Document and Entity Information
Document and Entity Information - shares | 9 Months Ended | |
Sep. 30, 2016 | Nov. 11, 2016 | |
Document And Entity Information | ||
Entity Registrant Name | SITESTAR CORP | |
Entity Central Index Key | 1,096,934 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2016 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Is Entity a Well-known Seasoned Issuer? | No | |
Is Entity a Voluntary Filer? | No | |
Is Entity's Reporting Status Current? | Yes | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 190,230,163 | |
Document Fiscal Period Focus | Q3 | |
Document Fiscal Year Focus | 2,016 |
Balance Sheets (Unaudited)
Balance Sheets (Unaudited) - USD ($) | Sep. 30, 2016 | Dec. 31, 2015 |
Current assets: | ||
Cash and cash equivalents | $ 1,668,948 | $ 184,731 |
Accounts receivable, net | 257,770 | 14,428 |
Investments, at fair value | 2,515,060 | |
Other current assets | 364,249 | 1,081 |
Total current assets | 4,806,027 | 200,240 |
Real estate - held for resale | 1,546,867 | 2,671,311 |
Real estate - held for investment, net | 510,525 | 911,162 |
Property and equipment, net | 108,305 | |
Goodwill, net | 1,266,296 | 212,445 |
Other assets | 256,250 | 200,055 |
TOTAL ASSETS | 8,494,270 | 4,195,213 |
Current Liabilities: | ||
Deferred revenue | 241,174 | 246,262 |
Notes payable, current | 240,000 | 90,000 |
Accounts payable | 105,131 | 58,094 |
Accrued expenses | 144,125 | 49,812 |
Total current liabilities | 730,430 | 444,168 |
Notes payable | 25,000 | |
Total Liabilities | 755,430 | 444,168 |
Stockholders' equity | ||
Preferred stock, $0.001 par value, 30,000,000 shares authorized; none issued | ||
Common stock, $0.001 par value, 300,000,000 shares authorized; 171,633,112 and 91,326,463 shares issued; 157,710,659 and 77,404,010 shares outstanding. | 171,633 | 91,327 |
Additional paid-in capital | 17,503,402 | 13,728,989 |
Treasury stock, at cost, 13,922,453 common shares | (637,561) | (637,561) |
Accumulated other comprehensive income | 31,969 | 3,415 |
Accumulated deficit | (9,347,558) | (9,435,125) |
Total stockholders’ equity attributable to Sitestar Corporation stockholders | 7,721,885 | 3,751,045 |
Noncontrolling interest in consolidated subsidiaries | 16,955 | |
Total stockholders' equity | 7,738,840 | 3,751,045 |
Total Liabilities and Stockholders' Equity | $ 8,494,270 | $ 4,195,213 |
Balance Sheets (Parenthetical)
Balance Sheets (Parenthetical) - $ / shares | Sep. 30, 2016 | Dec. 31, 2015 |
Statement of Financial Position [Abstract] | ||
Preferred Stock Par Value | $ 0.001 | $ 0.001 |
Preferred Stock Shares Authorized | 30,000,000 | 30,000,000 |
Preferred Stock Shares Issued | 0 | 0 |
Preferred Stock Shares Outstanding | 0 | 0 |
Common Stock Par Value | $ 0.001 | $ 0.001 |
Common Stock Shares Authorized | 300,000,000 | 300,000,000 |
Common Stock Shares Issued | 171,633,112 | 91,326,463 |
Common Stock Shares Outstanding | 157,710,659 | 77,404,010 |
Common Shares Treasury Stock | 13,922,453 | 13,922,453 |
Statements of Operations (Unaud
Statements of Operations (Unaudited) - USD ($) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2016 | Sep. 30, 2015 | Sep. 30, 2016 | Sep. 30, 2015 | |
Revenues: | ||||
Internet operations | $ 355,384 | $ 393,407 | $ 1,068,283 | $ 1,222,213 |
HVAC operations | 906,910 | 939,932 | ||
Real estate operations | 404,923 | 31,550 | 1,992,371 | 93,348 |
Total revenue | 1,667,217 | 424,957 | 4,000,586 | 1,315,561 |
Cost of Revenues: | ||||
Internet operations | 70,290 | 57,079 | 290,043 | 378,016 |
HVAC operations | 619,881 | 633,053 | ||
Real estate operations | 402,285 | 22,842 | 1,918,603 | 65,012 |
Total cost of revenues | 1,092,456 | 79,921 | 2,841,699 | 443,028 |
Gross Profit (Loss): | ||||
Internet operations | 285,094 | 336,328 | 778,240 | 844,197 |
HVAC operations | 287,029 | 306,879 | ||
Real estate operations | 2,638 | 8,708 | 73,768 | 28,336 |
Total gross profit | 574,761 | 345,036 | 1,158,887 | 872,533 |
Selling, general and administrative expenses | 634,338 | 165,128 | 1,152,715 | 702,602 |
Income (loss) from operations | (59,577) | 179,908 | 6,172 | 169,931 |
Other income (expense), net | 93,779 | (11,354) | 98,350 | (37,776) |
Income before income taxes | 34,202 | 168,554 | 104,522 | 132,155 |
Income tax benefit (expense) | ||||
Net income | 34,202 | 168,554 | 104,522 | 132,155 |
Less: net income attributable to noncontrolling interest | 14,102 | 16,955 | ||
Net income attributable to Sitestar Corporation Stockholders | $ 20,100 | $ 168,554 | $ 87,567 | $ 132,155 |
Earnings per share, basic and diluted | $ 0 | $ 0 | $ 0 | $ 0 |
Weighted average number of shares, basic and diluted | 122,794,725 | 77,404,010 | 92,644,688 | 77,404,010 |
Other comprehensive income: | ||||
Foreign exchange translation | $ (12) | $ 1,287 | $ (103) | $ 2,072 |
Unrealized gains (losses) related to available-for-sale securities | (21,694) | 28,657 | ||
Comprehensive income, net | 12,496 | 169,841 | 133,076 | 134,227 |
Comprehensive income attributable to noncontrolling interest | 14,102 | 16,955 | ||
Comprehensive income (loss) attributable to Sitestar Corporation Stockholders | $ (1,606) | $ 169,841 | $ 116,121 | $ 134,227 |
Shareholders Equity
Shareholders Equity - USD ($) | Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Income | Accumulated Deficit | Non Controlling Interest | Total |
Beginning Balance, Shares at Dec. 31, 2014 | 77,404,010 | ||||||
Beginning Balance, Amount at Dec. 31, 2014 | $ 91,327 | $ 13,728,989 | $ (637,561) | $ (768) | $ (8,515,803) | $ 4,666,184 | |
Net income (loss) | (919,322) | ||||||
Gain (loss) on foreign currency translation adjustments | 4,183 | 4,183 | |||||
Ending Balance, Shares | 77,404,010 | ||||||
Ending Balance, Value | $ 91,327 | 13,728,989 | (637,561) | 3,415 | (9,435,125) | 3,751,045 | |
Beginning Balance, Shares at Dec. 31, 2015 | 77,404,010 | ||||||
Beginning Balance, Amount at Dec. 31, 2015 | $ 91,327 | 13,728,989 | (637,561) | 3,415 | (9,435,125) | 3,751,045 | |
Net income (loss) | 87,567 | $ 16,955 | 104,522 | ||||
Contributed capital, Shares | 80,306,649 | ||||||
Contributed capital, Amount | $ 80,306 | 3,774,413 | 3,854,719 | ||||
Gain (loss) on foreign currency translation adjustments | (103) | (103) | |||||
Unrealized gain (loss) on investments | 28,657 | 28,657 | |||||
Ending Balance, Shares | 157,710,659 | ||||||
Ending Balance, Value | $ 171,633 | $ 17,503,402 | $ (637,561) | $ 31,969 | $ (9,347,558) | $ 16,955 | $ 7,738,840 |
Statements of Cash Flows (Unaud
Statements of Cash Flows (Unaudited) - USD ($) | 9 Months Ended | |
Sep. 30, 2016 | Sep. 30, 2015 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net income (loss) | $ 104,522 | $ 132,155 |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||
Amortization | 55 | |
Depreciation | 23,236 | 34,029 |
Gain on sale of real estate | (213,454) | |
Bad debt | 4,383 | 33,800 |
Real estate valuation adjustment | (11,164) | |
Changes in operating assets and liabilities: | ||
Accounts receivable, net | (247,828) | (30,786) |
Other current assets | (21,888) | 72 |
Deferred revenue, net | (5,088) | (10,975) |
Accounts payable | 47,037 | 88,750 |
Accrued expenses | 94,313 | (37,618) |
Net cash provided by (used in) operating activities | (214,712) | 198,263 |
Cash flows from investing activities: | ||
Proceeds from sale of real estate held for resale | 1,568,699 | |
Purchases of real estate held for resale | (98,059) | |
Improvements to real estate held for resale | (180,708) | (136,311) |
Proceeds from sale of real estate held for investment | 344,850 | |
Purchases of real estate held for investment | (41,588) | |
Improvements to real estate held for investment | (17,542) | (149,722) |
Purchase of marketable securities | (2,486,403) | |
Purchase of domain names | (56,250) | |
