UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2016
SITESTAR CORPORATION
(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.) | |
| 4026 Wards Rd. Ste G1 #271, Lynchburg, VA | 24502 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(434) 382-7366
(Issuer’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes X No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | |
| Non-accelerated filer | Smaller reporting company X |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes X No
The aggregate value of the voting common equity held by non-affiliates as of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $3,767,054 based on the price at which the common stock last sold on such day. This price reflects inter-dealer prices without retail mark up, mark down, or commissions, and may not represent actual transactions.
The number of shares outstanding of Common Stock, $0.001 par value as of March 24, 2017 is 282,730,163.
DOCUMENTS INCORPORATED BY REFERENCE
None.
| Page No. | |
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | |
| PART I | |
| Item 1. Business | 1 |
| Item 1A. Risk Factors | 4 |
| Item 1B. Unresolved Staff Comments | 4 |
| Item 2. Properties | 4 |
| Item 3. Legal Proceedings | 4 |
| Item 4. Mine Safety Disclosures | 4 |
| PART II | |
| Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 4 |
| Item 6. Selected Financial Data | 5 |
| Item 7. Management’s Discussions and Analysis of Financial Condition and Results of Operations | 5 |
| Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 9 |
| Item 8. Financial Statements | 9 |
| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | 10 |
| Item 9A. Controls and Procedures | 10 |
| Item 9B. Other Information | 11 |
| PART III | |
| Item 10. Directors, Executive Officers, and Corporate Governance | 11 |
| Item 11. Executive Compensation | 14 |
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters | 15 |
| Item 13. Certain Relationships and Related Transactions | 16 |
| Item 14. Principal Accountant Fees and Services | 16 |
| PART IV | |
| Item 15. Exhibits, Financial Statement Schedules | 17 |
| Item 16. Form 10-K Summary | 18 |
| Signatures | 19 |
| Report of Independent Registered Public Accounting Firm | 20 |
| Consolidated Financial Statements | 21 |
| Notes to Consolidated Financial Statements | 27 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including, without limitation, Part I, Item 1, “Business” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties which may affect the Company's business and prospects, including changes in economic and market conditions, acceptance of the Company’s products, maintenance of strategic alliances and other factors discussed elsewhere in this Form 10-K, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors.
PART I
| ITEM I. | BUSINESS |
Overview
Sitestar Corporation (formerly White Dove Systems, Inc., and then Interfoods Consolidated, Inc.) was incorporated in Nevada on December 17, 1992. On July 26, 1999, the Company restated its Articles of Incorporation to change the name of the Company to “Sitestar Corporation.” Unless the context otherwise requires, and when used in this Report, the “Company,” “Sitestar,” “we,” “our” or “us” refers to Sitestar Corporation and its subsidiaries.
The Company operates through five reportable segments: Corporate, Internet Operations, HVAC Operations, Real Estate Operations,
and Asset Management Operations. The Asset Management segment was created on October 10, 2016 and did not produce revenue in 2016.
In accordance with the Company’s accounting policies, expenses from the Asset Management segment were applied to the Corporate
segment. Expenses will be applied to the Asset Management segment once the segment produces revenue. The management of the Company
is also currently reviewing opportunities in the 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.
Internet Operations
The Company operates its internet operations through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade
internet access, wholesale managed modem services, web hosting, and various ancillary services. Sitestar.net provides services
to customers in the United States and Canada.
HVAC Operations
The Company operates its HVAC 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 Reports on Form 8-K filed with the SEC on June 14, 2016 and October 6, 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 profits interests. As of December 31, 2016, HVAC Value Fund had closed on five acquisitions for an aggregate purchase price of $1.46 million. 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 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 owns a real estate investment portfolio that includes 19 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. 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 through Willow Oak Asset Management in Alluvial Fund, LP, an unrelated private partnership that was launched on January 1, 2017. The asset management segment did not produce revenue in 2016, however, all future earnings will be allocated to Willow Oak Asset Management. Any expenses incurred in 2016 were allocated to the corporate segment.
Products and Services
Internet Operations
Sitestar is an Internet Service Provider (ISP) that offers consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, Web hosting, 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, fiber-optic and wireless). Additionally, we market and sell web hosting and related services to consumers and businesses. We also offer broadband services within our regional and national footprint.
In addition to our operations, we also own the domain, First.com. We are currently marketing First.com for sale.
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. 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. Competitors often offer incentives for customers to purchase internet access by offering discounts for bundled service offerings (i.e., phone, television, 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.
HVAC Operations
HVAC Value Fund, LLC is an Arizona based HVAC and plumbing company focused on repairs, replacements, and equipment maintenance. Our customer base consists of apartment communities, single family homes, condos, and property management companies, with a small portion of our work falling into the commercial category. We are focused on growing both organically and through acquisitions. Since inception of this subsidiary we have acquired small to mid-sized HVAC and plumbing companies where the owner needed an exit strategy and where we expected to retain the existing customer and employee base.
The Arizona and Southwest HVAC and plumbing services markets are highly fragmented, with the majority of companies run by technicians. HVAC Value Fund is both systems and customer-oriented with a goal of optimizing processes and maximizing margins.
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. We have examined each property on an individual basis to determine a strategy to maximize the net sale price. Where appropriate, we have and will reinvest resources into a property to increase its marketability and sale price. We have listed and sold properties both directly and through real estate agents. In 2016, we engaged a property manager to manage the rental properties that we own in Roanoke, Virginia.
State and municipal laws and regulations govern the real estate industry and do not vary significantly from one community to another. State laws, including the Virginia Residential Landlord and Tenant Act, in addition to local ordinances govern rental properties and also do not vary significantly throughout our real estate holding areas.
Employees
As of March 24, 2017, we employed five full-time individuals through the corporate, internet, real estate and asset management segments, 30 full-time employees through the HVAC segment, and one part-time employee through the HVAC segment. We also utilize outside contractors as necessary to assist with financial reporting, technical support, and customer service. Our employees are not unionized and we consider relations with employees to be favorable.
Available Information
Sitestar files annual, quarterly, and current reports and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an internet web site that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company also makes available free of charge on or through the Company’s internet website, http://www.sitestarcorp.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.
| ITEM 1A. | RISK FACTORS |
This Item 1A “Risk Factors” is not required for smaller reporting companies.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
The Company operates its Corporate and Internet Operations remotely. The principle office of our HVAC Operations is a mix of office and industrial warehouse space leased by HVAC Value Fund, LLC. The approximately 3,750 square feet of leased space is located in Peoria, Arizona.
As of December 31, 2016, the Company owns various real estate properties including 19 residential properties, one commercial property, and interests in several lots. Subsequent to December 31, 2016, two residential properties have been sold. The Company owns a 12,000 square foot office building located at 29 West Main Street, Martinsville, Virginia. This property was acquired in 1998 by Neocom Microspecialists, Inc., a company we later acquired. This facility was closed in 2010. It is currently vacant and being marketed for sale.
| ITEM 3. | LEGAL PROCEEDINGS |
On April 12, 2016, Sitestar filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”), the Company’s former CEO and director and currently an owner of record or beneficially of more than five percent of the Company’s Common Stock, alleging, among other things, that the Former CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized and wrongful related party transactions, including causing the Company to borrow certain amounts from the Former CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments to the Former CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former CEO, causing the Company to pay certain amounts to the Former CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former CEO, causing the Company to pay rent on its corporate headquarters owned by the Former CEO’s ex-wife in amounts commercially unreasonable and excessive and to make real estate tax payments thereon for the personal benefit of the Former CEO, converting to the Former CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by 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).
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| ITEM 5. | MARKET FOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Sitestar’s Common Stock is listed on the OTC QB Markets (“OTCQB”) under the symbol “SYTE”.
The following tables set forth the high and low closing bid quotations reported on the OTCQB for each calendar quarter for 2015 and 2016. Such quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions.
| 2015 | High Bid | Low Bid | ||||||
| First Quarter | $ | 0.05 | $ | 0.04 | ||||
| Second Quarter | $ | 0.06 | $ | 0.04 | ||||
| Third Quarter | $ | 0.05 | $ | 0.03 | ||||
| Fourth Quarter | $ | 0.06 | $ | 0.03 | ||||
| 2016 | ||||||||
| First Quarter | $ | 0.06 | $ | 0.05 | ||||
| Second Quarter | $ | 0.08 | $ | 0.05 | ||||
| Third Quarter | $ | 0.09 | $ | 0.07 | ||||
| Fourth Quarter | $ | 0.08 | $ | 0.08 | ||||
Record Holders
As of March 24, 2017, we had approximately 141 shareholders of record. This number does not reflect the number of individuals or institutional investors holding stock in nominee name through banks, brokerage firms, and others.
Equity Compensation Plans
We do not have any plans under which options, warrants or other rights to subscribe for or acquire shares of our common stock may be granted and there are no outstanding options, warrants or other rights to subscribe for or acquire shares of our common stock.
Dividends
To date, we have not paid any cash dividends on our capital stock. We intend to retain our cash and, therefore, do not anticipate paying any cash dividends in the foreseeable future.
| ITEM 6. | SELECTED FINANCIAL DATA |
Not applicable.
| ITEM 7. | MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items from management’s view. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related footnotes for the years ended December 31, 2016 and December 31, 2015 included in this Annual Report on Form 10-K. 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.
Summary of Financial Performance
Common stockholders’ equity increased from $3,751,045 at December 31, 2015 to $9,160,029 at December 31, 2016. The change was mostly attributable to $5,480,694 of additional common stock issued. This change was also driven by $821,863 of comprehensive income in the internet segment, $78,843 in comprehensive loss in the HVAC segment, $96,311 in comprehensive loss from the real estate segment, and $718,419 of other comprehensive loss in the corporate segment. The other income attributable to the corporate segment was primarily the result of realized and unrealized capital gains from investments in marketable securities. Corporate expenses for the year totaled $804,712.
Financial Condition, Liquidity, and Capital Resources
Sitestar carries out its business strategy in four operating segments: Internet Operations, HVAC Operations, Real Estate Operations, and Asset Management Operations. Our primary focus is on generating cash flow from operations. We will only reinvest 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 four segments or the Company’s historical operations. An example of this is the introduction and growth of our HVAC Segment, which occurred during the year ended December 31, 2016. Prior our management change in December 2015, the Company was solely focused on the internet and real estate segments.
Sitestar currently believes that its existing balances of cash, cash equivalents, and cash generated from operations and from the sale of its real estate portfolio will be sufficient to satisfy its currently anticipated cash requirements through at least the next 12 months and the foreseeable future. Our liquidity could be negatively affected if we were to make an additional 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.
The aging of accounts receivable as of December 31, 2016 and December 31, 2015 is as shown:
| December 31, 2016 | December 31, 2015 | |||||||||
| Current | $ | 155,224 | $ | 11,306 | ||||||
| 30 – 60 days | $ | 14,016 | $ | 1,944 | ||||||
| 60 + days | $ | 43,511 | $ | 1,178 | ||||||
| Total | $ | 212,751 | $ | 14,428 | ||||||
We have no material capital expenditure requirements.
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. Four of the five HVAC acquisitions that occurred during the year ended December 31, 2016 resulted in notes payable to the sellers. At December 31, 2016, these notes payable consisted of the following:
| 2016 | ||||
| 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 | ||
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements as of December 31, 2016 or at any time from January 1, 2015 through December 31, 2016.
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, 2016, the Company announced that it had entered into a letter of intent agreement with Alluvial Capital Management, LLC (“Alluvial Capital”) to make a seed investment through Willow Oak Asset Management in the Alluvial Fund, LP, a private investment partnership that was launched by Alluvial Capital on January 1, 2017 (“Alluvial Fund”). Alluvial Capital will act as the general partner and the Company, through Willow Oak Asset Management, will invest in Alluvial Fund as a limited partner.
The Company has agreed to make capital contributions to Alluvial Fund in the aggregate amount of $10 million to be provided over four equal tranches on January 1, 2017, April 1, 2017, July 1, 2017 and October 1, 2017. As of December 27, 2016 the Company satisfied its obligation to provide $2.5 million in preparation for the January 1, 2017 launch of Alluvial Fund. The remaining commitment will be funded through cash on hand and through the proceeds of a subsequently completed private placement.
We have no other meaningful long-term debt obligations, capital lease obligations, purchase obligations or other long-term liabilities as of December 31, 2016. The only operating lease obligations are agreements for leased office and warehouse space for HVAC Value Fund, LLC, which extend through July 31, 2019.
Results of Operations
Corporate
In the year ended December 31, 2016 the corporate segment produced $50,004 of other income related primarily to realized gains on the sales of marketable securities. Expenses totaled $804,712. This compares to corporate expenses of $428,244 incurred during the year ended December 31, 2015. Expenses were higher during the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to increased accounting expenses, increased legal expenses, and increased consulting expenses. This was offset by decreased dues and subscription expense, decreased insurance expense, and decreased rent expense. We paid no rent towards the corporate office during the year ended December 31, 2016. This office was vacated January 15, 2016.
