SYTE - Enterprise Diversified

[bskptkl]

All,

 

As many of you who have emailed me know, it is not my habit to comment on the day-to-day situation at Sitestar. However, I would like to provide a bit more of a perspective on the private placement. This will be my only comment on the subject until we hold our shareholder meeting.

 

In the letter I wrote to shareholders in December 2015, I promised to hold a shareholder meeting in the first six months of the year. It was embarrassing to me that we could not do that and shareholders were rightfully upset. One reason we were unable to do so was because of the state of the financials. The other was because of the quorum issue. We would have held the meeting, not been able to hit the quorum, and wasted the money and time to do so. Because of this capital raise, we can now move forward with scheduling the shareholder meeting. Our directors are meeting this weekend to set the date. We will develop the proxy and send it out soon thereafter. The meeting will be held in Charlotte, NC, and I hope everyone can attend.

 

Addressing a few other comments, we had to do this offering as an unregistered offering. For those involved in small companies, you are familiar that a rights offering and S-1 filing is pricey. That is true. The second part of that, and one that I was not aware of until being in this position, is the difficulty to get an S-1 approved. Given the turnover at the company with management, the board, and the auditor, as well as the overhang with previous management, getting an S-1 approved would have been a challenge, to put it mildly. That would have been the preferred route from the company’s perspective, but the option was not available to us and likely won’t be for some time.

 

With regards to the pricing, 4.8 cents is the book value at the end of Q1. I understand the share price has run up recently. Unfortunately it was not realistic to issue shares at 8 cents. We would not have been able to raise the funds necessary for a price other than book value. No placement fees were paid, legal expenses were low, and those who subscribed did not view that they were receiving a discount for accepting shares that are unregistered and restricted. However, accepting restricted shares bears a real cost not only because of liquidity, but also because of the fees for required legal opinions and trading costs associated with accepting certificates. It was highly unlikely that an outsider would have been willing to participate in a meaningful way at a different price than what the offering was priced at.

 

I am sad to read that some feel that we are ingratiating ourselves or “screwing” passive shareholders. I would ask for a little more perspective on the company’s current situation and the challenges we face with regards to the issues listed here. This capital raise is consistent with the things I wrote about in the shareholder letter. Obviously I wish we were in a different situation and did not have to raise money, but we need to build enough scale to effectively carry out our operations. Basically, we have to get bigger or go private. We cannot effectively exist as a public company with a book value of less than $4 million.

 

This offering allows us to spread these fixed costs across a wider asset base. This is an important thing because of the tiny size of our company. Former management did not have the proper infrastructure to operate as a public company. As we are building that foundation, these fixed costs have become meaningful. We are now able to spread that among a larger number of shares.

 

Additionally, we have been looking at several interesting opportunities. Having this cash, and the cash generated by the sale of properties discussed in the Q1 filing, allows us to more seriously examine those opportunities.

 

Doing this placement at this price was the only option to us to accomplish the goals listed above. I understand if shareholders may be upset, but I am confident that the entire company and all shareholders will benefit from it over the long term. As others who are in my position with a small company can attest, a lot of things happen behind the scenes that we cannot share with outside shareholders, as much as we would like to. We have to consider the situation and information within the company that outsiders are not privy to. We are doing the best we can, and I am proud of how much progress we have made since December. I hope we can keep that momentum going. Jeff, Jeremy, Chris, Keith, and I thank you all for the support.

Best regards,

 

Steve

But the issuance was restricted to a small group of shareholders. I have a simple solution - offer same terms to other large shareholders and issue more stock. Maybe have a cutoff date and holdings size.

[cje]

bskptkl- I imagine they will have a further rights offering at some point.  That wouldn't work in this case as Frank would be involved still- and it's expensive.

 

Just my $.02, I'm not involved in this position but have been watching it.  My firm has negotiated to buy into private placements for small public companies before 3 times.  Each time below the current market price- and we've never done it as it takes a pretty good discount to get past the PITA of having attorneys involved with the various legal restrictions, etc.  Then you're sitting on an illiquid position that you can't do anything with.

 

These guys needed to raise money.  My shop buys private companies.  Buying $250k HVAC companies is probably a decent strategy at the size they're at now, but the headaches per dollar are crazy high with such tiny companies.  I imagine they're looking for larger companies to integrate in, and you need cash to do that.

