UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2017March 31, 2021
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
(Exact Name of Registrant as Specified in Its Charter)
Commission file number 000-27763
Nevada | 88-0397234 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
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1518 Willow Lawn Drive, Richmond, VA | 23230 | |
(Address of Principal Executive Offices) | (Zip Code) |
(434) 382-7366336-7737
(Issuer’sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | Not applicable | Not applicable |
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 pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
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Non-accelerated filer |
| ☒ | Smaller reporting company |
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Emerging growth company | ☐ |
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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. ☐
Indicate by check mark whether the registrant is a shell company (as defined byin Rule 12b-2 of the Exchange Act). ☐ Yes [X]☒ No
The number of shares outstanding of the issuer’s Common Stock, $0.001$0.125 par value, as of November 9, 2017May 12, 2021 is 282,830,163.2,647,383.
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds |
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CAUTIONARY STATEMENT REGARDINGREGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including, without limitation, Part I, Item 2, “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”“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'sCompany’s business and prospects, including changes in economic and market conditions, acceptance of the Company’s products, maintenance of strategic alliances, and other factors discussed elsewhere in this Form 10-Q, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors.
PART I. FINANCIALFINANCIAL INFORMATION
SITESTAR CORPORATION
And Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| September 30, 2017 (unaudited) |
|
| December 31, 2016 |
| March 31, 2021 (unaudited) | December 31, 2020 | ||||||||
Assets |
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|
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Current Assets |
|
|
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|
|
|
|
| ||||||||
Cash and cash equivalents |
| $ | 151,867 |
|
| $ | 2,607,370 |
| $ | 292,767 | $ | 341,007 | ||||
Accounts receivable, net |
|
| 481,123 |
|
|
| 212,751 |
| 130,155 | 144,791 | ||||||
Investments, at fair value |
|
| 133,989 |
|
|
| 599,500 |
| ||||||||
Other current assets |
|
| 135,248 |
|
|
| 2,554,861 |
| 40,227 | 44,530 | ||||||
Current assets - held for resale | — | 231 | ||||||||||||||
Total current assets |
|
| 902,227 |
|
|
| 5,974,482 |
| 463,149 | 530,559 | ||||||
Real estate - held for resale |
|
| 337,481 |
|
|
| 1,399,280 |
| ||||||||
Long-term Assets | ||||||||||||||||
Real estate - held for investment, net |
|
| 502,368 |
|
|
| 506,011 |
| 70,319 | 241,876 | ||||||
Real estate - held for resale, net | 169,181 | — | ||||||||||||||
Property and equipment, net |
|
| 371,497 |
|
|
| 143,464 |
| 12,696 | 13,707 | ||||||
Goodwill, net |
|
| 1,991,994 |
|
|
| 1,553,745 |
| 212,445 | 212,445 | ||||||
Note receivable |
|
| 226,000 |
|
|
| — |
| 169,650 | 210,879 | ||||||
Non-current investments, at fair value |
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| 12,067,983 |
|
|
| — |
| ||||||||
Long-term investments | 15,736,234 | 13,574,462 | ||||||||||||||
Other assets |
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| 69,625 |
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| 264,250 |
| 73,076 | 73,252 | ||||||
|
|
| 15,566,948 |
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| 3,866,750 |
| ||||||||
Total long-term assets | 16,443,601 | 14,326,621 | ||||||||||||||
Total assets |
| $ | 16,469,175 |
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| $ | 9,841,232 |
| $ | 16,906,750 | $ | 14,857,180 | ||||
Liabilities and Stockholders' Equity |
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Liabilities and Stockholders’ Equity | ||||||||||||||||
Current Liabilities |
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Accounts payable | $ | 60,734 | $ | 65,524 | ||||||||||||
Accrued compensation | 89,328 | 281,904 | ||||||||||||||
Accrued expenses | 48,475 | 24,159 | ||||||||||||||
Deferred revenue |
| $ | 239,748 |
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| $ | 214,898 |
| 198,848 | 192,088 | ||||||
Notes payable, current |
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| 449,363 |
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| 240,000 |
| 5,277 | 5,609 | ||||||
Accounts payable |
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| 180,692 |
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| 77,918 |
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Accrued bonus |
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| 110,000 |
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| 51,855 |
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Accrued expenses |
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| 108,294 |
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| 71,532 |
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Total current liabilities |
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| 1,088,097 |
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| 656,203 |
| 402,662 | 569,284 | ||||||
Notes payable |
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| 209,272 |
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| 25,000 |
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Long-term Liabilities | ||||||||||||||||
Notes payable, net of current portion | 242,028 | 244,485 | ||||||||||||||
Total long-term liabilities |
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| 209,272 |
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| 25,000 |
| 242,028 | 244,485 | ||||||
Total liabilities |
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| 1,297,369 |
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| 681,203 |
| 644,690 | 813,769 | ||||||
Stockholders' equity |
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Stockholders’ Equity | ||||||||||||||||
Preferred stock, $0.001 par value, 30,000,000 shares authorized; none issued |
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| — |
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| — |
| — | — | ||||||
Common stock, $0.001 par value, 300,000,000 shares authorized; 294,526,821 and 204,152,616 shares issued; 282,830,163 and 190,230,163 shares outstanding |
|
| 294,527 |
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| 204,152 |
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Additional paid-in-capital |
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| 23,538,493 |
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| 19,096,858 |
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Treasury stock, at cost, 11,696,658 and 13,822,453 common shares |
|
| (544,571 | ) |
|
| (637,561 | ) | ||||||||
Accumulated other comprehensive (loss) income |
|
| (16,928 | ) |
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| 39,343 |
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Common stock, $0.125 par value, 2,800,000 shares authorized; 2,647,383 and 2,602,240 shares issued and outstanding | 330,922 | 325,280 | ||||||||||||||
Additional paid-in capital | 27,673,692 | 27,439,334 | ||||||||||||||
Accumulated deficit |
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| (8,099,715 | ) |
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| (9,542,763 | ) | (11,742,554 | ) | (13,721,203 | ) | ||||
Total stockholders' equity attributable to Sitestar Corporation Stockholders |
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| 15,171,806 |
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| 9,160,029 |
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Noncontrolling interest in consolidated subsidiaries |
|
| — |
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| — |
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Total stockholders' equity |
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| 15,171,806 |
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| 9,160,029 |
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Total liabilities and stockholders' equity |
| $ | 16,469,175 |
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| $ | 9,841,232 |
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Total stockholders’ equity | 16,262,060 | 14,043,411 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 16,906,750 | $ | 14,857,180 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
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| For the three months ended September 30 |
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| For the nine months ended September 30 |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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Revenues - internet operations |
| $ | 314,202 |
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| $ | 355,384 |
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| $ | 977,629 |
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| $ | 1,068,283 |
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Revenues - HVAC |
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| 1,332,239 |
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| 906,910 |
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| 3,526,913 |
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| 939,932 |
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Revenues - real estate |
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| 324,044 |
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| 404,923 |
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| 1,216,190 |
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| 1,992,371 |
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Revenues - asset management |
|
| 715,598 |
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|
| — |
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|
| 1,320,808 |
|
|
| — |
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Total revenues |
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| 2,686,083 |
|
|
| 1,667,217 |
|
|
| 7,041,540 |
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| 4,000,586 |
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Cost of revenues - internet operations |
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| 81,144 |
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| 70,290 |
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| 237,098 |
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|
| 290,043 |
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Cost of revenues - HVAC |
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| 875,991 |
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|
| 619,881 |
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|
| 2,307,902 |
|
|
| 633,053 |
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Cost of revenues - real estate |
|
| 306,537 |
|
|
| 402,285 |
|
|
| 1,264,602 |
|
|
| 1,918,603 |
|
Cost of revenues - asset management |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
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Total cost of revenues |
|
| 1,263,672 |
|
|
| 1,092,456 |
|
|
| 3,809,602 |
|
|
| 2,841,699 |
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Gross profit - internet operations |
|
| 233,058 |
|
|
| 285,094 |
|
|
| 740,531 |
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|
| 778,240 |
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Gross profit - HVAC |
|
| 456,248 |
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|
| 287,029 |
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|
| 1,219,011 |
|
|
| 306,879 |
|
Gross profit (loss) - real estate |
|
| 17,507 |
|
|
| 2,638 |
|
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| (48,412 | ) |
|
| 73,768 |
|
Gross profit - asset management |
|
| 715,598 |
|
|
| — |
|
|
| 1,320,808 |
|
|
| — |
|
Total gross profit |
|
| 1,422,411 |
|
|
| 574,761 |
|
|
| 3,231,938 |
|
|
| 1,158,887 |
|
Selling, general and administrative expenses |
|
| 606,378 |
|
|
| 634,338 |
|
|
| 1,909,650 |
|
|
| 1,152,715 |
|
Total operating expenses |
|
| 606,378 |
|
|
| 634,338 |
|
|
| 1,909,650 |
|
|
| 1,152,715 |
|
Income from operations |
|
| 816,033 |
|
|
| (59,577 | ) |
|
| 1,322,288 |
|
|
| 6,172 |
|
Other (expense) income, net |
|
| (8,877 | ) |
|
| 93,779 |
|
|
| 120,760 |
|
|
| 98,350 |
|
Income before income taxes |
|
| 807,156 |
|
|
| 34,202 |
|
|
| 1,443,048 |
|
|
| 104,522 |
|
Income tax benefit (expense) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income |
|
| 807,156 |
|
|
| 34,202 |
|
|
| 1,443,048 |
|
|
| 104,522 |
|
Less: net income attributable to the noncontrolling interest |
|
| — |
|
|
| 14,102 |
|
|
| — |
|
|
| 16,955 |
|
Net income attributable to Sitestar Corporation stockholders |
| $ | 807,156 |
|
| $ | 20,100 |
|
| $ | 1,443,048 |
|
| $ | 87,567 |
|
Earnings per share, basic and diluted |
|
| 0.00 |
|
|
| 0.00 |
|
|
| 0.01 |
|
|
| 0.00 |
|
Weighted average number of shares, basic and diluted |
|
| 282,830,163 |
|
|
| 122,794,725 |
|
|
| 272,315,145 |
|
|
| 92,644,688 |
|
For the three months ended | ||||||||
March 31 | ||||||||
2021 | 2020 | |||||||
Revenues - asset management | $ | 2,193,854 | $ | (1,745,154 | ) | |||
Revenues - real estate | 9,736 | 187,149 | ||||||
Revenues - internet operations | 232,266 | 253,559 | ||||||
Total revenues | 2,435,856 | (1,304,446 | ) | |||||
Cost of revenues - real estate | 7,644 | 132,209 | ||||||
Cost of revenues - internet operations | 71,963 | 87,188 | ||||||
Total cost of revenues | 79,607 | 219,397 | ||||||
Gross profit (loss) - asset management | 2,193,854 | (1,745,154 | ) | |||||
Gross profit - real estate | 2,092 | 54,940 | ||||||
Gross profit - internet operations | 160,303 | 166,371 | ||||||
Total gross profit (loss) | 2,356,249 | (1,523,843 | ) | |||||
Selling, general, and administrative expenses | ||||||||
Insurance | 6,603 | 24,133 | ||||||
Professional fees | 143,505 | 210,134 | ||||||
Salaries and wages | 182,954 | 161,349 | ||||||
Travel and meals | 351 | 3,135 | ||||||
Other operating expenses | 44,577 | 64,407 | ||||||
Total selling, general and administrative expenses | 377,990 | 463,158 | ||||||
Income (loss) from operations | 1,978,259 | (1,987,001 | ) | |||||
Interest expense | (4,795 | ) | (7,082 | ) | ||||
Other income, net | 4,542 | 12,159 | ||||||
Total other income (loss) | (253 | ) | 5,077 | |||||
Income (loss) from continuing operations before income taxes | 1,978,006 | (1,981,924 | ) | |||||
Income tax benefit (expense) | — | — | ||||||
Income (loss) from continuing operations | 1,978,006 | (1,981,924 | ) | |||||
Income from discontinued operations, net of taxes | 643 | 10,756 | ||||||
Net income (loss) | $ | 1,978,649 | $ | (1,971,168 | ) | |||
Net income (loss) per share, basic and diluted | 0.75 | (0.76 | ) | |||||
Net income (loss) per share from continuing operations, basic and diluted | 0.75 | (0.77 | ) | |||||
Net income (loss) per share from discontinued operations, basic and diluted | 0.00 | 0.00 | ||||||
Weighted average number of shares, basic | 2,630,831 | 2,585,081 | ||||||
Weighted average number of shares, diluted | 2,631,499 | 2,585,529 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECHANGES IN STOCKHOLDERS’ EQUITY
|
| For the three months ended September 30 |
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| For the nine months ended September 30 |
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|
| 2017 |
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| 2016 |
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| 2017 |
|
| 2016 |
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Net income |
| $ | 807,156 |
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| $ | 34,202 |
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| $ | 1,443,048 |
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| $ | 104,522 |
|
Other comprehensive income (loss), net of tax: |
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|
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|
|
|
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|
|
|
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|
|
|
|
Change in foreign currency translation adjustments |
|
| — |
|
|
| (12 | ) |
|
| — |
|
|
| (103 | ) |
Change in unrealized gains related to available-for-sale securities: |
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Change in fair value of available-for-sale securities |
|
| 10,068 |
|
|
| (21,694 | ) |
|
| 20,664 |
|
|
| 28,657 |
|
Adjustment for net (gains)/losses realized and included in net income |
|
| — |
|
|
| — |
|
|
| (76,935 | ) |
|
| — |
|
Total change in unrealized gains/losses on available-for-sale securities |
|
| 10,068 |
|
|
| (21,694 | ) |
|
| (56,271 | ) |
|
| 28,657 |
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Other comprehensive income (loss) |
|
| 10,068 |
|
|
| (21,706 | ) |
|
| (56,271 | ) |
|
| 28,554 |
|
Comprehensive income |
|
| 817,224 |
|
|
| 12,496 |
|
|
| 1,386,777 |
|
|
| 133,076 |
|
Less: comprehensive income attributable to the non controlling interest |
|
| — |
|
|
| 14,102 |
|
|
| — |
|
|
| 16,955 |
|
Comprehensive income (loss) attributable to Sitestar Corporation stockholders |
| $ | 817,224 |
|
| $ | (1,606 | ) |
| $ | 1,386,777 |
|
| $ | 116,121 |
|
Common Stock | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||
Balance December 31, 2020 | 2,602,240 | $ | 325,280 | $ | 27,439,334 | $ | (13,721,203 | ) | $ | 14,043,411 | ||||||||||
Net income (loss) | — | — | — | 1,978,649 | 1,978,649 | |||||||||||||||
Stock issuance | 45,143 | 5,642 | 234,358 | — | 240,000 | |||||||||||||||
Balance March 31, 2021 | 2,647,383 | $ | 330,922 | $ | 27,673,692 | $ | (11,742,554 | ) | $ | 16,262,060 |
Common Stock | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||
Balance December 31, 2019 | 2,566,646 | $ | 320,831 | $ | 27,313,734 | $ | (17,000,607 | ) | $ | 10,633,958 | ||||||||||
Net income (loss) | — | — | — | (1,971,168 | ) | (1,971,168 | ) | |||||||||||||
Stock issuance | 35,594 | 4,449 | 125,600 | — | 130,049 | |||||||||||||||
Balance March 31, 2020 | 2,602,240 | $ | 325,280 | $ | 27,439,334 | $ | (18,971,775 | ) | $ | 8,792,839 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYCASH FLOWS
Three Months Ended March 31, 2021 and 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| Total |
| ||
|
| Common |
|
|
|
|
|
| Additional |
|
| Treasury |
|
| Other Comprehensive |
|
| Accumulated |
|
| Noncontrolling |
|
| Stockholders' |
| |||||||
|
| Stock |
|
| Amount |
|
| Paid In Capital |
|
| Stock |
|
| Income |
|
| Deficit |
|
| Interest |
|
| Equity |
| ||||||||
Balance December 31, 2015 |
|
| 77,404,010 |
|
| $ | 91,327 |
|
| $ | 13,728,989 |
|
| $ | (637,561 | ) |
| $ | 3,415 |
|
| $ | (9,435,125 | ) |
| $ | — |
|
| $ | 3,751,045 |
|
Opening balance adjustment |
|
| 100,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance December 31, 2015 (restated) |
|
| 77,504,010 |
|
|
| 91,327 |
|
|
| 13,728,989 |
|
|
| (637,561 | ) |
|
| 3,415 |
|
|
| (9,435,125 | ) |
|
| — |
|
|
| 3,751,045 |
|
Net (loss) income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (107,638 | ) |
|
| — |
|
|
| (107,638 | ) |
Contributed capital |
|
| 112,826,153 |
|
|
| 112,825 |
|
|
| 5,367,869 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,480,694 |
|
Loss on foreign exchange translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (361 | ) |