Investment in HVAC subsidiaries | (1,238,436) | |
Net cash provided by (used in) investing activities | (2,065,790) | (425,680) |
Cash flows from financing activities: | ||
Principal payments on note payable | (90,000) | |
Proceeds from issuing common stock | 3,854,719 | |
Net cash flows from financing activities | 3,764,719 | |
Net increase (decrease) in cash | 1,484,217 | (227,417) |
Cash and cash equivalents at beginning of the period | 184,731 | 339,694 |
Cash and cash equivalents at end of the period | 1,668,948 | 112,277 |
Non-cash supplemental information | ||
Transfer of real estate held for investment to held for resale | 152,003 | 316,680 |
Unrealized gain on marketable securities reported as other comprehensive income | 28,657 | |
HVAC acquisitions through notes payable | $ 240,000 |
1. ORGANIZATION, SIGNIFICANT AC
1. ORGANIZATION, SIGNIFICANT ACCOUNTING POLICIES, AND BACKGROUND ON THE 2015 RESTATEMENT | 9 Months Ended |
Sep. 30, 2016 | |
Accounting Policies [Abstract] | |
1. ORGANIZATION, SIGNIFICANT ACCOUNTING POLICIES, AND BACKGROUND ON THE 2015 RESTATEMENT | NOTE 1. ORGANIZATION, SIGNIFICANT ACCOUNTING POLICIES, AND BACKGROUND ON THE 2015 RESTATEMENT Organization and Lines of Business Sitestar Corporation (formerly White Dove Systems, Inc., and then Interfoods Consolidated, Inc.) was incorporated in Nevada on December 17, 1992. On July 26, 1999, the Company restated its Articles of Incorporation to change the name of the Company to Sitestar Corporation. Unless the context otherwise requires, and when used in this Report, the Company, Sitestar, we, our or us refers to Sitestar Corporation and its subsidiaries. The Company operates through four reportable segments: Corporate, Internet Operations, Real Estate Operations, and HVAC Operations. The management of the Company is also currently reviewing investment opportunities in the public and private markets, including in other lines of business. Corporate The corporate segment includes any revenue or expenses derived from corporate office operations as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company. Sitestar also invests in marketable securities through the corporate segment. Internet Operations The Company operates its internet operations through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada. Real Estate Operations Sitestar owns a real estate investment portfolio that includes residential properties, vacant land, and one commercial property. Our real estate portfolio is primarily focused in the Roanoke and Lynchburg areas of Virginia. The portfolio includes single family homes that are currently rented and managed through a third-party property manager, as well as vacant properties being prepared or currently listed for sale. Pursuant to the approval of the Board of Directors, we are pursuing an orderly liquidation of our real estate portfolio. We do not have an estimate for how long it will take to complete this liquidation, if ever. HVAC Operations The Company operates its HVAC operations through HVAC Value Fund, LLC. HVAC Value Fund is focused on the acquisition and management of HVAC companies in Arizona and throughout the Southwest. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, we, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized and launched this subsidiary on June 13, 2016. Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has the ability to earn a profits interests. Per the signed 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, 2016, HVAC Value Fund had closed on four acquisitions for an aggregate purchase price of $1.14 million, two of which occurred in the quarter ended September 30, 2016. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, the purpose of HVAC Value Fund is to acquire HVAC businesses. Accordingly, these four acquisitions were made in the ordinary course of business and consistent with the customs and practices (including with respect to nature, scope, magnitude, quantity, frequency and contemplated purpose) of HVAC Value Fund, and, in turn, the Company. Principles of Consolidation The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including: Sitestar.net, Inc., FRE Enterprises, Inc., Advanced Internet Services, Inc., NetRover Inc., and HVAC Value Fund, LLC. All intercompany accounts and transactions have been eliminated. Background on the 2015 restatement As previously reported in our Annual Report on Form 10-K filed with the SEC on July 18, 2016, on December 3, 2015 Sitestars former auditor notified the independent Directors of the Company of his concerns about several related party transactions and what the former auditor considered to be former managements inadequate responses regarding these matters. The former auditor had not previously disclosed these concerns to the independent Directors and had not included the independent Directors in previous communications on the matter. The independent Directors requested information from former management on December 7, 2015 and believed the responses from former management to be inadequate. The independent Directors provided former management with an additional opportunity to explain the issues on December 14, 2015 and again found the responses to be lacking. Accordingly, the Board of Directors voted to terminate the former CEO and place the now former CFO on probation. An independent Director, Steven L. Kiel, was appointed as the interim CEO during that meeting. Directors also voted to form an Audit Committee at the December 14, 2015 meeting and appointed two independent Directors to the Committee. Among other things, the Audit Committee was tasked with reviewing and approving the engagement with an outside auditor. Also at the December 14, 2015 meeting, Directors agreed to engage outside legal counsel to lead an investigation into the allegations by the Companys former auditor. Legal counsel engaged an accounting firm to carry out an analysis of a range of transactions over the previous five years. The information above was originally detailed in 8-K filings on December 15, 2015 and December 29, 2015. A final investigation report was delivered to management in February 2016. This report served as the basis for a lawsuit filed by the Company against the former CEO, Mr. Erhartic, in April 2016. This lawsuit is described more fully in Part II, Item 1, Legal Proceedings. The results of the investigation, along with the problematic items identified by the former auditor and the accounting firm engaged to conduct the investigation, led the Company to make the decision that it was necessary to restate the 2014 10-K as well as the interim reports for 2014 and 2015. Results in this quarterly report include the restated comparison figures for the corresponding interim periods of fiscal 2015. Adjustments to asset and liability balances for the quarter ended September 30, 2015 are related primarily to previous errors related to the fair value analysis and capitalization policy for real estate properties held for investment and resale, errors in the revenue recognition criteria, errors in the calculation of depreciation, errors in the calculation of tax expenses, and cut-off deficiencies related to quarter-end accruals. Adjustments to cost of revenue for the quarter ended September 30, 2015 are related to previous errors in the accrual of expenses. Adjustments to operating expenses are related to errors in the accrual of salaries, errors in the accrual of expenses, errors in the calculation of bad debts, errors in the calculation of depreciation in the real estate segment and in property and equipment, reclassifications of expenses related to disputed use of funds by the former CEO, and clerical errors. Adjustments to other income are related to errors in the reporting of currency translations. |