Internet Operations
As of December 31, 2016, the focus of our internet 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 segment during 2016. Additionally, competitive pressures have negatively affected our ongoing revenue. Accordingly, revenue is slowly declining, though at a slower pace than previous years, as noted below.
Revenue attributed to the internet segment during the year ended December 31, 2016 totaled $1,415,289. While this was a decrease of $187,234 when compared to revenue generated in this segment during the year ended December 31, 2015 totaling $1,602,523, the internet segment also had other income during the year ended December 31, 2016 of $99,149 attributable primarily to the sale of a block of IP addresses. The year-over-year decline from the years ended December 31, 2015 and 2016 was 11.7%. This was an improvement from the year-over-year decline of 17% reported at the year ended December 31, 2015 compared to the year ended December 31, 2014. The year over year revenue decline is the result of fewer customer renewals and the absence of new customers.
The cost of revenue during the year ended December 31, 2016 totaled $369,514. This was a decrease of $170,420 when compared to the cost of revenue in this segment during the year ended December 31, 2015 totaling $539,934. This decrease was the result of decreased revenues and our work to restructure vender contracts and reduce fixed costs.
The tables below provide a summary of income statement figures over time. These figures are specific to the internet segment and are presented for the annual and quarterly periods designated below.
| Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
| Revenues | $ | 1,415,289 | $ | 1,602,523 | ||||
| Cost of revenue | 369,514 | 539,934 | ||||||
| Operating expenses | 322,700 | 284,437 | ||||||
| Other income (expense) | 99,149 | (958,232 | ) | |||||
| Other comprehensive income (loss) | (361 | ) | 4,183 | |||||
| Comprehensive income (loss) | $ | 821,863 | $ | (175,897 | ) | |||
| Quarter Ended | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | ||||||||||||
| Revenues | $ | 347,005 | $ | 355,384 | $ | 356,815 | $ | 356,085 | ||||||||
| Cost of revenue | 79,471 | 70,290 | 93,681 | 126,072 | ||||||||||||
| Operating expenses | 66,375 | 92,002 | 66,726 | 97,597 | ||||||||||||
| Other income | 6,382 | 92,767 | - | - | ||||||||||||
| Other comprehensive income (loss) | (258 | ) | (12 | ) | (3,735 | ) | 3,644 | |||||||||
| Comprehensive income | $ | 207,283 | $ | 285,847 | $ | 192,673 | $ | 136,060 | ||||||||
For the year ended December 31, 2015 we recorded a goodwill impairment of $954,049. This was the result of revenue and cash flow declines in the internet segment. New management implemented changes to the annual goodwill impairment analysis to more accurately reflect the value of the Company’s goodwill. This goodwill impairment and all goodwill that remains is specific to the internet segment.
Management has the resources to identify the current 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 utilize the domains.
Effective January 1, 2016, we have improved our internal reporting in the internet segment. As of December 31, 2016, we have a total of 9,423 customer accounts across the U.S. and Canada. No comparison figures from the year ended December 31, 2015 exist. As of December 31, 2016, our mix of customers consisted of approximately 88% internet access and 12% web hosting and storage.
Approximately 90% of our customer accounts are U.S. based, while 10% are Canadian based. Revenue generated by our U.S. customers totaled $1,312,444 and revenue generated by our Canadian customers totaled $102,845 during the year ended December 31, 2016. This compares to revenue generated by our U.S. customers of $1,488,836 and revenue generated by our Canadian customers of $113,687 during the year ended December 31, 2015.
We closed our Canada office on February 29, 2016 and terminated the employment of two employees. We now service our Canadian customers remotely and utilize one full-time employee in Canada.
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 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. HVAC Value Fund closed on five acquisitions totaling $1,455,000 during the year ended December 31, 2016. Subsequent to the year ended December 31, 2016, HVAC Value Fund closed on one additional acquisition totaling $650,000. 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, 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 operations generated revenue of $1,477,961 during the year ended December 31, 2016. Cost of revenue totaled $987,221 and operating expenses totaled $567,715. Other expenses totaled $1,868. The other expenses are related to the interest portion of the notes payable incurred by HVAC Value Fund in connection with our acquisitions. The comprehensive loss for the year ended December 31, 2016 totaled $78,843. No comparable figures exist for 2015.
Real Estate Operations
As of December 31, 2016, we owned 19 residential properties, one commercial property, and interests in several lots. In 2008, 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 list of properties was assigned to a real estate agent. Additionally, during 2016, 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.
During the year ended December 31, 2016, we continued 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 continue to be engaged to market the remaining properties listed for resale.
We own several rental properties managed by a third-party property management company. As of December 31, 2016, we had eight properties available for rent and seven rental properties were occupied. The leases in effect as of the year ended December 31, 2016 are based on either annual or multi-year time periods and include month-to-month provisions after the completion of the initial term. The property management company has introduced updated and renewed leases for existing rental properties. Seven properties were current with regard to tenant payments as of December 31, 2016. This compares to the year ended December 31, 2015 when we had 20 properties available for rent with 17 of the properties occupied and nine properties current with regard to tenant payments.
During the year ended December 31, 2016, we sold 23 residential properties for gross proceeds of $1,970,009. Net proceeds totaled $1,799,677. This compares to their carrying value of $1,752,622. During the year ended December 31, 2016, the Company generated rental revenue of $111,987, net of bad debt expense. The cost of rental revenue totaled $39,014. This compared to rental revenue of $132,680, net of bad debt expense and cost of rental revenue of $346,998 during the year ended December 31, 2015. The increase in rental revenue relative to cost of rental revenue was the result of improved rent collections due to the management by our third-party property manager.
Depreciation expense totaled $28,544 for the year ended December 31, 2016. Total accumulated depreciation as of December 31, 2016 totaled $77,955.
During the year ended December 31, 2016, a valuation adjustment of $152,411 was made by management on real estate properties held for sale in order to properly reflect market value for those properties held at the end of the year.
Asset Management Operations
The Company operates its asset management business through a wholly-owned subsidiary, Willow Oak Asset Management, LLC. This subsidiary was formed on October 10, 2016. As of December 31, 2016 this subsidiary did not have material operations. Effective January 1, 2017, Willow Oak Asset Management made its first $2.5 million investment in Alluvial Fund, as described above.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
This item is not required by smaller reporting companies.
| ITEM 8. | FINANCIAL STATEMENTS |
The information required by this Item may be found immediately after the signatures to this report and is incorporated herein by reference.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
Except as has been previously reported in those certain Current Reports under Section 13 or 15(d) of The Securities Exchange Act of 1934 filed by the Company with the Securities and Exchange Commission on February 18, 2016 and March 7, 2016, respectively, no disclosure for this Item 9 is required herein.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of December 31, 2016, management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. 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 Officer and the Chief 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 their 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 Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2016. 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.
Management’s Report on Internal Control over Financial Reporting
The management of Sitestar is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our management concluded that, as of December 31, 2016, our internal control over financial reporting was not effective based on such criteria. We have reviewed the results of management’s assessment with our Board of Directors. In addition, we will evaluate any changes to our internal control on a quarterly basis to determine if a material change occurred.
Material Weaknesses in Internal Controls
As defined by the Public Company Accounting Oversight Board’s Auditing Standard No. 5, a material weakness is a significant control deficiency, or a combination of significant control deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
As a result of our evaluations, we identified the following material weakness in our internal control over financial reporting as of December 31, 2016:
We did not maintain proper segregation of duties for the preparation of our financial statements. Due to the size of our administrative staff, audit areas such as accounts receivable, accounts payable, and payroll had deficiencies related to segregation of duties. While we have made strides to improve the control structure and add approval layers, incompatible functions among staff were not mitigated in a manner that would prevent a material misstatement from occurring as of December 31, 2016.
Changes in Our Internal Controls
During the year ended December 31, 2016, the Company hired a Certified Public Accountant as a Controller to assist with all accounting and reporting functions. The addition of the Controller adds a second layer of review and oversight over all financial reporting functions.
During the year ended December 31, 2016, the Company implemented multiple policies regarding controls pertaining to the information technology environment. These policies include: Acceptable Use, Backup and Recovery, Cloud Computing, Password, System Access, Version Control System, and Vulnerability Assessment.
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The following table sets forth certain information with respect to the directors and executive officers of the Company and the period such persons held their respective positions with the Company.
| Name | Age | Principal Occupation/ Position Held with Company |
Officer or Director Since |
| Jeffrey I. Moore | 31 | Chairman of the Board | 2013 |
| Steven L. Kiel | 38 | Chief Executive Officer; Chief Financial Officer; Director | 2015 |
| Jeremy K. Gold | 24 | Director | 2015 |
| Christopher T. Payne | 45 | Director | 2016 |
| Keith D. Smith | 52 | Director | 2016 |
| Rodney E. Lake | 40 | Chief Operating Officer and Corporate Secretary | 2016 |
Jeffrey I. Moore was appointed as the Chairman of the Board on February 17, 2016. He has served as a Director since 2013. Mr. Moore is a founder and Presiding Partner of M & M Investments, a value based investment partnership investing in common stocks. He is also owner and operator of Mt Melrose LLC, a company investing in real estate in Central Kentucky. Mr. Moore has earned a Bachelor of Arts in General Studies from Eastern Kentucky University.
Steven L. Kiel was appointed as President and Chief Executive Officer of the Company on December 14, 2015. He has served as a Director since 2015. Mr. Kiel is the President of Arquitos Capital Management and portfolio manager of Arquitos Capital Partners. Mr. Kiel is also a co-portfolio manager to Santa Monica Partners, a New York-based investment partnership. Mr. Kiel is a judge advocate in the Army Reserves, a veteran of Operation Iraqi Freedom, and currently holds the rank of Major. Previously, Mr. Kiel was an attorney in private practice. Mr. Kiel is a graduate of George Mason School of Law and Illinois State University and is a member of the bar in Illinois (inactive) and Washington, DC.
Jeremy K. Gold has been a Director since 2015. Mr. Gold has served as the Chairman of Sitestar's Audit Committee since 2015. Mr. Gold is a Research Analyst at Oberndorf Enterprises LLC. He has previously worked at Alesia Asset Management, CloudPlus Inc, Western Asset Management and Camden Asset Management. Mr. Gold holds a Bachelor of Arts in Physics from Williams College.
Christopher T. Payne has been a Director since 2016. Mr. Payne is a financial professional with more than 15 years of consulting, corporate finance and Big Four experience. In his current role, Mr. Payne manages and performs valuations involving various classes of equity and debt securities. He advises clients in both private and public companies and provides valuation and corporate advisory services for various purposes including mergers and acquisitions, fairness opinions, buy-sell agreements, IRS and SEC compliance matters, and corporate planning and reorganizations. Mr. Payne is a graduate from the George Mason University’s School of Business (MBA) and holds a Bachelor’s degree from the University of North Carolina at Charlotte.
Keith D. Smith has been a Director since 2016. Mr. Smith has served as the Chairman of Sitestar's Governance, Compensation and Nomination Committee since 2016. Mr. Smith is a Managing Director at a private business valuation / consulting firm in Rochester, New York. He is a valuation professional with more than 20 years of consulting, corporate finance and Big Four experience. Mr. Smith originates, manages and performs valuations involving equity, debt, derivatives, liabilities, intangible assets, intellectual property and NOLs of publicly and privately held businesses for acquisitions, divestitures, estate & gift tax reporting, liquidation, financial reporting, and general corporate planning. Previously, Mr. Smith worked in the valuation practice of a Big Four accounting firm and was an Air Force officer involved in the acquisition of space systems for the federal government. Mr. Smith holds an MBA from University of California – Los Angeles and a Bachelor of Science in Electrical Engineering from Union College.
Rodney E. Lake was appointed as Chief Operating Officer and Corporate Secretary of the Company on November 8, 2016. Mr. Lake is the Chief Investment Officer of The Benval Group LLC. The Benval Group provides consulting services to growing companies. Mr. Lake is a Visiting Instructor of Finance and the Manager for GW PARI – (Program on Applied Research & Investing) at The George Washington University (GW) School of Business. Prior to forming Benval, Mr. Lake worked as a Senior Investment Officer in The George Washington University Investment Office – this office was responsible for managing the University’s $1.5 billion endowment fund. Prior to the GW Investment Office, Mr. Lake was a Senior Financial Analyst in the Executive Vice President and Treasurer’s Office at GW. Before joining GW, Mr. Lake was a Financial Analyst in portfolio management at a mortgage banking subsidiary of California Federal Bank (now part of Citi). Mr. Lake graduated cum laude, from West Virginia Wesleyan College with a B.S. degree in business. He received his MBA from The George Washington University.
Beneficial Ownership Reporting Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Such persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports they file.
To the Company’s knowledge, based solely on its review of the copies of such reports received by the Company, such persons as described in the paragraph above timely filed all reports required by Section 16(a) during the fiscal year ended December 31, 2016.
Code of Ethics
The Company has adopted a Code of Ethics. It is available on the Company’s website www.sitestar.com under the Corporate Governance tab.
