10-Q 1 v312735_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

¨    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to _______________

 

000-27763

(Commission file number)

 

SITESTAR CORPORATION

(Exact name of small business issuer as specified in its charter)

 

NEVADA
(State or other jurisdiction of
incorporation or organization)
88-0397234
(I.R.S. Employer Identification No.)

 

7109 Timberlake Road, Lynchburg, VA  24502

(Address of principal executive offices)

 

(434) 239-4272

(Issuer's telephone number)

N/A

 (Former name, former address and former fiscal year, if changed since last report)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ¨ Accelerated Filer ¨] Non-Accelerated Filer (Do not check if a smaller reporting Company) ¨ Smaller Report Company x

 

 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of May 14, 2012, the issuer had 91,326,463 shares of common stock issued and 74,085,705 outstanding

 

 

 
 

 

SITESTAR CORPORATION

 

Index

 

  Page Number
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited)  
   
Condensed Consolidated Balance Sheets as of March  
31, 2012 and December 31, 2011 3-4
   
Condensed Consolidated Statements of Income for the  
three months ended March 31, 2012 and 2011 5
   
Condensed Consolidated Statements of Cash Flows for the  
three months ended March 31, 2012 and 2011 6-7
   
Notes to Condensed Consolidated Financial Statements 8-15
   
Item 2. Management's Discussion and Analysis 15-23
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk  23
   
Item 4. Controls and Procedures  23
   
Part II. OTHER INFORMATION  24
   
Item 1. Legal Proceedings  24
   
Item 1A. Risk Factors  24
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  24
   
Item 3. Defaults Upon Senior Securities  24
   
Item 4. Submission of Matters to a Vote of Security Holders  24
   
Item 5. Other Information  24
   
Item 6. Exhibits  24
   
SIGNATURES  25

 

2
 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2012 AND DECEMBER 31, 2011

 

ASSETS

  

2012

(Unaudited)

   2011 
CURRENT ASSETS        
Cash and cash equivalents  $170,149   $17,268 
Accounts receivable, net of allowance of $4,923
and $2,586
   60,765    53,090 
Prepaid expenses   1,504    13,037 
Real estate, at cost   2,504,107    2,464,694 
           
Total current assets   2,736,525    2,548,089 
           
PROPERTY AND EQUIPMENT, net   161,238    164,159 
CUSTOMER LIST, net of accumulated amortization of
$12,293,838 and $12,286,712
   26,835    33,961 
GOODWILL, net of impairment   1,288,559    1,288,559 
DEFERRED TAX ASSETS   778,442    762,607 
OTHER ASSETS   265,988    266,180 
           
TOTAL ASSETS  $5,257,587   $5,063,555 

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

3
 

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS, continued

MARCH 31, 2012 AND DECEMBER 31, 2011

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

2012

(Unaudited)

   2011 
CURRENT LIABILITIES          
Accounts payable  $28,446   $71,136 
Accrued income taxes   125,988    81,353 
Accrued expenses   33,626    31,433 
Deferred revenue   456,627    461,640 
Notes payable, current portion   900,615    900,615 
           
Total current liabilities   1,545,302    1,546,177 
           
NOTES PAYABLE – STOCKHOLDERS, less current portion   82,845    95,958 
           
TOTAL LIABILITIES   1,628,147    1,642,135 
           
STOCKHOLDERS' EQUITY          
Preferred Stock, $.001 par value, 10,000,000 shares authorized, 0 shares
issued and outstanding
   -    - 
Common stock, $.001 par value, 300,000,000 shares authorized,
91,326,463 shares issued in 2012 and 2011 and 74,085,705 shares
outstanding in 2012 and 2011
   91,326    91,326 
Additional paid-in capital   13,880,947    13,880,947 
Treasury stock, at cost, 17,240,758 common shares   (789,518)   (789,518)
Accumulated deficit   (9,553,315)   (9,761,335)
           
Total stockholders’ equity   3,629,440    3,421,420 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $5,257,587   $5,063,555 

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

4
 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED)

 

   2012   2011 
         
REVENUE        
Internet  $814,179   $1,048,615 
Real estate   487,875    - 
    1,302,054    1,048,615 
           
COST OF REVENUE          
Internet   444,052    491,485 
Real estate   382,540    - 
    826,592    491,485 
           
GROSS PROFIT   475,462    557,130 
           
OPERATING EXPENSES:          
   Selling general and administrative expenses   209,543    378,941 
           
INCOME FROM OPERATIONS   265,919    178,189 
           
OTHER INCOME (EXPENSES):          
  Other income (expenses)   (531)   908 
  Interest expense   (2,089)   (864)
TOTAL OTHER INCOME (EXPENSE)   (2,620)   44 
           
