The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Lines of Business
Sitestar Corporation (formerly White Dove Systems, Inc., and then Interfoods Consolidated, Inc.) was incorporated in Nevada on December 17, 1992. On July 26, 1999, the Company restated its Articles of Incorporation to change the name of the Company to “Sitestar Corporation.” 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 six reportable segments: Corporate, Internet Operations, HVAC Operations, Real Estate Operations, Asset Management Operations, and Mt Melrose Operations. The management of the Company also continually reviews various investment opportunities, including 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 segment 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. 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 non-voting profit interests. JNJ Investments has not earned any profits 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 March 31, 2018, 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 and operate 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 nine 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.
10
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
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 focuses on investing in deeply mispriced securities in the United States and abroad. Alluvial Fund focuses on small companies, thinly traded issues, and special situations, seeking to identify value that 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.
Mt Melrose Operations
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 (“New Mt Melrose”) on January 10, 2018, 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 (“Old Mt. Melrose”), 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, New 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. The Company accounted for the initial purchase of properties as an asset acquisition (consisting of a concentrated group of similar identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contained in ASU 2017-01. See Note 3 for more information.
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 has its own management team, led by our Chairman, Jeffrey Moore. Mr. Moore has extensive experience acquiring and operating real estate in the Lexington, Kentucky region where Mt Melrose is focused. The Mt Melrose management team is responsible for growing this business. Additionally, unlike EDI Real Estate, LLC, Mt Melrose does not outsource property management services and has developed an internal property management team to handle those functions and responsibilities.
11
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
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, Willow Oak Asset Management, LLC, and Mt Melrose LLC (“New Mt Melrose”).
Additionally, the Company has determined that New Mt Melrose is the primary beneficiary of Old Mt. Melrose. As such, the accompanying unaudited consolidated financial statements include the accounts of Old Mt. Melrose. While New Mt Melrose consolidated Old Mt. Melrose as its primary beneficiary, because it does not hold all the equity interests in Old Mt. Melrose, the equity interests of the noncontrolling party are separately presented in the accompanying unaudited consolidated balance sheets and unaudited consolidated statements of operations. See Note 3 for more information.
All intercompany accounts and transactions have been eliminated on consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared by Sitestar Corporation, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2018 (the “2017 Form 10-K”). The results for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.
Use of Estimates
In accordance with Generally Accepted Accounting Principles (GAAP) in the United State of America, the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments, including 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 on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and accounts receivable. The Company places its cash with high-quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
Investments
The Company holds various investments through its asset management segment. Assets held through Willow Oak Asset Management do not have a Readily Determinable Value as these investments are not publicly traded nor do they have published sales records. These investments are re-measured to fair value on a recurring basis. See Note 5 for more information.
12
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
During the year ended December 31, 2017, the Company also 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
March 31, 2018
, as all securities were sold prior to
the
year end
ed December 31, 2017
.
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.
Mt Melrose and EDI Real Estate rental services are typically paid via cash or check no later than the fifth of the month. Any services collected after the fifth are charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If services remain uncollected, standard operating procedures are followed to commence a notice process for the tenant to either pay the amount due or evacuate the property. These procedures ensure low amounts of past due receivables.
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 4 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.
13
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
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 costs where the cost extended the life of or added value to the property. Otherwise, the cost is expensed as incurred. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management.
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. These types of contracts are typically completed within one month’s time. A small portion of revenue is from the sale of annual service agreements. Revenue attributable to these agreements is appropriately recognized over the life of the agreement.
If payment is received prior to contract completion, 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.
14
Notes to Unaudited Condensed 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.
Mt Melrose Operations
Rental revenue from Mt Melrose rental operations 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.
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, inclusive of the recent tax reform act. 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
15
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
the potential common shares had been issued and if the additional common shares were dilutive. The Company
plans to issue approximately
15,574,457
additional
common shares
, subject to closing
adjustments,
to complete the Mt Melrose acquisition. These additional common shares to be issued
will be dilutive to
existing common stockholders
.