 

Frankly, I can't figure out why this thing climbed to $.08/share- made very little sense to me.  Again, just my $.02.

[Jurgis]

Frankly, I can't figure out why this thing climbed to $.08/share- made very little sense to me.  Again, just my $.02.

 

Your $.02 is what makes price difference between $.08 and $.06  :P  ;D

 

 

For companies of such size and liquidity CoBF sentiment is enough to move prices a lot.

 

And/or some people liked new management and wanted to get in "at the ground floor" possibly regardless of price. (Although anyone who wanted to build sizeable position either had to have a lot of patience or pay up).

[Guest Schwab711]

I usually hate this stuff but it seemed fairly predictable that management needed to raise money and reduce the influence of prior management quickly. There was a material chance that the company's progress would have been stalled otherwise. For several reasons, I think what happened was fair (maybe not optimal, but what is in business).

 

1. As mentioned by Steve, anything other than a private placement wasn't really an option. It's not like a lot of folks would have wanted to participate in the private placement considering the holding period restrictions, among others. PIPE transactions are the only way to go with little companies.

 

2. Book value was $0.047 or $0.048. This book value was primarily comprised of relatively easy to value assets (cash & homes in a liquid market). As mentioned earlier, every trade above this price was pricing in an intangible value that would take many years to be realized, if ever (the jump to $0.08 was based on a BOD nomination!!). Absolutely nothing changed after the PP from that perspective. I think you could even make an argument that PP investors deserved to purchase at less than book, given the leverage they had.

 

3. What HVAC company were they going to purchase for $1.8m that would generate enough cash to make it worth being public? They'd be spending all FCF on auditing and listing fees. The plan never made sense unless they expanded quickly. Companies with $1m in FCF are going dark for the same reasons. As a shareholder of SYTE you should expect a "go-big-or-go-home" attitude and the associated risks.

 

4. The company currently has ~$7.5m in assets, primarily cash. They are in the process of changing their business model and recently changed management. The stock has next to no liquidity. Folks that are speculating should understand that this should only be a multi-year holding. Anything less is plain foolish.

 

Just my observations. I do have a position.

[SmallCap]

stepping back from this dilution and how it was done.

 

I haven't seen a really good case made for why this company should continue as a going concern.

 

as far as I recall the premise the Ragnar had when he made the initial investments was that the main business was a dying business but the assets exceeded the share price. He also mistakenly attributed some value to the existing management.

 

after taking control of this business knowing the large chunk of shares are held by previous management and the market cap is too small for efficiency bot of which makes continuing to operate the business.  making moves like they just made necessary to continue operating the company.

 

But why continue operating the company?

 

i am oversimplifying it buy why not liquidate and the 3 amigos can create their own partnership to buy Hvac. What does continuing the company do for them and the shareholders?

[Guest Schwab711]

Given their stated strategic vision, I would guess having US dollars that are worth more than face value is pretty nice

[oddballstocks]

stepping back from this dilution and how it was done.

 

I haven't seen a really good case made for why this company should continue as a going concern.

 

as far as I recall the premise the Ragnar had when he made the initial investments was that the main business was a dying business but the assets exceeded the share price. He also mistakenly attributed some value to the existing management.

 

after taking control of this business knowing the large chunk of shares are held by previous management and the market cap is too small for efficiency bot of which makes continuing to operate the business.  making moves like they just made necessary to continue operating the company.

 

But why continue operating the company?

 

i am oversimplifying it buy why not liquidate and the 3 amigos can create their own partnership to buy Hvac. What does continuing the company do for them and the shareholders?

 

Years back a Director at a small company that went public explained it to me like this. Paraphrasing "In a private company when you earn $1 you have $1. In a public company when you earn $1 you have the market's multiple of it. If your company sucks and you have a PE of 5 that is still 5x more than you had as a private company"

[Spekulatius]

stepping back from this dilution and how it was done.

 

I haven't seen a really good case made for why this company should continue as a going concern.

 

as far as I recall the premise the Ragnar had when he made the initial investments was that the main business was a dying business but the assets exceeded the share price. He also mistakenly attributed some value to the existing management.