Corporate Governance
Board of Directors: During the fiscal year ended December 31, 2016, the Board of Directors held six meetings. During the period served, no Director attended fewer than 75% of the total number of meetings of the Board held during the year with the exception of Daniel A. Judd. All Directors are independent with the exception of Steven L. Kiel. During the fiscal year ended December 31, 2015, Mr. Judd was not considered to be an independent Director. As of his termination as Chief Financial Officer on March 3, 2016, he no longer held employment with the Company and was considered to be an independent Director until September 19, 2016, when he was neither nominated nor, hence, elected as a Director of Sitestar Corporation during this year’s nomination and election cycle.
The Company held a Shareholder Annual Meeting on September 19, 2016 in Charlotte, North Carolina. At that time all votes cast at the Annual Meeting, in person and by proxy, were counted for the reelection/election of directors.
Audit Committee: The Company approved the creation of an Audit Committee on December 14, 2015. The Audit Committee Charter was approved by the Board of Directors on January 5, 2016. A copy of the Audit Committee Charter is available on the Company’s website www.sitestar.com under the Corporate Governance tab. The Audit Committee assists the Board of Directors in fulfilling its responsibility to the shareholders, potential shareholders, and investment community relating to corporate accounting, reporting practices of the Company and the quality and integrity of the Company’s financial reporting. To fulfill its purposes, the Committee’s duties include the following:
| ● | Appoint, evaluate, compensate, oversee the work of and, if appropriate, terminate, the independent auditor, who shall report directly to the Committee. |
| ● | Approve in advance all audit engagement fees and terms of engagement as well as all audit and non-audit services to be provided by the independent auditor. |
| ● | Engage independent counsel and other advisors, as it deems necessary to carry out its duties. |
In performing these functions, the Audit Committee meets periodically with the independent auditors and management to review their work and confirm that they are properly discharging their respective responsibilities. During the fiscal year ended December 31, 2016, the Audit Committee held four meetings.
The Audit Committee currently consists of Jeremy K. Gold (Chairman of the Audit Committee), Jeffrey I. Moore, and Christopher T. Payne. Each member is considered to be independent, as defined by the SEC. Mr. Payne is considered to be an audit committee financial expert.
Governance, Compensation, and Nomination Committee: The Company approved the appointment of the Governance, Compensation, and Nomination Committee on September 19, 2016. The Governance, Compensation, and Nomination Committee Charter was approved by the Board of Directors on September 19, 2016. A copy of the Governance, Compensation, and Nomination Committee Charter is available on the Company’s website www.sitestar.com under the Corporate Governance tab. The Governance, Compensation, and Nomination Committee assists the Board of Directors in fulfilling its responsibility to the shareholders, potential shareholders, and investment community relating to corporate governance, compensation and nomination oversight and Director effectiveness and performance. To fulfill its purposes, the Committee’s duties include the following:
| ● | Recommending to the Board corporate governance guidelines applicable to the Company. |
| ● | Identifying, reviewing, evaluating, and recommending individuals qualified to become members of the Board and its committees. |
| ● | Evaluating and recommending to the Board the compensation of the Board and its committees. |
| ● | Reviewing the effectiveness and performance of the Board and its members. |
| ● | Assessing and reviewing risks associated with the Company and if necessary recommending mitigation actions to the Board. |
| ● | Setting the compensation of the Chief Executive Officer and performing other compensation and oversight. |
The Governance, Compensation, and Nomination Committee currently consists of Keith D. Smith (Chairman of the Governance, Compensation, and Nomination Committee), Jeffrey I. Moore, and Christopher T. Payne. Each member is considered to be independent, as defined by the SEC.
Family Relationships
There are no family relationships among our directors and/or executive officers.
| ITEM 11. | EXECUTIVE COMPENSATION |
The following table sets forth the annual compensation paid to our executive officers for the two fiscal years ended December 31st.
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) |
Bonus ($) |
Option Awards ($) | All Other Compensation ($) |
Total ($) |
| Steven L. Kiel, Chief Executive Officer, Chief Financial Officer(1) | 2016 2015 |
82,308 | 82,308 | |||
| Rodney Lake, Chief Operating Officer, Corporate Secretary(2) | 2016 2015 |
10,000 | 10,000 | |||
| Daniel A. Judd, Chief Financial Officer (3) | 2016 2015 |
9,084 48,200 |
9,084 48,200 | |||
| Frank R. Erhartic, Jr., Chief Executive Officer (4) | 2016 2015 |
48,269 |
48,269 |
(1) Appointed Chief Executive Officer on December 14, 2015 and Chief Financial Officer on March 3, 2016. As previously reported in our Current Report on Form 8-K filed with the SEC on January 26, 2017, on January 20, 2017 the Company entered into an employment agreement with Steven L. Kiel. Pursuant to the terms of the employment agreement, Mr. Kiel will be entitled to a base salary at the annualized rate of $100,000 ($8,333.33 monthly) and will be eligible to receive an annual performance bonus, in cash, upon meeting certain requirements and to participate in employee benefit plans as the Company may maintain from time to time. The annual performance bonus that Mr. Kiel will be eligible to receive is based on the percentage growth in the Company’s book value per share during each calendar year, subject to a 5% hurdle.
(2) Appointed Chief Operating Officer and Corporate Secretary on November 1, 2016. Mr. Lake is compensated through a consulting agreement with The Benval Group.
(3) Terminated as Chief Financial Officer on March 3, 2016
(4) Terminated as Chief Executive Officer on December 14, 2015
The following table sets forth the compensation paid to our Directors for the fiscal year ended December 31, 2016.
Summary Director Compensation Table
Directors receive $1,000 for each board and committee meeting attended up to $10,000 annually.
| Name and Title | Year | Total Compensation ($) |
| Jeffrey I. Moore, Chairman of the Board | 2016 | 10,000 |
| Jeremy K. Gold, Chairman of the Audit Committee(1) | 2016 | 10,000 |
| Christopher T. Payne, Director | 2016 | 6,000 |
| Keith D. Smith, Chairman of the Governance, Compensation and Nomination Committee | 2016 | 2,000 |
| Roger D. Malouf, Director(2) | 2016 | 2,000 |
(1) Mr. Gold was personally compensated in the amount of $5,000 for meeting attendance and Alesia Value Fund LLC was compensated in the amount of $5,000 for Mr. Gold’s meeting attendance.
(2) Mr. Malouf resigned as a director effective February 22, 2017.
| Name | Fees earned or paid in cash ($) | Stock awards ($) | Option awards ($) | Non-equity incentive plan compensation ($) | Nonqualified deferred compensation earnings ($) | All other compensation ($) | Total ($) |
| Jeffrey I. Moore | 10,000 | 10,000 | |||||
| Jeremy K. Gold | 10,000 | 10,000 | |||||
| Christopher T. Payne | 6,000 | 6,000 | |||||
| Keith D. Smith | 2,000 | 2,000 | |||||
| Roger D. Malouf | 2,000 | 2,000 |
There were no Equity Incentive Plans, Non-Equity Incentive Plans, or Stock Awards for the years ended December 31, 2016 and 2015.
There were no outstanding equity awards as of December 31, 2016.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS |
The following table sets forth as of March 24, 2017 information regarding the beneficial ownership of the Company’s voting securities (i) by each person or group known by the Company to be the owner of record or beneficially of more than five percent of the Company’s voting securities; (ii) by each of the Company’s Directors and executive officers; and (iii) by all Directors and executive officers of the Company as a group. Except as indicated in the following notes, the owners have sole voting and investment power with respect to the shares. Unless otherwise noted, each owner’s mailing address is c/o Sitestar Corporation, 4026 Wards Rd. Suite G1 #271, Lynchburg, VA 24502.
Name of Beneficial Owner |
Number of Shares Beneficially Owned |
Percent of Class (1) |
| Jeffrey I. Moore (2) | 9,923,373 | 3.51% |
| Steven L. Kiel (3) | 127,080,260 | 44.95% |
| Jeremy K. Gold | 1,677,251 | * |
| Christopher T. Payne | 2,278,000 | * |
| Keith D. Smith | 9,000,000 | 3.18% |
| Rodney Lake | - | - |
Frank R. Erhartic, Jr. (4) 7109 Timberlake Road Lynchburg, VA 24502 |
24,883,980 | 8.80% |
All directors and officers As a group (6 persons) |
149,958,884 | 53.04% |
*Less than 1%
(1) Percent of class is based on 282,730,163 shares of Common Stock outstanding as of March 24, 2017.
(2) Includes 4,110,849 shares owned directly by Mr. Moore, 758,489 shares beneficially owned by Julia H. Moore, 648,675 shares beneficially owned by Jay B. Moore beneficially, 218,000 shares beneficially owned by William T. May, and 4,187,360 shares beneficially owned by M & M Investments. The 9,923,373 shares may be deemed to be owned, beneficially and collectively, by Jeffrey I. Moore, as a “group” within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
(3) Includes 85,413,593 shares owned by Arquitos Capital Partners, LP. Arquitos Capital Management LLC acts as the General Partner to Arquitos Capital Partners, LP. Steven L. Kiel is the Managing Member of Arquitos Capital Management LLC and is deemed to have beneficial ownership over the Common Stock owned. Also includes 41,666,667 shares owned by Santa Monica Partners, L.P. SMP Asset Management, LLC is the general partner of Santa Monica Partners, L.P. and Steven L. Kiel is an advisor of SMP Asset Management, LLC and is deemed to have beneficial ownership over the Issuer's Common Stock owned by Santa Monica Partners, L.P.
(4) Based on the information contained in a Schedule 13D filed February 13, 2015.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
Prior to January 15, 2016, the Company leased its former corporate headquarters located at 7109 Timberlake Road, Lynchburg, Virginia from Frank Erhartic, Jr., a stockholder of the Company and the Company’s former CEO. The terms of the lease directed the Company to pay Mr. Erhartic $48,000 per year. The Company now believes that Mr. Erhartic was not the legal owner of the property. This related party matter is described in more detail in Note 13 to the Company’s Consolidated Financial Statements included in this filing.
The Company abandoned the corporate headquarters listed above on January 15, 2016. On April 12, 2016, the Company filed a complaint against Mr. Erhartic alleging, among other things, that at his direction the Company made improper payments involving the property listed above. This litigation matter is described in more detail in Note 10 to the Company’s Consolidated Financial Statements included in this filing.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Fees to Independent Registered Public Accountants for Fiscal 2016 and 2015:
| 2016 | 2015 | |||||||
| Audit fees (1) | $ | 167,125 | $ | 54,712 | ||||
| Audit related fees (2) | - | - | ||||||
| Tax fees (3) | 3,222 | - | ||||||
| All other fees | - | - | ||||||
| Total | $ | 170,347 | $ | 54,712 | ||||
(1) Consists of fees for services provided in connection with the audit of the Company’s financial statements and review of the Company’s quarterly financial statements.
(2) Consists of fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “Audit fees.”
(3) Consists of fees for preparation of Federal and state income tax returns.
Management notes that all audit fees paid during the year ended December 31, 2016 were paid to Cherry Bekaert, LLP and were related to audit services for the years ended December 31, 2016, December 31, 2015, and December 31, 2014. All audit fees paid during the year ended December 31, 2015 were paid to Ciro E. Adams, CPA, LLC. All tax fees paid during the year ended December 31, 2016 were paid to Davidson, Doyle, & Hilton, LLP.
The Company formed an Audit Committee on December 14, 2015. The Audit Committee Charter was subsequently approved by the Board of Directors and implemented on January 5, 2016.
The engagement of Cherry Bekaert, LLP for the 2016 and 2015 fiscal years and the scope of audit-related services, including the audits and reviews described above, were all pre-approved by the Audit Committee.
The policy of the Audit Committee is to pre-approve the engagement of the Company’s independent auditors and the furnishings of all audit and non-audit services.
PART IV
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| (a) | Financial Statements – Contained in Item 8: |
| Page | |||
| Report of Independent Registered Public Accounting Firm | 20 | ||
| Consolidated Balance Sheets – December 31, 2016 and 2015 | 21 | ||
| Consolidated Statements of Operations – Years Ended December 31, 2016 and 2015 | 23 | ||
| Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2016 and 2015 | 24 | ||
| Consolidated Statements of Cash Flows – Years Ended December 31, 2016 and 2015 | 25 | ||
| Notes to Financial Statements | 27 |
| (b) | Exhibits – The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference: |
| Exhibit | Description | ||
| 3.1(i) | Articles of Incorporation of the Registrant (December 17, 1992) (a) | ||
| 3.1(ii) | Amended Articles of Incorporation (July 29, 1998) (a) | ||
| 3.1(iii) | Amended Articles of Incorporation (October 26, 1998) (a) | ||
| 3.1(iv) | Amended Articles of Incorporation (July 14, 1999) (a) | ||
| 3.1(v) | Amended Articles of Incorporation (July 28, 1999) (a) | ||
| 3.2(i) | By-laws of the Registrant (December 17, 1992) (a) | ||
| 3.2(ii) | Amended By-laws of the Registrant (January 28, 2015) (b) | ||
| 10.1 | Limited Liability Company Agreement of HVAC Value Fund, LLC dated effective as of June 13, 2016 between the Registrant and other Members (as therein defined) (c) * | ||
| 10.2 | Limited Partnership Agreement of Alluvial Fund, LP dated as of January 1, 2017 and entered into by Willow Oak Asset Management, LLC on December 27, 2016 (d) | ||
| 10.3 | Side Letter Agreement dated December 28, 2016 by and between Willow Oak Asset Management, LLC and Alluvial Capital Management, LLC (for itself and on behalf of Alluvial Fund, LP) (e) * | ||
| 10.4 | Form of Sitestar Corporation Private Placement Subscription Agreement (f) | ||
| 31.1 | Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) ** | ||
| 31.2 | Certification of Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) ** | ||
| 32 | Certification Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** | ||
| 101 | Pursuant to Rule 405 of Regulation S-T, the following materials from Sitestar Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016 and the year ended December 31, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2016 and 2015; (ii) Consolidated Statements of Operations For the Years ended December 31, 2016 and 2015; (iii) Consolidated Statements of Cash Flows For the Years ended December 31, 2016 and 2015 (iv) Consolidated Statements of Stockholders’ Equity For the Years ended December 31, 2016 and 2015; (v) Notes to Consolidated Financial Statements |
(a) Filed as an exhibit to the Registrant's Form-10SB, as amended, initially filed with the Securities and Exchange Commission on October 22, 1999 and incorporated herein by reference.