2. SUMMARY OF SIGNIFICANT ACCOU
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 9 Months Ended |
Sep. 30, 2016 | |
Accounting Policies [Abstract] | |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited condensed consolidated financial statements have been prepared by Sitestar Corporation, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2015 included in the Companys Annual Report on Form 10-K filed with the SEC on July 18, 2016 (the 2015 Form 10-K). The comparative results for the three months and nine months ended September 30, 2015 included in the unaudited condensed consolidated financial statements in this Form 10-Q reflect restated amounts, as described in and reported under the 2015 Form 10-K. The results for the three months and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016. Use of Estimates In accordance with Accounting Principles Generally Accepted in the United State of America (GAAP), the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, goodwill valuation, other assets, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid instruments purchased with a maturity of three months or less. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and accounts receivable. The Company places its cash with high quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customers financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. Investments The Company currently holds and makes investments in marketable securities through its corporate operations. Marketable securities held are classified as available-for-sale based on managements intent. The classification of the investments in these marketable securities is assessed upon purchase and reassessed at each reporting period. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheets. Unrealized gains (losses) are categorized as Other Comprehensive Income. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as earned on the ex-dividend date. Interest and dividend income are recorded in the accompanying unaudited condensed statements of income in interest expense, net. Accounts Receivable The Company grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is charged off to bad debt expense, is based on managements assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are charged off to the allowance for doubtful accounts when account is individually determined to be uncollectible or account is more than 180 days past due. Sales of internet services, which are not automatically processed via credit card or bank account drafts, have been the Companys highest exposure to collection risk. The Company attempts to reduce this risk by including a late payment fee and a manual processing payment fee to customer accounts. Receivables more than ninety days past due are no longer included in accounts receivable and are turned over to a collection agency. Accounts more than 30 days are considered past due. Sales of HVAC services are typically paid via credit card or check upon completion of service. Sales that are not collected upon completion are generally to existing and repeat customers who have established a track record of timely payments. Historically, HVAC has not encountered issues with collectability of customer accounts. Accounts more than 30 days are considered past due. Impairment of Long-Lived Assets In accordance with GAAP, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell. Property and Equipment Property and equipment are 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. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. Goodwill and Other Intangible Assets Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company does not amortize goodwill. The Company tests its goodwill annually during the fourth quarter of its fiscal year or when events and circumstances indicate that those assets might not be recoverable. Impairment testing of goodwill is required at the reporting unit level (operating segment or one level below operating segment) and involves a two-step process. Prior to performing the two-step impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment in order to determine whether a detailed quantitative analysis is required. The first step of the impairment test involves comparing the estimated fair values of the Companys reporting units with the reporting units carrying amounts, including goodwill. The Company estimates the fair value of its reporting units using discounted expected future cash flows. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The Company performs an analysis of its goodwill as of December 31 annually. Other intangible assets consist of customer relationships, developed technology and software, trade names, and other assets acquired in conjunction with the purchases of businesses or purchases of assets from other companies. When management determines material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account managements own analysis and an independent third party valuation specialists appraisal. Intangible assets determined to have definite lives are amortized over their estimated useful lives. The Company owns more than 125 domain names. These domains are valued at historical cost. Real Estate Real estate properties held for resale are carried at the lower of cost or fair market value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area the real estate is located and tax assessed values. Fair value is evaluated annually by management, or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable. Real estate properties held for investment are carried at the cost basis plus additional expenses where the expense extended the life or added value to the property. Otherwise, the expense is not capitalized and is charged to expense. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management. Accrued Expenses Accrued expenses represent incurred but not yet paid expenses from Sales and Use taxes for ISP services, vacation accruals, and other payroll accruals. Deferred Revenue Deferred revenue represents collections from customers in advance of internet services to be performed. Revenue is recognized in the period service is provided. Revenue Recognition Internet Operations The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. The Company generates revenue in its internet segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic and wireless), web hosting, and additional related services to consumers and businesses. Customers may downgrade from internet access to web hosting plans to include email access and storage. In some years, this shift can be significant. Internet revenue is affected by the changing composition of revenue sources. Real Estate Operations Revenue from real estate held for resale is recognized upon closing of the sale, as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time. Rental revenue from real estate held for investment is recognized when it is due, generally on the first of each month or at another regular period agreed upon between the Company and the tenant. If payments are not provided in a timely manner, the amount due is designated as an account receivable. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. Tenants generally provide a security deposit at the time of possession. This deposit is held separate from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. HVAC Operations The company performs HVAC service repairs and installs HVAC units for its customers. Revenue is recognized at the time of the install or service call. Sales are adjusted for any returns or allowances. If an install is 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. Income Taxes Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The most recent three tax years are open to potential IRS examination. Income Per Share The basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company has no potentially dilutive securities. Comprehensive Income Comprehensive income is the result of two items: the impact of foreign currency translations related to the Companys operations in Canada, and the unrealized gains (losses) from marketable securities classified as available-for-sale. Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are required to adopt this standard in the first quarter of 2019. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures. Early adoption is not permitted. We are required to adopt this standard in the first quarter of 2018. The initial application of the standard is not expected to significantly impact the Company. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740). The ASU provides guidance related to the classifications of deferred income tax assets and liabilities into current and noncurrent amounts in a classified statement of financial position. Deferred tax assets and liabilities are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax assets and liabilities that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We are required to adopt this standard in the first quarter of 2018. The initial application of the standard is not expected to significantly impact the Company. 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 entitys 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. |
3. INVESTMENTS
3. INVESTMENTS | 9 Months Ended |
Sep. 30, 2016 | |
Schedule of Investments [Abstract] | |
3. INVESTMENTS | NOTE 3. INVESTMENTS The Company may invest excess cash in marketable securities through its corporate segment. The fair values of the Companys marketable securities are determined in accordance with GAAP, with fair value being defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The following available-for-sale securities, which comprise all of the Companys marketable securities, are re-measured to fair value on a recurring basis and are valued using Level 1 inputs, which are quoted prices (unadjusted) for identical assets in active markets: Cost Basis Unrealized Gain Fair Value September 30, 2016 Common Stock available for sale $ 2,486,403 $ 28,657 $ 2,515,060 |
4. FAIR VALUE OF ASSETS AND LIA
4. FAIR VALUE OF ASSETS AND LIABILITIES | 9 Months Ended |
Sep. 30, 2016 | |
Fair Value Disclosures [Abstract] | |
4. FAIR VALUE OF ASSETS AND LIABILITIES | NOTE 4. FAIR VALUE OF ASSETS AND LIABILITIES The Company has adopted FASB ASC 820, Fair Value Measurements · Level 1 - Inputs are quoted prices in active markets as of the measurement date for identical assets and liabilities that the Company has the ability to access. This category includes exchange-traded mutual funds and equity securities. · Level 2 - Inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates or yield curves, that are observable at commonly quoted intervals. This category includes mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, commercial paper, U.S. agency and municipal debt securities, U.S. Treasury securities and derivative contracts. · Level 3 - Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The measurements are highly subjective. Following is a description of the valuation methodologies used for assets measured at fair value. Assets and Liabilities Measured at Fair Value on a Recurring Basis The Company valued its marketable securities at fair value at the end of each reporting period. (Level 1) (Level 2) (Level 3) Total at Fair Value September 30, 2016 Marketable securities $ 2,515,060 $ $ $ 2,515,060 (Level 1) (Level 2) (Level 3) Total at Fair Value December 31, 2015 Marketable securities $ $ $ $ |
5. PROPERTY AND EQUIPMENT
5. PROPERTY AND EQUIPMENT | 9 Months Ended |
Sep. 30, 2016 | |
Property, Plant and Equipment [Abstract] | |
5. PROPERTY AND EQUIPMENT | NOTE 5. PROPERTY AND EQUIPMENT The cost of property and equipment at September 30, 2016 and December 31, 2015 consisted of the following: 2016 2015 Automobile $ 95,687 $ 9,500 Equipment 13,700 Furniture and fixtures 22,206 13,788 131,593 23,288 Less accumulated depreciation (23,288 ) (23,288 ) Property and equipment, net $ 108,305 $ Depreciation expense was inconsequential for the nine months ended September 30, 2016 and $5,518 for the year ended December 31, 2015. Increased automobile and equipment assets are the result of acquisitions in the HVAC operations. |
6. REAL ESTATE
6. REAL ESTATE | 9 Months Ended |
Sep. 30, 2016 | |
Notes to Financial Statements | |
6. REAL ESTATE | NOTE 6. REAL ESTATE As of September 30, 2016, the Company owned 21 residential properties, one commercial property, and interests in several lots. The Company sold four residential properties in the quarter ended September 30, 2016 for gross proceeds of $377,900 and net proceeds of $339,036. The carrying value of the four properties sold was $346,802. For the nine-month period ended September 30, 2016, the Company sold 21 residential properties for gross proceeds of $1,913,549 and net proceeds of $1,738,057. The carrying value of the 21 properties sold was $1,714,566. Real Estate Held for Investment As of September 30, 2016, the Company held eight residential properties as held for investment. The leases in effect as of the quarter ended September 30, 2016 are based on either annual or multi-year time periods and typically include month-to-month provisions after the completion of the initial term. An outside property management company manages these rental properties on behalf of the Company. The property management company has introduced updated and renewed leases for existing rental properties. Depreciation expense totaled $5,302 and $23,236 for the three months and nine months ended September 30, 2016, respectively. Total accumulated depreciation as of September 30, 2016 totaled $72,648. These properties held for investment were carried on the balance sheet at $510,525. Real Estate Held for Resale As of September 30, 2016, the Company held 13 residential properties, one commercial property, and several lots as held for resale. These properties held for resale were carried on the balance sheet at $1,546,867. |
7. NOTES PAYABLE
7. NOTES PAYABLE | 9 Months Ended |
Sep. 30, 2016 | |
Payables and Accruals [Abstract] | |
7. NOTES PAYABLE | NOTE 7. NOTES PAYABLE Notes payable at September 30, 2016 and 2015 (as restated) consist of the following: 2016 2015 (As Restated) Non-interest bearing amount due on acquisition of USA Telephone payable in thirty-six monthly installments starting January 2008. $ $ 90,000 Interest bearing amount due on acquisition through HVAC Value Fund, LLC 250,000 Non-interest bearing amount due on acquisition through HVAC Value Fund, LLC 15,000 Less current portion (240,000 ) Long-term portion $ 25,000 $ 90,000 On December 8, 2015, Sitestar settled a breach of contract claim with United Systems Access, Inc., et al. in connection with the matter, United Systems Access, Inc., et al. v. Sitestar Corporation, Civil Action, Docket No. CV-13-161, (York County, Maine Superior Court), previously commenced against the Company and whereby the plaintiff had alleged that the Company had failed to pay certain amounts owed on a promissory note. The settlement required Sitestar to pay $90,000 to United Systems Access. This claim by United Systems Access was accrued as a note payable in the amount of $900,615 as of December 31, 2013. Upon settlement of the agreement, the liability was marked to $90,000 as of December 31, 2014. The Company paid the settlement amount in three installments on January 4, 2016, January 15, 2016, and February 11, 2016. No additional payments are due. HVAC Value Fund, LLC typically structures acquisitions