SYTE - Enterprise Diversified

[oddballstocks]

Last time I was shooting the shit with our HVAC man (an owner operator) he spent an hour talking about all the non-compete agreements his friends and colleagues have subverted over the years.

 

So basically owner could sell his business and then start a new one and pretty much go to his former clients while the buyer is left with not much?

 

Not saying this happened to SYTE. Just clarifying.

 

When I was in high school my dad considered buying an HVAC dealer.  He worked in sales at a distributor and knew one of his best clients was considering selling.  He went fairly far with the transaction, audited the books, made some offers, hired an accountant to advise on M&A.  The thing stopped dead in its tracks for a single reason.  The seller had accumulated $50k of old inventory that they wanted sticker price for, while my dad recognized it was worthless.  They were $50k off on the price and they couldn't make a deal.  The seller wanted $300k, my dad would pay $250k.

 

I mention this because it's common.  You have someone who isn't a business person running a business.  They over spend on inventory, or trucks, or tools, or whatever and they want to "get their money out."  It isn't a bad thing, it's the nature of the business, and it's common.

 

I've talked to my dad about this extensively.  He was going to buy in not because it was a good deal, but because he was familiar with the industry.  He said this company had about a 5% net margin, and he felt he could double it by changing how they approached their selling, how they managed inventory, and how they scheduled repairs.  There are a lot of costs for HVAC repair.  This is off the top of my head, but I believe to get a person to your house costs about $150.  That's the truck, the tools, the labor, the benefits, and the time to drive.  If they can't make $150 right away they're losing money on the visit.  That's why a lot of places have a $70 service charge, they're trying to recoup half of that cost before they arrive.

 

My dad went into training HVAC techs.  He was a teacher before sales and recognized he loved to teach.  The biggest issue is there are not enough HVAC techs, or people who want to do this.  He said companies are struggling to hire, and they're willing to pay for classroom training to bring them up to speed.  Some of these classes are $15-20k.  But a good tech can make upwards of $40/hr.

 

The problem with HVAC is two fold.  The first is EVERYTHING is depreciating, the equipment, the tools, even the skills as new models are replaced.  The second is as your labor becomes more skilled there is incentive for them to go off on their own.

 

My dad said the most common situation was a guy is making $35/hr and sees that his company bills him at $150/hr.  He thinks "geez, I have a truck, I have these tools, why don't I go off on my own?"  And they do, and they charge $125/hr for labor, their wife does the books and the phone and they do ok.  Sometimes they recognize that it's better to be an employee, but some make it.  But it's REALLY hard to scale that thing. 

[Spekulatius]

What's the problem with the HVAC bidness?  Employees take the lion's share/are hard to retain?  Seems like lots of guys start up their own shop, with like one helper, in that industry.

HVAC contractors are asset-lite(maybe they own a truck). Only proprietary value is customer list and relationships. It's generally a relationship business. How long does that value last once old owner moves on?

 

So you're not buying reproducible revenues and profits, necessarily.

 

It’s price competitive, since the service is fairly standardized . Most of the work falls within just a few month, so they work long hours in peak time. Price and lead time are the primary factors. The long hours favor owner operators over those that just have employees, imo.

[LowIQinvestor]

Can anyone explain Kiel's job at Santa Monica Partners? thx!

 

"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. "

[oddballstocks]

Can anyone explain Kiel's job at Santa Monica Partners? thx!

 

"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. "

 

Yes...nothing nefarious there.  But why not just email him and ask.

[LowIQinvestor]

Can anyone explain Kiel's job at Santa Monica Partners? thx!

 

"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. "

 

Yes...nothing nefarious there.  But why not just email him and ask.

 

 

Was not implying anything nefarious. I just didn't know about this other job and what it entails exactly...