Other Comprehensive Income
Other comprehensive income is the result of unrealized gains (losses) from marketable securities classified as available-for-sale.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. 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 has adopted this standard in the first quarter of 2018. Management has evaluated the impact of this standard on customer contracts based on the modified retrospective method and determined that no adjustment was deemed necessary. There were no significant departures from the Company’s previous 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 has adopted this standard in the first quarter of 2018. The initial application of the standard has not significantly impacted 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 Company has adopted this standard in the first quarter of 2018. The initial application of the standard has not significantly impacted the Company.
In January 2017, the FASB issued ASU No. 2017-01 “Clarifying the Definition of a Business” (Topic 805). The amendments in the update provide a screen to determine when a set is not a business. If the screen is not met, the amendments in the update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. Lastly, the amendments in the update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017; earlier adoption is permitted under certain criteria. The Company adopted this ASU on January 1, 2018. While this ASU did not have a material effect on the Company’s financial statements on the date of adoption, the Company did follow the new guidance in determining that its acquisition of properties from Mt Melrose LLC in January 2018 was an asset acquisition. See Note 3 for additional information.
16
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
In January 2017, the FASB issued ASU No. 2017-04 “Simplifying the Test for Goodwill Impairment” (Topic 350). The guidance eliminates the re
quirement 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 o
ver 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 beginnin
g after December 15, 2019, and early adoption is permitted.
The Company has adopted this new guidance for its 2017 goodwill impairment analysis.
NOTE 3. ASSET ACQUISITION OF REAL ESTATE PROPERTIES
Acquisition
On December 10, 2017, the Company entered into a certain Master Real Estate Asset Purchase Agreement (the “Purchase Agreement”) with Mt. Melrose, LLC, a Kentucky limited liability company (“Old Mt. Melrose”), that owns and manages a portfolio of residential real estate in Lexington, Kentucky. Old Mt. Melrose is owned by Jeffrey I. Moore (“Moore”), the Company’s Chairman of the Board.
Pursuant to the Purchase Agreement, the Company, through a newly formed wholly owned limited liability company subsidiary Mt Melrose, LLC (“New Mt Melrose”), is in the process of acquiring, in a series of closings, substantially all of the business assets of Old Mt. Melrose. The assets primarily consist of 145 residential properties currently owned by Old Mt. Melrose and an undetermined number of additional residential properties under contract for purchase by Old Mt. Melrose, along with Old Mt. Melrose’s rights and ongoing obligations, as lessor/landlord, under all leases covering such real properties. Pursuant to the Purchase Agreement, the Company will assume, as of each closing, any outstanding indebtedness secured by the real properties then being conveyed at such closing.
On January 10, 2018, New Mt Melrose completed the first acquisition of 44 residential and other income-producing real properties for a total purchase price of $3,956,389, which consisted of $500,000 in cash, 15,075,183 shares of common stock valued at $1,658,270, and the assumption of $1,798,713 of existing debt. In connection with the initial closing, the Company and Old Mt. Melrose entered into a Cash Flow Agreement pursuant to which the Company is entitled to all net cash flows of Old Mt. Melrose relating to properties closed subsequently.
The Company accounted for the initial purchase of properties as an asset acquisition (consisting of a concentrated group of similar identifiable assets, including land, buildings, improvements, and in-place leases) following the guidance contain in ASU 2017-01. The total purchase price, along with approximately $45,250 of transaction expenses, was allocated to the land and buildings acquired based on their relative fair values, as follows:
|
|
Land
|
$797,565
|
Buildings
|
$3,190,262
|
Total Value
|
$3,987,827
|
The buildings will be amortized over their estimated useful lives of 39 years. The Company determined that the assumed leases and service contracts were not favorable or unfavorable based on their terms relative to their fair values.
At the initial closing, Moore was appointed as New Mt Melrose’s president and executed an employment agreement with New Mt Melrose. Subject to the terms of the employment agreement, in certain limited situations that are deemed to be within the Company’s control, Moore has a right to acquire New Mt Melrose for fair value.