where a portion of the purchase price is held back and is subject to certain conditions. These notes payable may or may not bear interest. HVAC Value Fund made two acquisitions in the quarter ended September 30, 2016. Each acquisition involved a note payable to the seller. The non-interest bearing note payable is due July 1, 2017 in the amount of $15,000, and is contingent on meeting a revenue target and other operational conditions. There are three separate interest bearing notes payable as of the quarter ended September 30, 2016. The first interest bearing note payable accrues interest at 7% annually. $25,000 is payable on June 16, 2017 and $25,000 is payable on June 16, 2018. These payments are contingent on meeting revenue targets and other operational conditions. The second interest bearing note payable is for $100,000 and bears interest at 6% annually. This note is due July 11, 2017 and is contingent on meeting revenue targets and other operational conditions. The third interest bearing note payable is for $100,000 and bears interest at 7% annually. This note is due July 30, 2017 and is contingent on meeting revenue targets and other operational conditions. |
8. SEGMENT INFORMATION
8. SEGMENT INFORMATION | 9 Months Ended |
Sep. 30, 2016 | |
Segment Reporting [Abstract] | |
8. SEGMENT INFORMATION | NOTE 8. SEGMENT INFORMATION As of September 30, 2016, the Company has four business units with separate management and reporting infrastructures that offer different products and services. The business units have been aggregated into four reportable segments: Corporate, Real Estate, Internet, and HVAC. The corporate segment includes any revenue or expenses derived from corporate office operations as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company. Sitestar also invests in marketable securities through the corporate segment. The real estate segment includes revenue and expenses related to the management of properties held for investment and revenue and expenses involving the preparation and sale of properties held for resale. The internet segment includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The HVAC segment includes revenue and expenses derived from the acquisition and management of HVAC companies in Arizona and throughout the Southwest. The internet segment includes revenue generated by operations in both the United States and Canada. In the quarter ended September 30, 2016, the internet segment generated revenue of $331,480 in the United States and revenue of $23,904 in Canada. This compares to the quarter ended September 30, 2015 where the internet segment generated revenue of $366,606 in the United States and revenue of $26,801 in Canada. Summarized financial information concerning the Companys reportable segments is shown in the following tables for the three months ended September 30, 2016 and 2015 (as restated) and for the nine months ended September 30, 2016 and 2015 (as restated). No comparable financial information exists for the HVAC segment because it commenced operations on June 13, 2016: Corporate Real Estate Internet HVAC Consolidated Three months ended September 30, 2016 Revenues $ $ 404,923 $ 355,384 $ 906,910 $ 1,667,217 Cost of revenue $ $ 402,285 $ 70,290 $ 619,881 $ 1,092,456 Net income (loss) before income taxes $ (315,062 ) $ (2,953 ) $ 285,847 $ 66,370 $ 34,202 Identifiable assets $ 3,840,647 $ 2,117,404 $ 614,610 $ 1,921,609 $ 8,494,270 Corporate Real Estate Internet HVAC Consolidated Three months ended September 30, 2015 (As restated) Revenues $ $ 31,550 $ 393,407 $ $ 424,957 Cost of revenue $ $ 22,842 $ 57,079 $ $ 79,921 Net income (loss) before income taxes $ (82,789) $ 4,322 $ 247,021 $ $ 168,554 Identifiable assets $ 196,703 $ 3,797,665 $ 1,308,870 $ $ 5,303,238 In the nine months ended September 30, 2016, the internet segment generated revenue of $991,956 in the United States and revenue of $76,327 in Canada. This compares to the nine months ended September 30, 2015 where the internet segment generated revenue of $1,134,988 in the United States and revenue of $87,225 in Canada. Corporate Real Estate Internet HVAC Consolidated Nine months ended September 30, 2016 Revenues $ $ 1,992,371 $ 1,068,283 $ 939,932 $ 4,000,586 Cost of revenue $ $ 1,918,603 $ 290,043 $ 633,053 $ 2,841,699 Net income (loss) before income taxes $ (645,927) $ 60,857 $ 614,670 $ 74,922 $ 104,522 Corporate Real Estate Internet HVAC Consolidated Nine months ended September 30, 2015 (As restated) Revenues $ $ 93,348 $ 1,222,213 $ $ 1,315,561 Cost of revenue $ $ 65,012 $ 378,016 $ $ 443,028 Net income (loss) before income taxes $ (454,863) $ 13,283 $ 573,735 $ $ 132,155 |
9. HVAC PRO FORMA INFORMATION
9. HVAC PRO FORMA INFORMATION | 9 Months Ended |
Sep. 30, 2016 | |
Notes to Financial Statements | |
9. HVAC PRO FORMA INFORMATION | NOTE 9. HVAC PRO FORMA INFORMATION As of June 17, 2016 and June 30, 2016, HVAC Value Fund, LLC completed the 100% acquisition of two HVAC subsidiaries. As of July 8, 2016, HVAC Value Fund, LLC completed the 100% acquisition of a third subsidiary. As of July 15, 2016, HVAC Value Fund, LLC completed the 100% acquisition of a fourth subsidiary. These subsidiaries engage in providing heating, ventilation, and air conditioning services, installation, and repairs to residential and commercial customers. As a result of the acquisitions, HVAC Value Fund, LLC will offer and expand heating, ventilation, and air conditioning services to customers in Arizona and the surrounding southwestern states. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, the purpose of HVAC Value Fund is to acquire HVAC businesses. Accordingly, these four acquisitions were made in the ordinary course of business and consistent with the customs and practices (including with respect to nature, scope, magnitude, quantity, frequency and contemplated purpose) of HVAC Value Fund, and, in turn, the Company. The acquired businesses contributed revenues of $906,910 and earnings of $66,370 to HVAC Value Fund, LLC during the three-month period ended September 30, 2016. The following unaudited pro forma summaries present consolidated information of HVAC Value Fund, LLC as if the current year business combinations had occurred on January 1, 2015. Management notes that the pro forma information for the period ended September 30, 2016 was calculated using annualized, unaudited 2015 financial information, as information for the period from January 1, 2016 through the applicable subsidiary closing date is unavailable. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has the ability to earn a profits interests. Pro forma earnings for the period ended September 30, 2016 and for the year ended December 31, 2015 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 period ended September 30, 2016 (unaudited) Consolidated pro forma period ended September 30, 2016 (unaudited) June 2016 acquisitions (in aggregate) July 8, 2016 acquisition July 15, 2016 acquisition Revenue $ 386,192 $ 1,060,202 $ 954,454 $ 2,400,849 Earnings $ 99,772 $ 205,804 $ 235,061 $ 540,637 Pro forma year ended December 31, 2015 (unaudited) Consolidated pro forma year ended December 31, 2015 (unaudited) June 2016 acquisitions (in aggregate) July 8, 2016 acquisition July 15, 2016 acquisition Revenue $ 674,212 $ 1,338,305 $ 1,034,926 $ 3,047,443 Earnings $ 247,328 $ 219,231 $ 313,301 $ 779,860 HVAC Value Fund, LLC did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The following tables summarize the consideration transferred to acquire each subsidiary and the amounts of identified assets acquired and liabilities assumed at the acquisition dates. Management continues to evaluate the valuation components of each acquisition on an ongoing basis. June 2016 acquisitions (in aggregate) Fair value of consideration transferred: Cash $ 160,000 Notes payable $ 65,000 Preliminary fair value of assets acquired: Vehicles $ 35,000 Equipment $ 13,700 Total identifiable assets $ 48,700 Goodwill $ 177,359 July 8, 2016 acquisition Fair value of consideration transferred: Cash $ 375,000 Notes payable $ 100,000 Preliminary fair value of assets acquired: Goodwill $ 475,780 July 15, 2016 acquisition Fair value of consideration transferred: Cash $ 340,000 Notes payable $ 100,000 Preliminary fair value of assets acquired: Vehicles $ 40,000 Total identifiable assets $ 40,000 Goodwill $ 400,000 The goodwill amounts noted above are attributable to the workforce of the acquired subsidiaries and the significant synergies expected to arise after acquisition by HVAC Value Fund, LLC. All of the goodwill was assigned to the HVAC segment. Management notes that the purchase price allocations above are deemed preliminary for valuation purposes and management reserves the right to adjust the allocations for the one year period allotted. |