(b) Filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on January 28, 2015 and incorporated herein by reference.
(c) Filed as Exhibit 10.1 to Registrant’s Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission on July 18, 2016, and incorporated herein by reference.
(d) Filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2016, and incorporated herein by reference.
(e) Filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2016, and incorporated herein by reference.
(f) Filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Securities and Exchange Commission on November 9, 2016, and incorporated herein by reference.
* Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
** Filed herewith
List of Subsidiaries
Sitestar.net, Inc.
HVAC Value Fund, LLC
Willow Oak Asset Management, LLC
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
SITESTAR CORPORATION
(REGISTRANT)
| Date: March 24, 2017 | By: /s/ Jeffrey I. Moore | |
| Jeffrey I. Moore | ||
| Chairman of the Board | ||
| Date: March 24, 2017 | By: /s/ Steven L. Kiel | |
| Steven L. Kiel | ||
| Chief Executive Officer | ||
| Chief Financial Officer | ||
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: March 24, 2017 | By: /s/ Jeffrey I. Moore | |
| Jeffrey I. Moore | ||
| Chairman of the Board | ||
| Date: March 24, 2017 | By: /s/ Steven L. Kiel | |
| Steven L. Kiel | ||
| Chief Executive Officer | ||
| (Principal Executive Officer), | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer), | ||
| and Director | ||
| Date: March 24, 2017 | By: /s/ Jeremy K. Gold | |
Jeremy K. Gold | ||
| Director | ||
| Date: March 24, 2017 | By: /s/ Christopher T. Payne | |
| Christopher T. Payne | ||
| Director | ||
| Date: March 24, 2017 | By: /s/ Keith D. Smith | |
| Keith D. Smith | ||
| Director | ||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Sitestar Corporation
We have audited the accompanying consolidated balance sheets of Sitestar Corporation as of December 31, 2016 and 2015 and the related consolidated statements of operations, consolidated statements of comprehensive loss, consolidated statements of stockholders’ equity, and consolidated statements of cash flows for each of the years in the two year period ended December 31, 2016. Sitestar Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sitestar Corporation as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
/s/ Cherry Bekaert LLP
Roanoke, VA
March 24, 2017
SITESTAR CORPORATION
And Subsidiaries
CONSOLIDATED BALANCE SHEETS
Years Ended December 31, 2016 and 2015
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,607,370 | $ | 184,731 | ||||
| Accounts receivable, net | 212,751 | 14,428 | ||||||
| Investments, at fair value | 599,500 | - | ||||||
| Other current assets | 2,554,861 | 1,081 | ||||||
| Total current assets | 5,974,482 | 200,240 | ||||||
| Real estate – held for resale | 1,399,280 | 2,671,311 | ||||||
| Real estate – held for investment, net | 506,011 | 911,162 | ||||||
| Property and equipment, net | 143,464 | - | ||||||
| Goodwill | 1,553,745 | 212,445 | ||||||
| Other intangible assets | 264,250 | 200,055 | ||||||
| Total assets | $ | 9,841,232 | $ | 4,195,213 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
SITESTAR CORPORATION
And Subsidiaries
CONSOLIDATED BALANCE SHEETS
Years Ended December 31, 2016 and 2015
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Deferred revenue | $ | 214,898 | $ | 246,262 | ||||
| Notes payable, current | 240,000 | 90,000 | ||||||
| Accounts payable | 77,918 | 58,094 | ||||||
| Accrued bonus | 51,855 | - | ||||||
| Other accrued expenses | 71,532 | 49,812 | ||||||
| Total current liabilities | 656,203 | 444,168 | ||||||
| Notes payable | 25,000 | - | ||||||
| Total liabilities | 681,203 | 444,168 | ||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $0.001 par value, 30,000,000 shares authorized; none issued or outstanding | - | - | ||||||
| Common stock, $0.001 par value, 300,000,000 shares authorized; 204,152,616 and 91,326,463 shares issued; 190,230,163 and 77,404,010 shares outstanding. | 204,152 | 91,327 | ||||||
| Additional paid-in capital | 19,096,858 | 13,728,989 | ||||||
| Treasury stock, at cost, 13,922,453 common shares | (637,561 | ) | (637,561 | ) | ||||
| Accumulated other comprehensive income | 39,343 | 3,415 | ||||||
| Accumulated deficit | (9,542,763 | ) | (9,435,125 | ) | ||||
| Total stockholders’ equity attributable to Sitestar Corporation stockholders | 9,160,029 | 3,751,045 | ||||||
| Noncontrolling interest in consolidated subsidiaries | - | - | ||||||
| Total stockholders’ equity | 9,160,029 | 3,751,045 | ||||||
| Total liabilities and stockholders’ equity | $ | 9,841,232 | $ | 4,195,213 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
SITESTAR CORPORATION
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenues: | ||||||||
| Internet operations | $ | 1,415,289 | $ | 1,602,523 | ||||
| HVAC operations | 1,477,961 | - | ||||||
| Real estate operations | 2,081,996 | 132,680 | ||||||
| Total revenue | 4,975,246 | 1,735,203 | ||||||
| Cost of Revenues: | ||||||||
| Internet operations | 369,514 | 539,934 | ||||||
| HVAC operations | 987,221 | - | ||||||
| Real estate operations | 2,165,020 | 346,998 | ||||||
| Total cost of revenues | 3,521,755 | 886,932 | ||||||
| Gross Profit (Loss): | ||||||||
| Internet operations | 1,045,775 | 1,062,588 | ||||||
| HVAC operations | 490,740 | - | ||||||
| Real estate operations | (83,024 | ) | (214,317 | ) | ||||
| Total gross profit | 1,453,491 | 848,271 | ||||||
| Selling, general and administrative expenses | 1,708,414 | 760,760 | ||||||
| Income (loss) from operations | (254,923 | ) | 87,511 | |||||
| Other income (expense), net | 147,285 | (52,784 | ) | |||||
| Goodwill impairment | - | (954,049 | ) | |||||
| Loss before income taxes | (107,638 | ) | (919,321 | ) | ||||
| Income tax benefit | - | - | ||||||
| Net loss | (107,638 | ) | (919,321 | ) | ||||
| Less: net loss attributable to noncontrolling interest | - | - | ||||||
| Net loss attributable to Sitestar Corporation Stockholders | $ | (107,638 | ) | $ | (919,321 | ) | ||
| Earnings per share, basic and diluted | $ | 0.00 | $ | (0.01 | ) | |||
| Weighted average number of shares, basic and diluted | 113,886,879 | 77,404,010 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
SITESTAR CORPORATION
and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Net loss | $ | (107,638 | ) | $ | (919,321 | ) | ||
| Other comprehensive income: | ||||||||
| Foreign exchange translation | (361 | ) | 4,183 | |||||
| Unrealized gains (losses) related to available-for-sale securities | 36,289 | - | ||||||
| Other comprehensive income (loss), net | 35,928 | (915,138 | ) | |||||
| Comprehensive loss attributable to noncontrolling interest | - | - | ||||||
| Comprehensive loss attributable to Sitestar Corporation Stockholders | $ | (71,710 | ) | $ | (915,138 | ) | ||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
| Sitestar Corporation stockholders’ equity | ||||||||||||||||||||||
| Common stock | Amount | Additional paid-in capital | Treasury stock | Accumulated other comprehensive income | Accumulated deficit | Non-controlling Interest | Total | |||||||||||||||
| Balance December 31, 2014 (restated) | 77,404,010 | $ | 91,327 | $ | 13,728,989 | $ | (637,561) | $ | (768) | $ | (8,515,804) | $ | - | $ | 4,666,183 | |||||||
| Net loss | - | - | - | - | - | (919,321) | - | (919,321) | ||||||||||||||
| Gain on foreign currency translation adjustments | - | - | - | - | 4,183 | - | - | 4,183 | ||||||||||||||
| Balance December 31, 2015 | 77,404,010 | $ | 91,327 | $ | 13,728,989 | $ | (637,561) | $ | 3,415 | $ | (9,435,125) | $ | - | $ | 3,751,045 | |||||||
| Net loss | - | - | - | - | - | (107,638) | - | (107,638) | ||||||||||||||
| Contributed capital | 112,826,153 | 112,825 | 5,367,869 | - | - | - | - | 5,480,694 | ||||||||||||||
| Loss on foreign currency translation adjustments | - | - | - | - | (361) | - | - | (361) | ||||||||||||||
| Unrealized gain on investments | - | - | - | - | 36,289 | - | - | 36,289 | ||||||||||||||
| Balance December 31, 2016 | 190,230,163 | $ | 204,152 | $ | 19,096,858 | $ | (637,561) | $ | 39,343 | $ | (9,542,763) | $ | - | $ | 9,160,029 | |||||||
The accompanying notes are an integral part
of these consolidated financial statements. SITESTAR CORPORATION and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December
31, 2016 and 2015 The accompanying notes are an integral part
of these consolidated financial statements. SITESTAR CORPORATION and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, 2016 and 2015 SITESTAR CORPORATION The accompanying notes are an integral part
of these consolidated financial statements.
SITESTAR CORPORATION and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING
POLICIES Organization and Lines of Business Sitestar Corporation (formerly
White Dove Systems, Inc., and then Interfoods Consolidated, Inc.) was incorporated in Nevada on December 17, 1992. On July 26,
1999, the Company restated its Articles of Incorporation to change the name of the Company to “Sitestar Corporation.”
Unless the context otherwise requires, and when used in this Report, the “Company,” “Sitestar,” “we,”
“our” or “us” refers to Sitestar Corporation and its subsidiaries. The Company operates through
five reportable segments: Corporate, Internet Operations, HVAC Operations, Real Estate Operations, and Asset Management Operations.
The management of the Company is also currently reviewing investment opportunities in the 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. Internet Operations The Company operates its
internet operations through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, wholesale
managed modem services, web hosting, and various ancillary services. Sitestar.net provides services to customers in the United
States and Canada. HVAC Operations The Company operates its
HVAC 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, the Company, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized
and launched this subsidiary on June 13, 2016. Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has
the ability to earn 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 December 31, 2016,
HVAC Value Fund had closed on five acquisitions for an aggregate purchase price of $1.46 million, 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. Real Estate Operations Sitestar owns a real estate investment portfolio
that includes 19 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. 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 Asset Management in Alluvial Fund, LP, an unrelated private partnership that was launched
on January 1, 2017. The asset management segment did not produce revenue in 2016. Any expenses incurred in 2016 were allocated
to the corporate segment. Principles of Consolidation The accompanying consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries including: Sitestar.net, Inc., HVAC
Value Fund, LLC, and Willow Oak Asset Management, LLC. All intercompany accounts and transactions have been eliminated. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Use of Estimates In accordance with 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 fair value of investments, revenue recognition, accrued expenses,
financing operations, goodwill valuation, other assets, and contingencies and litigation. Management bases its estimates and judgments
on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting
policies are described at relevant sections in the notes to the consolidated financial statements. 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. As of December
31, 2016, some of the Company’s cash balances exceeded the FDIC and CDIC limit. The Company extends credit based on an evaluation
of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally
dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances
for anticipated losses.
Investments The Company currently holds and makes investments
in marketable securities through its corporate operations. Marketable securities held are classified as available-for-sale based
on management’s intent. The classification of the investments in these marketable securities is assessed upon purchase and
reassessed at each reporting period. These investments are recorded at fair value and are classified as marketable securities
in the accompanying consolidated balance sheets. Unrealized gains (losses) are categorized as Other Comprehensive Income. Realized
gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis;
dividends are recorded as earned on the ex-dividend date. Accounts Receivable The Company grants credit
in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is charged
off to bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience
with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms
and are charged off to the allowance for doubtful accounts when 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 Company’s highest exposure to
collection risk. The Company attempts to reduce this risk by including a late payment fee and a manual processing payment
fee to customer accounts. Receivables more than 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 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 completed an analysis of its goodwill
as of December 31, 2016 and 2015. For the year ended December 31, 2015 the Company recorded a goodwill impairment of $954,049.