           
INCOME BEFORE INCOME TAXES   263,299    178,233 
           
INCOME TAXES (EXPENSE) BENEFIT   (55,280)   276,756 
           
NET INCOME  $208,019   $454,989 
           
BASIC AND DILUTED EARNINGS PER SHARE  $0.00   $0.01 
           
WEIGHTED AVERAGE SHARES          
  OUTSTANDING - BASIC AND DILUTED   74,085,705    74,691,038 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

5
 

  

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) 

 

   2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income  $208,019   $454,989 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization expense   10,242    135,879 
Allowance for doubtful accounts   2,337    656 
Increase in accounts receivable   (10,012)   (11,973)
(Increase) decrease in prepaid expenses   11,533    (18,789)
Increase in real estate   (39,413)   (862,970)
Increase in deferred income taxes   (15,835)   (267,190)
Decrease in accounts payable   (42,690)   (15,565)
Increase in accrued expenses   2,193    5,772 
Decrease in deferred revenue   (5,013)   (5,903)
Increase (decrease) in accrued income taxes   44,635    (110,312)
           
Net cash provided by operating activities   165,996    166,064 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
(Increase) decrease in other assets held for resale   (2)   2 
Increase in other assets   -    (1,500)
Purchase of non-compete   -    (1,000)
Purchase of customer list   -    (64,000)
           
Net cash used in investing activities   (2)   (927,968)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayment of notes payable – stockholders   (13,113)   (49,460)
Proceeds from notes payable – stockholders   -    89,920 
Purchase of treasury stock   -    (1,770)
           
Net cash provided by (used in) financing activities   (13,113)   38,690 
           
NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS   152,881    (723,214)
           
   CASH AND CASH EQUIVALENTS – BEGINNING OF  PERIOD   17,268    939,328 
           
   CASH AND CASH EQUIVALENTS – END OF  PERIOD  $170,149   $216,114 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

6
 

 

 SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED)

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

During the three months ended March 31, 2012 and 2011, the Company used cash to pay income taxes of $26,480 and $100,746 and paid interest expense of approximately $2,000 and $1,000, respectively.

 

 

 

 

7
 

  

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 1 – BASIS OF PRESENTATION

 

The unaudited condensed consolidated financial statements have been prepared by Sitestar Corporation (the “Company” or “Sitestar”), pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K.  The results for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

 

NOTE 2 – EARNINGS PER SHARE

 

GAAP requires dual presentation of basic and diluted earnings per share on the face of the statements of income and requires a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculation. Basic earnings per share are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted income per share is computed using weighted average shares outstanding adjusted to reflect the dilutive effect of all potential common shares that were outstanding during the period.

 

For the three months ended March 31, 2012 and 2011:

   2012   2011 
Net income available to common shareholders  $208,019   $454,989 
Weighted average number of common shares   74,085,705    74,691,038 
           
Basic and diluted income per share  $0.00   $0.01 

 

8
 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 3 – COMMON STOCK

 

During the three months ended March 31, 2012, the Company issued no shares of common stock and repurchased no treasury shares.

 

NOTE 4 – SEGMENT INFORMATION

 

The Company has three business units that have been aggregated into three reportable segments: Corporate, Real estate and Internet.

 

The Corporate group is the holding company and oversees the operation of the other business units. The Corporate group also arranges financing for the entire organization. The real estate group invests in, refurbishes and markets real estate for resale. The Company’s Internet group consists of multiple sites of operation and services customers throughout the U.S. and Canada.

 

The Company evaluates the performance of its operating segments based on income from operations before income taxes, accounting changes, non-recurring items and interest income and expense.

 

Summarized financial information concerning the Company's reportable segments is shown in the following tables as of and for the three months ended March 31, 2012 and 2011:

 

    March 31, 2012           
    Corporate    Real estate    Internet    Consolidated 
Revenue  $-   $487,875   $814,179   $1,302,054 
Operating income (loss)  $(42,926)  $105,335   $203,510   $265,919 
Depreciation and amortization  $-   $   $10,242   $10,242 
Interest expense  $-   $   $2,089   $2,089 
Real estate  $-   $2,504,107   $-   $2,504,107 
Intangible assets  $-   $   $1,316,477   $1,316,477 
Total assets  $-   $2,504,107   $2,753,480   $5,257,587 

 

 

 

9
 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 4 – SEGMENT INFORMATION, continued

 

      March 31, 2011           
    Corporate    Real estate    Internet    Consolidated 
Revenue  $-   $-   $1,048,615   $1,048,615 
Operating income (loss)  $(33,115)  $-   $211,304   $178,189 
Depreciation and amortization  $-   $   $135,879   $135,879 
Interest expense  $-   $   $864   $864 
Real estate  $-   $1,378,172   $-   $1,378,172 
Intangible assets  $-   $   $1,548,898   $1,548,898 
Total assets  $-   $1,378,172   $3,366,959   $4,745,131 

 

 

10
 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 5 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

No new accounting pronouncement issued or effective during the three months ended March 31, 2012 has had or is expected to have a material impact on the consolidated financial statements.

