a result of the reduction of the federal corporate income tax rate, we have revalued our net deferred tax asset, excluding after tax credits, as of December 31, 2017. As of December 31, 2017, this revaluation continues to be offset by a full valuation allowance.
As of December 31, 2017, the Company had federal net operating loss carryforwards of approximately $2.8 million and state net operating loss carryforwards of approximately $2.2 million. These carryforwards will expire in various amounts beginning in 2032. Internal Revenue Code Section 382 limits the use of net operating loss carryforwards in certain situations where changes occur in the stock ownership of a company. The Company believes that an ownership change did occur in August 2016. Net operating losses that arose prior to that ownership change will have limited availability to offset taxable income arising in periods following the ownership change. The Company has analyzed this issue and management believes that the Company’s net operating loss carryforwards will not expire unutilized.
The Company is required to recognize in the financial statements the impact of a tax position, if that position is not more likely than not of being sustained on audit, based on the technical merits of the position. The Company’s policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2017, there was no liability for unrecognized tax benefits. The Company does not expect that its uncertain tax positions will materially change in the next twelve months.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. Tax contingencies are based upon their technical merits, relative law, and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.
46
Notes to Consolidated Financial Statements
(Continued)
NOTE 13. RELATED PARTY TRANSACTIONS
Former CEO
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. The Company has filed a lawsuit against the Former CEO in order to recover, among other amounts, the payments made to the Former CEO. Additional information on this lawsuit can be found in Note 10. The Company vacated the building as of January 15, 2016.
The Company also leased a storage facility in Salem, Virginia, from the Former CEO. The Company is 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 Note 10.
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 Former CEO created several land trusts and designated the Company as the trustee. The Former CEO and, the Company believes, 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 Note 10.
Bonhoeffer Fund, LP
The Company’s subsidiary, Willow Oak Asset Management, LLC, signed a fee share agreement on June 13, 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, also a Sitestar director. Under the agreement, Willow Oak and Coolidge are the sole members of Bonhoeffer Capital Management LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership. Under their agreement, Willow Oak pays all start-up and operating expenses that are not partnership expenses under the limited partnership agreement. Willow Oak receives 50% of all performance and management fees earned by the general partner.
Mt Melrose Transaction
On December 10, 2017, the Company entered into a certain Master Real Estate Asset Purchase Agreement (the “Purchase Agreement”) with Mt. Melrose, LLC (“Seller”), a Kentucky limited liability company that is engaged in the business of owning and managing a portfolio of residential and other income-producing real estate in Lexington, Kentucky. As previously reported, Seller is owned by Jeffrey I. Moore, Chairman of the Board of the Company. In accordance with its charter, the Company’s audit committee unanimously approved this related party transaction.
Pursuant to the Purchase Agreement, the Company, through a newly formed company subsidiary wholly owned by the Company (the “Purchaser”), will acquire, in a series of closings, substantially all of the business assets of the Seller. The assets primarily consist of 122 residential properties currently owned by the Seller and an undetermined number of additional residential properties under contract for purchase by Seller, along with Seller’s rights and ongoing obligations, as lessor/landlord, under all leases covering such real properties. Pursuant to the Purchase Agreement, Purchaser will assume, as of each closing, any outstanding indebtedness secured by the real properties then being conveyed at such closing. As of November 30, 2017, the real properties, all together, secured indebtedness having an aggregate principal balance of approximately $4,883,736.