Variable Interests
The Company has determined that Old Mt. Melrose is a “variable interest entity” because Moore’s equity interests in Old Mt. Melrose are not effective in determining whether Moore or New Mt Melrose has a controlling financial interest, and that New Mt Melrose’s rights under the Cash Flow Agreement are deemed to be variable interests in Old Mt. Melrose. The Company has determined that New Mt Melrose is the primary beneficiary of Old Mt. Melrose since substantially all of Old Mt. Melrose’s activities are now conducted on behalf of New Mt Melrose and because the New Mt Melrose may be required to provide financial support to Old Mt. Melrose under the Cash Flow Agreement. As its primary beneficiary, New Mt Melrose consolidates Old Mt. Melrose’s financial results beginning on January 10, 2018. The fair values of the assets and liabilities of Old Mt. Melrose have been allocated
17
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
accordingly on the unaudited condensed consolidated balance sheets for the period ended March 31, 2018.
As noted on the
unaudited consolidated st
atements of stockholders’ equity,
the ending noncontrolling interest allocated to the variable interest entity represents the remaining equity held by Old Mt. Melrose for properties yet to be acquired.
The ending noncontrolling interest
amount
also
includes any income or loss generated by th
e
remaining properties
to be acquired
for the period ended March 31, 2018.
As of March 31, 2018, Old Mt. Melrose’s total assets were approximately $5.6 million and its total liabilities were approximately $3.8 million. These amounts have been consolidated in the accompanying unaudited consolidated financial statements.
NOTE 4. 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.
The business acquired on January 20, 2017 contributed revenues of $200,783, a net loss of $12,433, and additional selling, general and administrative expenses to HVAC Value Fund during the quarter ended March 31, 2018. The following unaudited pro forma summary presents consolidated information of HVAC Value Fund as if the previous year business combination had occurred on January 1 of the fiscal year. Pro forma information for the period ended March 31, 2018 was calculated using annualized, unaudited 2016 information, as information for the period from January 1, 2017 through the 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 quarter ended March 31, 2018 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 three months ended March 31, 2017 (unaudited)
|
|
With January 20, 2017 acquisition
|
|
Revenue
|
|
$
|
972,999
|
|
Earnings
|
|
$
|
(58,735
|
)
|
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
|
|
18
Notes to Unaudited Condensed 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.
19
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
As previously reported 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 w
as 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 ope
rational 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 acquisit
ion decreased.
NOTE 5. INVESTMENTS
Certain 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.
|
|
Cost Basis
|
|
|
Accrued Fees
|
|
|
Unrealized Gain
|
|
|
Fair Value
|
|
March 31, 2018 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP
|
|
$
|
7,010,860
|
|
|
$
|
791
|
|
|
$
|
2,535,881
|
|
|
$
|
9,547,532
|
|
Huckleberry Real Estate Fund II, LLC
|
|
|
750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750,000
|
|
Total
|
|
$
|
7,760,860
|
|
|
$
|
791
|
|
|
$
|
2,535,881
|
|
|
$
|
10,297,532
|
|
|
|
Cost Basis
|
|
|
Accrued Fees
|
|
|
Unrealized Gain
|
|
|
Fair Value
|
|
March 31, 2017 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP
|
|
$
|
5,000,000
|
|
|
$
|
45
|
|
|
$
|
150,761
|
|
|
$
|
5,150,806
|
|
Huckleberry Real Estate Fund II, LLC
|
|
|
750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750,000
|
|
Total
|
|
$
|
5,750,000
|
|
|
$
|
45
|
|
|
$
|
150,761
|
|
|
$
|
5,900,806
|
|
NOTE 6. 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.
|
20
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
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 5 above.
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Excluded)
(a)
|
|
|
Total at Fair Value
|
|
March 31, 2018 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huckleberry Real Estate Fund II, LLC
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
750,000
|
|
|
$
|
—
|
|
|
$
|
750,000
|
|
Alluvial Fund, LP
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,547,532
|
|
|
|
9,547,532
|
|
Total investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
750,000
|
|
|
$
|
9,547,532
|
|
|
$
|
10,297,532
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Excluded)
(a)
|
|
|
Total at Fair Value
|
|
March 31, 2017 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
175,078
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
175,078
|
|
Huckleberry Real Estate Fund II, LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
750,000
|
|
|
|
—
|
|
|
|
750,000
|
|
Alluvial Fund, LP
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,150,806
|
|
|
|
5,150,806
|
|
Total investments
|
|
$
|
175,078
|
|
|
$
|
—
|
|
|
$
|
750,000
|
|
|
$
|
5,150,806
|
|
|
$
|
6,075,884
|
|
|
(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 4 for more information.