No impairment was recorded in 2016. This non-cash expense was the result of revenue and cash flow declines in the internet segment.
Additionally, new management implemented changes to the annual goodwill impairment analysis to more accurately reflect the value
of the Company’s goodwill in 2015. 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. Other intangible assets
consist of customer relationships, developed technology and software, trade names, and other assets acquired in conjunction with
the purchases of businesses or purchases of assets from other companies. As of December 31, 2016, these intangible assets have
been fully amortized. The remaining intangible assets consist of Domain Names attributed to the internet segment. When management
determines material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the
fair values of the identifiable intangible assets by taking into account management’s own analysis and an independent third
party valuation specialist’s appraisal. Intangible assets determined to have definite lives are amortized over their estimated
useful lives. The Company owns 637 domain
names, of which 110 are available for sale. These domains are valued at historical cost. Real Estate Real estate properties
held for resale are carried at the lower of cost or fair market value. All costs directly related to the improvement and carrying
of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property
do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, the excess
is charged to expense. Fair value is estimated based on comparable sales in the geographic area 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 Bonus Accrued bonuses represent
performance based incentives that have not yet been paid. These bonus amounts are paid annually after financial records are finalized. Other 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. 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. 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 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. 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. 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. 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 February 2016, the
FASB issued ASU 2016-02, “Leases” (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements
in ASC Topic 842, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing
and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, with early adoption permitted. The Company is required to adopt this standard in the first
quarter of 2019. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements. In August 2015, the FASB
issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic
606)” by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those years, beginning
after December 15, 2017. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising
from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires
new disclosures. Early adoption is not permitted. The Company is required to adopt this standard in the first quarter of 2018.
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. 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. NOTE 3. 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. As of October 1, 2016, HVAC Value Fund, LLC completed the 100% acquisition of a fifth subsidiary. These
subsidiaries engage in providing heating, ventilation, plumbing, and air conditioning services, installation, and repairs to residential
and commercial customers. As a result of the acquisitions, HVAC Value Fund, LLC will offer heating, ventilation, plumbing, 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 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. The acquired businesses
contributed revenues of $1,477,961 and net income of $116,328 to HVAC Value Fund, LLC during the year ended December 31, 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 year ended December 31,
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 profits interests. Pro forma earnings for the year ended December 31, 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. 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. 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. NOTE 4. INVESTMENTS The Company may invest
excess cash in marketable securities through its corporate segment. The fair values of the Company’s marketable securities
are determined in accordance with GAAP, with fair value being defined as the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or liability. The
following available-for-sale securities, which comprise all of the Company’s marketable securities, are re-measured to fair
value on a recurring basis and are valued using Level 1 inputs, which are quoted prices (unadjusted) for identical assets in active
markets:
NOTE 5. FAIR VALUE OF ASSETS AND LIABILITIES The Company has adopted
FASB ASC 820, Fair Value Measurements. ASC 820 defines fair value as the amount that would be received from the sale of
an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value
them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable
inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s
judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes
three levels based on the objectivity of the inputs as follows: 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.
Assets and Liabilities Measured at Fair Value on a Non-Recurring
Basis The Company analyzes goodwill on an annual
basis or whenever events or changes in circumstances indicate potential impairments. For the year ended December 31, 2016, goodwill
held at year end was determined to be valued appropriately and no impairment existed. During the year ended December 31, 2015,
the Company recorded a goodwill impairment of $954,049. Specifically, this was the result of revenue and cash flow declines in
the internet segment. The Company values real estate held on the
balance sheet on an annual basis or whenever events or changes in circumstances indicate a change in their fair market value.
For the year ended December 31, 2016, the Company adjusted the carrying value of properties held downward by $152,411, as repair
and improvement expenses for some properties exceeded the current market value of the property. For the year ended December 31,
2015, the Company adjusted the carrying value of properties held downward by $228,352. These adjustments are the result of fluctuating
market conditions and write downs of previously capitalized improvements made by prior management. NOTE 6. PROPERTY AND EQUIPMENT The cost of property and
equipment at December 31, 2016 and December 31, 2015 consisted of the following:
Depreciation expense was
$10,172 for the year ended December 31, 2016 and $5,518 for the year ended December 31, 2015. Increased automobile, equipment,
and furniture and fixtures are the result of acquisitions in the HVAC operations. Increased computer assets are the result of
new servers purchased related to the internet segment. NOTE 7. REAL ESTATE As of December 31, 2016,
the Company owned 19 residential properties, one commercial property, and interests in several lots. The Company sold 23 residential
properties in the year ended December 31, 2016 for gross proceeds of $1,970,009 and net proceeds of $1,799,677. The carrying value
of the 23 properties sold was $1,752,622. As of December 31, 2015,
the Company owned 42 residential properties, one commercial property, and interests in several lots. The Company acquired three
residential real estate properties in 2015 for a total gross purchase amount of $147,684. The Company made no sales of assets
in the year ended December 31, 2015. Real Estate Held for Investment As of December 31, 2016,
the Company held eight residential properties as held for investment. The leases in effect as of the year ended December 31, 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. As of December 31, 2015,
the Company held 14 residential properties and several lots as held for investments. Of these, nine properties had tenants and
were current with regards to tenant payments as of December 31, 2015. Four other properties that were available to rent were held
in real estate for resale. Depreciation expense totaled
$28,544 for the year ended December 31, 2016 and $44,770 for the year ended December 31, 2015. Total accumulated depreciation
as of December 31, 2016 and 2015 totaled $77,955 and $92,627, respectively. As of December 31, 2016 and 2015, these properties
held for investment were carried on the balance sheet at $506,011and $911,162, respectively. The leases in effect as
of the year ended December 31, 2016 are based on either annual or multi-year time periods and include month-to-month provisions
after the completion of the initial term. The property management company has introduced updated and renewed leases for existing
rental properties. The future anticipated minimum rental revenues
based on leases in place as of December 31, 2016 are as follows:
Real Estate Held for Resale As of December 31, 2016,
the Company held 11 residential properties, one commercial property and several lots as held for resale. These properties held
for resale were carried on the balance sheet at $1,399,280. As of December 31, 2015,
the Company held 28 residential properties and one commercial property as held for resale. These properties held for resale were
carried on the balance sheet at $2,671,311. NOTE 8. NOTES PAYABLE Notes payable at December 31, 2016 and 2015
consist of the following:
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 five acquisitions in the year ended December 31, 2016. Four of the five acquisitions
resulted in 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. NOTE 9. ACCOUNTS RECEIVABLE AND BAD DEBT
EXPENSE For the years ended December 31, 2016 and 2015,
bad debt expense was $2,537 and $27,163, respectively. The increase in accounts receivable is primarily the result of the formation
of the HVAC subsidiary. As of December 31, 2016 and 2015, accounts receivable consisted of the following:
NOTE 10. COMMITMENTS AND CONTINGENCIES Leases The Company previously
leased certain facilities for its corporate offices and a storage facility from a related party, and beginning on September 1,
2016, rents office and warehouse space for HVAC Value Fund, LLC. The Company also previously rented an office in Chatham, Ontario
in Canada. Total rent expense for the years ended December 31, 2016 and 2015 was $12,472 and $56,100, respectively. Total rent
expense for the Canadian facility for the years ended December 31, 2016 and 2015 was $3,000 CAD and $18,000 CAD, respectively.
Total rent expense for the HVAC office and warehouse space for the year ended December 31, 2016 was $10,251. All leased facilities,
with the exception of the HVAC facilities, have been vacated as of the first quarter of 2016. The HVAC facilities leases are in
effect until July 31, 2019. The future lease obligations related to the HVAC facilities are as follows: Litigation On April 12, 2016, Sitestar
filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”), the Company’s former CEO and
director and currently an owner of record or beneficially of more than five percent of the Company’s Common Stock, alleging,
among other things, that the Former CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized
and wrongful related party transactions, including causing the Company to borrow certain amounts from the Former CEO’s mother
unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments
to the Former CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former
CEO, causing the Company to pay certain amounts to the Former CEO for lease payments under an unauthorized lease as to a storage
facility owned by the Former CEO, causing the Company to pay rent on its corporate headquarters owned by the Former CEO’s
ex-wife in amounts commercially unreasonable and excessive and to make real estate tax payments thereon for the personal benefit
of the Former CEO, converting to the Former CEO and/or absconding with five motor vehicles owned by the Company, causing the Company
to pay real property and personal property taxes on numerous properties owned personally by 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). NOTE 11. STOCKHOLDERS' EQUITY Classes of Shares The Company's Articles
of Incorporation authorize 330,000,000 shares, consisting of 30,000,000 shares of preferred stock, which have a par value of $0.001
per share and 300,000,000 shares of common stock, which have a par value of $0.001. Preferred Stock Preferred stock, any series,
shall have the powers, preferences, rights, qualifications, limitations and restrictions as fixed by the Company's Board of Directors
in its sole discretion. As of December 31, 2016, the Company's Board of Directors has not issued any Preferred Stock. Common Stock The Company has 300,000,000
authorized shares of Common Stock. As of March 24, 2017, 296,652,616 shares were issued and 282,730,163 shares were outstanding.
This compares to the year ended December 31, 2015 when 91,326,463 shares were issued and 77,404,010 shares were outstanding and
the year ended December 31, 2016 when 204,152,616 shares were issued and 190,230,163 shares were outstanding.
NOTE 12. INCOME TAXES The provision for federal
and state income taxes for the years ended December 31, 2016 and 2015 included the following: Deferred tax assets and liabilities reflect
the net effect of temporary differences between the carrying amount of assets and liabilities used for income tax purposes. Significant
components of the Company’s deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows: ASC 740 provides for the
recognition of deferred tax assets if realization of such assets is more likely than not. Based on the weight of available
evidence, which includes the Company’s historical operation performance and the reported cumulative losses in the three
year period preceding 2016, the Company has provided a full valuation allowance against its net deferred tax assets. As of December 31, 2016,
the Company had federal net operating loss carryforwards of approximately $2.4 million, which will expire in various amounts beginning
in 2032. Internal Revenue Code Section 382 limits the use of net operating loss carryforwards in certain situations
where changes occur in the stock ownership of a company. The Company believes that an ownership change did occur
in August, 2016. Net operating losses that arose prior to that ownership change will have limited availability to offset
taxable income arising in periods following the ownership change. The Company’s analysis of this issue is not
complete but management believes that the Company’s net operating loss carryforwards will not expire unutilized. The Company has limited
operations in Canada and the Company is currently evaluating its tax position in that country. Management does not believe
that there is any significant tax exposure in Canada. The Company is required to recognize in the
financial statements the impact of a tax position, if that position is not more likely than not of being sustained on audit, based
on the technical merits of the position. The Company’s policy is to record interest and penalties related to
unrecognized tax benefits in income tax expense. At December 31, 2016, there was no liability for unrecognized tax benefits. NOTE 13. RELATED PARTY TRANSACTIONS As of the year ended December
31, 2015, the Company previously purported to lease its office building in Lynchburg, Virginia from the former CEO of the Company.
Public records indicate that the owner of this property from at least January 1, 2014 through December 31, 2015 was the former
CEO’s ex-wife. The Company has filed a lawsuit against the former CEO in order to recover, among other amounts, the payments
made to the former CEO. Additional information on this lawsuit can be found in Note 10. The Company vacated the building as of
January 15, 2016. The Company also leased
a storage facility in Salem, Virginia from the former CEO. The Company is attempting to recover the payments made to the former
CEO related to this facility. The lease was not approved by the process required by the Company’s Code of Ethics. The former
CEO has refused to provide access to the storage facility to the management and has not returned Company-owned equipment located
at the storage facility. The value of this equipment is also included in the lawsuit. Additional information can be found in Note
10. The Company paid a total
of $56,100 in rent to the former CEO related to the office building in Lynchburg, Virginia and the storage facility in Salem,
Virginia for the year ended December 31, 2015. The former CEO created
several land trusts and designated the Company as the trustee. The former CEO and, the Company believes, the former CFO placed
personally owned properties within these land trusts. This activity was not approved by the process required by the Company’s
Code of Ethics. This activity is the subject of litigation involving the former CEO. Additional information can be found in Note
10. NOTE 14. SEGMENT INFORMATION As of December 31, 2016,
the Company has five reportable segments with separate management and reporting infrastructures that offer different products
and services: Corporate, Internet, HVAC, Real Estate, and Asset Management. The corporate segment
includes any revenue or expenses derived from corporate office operations as well as expenses related to public company reporting,
the oversight of subsidiaries, and other items that affect the overall Company. Sitestar also invests in marketable securities
through the corporate segment. The internet segment includes revenue and expenses related to the sale of internet access, hosting,
storage, and other ancillary services. The HVAC segment includes revenue and expenses derived from the acquisition and management
of HVAC 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 did not produce revenues in 2016, but will include revenues from various subsidiary investments
going forward. All expenses associated with the Asset Management segment were allocated to the Corporate segment for the year
ending December 31, 2016. The internet segment includes
revenue generated by customers in both the United States and Canada. In the year ended December 31, 2016, the internet segment
generated revenue of $1,312,444 in the United States and revenue of $102,845 in Canada. This compares to the year ended December
31, 2015 where the internet segment generated revenue of $1,488,835 in the United States and revenue of $113,687 in Canada. Summarized financial information concerning
the Company’s reportable segments is shown in the following tables for the years ended December 31, 2016 and 2015. No comparable
financial information exists for the HVAC segment for the year ended December 31, 2015 because it commenced operations on June
13, 2016: NOTE 15. SUBSEQUENT EVENTS As previously reported
in our Current Report on Form 8-K filed with the SEC on January 26, 2017, on January 20, 2017 the Company entered into an employment
agreement with Steven L. Kiel, its Chief Executive Officer, President and Chief Financial Officer. The employment agreement commenced
as of January 20, 2017 and continues through December 31, 2018, unless earlier terminated pursuant to its terms. From and after
December 31, 2018, the employment agreement will automatically renew for successive one-year periods, unless the Company elects
not to extend the term upon 90 days’ advance notice to Mr. Kiel Pursuant to the terms of the employment agreement,
Mr. Kiel will be entitled to a base salary at the annualized rate of $100,000 ($8,333.33 monthly) and will be eligible to receive
an annual performance bonus, in cash, upon meeting certain requirements and to participate in employee benefit plans as the Company
may maintain from time to time. The annual performance bonus that Mr. Kiel will be eligible to receive is based on the percentage
growth in the Company’s book value per share during each calendar year, subject to a 5% hurdle. As previously reported
in our Current Report on Form 8-K filed with the SEC on January 26, 2017, on January 25, 2017 the Company entered into an employment
agreement with Tabitha Keatts, the Company’s President of Internet Operations. The employment agreement commenced as of
January 25, 2017 and continues through December 31, 2018, unless earlier terminated pursuant to its terms. From and after December
31, 2018, the employment agreement will automatically renew for successive one-year periods, unless the Company elects not to
extend the term upon 90 days’ advance notice to Ms. Keatts Pursuant to the terms of the employment agreement, Ms.