10. ACCOUNTS RECEIVABLE AND BAD
10. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE | 9 Months Ended |
Sep. 30, 2016 | |
Notes to Financial Statements | |
10. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE | NOTE 10. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE For the nine months ended September 30, 2016 and 2015 (as restated), bad debt expense was $1,407 and $33,800, respectively. For the nine months ended September 30, 2016 and 2015 (as restated), accounts receivable were $257,770 and $18,799, respectively. The increase in accounts receivable is primarily the result of the formation of the HVAC subsidiary. As of September 30, 2016 and 2015 (as restated), accounts receivable consisted of the following: 2016 2015 (As Restated) Gross accounts receivable $ 258,437 $ 19,629 Less allowance for doubtful accounts (667) (830) Accounts receivable, net $ 257,770 $ 18,799 |
11. SUBSEQUENT EVENTS
11. SUBSEQUENT EVENTS | 9 Months Ended |
Sep. 30, 2016 | |
Subsequent Events [Abstract] | |
10. SUBSEQUENT EVENTS | NOTE 11. SUBSEQUENT EVENTS As of November 11, 2016, our subsidiary, HVAC Value Fund, LLC, has completed five acquisitions in the HVAC (Heating, Ventilation, and Air Conditioning) industry, one of the five acquisitions was completed subsequent to September 30, 2016. This most recent acquisition was previously reported in our Current Report on Form 8-K filed with the SEC on October 6, 2016. Included in other current assets for the quarter ended September 30, 2016 is $315,780 for good faith consideration paid related to this acquisition. As previously reported in our Current Report on Form 8-K filed with the SEC on June 14, 2016, the purpose of HVAC Value Fund is to acquire HVAC businesses. Accordingly, these five 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. Also, as previously reported in our Current Report on Form 8-K filed with the SEC on October 6, 2016, as of October 1, 2016, the Company has contributed additional capital in the amount of $500,000 to HVAC Value Fund. On October 11, 2016, Sitestar organized Willow Oak Asset Management, LLC, a Delaware limited liability company (Willow Oak). Sitestar is the sole member of Willow Oak. Willow Oak was formed in preparation of pursuing a new business opportunity with Alluvial Capital Management, LLC, as described in Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations below. To date, Willow Oak has yet to carry out any material business or have any material assets or liabilities. As previously reported in our Current Report on Form 8-K filed with the SEC on November 9, 2016, on November 1, 2016, the Company appointed Rodney E. Lake as Chief Operating Officer and Corporate Secretary of the Company. In his capacity as Chief Operating Officer, Mr. Lake will serve as the Companys principal operating officer. As previously reported in our Current Report on Form 8-K filed with the SEC on November 9, 2016, on November 7, 2016, Sitestar accepted and closed upon subscriptions from a private placement of shares of common stock of the Company in the amount of $1,625,975 and issued 32,519,504 shares of common stock in connection therewith. Immediately following this private placement, the Company had a total of 204,152,616 issued shares of common stock and 190,230,163 outstanding shares of common stock. |
1. BASIS OF PRESENTATION AND SI
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies) | 9 Months Ended |
Sep. 30, 2016 | |
Accounting Policies [Abstract] | |
Basis of Presentation | Basis of Presentation The unaudited condensed consolidated financial statements have been prepared by Sitestar Corporation, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2015 included in the Companys Annual Report on Form 10-K filed with the SEC on July 18, 2016 (the 2015 Form 10-K). The comparative results for the three months and nine months ended September 30, 2015 included in the unaudited condensed consolidated financial statements in this Form 10-Q reflect restated amounts, as described in and reported under the 2015 Form 10-K. The results for the three months and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016. |
Use of Estimates | Use of Estimates In accordance with Accounting Principles Generally Accepted in the United State of America (GAAP), the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, goodwill valuation, other assets, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements. |
Cash and Cash Equivalents | Cash and Cash Equivalents For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid instruments purchased with a maturity of three months or less. |
Concentration of Credit Risk | Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and accounts receivable. The Company places its cash with high quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customers financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. |
Investments | 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 managements intent. The classification of the investments in these marketable securities is assessed upon purchase and reassessed at each reporting period. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheets. Unrealized gains (losses) are categorized as Other Comprehensive Income. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as earned on the ex-dividend date. Interest and dividend income are recorded in the accompanying unaudited condensed statements of income in interest expense, net. |
Accounts Receivable | Accounts Receivable The Company grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is charged off to bad debt expense, is based on managements assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are charged off to the allowance for doubtful accounts when account is individually determined to be uncollectible or account is more than 180 days past due. Sales of internet services, which are not automatically processed via credit card or bank account drafts, have been the Companys highest exposure to collection risk. The Company attempts to reduce this risk by including a late payment fee and a manual processing payment fee to customer accounts. Receivables more than ninety days past due are no longer included in accounts receivable and are turned over to a collection agency. Accounts more than 30 days are considered past due. Sales of HVAC services are typically paid via credit card or check upon completion of service. Sales that are not collected upon completion are generally to existing and repeat customers who have established a track record of timely payments. Historically, HVAC has not encountered issues with collectability of customer accounts. Accounts more than 30 days are considered past due. |