[slkiel]

Hey guys- some answers to a few of your questions. We always go more in-depth at our shareholder meeting as well. I invite you attend (even if you are not currently a shareholder). Details are here: http://sitestarcorp.com/annual-meeting/

 

Name change: We have always wanted the subsidiaries to be the stars. The corporate office primarily does capital allocation, so the brands should be at the subsidiary level. Any investor who wants to know about Enterprise Diversified (ENDI) should follow our SEC filings. We will likely refer to the company as ENDI. If they want to learn about our subsidiaries they should keep an alert for Willow Oak, Mt Melrose, etc.

 

Santa Monica Partners reference: I was an advisor for the fund for a several years and they are a significant investor in the company. That entailed suggesting stock ideas and reviewing the holdings in their portfolio. I am no longer an advisor, but was for most of last year. The language in the proxy probably should have said that I was an advisor at the time of the issuance as opposed to the insinuation that I am currently an advisor.

 

Management compensation: The short answer here is that shareholders get an excellent deal. We have a COO, a chief of staff, a general counsel, a controller, and a back office admin at the corporate level in addition to me. Each of them deserves much, much higher pay. They put in far more work than peers at other companies and do a hyper-efficient job. They work for us because they enjoy the culture, autonomy, and opportunity to be involved in creating a special company. I recommend coming to the annual meeting and talking to them. They would be happy to share their opinions. As for my pay and the idea of double-dipping. I don't fully understand this argument. Our COO and general counsel also own a significant amount of shares in the company. Should they not also get a salary? I urge you to read my employment agreement (and Jeff's and Tabitha's) to see how we think about things. Objectively my salary and bonus are significantly less than the value I provide to the company and significantly less than anyone else would accept to run the company. We have set this up as fair as possible, and I would urge other companies to follow our compensation model.

 

The capital raise: I have written about this several times (including on this thread) and we talked extensively about it at the annual meeting. You can get additional background in last year's shareholder letter below. To be clear, we could not do a rights offering due to issues with the SEC and DTCC. It took several years to clear that up. However, anyone who had interest in participating was aware of the private placement. One of the reasons we did it in several phases was to make sure everyone knew about it. Even with that, we were unable to get it fully subscribed.

 

As for the price, 8 cents was not market value and I am not sure why that keeps being referenced. Something like $20,000 dollars of shares traded hands at that price. We were trying to raise more than $10 million to recapitalize the company. Even so, there was not nearly enough interest at 5 cents. I ended up having to backstop it at a far higher level than I wanted to.

 

The 5 cent price was set at book value. The company had not traded above book value for something like five years before. It often traded for less than half of book value even after our proxy group announced our intention to attempt to get board seats. There were restrictions with the private placement, but that was not the primary reason for the 5 cent price. The price was set internally when shares traded near book value.

 

If you are not experienced in the nano-cap world, you may not fully appreciate that the last trading price in an illiquid penny stock is not true value. If we could have raised money at 8 cents or 7 cents or 6 cents, we would have. We would have loved for the company to have another $6m in cash!

 

http://sitestarcorp.com/wp-content/uploads/2017/03/032417-Shareholder-Letter-1.pdf

 

I understand that Neal feels wronged in some way. I am not sure what we could have done differently to satisfy him. He had the opportunity to participate in the private placement and we would have loved for him to do so. We were talking about a company with about $4 million in book value at the time that files with the SEC. That size makes absolutely no sense to be public. If we did not do the capital raise we would have delisted and the share price would be significantly lower than today. We chose to attempt to grow the company and remain listed. 

 

I don't want to make it a habit to respond here, but I do want to clear up some of the ongoing misconceptions. We are doing the best we can to build a great company. We have a lot of great people involved. For others who have roles like this, they know it is far from easy. On the whole our results have been astronomically good. Have we been perfect? No chance, but we have always put the shareholders first and have acted ruthlessly on their behalf.

 

Don't attempt to group us ethically into the company who is named after their CEO (I won't name it here). Our people deserve much, much better than that. If you take the time to meet us, that will be painfully obvious. We would not have attracted the talent that we have if we act like that other company.