Keatts will be entitled to a base salary at the annualized rate of $35,000 ($2,916.67 monthly) and will be eligible to receive
an annual performance bonus, in cash, based upon net income from the Company’s Internet Operations Division and to participate
in employee benefit plans as the Company may maintain from time to time. As previously reported
in our Current Report on Form 8-K filed with the SEC on January 30, 2017, on January 24, 2017 our subsidiary, Willow Oak Asset
Management 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 Asset Management 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 Asset Management 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 Asset Management committed to make a capital contribution to Huckleberry Fund in an aggregate amount of at least
$750,000, which amount was due by January 31, 2017. As of March 24, 2017,
our subsidiary, HVAC Value Fund, LLC, has completed six acquisitions in the HVAC (Heating, Ventilation, and Air Conditioning)
industry, one of which such acquisitions was completed subsequent to December 31, 2016. This most recent acquisition was completed
on January 19, 2017, for a purchase price totaling $560,000. Included in other current assets for the year ended December 31,
2016 is $25,000 for good faith consideration paid related to this subsequent 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 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.
Year
Ended December 31,
2016
2015
Cash
flows from operating activities:
Net
loss
$ (107,638 )
$ (919,321 )
Adjustments
to reconcile net loss to operating cash flows:
Amortization
55
-
Depreciation
38,715
50,179
Gain
on sale of real estate
(47,055 )
-
Gain
on sale of securities
(47,610 )
Bad
debt
2,537
27,163
Real
estate valuation adjustment
152,411
228,352
Goodwill
impairment
-
954,049
Changes
in operating assets and liabilities:
Accounts
receivable, net
(201,221 )
(19,780 )
Other
current assets
(28,780 )
6,940
Deferred
revenue, net
(31,364 )
(22,995 )
Accounts
payable
19,824
36,450
Accrued
expenses
73,575
(29,847 )
Net
cash flows from operating activities
(176,551 )
311,190
Cash
flows from investing activities:
Proceeds
from sale of real estate held for resale
1,488,324
-
Purchases
of real estate held for resale
(5,467 )
(106,096 )
Improvements
to real estate held for resale
(232,591 )
(295,655 )
Proceeds
from sale of real estate held for investment
311,353
-
Purchases
of real estate held for investment
-
(41,588 )
Improvements
to real estate held for investment
(18,337 )
(22,814 )
Purchase
of marketable securities, net of sales
(515,601 )
-
Purchase
of domain names
(64,250 )
-
Purchase
of property and equipment
(39,935 )
Investment
in subsidiaries
(3,715,000 )
-
Net
cash flows from investing activities
(2,791,504 )
(466,153 )
Cash
flows from financing activities:
Principal
payments on note payable
(90,000 )
-
Proceeds
from issuing common stock
5,480,694
-
Net
cash flows from financing activities
5,390,694
-
Net
increase (decrease) in cash
2,422,639
(154,963 )
Cash
and cash equivalents at beginning of the period
184,731
339,694
Cash
and cash equivalents at end of the period
$ 2,607,370
$ 184,731
Year
Ended December 31,
2016
2015
Non-cash
supplemental information:
Transfer
of real estate held for investment to held for resale
$ 152,003
$ 316,680
Transfer
of property and equipment to real estate held for resale
$ -
$ 100,000
Unrealized
gain on marketable securities reported as other comprehensive income
$ 36,289
$ -
HVAC
acquisitions through notes payable
$ 265,000
$ -
Pro
forma year ended December 31, 2016 (unaudited)
Consolidated
pro forma year ended December 31, 2016 (unaudited)
June
2016 acquisitions (in aggregate)
July
8, 2016 acquisition
July
15, 2016 acquisition
October
1, 2016 acquisition
Revenue
$ 534,997
$ 1,293,380
$ 1,052,186
$ 900,605
$ 3,781,167
Earnings
$ 71,314
$ 192,922
$ 217,609
$ 35,650
$ 517,495
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
October
1, 2016 acquisition
Revenue
$ 674,212
$ 1,338,305
$ 1,034,926
$ 977,613
$ 4,025,056
Earnings
$ 247,328
$ 219,231
$ 313,302
$ 2,759
$ 782,620
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
$ 176,300
July
8, 2016 acquisition
Fair
value of consideration transferred:
Cash
$ 375,000
Notes
payable
$ 100,000
Preliminary
fair value of assets acquired:
Goodwill
$ 475,000
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
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
Cost Basis
Unrealized Gain
Fair Value
December 31, 2016
Common Stock available for sale
$ 563,211
$ 36,289
$ 599,500
● 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.
(Level 1)
(Level 2)
(Level 3)
Total at Fair Value
December 31, 2016
Marketable securities
$ 599,500
$ -
$ -
$ 599,500
(Level 1)
(Level 2)
(Level 3)
Total at Fair Value
December 31, 2015
Marketable securities
$ -
$ -
$ -
$ -
2016
2015
Automobile
$ 115,688
$ 9,500
Computers and equipment
36,030
-
Furniture and fixtures
25,206
13,788
176,924
23,288
Less accumulated depreciation
(33,460 )
(23,288 )
Property and equipment, net
$ 143,464
$ -
2017
$ 68,510
2018
15,795
Total
$ 84,305
2016
2015
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 acquisitions through HVAC Value Fund, LLC
15,000
-
Less current portion
(240,000 )
-
Long-term portion
$ 25,000
$ 90,000
2016
2015
Gross accounts receivable
$ 213,624
$ 20,692
Less allowance for doubtful accounts
(873 )
(6,264 )
Accounts receivable, net
$ 212,751
$ 14,428
2017
$ 42,869
2018
31,723
2019
4,200
Total
$ 78,792
2016
2015
Current benefit (provision):
Federal
$ -
$ -
State
-
-
Deferred provision:
Federal
16,047
(318,594 )
State
30,535
(5,359 )
Valuation allowance
(46,582 )
323,953
Total income tax provision
$ -
$ -
2016
2015
Net operating loss carryforward
$ 803,637
$ 560,137
Amortizations of intangible assets
1,092,769
1,383,166
Accrued vacation
608
293
Valuation allowance
(1,897,014 )
(1,943,596 )
Deferred tax asset, net
$ -
$ -
Corporate
Internet
HVAC
Real Estate
Consolidated
Year ended December 31, 2016
Revenues
$ -
$ 1,415,289
$ 1,477,961
$ 2,081,996
$ 4,975,246
Cost of revenue
$ -
$ 369,514
$ 987,221
$ 2,165,020
$ 3,521,755
Net income (loss) before income taxes
$ (754,708 )
$ 822,224
$ (78,843 )
$ (96,311 )
$ (107,638 )
Goodwill
$ -
$ 212,445
$ 1,341,300
$ -
$ 1,553,745
Identifiable assets
$ 5,004,655
$ 622,431
$ 2,234,564
$ 1,979,582
$ 9,841,232
Corporate
Internet
HVAC
Real Estate
Consolidated
Year ended December 31, 2015
Revenues
$ -
$ 1,602,523
$ -
$ 132,680
$ 1,735,203
Cost of revenue
$ -
$ 539,934
$ -
$ 346,998
$ 886,932
Net income (loss) before income taxes
$ (476,845 )
$ (175,897 )
$ -
$ (262,397 )
$ (915,139 )
Goodwill
$ -
$ 212,445
$ -
$ -
$ 212,445
Identifiable assets
$ 184,786
$ 427,954
$ -
$ 3,582,473
$ 4,195,213
EXHIBIT 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Steven L. Kiel, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Sitestar Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 24, 2017 | ||
| By: | /s/ Steven L. Kiel | |
| Steven L. Kiel | ||
| Chief Executive Officer | ||
| Chief Financial Officer |
EXHIBIT 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Steven L. Kiel, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Sitestar Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 24, 2017 | ||
| By: | /s/ Steven L. Kiel | |
| Steven L. Kiel | ||
| Chief Executive Officer | ||
| Chief Financial Officer |
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Sitestar Corporation, (SYTE) on Form 10-K for the year ended December 31, 2015, I, Steven L. Kiel, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| By: | /s/ Steven L. Kiel | |
| Steven L. Kiel | ||
| Chief Executive Officer | ||
| Chief Financial Officer | ||
| Date: March 24, 2017 |
This certification is being furnished to the SEC with this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section.
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Jul. 18, 2017 |
Jun. 30, 2016 |
|
| Document And Entity Information | |||
| Entity Registrant Name | SITESTAR CORP | ||
| Entity Central Index Key | 0001096934 | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 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 Public Float | $ 3,767,054 | ||
| Entity Common Stock, Shares Outstanding | 282,730,163 | ||
| Document Fiscal Period Focus | FY | ||
| Document Fiscal Year Focus | 2016 |
Balance Sheets (Parenthetical) - $ / shares |
Dec. 31, 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 | 204,152,616 | 91,326,463 |
| Common Stock Shares Outstanding | 190,230,163 | 77,404,010 |
| Common Shares Treasury Stock | 13,922,453 | 13,922,453 |
Statements of Comprehensive Loss - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Statements Of Comprehensive Loss | ||
| Net loss | $ (107,638) | $ (919,321) |
| Other comprehensive income: | ||
| Foreign exchange translation | (361) | 4,183 |
| Unrealized gains (losses) related to available-for-sale securities | 36,289 | |
| Other comprehensive income (loss), net | 35,928 | (915,138) |
| Comprehensive loss attributable to noncontrolling interest | ||
| Comprehensive loss attributable to Sitestar Corporation Stockholders | $ (71,710) | $ (915,138) |
Shareholders Equity - USD ($) |
Common Stock |
Additional Paid-In Capital |
Treasury Stock |
Accumulated Other Comprehensive Income |
Accumulated Deficit |
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) | $ (8,515,804) | $ 4,666,183 |
| Net income | (919,321) | (919,321) | ||||
| Gain 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 | (107,638) | (107,638) | ||||
| Contributed capital, Shares | 112,826,153 | |||||
| Contributed capital, Amount | $ 112,825 | 5,367,869 | 5,480,694 | |||
| Gain on foreign currency translation adjustments | (361) | (361) | ||||
| Unrealized gain on investments | 36,289 | 36,289 | ||||
| Ending Balance, Shares | 190,230,163 | |||||
| Ending Balance, Value | $ 204,152 | $ 19,096,858 | $ (637,561) | $ 39,343 | $ (9,542,763) | $ 9,160,029 |
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| Accounting Policies [Abstract] | |
| 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES | NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Lines of Business
Sitestar Corporation (formerly White Dove Systems, Inc., and then Interfoods Consolidated, Inc.) was incorporated in Nevada on December 17, 1992. On July 26, 1999, the Company restated its Articles of Incorporation to change the name of the Company to “Sitestar Corporation.” Unless the context otherwise requires, and when used in this Report, the “Company,” “Sitestar,” “we,” “our” or “us” refers to Sitestar Corporation and its subsidiaries.
The Company operates through five reportable segments: Corporate, Internet Operations, HVAC Operations, Real Estate Operations, and Asset Management Operations. The management of the Company is also currently reviewing investment opportunities in the 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.