|
| — |
|
|
| — |
|
|
| (361 | ) |
Unrealized gain on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 36,289 |
|
|
| — |
|
|
| — |
|
|
| 36,289 |
|
Balance December 31, 2016 |
|
| 190,330,163 |
|
|
| 204,152 |
|
|
| 19,096,858 |
|
|
| (637,561 | ) |
|
| 39,343 |
|
|
| (9,542,763 | ) |
|
| — |
|
|
| 9,160,029 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,443,048 |
|
|
| — |
|
|
| 1,443,048 |
|
Contributed capital |
|
| 92,500,000 |
|
|
| 92,500 |
|
|
| 4,532,500 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,625,000 |
|
Unrealized (loss) gain on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (56,271 | ) |
|
| — |
|
|
| — |
|
|
| (56,271 | ) |
Adjustment for share cancellation |
|
| — |
|
|
| (2,125 | ) |
|
| (90,865 | ) |
|
| 92,990 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance September 30, 2017 |
|
| 282,830,163 |
|
| $ | 294,527 |
|
| $ | 23,538,493 |
|
| $ | (544,571 | ) |
| $ | (16,928 | ) |
| $ | (8,099,715 | ) |
| $ | — |
|
| $ | 15,171,806 |
|
2021 | 2020 | |||||||
Cash flows from (used in) from operating activities: | ||||||||
Net income (loss) from continuing operations | $ | 1,978,006 | $ | (1,981,924 | ) | |||
Adjustments to reconcile net income to net cash flows from (used in) operating activities: | ||||||||
Unrealized (gains) losses on long-term investments | (2,053,384 | ) | 1,784,406 | |||||
Gain on sale of real estate | — | (73,165 | ) | |||||
Depreciation and amortization | 3,563 | 5,278 | ||||||
Bad debt expense | 89 | 405 | ||||||
Accrued stock compensation expense | 37,500 | 37,500 | ||||||
Accrued interest income on notes receivable | (4,650 | ) | (3,918 | ) | ||||
(Increase) decrease in: | ||||||||
Accounts receivable, net | 14,547 | 17,186 | ||||||
Other current assets | 4,772 | 13,455 | ||||||
Increase (decrease) in: | ||||||||
Accounts payable | (4,790 | ) | 30,798 | |||||
Accrued expenses | 34,240 | 17,970 | ||||||
Deferred revenue | 6,760 | (3,530 | ) | |||||
Net cash flows from (used in) continuing operations | 16,653 | (155,539 | ) | |||||
Net cash flows from discontinued operations | 874 | 11,018 | ||||||
Net cash flows from (used in) operating activities | 17,527 | (144,521 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchases of investments | (62,978 | ) | (12,472 | ) | ||||
Proceeds from sale of real estate | — | 172,000 | ||||||
Net cash flows from continuing operations | (62,978 | ) | 159,528 | |||||
Net cash flows from discontinued operations | — | — | ||||||
Net cash flows from investing activities | (62,978 | ) | 159,528 | |||||
Cash flows from financing activities: | ||||||||
Principal payments on note payable | (2,789 | ) | (128,349 | ) | ||||
Net cash flows (used in) from continuing operations | (2,789 | ) | (128,349 | ) | ||||
Net cash flows (used in) from discontinued operations | — | — | ||||||
Net cash flows (used in) financing activities | (2,789 | ) | (128,349 | ) | ||||
Net increase (decrease) in cash | (48,240 | ) | (113,342 | ) | ||||
Cash and cash equivalents at beginning of the period | 341,007 | 666,810 | ||||||
Cash and cash equivalents at end of the period | $ | 292,767 | $ | 553,468 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NineThree Months Ended September 30, 2017March 31, 2021 and 20162020
|
| 2017 |
|
| 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 1,443,048 |
|
| $ | 104,522 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization |
|
| — |
|
|
| 55 |
|
Depreciation |
|
| 82,309 |
|
|
| 23,236 |
|
Loss (gain) on sale of real estate |
|
| 42,938 |
|
|
| (213,454 | ) |
Gain on sale of available-for-sale securities |
|
| (76,935 | ) |
|
| — |
|
Gain on non-current investments |
|
| (1,317,983 | ) |
|
| — |
|
Loss on disposal of vehicle |
|
| 8,110 |
|
|
| — |
|
Bad debt expense |
|
| 15,281 |
|
|
| 4,383 |
|
Real estate valuation adjustment |
|
| 58,742 |
|
|
| — |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| (283,653 | ) |
|
| (247,828 | ) |
Other current assets |
|
| (80,387 | ) |
|
| (21,888 | ) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Deferred revenue |
|
| 24,850 |
|
|
| (5,088 | ) |
Accounts payable |
|
| 102,774 |
|
|
| 47,037 |
|
Accrued expenses |
|
| 94,907 |
|
|
| 94,313 |
|
Net cash flows from operating activities |
|
| 114,001 |
|
|
| (214,712 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of real estate held for sale |
|
| 683,832 |
|
|
| 1,568,699 |
|
Proceeds from sale of real estate held for investment |
|
| 137,475 |
|
|
| 344,850 |
|
Improvements to real estate held for sale |
|
| (100,596 | ) |
|
| (180,708 | ) |
Improvements to real estate held for investment |
|
| — |
|
|
| (17,542 | ) |
Proceeds from sale of marketable securities |
|
| 486,175 |
|
|
| — |
|
Purchases of marketable securities |
|
| — |
|
|
| (2,486,403 | ) |
Proceeds from sale of domain names |
|
| 200,000 |
|
|
| — |
|
Purchase of domain names |
|
| — |
|
|
| (56,250 | ) |
Purchase of property and equipment |
|
| (34,392 | ) |
|
| — |
|
Capitalized loan fees |
|
| (5,375 | ) |
|
| — |
|
Subsidiary acquisitions |
|
| (8,711,772 | ) |
|
| (1,238,436 | ) |
Net cash flows from investing activities |
|
| (7,344,653 | ) |
|
| (2,065,790 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Principal payments on note payable |
|
| (277,088 | ) |
|
| (90,000 | ) |
Proceeds from notes payable |
|
| 427,237 |
|
|
| — |
|
Proceeds from issuance of common stock |
|
| 4,625,000 |
|
|
| 3,854,719 |
|
Net cash flows from financing activities |
|
| 4,775,149 |
|
|
| 3,764,719 |
|
Net increase (decrease) in cash |
|
| (2,455,503 | ) |
|
| 1,484,217 |
|
Cash and cash equivalents at beginning of the period |
|
| 2,607,370 |
|
|
| 184,731 |
|
Cash and cash equivalents at end of the period |
| $ | 151,867 |
|
| $ | 1,668,948 |
|
2021 | 2020 | |||||||
Non-cash and other supplemental information: | ||||||||
Transfer of real estate held for investment to held for resale | $ | 169,181 | $ | 43,917 | ||||
Issuance of common stock per equity compensation plan | $ | 240,000 | $ | 130,049 | ||||
Accrued interest receivable converted to Triad Guaranty, Inc. stock | $ | 45,410 | $ | — | ||||
Continuing operations cash paid for interest | $ | 4,795 | $ | 7,082 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SITESTAR CORPORATIONENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended September 30, 2017 and 2016
|
| 2017 |
|
| 2016 |
| ||
Non-cash supplemental information: |
|
|
|
|
|
|
|
|
Unrealized loss (gain) on marketable securities reported as other comprehensive income |
| $ | 56,271 |
|
| $ | 28,657 |
|
Issuance of note receivable on sale of real estate held for sale |
| $ | 226,000 |
|
| $ | — |
|
Transfer of real estate held for resale to real estate held for investment |
| $ | 125,000 |
|
| $ | — |
|
Transfer of real estate held for investment to real estate held for resale |
| $ | — |
|
| $ | 152,003 |
|
Transfer of other current assets to investments |
| $ | 2,500,000 |
|
| $ | — |
|
Adjustments to goodwill due to carryback obligations |
| $ | 29,504 |
|
| $ | — |
|
HVAC equipment acquired through capital leases and debt obligations |
| $ | 172,990 |
|
| $ | — |
|
HVAC acquisitions through notes payable |
| $ | 100,000 |
|
| $ | 240,000 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Lines of Business
Sitestar Corporation
Enterprise Diversified, Inc. (formerly White Dove Systems, Inc., and then Interfoods Consolidated, Inc.), and then Sitestar Corporation) was incorporated in Nevada on December 17, 1992. On July 26, 1999,June 1, 2018, the Company restatedamended its Articles of Incorporation to change the name of the Company to “Sitestar Corporation.“Enterprise Diversified, Inc.” Unless the context otherwise requires, and when used in this Report, the “Company,” “Sitestar,“ENDI,” “we,” “our”“our,” or “us” refers to Sitestar CorporationEnterprise Diversified, Inc. and its subsidiaries.
The
During the three-month period ended March 31, 2021, the Company operatesoperated through fivefour reportable segments: Corporate, Internet Operations, HVACAsset Management Operations, Real Estate Operations, Internet Operations, and Asset ManagementOther Operations. Other Operations include corporate operations and nonrecurring or one-time strategic funding or similar activity that is not considered to be one of our primary lines of business. During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, for the three-month period ended March 31, 2021, and for all prior periods presented, Home Services Operations are reported as discontinued operations. The management of the Company also continually reviews various investmentbusiness opportunities for the Company, including those in other lines of business.
Corporate
The Company operates its asset management operations business through its wholly owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”) and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”).
In 2016, the Company made a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017, by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As a special limited partner, Willow Oak earns a share of management and performance fees earned. As of March 31, 2021, Willow Oak continues to hold its direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations.
In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement in June 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership launched by Willow Oak and managed by Coolidge. Under their agreement concerning Bonhoeffer Fund, LP, Willow Oak paid all start-up expenses and pays agreed-upon operating expenses that are not partnership expenses, Coolidge is responsible for all investment management, and Willow Oak receives 50% of all performance and management fees earned. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.
On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our Board chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak’s Fund Management Services (“FMS”) consisting of the following services: strategic planning, investor relations, marketing, operations, compliance and legal coordination, accounting and bookkeeping, annual audit coordination, and liaison to third-party service providers. On November 1, 2020, this agreement was renewed with revised terms that include an exchange of services between Willow Oak and Arquitos. Willow Oak earns monthly and annual fees as consideration for these services.
On October 1, 2019, Willow Oak partnered with Geoff Gannon and Andrew Kuhn to form Focused Compounding Capital Management, LLC (“Focused Compounding”). This joint venture, of which Willow Oak Capital Management is a 10% beneficial owner, manages capital through separately managed accounts and a private investment fund launched January 1, 2020. Willow Oak provides ongoing FMS and operational support in addition to having covered all one-time expenses associated with the launch of Focused Compounding Fund, LP. As consideration for the arrangement, Willow Oak Capital Management is entitled to 10% of gross management and performance fees earned by Focused Compounding. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.
On September 29, 2020, Willow Oak, through Willow Oak AMS, executed a strategic relationship agreement with SVN Capital, LLC to become a 20% beneficial owner of the firm in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak FMS. As a beneficial owner of SVN Capital, LLC, Willow Oak is entitled to 20% of gross management and performance fees earned by the firm. Additionally, Willow Oak FMS earns a direct fee from SVN Capital Fund, LP, a private investment fund launched by the firm’s managing member, for the administrative, compliance, and tax and audit liaison services it renders.
Real Estate Operations
As has been previously reported, in December 2017, ENDI created a wholly owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), to acquire 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 in December 2017 with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, then an ENDI director. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to an unaffiliated third-party purchaser, Woodmont Lexington, LLC (“Woodmont”). As consideration for the transaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of New Mt Melrose and its real estate portfolio. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. See Note 4 for more information.
As has been previously reported, in July 2017, ENDI created a wholly owned real estate subsidiary named EDI Real Estate, LLC to hold ENDI’s legacy portfolio of real estate. As of March 31, 2021, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes four residential properties and vacant land. Subsequent to March 31, 2021, one residential property has been sold. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia. The portfolio includes single-family homes, both rented and vacant, that are managed by a third-party property management company.
Internet Operations
The Company operates its internet operations segment through Sitestar.net, a wholly owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
Other Operations
Other operations include nonrecurring or one-time strategic funding or similar activity and other corporate segment includesoperations that are not considered to be one of the Company’s primary lines of business. Below are the main recent activities comprising other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying consolidated financial statements.
Financing Arrangement Regarding Triad Guaranty, Inc.
In August 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy in April 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. On December 31, 2020, the Company accepted a revision of terms to the original promissory note which include, among other things, an extension of the loan maturity date to December 31, 2022, an increase of interest to the amount of 12% annually, and a provision to settle all currently accrued interest through the issuance of Triad Guaranty, Inc. common shares. In line with the revision of note terms, during the three-month period ended March 31, 2021, the Company was issued 454,097 shares of Triad Guaranty, Inc. in lieu of interest accrued on the note receivable as of December 31, 2020.
Corporate Operations
Corporate operations include 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
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operates its internetoperated a home services operations segment through Sitestar.net, a wholly-ownedits former 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 throughSpecialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC. HVAC Value Fund isLLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the acquisition and management of HVAC and plumbing companies in Arizona and throughout the Southwest United States. Arizona.
As has been previously reported, in our Current Report on Form 8-K filed with the SEC on June 14, 2016,May 24, 2019, 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 hascompleted 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 September 30, 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. Through EDI Real Estate, LLC, Sitestar owns a real estate investment portfolio that includes 10 residential properties, vacant land, and one commercial property. Our real estate portfolio is primarily focused in the Roanoke and Lynchburg areas of Virginia. The portfolio includes single family homes that are currently rented and managed through a third-party property manager, as well as vacant properties being prepared or currently listed for sale.
10
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Sitestar created a wholly-owned asset management subsidiary on October 10, 2016 named Willow Oak Asset Management, LLC (“Willow Oak”). 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, an unrelated private investment partnership that was launched on January 1, 2017. Under the operating agreement included in the Form 8-K, the Company may not make any withdrawal from its Capital Account until its Capital Account balance exceeds $50,000,000 and any partial withdrawal may not reduce the Capital Account balance below $50,000,000. Additionally, a full withdrawal shall not be permitted prior to a date five years after the effective datedivestiture of the accompanying Side Letter. As previously reported in our Current Reports on Form 8-K filed with the SEC on January 26, 2017, the Company also committedhome services operations to make a capital contribution to Huckleberry Real Estate Fund II, LLC in the aggregate amount of $750,000. Under the operating agreement included in the Form 8-K, the Managing Member shall have sole discretion regarding the amounts and timing of Distributions to Members. 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.Rooter Hero. See Note 3 for more information.
Willow Oak signed a fee share agreement on May 11, 2017 with Lizard Head, LLC, the general partner of Bridge Reid Fund I, LP, an unrelated private investment partnership. 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.
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.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and its wholly-owned subsidiariesthose entities in which it otherwise has a controlling financial interest, including: Sitestar.net, Inc., HVAC Value Fund, LLC, EDI Real Estate, LLC, and Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC, Willow Oak Asset Management Fund Management Services, LLC, Bonhoeffer Capital Management, LLC, Sitestar.net, Inc., and EDI Real Estate, LLC.
All intercompany accounts and transactions have been eliminated. eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim consolidated financial statements are unaudited. These unaudited condensedinterim consolidated financial statements have been prepared by Sitestar Corporation, pursuant toin accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC).(“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The information furnishedDecember 31, 2020, consolidated balance sheet included herein reflects all adjustments (consistingwas derived from audited consolidated financial statements as of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods.that date. Certain information and footnote disclosuresdisclosure normally presentincluded in annual consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP)GAAP have been omitted pursuant to suchinstructions, rules, and regulations. Theseregulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements should beare read in conjunction with the audited consolidated financial statements and notes previously filed in our Annual Report on Form 10-K for the year ended December 31, 2016 included in2020. In the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s Annual Report on Form 10-K filed withfinancial position as of March 31, 2021, and the SEC on March 24, 2017 (the “2016 Form 10-K”). The results of operations for the ninethree months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending DecemberMarch 31, 2017.2021, and 2020.
Use of Estimates
In accordance with Accounting Principles Generally Accepted in the United State of America (GAAP),GAAP, the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments, including, among other items, those related to fair value of investments, revenue recognition, accrued expenses, financing operations, fair value of goodwill, fixed asset lives and impairment, lease right-of-use assets and impairment, deferred tax assets, liabilities and valuation allowance, other assets, the present value of lease liabilities, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements.