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. No adjustment was deemed necessary for the quarter ended
March
31, 2018. For the year ended December 31, 2017, the Company adjusted the carrying value of properties held downward by $101,694. 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.
As discussed in Note 3, in January 2018, Mt Melrose completed the first acquisition of 44 residential and other income producing real properties for a total purchase price of $3,956,389. The total purchase price, along with transaction expenses, was allocated to the land and buildings acquired based on their relative fair values. The fair values of the land and buildings was determined using Level 3 inputs, namely comparable properties within the Lexington, Kentucky region. The remaining acquisitions will be measured in a similar way using similar inputs.
NOTE 7. PROPERTY AND EQUIPMENT
The cost of property and equipment at
March 31
, 2018 and December 31, 2017 consisted of the following:
|
|
2018
|
|
|
2017
|
|
Automobile
|
|
$
|
366,710
|
|
|
$
|
264,778
|
|
Building
|
|
|
580,000
|
|
|
|
—
|
|
Computers and equipment
|
|
|
198,412
|
|
|
|
162,401
|
|
Furniture and fixtures
|
|
|
118,856
|
|
|
|
25,206
|
|
Land
|
|
|
2,103,370
|
|
|
|
—
|
|
|
|
|
3,367,348
|
|
|
|
452,385
|
|
Less accumulated depreciation
|
|
|
(155,249
|
)
|
|
|
(121,086
|
)
|
Property and equipment, net
|
|
$
|
3,212,099
|
|
|
$
|
331,299
|
|
21
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
Depreciation expense was $3
4
,1
63
for the three months ended
March 31
, 2018 and $89,516
for the year ended December 31, 2017. Increased buildings, vehicles, computers, and equipment are the result of the Mt Melrose acquisition that occurred on January 10, 2018.
The building held through Mt Melrose, LLC is a multi-purpose office and warehouse space located in Lexington, Kentucky, that will ultimately serve as Mt Melrose’s headquarters. The building is currently under renovation to repurpose existing spaces and make improvements to the structure and function of the building.
NOTE 8. REAL ESTATE
EDI Real Estate, LLC
As of
March 31
, 2018, the Company owned nine residential properties, one commercial property, and interests in several lots. The Company sold one residential property and one plot of land in the quarter ended March 31, 2018, for gross proceeds of $62,000 and net proceeds of $57,101. The carrying value of the two properties sold was $69,033. The Company did
not purchase any properties in the quarter ended
March 31
, 2018.
Real Estate Held for Investment
As of
March 31
, 2018, the Company accounted for nine residential properties as held for investment. The Company had eight properties available for rent with all eight properties being occupied. One additional property continues to be renovated with the intention to have it ready for rent during 2018. The leases in effect, as of the quarter ended
March 31
, 2018, are based on either annual or multi-year time periods and typically include month-to-month provisions after the completion of the initial term. An outside property management company manages these rental properties on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties.
Depreciation expense totaled $5,304 for the three months ended
March 31
, 2018. Total accumulated depreciation as of
March 31
, 2018 totaled $91,664. As of March 31, 2018, these EDI Real Estate, LLC properties held for investment were carried on the balance sheet at $611,071.
Real Estate Held for Resale
As of
March 31
, 2018, the Company accounted for one commercial property and several lots as held for resale. These properties held for resale were carried on the balance sheet at $130,085.
Mt Melrose, LLC
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 (“New Mt Melrose”), 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 (“Old Mt. Melrose”), 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, New Mt Melrose is a real estate business that the Company expects will grow significantly over time. New Mt Melrose has its own management team, led by our Chairman, Jeffrey Moore. Mr. Moore has extensive experience acquiring and operating real estate in the Lexington, Kentucky region where New Mt Melrose is focused. The New Mt Melrose management team is responsible for growing this business.