 

I hope you take the opportunity to meet us either at our annual meeting or at Berkshire: https://medium.com/@WOAM/investor-day-presentation-may-5-2018-28b71e38ca3a

 

 

 

 

 

[Guest roark33]

One question I have around the discussion of trading price of an illiquid stock.  You seem to indicate that the stock market price is not indicative of the actual value.  I believe you use the stock market value to calculate your Fund's investment results and are compensated on that basis.  Do you think this is the appropriate method? 

[slkiel]

The SYTE position was marked at an illiquidity discount in my fund. Now that it is more liquid, it is not. The August 31, 2016 mark for the fund, for example, was 5.2 cents. The valuation terms with the hedge fund are governed by its LPA. An individual investor's situation is going to be different. For those who follow my fund, you will see that about half of the gains in 2017 were from the SYTE position. I first owned shares in the company in 2013 and did not have material gains in the position until 2017. 

[InelegantInvestor]

 

Management compensation: The short answer here is that shareholders get an excellent deal. We have a COO, a chief of staff, a general counsel, a controller, and a back office admin at the corporate level in addition to me. Each of them deserves much, much higher pay. They put in far more work than peers at other companies and do a hyper-efficient job. They work for us because they enjoy the culture, autonomy, and opportunity to be involved in creating a special company. I recommend coming to the annual meeting and talking to them. They would be happy to share their opinions. As for my pay and the idea of double-dipping. I don't fully understand this argument. Our COO and general counsel also own a significant amount of shares in the company. Should they not also get a salary? I urge you to read my employment agreement (and Jeff's and Tabitha's) to see how we think about things. Objectively my salary and bonus are significantly less than the value I provide to the company and significantly less than anyone else would accept to run the company. We have set this up as fair as possible, and I would urge other companies to follow our compensation model.

 

The capital raise: I have written about this several times (including on this thread) and we talked extensively about it at the annual meeting. You can get additional background in last year's shareholder letter below. To be clear, we could not do a rights offering due to issues with the SEC and DTCC. It took several years to clear that up. However, anyone who had interest in participating was aware of the private placement. One of the reasons we did it in several phases was to make sure everyone knew about it. Even with that, we were unable to get it fully subscribed.

 

As for the price, 8 cents was not market value and I am not sure why that keeps being referenced. Something like $20,000 dollars of shares traded hands at that price. We were trying to raise more than $10 million to recapitalize the company. Even so, there was not nearly enough interest at 5 cents. I ended up having to backstop it at a far higher level than I wanted to.

 

The 5 cent price was set at book value. The company had not traded above book value for something like five years before. It often traded for less than half of book value even after our proxy group announced our intention to attempt to get board seats. There were restrictions with the private placement, but that was not the primary reason for the 5 cent price. The price was set internally when shares traded near book value.

 

If you are not experienced in the nano-cap world, you may not fully appreciate that the last trading price in an illiquid penny stock is not true value. If we could have raised money at 8 cents or 7 cents or 6 cents, we would have. We would have loved for the company to have another $6m in cash!

 

http://sitestarcorp.com/wp-content/uploads/2017/03/032417-Shareholder-Letter-1.pdf

 

I understand that Neal feels wronged in some way. I am not sure what we could have done differently to satisfy him. He had the opportunity to participate in the private placement and we would have loved for him to do so. We were talking about a company with about $4 million in book value at the time that files with the SEC. That size makes absolutely no sense to be public. If we did not do the capital raise we would have delisted and the share price would be significantly lower than today. We chose to attempt to grow the company and remain listed. 

 

I don't want to make it a habit to respond here, but I do want to clear up some of the ongoing misconceptions. We are doing the best we can to build a great company. We have a lot of great people involved. For others who have roles like this, they know it is far from easy. On the whole our results have been astronomically good. Have we been perfect? No chance, but we have always put the shareholders first and have acted ruthlessly on their behalf.