 

after taking control of this business knowing the large chunk of shares are held by previous management and the market cap is too small for efficiency bot of which makes continuing to operate the business.  making moves like they just made necessary to continue operating the company.

 

But why continue operating the company?

 

i am oversimplifying it buy why not liquidate and the 3 amigos can create their own partnership to buy Hvac. What does continuing the company do for them and the shareholders?

 

Years back a Director at a small company that went public explained it to me like this. Paraphrasing "In a private company when you earn $1 you have $1. In a public company when you earn $1 you have the market's multiple of it. If your company sucks and you have a PE of 5 that is still 5x more than you had as a private company"

You can sell your private company at a multiple of earnings, but that multiple of your private company very likely is lower than the multiple of a public company.

 

A rights offering that includes existing shareholders would have been fairer. I don't know how much it costs to do an S-1 filing, but the fees for the SEC are quite small ($100/M of capital raised or so). I suspect that he main cost is for the lawyers writing the prospectus?

 

The 0.048c price is not that unfair, since it seems close to the unperpetuated price of the stock and probably close to the NAV.

[Travis Wiedower]

I also think the risk of Frank buying his allotted shares (or anything close) in an offering was very low. He was making $50k a year and is currently being sued by Sitestar... doubt his available cash is that high.

[TBW]

I think that the optics look bad but ultimately they did what they had to do at what I think upon reflection is a fair price.  The situation to me is more a reflection of how difficult/expensive it is to be a small public company rather than management being self-serving. 

 

Question does anyone know the AUM of Arquitos?  Curious to know how much of their fund SYTE is now.

[Foreign Tuffett]

stepping back from this dilution and how it was done.

 

I haven't seen a really good case made for why this company should continue as a going concern.

 

 

Neither have I

[gg]

stepping back from this dilution and how it was done.

 

I haven't seen a really good case made for why this company should continue as a going concern.

 

 

Neither have I

 

It does not seem likely that liquidating the assets at this point would yield a distribution that is meaningfully higher than the current share price. So, might as well make an attempt to create value (by attempting to growing earnings and compounding capital)

[TBW]

Anyone else going to the shareholder meeting?  If so let me know I would be happy to organize a meet-up the night before.

[rkbabang]

Interesting.  Frank posted to a message board here:

 

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=125043195

 

This guy is delusional, he still thinks that he is Chairman of the Board.  This is what he wrote:

 

"You can't trust what these guys say in my opinion. They go onto the Board under false pretenses and took over under false pretenses.

 

I am still a Board member and the Chairmen of the Board, I agreed to resign but not immediately like they claim. To officially resign, it must be in writing which it never was. Dan Judd s also a Board member and has been pressured to resign. I have not had any Special Board meetings nor any Board meetings after I left the company nor had Dan Judd after he left.

 

Whatever actions they are taking may not be legal in my opinion and not to the benefit of the company. We have never voted on anything to my knowledge. The company is in liquidation mode and there is too much conflict of interest. Doubling the amount of shares at a discounted rate in order to have complete control is theft also in my opinion.

 

I have seen this happen when I merged my company into Sitestar and other management took over. My large ownership position was diluted and the share price crashed to under a penny. That other management also created a separate company, borrowed money, invested it into different things and to this day, I don't know where that money went. I hope this doesn't happen here.

 

There is no reason to issue more shares as they have enough cash. They kicked out the renters from the rental properties and sold most of the properties. There isn't going to be much of a business left soon. This HVAC business makes no sense. Does anyone in management know anything about that business?

 

I for one am not going to vote these guys in on the Proxy. I am not sure that they even have proper authorization to even hold the vote. Why would they need to? They have complete control.

 

Frank"

 

[Ballinvarosig Investors]

Q2 results out

 

http://www.otcmarkets.com/edgar/GetFilingPdf?FilingID=11587310

[Gamecock-YT]

Anyone else going to the shareholder meeting?  If so let me know I would be happy to organize a meet-up the night before.

 

There's a few COBFers in the Charlotte area that could be interested.

[eclecticvalue]

Will there be someone taking notes at the annual meeting?

[TBW]

Planning on meeting sunday night in Charlotte at 9pm. PM me for more details will pick a place when I get a sense for how many people want to join.