11
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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, cash equivalents, accounts receivable, and accountsnotes receivable. The Company places its cash with high qualityhigh-quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid instruments purchased with a maturity of three months or less.
Investments
The Company currently holds and makes investments in marketable securities through its corporate operations. Marketable securities held are classified as available-for-sale based on management’s intent. Unrealized gains (losses) are categorized as other comprehensive income. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as earned on the ex-dividend date. The Company holds additional non-currentvarious investments through its asset management operations. Non-currentoperations and real estate operations segments. Additionally, investments may be held and reported under the Company’s “other” segment. Assets held through these segments do not qualifyhave a readily determinable value as available-for-sale securities. The classification of these investments is assessed upon purchase and reassessed at each reporting period. Non-currentare either not publicly traded, do not have published sales records, or do not routinely make current financial information available. These investments are remeasured to fair value on a recurring basis. See Note 5 for more information.
As of March 31, 2021, and December 31, 2020, the Company also holds its remaining equity investment in Mt Melrose, LLC through its real estate operations segment. The Company has determined that its remaining equity investment does not have a readily determinable fair value, and the Company will account for the investment at cost, less any impairment, as adjusted for changes resulting from observable price changes. When fair value becomes determinable, the investment will be marked to market at the end of each reporting period and revenue is recognized in the condensed consolidated statement of income in the period of adjustment.fair value on a periodic basis.
Accounts Receivable
The Company’s asset management operations segment records receivable amounts for fee shares and fund management services revenue earned on a monthly basis. Performance fee shares crystalize and are collected on an annual basis while management fee shares crystalize and are collected on either a monthly or quarterly basis as dictated by the respective partnership agreement. Fund management services receivables are collected monthly in line with ongoing performance. The Company historically has had no collection issues with fee share and fund management receivables, and the overall possibility for non-collection is extremely low. For these reasons, management has determined that it is not necessary to record an allowance against these receivables.
The Company also grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is charged off tothe recorded allowance for doubtful accounts and bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are chargedwritten off tofrom the allowance for doubtful accounts when an account or invoice is individually determined to be uncollectible.
Sales
Real estate operations segment rental accounts are typically paid by tenants via cash or check no later than the fifth of internet services, whichthe month. Any accounts collected after the fifth are charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If payments are not automatically processed via credit cardprovided in a timely manner, then the amount due is designated as an account receivable. If accounts remain uncollected, then standard operating procedures are followed to commence a notice process for the tenant to either pay the amount due or bank account drafts, have beenvacate the Company’s highest exposure to collection risk. property. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. These procedures typically result in low amounts of past due receivables.
The Companyinternet operations segment attempts to reduce thisthe risk of non-collection by including a late paymentlate-payment fee and a manual processing paymentmanual-processing-payment fee to customer accounts. Receivables more than ninety90 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
As 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 existingMarch 31, 2021, and repeat customers who have established a track record of timely payments. Historically, HVAC has not encountered issues with collectability of customer accounts. AccountsDecember 31, 2020, allowances offsetting gross accounts receivable more than 60 days are considered past due.on the accompanying condensed consolidated balance sheets totaled $509 and $421, respectively. For the quarterly periods ended March 31, 2021, and 2020, bad debt expense from continuing operations was $89 and $405, respectively.
Note
Notes Receivable
The Company currently holdsdoes not routinely issue notes receivable in the ordinary course of business, but when a business opportunity arises, a subsidiary may issue a note receivable from the sale of a real estate property to a third-party. This note is long term in nature and no collection issues are expected.
Impairment of Long-Lived Assets
In accordance with GAAP, long-lived assetsif it appears to be heldfavorable to the Company. Notes receivable are recorded at their principal amount and usedinterest is accrued quarterly based on the applicable interest rate. The Company makes an assessment of the ultimate collectability of each note receivable on an annual basis based upon the financial condition of the borrower.
Property and Equipment
Property and equipment are analyzedrecorded at cost. Expenditures for impairment whenever events or changesmaintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Gains and losses on disposals are included in circumstances indicate that the related carrying amounts may not be recoverable.results of operations. Depreciation is computed using the straight-line method based on the estimated useful lives for each of the following asset classifications:
Furniture and fixtures (in years) | 5 | |||
Equipment (in years) | 7 | |||
Building improvements (in years) | 15 | |||
Buildings (in years) | 27.5 |
The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated 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 assetsProperty and equipment to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell.
12
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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, fifteen years for building improvements, and thirty-nine 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 quarteras of its fiscal yearDecember 31, or whenmore often if events and circumstances indicate that those assets might not be recoverable.
Impairment testing of goodwill is required at the reporting unitreporting-unit level (operating segment or one level below operating segment) and. The impairment test involves a two-step process.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 two-step 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 first step of the impairment test involves comparing the estimated fair values of the Company’s reporting units with the reporting units’ carrying amounts, including goodwill. The Company estimates the fair value of its reporting units using discounted expected future cash flows. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The Company performs an analysis of its goodwill as of December 31 annually, or whenever events or changes in circumstances indicate that the assigned values may no longer be appropriate.
No impairment wasadjustments were recorded in 2016. Duringduring the quarterthree-month periods ended September 30, 2017, a net downward adjustment of $14,504 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.March 31, 2021, and 2020.
Other intangible
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 September 30, 2017, these intangible assets have been fully amortized. The remaining intangible assets(other than goodwill) consist of domain names attributed to the internet operations segment. The Company owns 228 domain names, of which 106 are available for sale. These domains are valued at historical cost. When management determines that 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 analysisinternal and an independent third-party valuation specialist’s appraisal.external appraisals. Intangible assets determined to have definite lives are amortized over their estimated useful lives.
The Company owns 634 domain names,evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of which 107impairment, then the Company uses estimated future undiscounted cash flows of the related intangible asset or asset grouping over the remaining life in measuring whether the assets are available for sale. These domainsrecoverable. In the event such cash flows are valued at historical cost.not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.
No impairment adjustments were recorded during the three-month periods ended March 31, 2021, and 2020.
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, then 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.located. Fair value is evaluated annually by management or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable.
No impairment adjustments were recorded during the three-month periods ended March 31, 2021, and 2020.
Real estate properties held for investment are carried at the cost basis plus additional expensescosts where the expensecost extended the life of or added value to the property. Otherwise, the expensecost is not capitalized and is charged to expense.expensed as incurred. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management.
Accrued Bonus
During the three-month periods ended March 31, 2021, and 2020, $169,181 and $43,917, respectively, of real estate held for investment was transferred to real estate held for resale. No improvements were made to existing real estate held for investment during the three-month periods ended March 31, 2021, and 2020.
Accrued bonuses represent performance basedCompensation
Accrued compensation represents performance-based incentives that have not yet been paid. Additional compensation can be paid in the form of cash or via the issuance of Company stock. Compensation structures for employees are a pre-approved part of a formal employment agreement or arrangement. Stock-based compensation, issued as part of the Company’s 2020 Equity Incentive Plan, is reserved for board members and members of senior management. The compensation accrual amount is based on the final value of Company stock that has been approved to be issued by the Governance, Compensation, and Nomination Committee of the Board of Directors. These bonuscompensation amounts are accrued when earned and able to be estimated and are paid or issued annually after financial records are finalized.
13
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Other accrued expenses represent incurred but not yet paidnot-yet-paid expenses from Sales and Use taxes for ISP services, vacationpayroll accruals, professional fees, and other payroll accruals.accrued taxes.
Deferred Revenue
DeferredLeases
The Company records right-of-use (ROU) assets and lease liabilities arising from both financing and operating leases that contain terms extending longer than one year. The Company does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12 months or less). In making our determinations, the Company combines lease and non-lease elements of our leases.
Revenue Recognition
Asset Management Operations and Other Investment Revenue
The Company earns revenue represents collections from customersinvestments and through various fee share and consulting agreements, including realized and unrealized gains and losses, which may result in advancenegative period or quarterly revenues. Management fees earned are recorded monthly and are included in revenue on the accompanying unaudited condensed consolidated statements of internet servicesoperations. Performance fees earned are accrued monthly, paid out annually, and are also included in revenue on the accompanying unaudited condensed consolidated statements of operations. Consulting fees are billed, paid, and recorded on a monthly basis. Long-term investments are marked to be performed. Revenue ismarket at the end of each reporting period. Realized and unrealized gains and losses are recognized as revenue in the period serviceof adjustment.
Management notes that the structure of these arrangements leaves a very low possibility for nonperformance. While the amount of revenue varies from month to month, collectability is provided.very high. No contract assets or liabilities are recognized or incurred.
Additionally, the Company earns revenue from direct participation in various private investment funds, primarily the Alluvial Fund. This results in the realized and unrealized gains and losses within a fund such as the Alluvial Fund being recognized as revenue, or a decrease in revenue, on the accompanying unaudited condensed consolidated statements of operations.
A summary of revenue earned through the asset management operations segment for the three-month periods ended March 31, 2021, and 2020 is included below:
For the three months ended | ||||||||
Asset Management Operations Revenue | March 31, 2021 | March 31, 2020 | ||||||
Gains (losses) on investment activity | $ | 2,054,471 | $ | (1,784,406 | ) | |||
Management and performance fee revenue | 118,843 | 15,252 | ||||||
Fund management services revenue | 20,540 | 24,000 | ||||||
Total revenue | $ | 2,193,854 | $ | (1,745,154 | ) |
Real Estate Revenue
The Company earns real estate revenue through rental agreements on real estate held for investment, as well as through the sale of real estate held for resale.
Rental revenue from real estate held for investment is recognized when it is earned, generally on the last day of each month or at another regular period agreed upon by the Company and the tenant. Tenants generally provide a security deposit at the time of possession. This deposit is held separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. Management has concluded that the nature of the performance obligation is cyclical and predictable with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.
Revenue Recognitionfrom real estate held for resale is recognized upon closing of the sale (transfer of control), as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time.
Internet OperationsRevenue
The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for nonperformance. Contract liabilities (deferred revenue) were recognized in the amount of collections received in advance of services to be performed. No contract assets were recognized or incurred.
The Company generates revenue in its internet operations segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, third-party software as a reseller, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), web hosting, and additional related services to consumers and businesses. Customers may also subscribe to web hosting plans to include email access and storage. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.
HVAC Operations
The Company performs HVAC and plumbing service repairs and installs HVAC units for its customers.Deferred Revenue
Deferred revenue represents collections from customers in advance of services to be performed. Revenue is recognized at the time 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. If payment is not provided in advance or at the time of service or installation, the amount due is designated as an account receivable.
Real Estate Operations
Revenue from real estate held for resale is recognized upon closing of the sale, as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time.
Rental revenue from real estate held for investment is recognized when it is due, generally on the first of each month or at another regular period agreed upon between the Company and the tenant. If payments are not provided in a timely manner, the amount due is designated as an account receivable. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. Tenants generally provide a security deposit at the time of possession. This deposit is held separate from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company.
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 quality 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 service is provided. Total deferred revenue from continuing operations increased from $192,088 at December 31, 2020, to $198,848 at March 31, 2021. During the three-month periods ended March 31, 2021, and 2020, $119,312 and $127,957, respectively, of adjustment.
14
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)revenue from continuing operations was recognized from prior-year contract liabilities (deferred revenue).
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 benefits or consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basesbasis 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.enactment, inclusive of the recent tax reform act. The most recent three tax years, fiscal years endingended December 31, 2016,2020, December 31, 2015,2019, and December 31, 2014,2018, are open to potential IRS examination.
Income (Loss) Per Share
The basic
Basic income (loss) per common share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.
In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potentially dilutive common shares is anti-dilutive. In periods of net income, diluted earnings per share is computed using the more dilutive of the “two-class method” or the “treasury method.” Dilutive earnings per share under the “two-class method” is calculated by dividing net income available to common stockholders as adjusted for the participating securities, by the weighted-average number of shares outstanding plus the dilutive impact of all other potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives. Dilutive earnings per share under the “treasury method” are calculated by dividing net income available to common stockholders by the weighted averageweighted-average number of shares outstanding plus the dilutive impact of all potentially dilutive common shares, consisting primarily of common shares outstanding. Diluted income perunderlying common share is computed similar to basic income per common share except that the denominator is increased to include thestock equity incentives.
The number of additionalpotentially dilutive shares for the three-month periods ended March 31, 2021. and 2020, consisting of common shares that would have been outstanding ifunderlying common stock equity incentives, was 668. None of the potential common shares had been issued and if the additional common shares were dilutive. The Company has no potentially dilutive securities. securities had a dilutive impact during the three-month periods ended March 31, 2021, and 2020 after rounding was applied.
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.
Recently Issued Accounting Pronouncements
In FebruaryJune 2016, the FASB issued ASU 2016-02, “Leases”No. 2016-13, “Financial Instruments - Credit Losses” (Topic 842)326). The guidance in ASU 2016-02 supersedeseliminates the leaseprobable initial recognition requirements in ASC Topic 842, Leases. ASU 2016-02 requiresthreshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate should now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. In April 2019, the FASB further clarified the scope of the credit losses standard and addressed issues related to recognizeaccrued interest receivable balances, recoveries, variable interest rates, and prepayments. In May 2019, the FASB issued further guidance to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible financial instruments. In November 2019, the FASB issued further guidance on expected recoveries for purchased financial assets with credit deterioration, and liabilities arising from a leasetransition refiled for both financingtroubled debt restructurings, disclosures related to accrued interest receivables, and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02financial assets secured by collateral maintenance provisions. The guidance 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, and2022, including 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.fiscal years. Early adoption is not permitted. The Company is required to adopt this standard in the first quarter of 2018.
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 liabilitypermitted 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 Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial condition, results of operations, and cash flows.
15
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
In January 2017, the FASB issued ASU No. 2017-04 “Simplifying the Test for Goodwill Impairment”. 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, 20192018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and earlythe adoption is permitted.of the remaining amendments must be applied on a prospective basis. The Company currently expects that the adoption of this guidance may change the way we assess the collectability of our receivables and recoverability of other financial instruments. The Company will adopt this new guidance for its 2017 goodwill impairment analysis.as of January 1, 2023. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying consolidated financial statements.
NOTE 3. BUSINESS CONBINATIONS OR ACQUISITIONSHOME SERVICES SUBSIDIARY ASSET SALE
As
On May 24, 2019, as has been previously reported, the Company completed a divestiture of June 17, 2016 and June 30, 2016,its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, completedLLC), to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the 100% acquisitiontransaction, all of two HVAC subsidiaries.Specialty Contracting Group’s personal property and customer lists and records were conveyed to Rooter Hero, excluding stock inventory and other current assets. 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 resultpart of the acquisitions, HVAC Value Fund offers heating, ventilation, plumbing,transaction, Rooter Hero assumed Specialty Contracting Group’s obligations under lease and/or loan agreements for all outstanding vehicles and air conditioning servicesequipment, as well as the obligations to customersservice all of the subsidiary’s then-remaining customer accounts going forward. No cash consideration was exchanged in Arizonathe transaction. Rather, as consideration for the transaction, Rooter Hero agreed to pay monthly royalties for the sixty (60) months following the closing calculated on the basis of any revenue actually received from the customer accounts transferred (7.5% of any monthly revenue generated from qualified sales during the first year, and 5% of any such monthly revenue during years two through five; in each case subject to reduction for pre-approved warranty-related costs concerning select customers).
The operations of Specialty Contracting Group, LLC had been considered a component of, and the surrounding southwestern states. 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 madedivestiture reflected a strategic shift in, the ordinary courseCompany’s business. As such, Specialty Contracting Group, LLC’s historical operations have been classified as discontinued operations in the Company’s financial statements. The loss from discontinued operations has been determined using a loss recovery approach, as the collection of businessfuture royalties is uncertain and consistent witha reasonable estimate could not be made. This approach requires that the customscontingent consideration, the future royalties to be received, be valued at the lesser of the amount of the “probable,” defined as a greater than 50% likelihood, future proceeds or the carrying value of the disposed assets. Due to the unpredictability of the contingent consideration, and practices (including with respectmanagement’s inherent lack of control over the buyer’s operations, management determined it would not be reasonable to nature, scope, magnitude, quantity, frequency,attempt to value the contingent consideration. This resulted in assigning the contingent consideration a current valuation of zero. As and contemplated purpose)to the extent any royalties are deemed probable, they will be subsequently recognized as a “recovery from discontinued operations” on the statements of HVAC Value Fund,operations and in turn,will offset, or recover, the Company.