Impairment of Long-Lived Assets | Impairment of Long-Lived Assets In accordance with GAAP, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell. |
Property and Equipment | Property and Equipment 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. 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 and Other Intangible Assets Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company does not amortize goodwill. The Company tests its goodwill annually during the fourth quarter of its fiscal year or when events and circumstances indicate that those assets might not be recoverable. Impairment testing of goodwill is required at the reporting unit level (operating segment or one level below operating segment) and involves a two-step process. Prior to performing the two-step impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment in order to determine whether a detailed quantitative analysis is required. The first step of the impairment test involves comparing the estimated fair values of the Companys reporting units with the reporting units carrying amounts, including goodwill. The Company estimates the fair value of its reporting units using discounted expected future cash flows. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The Company performs an analysis of its goodwill as of December 31 annually. Other intangible assets consist of customer relationships, developed technology and software, trade names, and other assets acquired in conjunction with the purchases of businesses or purchases of assets from other companies. When management determines material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account managements own analysis and an independent third party valuation specialists appraisal. Intangible assets determined to have definite lives are amortized over their estimated useful lives. The Company owns more than 125 domain names. These domains are valued at historical cost. |
Real Estate | Real Estate Real estate properties held for resale are carried at the lower of cost or fair market value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area the real estate is located and tax assessed values. Fair value is evaluated annually by management, or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable. Real estate properties held for investment are carried at the cost basis plus additional expenses where the expense extended the life or added value to the property. Otherwise, the expense is not capitalized and is charged to expense. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management. |
Accrued Expenses | Accrued Expenses Accrued expenses represent incurred but not yet paid expenses from Sales and Use taxes for ISP services, vacation accruals, and other payroll accruals. |
Deferred Revenue | Deferred Revenue Deferred revenue represents collections from customers in advance of internet services to be performed. Revenue is recognized in the period service is provided. |
Revenue Recognition | Revenue Recognition Internet Operations The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. The Company generates revenue in its internet segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic and wireless), web hosting, and additional related services to consumers and businesses. Customers may downgrade from internet access to web hosting plans to include email access and storage. In some years, this shift can be significant. Internet revenue is affected by the changing composition of revenue sources. Real Estate Operations Revenue from real estate held for resale is recognized upon closing of the sale, as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time. Rental revenue from real estate held for investment is recognized when it is due, generally on the first of each month or at another regular period agreed upon between the Company and the tenant. If payments are not provided in a timely manner, the amount due is designated as an account receivable. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. Tenants generally provide a security deposit at the time of possession. This deposit is held separate from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. HVAC Operations The company performs HVAC service repairs and installs HVAC units for its customers. Revenue is recognized at the time of the install or service call. Sales are adjusted for any returns or allowances. If an install is 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. |
Income Taxes | Income Taxes Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The most recent three tax years are open to potential IRS examination. |
Income Per Share | Income Per Share The basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company has no potentially dilutive securities. |
Comprehensive Income | Comprehensive Income Comprehensive income is the result of two items: the impact of foreign currency translations related to the Companys operations in Canada, and the unrealized gains (losses) from marketable securities classified as available-for-sale. |
Recently Issued Accounting Pronouncements | Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are required to adopt this standard in the first quarter of 2019. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures. Early adoption is not permitted. We are required to adopt this standard in the first quarter of 2018. The initial application of the standard is not expected to significantly impact the Company. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740). The ASU provides guidance related to the classifications of deferred income tax assets and liabilities into current and noncurrent amounts in a classified statement of financial position. Deferred tax assets and liabilities are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax assets and liabilities that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We are required to adopt this standard in the first quarter of 2018. The initial application of the standard is not expected to significantly impact the Company. 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 entitys 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. |
3. INVESTMENTS (Tables)
3. INVESTMENTS (Tables) | 9 Months Ended |
Sep. 30, 2016 | |
Investments Tables | |
Investments | Cost Basis Unrealized Gain Fair Value September 30, 2016 Common Stock available for sale $ 2,486,403 $ 28,657 $ 2,515,060 |
4. FAIR VALUE OF ASSETS AND L20
4. FAIR VALUE OF ASSETS AND LIABILITIES (Tables) | 9 Months Ended |
Sep. 30, 2016 | |
Fair Value Of Assets And Liabilities Tables | |
FAIR VALUE OF ASSETS AND LIABILITIES | (Level 1) (Level 2) (Level 3) Total at Fair Value September 30, 2016 Marketable securities $ 2,515,060 $ $ $ 2,515,060 (Level 1) (Level 2) (Level 3) Total at Fair Value December 31, 2015 Marketable securities $ $ $ $ |
5. PROPERTY AND EQUIPMENT (Tabl
5. PROPERTY AND EQUIPMENT (Tables) | 9 Months Ended |
Sep. 30, 2016 | |
Property And Equipment Tables | |
PROPERTY AND EQUIPMENT | 2016 2015 Automobile $ 95,687 $ 9,500 Equipment 13,700 Furniture and fixtures 22,206 13,788 131,593 23,288 Less accumulated depreciation (23,288 ) (23,288 ) Property and equipment, net $ 108,305 $ |
7. NOTES PAYABLE (Tables)
7. NOTES PAYABLE (Tables) | 9 Months Ended |
Sep. 30, 2016 | |
Payables and Accruals [Abstract] | |
Notes Payable | 2016 2015 (As Restated) Non-interest bearing amount due on acquisition of USA Telephone payable in thirty-six monthly installments starting January 2008. $ $ 90,000 Interest bearing amount due on acquisition through HVAC Value Fund, LLC 250,000 Non-interest bearing amount due on acquisition through HVAC Value Fund, LLC 15,000 Less current portion (240,000 ) Long-term portion $ 25,000 $ 90,000 |
8. SEGMENT INFORMATION (Tables)