[LR1400]

I don't have a clear picture as to why they are liquidating the real estate portfolio. I believe someone noted they are moving that capital to the HVAC business.

 

Is the real estate overvalued and they are able to sell out for large numbers?

 

Renting out houses is reasonably passive, especially when using a property manager. Often you get ok cash flow and long term wealth when held for awhile.

I'll be watching that HVAC business, that could do pretty decently. It could be a good roll-up platform. I do see HVAC being reasonably hard to scale though. I understand it has been done, but it seems tough.

[rkbabang]

I don't have a clear picture as to why they are liquidating the real estate portfolio. I believe someone noted they are moving that capital to the HVAC business.

 

Is the real estate overvalued and they are able to sell out for large numbers?

 

Renting out houses is reasonably passive, especially when using a property manager. Often you get ok cash flow and long term wealth when held for awhile.

I'll be watching that HVAC business, that could do pretty decently. It could be a good roll-up platform. I do see HVAC being reasonably hard to scale though. I understand it has been done, but it seems tough.

 

I'm assuming they think that they can earn loftier returns elsewhere.  I'm just glad that many of these properties are no longer going to be sitting vacant and deteriorating anymore.  If you are not going to make use of them in some productive manner (and the former management wasn't) selling them is certainly the best option.  It also seems as if they are getting slightly more for them than expected which is a nice bonus.  Now we will see how the current management uses the capital.

 

[LR1400]

I don't have a clear picture as to why they are liquidating the real estate portfolio. I believe someone noted they are moving that capital to the HVAC business.

 

Is the real estate overvalued and they are able to sell out for large numbers?

 

Renting out houses is reasonably passive, especially when using a property manager. Often you get ok cash flow and long term wealth when held for awhile.

I'll be watching that HVAC business, that could do pretty decently. It could be a good roll-up platform. I do see HVAC being reasonably hard to scale though. I understand it has been done, but it seems tough.

 

I'm assuming they think that they can earn loftier returns elsewhere.  I'm just glad that many of these properties are no longer going to be sitting vacant and deteriorating anymore.  If you are not going to make use of them in some productive manner (and the former management wasn't) selling them is certainly the best option.  It also seems as if they are getting slightly more for them than expected which is a nice bonus.  Now we will see how the current management uses the capital.

 

I wasn't sure if the properties were vacant or not. Vacant property that can't be rented at reasonable rates....makes sense to sell. The former CEO said new management forced tenants out and then sold...

[rkbabang]

I don't have a clear picture as to why they are liquidating the real estate portfolio. I believe someone noted they are moving that capital to the HVAC business.

 

Is the real estate overvalued and they are able to sell out for large numbers?

 

Renting out houses is reasonably passive, especially when using a property manager. Often you get ok cash flow and long term wealth when held for awhile.

I'll be watching that HVAC business, that could do pretty decently. It could be a good roll-up platform. I do see HVAC being reasonably hard to scale though. I understand it has been done, but it seems tough.

 

I'm assuming they think that they can earn loftier returns elsewhere.  I'm just glad that many of these properties are no longer going to be sitting vacant and deteriorating anymore.  If you are not going to make use of them in some productive manner (and the former management wasn't) selling them is certainly the best option.  It also seems as if they are getting slightly more for them than expected which is a nice bonus.  Now we will see how the current management uses the capital.

 

I wasn't sure if the properties were vacant or not. Vacant property that can't be rented at reasonable rates....makes sense to sell. The former CEO said new management forced tenants out and then sold...

 

They were not all vacant, but unless I am mistaken, most of them were.

 

[LR1400]

I don't have a clear picture as to why they are liquidating the real estate portfolio. I believe someone noted they are moving that capital to the HVAC business.

 

Is the real estate overvalued and they are able to sell out for large numbers?

 

Renting out houses is reasonably passive, especially when using a property manager. Often you get ok cash flow and long term wealth when held for awhile.

I'll be watching that HVAC business, that could do pretty decently. It could be a good roll-up platform. I do see HVAC being reasonably hard to scale though. I understand it has been done, but it seems tough.