 

Don't attempt to group us ethically into the company who is named after their CEO (I won't name it here). Our people deserve much, much better than that. If you take the time to meet us, that will be painfully obvious. We would not have attracted the talent that we have if we act like that other company.

 

I hope you take the opportunity to meet us either at our annual meeting or at Berkshire: https://medium.com/@WOAM/investor-day-presentation-may-5-2018-28b71e38ca3a

 

Again, I really don't want to get into a back and forth, but I feel I need to respond to what you have said. I do appreciate your making the effort to comment, even though we disagree markedly on a number of points.

 

First, regarding double dipping. You are paid, I presume, by your fund, to manage assets, and on the performance of those assets. You have invested a significant amount of your fund in Sitestar. You are paid by Sitestar a second time to manage those same assets, and are again compensated on their performance. Aside from that, there is a conflict in deciding whether to make investments at your fund or in this captive vehicle.

 

Contrary to your claim, I was not aware of the first private placement prior to its execution, nor do I think many were. That placement gave you majority control of the company without paying a control premium and without ever facing a shareholder vote(your prior claim that the support you received in the settlement from the prior CEO constituted a shareholder vote notwithstanding). I held >2% of outstanding shares prior to the dilution. You and other directors were well aware of this. At no time was I made aware of an opportunity to participate in a private placement by any of you.

 

I would agree that a company with $4 million in book value should have not have been public. Of course, the company had been public at that size for years. You created a false sense of urgency that demanded an immediate infusion of capital that allowed you to take control without a shareholder vote. I would have happily taken the time to meet you, as you suggest, prior to you embarking on this path. However at the time you asked that you not be contacted(in your initial letter) and you ignored or rejected multiple attempts to meet or talk. The first opportunity to meet came at the shareholder meeting after you had already given yourself a majority stake and my voice no longer had any weight to it.

 

Your argument about price and book value holds little weight as well. Yes, market price in an illiquid security has low correlation to value(which is one reason we all like to work in this space). Yet you trumpet the share price increase in your recent letter, and even in this comment when you refer  to your results as "astronomically good". As the main purchaser of the private placements, you could have chosen to pay a higher price- as the BOMN guys just did in their recent placement at well above book, but you did not. It is hard to maintain that market forces were at work when it was your own agency- on both sides of the transaction- that set the price.

 

The jury is out on your operating results. I think you would agree that HVAC is looking like a poor investment at present. Willow Oak looks better, but I don't know how it looks in a down market.  I think you are a smart guy and a reasonably talented investor, but your overconfidence has led you to be blind to how your actions appear to other shareholders. I was specifically not comparing you to Biglari, for example, who I think is pure malevolence.

 

I am unable to attend your annual meeting, but would be willing to meet with you or speak with you in another venue, should you desire.

 

 

[Tim Eriksen]

 

First, regarding double dipping. You are paid, I presume, by your fund, to manage assets, and on the performance of those assets. You have invested a significant amount of your fund in Sitestar. You are paid by Sitestar a second time to manage those same assets, and are again compensated on their performance. Aside from that, there is a conflict in deciding whether to make investments at your fund or in this captive vehicle.

 

 

I am not trying to wade into your discussion with Steve, or defend him.  I may have a blind spot to this since I am in a similar situation, but I don't agree with the premise that he is managing the same assets and that it is therefore double dipping.  Clearly there is an overlap.  My fund owns 7% of Solitron. Steve's fund owns I believe 27% of Sitestar.  A company needs a CEO.  Should the fund manager do the work for nothing?  It is work, and it is additional work that someone else would likely charge more for.  In the end, the company is saving money and thus it is a benefit to both shareholders and fund investors.  I don't get why shareholders who are not fund investors should get a CEO for free.  They don't really seem to have legitimate argument that they are being taken advantage of.   

 

I know some managers choose to credit CEO and even Board fees back to their funds, and some don't.  There is no legal or moral obligation to do so.  Regulators I interact with care that whatever is chosen is fully disclosed along with any potential conflicts of interest.  They also care if it takes too much time away from managing one's fund.

