SYTE - Enterprise Diversified

[Poor Charlie]

Would you rather own an average house flipping/landlording business or an average HVAC business?

 

Data Point 1:

If you google "HVAC quotes" you find links to dodgy looking leadgen sites that ask users to answer a bunch of questions and cough up their email address. By contrast, how do consumers get info about real estate listings online? They use zillow, redfin, etc which give away massive amounts of detail for free without even requiring a signup. This tells us something about the balance of consumer to business pricing power in the two markets.

 

Data Point 2:

Search HVAC on http://ragnarisapirate.blogspot.com and read about Jeff's experience as a property investor dealing with HVAC issues.  The CEO of HVAC Co is also a former real estate guy who decided that HVAC is the better business to be in.

 

Especially after seeing the numbers on the rental properties, to me this looks like a rational move of redeploying capital to a business with more upside. 

 

Finally, what is the best possible upside you can get from flipping an undervalued piece of real estate?  Maybe 100% - 150% on a phenomenal deal after a bunch of [probably HVAC] work? How does that compare with the upside of creating a trusted brand or a bigger company w/ economies of scale in the HVAC space?

 

Long as of this AM...

 

The HVAC industry is a decent place to deploy capital: almost all parts of the value chain (OE / distribution / servicing) earn, on average, nice returns on capital; cold-starts have a better-than-average chance of working out; and acquisitions, if thoughtfully executed, don’t seem to have the blow-up risk you find in most industries.  Furthermore, a number of companies have started from positions similar to SYTE in the HVAC industry and gone on to do well.  For instance, take a look at AAON and ACR Group.  AAON (OE) started as a reverse-merger and ACR Group (distribution) started (if memory serves) as a publicly traded shell.  Both grew substantially and earned very good returns on capital over multi-decade periods. 

 

There aren’t that many companies in the HVAC industry that are public, but those that are/were (like AAON and ACR) have disproportionately done well.  The only poorly performing publicly traded HVAC business that I’ve looked at was ServiceMaster’s plumbing / HVAC servicing business that they sold off in 2006.

 

[Wabash02]

I view it as nothing but positive that Keith will be joining the board!

[rkbabang]

The 10Q is out for the quarter ending in March. Looks like a few properties sold and some cost reductions in the internet portion of the business.  Also after March they sold 17 properties ($1.3M) and as already announced invested in the HVAC fund which has made 4 acquisitions.  No further word on how the suit against the former CEO is going.

 

https://www.sec.gov/Archives/edgar/data/1096934/000072174816001511/0000721748-16-001511-index.htm

 

[bizaro86]

They just did a private placement doubling the number of shares outstanding at $0.048. That should take care of any concern of the old CEO holding them hostage, as they are now firmly in control. I'm not in love with the price of the private placement, but I suppose it was priced before the stock rose.

 

http://www.otcmarkets.com/stock/SYTE/news/Sitestar-Completes-a-Private-Placement-of-Common-Stock?id=137926&b=y

 

[InelegantInvestor]

They just did a private placement doubling the number of shares outstanding at $0.048. That should take care of any concern of the old CEO holding them hostage, as they are now firmly in control. I'm not in love with the price of the private placement, but I suppose it was priced before the stock rose.

 

http://www.otcmarkets.com/stock/SYTE/news/Sitestar-Completes-a-Private-Placement-of-Common-Stock?id=137926&b=y

 

So, they doubled shares, sold way below market, and didn't offer existing shareholders a chance to participate. Classy.

 

[Jurgis]

They just did a private placement doubling the number of shares outstanding at $0.048. That should take care of any concern of the old CEO holding them hostage, as they are now firmly in control. I'm not in love with the price of the private placement, but I suppose it was priced before the stock rose.

 

http://www.otcmarkets.com/stock/SYTE/news/Sitestar-Completes-a-Private-Placement-of-Common-Stock?id=137926&b=y

 

So, they doubled shares, sold way below market, and didn't offer existing shareholders a chance to participate. Classy.

 

This also seems par for the course for these "good guys" taken-over nanocaps.  :-\

[Ballinvarosig Investors]

They just did a private placement doubling the number of shares outstanding at $0.048. That should take care of any concern of the old CEO holding them hostage, as they are now firmly in control. I'm not in love with the price of the private placement, but I suppose it was priced before the stock rose.

 

http://www.otcmarkets.com/stock/SYTE/news/Sitestar-Completes-a-Private-Placement-of-Common-Stock?id=137926&b=y

 

So, they doubled shares, sold way below market, and didn't offer existing shareholders a chance to participate. Classy.

I bet Steve Kiel got to participate.

[Travis Wiedower]

Yikes that looks really bad :o

[Wabash02]

Wow, this is really disappointing. 