All real estate held through Mt Melrose, LLC is classified as held for investment. As of the quarter ended March 31, 2018, this includes 145 properties carried on the balance sheet at $8,513,575. Of the 145 properties held for investment, 70 of the properties are currently rented. The remaining properties are under construction and are being readied for rent. Depreciation expense and accumulated depreciation totaled $39,802 for the quarter ended March 31, 2018.
22
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 9. NOTES PAYABLE
Notes payable at March 31, 2018 and December 31, 2017 consist of the following:
|
|
2018
|
|
|
2017
|
|
Interest bearing amounts due on real estate held for investment through
Mt Melrose, LLC
|
|
$
|
6,226,850
|
|
|
$
|
—
|
|
Interest bearing amount due on acquisition through HVAC Value
Fund, LLC
|
|
|
25,000
|
|
|
|
25,000
|
|
Non-interest bearing amount due on acquisition through HVAC
Value Fund, LLC
|
|
|
—
|
|
|
|
64,804
|
|
Interest bearing amount due on line of credits through HVAC
Value Fund, LLC
|
|
|
247,493
|
|
|
|
220,485
|
|
Equipment and vehicle capital leases and loans acquired by HVAC
Value Fund, LLC
|
|
|
101,925
|
|
|
|
116,987
|
|
Vehicle loans through HVAC Value Fund, LLC
|
|
|
60,752
|
|
|
|
—
|
|
Interest bearing amount due on real estate held for investment through
EDI Real Estate, LLC
|
|
|
137,600
|
|
|
|
137,600
|
|
Less current portion
|
|
|
(865,408
|
)
|
|
|
(370,802
|
)
|
Long-term portion
|
|
$
|
5,934,212
|
|
|
$
|
194,074
|
|
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. Of the six acquisitions made by HVAC Value Fund during 2016 and 2017, five resulted in notes payable to the seller. As of December 31, 2017, two of the five seller notes remained outstanding. The interest bearing note payable accrues interest at 7% annually. A payment of $25,000 is payable on June 16, 2018 and is contingent on meeting revenue targets and other operational conditions. The non-interest bearing note payable was paid in full during the quarter ended March 31, 2018. Additional debt held through the HVAC segment includes lines of credit, as well as loans and leases for various vehicles and equipment. Two vehicle loans were entered into during the quarter ended March 31, 2018. These loans require monthly payments through May 2023 and hold annual interest rates of 5.99%.
During the quarter ended September 30, 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.
On January 10, 2018, our new, wholly owned subsidiary, Mt Melrose, LLC (“Purchaser”), a Delaware limited liability company, entered into a certain Cash Flow Agreement with Mt. Melrose, LLC (“Seller”), a Kentucky limited liability company (the “Cash Flow Agreement”), pursuant to which, in connection with the parties’ anticipated consummation of all of the real property purchase transactions under the Mt Melrose Purchase Agreement, the parties agreed after January 10, 2018, until such time as the parties consummate the relevant closing as to each real property under the Mt Melrose Purchase Agreement, Seller assigns to Purchaser all of the income, rents, receivables and revenues arising from or issuing out of such real property, and Purchaser assumes 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 both acquired and to be acquired, among other operating expenses. The debt secured by the real properties have varying annual interest rates from 4.375% to 13%. These notes begin to mature as early as March 2019 with the last note extending until January 2042. Some of these loans are interest only while others accrue interest that is due in full with a final balloon payment. As of the quarter ended March 31, 2018, $6,226,850 of debt is secured by these properties.
23
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 10. ACCOUNTS RECEIVABLE AND BAD
DEBT EXPENSE
For the three months ended March 31, 2018 and for the year ended December 31, 2017, bad debt expense was $9,661 and $28,986, respectively. The decrease in accounts receivable is the result of the collection of a note receivable that occurred during the three months ended March 31, 2018. The note arose from a financing arrangement for a residential property sold during the nine months ended September 30, 2017. As of March 31, 2018 and December 31, 2017, accounts receivable consisted of the following:
|
|
2018
|
|
|
2017
|
|
Gross accounts receivable
|
|
$
|
332,125
|
|
|
$
|
399,378
|
|
Less allowance for doubtful accounts
|
|
|
(7,618
|
)
|
|
|
(2,498
|
)
|
Accounts receivable, net
|
|
$
|
324,507
|
|
|
$
|
396,880
|
|
NOTE 11. SEGMENT INFORMATION
As of March 31, 2018, the Company has six business units with separate management and reporting infrastructures that offer different products and services. The six business units have been aggregated into the following reportable segments: Corporate, Internet, HVAC, Real Estate, Asset Management, and Mt Melrose.