 

NOTE 6 – ACQUISITIONS

 

NCISP.net

Effective March 1, 2011, the Company entered into an Asset Purchase Agreement pursuant to which it acquired the Internet related assets of NCISP.net, a North Carolina-based Internet Service Provider. The total purchase price was $88,000 representing the fair value of the assets acquired which consisted of a $55,000 cash payment at closing with the remaining balance paid in 6 monthly installments beginning April 2011.

 

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition. Sitestar has assessed the valuations of certain intangible assets as represented below.

 

Equipment  $- 
Customer list   97,000 
Non-compete agreement   1,000 
Deferred revenue   (10,000)
      
Purchase price  $88,000 

 

11
 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 7 -- PROVISION FOR INCOME TAXES

 

The provision for federal and state income taxes for the three months ended March 31, 2012 and 2011 included the following: 

 

   2012   2011 
Current provision:          
Federal  $60,447   $(8,131)
State   10,667    (1,435)
Deferred provision:          
Federal   (13,459)   (227,112)
State   (2,375)   (40,078)
           
Total income tax provision  $55,280   $(276,756)

 

Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.  Significant components of the Company's deferred tax assets and liabilities at March 31, 2012 and December 31, 2011 are as follows:

 

   2012   2011 
Accounts receivable  $4,923   $2,586 
Amortization of Intangible assets   3,325,939    3,312,441 
Less valuation allowance   (2,552,420)   (2,552,420)
           
Deferred tax asset  $778,442   $762,607 

 

At March 31, 2012 and December 31, 2011, the Company has provided a valuation allowance for a portion of the deferred tax asset that management has not been able to determine that realization is more likely than not. The Company is subject to Federal income taxes as well as income taxes of state jurisdictions. For Federal and state tax purposes, tax years 2008 through 2011 remain open to examination.

 

12
 

 

  SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 8 – INTANGIBLE ASSETS

 

The Company continually monitors its intangible assets to determine whether any impairment has occurred.  In making such determination with respect to these assets, the Company evaluates the performance, on a discounted cash flow basis, of the intangible assets or group of assets.  Should impairment be identified, a loss would be reported to the extent that the carrying value of the related intangible asset exceeds its fair value using the discounted cash flow method.  The Company's customer lists are being amortized over three years. Total amortization expense was $7,321 and $132,958 for the three months ended March, 31, 2012 and 2011.

 

NOTE 9 – DEFERRED REVENUE

 

Deferred revenue represents collections from customers in advance for services not yet performed and are recognized as revenue in the period service is provided.

 

Revenue Recognition

 

Internet

 

The Company sells Internet services under annual and monthly contracts.  Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances.

 

Real Estate

 

Revenue from real estate is recognized upon closing of the sale, as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time.

 

13
 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 10 - NOTES PAYABLE

 

Notes payable at March 31, 2012 and December 31, 2011 consist of the following:

 

    2012    2011 
Non-interest bearing amount due on acquisition of USA Telephone.  $900,615   $900,615 
           
Totals   900,615    900,615 
Less current portion   (900,615)   (900,615)
           
Long-term portion  $-   $- 

 

The future principal maturities of these notes are as follows:

Twelve months ending  March 31, 2013  $900,615 
Twelve months ending  March 31, 2014   - 
Twelve months ending  March 31, 2015   - 
Twelve months ending  March 31, 2016   - 
Twelve months ending  March 31, 2017   - 
Thereafter   - 
      
Total  $900,615 

 

NOTE 11 - NOTES PAYABLE – STOCKHOLDERS

 

Notes payable - stockholders at March 31, 2012 and December 31, 2011 consist of the following: 

   2012   2011 
Note payable to officer and stockholder on a line of credit of $750,000 at an annual interest rate of 10%.  The accrued interest and principal are due on January 1, 2014.  $32,845   $45,958 
           
Note payable to stockholder for $50,000 at an annual interest rate of 8 % interest.  The accrued interest and principal are due on January 1, 2014.          50,000    50,000 
           
Totals   82,845    95,958 
Less current portion   -    - 
           
Long-term portion  $82,845   $95,958 

14
 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 11 - NOTES PAYABLE – STOCKHOLDERS, continued

 

The future principal maturities of these notes are as follows:

 

Twelve months ending March 31, 2013  $- 
Twelve months ending March 31, 2014   82,845 
Twelve months ending March 31, 2015   - 
Twelve months ending March 31, 2016   - 
Twelve months ending March 31, 2017   - 
Total  $82,845 

 

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-looking statements

 

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

 

Stockholders are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the Company’s ability to expand the Company’s customer base, make strategic acquisitions, general market conditions and competition and pricing.