[CorpRaider]

Seems reasonable.  Speaking generally, if the shares of the related entity were a large enough percentage of the fund maybe the LPs would have a beef, but I don't see how the shareholders of the public entity have reason to complain simply because of the structure.

[InelegantInvestor]

Seems reasonable.  Speaking generally, if the shares of the related entity were a large enough percentage of the fund maybe the LPs would have a beef, but I don't see how the shareholders of the public entity have reason to complain simply because of the structure.

When an investment idea comes to a manager with two roles(fund manager and CEO) how does he decide whether to do it in his fund or do it in the corporation?

OTOH, if he does it in the corporation, he gets paid twice for performance. OTOH, if he does it in the fund, he has a potential problem in his role as fiduciary of the corporation. It's an untenable situation, and getting paid in both for being a capital allocator exacerbates it.  It makes me incredibly uncomfortable to pay a CEO whose primary interest in a deal may not be for the company.

 

 

[CorpRaider]

Yeah, it seems there are potential conflicts to be navigated (as there are with the BOMN guys, and others).  My response was just addressing the "double compensation" issue as discussed in the post prior to mine. 

 

Also, post more on your blog.  ;D

 

 

[InelegantInvestor]

Yeah, it seems there are potential conflicts to be navigated (as there are with the BOMN guys, and others).  My response was just addressing the "double compensation" issue as discussed in the post prior to mine. 

 

 

 

Right, I've raised that. It is certainly more of an issue for the LPs in the fund, but even for investors in the company, it is distasteful that he is paid twice. Particularly the bonus. If the intention of bonus is to incentivize performance does getting paid for the same performance twice add enough additional incentive to overcome any performance drag. And when you can do things like sell yourself cheap stock to boost performance... It's just a conflict that probably is insoluble.

[Tim Eriksen]

Yeah, it seems there are potential conflicts to be navigated (as there are with the BOMN guys, and others).  My response was just addressing the "double compensation" issue as discussed in the post prior to mine. 

 

 

 

Right, I've raised that. It is certainly more of an issue for the LPs in the fund, but even for investors in the company, it is distasteful that he is paid twice. Particularly the bonus. If the intention of bonus is to incentivize performance does getting paid for the same performance twice add enough additional incentive to overcome any performance drag. And when you can do things like sell yourself cheap stock to boost performance... It's just a conflict that probably is insoluble.

 

But he is not really paid twice.  If they had hired someone at a higher rate it probably wouldn't bother you.  It is not the same performance.  It is two different jobs each with their own respective compensation.  The confusion is that the same person is fulfilling both roles.  There is no performance drag.  It is a benefit for shareholders in SYTE and his fund to have a cheaper CEO who is more tied into the overall results.  Spending time on SYTE probably takes time away from analyzing other potential investments but so far that has not hurt his LPs, it has been a benefit. 

 

I guess we will continue to see it differently.  It is not surprising that we haven't arrived at the same conclusion when we can't agree on the facts.  Respectful disagreement.         

[InelegantInvestor]

Yeah, it seems there are potential conflicts to be navigated (as there are with the BOMN guys, and others).  My response was just addressing the "double compensation" issue as discussed in the post prior to mine. 

 

 

 

Right, I've raised that. It is certainly more of an issue for the LPs in the fund, but even for investors in the company, it is distasteful that he is paid twice. Particularly the bonus. If the intention of bonus is to incentivize performance does getting paid for the same performance twice add enough additional incentive to overcome any performance drag. And when you can do things like sell yourself cheap stock to boost performance... It's just a conflict that probably is insoluble.

 

But he is not really paid twice.  If they had hired someone at a higher rate it probably wouldn't bother you.  It is not the same performance.  It is two different jobs each with their own respective compensation.  The confusion is that the same person is fulfilling both roles.  There is no performance drag.  It is a benefit for shareholders in SYTE and his fund to have a cheaper CEO who is more tied into the overall results.  Spending time on SYTE probably takes time away from analyzing other potential investments but so far that has not hurt his LPs, it has been a benefit. 