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. 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 Mt Melrose segment includes revenue and expenses related to the property management and real estate rental activities of a portfolio of rental properties located in Lexington, Kentucky.
The internet segment includes revenue generated by operations in both the United States and Canada. In the quarter ended March 31, 2018, the internet segment generated revenue of $282,459 in the United States and revenue of $19,277 in Canada. This compares to the quarter ended March 31, 2017 where the internet segment generated revenue of $312,618
in the United States and revenue of $22,468 in Canada.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three months ended March 31, 2018 and 2017.
|
|
Corporate
|
|
|
Internet
|
|
|
HVAC
|
|
|
Real Estate
|
|
|
Asset Management
|
|
|
Mt Melrose
|
|
|
Consolidated
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
301,736
|
|
|
$
|
625,839
|
|
|
$
|
79,145
|
|
|
$
|
284,705
|
|
|
$
|
174,518
|
|
|
$
|
1,465,943
|
|
Cost of revenue
|
|
|
—
|
|
|
|
71,147
|
|
|
|
488,675
|
|
|
|
75,363
|
|
|
|
—
|
|
|
|
140,860
|
|
|
|
776,045
|
|
Net income (loss) before income taxes
|
|
|
(372,575
|
)
|
|
|
190,607
|
|
|
|
(178,387
|
)
|
|
|
(1,675
|
)
|
|
|
267,907
|
|
|
|
(136,807
|
)
|
|
|
(230,930
|
)
|
Goodwill
|
|
|
—
|
|
|
|
212,445
|
|
|
|
1,779,549
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,991,994
|
|
Identifiable assets
|
|
|
294,557
|
|
|
|
415,311
|
|
|
|
2,434,884
|
|
|
|
816,107
|
|
|
|
10,333,980
|
|
|
|
12,610,303
|
|
|
|
26,905,142
|
|
|
|
Corporate
|
|
|
Internet
|
|
|
HVAC
|
|
|
Real Estate
|
|
|
Asset Management
|
|
|
Mt Melrose
|
|
|
Consolidated
|
|
Three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
335,086
|
|
|
$
|
895,392
|
|
|
$
|
866,544
|
|
|
$
|
150,807
|
|
|
$
|
—
|
|
|
$
|
2,247,829
|
|
Cost of revenue
|
|
|
—
|
|
|
|
79,809
|
|
|
|
594,571
|
|
|
|
930,720
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,605,100
|
|
Net income (loss) before income taxes
|
|
|
(66,899
|
)
|
|
|
215,562
|
|
|
|
(62,938
|
)
|
|
|
(67,798
|
)
|
|
|
150,701
|
|
|
|
—
|
|
|
|
168,628
|
|
Goodwill
|
|
|
—
|
|
|
|
212,445
|
|
|
|
1,809,053
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,021,498
|
|
Identifiable assets
|
|
|
4,469,112
|
|
|
|
699,024
|
|
|
|
2,528,451
|
|
|
|
1,387,320
|
|
|
|
5,900,964
|
|
|
|
—
|
|
|
|
14,984,871
|
|
24
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE
1
2
.
ADJUSTMENT TO OPENING BALANCE NUMBER OF SHARES AND CAN
CELLATION 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 effected. 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 balance sheets and the condensed consolidated statements of stockholders’ equity, as of the quarter ended March 31, 2018, 2,125,795 treasury shares have been cancelled.
As of May 11, 2018, the correct number of shares outstanding is 297,905,346 and the correct number of treasury shares held is 11,696,658.
NOTE 13. SUBSEQUENT EVENTS
Management has evaluated
subsequent events from March 31, 2018, through May 11, 2018, the date the unaudited condensed consolidated financial statements were issued. Management concluded that no subsequent events have occurred that would require recognition or disclosure in the unaudited condensed consolidated financial statements.
25