The aggregate purchase price to be paid to Seller is approximately $8,448,700, subject to adjustments to reflect (i) any additional real properties acquired by Seller after the date of the Purchase Agreement and to be purchased by the Company, (ii) proration of such items as are customarily prorated at the time of each closing and (iii) any mutually agreed-upon reductions to the purchase price of one or more of the real properties negotiated between the parties following the Company’s due diligence investigation thereof or following any casualty loss, eminent domain, or condemnation affecting such property. $500,000 of the purchase price will be payable to Seller in cash, and the balance of the purchase price will be payable by (i) Purchaser’s assumption of the outstanding indebtedness secured by the real properties then being conveyed, as described above, and (ii) the Company’s issuance to Mr. Moore of restricted shares of the Company’s common stock (that will be exempt from registration pursuant to the provisions of
47
Notes to Consolidated Financial Statements
(Continued)
Section 4(2) and Rule 506 of Regulation D promulgated under the Securities Act of 1933
), subject to Seller’s right to receive cash in lieu thereof. Portions of the purchase price will be paid at each closing, in such amounts as the parties may mutually agree to attribute and allocate to the specific assets being conveyed at such closing.
Under the Purchase Agreement, the parties agreed to finalize as soon as reasonably practicable a mutually acceptable schedule of closings and the specific assets to be conveyed at each such closing; provided, however, no closing as to any of the assets will be scheduled to occur later than June 10, 2019.
Each closing is subject to customary conditions precedent, including, without limitation, the parties’ respective customary representations and warranties made under the Purchase Agreement being true and correct as of the time of such closing, the parties having obtained any regulatory approvals necessary for consummation of the closing, and each party having delivered, respectively, customary instruments of transfer and assignment and assumption and other items specified in the Purchase Agreement.
The Purchase Agreement provided, further, as a condition precedent to Seller’s obligation to any of the closings thereunder, that, prior to the first closing, the Company or Purchaser and Mr. Moore shall have entered into a definitive employment agreement pursuant to which Mr. Moore will be employed as the President of Purchaser. Mr. Moore and the Purchaser entered into an employment agreement on January 10, 2018.
The transactions contemplated under the Purchase Agreement are referred to herein as the “Mt. Melrose Transaction.” The description of the Purchase Agreement above is a summary of certain of its material terms, does not purport to be complete and is qualified in its entirety by reference, including for other terms and conditions of the Mt. Melrose Transaction, to the Purchase Agreement, a copy of which is attached hereto as
Exhibit 10.5
and is incorporated herein by reference.
The Mt. Melrose Transaction was considered and approved on December 1, 2017, by each of the Audit Committee of the Board of Directors of the Company and the Board of Directors of the Company. Mr. Moore did not participate in discussions of the Audit Committee or the Board about whether to approve the Mt. Melrose Transaction and abstained from voting on the Mt. Melrose Transaction at both meetings. In each case, it was considered that Mr. Moore is an interested Director of the Company and that the Mt. Melrose Transaction is a related party transaction. In each case it also was determined, among other things, that, notwithstanding that Mr. Moore is an interested Director of the Company, the Mt. Melrose Transaction is beneficial and fair to the Company and is on terms not less favorable to the Company than those that prevail in arms-length transactions with third parties.
Mt Melrose First Close
On January 10, 2018, the Purchaser, Mt Melrose, LLC, a newly organized Delaware limited liability company subsidiary wholly owned by the Company, completed a first acquisition from Seller of 44 residential and other income-producing real properties located in Lexington, Kentucky, pursuant to the Purchase Agreement. This first tranche of real properties was acquired for total consideration of $3,814,500, which was payable as follows:
|
•
|
by payment of $500,000 to Seller in cash;
|
|
•
|
by Purchaser’s assumption of $1,798,713 of outstanding indebtedness secured by the acquired real properties and relevant
de minimis
prorated expenses
; and
|
|
•
|
the balance by issuance to Seller of 15,075,183 shares of the Company’s common stock, all in accordance with the terms of the Purchase Agreement.
|
As a result of this first closing under the Purchase Agreement, Purchaser assumed $1,798,713 of outstanding indebtedness secured by the acquired real properties, along with all of Seller’s rights and ongoing obligations, as lessor/landlord, under all leases covering the acquired real properties. In connection with the Company’s organization of Purchaser and this first closing under the Purchase Agreement, the Purchaser has appointed Mr. Moore to serve as its President. Presently, 81 additional real properties are outstanding for purchase under the Purchase Agreement.