 

I guess we will continue to see it differently.  It is not surprising that we haven't arrived at the same conclusion when we can't agree on the facts.  Respectful disagreement.       

 

Agreed. It is certainly not at the level of He who must not be named, where he then had the company invest in his fund. I hope we never see that here. 

 

I think it's important to conduct oneself in such a way that nobody can harbor suspicions of you. The setup here is just not conducive to that.

[slkiel]

With regards to the ADV filing, I lived in Virginia when I started the fund and then California and had to register as an RIA in each state when I lived there. I then moved the office to New York and New York does not require (or allow) me to be registered, so I'm not. I won't be registered with the SEC until the fund gets to $150m.

 

Neal- to your comments, there are quite a few facts in which we disagree. I am not sure how we bridge that gap. The suspicions have primarily come from you on items that are not based on the facts of the situation. We have an independent board, corporate staff, and subsidiary managers who all are comfortable with our decisions and absolutely comfortable with our ethical behavior.  Do you really think someone like Keith Smith, who is the most ethical person in the world, would have not raised an objection if we were anywhere close to the line? What I would ask is that you be  a bit more humble towards the judgements of people like Keith, Jeff, and others who know all of the facts and pressures we were under.

 

Also, to be clear, my reference to the results being good were about the operations, not the share price.

[InelegantInvestor]

 

 

Neal- to your comments, there are quite a few facts in which we disagree. I am not sure how we bridge that gap. The suspicions have primarily come from you on items that are not based on the facts of the situation. We have an independent board, corporate staff, and subsidiary managers who all are comfortable with our decisions and absolutely comfortable with our ethical behavior.  Do you really think someone like Keith Smith, who is the most ethical person in the world, would have not raised an objection if we were anywhere close to the line? What I would ask is that you be  a bit more humble towards the judgements of people like Keith, Jeff, and others who know all of the facts and pressures we were under.

 

Also, to be clear, my reference to the results being good were about the operations, not the share price.

 

No doubt, we disagree. I have no interest in rehashing all of this. I am considerably more humble than you might think. In particularly, my humility leads me to be exceedingly cautious when something does not smell right rather than believe that I can figure it out. Fact is, that there are a series of behaviors on your part, that just don't smell right. You might be the best investor and operator in the world, but if you're not paying attention to the optics of what you do, that's a red flag. Likewise, I don't really know Keith. I'm sure is he ethical and all, but I don't see how pulling him into this sheds any light on the key questions.

 

There are certain facts that are not open to dispute, nor judgement.

1) By the time the first meeting of shareholders was held, you had already sold yourself a controlling interest in the company, making any shareholder vote pointless.

2) You never offered to me the opportunity, or indicated to me in any way that it was possible, to participate in any private placement.

 

As for the operations being "astronomically good", I guess I'm just not seeing it. HVAC is, charitably, a wash, and, less charitably, in trouble. Asset management- you'd know better than me as I have not seen Q1 numbers, but it remains to be seen how it performs in down quarters. It was an easy business to make money in last year...

 

I sincerely hope my fears are unfounded and that the company performs well. I do still have a significant position.

I keep speaking for two reasons:

1) I think it is important for other investors to have the full picture

2) I hope that you will have the humility to ponder whether there is any truth to what I'm saying, examine your behavior, and use my feedback to improve the performance of the company going forward.

 

As I said, I'm happy to discuss with you at any point. In fact, I would prefer to do so privately. You know how to reach me should you so wish.

 

[Tim Eriksen]

Some of those certain facts sure seem in dispute.  Maybe you didn't get a personal phone call inviting you to participate, but neither did I, or most people.  The fact of the matter is they made it clear they were doing a private placement (PP) for the Alluvial investment.  Even if you missed that one, the November 8, 2016 press release made it clear that the PP was open and anyone could get the same price. 