On a pro forma basis, the business acquired on January 20, 2017 contributed revenues of $225,112, net income of $1,353, and additional selling, general and administrative expenses to HVAC Value Fundinitial loss recorded. Accordingly, during the quarterthree-month periods ended September 30, 2017. The following unaudited pro forma summaries present consolidated informationMarch 31, 2021, and 2020, an offsetting $643 and $11,019, respectively, of HVAC Value Fund as ifroyalties on discontinued operations were recognized within the currentreported $643 and previous year business combinations had occurred on January 1$10,756 of each respective fiscal year. Somerecoveries from discontinued operations, respectively.
As of the pro forma information for the year ended December 31, 2016 was calculated using annualized,2020, discontinued assets reported on the face of the accompanying condensed consolidated balance sheets totaled $231. No discontinued liabilities were reported as of the year-ended December 31, 2020. This compares to the three-month period ended March 31, 2021, when no discontinued assets or discontinued liabilities are reported on the face of the accompanying condensed consolidated balance sheets.
A reconciliation of discontinued operations as reported on the accompanying unaudited 2015 financial information, and pro forma informationcondensed consolidated statements of operations for the periodthree-month periods ended September 30, 2017 was calculated using annualized, unaudited 2016 information,March 31, 2021, and 2020, is as informationfollows:
For the three months ended | ||||||||
March 31, 2021 | March 31, 2020 | |||||||
Revenues | $ | — | $ | — | ||||
Cost of revenues | — | — | ||||||
Gross profit | — | — | ||||||
Selling, general, and administrative expenses | — | 263 | ||||||
Recoveries from sale of subsidiary | 643 | 11,019 | ||||||
Other income (expense), net | — | — | ||||||
Income (loss) reported as discontinued operations | $ | 643 | $ | 10,756 |
NOTE 4. SALE OF CONTROLLING INTEREST IN REAL ESTATE SUBSIDIARY
Transaction
As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to an unaffiliated third-party purchaser, Woodmont Lexington, LLC, a Delaware limited liability company (“Woodmont”). As consideration for the periodtransaction, Woodmont paid the Company $100,000 and agreed to assume full responsibility for the management and operation of Mt Melrose and its real estate portfolio. The Company retained a 35% membership interest in Mt Melrose. Subsequent to the transaction, however, Woodmont, as the manager of Mt Melrose, has purported that the Company’s membership interest in Mt Melrose has been diluted to 20.8%; the Company has disputed this assertion and maintains that it has retained its 35% membership interest.
In connection with this transaction, the Company and Woodmont also entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC (the “A&R LLC Agreement”). The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members, including as to any distributions of cash to the members. The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont was designated as the sole manager. In addition, the Company expressly agreed to a three-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose; and with respect to any matters requiring a vote of the members, the Company will vote with (i.e., the same as) Woodmont. This arrangement was intended to allow the Company to maintain a passive management structure, while still owning a significant portion of the partnership.
While the operations of Mt Melrose, LLC have been considered a component of the Company’s business, the sale did not represent a major strategic shift in the Company’s business. While we deconsolidated the operations of Mt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest, Mt Melrose, LLC’s historical operations continue to be reflected as “continuing operations” in the Company’s financial statements.
Deconsolidation Due to Transfer of Control
Prior to the sale of 65% of its Mt Melrose interest, the Company owned 100% of the membership interests in Mt Melrose, LLC and controlled the entity by virtue of its voting interests. As a result, the Company previously had consolidated Mt Melrose under the “voting interests” (VOE) consolidation model.
By virtue of the A&R LLC Agreement, and the aforementioned standstill agreement, however, Woodmont is the sole “manager” responsible for all management and operating decisions of Mt Melrose. Accordingly, management determined that as of June 27, 2019, the Company no longer has a “controlling financial interest” in Mt Melrose and no longer should consolidate Mt Melrose. Furthermore, the Company has concluded that Mt Melrose does not qualify as a “variable interest entity” as Mt Melrose has sufficient equity at risk to permit operations and the Company is not the primary beneficiary of Mt Melrose’s activities. All activity prior to the deconsolidation event has been included on our consolidated statements of operations for given prior reporting periods in continuing operations, and under the real estate segment. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC have been removed from our consolidated balance sheets. The Company’s membership interest in Mt Melrose is now accounted for as an investment in the equity of Mt Melrose in the Company’s reported financial statements.
Accounting for Remaining Mt Melrose Investment
The Company adopted ASU 2016-01 effective January 1, 2016 through the applicable subsidiary closing date is unavailable.
As previously reported2018. ASU 2016-01 generally requires entities to measure equity investments at fair value and recognize any changes in our Current Report on Form 8-K filed with the SEC on June 14, 2016, Sitestarfair value in net income. However, entities are able to elect a measurement alternative for equity investments that do not have a “readily determinable fair value.” The Company has a 100% voting interestdetermined that its equity investment in HVAC Value Fund and JNJ Investments has the ability to earn profit interests. Pro forma earnings for the quarter ended September 30, 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 nine months ended September 30, 2017 (unaudited) |
| With January 20, 2017 acquisition |
| |
Revenue |
| $ | 3,602,740 |
|
Earnings |
| $ | 104,179 |
|
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 FundMt Melrose did not have any material, nonrecurring pro forma adjustments directly attributablea readily determinable fair value at the time of deconsolidation. The Company’s inability to “exercise significant influence” due to the business combination included inpreviously mentioned standstill agreement, also supports the reported pro forma revenue and earnings.
16
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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 |
|
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 |
|
17
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The goodwill amounts noted above are attributable to the workforceuse of the acquired subsidiariesmeasurement alternative. Under this alternative, the Company measures the Mt Melrose investment at its implied fair value and the significant efficiencies expected to arise after acquisition by HVAC Value Fund. Allassess it for impairment at each reporting date, or more often if indication of the goodwill was assigned to the HVAC segment.
As previously mentioneda potential impairment exists. When fair value becomes determinable, from observable price changes 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.
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 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.
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 October 1, 2016 and January 20, 2017 acquisitions remain open for subsequent management adjustment.
NOTE 4. INVESTMENTS
The Company holds various investments through Willow Oak, LLC through its asset management segment and may invest excess cash in marketable securities through its corporate segment. The fair values oforderly transactions, the Company’s marketable securities are determined in accordance with GAAP, with fair value being defined as the amount that wouldinvestment will 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 are re-measuredmarked to fair value on a recurring basisperiodic basis. Future dividends will be recognized as income and are valued using Level 1 inputs, which are quoted prices (unadjusted) for identical assetsreturns of capital recognized as a reduction in active markets.
|
| Cost Basis |
|
| Unrealized Gain |
|
| Unrealized Loss |
|
| Fair Value |
| ||||
September 30, 2017 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock available for sale |
| $ | 153,970 |
|
| $ | — |
|
| $ | (19,981 | ) |
| $ | 133,989 |
|
|
| Cost Basis |
|
| Unrealized Gain |
|
| Unrealized Loss |
|
| Fair Value |
| ||||
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock available for sale |
| $ | 563,211 |
|
| $ | 36,289 |
|
| $ | — |
|
| $ | 599,500 |
|
In the threeCompany’s investment when and nine month period ended September 30, 2017, the Company recognized no realized gains or losses and $76,935 of realized gains, respectively. This compares to the three and nine month period ended September 30, 2016 when the Company recognized no realized gains or losses.if received.
Non-currentUsing the $100,000 transaction price for a 65% interest in Mt Melrose, LLC, the implied value of the retained 35% interest at the time of the transaction was $53,846. This amount is included under the long-term investment amount on the accompanying consolidated balance sheets as of March 31, 2021, and December 31, 2020.
NOTE 5. INVESTMENTS
Certain assets held through the Company, Willow Oak Asset Management, LLC, or EDI Real Estate, LLC, do not have a Readily Determinable Valuereadily determinable value, as these investments are not publicly traded, nor do they have published sales records. The investment in Alluvial Fund, LP 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.(see Note 6). 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 EstateThe Company’s investment in Alluvial 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-measuredremeasured to fair value on a recurring basis and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Included inDue to the nature of the Mt Melrose, LLC investment (subsequent to the Company’s transfer and relinquishment of control (see Note 4)), the investment is measured at cost basis, as fair value is not determinable until additional inputs and measurements become available. Due to the illiquid nature of Triad Guaranty, Inc. stock and the lack of available current financial information for the entity, the Company has measured its investment at cost basis, of the investment as well as any accrued management fees.fair value until additional inputs and measurements become available.
Cost Basis | Unrealized Gain | Carrying Value | ||||||||||
March 31, 2021 | ||||||||||||
Alluvial Fund, LP (at fair value) | $ | 7,064,758 | $ | 8,572,220 | $ | 15,636,978 | ||||||
Mt Melrose, LLC (at cost) | 53,846 | — | 53,846 | |||||||||
Triad Guaranty, Inc. stock (at cost) | 45,410 | — | 45,410 | |||||||||
Total | $ | 7,164,014 | $ | 8,572,220 | $ | 15,736,234 |
18
Cost Basis | Unrealized Gain | Carrying Value | ||||||||||
December 31, 2020 | ||||||||||||
Alluvial Fund, LP (at fair value) | $ | 7,064,758 | $ | 6,455,858 | $ | 13,520,616 | ||||||
Mt Melrose, LLC (at cost) | 53,846 | — | 53,846 | |||||||||
Total | $ | 7,118,604 | $ | 6,455,858 | $ | 13,574,462 |
Notes
Alluvial Fund is a private investment fund that focuses on investing in what it believes are deeply mispriced securities in the United States and abroad. Alluvial Fund focuses on small companies, thinly traded issues, and special situations, seeking to Unaudited Condensed Consolidated Financial Statements (Continued)identify value that its management believes the market has yet to recognize. During the three-month periods ended March 31, 2021, and 2020, the Company did not withdraw management or performance fees earned through the Alluvial Fund, and such fees were deemed reinvested. For the three-month periods ended March 31, 2021, and 2020, the total amounts of these reinvested fees were $62,978 and $8,326, respectively.
| Cost Basis |
|
| Accrued Fees |
|
| Unrealized Gain |
|
| Fair Value |
| |||||
September 30, 2017 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alluvial Fund, LP |
| $ | 10,000,000 |
|
| $ | 702 |
|
| $ | 1,317,281 |
|
| $ | 11,317,983 |
|
Huckleberry Real Estate Fund II, LLC |
|
| 750,000 |
|
|
| — |
|
|
| — |
|
|
| 750,000 |
|
Total |
| $ | 10,750,000 |
|
| $ | 702 |
|
| $ | 1,317,281 |
|
| $ | 12,067,983 |
|
NOTE 5.6. FAIR VALUE OF ASSETS AND LIABILITIES
The Company has adopted FASB ASC 820, Fair Value Measurements. ASC 820
GAAP 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 820date, and 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 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; and | |
● | 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. |
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 valuedvalues its marketable securitiesinvestments at fair value at the end of each reporting period. See description of these investments in Note 45 above.
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| (Excluded) (a) |
|
| Total at Fair Value |
| |||||
September 30, 2017 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
| $ | 133,989 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 133,989 |
|
Huckleberry Real Estate Fund II, LLC |
| $ | — |
|
| $ | — |
|
| $ | 750,000 |
|
| $ | — |
|
| $ | 750,000 |
|
Alluvial Fund, LP |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 11,317,983 |
|
| $ | 11,317,983 |
|
Total investments |
| $ | 133,989 |
|
| $ | — |
|
| $ | 750,000 |
|
| $ | 11,317,983 |
|
| $ | 12,201,972 |
|
(Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | ||||||||||||||||
March 31, 2021 | ||||||||||||||||||||
Alluvial Fund, LP | $ | — | $ | — | $ | — | $ | 15,636,978 | $ | 15,636,978 | ||||||||||
Total investments | $ | — | $ | — | $ | — | $ | 15,636,978 | $ | 15,636,978 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| (Excluded) (a) |
|
| Total at Fair Value |
| |||||
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
| $ | 599,500 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 599,500 |
|
(Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | ||||||||||||||||
December 31, 2020 | ||||||||||||||||||||
Alluvial Fund, LP | $ | — | $ | — | $ | — | $ | 13,520,616 | $ | 13,520,616 | ||||||||||
Total investments | $ | — | $ | — | $ | — | $ | 13,520,616 | $ | 13,520,616 |
| (a) |
|
19
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Assets and Liabilities Measured at Fair Value on a Non-RecurringNon-recurring Basis
The Company analyzes goodwill on an annual basis or whenevermore often if events or changes in circumstances indicate potential impairments. ForNo impairments were recorded during the yearthree-month periods ended DecemberMarch 31, 2016, goodwill held at year end was determined to be valued appropriately2021, and no impairment existed. During the quarter ended September 30, 2017, a net downward adjustment of $14,504 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.2020.
The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate a changean impairment may have occurred. No impairments were recorded during the three-month periods ended March 31, 2021, and 2020.
As discussed in their fair market value. ForNote 4, the quarterCompany’s ongoing equity investment in Mt Melrose, LLC is carried at its implied cost under the alternative approach and will be assessed for impairment at each balance sheet date. No impairments were recorded during the three-month periods ended September 30, 2017,March 31, 2021, and 2020.
As discussed previously, the Company adjustedholds stock in Triad Guaranty, Inc. This stock was received in accordance with the carrying value of properties held downward by $10,001. For the year ended December 31, 2016,2020 revisions to the original promissory note, which included Triad stock to be issued in lieu of accrued interest. Due to the illiquid nature of Triad Guaranty, Inc. stock and the lack of available current financial information for the entity, the Company adjustedhas measured its investment in the carrying valuestock at cost basis. The Company’s costs basis in the stock is equal to the amount of properties held downward by $152,411. These adjustmentsaccrued interest on the promissory note as of December 31, 2020. The Company will assess its investment in Triad for impairment at each balance sheet date, or when additional inputs and measurements become available. No impairments were recorded during the result of repair and improvement expenses exceeding the current market value of the property.three-month period ended March 31, 2021.
NOTE 6.7. PROPERTY AND EQUIPMENT
The cost of property and equipment at September 30, 2017March 31, 2021, and December 31, 20162020, consisted of the following:
|
| 2017 |
|
| 2016 |
| March 31, 2021 | December 31, 2020 | ||||||||
Automobile |
| $ | 264,778 |
|
| $ | 115,688 |
| ||||||||
Computers and equipment |
|
| 178,341 |
|
|
| 36,030 |
| $ | 17,330 | $ | 17,330 | ||||
Furniture and fixtures |
|
| 25,206 |
|
|
| 25,206 |
| 10,850 | 10,850 | ||||||
|
|
| 468,325 |
|
|
| 176,924 |
| 28,180 | 28,180 | ||||||
Less accumulated depreciation |
|
| (96,828 | ) |
|
| (33,460 | ) | (15,484 | ) | (14,473 | ) | ||||
Property and equipment, net |
| $ | 371,497 |
|
| $ | 143,464 |
| $ | 12,696 | $ | 13,707 |
Depreciation expense from continuing operations was $65,258$1,012 for the nine monthsthree-month period ended September 30, 2017March 31, 2021, and $10,172$1,012 for the yearthree-month period ended March 31, 2020.
NOTE 8. REAL ESTATE
EDI Real Estate, LLC
Through EDI Real Estate, as of March 31, 2021, and 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 September 30, 2017,2020, the Company owned 10 residential properties, one commercial property, and interests in several lots. The Company sold three residential properties inidentified the quarter ended September 30, 2017 for gross proceeds of $299,900 and net proceeds of $271,037. The carrying value of the three properties sold was $275,541. The Company did not purchase any properties in the quarter ended September 30, 2017.
Real Estate Held for Investment
As of September 30, 2017, the Company accounted for eight residential propertiesfollowing units as held for investment. resale or held for investment as noted below:
EDI Real Estate | March 31, 2021 | December 31, 2020 | ||||||
Units occupied or available for rent | 2 | 4 | ||||||
Vacant lots held for investment | 3 | 3 | ||||||
Total units held for investment | 5 | 7 | ||||||
Units held for resale | 2 | — | ||||||
Vacant lots held for resale | — | — | ||||||
Total units held for resale | 2 | — |
Units held for investment consist of single-family residential rental units.
The leases in effect as of the quarter ended September 30, 2017March 31, 2021, 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
EDI Real Estate | March 31, 2021 | December 31, 2020 | ||||||
Total real estate held for investment | $ | 95,679 | $ | 303,158 | ||||
Accumulated depreciation | (25,360 | ) | (61,282 | ) | ||||
Real estate held for investment, net | 70,319 | 241,876 | ||||||
Real estate held for resale, net | $ | 169,181 | $ | — |
For the three-month period ended March 31, 2021, depreciation expense totaled $17,051 foron the nine monthsEDI Real Estate portfolio of properties was $2,377. This compares to the three-month period ended September 30, 2017. Total accumulatedMarch 31, 2020, when depreciation asexpense on the EDI Real Estate portfolio of September 30, 2017 totaled $81,057. These properties was $4,091.