8. SEGMENT INFORMATION (Tables) | 9 Months Ended |
Sep. 30, 2016 | |
Segment Information Tables | |
Segment Information | Corporate Real Estate Internet HVAC Consolidated Three months ended September 30, 2016 Revenues $ $ 404,923 $ 355,384 $ 906,910 $ 1,667,217 Cost of revenue $ $ 402,285 $ 70,290 $ 619,881 $ 1,092,456 Net income (loss) before income taxes $ (315,062 ) $ (2,953 ) $ 285,847 $ 66,370 $ 34,202 Identifiable assets $ 3,840,647 $ 2,117,404 $ 614,610 $ 1,921,609 $ 8,494,270 Corporate Real Estate Internet HVAC Consolidated Three months ended September 30, 2015 (As restated) Revenues $ $ 31,550 $ 393,407 $ $ 424,957 Cost of revenue $ $ 22,842 $ 57,079 $ $ 79,921 Net income (loss) before income taxes $ (82,789) $ 4,322 $ 247,021 $ $ 168,554 Identifiable assets $ 196,703 $ 3,797,665 $ 1,308,870 $ $ 5,303,238 In the nine months ended September 30, 2016, the internet segment generated revenue of $991,956 in the United States and revenue of $76,327 in Canada. This compares to the nine months ended September 30, 2015 where the internet segment generated revenue of $1,134,988 in the United States and revenue of $87,225 in Canada. Corporate Real Estate Internet HVAC Consolidated Nine months ended September 30, 2016 Revenues $ $ 1,992,371 $ 1,068,283 $ 939,932 $ 4,000,586 Cost of revenue $ $ 1,918,603 $ 290,043 $ 633,053 $ 2,841,699 Net income (loss) before income taxes $ (645,927) $ 60,857 $ 614,670 $ 74,922 $ 104,522 Corporate Real Estate Internet HVAC Consolidated Nine months ended September 30, 2015 (As restated) Revenues $ $ 93,348 $ 1,222,213 $ $ 1,315,561 Cost of revenue $ $ 65,012 $ 378,016 $ $ 443,028 Net income (loss) before income taxes $ (454,863) $ 13,283 $ 573,735 $ $ 132,155 |
9. HVAC PRO FORMA INFORMATION (
9. HVAC PRO FORMA INFORMATION (Tables) | 9 Months Ended |
Sep. 30, 2016 | |
Hvac Pro Forma Information Tables | |
HVAC PRO FORMA INFORMATION | Pro forma period ended September 30, 2016 (unaudited) Consolidated pro forma period ended September 30, 2016 (unaudited) June 2016 acquisitions (in aggregate) July 8, 2016 acquisition July 15, 2016 acquisition Revenue $ 386,192 $ 1,060,202 $ 954,454 $ 2,400,849 Earnings $ 99,772 $ 205,804 $ 235,061 $ 540,637 Pro forma year ended December 31, 2015 (unaudited) Consolidated pro forma year ended December 31, 2015 (unaudited) June 2016 acquisitions (in aggregate) July 8, 2016 acquisition July 15, 2016 acquisition Revenue $ 674,212 $ 1,338,305 $ 1,034,926 $ 3,047,443 Earnings $ 247,328 $ 219,231 $ 313,301 $ 779,860 June 2016 acquisitions (in aggregate) Fair value of consideration transferred: Cash $ 160,000 Notes payable $ 65,000 Preliminary fair value of assets acquired: Vehicles $ 35,000 Equipment $ 13,700 Total identifiable assets $ 48,700 Goodwill $ 177,359 July 8, 2016 acquisition Fair value of consideration transferred: Cash $ 375,000 Notes payable $ 100,000 Preliminary fair value of assets acquired: Goodwill $ 475,780 July 15, 2016 acquisition Fair value of consideration transferred: Cash $ 340,000 Notes payable $ 100,000 Preliminary fair value of assets acquired: Vehicles $ 40,000 Total identifiable assets $ 40,000 Goodwill $ 400,000 |
10. ACCOUNTS RECEIVABLE AND B25
10. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE (Tables) | 9 Months Ended |
Sep. 30, 2016 | |
Accounts Receivable And Bad Debt Expense Tables | |
Accounts Receivable and Bad Debt Expense | 2016 2015 (As Restated) Gross accounts receivable $ 258,437 $ 19,629 Less allowance for doubtful accounts (667) (830) Accounts receivable, net $ 257,770 $ 18,799 |
3. INVESTMENTS (Details)
3. INVESTMENTS (Details) | Sep. 30, 2016USD ($) |
Investments Details | |
Common Stock available for sale - Cost Basis | $ 2,486,403 |
Common Stock available for sale - Unrealized Gain | 28,657 |
Common Stock available for sale - Fair Value | $ 2,515,060 |
4. FAIR VALUE OF ASSETS AND L27
4. FAIR VALUE OF ASSETS AND LIABILITIES (Details) - USD ($) | Sep. 30, 2016 | Dec. 31, 2015 |
Marketable securities | $ 250,000 | |
Fair Value, Inputs, Level 3 | ||
Marketable securities | ||
Fair Value, Inputs, Level 1 | ||
Marketable securities | 250,000 | |
Fair Value, Inputs, Level 2 | ||
Marketable securities |
5. PROPERTY AND EQUIPMENT - Pro
5. PROPERTY AND EQUIPMENT - Property and Equipment (Details) - USD ($) | Sep. 30, 2016 | Dec. 31, 2015 |
Property and Equipment, Gross | $ 131,593 | $ 23,288 |
Less accumulated depreciation | (23,288) | (23,288) |
Property and Equipment, Net | 108,305 | |
Automobile | ||
Property and Equipment, Gross | 95,687 | 9,500 |
Equipment | ||
Property and Equipment, Gross | 13,700 | |
Furniture and Fixtures | ||
Property and Equipment, Gross | $ 22,206 | $ 13,788 |
7. NOTES PAYABLE - Notes Payabl
7. NOTES PAYABLE - Notes Payable (Details) - USD ($) | Sep. 30, 2016 | Sep. 30, 2015 |
Payables and Accruals [Abstract] | ||
Non-interest bearing amount due on acquisition of USA Telephone customers per contract payable in thirty six monthly installments starting January 2008. | $ 90,000 | |
Interest bearing amount due on acquisition through HVAC Value Fund, LLC | 250,000 | |
Non-interest bearing amount due on acquisition through HVAC Value Fund, LLC | 15,000 | |
Less current portion | (240,000) | |
Long-term portion | $ 25,000 | $ 90,000 |
8. SEGMENT INFORMATION - Segmen
8. SEGMENT INFORMATION - Segment Information (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2016 | Sep. 30, 2015 | Sep. 30, 2016 | Sep. 30, 2015 | |
Cost of revenue | $ 1,092,456 | $ 79,921 | $ 2,841,699 | $ 443,028 |
Net income (loss) before income taxes | 34,202 | 168,554 | 104,522 | 132,155 |
Corporate | ||||
Revenue | ||||
Cost of revenue | ||||
Net income (loss) before income taxes | (315,062) | (82,789) | (645,927) | (454,863) |
Identifiable assets | 3,840,647 | 196,703 | ||
Real Estate | ||||
Revenue | 404,923 | 31,550 | 1,992,371 | 93,348 |
Cost of revenue | 402,285 | 22,842 | 1,918,603 | 65,012 |
Net income (loss) before income taxes | (2,953) | 4,322 | 60,857 | 13,283 |
Identifiable assets | 2,117,404 | 3,797,665 | ||
Internet | ||||
Revenue | 355,384 | 393,407 | 1,068,283 | 1,222,213 |
Cost of revenue | 70,290 | 57,079 | 290,043 | 378,016 |
Net income (loss) before income taxes | 285,847 | 247,021 | 614,670 | 573,735 |
Identifiable assets | 614,610 | 1,308,870 | ||
HVAC | ||||
Revenue | 906,910 | 939,932 | 1,315,561 | |
Cost of revenue | 619,881 | 633,053 | 443,028 | |
Net income (loss) before income taxes | 66,370 | 74,922 | 132,155 | |
Identifiable assets | 1,921,609 | |||
Consolidated | ||||
Revenue | 1,667,217 | 424,957 | 4,000,586 | |
Cost of revenue | 1,092,456 | 79,921 | 2,841,699 | |
Net income (loss) before income taxes | 34,202 | 168,554 | $ 104,522 | |
Identifiable assets | $ 8,494,270 | $ 5,303,238 |
9. HVAC PRO FORMA INFORMATION31
9. HVAC PRO FORMA INFORMATION (Details) - USD ($) | 3 Months Ended | 9 Months Ended | 12 Months Ended | ||
Sep. 30, 2016 | Sep. 30, 2015 | Sep. 30, 2016 | Sep. 30, 2015 | Dec. 31, 2015 | |
Revenue | $ 1,667,217 | $ 424,957 | $ 4,000,586 | $ 1,315,561 | |
June 2016 acquisitions (in aggregate) | |||||
Revenue | 386,192 | $ 674,212 | |||
Earnings | 99,772 | 247,328 | |||
July 8, 2016 acquisition | |||||
Revenue | 1,060,202 | 1,338,305 | |||
Earnings | 205,804 | 219,231 | |||
July 15, 2016 acquisition | |||||
Revenue | 954,454 | 1,034,926 | |||
Earnings | 235,061 | 313,301 | |||
Consolidated pro forma period | |||||
Revenue | 2,400,849 | 3,047,443 | |||
Earnings | $ 540,637 | $ 779,860 |
10. ACCOUNTS RECEIVABLE AND B32
10. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE (Details) - USD ($) | Sep. 30, 2016 | Sep. 30, 2015 |
Accounts Receivable And Bad Debt Expense Details | ||
Gross accounts receivable | $ 258,437 | $ 19,629 |
Less allowance for doubtful accounts | (667) | (830) |
Accounts receivable, net | $ 257,770 | $ 18,799 |