 

Although the Company believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements contained in the report will prove to be accurate.

 

General

 

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related footnotes for the year ended December 31, 2011 included in the Annual Report on Form 10-K.  The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

 

15
 

 

SITESTAR CORPORATION

 

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Overview

 

Internet

 

Sitestar is an Internet Service Provider (ISP) that offers consumer and business-grade Internet access, wholesale managed modem services for downstream ISPs and Web hosting.  Sitestar also delivers value-added services including spam, virus and spyware protection, pop-up ad blocking and web acceleration.  The Company maintains multiple sites of operation and provides services to customers throughout the U.S. and Canada.

 

The products and services that the Company provides include:

·Internet access services;
·Web acceleration services;
·Web hosting services;

 

The Company’s Internet division markets and sells narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic and wireless), and supports these products utilizing its own infrastructure and affiliations.  Value-added services include web acceleration, spam and virus filtering, as well as, spyware protection. Additionally, the Company markets and sells web hosting and related services to consumers and businesses.

 

Real Estate

 

The real estate group invests in, refurbishes and markets real estate for resale. The increase in real estate sales marks the beginning of the Company’s efforts to turn investments of excess cash from the Internet division into a new revenue stream. With the increased inventory of real estate investments, the sales should become a more prominent source of revenue.

 

16
 

 

SITESTAR CORPORATION

 

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Results of operations

 

The following tables show financial data for the three months ended March 31, 2012.

 

   Corporate   Internet   Real estate   Total 
Revenue  $-   $814,179   $487,875   $1,302,054 
Cost of revenue   -    444,052    382,540    826,592 
                     
Gross profit   -    370,127    105,335    475,462 
                     
Operating expenses   42,926    166,617    -    209,543 
                     
Income (loss) from operations   (42,926)   203,510    105,335    265,919 
Other income (expense)   -    (2,620)   -    (2,620)
                     
Income (loss) before income taxes   (42,926)   200,890    105,335    263,299 
Income taxes (expense) benefit   -    (33,165)   (22,115)   (55,280)
                     
Net income (loss)  $(42,926)  $167,725   $83,220   $208,019 

 

 

 

17
 

 

SITESTAR CORPORATION

 

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

The following tables show financial data for the three months ended March 31, 2011.

 

    Corporate    Internet    Real estate    Total 
Revenue  $-   $1,048,615   $-   $1,048,615 
Cost of revenue   -    491,485    -    491,485 
                     
Gross profit   -    557,130    -    557,130 
                     
Operating expenses   33,115    345,826    -    378,941 
                     
Income (loss) from operations   (33,115)   211,304    -    178,189 
Other income (expense)   -    44    -    44 
                     
Income (loss) before income taxes   (33,115)   211,348    -    178,233 
Income taxes (expense) benefit   -    276,756    -    276,756 
                     
Net income (loss)  $(33,115)  $488,104   $-   $454,989 

 

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) consists of revenue less cost of revenue and operating expense.  EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is presented to enhance an understanding of the Company’s operating results and is not intended to represent cash flows or results of operations in accordance with GAAP for the periods indicated. EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures for other companies. See the Liquidity and Capital Resource section for further discussion of cash generated from operations.

 

The following tables show a reconciliation of EBITDA to the GAAP presentation of net income for the three months ended March 31, 2012 and 2011.

 

18
 

SITESTAR CORPORATION

 

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

For the three months ended March 31, 2012

 

    Corporate    Internet    Real estate    Total 
EBITDA  $(42,926)  $213,221   $105,335   $275,630 
Interest expense   -    (2,089)   -    (2,089)
Taxes   -    (33,165)   (22,115)   (55,280)
Depreciation   -    (2,921)   -    (2,921)
Amortization   -    (7,321)   -    (7,321)
                     
Net income (loss)  $(42,926)  $167,725   $83,220   $208,019 

 

For the three months ended March 31, 2011

 

    Corporate    Internet    Real estate    Total 
EBITDA  $(33,115)  $348,091   $-   $314,976 
Interest expense   -    (864)   -    (864)
Taxes   -    276,756    -    276,756 
Depreciation   -    (2,921)   -    (2,921)
Amortization   -    (132,958)   -    (132,958)
                     
Net income (loss)  $(33,115)  $488,104   $-   $454,989 

 

Pursuant to the approval of the board of directors, the Company’s management believes that it is in the best interests of the Corporation to implement a program to purchase (“Purchase Program”), as investments, real estate with the Company’s surplus cash flows. Any real estate purchased pursuant to the Purchase Program will be held as investment until such time or times as the Board of Directors, in its discretion, may deem advisable to sell or otherwise dispose of the property.