No properties were sold during the three-month period ended March 31, 2021. Subsequent to March 31, 2021, one property held for investment were carried onresale has been sold. During the balance sheet at $502,368.
Real Estate Held for Resale
As of September 30, 2017, the Company accounted forthree-month period ended March 31, 2020, two residential properties, one commercial property, and several lots as held for resale. These properties held for resale were carriedsold for gross proceeds of $172,000. Net proceeds totaled $34,749. This compares to their carrying value of $98,835, which resulted in a total gain of $73,165 for the period. No properties were purchased during the three-month periods ended March 31, 2021, and 2020 for the EDI Real Estate portfolio.
No impairment adjustments were recorded on the balance sheet at $337,481.
20
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)EDI Real Estate portfolio during the three-month periods ended March 31, 2021, and 2020.
Future Minimum Rental Revenues - EDI Real Estate, LLC
The future anticipated minimum rental revenues based on leases in place as of March 31, 2021, for EDI Real Estate, LLC are as follows:
2021 | $ | 795 | ||
2022 | — | |||
Total | $ | 795 |
NOTE 8.9. NOTES PAYABLE
Notes payable at September 30, 2017March 31, 2021, and December 31, 20162020, 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 |
|
| 73,838 |
|
|
| 15,000 |
|
Interest bearing amount due on line of credit through HVAC Value Fund, LLC |
|
| 289,637 |
|
|
| — |
|
Equipment and vehicle capital leases acquired by HVAC Value Fund, LLC |
|
| 132,560 |
|
|
|
|
|
Interest bearing amount due on real estate held for investment through EDI Real Estate, LLC |
|
| 137,600 |
|
|
| — |
|
Less current portion |
|
| (449,363 | ) |
|
| (240,000 | ) |
Long-term portion |
| $ | 209,272 |
|
| $ | 25,000 |
|
Interest Rates | Average Term | March 31, 2021 | December 31, 2020 | ||||||||||
Interest-bearing amount due on promissory note through EDI Real Estate, LLC | 5.60% | 15 years | $ | 151,305 | $ | 154,094 | |||||||
Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC | 6.00% | 5 years | 96,000 | 96,000 | |||||||||
Less current portion | (5,277 | ) | (5,609 | ) | |||||||||
Long-term portion | $ | 242,028 | $ | 244,485 |
HVAC Value Fund typically structures acquisitions where
The timing of future payments of notes payable are as follows as of March 31, 2021:
2021 | $ | 3,901 | ||
2022 | 101,507 | |||
2023 | 5,828 | |||
2024 | 6,145 | |||
2025 and thereafter | 129,924 | |||
Total | $ | 247,305 |
During the quarterly period ended September 30, 2018, EDI Real Estate, LLC, as a portionborrower, issued a promissory note secured by certain properties held for investment. This note carries an annual interest rate of the purchase price is held back5.6% and fully matures on September 1, 2033, with early payoff permitted. The interest rate on this note is subject to certain conditions. These notes payable may or may not bear interest. HVAC Value Fund madechange once each five-year period based on an index rate plus a margin of 2.750 percentage points. The index rate is calculated as a monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of five acquisitions inyears. As of the year ended December 31, 2016 and one additional acquisition in the quarterthree-month period ended March 31, 2017. Four2021, the remaining note payable balance is secured by three of the five acquisitions made in the year ended December 31, 2016 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.remaining residential properties.
During the quarterquarterly period ended September 30, 2017, EDI Real Estate, LLC, entered intoas a borrower, issued two promissory notes, each secured by a property held for investment. These notes carry annual interest rates of 6%, pay interest quarterly, and are due September 15, 2022, with early payoff permitted.
NOTE 9. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
For the nine months ended September 30, 2017 and December 31, 2016, bad debt expense was $15,281 and $34, respectively. For the nine months ended September 30, 2017 and December 31, 2016, accounts receivable were $481,123 and $212,751, 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 nine months ended September 30, 2017. As of September 30, 2017 and December 31, 2016, accounts receivable consisted of the following:
|
| 2017 |
|
| 2016 |
| ||
Gross accounts receivable |
| $ | 483,123 |
|
| $ | 213,624 |
|
Less allowance for doubtful accounts |
|
| (2,000 | ) |
|
| (873 | ) |
Accounts receivable, net |
| $ | 481,123 |
|
| $ | 212,751 |
|
NOTE 10. SEGMENT INFORMATION
As of September 30, 2017,
During the three-month period ended March 31, 2021, the Company has fiveoperated through four business unitssegments with separate management and reporting infrastructures that offer different products and services. The four business units have been aggregated into five reportable segments: Corporate, Internet, HVAC,segments are as follows: Asset Management Operations, Real Estate Operations, Internet Operations, and Asset Management.
21
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)Other Operations.
During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, as mentioned in Note 3, the Company completed a divestiture of its home services operations on May 24, 2019. As a result, as of the three-month period ended March 31, 2021, and for all prior periods presented, the Company’s former home services operations segment has been reported as discontinued operations.
The corporateasset management operations segment includes revenues and expenses derived from various joint ventures, service offerings, and initiatives undertaken in the asset management industry.
The real estate operations segment includes (i) our equity in Mt Melrose, LLC, which manages properties held for investment and held for resale located in Lexington, Kentucky, and (ii) revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia.
The internet operations segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services. Our internet segment includes revenue generated by operations in both the United States and Canada. For the three-month periods ended March 31, 2021, the internet segment generated revenue of $220,280 in the United States and revenue of $11,986 in Canada. This compares to the three-month period ended March 31, 2020, where the internet segment generated revenue of $240,622 in the United States and revenue of $12,937 in Canada. All assets reported under the internet segment for the periods ended March 31, 2021, and December 31, 2020, are located within the United States.
The other operations segment includes revenue and expenses from nonrecurring or one-time strategic funding or similar activity and 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 and throughout the Southwest. 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 operations in both the United States and Canada. In the quarter ended September 30, 2017, the internet segment generated revenue of $295,371 in the United States and revenue of $18,831 in Canada. This compares to the quarter ended September 30, 2016 where the internet segment generated revenue of $331,480 in the United States and revenue of $23,904 in Canada.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three months ended September 30, 2017 and 2016 and for the nine months ended September 30, 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 |
| ||||||
Three months ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | — |
|
| $ | 314,202 |
|
| $ | 1,332,239 |
|
| $ | 324,044 |
|
| $ | 715,598 |
|
| $ | 2,686,083 |
|
Cost of revenue |
| $ | — |
|
| $ | 81,144 |
|
| $ | 875,991 |
|
| $ | 306,537 |
|
| $ | — |
|
| $ | 1,263,672 |
|
Net income (loss) before income taxes |
| $ | (167,120 | ) |
| $ | 172,415 |
|
| $ | 119,681 |
|
| $ | 8,126 |
|
| $ | 674,054 |
|
| $ | 807,156 |
|
Goodwill |
| $ | — |
|
| $ | 212,445 |
|
| $ | 1,779,549 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,991,994 |
|
Identifiable assets |
| $ | 201,291 |
|
| $ | 315,754 |
|
| $ | 2,787,303 |
|
| $ | 1,072,849 |
|
| $ | 12,091,978 |
|
| $ | 16,469,175 |
|
|
| Corporate |
|
| Internet |
|
| HVAC |
|
| Real Estate |
|
| Asset Management |
|
| Consolidated |
| ||||||
Three months ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | — |
|
| $ | 355,384 |
|
| $ | 906,910 |
|
| $ | 404,923 |
|
| $ | — |
|
| $ | 1,667,217 |
|
Cost of revenue |
| $ | — |
|
| $ | 70,290 |
|
| $ | 619,881 |
|
| $ | 402,285 |
|
| $ | — |
|
| $ | 1,092,456 |
|
Net income (loss) before income taxes |
| $ | (315,062 | ) |
| $ | 285,847 |
|
| $ | 66,370 |
|
| $ | (2,953 | ) |
| $ | — |
|
| $ | 34,202 |
|
Goodwill |
| $ | — |
|
| $ | 212,445 |
|
| $ | 1,053,851 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,266,296 |
|
Identifiable assets |
| $ | 3,840,647 |
|
| $ | 614,610 |
|
| $ | 1,921,609 |
|
| $ | 2,117,404 |
|
| $ | — |
|
| $ | 8,494,270 |
|
| Corporate |
|
| Internet |
|
| HVAC |
|
| Real Estate |
|
| Asset Management |
|
| Consolidated |
| |||||||
Nine months ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | — |
|
| $ | 977,629 |
|
| $ | 3,526,913 |
|
| $ | 1,216,190 |
|
| $ | 1,320,808 |
|
| $ | 7,041,540 |
|
Cost of revenue |
| $ | — |
|
| $ | 237,098 |
|
| $ | 2,307,902 |
|
| $ | 1,264,602 |
|
| $ | — |
|
| $ | 3,809,602 |
|
Net income (loss) before income taxes |
| $ | (403,869 | ) |
| $ | 585,930 |
|
| $ | 88,774 |
|
| $ | (68,810 | ) |
| $ | 1,241,023 |
|
| $ | 1,443,048 |
|
Goodwill |
| $ | — |
|
| $ | 212,445 |
|
| $ | 1,779,549 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,991,994 |
|
Identifiable assets |
| $ | 201,291 |
|
| $ | 315,754 |
|
| $ | 2,787,303 |
|
| $ | 1,072,849 |
|
| $ | 12,091,978 |
|
| $ | 16,469,175 |
|
| Corporate |
|
| Internet |
|
| HVAC |
|
| Real Estate |
|
| Asset Management |
|
| Consolidated |
| |||||||
Nine months ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | — |
|
| $ | 1,068,283 |
|
| $ | 939,932 |
|
| $ | 1,992,371 |
|
| $ | — |
|
| $ | 4,000,586 |
|
Cost of revenue |
| $ | — |
|
| $ | 290,043 |
|
| $ | 633,053 |
|
| $ | 1,918,603 |
|
| $ | — |
|
| $ | 2,841,699 |
|
Net income (loss) before income taxes |
| $ | (645,927 | ) |
| $ | 614,670 |
|
| $ | 74,922 |
|
| $ | 60,857 |
|
| $ | — |
|
| $ | 104,522 |
|
Goodwill |
| $ | — |
|
| $ | 212,445 |
|
| $ | 1,053,851 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,266,296 |
|
Identifiable assets |
| $ | 3,840,647 |
|
| $ | 614,610 |
|
| $ | 1,921,609 |
|
| $ | 2,117,404 |
|
| $ | — |
|
| $ | 8,494,270 |
|
22
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
NOTE 11. ADJUSTMENT TO OPENING BALANCE NUMBER OF SHARES AND CANCELLATION OF TREASURY SHARES
During the quarterthree-month periods ended March 31, 2017, management was made aware2021, and 2020.
Three Months Ended March 31, 2021 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
Revenues | $ | 2,193,854 | $ | 9,736 | $ | 232,266 | $ | — | $ | — | $ | 2,435,856 | ||||||||||||
Cost of revenue | — | 7,644 | 71,963 | — | — | 79,607 | ||||||||||||||||||
Operating expenses | 117,711 | 6,485 | 46,541 | 207,253 | — | 377,990 | ||||||||||||||||||
Other income (expense) | — | (4,795 | ) | 361 | 4,181 | — | (253 | ) | ||||||||||||||||
Income (loss) from continuing operations | 2,076,143 | (9,188 | ) | 114,123 | (203,072 | ) | — | 1,978,006 | ||||||||||||||||
Income from discontinued operations | — | — | — | — | 643 | 643 | ||||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | ||||||||||||||||||
Identifiable assets | $ | 15,820,688 | $ | 312,819 | $ | 433,317 | $ | 339,926 | $ | — | $ | 16,906,750 |
Three Months Ended March 31, 2020 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
Revenues | $ | (1,745,154 | ) | $ | 187,149 | $ | 253,559 | $ | — | $ | — | $ | (1,304,446 | ) | ||||||||||
Cost of revenue | — | 132,209 | 87,188 | — | — | 219,397 | ||||||||||||||||||
Operating expenses | 109,241 | 16,636 | 47,848 | 289,433 | — | 463,158 | ||||||||||||||||||
Other income (expense) | 2,283 | (1,268 | ) | 370 | 3,692 | — | 5,077 | |||||||||||||||||
Income (loss) from continuing operations | (1,852,112 | ) | 37,036 | 118,893 | (285,741 | ) | — | (1,981,924 | ) | |||||||||||||||
Income from discontinued operations | — | — | — | — | 10,756 | 10,756 | ||||||||||||||||||
Goodwill | — | — | 212,445 | — | — | 212,445 | ||||||||||||||||||
Identifiable assets | $ | 8,399,068 | $ | 457,145 | $ | 468,024 | $ | 543,702 | $ | 321 | $ | 9,868,260 |
NOTE 11. COMMITMENTS AND CONTINGENCIES
Leases
As of a clerical error that affected the reported number of treasury shares held as ofMarch 31, 2021, and December 31, 2016. It was discovered that2020, 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 thatno remaining leases classified as operating leases and no financing leases.
The previous lease for office space for Willow Oak Asset Management, LLC expired on September 30, 2020, and has been renewed on a full restatement ismonth-to-month basis beginning on October 1, 2020. The previous lease for warehouse space for corporate matters was a short-term lease, under 12 months, and expired in February 2020. In accordance with ongoing accounting policy elections, the Company does not necessary asrecognize right-of-use (ROU) assets or lease liabilities for short-term or month-to-month leases. Total rental expenses attributed to these short-term leases for the total misstatement accountsthree-month periods ended March 31, 2021, and 2020 were $5,250 and $13,434, respectively.
Lease costs for 0.035%the three-month periods ended March 31, 2021, and 2020 consisted of the total number of shares outstanding andfollowing:
For the three months ended | ||||||||
March 31, 2021 | March 31, 2020 | |||||||
Finance lease costs: | ||||||||
Amortization of ROU assets | $ | — | $ | — | ||||
Interest on lease liabilities | — | — | ||||||
Operating lease cost | — | 28,888 | ||||||
Sublease income | — | — | ||||||
Total lease costs from continuing operations | — | 28,888 | ||||||
Total lease costs from discontinued operations | — | — | ||||||
Total lease costs | $ | — | $ | 28,888 |
As the Company has 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,remaining leases classified as operating leases or financing leases as of the quarterperiods ended September 30, 2017, 2,125,795 treasury sharesMarch 31, 2021, and December 31, 2020, there are no future liabilities or maturities of lease obligations recognized on the accompanying consolidated balance sheets.
Other Commitments
As mentioned in Note 4, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to Woodmont. Under the terms of the parties’ membership interest purchase agreement, the Company agreed to indemnify Woodmont against certain losses actually incurred by Woodmont as a result of breaches of the Company’s representations and warranties made under the agreement. As has been previously reported, Woodmont has made several claims for indemnification under the agreement, all of which have been cancelled.disputed by the Company.
Litigation & Legal Proceedings
Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.
As has been previously reported, on April 12, 2016, the Company filed a civil action complaint against Frank Erhartic, Jr. (the “Former Erhartic CEO”), the Company’s former CEO and director (prior to December 14, 2015) and currently an owner of record or beneficially of more than 5% of the Company’s Common Stock, alleging, among other things, that the Former Erhartic CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized and wrongful related-party transactions, including causing the Company to borrow certain amounts from the Former Erhartic CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments to the Former Erhartic CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former Erhartic CEO, causing the Company to pay certain amounts to the Former Erhartic CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former Erhartic CEO, causing the Company to pay rent on its corporate headquarters owned by the Former Erhartic CEO’s ex-wife in amounts commercially unreasonable and excessive, and to make real estate tax payments thereon for the personal benefit of the Former Erhartic CEO, converting to the Former Erhartic CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by the Former Erhartic CEO, causing the Company to pay personal credit card debt of the Former Erhartic CEO, causing the Company to significantly overpay the Former Erhartic CEO’s health and dental insurance for the benefit of the Former Erhartic CEO, and causing the Company to pay the Former Erhartic CEO’s personal automobile insurance. The Company is seeking, among other relief available, monetary damages in excess of $350,000. This litigation matter is currently pending in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia).
Other: Mt Melrose-related Proceedings
As has been previously reported, various disputes have arisen between the Company and Woodmont Lexington, LLC (“Woodmont”), the entity to whom the Company sold, on June 27, 2019, 65% of the Company’s membership interest in Mt Melrose, LLC.