Internet Operations
The Company operates its internet operations through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
HVAC Operations
The Company operates its HVAC 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, the Company, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized and launched this subsidiary on June 13, 2016. Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has the ability to earn 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 December 31, 2016, HVAC Value Fund had closed on five acquisitions for an aggregate purchase price of $1.46 million, 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.
Real Estate Operations
Sitestar owns a real estate investment portfolio that includes 19 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. 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 Asset Management in Alluvial Fund, LP, an unrelated private partnership that was launched on January 1, 2017. The asset management segment did not produce revenue in 2016. Any expenses incurred in 2016 were allocated to the corporate segment.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including: Sitestar.net, Inc., HVAC Value Fund, LLC, and Willow Oak Asset Management, LLC. All intercompany accounts and transactions have been eliminated. |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
12 Months Ended | ||||
|---|---|---|---|---|---|
Dec. 31, 2016 | |||||
| Notes to Financial Statements | |||||
| 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 fair value of investments, revenue recognition, accrued expenses, financing operations, goodwill valuation, other assets, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements.
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. As of December 31, 2016, some of the Company’s cash balances exceeded the FDIC and CDIC limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. Investments
The Company currently holds and makes investments in marketable securities through its corporate operations. Marketable securities held are classified as available-for-sale based on management’s intent. The classification of the investments in these marketable securities is assessed upon purchase and reassessed at each reporting period. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheets. Unrealized gains (losses) are categorized as Other Comprehensive Income. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as earned on the ex-dividend date.
Accounts Receivable
The Company grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is charged off to bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are charged off to the allowance for doubtful accounts when 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 Company’s highest exposure to collection risk. The Company attempts to reduce this risk by including a late payment fee and a manual processing payment fee to customer accounts. Receivables more than 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 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 completed an analysis of its goodwill as of December 31, 2016 and 2015. For the year ended December 31, 2015 the Company recorded a goodwill impairment of $954,049. No impairment was recorded in 2016. This non-cash expense was the result of revenue and cash flow declines in the internet segment. Additionally, new management implemented changes to the annual goodwill impairment analysis to more accurately reflect the value of the Company’s goodwill in 2015.
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.
Other intangible assets consist of customer relationships, developed technology and software, trade names, and other assets acquired in conjunction with the purchases of businesses or purchases of assets from other companies. As of December 31, 2016, these intangible assets have been fully amortized. The remaining intangible assets consist of Domain Names attributed to the internet segment. When management determines material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account management’s own analysis and an independent third party valuation specialist’s appraisal. Intangible assets determined to have definite lives are amortized over their estimated useful lives.
The Company owns 637 domain names, of which 110 are available for sale. These domains are valued at historical cost.
Real Estate
Real estate properties held for resale are carried at the lower of cost or fair market value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area 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 Bonus
Accrued bonuses represent performance based incentives that have not yet been paid. These bonus amounts are paid annually after financial records are finalized.
Other 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.
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. 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 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.
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.
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.
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 February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is required to adopt this standard in the first quarter of 2019. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements.
In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures. Early adoption is not permitted. The Company is required to adopt this standard in the first quarter of 2018. 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. 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. |
3. HVAC PRO FORMA INFORMATION |
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| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3. HVAC PRO FORMA INFORMATION |
NOTE 3. 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. As of October 1, 2016, HVAC Value Fund, LLC completed the 100% acquisition of a fifth subsidiary. These subsidiaries engage in providing heating, ventilation, plumbing, and air conditioning services, installation, and repairs to residential and commercial customers. As a result of the acquisitions, HVAC Value Fund, LLC will offer heating, ventilation, plumbing, 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 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.
The acquired businesses contributed revenues of $1,477,961 and net income of $116,328 to HVAC Value Fund, LLC during the year ended December 31, 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 year ended December 31, 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 profits interests. Pro forma earnings for the year ended December 31, 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.
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.
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. |
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4. INVESTMENTS |
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||
| Schedule of Investments [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| 4. INVESTMENTS |
NOTE 4. INVESTMENTS
The Company may invest excess cash in marketable securities through its corporate segment. The fair values of the Company’s marketable securities are determined in accordance with GAAP, with fair value being defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
The following available-for-sale securities, which comprise all of the Company’s marketable securities, are re-measured to fair value on a recurring basis and are valued using Level 1 inputs, which are quoted prices (unadjusted) for identical assets in active markets:
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5. FAIR VALUE OF ASSETS AND LIABILITIES |
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| Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 5. FAIR VALUE OF ASSETS AND LIABILITIES | NOTE 5. FAIR VALUE OF ASSETS AND LIABILITIES
The Company has adopted FASB ASC 820, Fair Value Measurements. ASC 820 defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:
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.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company analyzes goodwill on an annual basis or whenever events or changes in circumstances indicate potential impairments. For the year ended December 31, 2016, goodwill held at year end was determined to be valued appropriately and no impairment existed. During the year ended December 31, 2015, the Company recorded a goodwill impairment of $954,049. Specifically, this was the result of revenue and cash flow declines in the internet segment.
The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate a change in their fair market value. For the year ended December 31, 2016, the Company adjusted the carrying value of properties held downward by $152,411, as repair and improvement expenses for some properties exceeded the current market value of the property. For the year ended December 31, 2015, the Company adjusted the carrying value of properties held downward by $228,352. These adjustments are the result of fluctuating market conditions and write downs of previously capitalized improvements made by prior management. |
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6. PROPERTY AND EQUIPMENT |
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| Property And Equipment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 6. PROPERTY AND EQUIPMENT | NOTE 6. PROPERTY AND EQUIPMENT
The cost of property and equipment at December 31, 2016 and December 31, 2015 consisted of the following:
Depreciation expense was $10,172 for the year ended December 31, 2016 and $5,518 for the year ended December 31, 2015. Increased automobile, equipment, and furniture and fixtures are the result of acquisitions in the HVAC operations. Increased computer assets are the result of new servers purchased related to the internet segment.
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7. REAL ESTATE |
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Dec. 31, 2016 | ||||||||||||||||||||||
| Real Estate [Abstract] | ||||||||||||||||||||||
| 7. REAL ESTATE | NOTE 7. REAL ESTATE
As of December 31, 2016, the Company owned 19 residential properties, one commercial property, and interests in several lots. The Company sold 23 residential properties in the year ended December 31, 2016 for gross proceeds of $1,970,009 and net proceeds of $1,799,677. The carrying value of the 23 properties sold was $1,752,622.
As of December 31, 2015, the Company owned 42 residential properties, one commercial property, and interests in several lots. The Company acquired three residential real estate properties in 2015 for a total gross purchase amount of $147,684. The Company made no sales of assets in the year ended December 31, 2015.
Real Estate Held for Investment
As of December 31, 2016, the Company held eight residential properties as held for investment. The leases in effect as of the year ended December 31, 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.
As of December 31, 2015, the Company held 14 residential properties and several lots as held for investments. Of these, nine properties had tenants and were current with regards to tenant payments as of December 31, 2015. Four other properties that were available to rent were held in real estate for resale.
Depreciation expense totaled $28,544 for the year ended December 31, 2016 and $44,770 for the year ended December 31, 2015. Total accumulated depreciation as of December 31, 2016 and 2015 totaled $77,955 and $92,627, respectively. As of December 31, 2016 and 2015, these properties held for investment were carried on the balance sheet at $506,011and $911,162, respectively.
The leases in effect as of the year ended December 31, 2016 are based on either annual or multi-year time periods and include month-to-month provisions after the completion of the initial term. The property management company has introduced updated and renewed leases for existing rental properties.
The future anticipated minimum rental revenues based on leases in place as of December 31, 2016 are as follows:
Real Estate Held for Resale
As of December 31, 2016, the Company held 11 residential properties, one commercial property and several lots as held for resale. These properties held for resale were carried on the balance sheet at $1,399,280.
As of December 31, 2015, the Company held 28 residential properties and one commercial property as held for resale. These properties held for resale were carried on the balance sheet at $2,671,311. |
8. NOTES PAYABLE |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 8. NOTES PAYABLE |
NOTE 8. NOTES PAYABLE
Notes payable at December 31, 2016 and 2015 consist of the following:
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 five acquisitions in the year ended December 31, 2016. Four of the five acquisitions resulted in 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.
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9. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE |
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| 9. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE | NOTE 9. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
For the years ended December 31, 2016 and 2015, bad debt expense was $2,537 and $27,163, respectively. The increase in accounts receivable is primarily the result of the formation of the HVAC subsidiary. As of December 31, 2016 and 2015, accounts receivable consisted of the following:
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10. COMMITMENTS AND CONTINGENCIES |
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| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||
| 10. COMMITMENTS AND CONTINGENCIES | NOTE 10. COMMITMENTS AND CONTINGENCIES
Leases
The Company previously leased certain facilities for its corporate offices and a storage facility from a related party, and beginning on September 1, 2016, rents office and warehouse space for HVAC Value Fund, LLC. The Company also previously rented an office in Chatham, Ontario in Canada. Total rent expense for the years ended December 31, 2016 and 2015 was $12,472 and $56,100, respectively. Total rent expense for the Canadian facility for the years ended December 31, 2016 and 2015 was $3,000 CAD and $18,000 CAD, respectively. Total rent expense for the HVAC office and warehouse space for the year ended December 31, 2016 was $10,251. All leased facilities, with the exception of the HVAC facilities, have been vacated as of the first quarter of 2016. The HVAC facilities leases are in effect until July 31, 2019. The future lease obligations related to the HVAC facilities are as follows:
Litigation
On April 12, 2016, Sitestar filed a civil action complaint against Frank Erhartic, Jr. (the “Former CEO”), the Company’s former CEO and director and currently an owner of record or beneficially of more than five percent of the Company’s Common Stock, alleging, among other things, that the Former CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized and wrongful related party transactions, including causing the Company to borrow certain amounts from the Former CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments to the Former CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former CEO, causing the Company to pay certain amounts to the Former CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former CEO, causing the Company to pay rent on its corporate headquarters owned by the Former CEO’s ex-wife in amounts commercially unreasonable and excessive and to make real estate tax payments thereon for the personal benefit of the Former CEO, converting to the Former CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by 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).
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11. STOCKHOLDERS' EQUITY |
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Dec. 31, 2016 | |
| Equity [Abstract] | |
| 11. STOCKHOLDERS' EQUITY | NOTE 11. STOCKHOLDERS' EQUITY
Classes of Shares
The Company's Articles of Incorporation authorize 330,000,000 shares, consisting of 30,000,000 shares of preferred stock, which have a par value of $0.001 per share and 300,000,000 shares of common stock, which have a par value of $0.001.
Preferred Stock
Preferred stock, any series, shall have the powers, preferences, rights, qualifications, limitations and restrictions as fixed by the Company's Board of Directors in its sole discretion. As of December 31, 2016, the Company's Board of Directors has not issued any Preferred Stock.
Common Stock
The Company has 300,000,000 authorized shares of Common Stock. As of March 24, 2017, 296,652,616 shares were issued and 282,730,163 shares were outstanding. This compares to the year ended December 31, 2015 when 91,326,463 shares were issued and 77,404,010 shares were outstanding and the year ended December 31, 2016 when 204,152,616 shares were issued and 190,230,163 shares were outstanding. |
12. INCOME TAXES |
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| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 12. INCOME TAXES | NOTE 12. INCOME TAXES
The provision for federal and state income taxes for the years ended December 31, 2016 and 2015 included the following:
Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows:
ASC 740 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based on the weight of available evidence, which includes the Company’s historical operation performance and the reported cumulative losses in the three year period preceding 2016, the Company has provided a full valuation allowance against its net deferred tax assets.
As of December 31, 2016, the Company had federal net operating loss carryforwards of approximately $2.4 million, which will expire in various amounts beginning in 2032. Internal Revenue Code Section 382 limits the use of net operating loss carryforwards in certain situations where changes occur in the stock ownership of a company. The Company believes that an ownership change did occur in August, 2016. Net operating losses that arose prior to that ownership change will have limited availability to offset taxable income arising in periods following the ownership change. The Company’s analysis of this issue is not complete but management believes that the Company’s net operating loss carryforwards will not expire unutilized.
The Company has limited operations in Canada and the Company is currently evaluating its tax position in that country. Management does not believe that there is any significant tax exposure in Canada.
The Company is required to recognize in the financial statements the impact of a tax position, if that position is not more likely than not of being sustained on audit, based on the technical merits of the position. The Company’s policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2016, there was no liability for unrecognized tax benefits.
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13. RELATED PARTY TRANSACTIONS |
12 Months Ended |
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Dec. 31, 2016 | |
| Related Party Transactions [Abstract] | |
| 13. RELATED PARTY TRANSACTIONS | NOTE 13. RELATED PARTY TRANSACTIONS
As of the year ended December 31, 2015, the Company previously purported to lease its office building in Lynchburg, Virginia from the former CEO of the Company. Public records indicate that the owner of this property from at least January 1, 2014 through December 31, 2015 was the former CEO’s ex-wife. The Company has filed a lawsuit against the former CEO in order to recover, among other amounts, the payments made to the former CEO. Additional information on this lawsuit can be found in Note 10. The Company vacated the building as of January 15, 2016.