Mt Melrose Cash Flow Agreement
On Wednesday, January 10, 2018, Purchaser entered into a certain Cash Flow Agreement with Seller (the “Cash Flow Agreement”), pursuant to which, in connection with the parties’ anticipated consummation of all of the real property purchase
48
Notes to Consolidated Financial Statements
(Continued)
transactions under the Purchase Agreement described above, the parties have agreed that as of and from and
after January 10, 2018, until such time as the parties consummate the relevant closing as to each real property under the Purchase Agreement, Seller will assign to Purchaser all of the income, rents, receivables, and revenues arising from or issuing out of
such real property, and Purchaser will assume Seller’s responsibility for payment of certain of the costs and expenses attributable to such real property.
Under the Cash Flow Agreement, Purchaser is responsible for Seller’s monthly payments of interest and/or principal under the outstanding debt secured by the real properties; Seller’s real property taxes with respect to the real properties due and attributable to the periods from and after the effective date; and Seller’s ordinary expenses of operating the real properties, actually incurred, to the extent attributable to
de minimis
repairs, recurring
maintenance services, and/or water, electricity, sewer, gas, telephone, or other similar utility charges. However, the risk of loss and casualty damage with respect to all or any portion of the real properties will continue to be borne by Seller up to and including the actual time of the relevant closing respecting such real property.
Based on the 81 real properties presently outstanding for purchase under the Purchase Agreement, Purchaser presently is obligated under the Cash Flow Agreement for (i) monthly payments of interest and/or principal under the outstanding debt secured by such real properties in the aggregate amount of $40,698 per month, (ii) insurance of $4,619 per month, (iii) estimated annualized obligations for real property taxes with respect to such real properties in the aggregate amount of approximately $60,000 per year, and (iv) ordinary recurring expenses of operating such real properties that are expected to be immaterial in aggregate.
The description of the Cash Flow Agreement above is a summary of certain of its material terms, does not purport to be complete, and is qualified in its entirety by reference to the Cash Flow Agreement, a copy of which is attached hereto as
Exhibit 10.6
and is incorporated herein by reference.
NOTE 14. SEGMENT INFORMATION
As of December 31, 2017, the Company has five reportable segments with separate management and reporting infrastructures that offer different products and services: Corporate, Internet, HVAC, Real Estate, and Asset Management.
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. 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 and plumbing companies in Arizona. 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 asset management segment includes revenues and expenses derived from various investment opportunities and partnerships.
The internet segment includes revenue generated by customers in both the United States and Canada. In the year ended December 31, 2017, the internet segment generated revenue of $1,205,281 in the United States and revenue of $82,127 in Canada. This compares to the year ended December 31, 2016, where the internet segment generated revenue of $1,312,444 in the United States and revenue of $102,845 in Canada.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the years ended December 31, 2017 and 2016. No comparable financial information exists for the asset management segment because it did not commence operations until January 1, 2017. Also note that the HVAC segment did not commence operations until June 14, 2016.