As has been previously reported, the Company filed a verified complaint in the Court of Chancery of the State of Delaware on November 20, 2019, commencing a civil action against Woodmont – seeCivil Action No. 2019-0928-JTL (the “Delaware Action”). The Delaware Action was filed by the Company in response to various repeated claims and demands and injurious conduct by Woodmont and its representative. The Company is seeking, among other relief available against Woodmont, injunctive, declaratory and equitable relief, and relief for, among other things, Woodmont’s breaches of contract and unjust enrichment, along with attorneys’ fees and expenses. While management intends to vigorously prosecute the Company’s claims and defend the Company’s rights against Woodmont in these matters, the Company and Woodmont have agreed to engage in voluntary mediation concerning their various disputes through the Delaware Court of Chancery, which voluntary mediation commenced in March 2021. The Delaware Action remains pending in the Delaware Court of Chancery; however, it is currently stayed pending the outcome of the parties’ mediation and potential resolution of disputes.
NOTE 12. STOCKHOLDERS’EQUITY
Classes of Shares
As of November 9, 2017,March 31, 2021, the correct numberCompany’s Articles of Incorporation, as amended, authorize 32,800,000 shares outstanding is 282,830,163of capital stock of the Company, consisting of 30,000,000 authorized shares of serial preferred stock, par value of $0.001 per share, and 2,800,000 authorized shares of common stock, par value of $0.125 per share.
Preferred Stock
Preferred stock, any series, shall have the correct numberpowers, preferences, rights, qualifications, limitations, and restrictions as from time to time fixed by the Company’s Board of treasuryDirectors in its sole discretion. As of March 31, 2021, the Company has not issued any shares held is 11,696,658.of its preferred stock (including, without limitation, its Series A Preferred Stock).
As previously reported in the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2020, the Company has adopted a certain stockholder rights agreement styled as the Tax Benefit Preservation Plan, dated as of July 24, 2020, by and between the Company and Colonial Stock Transfer Company, Inc., as rights agent. The Tax Benefit Preservation Plan was adopted as a means designed to safeguard against inadvertent diminution or limitation of the Company’s valuable tax assets. As previously reported, pursuant to the Tax Benefit Preservation Plan, as of July 24, 2020, the Company has designated a series of its preferred stock as the Series A Preferred Stock, consisting of 250,000 shares so designated.
Common Stock
As of March 31, 2021, 2,647,383 shares of the Company’s common stock were issued and outstanding.
NOTE 12.13. SUBSEQUENT EVENTS
Management has evaluated all subsequent events from September 30, 2017March 31, 2021, through November 9, 2017, the date the unaudited condensed consolidated financial statements were issued. Management has concluded that no subsequent events have occurred that would require recognition or disclosure in the unaudited condensed consolidated financial statements.
|
This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related footnotes for the quarterthree-month period ended September 30, 2017.March 31, 2021. The discussion of results, causes, and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. Additionally, it should be noted that a uniform comparative analysis cannot be performed for all segments, as a segment’s limited financial history or recent restructuring results in less comparable financial performance.
Overview
Sitestar Corporation
During the three-month period ended March 31, 2021, Enterprise Diversified, Inc. (“Sitestar,ENDI,” the “Company,” or “we”) operated through four reportable segments:
● | Asset Management Operations - this segment includes revenue and expenses derived from our various joint ventures, service offerings, and initiatives undertaken in the asset management industry; |
● | Real Estate Operations - this segment includes (i) our equity in Mt Melrose, LLC, which manages properties held for investment and held for resale located in Lexington, Kentucky, and (ii) revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia; |
● | Internet Operations - this segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services; and |
● | Other Operations - this segment includes any revenue and expenses from nonrecurring or one-time strategic funding or similar activity that is not considered to be one of our primary lines of business, and 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. |
During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations, comprised of former subsidiary Specialty Contracting Group, LLC’s operation of HVAC and plumbing companies in Arizona. However, for the three-month period ended March 31, 2021, and for all prior periods presented, Home Services Operations are reported as discontinued operations.
The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
Asset Management Operations
The Company operates under five segments:its asset management operations business through its wholly owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC ("Willow Oak AMS"), and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”).
In 2016, the Company made a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017, by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As a special limited partner, Willow Oak earns a share of management and performance fees earned. As of March 31, 2021, Willow Oak continues to hold its direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying consolidated statements of operations.
In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement in June 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership launched by Willow Oak and managed by Coolidge. Under their agreement concerning Bonhoeffer Fund, LP, Willow Oak paid all start-up expenses and pays agreed-upon operating expenses that are not partnership expenses, Coolidge is responsible for all investment management, and Willow Oak receives 50% of all performance and management fees earned. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.
On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our Board chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak’s Fund Management Services (“FMS”) consisting of the following services: strategic planning, investor relations, marketing, operations, compliance and legal coordination, accounting and bookkeeping, annual audit coordination, and liaison to third-party service providers. Willow Oak earns monthly and annual fees as consideration for these services.
On October 1, 2019, Willow Oak partnered with Geoff Gannon and Andrew Kuhn to form Focused Compounding Capital Management, LLC (“Focused Compounding”). This joint venture, of which Willow Oak Capital Management is a 10% beneficial owner, manages capital through separately managed accounts and a private investment fund launched January 1, 2020. Willow Oak provides ongoing FMS and operational support in addition to having covered all one-time expenses associated with the launch of Focused Compounding Fund, LP. As consideration for the arrangement, Willow Oak Capital Management is entitled to 10% of gross management and performance fees earned by Focused Compounding. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.
On September 29, 2020, Willow Oak, through Willow Oak AMS, executed a strategic relationship agreement with SVN Capital, LLC to become a 20% beneficial owner of the firm in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak FMS. As a beneficial owner of SVN Capital, LLC, Willow Oak is entitled to 20% of gross management and performance fees earned by the firm. Additionally, Willow Oak FMS earns a direct fee from SVN Capital Fund, LP, a private investment fund launched by the firm’s managing member, for the administrative, compliance, and tax and audit liaison services it renders.
Corporate:
Real Estate Operations
As has been previously reported, in December 2017, ENDI created New Mt Melrose, a wholly owned subsidiary at that time, to acquire 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 in December 2017 with the seller, Old Mt. Melrose. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to Woodmont, which agreed to assume full responsibility for the management and operation of New Mt Melrose and its real estate portfolio. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. See Note 4 for more information.
As has been previously reported, in July 2017, ENDI created a wholly owned real estate subsidiary named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of March 31, 2021, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes four residential properties and vacant land. Subsequent to March 31, 2021, one residential property has been sold. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia. The portfolio includes occupied single-family homes that are managed by a third-party property management company. The leases in effect as of December 31, 2020, are based on annual time periods and include month-to-month provisions after the completion of the initial term.
State and municipal laws and regulations govern the real estate industry in general and do not vary significantly throughout our real estate holding areas. State laws, including the Virginia Residential Landlord and Tenant Act, in addition to local ordinances, govern our rental properties and also do not vary significantly throughout our real estate holding areas.
Internet Operations
The Company operates its internet operations segment through Sitestar.net, a wholly owned subsidiary. Sitestar.net is an Internet Service Provider (ISP) that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. We provide services to customers in the United States and Canada. This segment markets and sells narrow-band (dial-up and ISDN) and broadband services (DSL and fiber-optic), as well as web hosting and related services to consumers and businesses.
Our primary competitors include regional and national cable and telecommunications companies that have substantially greater market presence, brand-name recognition, and financial resources compared to Sitestar.net. Secondary competitors include local and regional ISPs.
The residential broadband internet access market is dominated by cable and telecommunications companies. These companies offer internet connectivity through the use of cable modems, Digital Subscriber Line (DSL) programs, and fiber. These competitors have extensive scale and significantly more resources than Sitestar.net. Competitors often offer incentives for customers to purchase internet access by offering discounts for bundled service offerings (i.e., phone, television, and Internet). While we are a reseller of broadband services including DSL and fiber services, our profit margin is heavily influenced by these competitive forces.
There are currently laws and regulations directly applicable to access or commerce on the internet, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security, and the convergence of traditional telecommunications services with Internet communications. We may be positively or negatively affected by the repeal, modification, or adoption of various laws and regulations. These changes may occur at the international, federal, state, and local levels, and may cover a wide range of issues.
As of March 31, 2021, the focus of our internet operations segment is to generate cash flow, work to make our costs variable, and reinvest in our operations when an acceptable return is available. We did not make significant reinvestments into the internet operations segment during the three-month period ended March 31, 2021.
Management routinely endeavors to identify the market value for domain names owned by the Company in order to assess potential income opportunities. Management evaluates these domain names for third-party sales potential, as well as for other marketing opportunities that could generate new revenue from current customers who utilize the domains.
Other Operations
Other operations include nonrecurring or one-time strategic funding or similar activity and other corporate segmentoperations that are not considered to be one of the Company’s primary lines of business. Below are the main recent activities comprising other operations.
Financing Arrangement Regarding Triad Guaranty, Inc.
In August 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy in April 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. On December 31, 2020, the Company accepted a revision of terms to the original promissory note which includes, among other things, an extension of the loan maturity date to December 31, 2022, an increase of interest to the amount of 12% annually, and a provision to settle all currently accrued interest through the issuance of Triad Guaranty, Inc. common shares. In line with the revision of note terms, during the three-month period ended March 31, 2021, the Company was issued 454,097 shares of Triad Guaranty, Inc. in lieu of interest accrued on the note receivable as of December 31, 2020.
Corporate Operations
Corporate operations include 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 may also invest in marketable securities
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operated its home services operations segment through the corporate segment.
Internet Operations: The Company operates its internet operations through Sitestar.net, a wholly owned subsidiary, that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, and various ancillary services. Sitestar.net provides services and support to customers in the United States and Canada.
HVAC Operations: The Company operates its HVAC Operations throughSpecialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC, a wholly-ownedLLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the acquisition and management of HVAC and plumbing companies in Arizona and throughout the Southwest. Arizona.
As has been previously reported, in our Current Report on Form 8-K filed with the SEC on June 14, 2016, we, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized and launched this subsidiary on June 13, 2016. As of September 30, 2017, HVAC Value Fund had closed on six acquisitions totaling $2,015,000, plus estimated earn outs of approximately $350,000.
Real Estate Operations: Sitestar owns a real estate investment portfolio through EDI Real Estate, LLC that includes residential properties, vacant land, and one commercial property. Our real estate portfolio is primarily focused in the Roanoke and Lynchburg areas of Virginia. The portfolio includes single family homes that are currently rented and managed through a third-party property manager, as well as vacant properties being prepared or currently listed for sale.
Asset Management Operations: Sitestar created a wholly-owned asset management subsidiary on October 10, 2016 named Willow Oak Asset Management, LLC (“Willow Oak”). As previously reported in our Current Reports on Form 8-K filed with the SEC on September 19, 2016 and December 30, 2016, respectively,May 24, 2019, the Company agreed to make a seed investment totaling $10 million through Willow Oak in Alluvial Fund, LP, an unrelated private partnership that was launched on January 1, 2017. As previously reported in our Current Report on Form 8-K filed with the SEC on January 30, 2017, on January 24, 2017 Willow Oak entered into a certain Limited Liability Company Operating Agreement of Huckleberry Real Estate Fund II, LLC (“Huckleberry Fund”) dated as of January 24, 2017. Future investments of this nature will operate under Willow Oak and all related revenues and expenses will be allocated to the asset management segment accordingly. Sitestar, throughcompleted its wholly-owned subsidiary, Willow Oak signed a fee share agreement on May 11, 2017 with Lizard Head, LLC, the general partner of Bridge Reid Fund I, LP. 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%divestiture 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. 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 Asset and Coolidge are the sole members of Bonhoeffer Capital Management LLC, the general partnerhome services operations 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.Rooter Hero. See Note 3 for more information.
Summary of Financial Performance
Common stockholders’ equity increased from $9,160,029$14,043,411 at December 31, 20162020, to $15,171,806$16,262,060 at September 30, 2017. The change was mostly attributable to $4,625,000 of additional common stock issued.March 31, 2021. This change was also driven by $585,930attributable to $2,076,143 of comprehensive income in the internet segment, $88,774 of comprehensive income in the HVAC segment, $68,810 of comprehensive loss from the real estate segment, $1,241,023 of comprehensivenet income in the asset management operations segment and $460,140$114,123 of comprehensive lossnet income in the corporate segment. The comprehensive loss attributable to the corporateinternet operations segment, and was partially offset by realized capital gainsa net loss of $9,188 in the real estate operations segment, $203,072 in other segments, and $643 of recoveries resulting from investments in marketable securities of $76,940.discontinued operations under the former home services operations segment. Corporate expenses for the nine monthsthree-month period ended September 30, 2017March 31, 2021, included in the net loss from other operations, totaled $482,561.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)$207,253. Total comprehensive net income for the three-month period ended March 31, 2021, equaled $1,978,649.
This section provides an overview of changes in our assets, liabilities, and equity and should be read together with our accompanying unaudited condensed consolidated financial statements, including the accompanying notes to the financial statements. The table below provides a balance sheet summary for the periods presented and is designed to provide an overview of the balance sheet changes from quarter to quarter.
|
| September 30, 2017 |
|
| June 30, 2017 |
|
| March 31, 2017 |
|
| December 31, 2016 |
| March 31, 2021 | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | ||||||||||||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Cash and equivalents |
| $ | 151,867 |
|
| $ | 2,231,807 |
|
| $ | 4,573,708 |
|
| $ | 2,607,370 |
| $ | 292,767 | $ | 341,007 | $ | 337,149 | $ | 425,985 | $ | 553,468 | |||||||||||
Accounts receivables, net | 130,155 | 144,791 | 49,824 | 28,394 | 35,298 | ||||||||||||||||||||||||||||||||
Investments, at fair value |
|
| 12,201,972 |
|
|
| 8,978,684 |
|
|
| 6,075,884 |
|
|
| 599,500 |
| 15,736,234 | 13,574,462 | 11,135,580 | 9,586,178 | 8,354,270 | ||||||||||||||||
Real estate, total |
|
| 839,849 |
|
|
| 1,102,158 |
|
|
| 1,098,758 |
|
|
| 1,905,291 |
| 239,500 | 241,876 | 378,698 | 383,128 | 376,499 | ||||||||||||||||
Accounts receivables, net |
|
| 481,123 |
|
|
| 440,403 |
|
|
| 260,051 |
|
|
| 212,751 |
| |||||||||||||||||||||
Goodwill and other assets |
|
| 2,794,364 |
|
|
| 2,763,402 |
|
|
| 2,976,470 |
|
|
| 4,516,320 |
| 508,094 | 555,044 | 524,772 | 545,407 | 548,725 | ||||||||||||||||
Total assets |
| $ | 16,469,175 |
|
| $ | 15,516,454 |
|
| $ | 14,984,871 |
|
| $ | 9,841,232 |
| $ | 16,906,750 | $ | 14,857,180 | $ | 12,426,023 | $ | 10,969,092 | $ | 9,868,260 | |||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Deferred revenue |
| $ | 239,748 |
|
| $ | 247,873 |
|
| $ | 238,941 |
|
| $ | 214,898 |
| |||||||||||||||||||||
Accounts payable |
|
| 180,692 |
|
|
| 220,631 |
|
|
| 92,953 |
|
|
| 77,918 |
| $ | 60,734 | $ | 65,524 | $ | 63,573 | $ | 77,670 | $ | 188,732 | |||||||||||
Accrued expenses |
|
| 218,294 |
|
|
| 195,414 |
|
|
| 219,602 |
|
|
| 123,387 |
| 137,803 | 306,063 | 176,904 | 119,839 | 124,255 | ||||||||||||||||
Deferred revenue | 198,848 | 192,088 | 213,498 | 210,671 | 201,430 | ||||||||||||||||||||||||||||||||
Notes payable and other liabilities |
|
| 658,635 |
|
|
| 497,954 |
|
|
| 528,676 |
|
|
| 265,000 |
| 247,305 | 250,094 | 646,791 | 666,608 | 561,004 | ||||||||||||||||
Total liabilities |
|
| 1,297,369 |
|
|
| 1,161,872 |
|
|
| 1,080,172 |
|
|
| 681,203 |
| 644,690 | 813,769 | 1,100,766 | 1,074,788 | 1,075,421 | ||||||||||||||||
Total stockholders’ equity |
|
| 15,171,806 |
|
|
| 14,354,582 |
|
|
| 13,904,699 |
|
|
| 9,160,029 |
| 16,262,060 | 14,043,411 | 11,325,257 | 9,894,304 | 8,792,839 | ||||||||||||||||
Total liabilities and stockholders’ equity |
| $ | 16,469,175 |
|
| $ | 15,516,454 |
|
| $ | 14,984,871 |
|
| $ | 9,841,232 |
| $ | 16,906,750 | $ | 14,857,180 | $ | 12,426,023 | $ | 10,969,092 | $ | 9,868,260 |
Results of operations
Corporate
In the quarter ended September 30, 2017 the corporate segment produced a total of $97,029 of comprehensive loss. This includes $10,068 of other comprehensive income which was generated as a result of unrealized capital gains from the ownership of marketable securities. Expenses totaled $108,849. This compares to corporate expenses of $315,301 incurred during the quarter ended September 30, 2016. Expenses were higher during the quarter ended September 30, 2016 compared to the quarter ended September 30, 2017 primarily due to increased accounting and legal expenses related to outsourced accounting roles and legacy legal matters. Accounting and legal roles have since been brought in-house.