The Company also leased a storage facility in Salem, Virginia from the former CEO. The Company is attempting to recover the payments made to the former CEO related to this facility. The lease was not approved by the process required by the Company’s Code of Ethics. The former CEO has refused to provide access to the storage facility to the management and has not returned Company-owned equipment located at the storage facility. The value of this equipment is also included in the lawsuit. Additional information can be found in Note 10.
The Company paid a total of $56,100 in rent to the former CEO related to the office building in Lynchburg, Virginia and the storage facility in Salem, Virginia for the year ended December 31, 2015. The former CEO created several land trusts and designated the Company as the trustee. The former CEO and, the Company believes, the former CFO placed personally owned properties within these land trusts. This activity was not approved by the process required by the Company’s Code of Ethics. This activity is the subject of litigation involving the former CEO. Additional information can be found in Note 10. |
14. SEGMENT INFORMATION |
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| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 14. SEGMENT INFORMATION | NOTE 14. SEGMENT INFORMATION
As of December 31, 2016, the Company has five reportable segments with separate management and reporting infrastructures that offer different products and services: Corporate, Internet, HVAC, Real Estate, and Asset Management.
The corporate segment includes any revenue or expenses derived from corporate office operations as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company. Sitestar also invests in marketable securities through the corporate segment. The internet segment includes revenue and expenses related to the sale of internet access, hosting, storage, and other ancillary services. The HVAC segment includes revenue and expenses derived from the acquisition and management of HVAC 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 did not produce revenues in 2016, but will include revenues from various subsidiary investments going forward. All expenses associated with the Asset Management segment were allocated to the Corporate segment for the year ending December 31, 2016.
The internet segment includes revenue generated by customers in both the United States and Canada. In the year ended December 31, 2016, the internet segment generated revenue of $1,312,444 in the United States and revenue of $102,845 in Canada. This compares to the year ended December 31, 2015 where the internet segment generated revenue of $1,488,835 in the United States and revenue of $113,687 in Canada.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the years ended December 31, 2016 and 2015. No comparable financial information exists for the HVAC segment for the year ended December 31, 2015 because it commenced operations on June 13, 2016:
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15. SUBSEQUENT EVENTS |
12 Months Ended |
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Dec. 31, 2016 | |
| Subsequent Events [Abstract] | |
| 15. SUBSEQUENT EVENTS | NOTE 15 - SUBSEQUENT EVENTS
As previously reported in our Current Report on Form 8-K filed with the SEC on January 26, 2017, on January 20, 2017 the Company entered into an employment agreement with Steven L. Kiel, its Chief Executive Officer, President and Chief Financial Officer. The employment agreement commenced as of January 20, 2017 and continues through December 31, 2018, unless earlier terminated pursuant to its terms. From and after December 31, 2018, the employment agreement will automatically renew for successive one-year periods, unless the Company elects not to extend the term upon 90 days’ advance notice to Mr. Kiel Pursuant to the terms of the employment agreement, Mr. Kiel will be entitled to a base salary at the annualized rate of $100,000 ($8,333.33 monthly) and will be eligible to receive an annual performance bonus, in cash, upon meeting certain requirements and to participate in employee benefit plans as the Company may maintain from time to time. The annual performance bonus that Mr. Kiel will be eligible to receive is based on the percentage growth in the Company’s book value per share during each calendar year, subject to a 5% hurdle.
As previously reported in our Current Report on Form 8-K filed with the SEC on January 26, 2017, on January 25, 2017 the Company entered into an employment agreement with Tabitha Keatts, the Company’s President of Internet Operations. The employment agreement commenced as of January 25, 2017 and continues through December 31, 2018, unless earlier terminated pursuant to its terms. From and after December 31, 2018, the employment agreement will automatically renew for successive one-year periods, unless the Company elects not to extend the term upon 90 days’ advance notice to Ms. Keatts Pursuant to the terms of the employment agreement, Ms. Keatts will be entitled to a base salary at the annualized rate of $35,000 ($2,916.67 monthly) and will be eligible to receive an annual performance bonus, in cash, based upon net income from the Company’s Internet Operations Division and to participate in employee benefit plans as the Company may maintain from time to time.
As previously reported in our Current Report on Form 8-K filed with the SEC on January 30, 2017, on January 24, 2017 our subsidiary, Willow Oak Asset Management 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 Asset Management 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 Asset Management 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 Asset Management committed to make a capital contribution to Huckleberry Fund in an aggregate amount of at least $750,000, which amount was due by January 31, 2017.
As of March 24, 2017, our subsidiary, HVAC Value Fund, LLC, has completed six acquisitions in the HVAC (Heating, Ventilation, and Air Conditioning) industry, one of which such acquisitions was completed subsequent to December 31, 2016. This most recent acquisition was completed on January 19, 2017, for a purchase price totaling $560,000. Included in other current assets for the year ended December 31, 2016 is $25,000 for good faith consideration paid related to this subsequent 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 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.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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Dec. 31, 2016 | |
| Accounting Policies [Abstract] | |
| Organization and Lines of Business | 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 five reportable segments: Corporate, Internet Operations, HVAC Operations, Real Estate Operations, and Asset Management Operations. The management of the Company is also currently reviewing investment opportunities in the 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.
Internet Operations
The Company operates its internet operations through Sitestar.net, a wholly-owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
HVAC Operations
The Company operates its HVAC 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, the Company, along with JNJ Investments, LLC, an unaffiliated third party and member of HVAC Value Fund, LLC, organized and launched this subsidiary on June 13, 2016. Sitestar has a 100% voting interest in HVAC Value Fund and JNJ Investments has the ability to earn 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 December 31, 2016, HVAC Value Fund had closed on five acquisitions for an aggregate purchase price of $1.46 million, 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.
Real Estate Operations
Sitestar owns a real estate investment portfolio that includes 19 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. 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 Asset Management in Alluvial Fund, LP, an unrelated private partnership that was launched on January 1, 2017. The asset management segment did not produce revenue in 2016. Any expenses incurred in 2016 were allocated to the corporate segment. |
| Principles of Consolidation | Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including: Sitestar.net, Inc., HVAC Value Fund, LLC, and Willow Oak Asset Management, LLC. All intercompany accounts and transactions have been eliminated. |
| 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 fair value of investments, revenue recognition, accrued expenses, financing operations, goodwill valuation, other assets, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements. |
| 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. As of December 31, 2016, some of the Company’s cash balances exceeded the FDIC and CDIC limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. |
| Investments | Investments
The Company currently holds and makes investments in marketable securities through its corporate operations. Marketable securities held are classified as available-for-sale based on management’s intent. The classification of the investments in these marketable securities is assessed upon purchase and reassessed at each reporting period. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheets. Unrealized gains (losses) are categorized as Other Comprehensive Income. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as earned on the ex-dividend date. |
| 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 management’s assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are charged off to the allowance for doubtful accounts when 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 Company’s highest exposure to collection risk. The Company attempts to reduce this risk by including a late payment fee and a manual processing payment fee to customer accounts. Receivables more than 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 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 completed an analysis of its goodwill as of December 31, 2016 and 2015. For the year ended December 31, 2015 the Company recorded a goodwill impairment of $954,049. No impairment was recorded in 2016. This non-cash expense was the result of revenue and cash flow declines in the internet segment. Additionally, new management implemented changes to the annual goodwill impairment analysis to more accurately reflect the value of the Company’s goodwill in 2015.
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.
Other intangible assets consist of customer relationships, developed technology and software, trade names, and other assets acquired in conjunction with the purchases of businesses or purchases of assets from other companies. As of December 31, 2016, these intangible assets have been fully amortized. The remaining intangible assets consist of Domain Names attributed to the internet segment. When management determines material intangible assets are acquired in conjunction with the purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account management’s own analysis and an independent third party valuation specialist’s appraisal. Intangible assets determined to have definite lives are amortized over their estimated useful lives.
The Company owns 637 domain names, of which 110 are available for sale. 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 Bonus | Accrued Bonus
Accrued bonuses represent performance based incentives that have not yet been paid. These bonus amounts are paid annually after financial records are finalized. |
| Other Accrued Expenses | Other 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.
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. 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 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.
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. |
| 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. |
| Other Comprehensive Income | 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 | Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 842, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is required to adopt this standard in the first quarter of 2019. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements.
In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures. Early adoption is not permitted. The Company is required to adopt this standard in the first quarter of 2018. 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. 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. |
3. HVAC PRO FORMA INFORMATION (Tables) |
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4. INVESTMENTS (Tables) |
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6. PROPERTY AND EQUIPMENT (Tables) |
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8. NOTES PAYABLE (Tables) |
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9. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE (Tables) |
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10. COMMITMENTS AND CONTINGENCIES (Tables) |
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12. INCOME TAXES (Tables) |
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14. SEGMENT INFORMATION (Tables) |
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3. HVAC PRO FORMA INFORMATION (Details) - USD ($) |
12 Months Ended | |
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Dec. 31, 2016 |
Dec. 31, 2015 |
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| Revenue | $ 4,975,246 | $ 1,735,203 |
| June 2016 acquisitions (in aggregate) | ||
| Revenue | 534,997 | 674,212 |
| Earnings | 71,314 | 247,328 |
| July 8, 2016 acquisition | ||
| Revenue | 1,293,380 | 1,338,305 |
| Earnings | 192,922 | 219,231 |
| July 15, 2016 acquisition | ||
| Revenue | 1,052,186 | 1,034,926 |
| Earnings | 217,609 | 313,302 |
| October 1 2016 acquisition | ||
| Revenue | 900,605 | 977,613 |
| Earnings | 35,650 | 2,759 |
| Consolidated pro forma period | ||
| Revenue | 3,781,167 | 4,025,056 |
| Earnings | $ 517,495 | $ 782,620 |
4. INVESTMENTS (Details) |
Dec. 31, 2016
USD ($)
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| Investments Details | |
| Common Stock available for sale - Cost Basis | $ 563,211 |
| Common Stock available for sale - Unrealized Gain | 36,289 |
| Common Stock available for sale - Fair Value | $ 599,500 |
5. FAIR VALUE OF ASSETS AND LIABILITIES (Details) - USD ($) |
Dec. 31, 2016 |
Dec. 31, 2015 |
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| Marketable securities | $ 599,500 | |
| Fair Value, Inputs, Level 1 | ||
| Marketable securities | 599,500 | |
| Fair Value, Inputs, Level 3 | ||
| Marketable securities | ||
| Fair Value, Inputs, Level 2 | ||
| Marketable securities |
6. PROPERTY AND EQUIPMENT - Property and Equipment (Details) - USD ($) |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Property and Equipment, Gross | $ 176,924 | $ 23,288 |
| Less accumulated depreciation | (33,460) | (23,288) |
| Property and Equipment, Net | 143,464 | |
| Automobile | ||
| Property and Equipment, Gross | 115,688 | 9,500 |
| Computer Equipment | ||
| Property and Equipment, Gross | 36,030 | |
| Furniture and Fixtures | ||
| Property and Equipment, Gross | $ 25,206 | $ 13,788 |
6. PROPERTY AND EQUIPMENT (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Property, Plant and Equipment [Abstract] | ||
| Depreciation Expense | $ 10,172 | $ 5,518 |
7. REAL ESTATE (Details) |
Dec. 31, 2016
USD ($)
|
|---|---|
| Real Estate Details | |
| 2017 | $ 68,510 |
| 2018 | 15,795 |
| Total | $ 84,305 |
8. NOTES PAYABLE - Notes Payable (Details) - USD ($) |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Debt Disclosure [Abstract] | ||
| 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 acquisitions through HVAC Value Fund, LLC | 15,000 | |
| Less current portion | (240,000) | |
| Long term portion | $ 25,000 | $ 90,000 |
9. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE (Details) - USD ($) |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Accounts Receivable And Bad Debt Expense Details | ||
| Gross accounts receivable | $ 213,624 | $ 20,692 |
| Less allowance for doubtful accounts | (873) | (6,264) |
| Accounts receivable, net | $ 212,751 | $ 14,428 |
10. COMMITMENTS AND CONTINGENCIES (Details) |
Dec. 31, 2016
USD ($)
|
|---|---|
| Commitments And Contingencies Details | |
| 2017 | $ 42,869 |
| 2018 | 31,723 |
| 2019 | 4,200 |
| Total | $ 78,792 |
10. COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Commitments and Contingencies Disclosure [Abstract] | ||
| Rent Expense | $ 12,472 | $ 12,472 |
12. INCOME TAXES - Provision for Income Taxes (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Income Tax Disclosure [Abstract] | ||
| Federal | ||
| State | ||
| Federal | 16,047 | (318,594) |
| State | 30,535 | (5,359) |
| Valuation allowance | (46,582) | 323,953 |
| Total income tax provision | ||
12. INCOME TAXES - Significant Components of Deferred Tax Assets (Details) - USD ($) |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Income Tax Disclosure [Abstract] | ||
| Net operating loss carryforward | $ 803,637 | $ 560,137 |
| Amortization of Intangible assets | 1,092,769 | 1,383,166 |
| Accrued vacation | 608 | 293 |
| Valuation allowance | (1,897,014) | (1,943,596) |
| Deferred tax asset |
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