Why I’m Withholding My Votes For All Sitestar Directors

It won’t matter. Steven Kiel made sure of that when he seized control of Sitestar(SYTE) without a shareholder vote or a control premium. In fact, Mr. Kiel went from 6% of shares to 42.5% by buying new shares at a significant discount to market price.

In an August 11 post on Corner of Berkshire and Fairfax, Mr. Kiel attempted to justify this:

n 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.

Mr. Kiel first makes the claim that this was necessary in order to have a quorum represented at the annual meeting. By the company’s bylaws a quorum is 50% of outstanding shares. If this were the purpose, it could have been accomplished with far less dilution. Certainly, Mr. Kiel did not need to become the quorum himself! Mr. Kiel than transitions to a new claim- the company required  additional capital to continue as a public company.  Of course the company would be better served with more capital, but without the quorum claim, this would not have justified the urgency that Mr. Kiel claims necessitated this raise. As well, the history of this as a public company with this level of capital belies the claim. Further, there is an inherent assumption that continuing as a public, filing company is in the best interest of shareholders, and not just Mr. Kiel.

For a long time, I was both publicly and privately supportive of Mr. Kiel and Mr. Moore. I believed they offered a better path forward for shareholders than previous management. I also believed that they would align their interests with other shareholders, not agains them. Whether intentional or not, Mr. Kiel has now acquired complete control of the company without ever facing a shareholder vote(his initial election to the Board was through an agreement with previous management). All Board members have been handpicked by Mr. Kiel. There are no checks or balances on Mr. Kiel’s power and the votes of non-management shareholders are no diluted and meaningless.

So I will vote against them, not because it can have any effect, but to register my extreme displeasure with the highjacking of this company from its lawful owners. Mr. Kiel should be ashamed of his actions, as should the Board which allowed this to take place in clear contradiction to their fiduciary responsibilities. I never chose to invest in Mr. Kiel’s fund, yet, that is where I find myself today.  I continue to hold the vast majority of my shares but will sell as the market allows.

Disclosure: The author holds shares of Sitestar