[rkbabang]

I understand why they didn't want to give existing shareholders a chance to participate: they didn't want Frank to participate.  But it is still hugely disappointing.  As they screwed all outside shareholders, not just him. The price they got is disappointing as well, especially because they did it in secret, giving a sweet deal to someone.  This is the opposite of a shareholder friendly move.

 

I know I've criticized Sardar Biglari quite a bit, but one thing I really liked about him, way back when, was when he wanted to raise money he'd do a rights offering so that ALL existing shareholders had the opportunity to participate and maintain their ownership percentage in the company.

 

[andgroup]

So you average down and you wait a little longer, but honestly, these guys are on fire.  2-3 steps ahead of everyone. It is very fun to watch. I'm very happy to pickup some more shares today and watch this thing unfold over the longer term.  I won't be selling my shares anytime soon.  I think this team will far more than makeup for this little bump in the road. - John Woods

 

 

[bskptkl]

I understand why they didn't want to give existing shareholders a chance to participate: they didn't want Frank to participate.  But it is still hugely disappointing.  As they screwed all outside shareholders, not just him. The price they got is disappointing as well, especially because they did it in secret, giving a sweet deal to someone.  This is the opposite of a shareholder friendly move.

 

I know I've criticized Sardar Biglari quite a bit, but one thing I really liked about him, way back when, was when he wanted to raise money he'd do a rights offering so that ALL existing shareholders had the opportunity to participate and maintain their ownership percentage in the company.

Agree 100% about unfair and all, but rights offering can be extremely expensive for such a tiny company. Private placements on other hand are very cheap. They should have priced it higher, but maybe it ran up in price after they set it.

[rkbabang]

I'm not selling, just a little miffed.  I'm hoping it comes down a bit more, so I can pick up a little more. 

[andgroup]

Also excuse me for being a bit philosophical here, but I do not put Biglari anywhere near Kiel in terms of character, I think they are in totally different orbits, and I never invested with Biglari, but I am invested in this deal and I plan to keep my stake and increase it every time I get a chance.

[Jurgis]

Right, so when the "good guys" buy half of the company under the table for lower than market price it's OK, because they are the "good guys" . They did it for the benefit of all shareholders. Showed character too.  8)

[andgroup]

I think he was looking out for the longer term interest of the company, but if you are trying to trade for a quick pop, it probably wasn't fun.  But I'm in this for the longer term and so all I've got to say is, if anyone is real unhappy, please sell your shares, my limit orders are waiting to pounce....

[rkbabang]

I'd like to know who they offered it to.  Before this deal I owned 1.2% of the company and I didn't know about it.

 

[InelegantInvestor]

I'd like to know who they offered it to.  Before this deal I owned 1.2% of the company and I didn't know about it.

 

Same here. I was well over 1%

[Jurgis]

I'd like to know who they offered it to.  Before this deal I owned 1.2% of the company and I didn't know about it.

 

Purchasers of the stock in the private placement primarily consisted of affiliates to the Company.

 

Apparently your 1.2% does not an affiliate make. Now, you own ~0.6%, have a nice day.

 

OK, I got it. They needed to sell shares, they wanted something for their efforts that took bunch of time and work, they did the deal to sell shares to themselves. It doesn't make it any nicer, but that's par for the course.

 

Disclosure: I am a spectator at this time. Just learning not to get into nanocap bandwagons with "good guys" by assuming things will work great when they take the helm. (Imagine the fury if former CEO had sold 50% shares of the company to himself under market price just before the "good guys" showed up.)

[slkiel]

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

 

[T-bone1]

Great response!  Thanks Steve and well done.

[andgroup]

Great job!

 

[woyzeck]

From what I can tell as an outsider you have done everything right since your involvement and outsiders have benefitted handsomely. However, raising capital now at a questionable price, which clearly benefits yourself and other insiders at the expense of outsiders, is a questionable practice and in my opinion probably inappropriate even considering the circumstances. Don’t get me wrong, I think you are a very talented investor, and I believe you will do well for Sitestar investors over time, but the price just doens’t seem fair. How do outsiders know the current book value is appropriate? Are insiders aware of any gains on the sale of real estate since the Q1 10-Q? Why not wait with the issuance until the Q2 10-Q is out?

[Sunrider]

Hmm. I was inclined to give you and the pirate the benefit of the doubt but the quorum point seems strange to me / insufficient justification.

 

Why would you have to worry about a quorum (as opposed to being able to get a majority). Most annual meetings have very few people turn up and they end up being quorate without issue. Re voting - well that would be done by proxy and mostly electronically anyway.

 

So what is it that you were worried about/actually mean here?

Thanks.

C.

 

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

[Ballinvarosig Investors]

Share price activity yesterday was amusing, seems like it didn't click for investors until lunch time that they would be facing huge dilution.

 

Seriously though, if management couldn't do right by all the shareholders, they should have just liquidated this thing.