Internet Operations
As
Asset Management Operations
The Company operates its asset management operations business through its wholly owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”), and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”). These subsidiaries were formed on October 10, 2016, May 24, 2018, and August 21, 2020, respectively. During the segment’s first year of September 30, 2017, the focus of our internet segment is to generate cash flow, work to make our costs variable,operations, Willow Oak entered into three fee share agreements with multiple private investment partnerships and reinvest in our operations whenmade an acceptable return is available. We did not make significant reinvestments into the internet segment during the three months ended September 30, 2017. Additionally, competitive pressures have negatively affected our ongoing revenue. Accordingly, revenue has continued to decline, though at a slower pace than previous years, as noted below.
Revenue attributed to the internet segment during the quarter ended September 30, 2017 totaled $314,202. While this was a decrease of $41,182 when compared to revenue generated in this segment during the quarter ended September 30, 2016 totaling $355,384, income from operations reported for the segment decreased by only $19,426 during the same time period. The year over year revenue decline from the quarters ended September 30, 2017 and 2016 was 11.6%. This was a slight improvement from the year over decline of 11.7% reported atadditional investment through another partnership arrangement. During the year ended December 31, 2016 compared to2018, two new partnerships were formed, multiple fee share agreements were entered into, and a new service offering, Fund Management Services, was launched. During the year ended December 31, 2015.2019, one new joint venture was formed in which Willow Oak Capital Management is a non-managing beneficial owner. During the year ended December 31, 2020, we assisted in the launch of a new private investment fund, and two new wholly owned entities, Willow Oak AMS and Willow Oak FMS, were formed to advance strategic relationships with external investment firms. Additionally, Willow Oak formalized a new strategic relationship with an investment firm, becoming a non-managing beneficial owner in exchange for the provision of certain ongoing FMS and operational services.
As of March 31, 2021, Willow Oak continues to hold a direct investment in the Alluvial Fund, LP. The year over yearrealized and unrealized investment gains and losses are reported as revenue decline ison the accompanying unaudited condensed consolidated statements of operations. This treatment can result in reporting negative revenue figures for a given period.
Willow Oak continues to earn revenue through fee share arrangements, as well as through fund management services.
During the three-month period ended March 31, 2021, the asset management operations segment produced $2,193,854 of fewer customer renewalsrevenue. Cost of revenue was $0 and operating expenses totaled $117,711. Net income for the absencethree-month period ended March 31, 2021, totaled $2,076,143. This compares to the three-month period ended March 31, 2020, when the asset management operations segment produced negative $1,745,154 of new customers.
Therevenue, cost of revenue duringwas $0, and operating expenses totaled $109,241. Additionally, other income for the quarterthree-month period ended September 30, 2017 totaled $81,144. ThisMarch 31, 2020, was an increase of $10,854 when compared to$2,283, and the cost of revenue in thistotal net loss was $1,852,112. Other income for the segment during the quarterthree-month period ended September 30, 2016 totaling $70,290.March 31, 2020, was primarily due to sublease rental income earned through the Company’s New York office space.
The increase in revenue for the three-month period ended March 31, 2021, is primarily due to market volatility and increased returns through the Company’s Alluvial Fund investment in addition to an increase in fee share revenues from the new affiliate and fund management services relationships. The increase in operating expenses is primarily due to higher payroll expenses.
As of March 31, 2021, the fair value of long-term investments held through the asset management operations segment totaled $15,636,978. This compares to the fair value of long-term investments held at December 31, 2020, which totaled $13,520,616. The increase was the result of a temporary contract price decrease experiencedin investments is attributable to positive Alluvial Fund performance during the quarterthree-month period ended September 30, 2016.
As noted inMarch 31, 2021. Management notes that, while short-term market volatility can have a significant effect on reported revenue for a given period, the quarterly report filed on August 8, 2017, during the quarter ended June 30, 2017, the internet segment closed on the sale of First.com, a domain name that has been actively marketed since the first quarter of 2016. The domain name had a cost basis of $200,000 and was sold for net proceeds of $200,000, which includes broker and commission fees paid. This transaction was reported in other income during the quarter ended June 30, 2017.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)Company’s overall investment strategy is ultra-long-term focused.
The tabletables below providesprovide a summary of income statement figuresamounts over time. These figures are specific to the internetasset management operations segment and are presented for the quarterly periods designated below.
For the three months ended | ||||||||
Asset Management Operations Revenue | March 31, 2021 | March 31, 2020 | ||||||
Gains (losses) on investment activity | $ | 2,054,471 | $ | (1,784,406 | ) | |||
Management and performance fee revenue | 118,843 | 15,252 | ||||||
Fund management services revenue | 20,540 | 24,000 | ||||||
Total revenue | $ | 2,193,854 | $ | (1,745,154 | ) |
|
| September 30, 2017 |
|
| June 30, 2017 |
|
| March 31, 2017 |
|
| December 31, 2016 |
| ||||
Revenues |
| $ | 314,202 |
|
| $ | 328,341 |
|
| $ | 335,086 |
|
| $ | 347,005 |
|
Cost of revenue |
|
| 81,144 |
|
|
| 76,145 |
|
|
| 79,809 |
|
|
| 79,471 |
|
Operating expenses |
|
| 61,299 |
|
|
| 68,214 |
|
|
| 94,024 |
|
|
| 66,375 |
|
Other income |
|
| 656 |
|
|
| 2,771 |
|
|
| 54,309 |
|
|
| 6,382 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (258 | ) |
Comprehensive income (loss) |
| $ | 172,415 |
|
| $ | 186,753 |
|
| $ | 215,562 |
|
| $ | 207,283 |
|
Management is currently identifyingReal Estate Operations
For the market value for domain names in order to assess potential income opportunities. Management also evaluates domain names available for purchase in order to generate new revenue from customers who utilizethree-month period ended March 31, 2021, the domains.
Effective January 1, 2016, we have improved and restructured our internal reporting in the internet segment. Our current sales mix of customers consists of approximately 69% internet access and 31% web hosting and storage. Approximately 91% of our customer accounts are managed by our U.S.real estate operations and 9% of our customer accounts are managed by our Canada operations. Revenue generated by our U.S. operations totaled $295,371 and revenue generated by our Canada operations totaled $18,831 during the quarter ended September 30, 2017. This compares to revenue generated by our U.S. operations of $330,480 and revenue generated by our Canada operations of $23,904 during the quarter ended September 30, 2016.
HVAC Operations
The Company operates its HVAC operations through HVAC Value Fund, LLC, a wholly-owned subsidiary focused on the acquisition and management of HVAC and plumbing companies in Arizona and throughout the Southwest. After gaining experience with HVAC acquisitions, management noted the complementary nature of plumbing providers and completed two acquisitions where a significant amount of their revenue originated from plumbing services. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, we, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized and launched this subsidiary on June 13, 2016. HVAC Value Fund closed on five acquisitions totaling $1,455,000 during the year ended December 31, 2016. During the nine months ended September 30, 2017, HVAC Value Fund closed on one additional acquisition totaling $560,000. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016 and discussed further herein, the purpose of HVAC Value Fund is to acquire HVAC and plumbing businesses. Accordingly, all of our 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.
Our HVAC operationssegment generated revenue of $1,332,239 during$9,736 and cost of revenues totaling $7,644. All revenues and cost of revenues for the quartercurrent period are related to rental activities. Operating expenses for the three-month period ended September 30, 2017. Cost of revenue totaled $875,991 and operating expenses totaled $322,639.March 31, 2021, were $6,485. Other expenses totaled $13,928. The other expenses are related to$4,795 and the interest portion of the notes payable incurred by HVAC Value Fund as well as anet loss incurred on the disposal of an asset. Comprehensive income for the quarterthree-month period ended September 30, 2017March 31, 2021, totaled $119,681.$9,188. This compares to the quarterthree-month period ended September 30, 2016,March 31, 2020, when HVACthe real estate operations segment generated revenue of $906,910,$187,149, including $15,149 of rental revenue, and cost of revenues totaling $132,209, which included $16,347 of cost of rental revenues. Operating expenses for the three-month period ended March 31, 2020, were $16,636, other expenses totaled $1,268, and total reported net income was $37,036. Other expenses incurred during the three-month periods ended March 31, 2021, and 2020, were primarily interest-related expenses. The current period decreases in revenue, cost of revenue, totaled $619,881, operating expenses, totaled $219,537 and comprehensive income forinterest expense are primarily due to the quarter totaled $66,370. Management notes that for the quarter ended September 30, 2016, HVAC Value Fund had closed only foursale of the six currentlycertain real estate properties held acquisitions. historically as rental properties.
EDI Real Estate Operations
As of September 30, 2017, we owned 10 residential properties, one commercial property,March 31, 2021, and interests in several lots. In 2008,December 31, 2020, the Company had implemented a program to redirect cash generated from the internet operations into the purchase and renovation of real estate. This program was abolished with the change in management on December 14, 2015. From December 14, 2015 through the end of 2015, several real estate agents and investors were engaged to determine the marketability of our properties. Repair work ceased until a more thorough review for each property could be completed to determine the most profitable course forward. Prior to year-end 2015, a listEDI Real Estate portfolio of properties was assigned to a real estate agent. Additionally, during 2015, we entered into negotiations with several investors to sell various properties. Many of these properties were held for resale by prior management, but prior marketing activity was poor.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)included the following units:
EDI Real Estate | March 31, 2021 | December 31, 2020 | ||||||
Units occupied or available for rent | 2 | 4 | ||||||
Vacant lots held for investment | 3 | 3 | ||||||
Total units held for investment | 5 | 7 | ||||||
Units held for resale | 2 | — | ||||||
Vacant lots held for resale | — | — | ||||||
Total units held for resale | 2 | — |
The Company sold three residential properties in the quarter ended September 30, 2017 for gross proceeds of $299,900 and net proceeds of $271,037. The carrying value of the three properties sold was $275,541. Two of these properties were previously held for sale, while the other property was
Units held for investment and sold through a tenant purchase option. No properties were acquired during this time period or subsequent to the quarter ending. We continue to market for sale or prepare to market for sale each property in the held for resale category. Properties have either sold as-is or have been repaired and upgraded before being listed for sale. Several real estate agents have been engaged to market the remaining properties listed for resale.consist of single-family residential rental units.
We own several rental properties managed by a third-party property management company. As of September 30, 2017, we had eight properties available for rent. All rental properties were occupied.
The leases in effect, as of the quarter ended September 30, 2017March 31, 2021, 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. All eight
EDI Real Estate | March 31, 2021 | December 31, 2020 | ||||||
Total real estate held for investment | $ | 95,679 | $ | 303,158 | ||||
Accumulated depreciation | (25,360 | ) | (61,282 | ) | ||||
Real estate held for investment, net | 70,319 | 241,876 | ||||||
Real estate held for resale, net | $ | 169,181 | $ | — |
For the three-month period ended March 31, 2021, depreciation expense on the EDI Real Estate portfolio of properties was $2,377. This compares to the three-month period ended March 31, 2020, when depreciation expense on the EDI Real Estate portfolio of properties was $4,091.
No properties were current with regardsold during the three-month period ended March 31, 2021. Subsequent to tenant payments asMarch 31, 2021, one property held for resale has been sold. During the three-month period ended March 31, 2020, two properties held for resale were sold for gross proceeds of September 30, 2017.$172,000. Net proceeds totaled $34,749. This is comparablecompares to their carrying value of $98,835, which resulted in a total gain of $73,165 for the quarterperiod. No properties were purchased during the three-month periods ended September 30, 2016 when we also had eight properties availableMarch 31, 2021, and 2020 for rent with all of the properties occupied and current with regard to tenant payments.EDI Real Estate portfolio.
During the quarterthree-month periods ended September 30, 2017,March 31, 2021, and 2020, $169,181 and $43,917, respectively, of real estate held for investment was transferred to real estate held for resale.
There were no impairment adjustments recorded during the three-month periods ended March 31, 2021, and 2020.
Mt Melrose Operations
For the periods ended March 31, 2021, and December 31, 2020, the Company’s remaining investment in Mt Melrose is carried on our condensed consolidated balance sheets for $53,846. This carrying value is reflective of the mechanics of the June 27, 2019, transaction, rather than management’s perceived value of the Company’s remaining interest. By way of the Mt Melrose transaction, further described in Note 4, the Company generated rental revenuewas able to significantly reduce direct and overhead expenses, improve net cash flows, and fully deconsolidate approximately $6.4 million of $24,144, netdebt. Additionally, the Company was afforded the opportunity to refocus growth opportunities to its asset management operations segment. These circumstances, rather than the cash consideration received, are what strategically prompted the majority sale of badthe Mt Melrose entity. Additional debt expense. Therestructurings and sales of previously inactive real estate properties have allowed the portfolio to continue its redirection, which management believes could provide long-term returns greater than its current carrying value.
Internet Operations
Revenue attributed to the internet operations segment during the three-month period ended March 31, 2021, totaled $232,266, and cost of revenue totaled $6,081.$71,963. Operating expenses for the segment totaled $46,541 for the three-month period ended March 31, 2021, and other income totaled $361. Total net income for the internet operations segment was $114,123 for the three-month period ended March 31, 2021. This comparedcompares to rentalthe three-month period ended March 31, 2020, when revenue of $27,023, net of bad debt during the quarter ended September 30, 2016. Thetotaled $253,559, cost of revenue duringrevenues totaled $87,188, operating expenses were $47,848, other income was $370, and net income was $118,893. Other income for the comparison period totaled $11,104. The decrease in cost of revenue wassegment is the result of improved maintenance of the rental properties by our third-party property manager.refundable sales tax credits.
Depreciation expense totaled $5,304 for the quarter ended September 30, 2017. Total accumulated depreciation as of September 30, 2017 totaled $81,057.
Asset Management Operations
The Company operates its asset management business through a wholly-owned subsidiary, Willow Oak Asset Management, LLC (“Willow Oak”). This subsidiary was formed on October 10, 2016. As of March 31, 2021, we have a total of 6,895 customer accounts across the quarter ended September 30, 2017, all four $2.5 million payments ofU.S. and Canada. This compares to the $10 million seed investment in Alluvial Fund, as previously described, have been made. Willow Oak earns revenues through a fee share arrangement with Alluvial Fund, LP. In accordance with GAAP, for financial reporting purposes, all Alluvial Fund investment gains and losses are reported as revenue on the condensed consolidated statement of income. For tax purposes, the realized portion of these gains will be taxable. Fees earned from the fee share agreement specific to management fees are paid monthly and reported as revenue. Fees earned from the fee share agreement specific to performance are accrued monthly and reported as revenue. These fees are paid out annually and may fluctuate throughout the year.
Willow Oak entered into a certain Limited Liability Company Operating Agreement of Huckleberry Real Estate Fund II, LLC (“Huckleberry Fund”) dated as of January 24, 2017 (the “Operating Agreement”). In connection with entering into the Operating Agreement, Willow Oak also entered into a certain Side Letter Agreement dated January 23, 2017 (the “Side Letter”) with Huckleberry Fund and Huckleberry Capital Management, LLC (“Huckleberry Management”), an unaffiliated and unrelated New Jersey limited liability company and registered investment adviser. Under the terms of the Operating Agreement and the Side Letter, Willow Oak subscribed for a membership interest in Huckleberry Fund, a Delaware limited liability company and private investment fund managed by Huckleberry Management and organized to invest in the Oak Street properties real estate project in Lakewood, New Jersey. In connection with our subscription for a membership interest in Huckleberry Fund, Willow Oak committed to make a capital contribution to Huckleberry Fund in an aggregate amount of at least $750,000, which was made during the quarterthree-month period ended March 31, 2017.