 

Because the original funding goal was not met, Sitestar will open the capital raise a final time on February 1, 2017. Members of the Board of Directors have agreed to backstop the February 1, 2017 capital raise with at least $1.8 million in additional funding.

 

Further to say that you "don't see how pulling (Keith an independent director) into this sheds any light" shows that you don't realize that when you impugn Steve's character related to the PPs you are impugning the Board's as well.  Independent directors had to approve the PPs. 

 

I know you hope Steve will ponder if there is any truth to what you are saying, and that is fair.  i don't recall if there was any heads up to the first PP.  I hope you ponder whether frustration or something else is clouding your objectivity regarding the facts and whether your comments fairly attack the character of others.  I don't say that as someone who knows everything or is immune from blind spots.  Evaluating ourselves can be one of the most difficult things there is to do.  We can see the speck in someone else's eye but not the log in our own.  I can be unfairly critical of others.

 

One thing we all agree on is that we hope Sitestar and its shareholders do well.  With that I will end my participation in this sub topic.  Well at least try to.

[slkiel]

We had to do the first capital raise in order to have a quorum at the shareholder meeting. I have previously discussed this, I believe in this thread. The former CEO indicated that he would not vote. We could not otherwise hold a shareholder meeting. We had no other options. We did not do it to "take over" the company. We were already in control of the company. We did it to hit the quorum so we could hold the shareholder meeting and get on with running the company.

 

With regards to specifically offering you an opportunity, Neal, we are not allowed to "solicit." What we did was try to make people aware of the offering so they could reach out to us. We accepted everyone who then contacted us. We would have loved to have you participate.

 

The reason why I am engaging on this platform is because, as Tim referenced, you are attacking the character of the people involved with the company along with me. It is not fair to them, and it is not accurate. And, I will add, no one who has taken the time to come to our meeting and meet the people involved with the company feel as you do. They all understand why we took the actions we did. If you come to the meeting and ask your questions, you will come away feeling as they do.

 

At this point all of us have said how we feel. Readers can use their own judgment from here.

[Spekulatius]

It’s seems to me that investors in SYT get a fair disclosure and as of now a fair price for their equity $0.11) if they chose to exit. That’s better than most Microcaps for sure

 

I don’t like SYTE and how it is structured due to the high cost burden (600k annually) and a high likelihood that the HVAC business will turn out to be a failure. I also don’t see, why owning a fund or several funds within a C-Corp is a good idea, it certainly isn’t tax efficient.

 

In my opinion, the smart play from a risk reward perspective would be just to invest in Alluvial as a LP and be done with it.

[LC]

I think the governance issue is well covered thus far.

 

I agree with Spekulatius. I don't think the underlying businesses are that exciting. But there are many ways to skin a cat, and I hope everyone here makes a lot of $$ :)

[Parsad]

Let me offer my two cents, as someone in a very similar position to Steve:

 

In terms of compensation - Our fund owns 42% of PDH...I receive a salary from PDH as CEO and I receive only incentive fees I earn from our fund.  PDH makes up about 15% of the fund. 

 

Now some people would argue I'm double-dipping, since I receive my fees from the fund and I receive a salary as CEO of PDH.  That would be true if PDH was a passive investment like Bank of America, Macy's or some other stock we own in the fund...where I have no direction over, nor any day to day responsibilities.  And believe me, the day to day duties are extensive...especially in the beginning when we got involved and I was working 14 hour days six days a week for the first 2 years trying to turn it around.  Or it could be perceived as double-dipping if we received a management fee from the fund...but we don't...totally incentive-based.

 

Also, my CEO salary is on par or less than what anyone else would have gotten for that position...depending on the fluctuating market cap and book value over the years...you could argue either way, and because of that I won't try and debate it.  It will either look cheap or look expensive 5-10 years out.  But I capped it from day one...I will never get a raise!  How many CEO's would do that?