|
|
Corporate
|
|
|
Internet
|
|
|
HVAC
|
|
|
Real Estate
|
|
|
Asset Management
|
|
|
Consolidated
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
1,287,408
|
|
|
$
|
4,294,904
|
|
|
$
|
1,239,992
|
|
|
$
|
2,271,747
|
|
|
$
|
9,094,051
|
|
Cost of revenue
|
|
$
|
—
|
|
|
$
|
304,719
|
|
|
$
|
2,961,874
|
|
|
$
|
1,317,388
|
|
|
$
|
—
|
|
|
$
|
4,583,981
|
|
Net income (loss) before income taxes
|
|
$
|
(597,225
|
)
|
|
$
|
782,313
|
|
|
$
|
(106,701
|
)
|
|
$
|
(100,693
|
)
|
|
$
|
2,164,221
|
|
|
$
|
2,141,915
|
|
Goodwill
|
|
$
|
—
|
|
|
$
|
212,445
|
|
|
$
|
1,779,549
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,991,994
|
|
Identifiable assets
|
|
$
|
144,869
|
|
|
$
|
485,757
|
|
|
$
|
2,585,933
|
|
|
$
|
1,057,357
|
|
|
$
|
13,042,887
|
|
|
$
|
17,316,803
|
|
49
Notes to Consolidated Financial Statements
(Continued)
|
|
Corporate
|
|
|
Internet
|
|
|
HVAC
|
|
|
Real Estate
|
|
|
Consolidated
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
1,415,289
|
|
|
$
|
1,477,961
|
|
|
$
|
2,081,996
|
|
|
$
|
4,975,246
|
|
Cost of revenue
|
|
$
|
—
|
|
|
$
|
369,514
|
|
|
$
|
987,221
|
|
|
$
|
2,165,020
|
|
|
$
|
3,521,755
|
|
Net income (loss) before income taxes
|
|
$
|
(754,708
|
)
|
|
$
|
822,224
|
|
|
$
|
(78,843
|
)
|
|
$
|
(96,311
|
)
|
|
$
|
(107,638
|
)
|
Goodwill
|
|
$
|
—
|
|
|
$
|
212,445
|
|
|
$
|
1,341,300
|
|
|
$
|
—
|
|
|
$
|
1,553,745
|
|
Identifiable assets
|
|
$
|
5,004,655
|
|
|
$
|
622,431
|
|
|
$
|
2,234,564
|
|
|
$
|
1,979,582
|
|
|
$
|
9,841,232
|
|
NOTE 15. ADJUSTMENT TO OPENING BALANCE NUMBER OF SHARES AND CANCELLATION OF TREASURY SHARES
During the quarter ended March 31, 2017, management was made aware of a clerical error that affected the reported number of treasury shares held as of December 31, 2016. It was discovered that the number of treasury shares held was overstated by 100,000 shares, which in turn understated the total number of shares outstanding by the same amount. The Company has concluded that a full restatement is not necessary as the total misstatement accounts for 0.035% of the total number of shares outstanding and no per share metrics were affected. This error dates back to records kept by prior management but has since been reconciled and corrected. Further, management is actively working to cancel existing treasury shares. As noted on the condensed consolidated statements of stockholders’ equity, as of the year ended December 31, 2017, 2,125,795 treasury shares have been cancelled.
As of March 30, 2018, the correct number of shares outstanding is 297,905,346, and the correct number of treasury shares held is 11,696,658.
NOTE 16. SUBSEQUENT EVENTS
Mt Melrose Transaction
On January 10, 2018, the Company’s wholly owned subsidiary, Mt Melrose LLC, a Delaware limited liability company, completed the first close under the Mt. Melrose Transaction, and entered into the Cash Flow Agreement with the Seller. Each is more fully described in NOTE 13 Related Party Transactions.
Alluvial Fund, LP
On January 1, 2018, pursuant to an amendment to the Alluvial Side Letter Agreement, dated December 15, 2017, Willow Oak Asset Management, LLC withdrew $3,000,000 from its $10,000,000 investment in Alluvial Fund, LP in order to partially fund the first close of the Mt Melrose Transaction. Under the terms of the amendment to the Alluvial Side Letter Agreement, to the extent that funds withdrawn by Willow Oak are replaced coincidentally by funds from a third party, Willow Oak is no longer subject to the former “lockup” restrictions, which formerly conditioned any withdrawals upon Willow Oak having a $50,000,000 capital account balance. Arquitos Capital Partners, LP, which is managed by our Chief Executive Officer, Steven L. Kiel, simultaneously invested $3,000,000 in Alluvial, to replace the amount withdrawn by Willow Oak. The Arquitos investment into Alluvial counts toward Willow Oak’s seed investment total for purposes of Willow Oak’s agreement with Alluvial.
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