Willow Oak signed a fee share agreement on May 11, 2017 with Lizard Head, LLC, the general partner of Bridge Reid Fund I, LP. 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.
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 Asset 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.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
In the quarter ended September 30, 2017 the asset management segment produced2020, when we had a total of $674,0547,401 customer accounts. As of comprehensiveMarch 31, 2021, approximately 60% of our revenue is driven by internet access services, with the remaining 40% being earned though web hosting and other web-based storage services.
Approximately 92% of our customer accounts are U.S.-based, while 8% are Canada-based. Revenue generated by our U.S. customers totaled $220,280, and revenue generated by our Canadian customers totaled $11,986 during the three-month period ended March 31, 2021. This compares to revenue generated by our U.S. customers of $240,622, and revenue generated by our Canadian customers of $12,937 during the three-month period ended March 31, 2020.
Other Operations
For the three-month period ended March 31, 2021, the Company’s other operations segment did not produce any revenue or cost of goods sold. Operating expenses totaled $207,253, and other income which was generated as$4,181 for the three-month period ended March 31, 2021. Corporate operating expenses accounted for the full $207,253 of reported operating expenses for our other operations. This resulted in a resultnet loss of unrealized capital gains recognized as$203,072 for the three-month period ended March 31, 2021. This compares to the three-month period ended March 31, 2020, when the other operations segment again did not produce any revenue from its partnership with Alluvial Fund, LP. As previously noted, these non-current securities are marked to market ator cost of goods sold, but did incur corporate operating expenses of $289,433, other income of $3,692, and a net loss of $285,741 for the end of each reporting period and unrealized gains and losses are recognized as revenue in the period of adjustment. Expenses totaled $41,544. Theseperiod. Corporate expenses were lower for the three-month period ended March 31, 2021, primarily due to a decrease in legal expenses.
Discontinued Operations - Home ServicesOperations
As noted previously, Specialty Contracting Group, LLC’s historical operations are now classified as “discontinued operations” in our consolidated financial statements, and consulting feesall presented prior periods have also been reclassified to discontinued operations for comparability. Net income reported from discontinued operations related to the launch of the Bonhoeffer Fund, LP. No comparable figures existhome services operations segment for the quarterthree-month period ended September 30, 2016 asMarch 31, 2021, were $643. This compares to net income of $10,756 reported from discontinued operations related to the asset management subsidiary did not commence activities until January 1, 2017.home services operations segment for the three-month period ended March 31, 2020.
Financial Condition, Liquidity, and Capital Resources
During the three-month period ended March 31, 2021, Enterprise Diversified carried out its business strategy in four operating segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. Our primary focus is on generating cash flow so that we have the flexibility to pursue opportunities as they present themselves. We will only invest cash in each segment if we believe that the return on this invested capital is appropriate for the risk associated with the investment. This consideration is measured against all investment opportunities available to us and is not limited to these particular segments or the Company’s historical operations.
Cash and equivalents totaled $151,867$292,767 at quarter end September 30, 2017the three-month period ended March 31, 2021, compared to $2,607,370$341,007 at year endyear-end December 31, 2016. This2020. Real estate held for investment decreased to $70,319 at the period ended March 31, 2021, compared to $241,876 at year-end December 31, 2020, and real estate held for resale increased to $169,181 at the period ended March 31, 2021, compared to $0 at year-end December 31, 2020. Additionally, accrued compensation decreased from $281,904 at the year ended December 31, 2020, to $89,328 at the three-month period ended March 31, 2021. The fluctuations in real estate amounts are primarily due to the opportunistic sales of certain EDI Real Estate rental properties, and the decrease in cash and equivalentsaccrued compensation is the result of our investments in Alluvial Fund and an acquisition by our HVAC segment. During this time period, net accounts receivable increased to $481,123 from $212,751 due to increased sales related to the HVAC segmentissuance of common stock during the quarterthree-month period ended September 30, 2017.March 31, 2021. The Company does not expect to make significant reinvestments into property and equipment used in operating activities at this time.
Accounts payable increased to $180,692 at quarter end September 30, 2017 compared to $77,918 at year end December 31, 2016. Accrued expenses increased to $158,271 from $71,532 during this time period.
The increases in accounts payable and accrued expenses are also due to increased activity in the HVAC segment in the quarter ended September 30, 2017. Accrued bonus increased to $110,000 from $51,855 during this time period. Deferred revenue increased to $239,748 from $214,898 during this time period. Fluctuation in accrued bonus and deferred revenue are cyclical differences based on the timing of bonuses paid and the renewal of customer subscriptions in the internet segment.
WeCompany currently believebelieves that our existing balances of cash, cash equivalents, and cash generated from operations and from the sale of our real estate portfolio will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months and the foreseeable future. The Company does not have significant long-term debt. Our liquidity could be negatively affected if we were to make an acquisition, which may necessitate the need to raise capital through future debt or equity financing. Additional financing may not be available at all or on terms favorable to us.months.
The aging of accounts receivable as of September 30, 2017March 31, 2021, and December 31, 20162020 is as shown:
March 31, 2021 | December 31, 2020 | |||||||
Current | $ | 127,151 | $ | 142,121 | ||||
30 – 60 days | 1,748 | 1,836 | ||||||
60 + days | 1,256 | 834 | ||||||
Total | $ | 130,155 | $ | 144,791 |
We have no material capital expenditure requirements.
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Current |
| $ | 291,269 |
|
| $ | 155,224 |
|
30 – 60 days |
| $ | 56,270 |
|
| $ | 14,016 |
|
60 + days |
| $ | 135,584 |
|
| $ | 43,511 |
|
Total |
| $ | 483,123 |
|
| $ | 212,751 |
|
Contractual Obligations
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,
In 2016, the Company announced that it had entered intomade a letter of intent agreement with Alluvial Capital Management, LLC (“Alluvial Capital”)strategic determination to makefund a seed investment, through Willow Oak, Asset Managementto assist in the launch of Alluvial Fund, LP, a private investment partnershipfund that was launched by Alluvial Capital on January 1, 2017, (“Alluvial Fund”).by an unaffiliated sponsor and general partner, Alluvial Capital will act as the general partnerManagement, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and the Company, through Willow Oak Asset Management, will investits direct investment in Alluvial Fund as a limited partner.
The Company has agreed to make capital contributions to Alluvial Fundwere both beneficial and necessary undertakings in the aggregate amount of $10 million to be provided over four equal tranches on January 1, 2017, April 1, 2017, July 1, 2017conjunction with establishing an asset management operations business and October 1, 2017.gaining credibility within that industry. As of September 30, 2017, the Company satisfied its obligation to provide $10 million in accordance with the contribution schedule.
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 leases2021, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on various vehicles and equipment that extend through 2020.
Through the asset management segment, a lease on office space in New York City will commence on October 1, 2017. This lease extends through September 30, 2020. All related expenses will be allocated to the asset management segment.
28
Item 2. Management’s Discussion and Analysisaccompanying unaudited condensed consolidated statements of Financial Condition and Results of Operations (Continued)operations.
WeAs has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to Woodmont. Under the terms of the parties’ membership interest purchase agreement, the Company agreed to indemnify Woodmont against certain losses actually incurred by Woodmont as a result of breaches of the Company’s representations and warranties made under the agreement. As has been previously reported, Woodmont has made several claims for indemnification under the agreement, all of which have no other meaningful long-term debt obligations, purchase obligations or other long-term liabilities asbeen disputed by the Company. Also, in connection with the transaction, the Company and Woodmont entered into a certain Amended and Restated Limited Liability Company Agreement of September 30, 2017 other than those previously mentioned related to the HVAC and asset management segment. The only operating lease obligations are agreements for leased office and warehouse space for HVAC Value Fund,Mt Melrose, LLC, which extend through July 31, 2019,sets forth the general terms and for leased office space for Willow Oak Asset Management, LLC,conditions governing the arrangements between the two members; and, in addition, the Company expressly agreed to a three-year “standstill” arrangement, during which extends through September 30,2020.time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose.
Off-Balance
Off-balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements as of September 30, 2017.March 31, 2021, nor at any time from January 1, 2021, through March 31, 2021.
Discussion Regarding COVID-19 Potential Impacts
Due to the continuing uncertainty surrounding the COVID-19 pandemic, the Company has experienced, and continues to expect, market volatility as primarily related to its investment in the Alluvial Fund. As reported in prior periods, this volatility can create periods when the asset management operations segment produces negative revenue amounts. Due to the size of the investment, these negative revenue amounts can also have a sizable impact on the Company’s balance sheets at a given point in time. The nature of this investment has inherent market risks, and short-term results can be unpredictable.
Management continues to monitor and assess all Company operations for additional potential impacts of the COVID-19 pandemic. As of the three-month period ended March 31, 2021, the Company has not been forced to make significant operational changes as a result of the pandemic. Management does not anticipate additional challenges in meeting existing obligations, nor do we expect significant customer or vendor interruptions. However, the extent to which the continuing COVID-19 pandemic ultimately may impact our business, financial condition, liquidity, and results of operations likely will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the continuing pandemic, the direct and indirect impact of the continuing pandemic on our employees, customers, and service providers, as well as the U.S. economy, and the actions taken by governmental authorities and other third parties in response to the continuing pandemic.
Discussion Regarding the Company’s Status Under the Investment Company Act of 1940
As discussed above, the Company, directly and through our subsidiaries, currently is engaged primarily in asset management operations, real estate operations, and internet operations lines of business--that is, in businesses other than that of investing, reinvesting, owning, holding, or trading in securities. We are not engaged primarily, nor do we propose to engage primarily, in the business of investing, reinvesting, or trading in securities; nor does the Company propose to operate any of its businesses in a manner that would cause the Company to be subject to regulation as an “investment company” under the Investment Company Act of 1940 (the “1940 Act”).
However, as of the quarterly period ended March 31, 2021, management has determined that our ownership of “investment securities” (as defined in the 1940 Act) exceeds 40% of the value of the Company’s total assets (exclusive of government securities and cash items), as measured under the 1940 Act. Our ownership of “investment securities” is largely comprised of our investment and limited partnership interests in Alluvial Fund, LP. In this respect, as the composition of our assets has changed over recent time, including by virtue of our previous sale of membership interests in Mt Melrose, LLC and our previous divestiture of the former Home Services Operations segment, the impact of our long-standing Alluvial Fund investment to the composition of our total assets, as measured under the 1940 Act, has become more pronounced, albeit inadvertently.
During the quarterly period ended March 31, 2021, representatives from the Securities and Exchange Commission (“SEC”) Division of Investment Management and the Company have engaged in several informal discussions and correspondence regarding a general inquiry by the SEC as to the Company’s current status under the 1940 Act, namely as a result of the apparent quantitative significance of the Company’s assets that may constitute “investment securities” in relation to the Company’s total assets, as noted above.
As a result of such discussions and correspondence among the Company and the SEC, the Board of Directors of the Company has re-confirmed that the Company has a bona fide intent to be engaged primarily in lines of business not constituting that of investing, reinvesting or trading in securities, nor that of acquiring, owning or holding “investment securities,” and the Board has resolved to explore certain strategic options so as to eliminate as soon as is reasonably possible any uncertainty in regard to the Company’s status under the 1940 Act. In this respect, the Company is in the process of developing a strategic operational plan setting forth specific potential steps designed to grow certain operational lines of business and effect changes to the composition of our assets in the near future; although there can be no assurances, of course, that we will be successful in our formulation and/or carrying out of any such plan.
Quantitative and |
This item is not required by smaller reporting companies.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2017,
The Company’s management, with the participation of our Chief Executive Officerprincipal executive officer and Chief Financial Officer, performed an evaluation ofprincipal financial officer, have evaluated the effectiveness of the design and operation of our disclosure“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.Act, as of March 31, 2021. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officerour principal executive officer and the Chief Financial Officer,principal financial officer, to allow timely decisions regarding required disclosures. Because of inherent limitations, any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objective. Based upon theirthis evaluation, and based upon material weaknesses in our internal control over financial reporting identified as of the date of our most recent evaluation of internal controls over financial reporting, our Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2017. Management is aware of these deficiencies and is working diligently to improve the relevant controls and procedures; provided, however, there can be no assurance that such relevant controls and procedures will be improved or, even if improved, that such improved controls and procedures will be effective.March 31, 2021.
Changes in Our Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended September 30, 2017,March 31, 2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date of our most recent evaluation of the Company’s internal control over financial reporting.
PART II. OTHEROTHER INFORMATION
Sitestar v. Frank Erhartic, Jr.
On April 12, 2016, Sitestar filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”),Pursuant to Item 103 of Regulation S-K, as amended, the information required by this item is provided by cross-reference to the Company’s former CEO and director and currently an owner of record or beneficially of more than five percent oflegal proceedings disclosure located under the Company’s Common Stock, alleging, among other things, that the Former CEO engagedLitigation & Legal Proceedings heading 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 paymentsNote 11 to the Former CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former CEO, causing the Company to pay certain amounts to the Former CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former CEO, causing the Company to pay rent on its corporate headquarters owned by the Former CEO’s ex-wife in amounts commercially unreasonable and excessive and to make real estate tax payments thereon for the personal benefit of the Former CEO, converting to the Former CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by the Former CEO, causing the Company to pay personal credit card debt of the Former CEO, causing the Company to significantly overpay the Former CEO’s health and dental insurance for the benefit of the Former CEO, and causing the Company to pay the Former CEO’s personal automobile insurance. The Company is seeking, among other relief available, monetary damages in excess of $350,000. This litigation matter is currently pending in the Circuit Court for the City of Lynchburg (Lynchburg, Virginia)accompanying unaudited consolidated financial statements (see page 21).
Other Litigation
From time to time, we are subject to legal proceedings related to the conduct of our business. Based on the information available as of the date of this filing, we believe that the ultimate outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
This item is not required byfor smaller reporting companies.
As previously reported in our Current Report on Form 8-K filed with the SEC on
On February 6, 2017,3, 2021, the Company accepted and closed upon subscriptions fromissued a private placementtotal of shares of common stock of the Company (the “Private Placement”) in the amount of $4,625,000, and issued 92,500,00045,143 unregistered shares of its common stockCommon Stock to members of the Board of Directors and select senior management in connection therewith. Immediately following the Private Placementlieu of cash payment of certain accrued director’s fees and annual management bonuses, pursuant to and in line with our previously reported Enterprise Diversified, Inc. 2020 Equity Incentive Plan, as of February 6, 2017, the Company had a total of 296,652,616 issued shares of common stock and 282,830,163 outstanding shares of common stock.
amended. The issuancenumber of shares of common stockissued was determined by the Governance, Compensation, and Nomination Committee of the Company pursuant toBoard of Directors using the Private Placement wasvolume weighted average price of a private placement to “accredited investors” (as that term is definedshare of Common Stock for the ninety (90) days immediately preceding January 31, 2021, which equaled $5.3166. To the extent this issuance constituted an offer or sale of securities under Rule 501 of Regulation D), andthe Securities Act, it was exempt from registration under the Securities Act of 1933 (“Securities Act”), in reliance upon Section 4(2)4(a)(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.
None.
Not applicable.
The Company is not primarily engaged, and does not propose to primarily engage, in the business of investing, reinvesting or trading in securities, and does not propose to operate in a manner that would cause it to acquire ‘investment securities’ (as defined in the Investment Company Act), having a value exceeding 40 percent of the value of its total assets (exclusive of Government securities and cash items), calculated on an unconsolidated basis. The board of the Company has elected to eliminate any uncertainty in regard to the Company’s current status under the Act, and has confirmed pursuant to Rule 3a-2 adopted under the Act that the Company has a bona fide intent to be engaged primarily, as soon as is reasonably possible and in any event by the end of the one-year period beginning June 30, 2017, in various lines of business not constituting investment securities, including, but not necessarily limited to, internet services, HVAC and plumbing services and real estate. This bona fide intent is demonstrated by the Company’s internal operational plan (the ‘Plan’), prepared and submitted by the Company, which sets forth detailed and specific potential steps to use the Company’s capital and assets to grow certain operational lines of business. Pursuant to the Plan, the Company’s holdings of investment securities will constitute less than 40 percent of its total assets on an unconsolidated basis no later than one year from June 30, 2017.
Exhibit |
| Description |
31.1 |
| Certification of |
31.2 |
| Certification of |
32 |
| |
101 |
| Pursuant to Rule 405 of Regulation S-T, the following materials from |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
|
|
Date: |
| /s/Steven L. Kiel |
|
| Steven L. Kiel |
|
|
|
(Principal Executive Officer) | ||
Date: May 14, 2021 | /s/ Alea A. Kleinhammer | |
Alea A. Kleinhammer | ||
Chief Financial Officer | ||
|
| (Principal |
34