 

Whether we should or should not have gotten involved with PDH can be debated either way.  But it is what it is, and we are intent on growing it over time and making it into something special.  I have a very direct influence over the success or failure of PDH...not like passive investments in our fund.  It consumes an enormous amount of time, work, energy and even costs you mentally (stress).  So while I'm sure some would like to continue arguing that it is double-dipping, it certainly isn't in our case.  And from what I've seen, Steve's circumstance is very similar.  Cheers!

[LC]

Sanjeev,

 

I'm curious, how do you think about your situation in regards to your investors at your fund?

 

They don't own PDH directly, and PDH only makes up 15% of their holdings with you.

However you are (or were) essentially spending 100% of your time working on PDH.

 

So my question is, the incentive fee you charge is for 100% of your fund asset's performance, but your time is only being spent on 15% of the fund's assets.

 

Now I'm sure given your reputation that your investors didn't even bat an eyelash at the situation, but from the outside looking in, do you think one could raise this argument?

[Parsad]

Sanjeev,

 

I'm curious, how do you think about your situation in regards to your investors at your fund?

 

They don't own PDH directly, and PDH only makes up 15% of their holdings with you.

However you are (or were) essentially spending 100% of your time working on PDH.

 

So my question is, the incentive fee you charge is for 100% of your fund asset's performance, but your time is only being spent on 15% of the fund's assets.

 

Now I'm sure given your reputation that your investors didn't even bat an eyelash at the situation, but from the outside looking in, do you think one could raise this argument?

 

The incentive fee is based solely on performance.  So if I don't perform, and our partners can argue I haven't over the last 2-3 years...then I don't get paid and it costs them nothing other than lost opportunity.  They may not be happy, but at least my interests and their interests are aligned. 

 

Let me ask you a question now:  If I had been correct on Sequant Re, and that investment had worked out perfectly and now PDH was making $1-1.5M a year in fees from Sequant Re (let's not even include the 17% annualized return on Russell Breweries, 13% annualized return on Kingswood's 1st real estate project, increase in PDC's revenue from essentiallly zero (but we'll call it $900K in 2015) to $1.5M in 2018, and the 19% annualized return I did in 2016/2017 on the investment portfolio)...all these things came to fruition except the biggest investment...Sequant Re.  If I had been right, and PDH stock was now at 25 cents...would my partners have minded my interest and time spent on PDH?  No, of course not. 

 

In this business, you are only as good as your last game.  Value investors, while they think they are different, are as equally short-term focused as the average investor.  How many value investors have held Fairfax shares steadily from when they bought them and not wavered?  Of those that bought at the lows in 2003, and there were hundreds, I would say you could probably count those still holding those shares on one hand.  That percentage might be a bit better for Berkshire shareholders, but I would bet that it isn't statistically much different for those that bought Berkshire shares back in 1999/2000.  Managers don't get into the business to be wrong...every decision, good or bad, we try and make the best evaluated decision we can with the information we have on hand at the time.

 

The lesson is that managers may not always make the best/correct decision, and their partners may not always be happy about that, but the goal is to make sure incentives and behaviors are in line with partner/shareholder interests.  That is the only thing anyone can guarantee...whether they are a hedge fund manager or the CEO of a corporation.  If you have the working fundamentals right, at least incentives are fully aligned...since performance is never guaranteed on any investment.  We live for and absolutely try to do that!

 

As mentioned previously on another thread, we recently closed our Canadian Fund.  Our performance was underwhelming, and operating costs in Canada for such a small fund was part of the reason...so we felt that the fund was not adding value to investors and made the decision to close.  The vast majority (about 80%) of our partners did ok or well while in the fund, but there were four more recent partners who had lost some of their capital...from 1% to about 10%.  Alnesh and I felt compelled to make them whole from our own money and we did.  While we underperformed, and of course the partners would have preferred us to have killed the indices, there are no guarantees on investment return.  But our incentives, behavior and culture was 100% aligned with partner interests...that's the only thing we can 100% guarantee.  Name me a fund manager who has made their partners whole without it being in the LP agreement?  Cheers!