In the Arquitos Capital Partners 2015 investor letter, I mentioned that I had been appointed as the interim CEO of Sitestar (SYTE), a small public company in which the partnership has held a position for several years. Earlier this year the interim label came off. We have made tremendous progress at the company, and I thought you might be interested in reading the letter to Sitestar shareholders that I issued a few days ago.


Arquitos Capital – Letter To Sitestar Shareholders

To the Shareholders of Sitestar:

What a difference seven months makes!

On December 14. 2015 we were handed a company in disarray. Sitestar’s former auditor had made serious allegations against the former CEO. We would soon thereafter learn that the company’s financials could not be relied upon. Of course, there was also no realistic plan to monetize Sitestar’s assets.

Today, thanks to our employees, directors, and service providers, we are beginning to develop the company’s future. In baseball parlance, we are in the top of the first inning. In fact, we may be just a few batters in. The lead-off hitter was a very tough out, though! Later in this letter I will provide details on the challenges we faced. The scale was much greater than any of us could have anticipated in December, and the entire company is happy to now be moving forward and creating the future.

Our Philosophy

The directors and I are students of investing from a value perspective. Whether we carry this out through investment partnerships, individual accounts, entrepreneurial ventures, or through corporate or advisory work, we all enjoy learning about companies, their leaders, and how and why they go about their work. With Sitestar, we have optionality to apply this research both in the public and private markets. We are excited to take advantage of this flexibility and believe that we can generate attractive returns, when measured over the long term, by applying our experience to Sitestar.

Collectively, we have spent many years analyzing business models. There are a handful that we hold in very high regard. Each are attractive for their own reasons, their own histories, and the idiosyncrasies of those that lead them or have led them. Ultimately, the company’s structure has to match the personality of the person that leads the company. Leaders like Jack Welch, Jeff Bezos, Steve Jobs, or Elon Musk can or could run centralized companies because they are or were fanatics on operational matters.

On the other end of the spectrum, certain companies have been unusually successful being highly decentralized. Everyone’s favorite value investor has described his style as management by abdication. (I will say that I think that quote dramatically oversimplifies what is actually occurring). Others have also successfully centralized capital allocation decisions at the corporate level while allowing for decentralized management at the operational level.

We are developing a similar decentralized management structure. Leading Sitestar in a way that empowers its managers accomplishes several things. It attracts talented, entrepreneurial people. We have already seen how this can work with Nathan Reid and our creation of HVAC Value Fund. It unleashes the potential of individuals. We have seen this with Tabitha Keatts, who is in charge of our internet operations and has become a fanatical cost-cutter.

Nathan and Tabitha crave accountability. Their view, and my view, is that they should be judged based on their work and their leadership of the operations that they lead. This is a structure that rewards success and punishes failure. Not everybody can handle this level of accountability. We look forward to attracting managers who yearn for it.

I am, at heart, an entrepreneur, though it may not be obvious by looking at my background. I have managed a small investment partnership since 2012. I have been in the Army Reserves since 2000, first as an enlisted member and then as an officer. I am currently a Judge Advocate, which is an Army lawyer, and hold the rank of Major. I have practiced law and also worked as a consultant. I spent the first seven years of my career working at a public policy organization in Washington, DC. I have participated in and observed a wide range of management styles.

The structure we are setting up within Sitestar is the one that best fits both my personality and skillset and also allows for our ownership of a diversified group of companies. I don’t know what other opportunities Sitestar will pursue, but I can say that we are attracted to companies, both public and private, that have dynamic leaders and financial structures that we believe can lead to attractive returns.

Strengthening our Board of Directors

Over the last several months we have had an opportunity to remake the board of directors. I am excited about the direction we are headed. Former CEO and director, Frank Erhartic, resigned from the board in December after he was terminated as the CEO. That brought the number of directors to five, a number at which the board has now formally set.

Roger Malouf resigned as a director in February. Roger had previously been selected to be a director by Frank Erhartic and now former CFO, Dan Judd. That appointment had been required as part of the 2015 settlement agreement between prior management and the Moore Shareholder Group. We enjoyed working with Roger and appreciated his business insights and his integrity.

After Roger resigned, we appointed Chris Payne as a director. Chris is someone who both Jeff Moore and I have known for many years. Chris fits the culture we are trying to develop. He has high ethical standards. He understands value investing from a fundamental perspective, especially as it pertains to small companies. Chris’s experience is with valuing companies, typically on the private side. This experience will serve us well as we review opportunities.

Dan Judd, who we terminated on March 3, has refused to resign as a director. He has not participated in board meetings and has not responded to requests for information. He will not be included as a company nominee at the next shareholder meeting.

Keith Smith has agreed to be our nominee to replace Dan. Fellow value investors will recognize the name as Keith has been profiled several times in The Globe and Mail for his incredible long-term stock picking record. More importantly, Keith is smart, energetic, and ethical. He fits our new culture perfectly. Keith has already participated in board meetings as an observer and has proven to be an invaluable asset.

My goal, and the goal of the other directors, is to build a strong team of individuals who will aggressively defend Sitestar’s interests. The addition of Chris and the nomination of Keith to the board have been a real coup for the company. Jeff, Jeremy, and I could not be happier that both of them agreed to join us. It will be difficult for us to fail if we can retain and continue to attract such high quality people.
Allow me to provide some clarity on the internal workings of the board prior to the management change. It would have been perfectly reasonable for a passive investor to observe that Jeff, Jeremy and myself were on the board during 2015 and then ask why we were unaware of the significant accounting and operational issues prior to the management

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