 

I'm assuming they think that they can earn loftier returns elsewhere.  I'm just glad that many of these properties are no longer going to be sitting vacant and deteriorating anymore.  If you are not going to make use of them in some productive manner (and the former management wasn't) selling them is certainly the best option.  It also seems as if they are getting slightly more for them than expected which is a nice bonus.  Now we will see how the current management uses the capital.

 

I wasn't sure if the properties were vacant or not. Vacant property that can't be rented at reasonable rates....makes sense to sell. The former CEO said new management forced tenants out and then sold...

 

They were not all vacant, but unless I am mistaken, most of them were.

 

I think the annual report said 8 were occupied. I wonder why they didn't know this going in/through due diligence. I like most of their approach and it is something to watch and possibly emulate.

[rkbabang]

I don't have a clear picture as to why they are liquidating the real estate portfolio. I believe someone noted they are moving that capital to the HVAC business.

 

Is the real estate overvalued and they are able to sell out for large numbers?

 

Renting out houses is reasonably passive, especially when using a property manager. Often you get ok cash flow and long term wealth when held for awhile.

I'll be watching that HVAC business, that could do pretty decently. It could be a good roll-up platform. I do see HVAC being reasonably hard to scale though. I understand it has been done, but it seems tough.

 

I'm assuming they think that they can earn loftier returns elsewhere.  I'm just glad that many of these properties are no longer going to be sitting vacant and deteriorating anymore.  If you are not going to make use of them in some productive manner (and the former management wasn't) selling them is certainly the best option.  It also seems as if they are getting slightly more for them than expected which is a nice bonus.  Now we will see how the current management uses the capital.

 

I wasn't sure if the properties were vacant or not. Vacant property that can't be rented at reasonable rates....makes sense to sell. The former CEO said new management forced tenants out and then sold...

 

They were not all vacant, but unless I am mistaken, most of them were.

 

I think the annual report said 8 were occupied. I wonder why they didn't know this going in/through due diligence. I like most of their approach and it is something to watch and possibly emulate.

 

They did know this going in.  The fact that SYTE wasn't doing anything with the properties it owned, and some of them needed significant work that wasn't being done, was one of the reasons for the activism which eventually led to the management change.

 

 

My initial thesis was that SYTE was sitting on value that wasn't being utilized and the addition of Jeff Moore to the board was a sign that management was ready to start renovating and doing something with these properties. That didn't turn out to be the case.  I didn't expect what happened.

 

[LR1400]

I don't have a clear picture as to why they are liquidating the real estate portfolio. I believe someone noted they are moving that capital to the HVAC business.

 

Is the real estate overvalued and they are able to sell out for large numbers?

 

Renting out houses is reasonably passive, especially when using a property manager. Often you get ok cash flow and long term wealth when held for awhile.

I'll be watching that HVAC business, that could do pretty decently. It could be a good roll-up platform. I do see HVAC being reasonably hard to scale though. I understand it has been done, but it seems tough.

 

I'm assuming they think that they can earn loftier returns elsewhere.  I'm just glad that many of these properties are no longer going to be sitting vacant and deteriorating anymore.  If you are not going to make use of them in some productive manner (and the former management wasn't) selling them is certainly the best option.  It also seems as if they are getting slightly more for them than expected which is a nice bonus.  Now we will see how the current management uses the capital.

 

I wasn't sure if the properties were vacant or not. Vacant property that can't be rented at reasonable rates....makes sense to sell. The former CEO said new management forced tenants out and then sold...

 

They were not all vacant, but unless I am mistaken, most of them were.

 

I think the annual report said 8 were occupied. I wonder why they didn't know this going in/through due diligence. I like most of their approach and it is something to watch and possibly emulate.

 

They did know this going in.  The fact that SYTE wasn't doing anything with the properties it owned, and some of them needed significant work that wasn't being done, was one of the reasons for the activism which eventually led to the management change.

 

 

My initial thesis was that SYTE was sitting on value that wasn't being utilized and the addition of Jeff Moore to the board was a sign that management was ready to start renovating and doing something with these properties. That didn't turn out to be the case.  I didn't expect what happened.

 

That would've probably worked well until the dilution. The price is too high now.

 

Hopefully everyone got in pretty early on this. Buying distressed property, renovating then leasing or selling has worked for lots of people.

 

Do you feel the HVAC business is truly scale-able, at least with minimal capital?