 

The current real estate market presents the unique opportunity to acquire properties at deep discounts from fair market value with the potential for substantial profits. Management evaluates property as it becomes available with respect to the market value versus the acquisition cost, in addition to other conditions that could affect the resale value. Renovations are made as needed to maximize the market appeal and value prior to listing for sale.

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Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Management believes that there is sustainable cash flow potential for the near future in real estate and is actively pursuing the program. As of the balance sheet date, March 31, 2012, the Company has invested approximately $2,504,107 in surplus funds and is continuing the investing process.

 

THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO MARCH 31, 2011 

 

REVENUE

 

Total revenue for the three months ended March 31, 2012 increased by $253,439 or 24.2% from $1,048,615 for the three months ended March 31, 2011 to $1,302,054 for the same period in 2012. Internet sales decreased $234,436 or 22.4% from $1,048,615 for the three months ended March 31, 2011 to $814,179 for the same period in 2012. Real estate sales for the three months ended March 31, 2012 were $487,875 and were zero for the same period in 2011.

 

The decrease in Internet sales is attributed to the lack of acquisitions of Internet access and web hosting customers of ISPs. Although the Company continues to sign up new customers, competition from ubiquitous nationwide telecommunications and cable providers threatens significant and sustainable organic growth. To insure continued strength in revenues, the Company has acquired and plans to continue to acquire the assets of additional ISPs, folding them into its operations to provide future revenues. The continued success of the new real estate division is the result of providing a product with market appeal, sold at a discount while still providing a profitable revenue stream.

 

COST OF REVENUE

 

Total costs of revenue for the three months ended March 31, 2012 increased by $335,107 or 68.2% from $491,485 for the three months ended March 31, 2011 to $826,592 for the same period in 2012.  Cost of revenue Internet revenue decreased $47,433 or 9.7% from $491,485 for the three months ended March 31, 2011 to $444,052 for the same period in 2012 as a result of declining revenue. Cost of real estate revenue increased $382,540 or 100.0% from zero for the three months ended March 31, 2011 to $382,540 for the same period in 2012.

 

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SITESTAR CORPORATION

 

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

OPERATING EXPENSES

 

Operating expenses for the three months ended March 31, 2012 decreased $169,398 or 44.7% from $378,941 for the three months ended March 31, 2011 to $209,543 for the same period in 2012. This decrease is primarily due to lower amortization expense as a result of intangibles being fully amortized.  Amortization expense decreased $125,637 or 94.5% from $132,958 for the three months ended March 31, 2011 to $7,321 for the same period in 2012.

 

INCOME TAXES

 

For the three months ended March 31, 2012 and March 31, 2011 corporate income tax expenses (benefit) of $55,280 and $(276,756) were accrued.

 

INTEREST EXPENSE

 

Interest expense for the three months ended March 31, 2012 increased by $1,225 or 141.8% from $864 for the three months ended March 31, 2011 to $2,089 for the same period in 2012.  

 

MARCH 31, 2012 COMPARED TO DECEMBER 31, 2011

 

FINANCIAL CONDITION

 

Net accounts receivable increased $7,675 or 14.5% from $53,090 on December 31, 2011 to $60,765 on March 31, 2012.  Investment in real estate increased net $39,413 or 1.6% from $2,464,694 on December 31, 2011 to $2,504,107 on March 31, 2012. Accounts payable decreased by $42,690 or 60.0% from $71,136 on December 31, 2011 to $28,446 on March 31, 2012. Deferred revenue decreased by $5,013 or 1.1% from $461,640 on December 31, 2011 to $456,627 on March 31, 2012 representing decreased volume of customer accounts that have been prepaid. Long-term notes payable to shareholders decreased $13,113 or 13.7% from $95,958 on December 31, 2011 to $82,845 on March 31, 2012.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents totaled $170,149 and $17,268 at March 31, 2012 and at December 31, 2011. EBITDA was $275,630 for the three months ended March 31, 2012 as compared to $314,976 for the same period in 2011.

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SITESTAR CORPORATION

 

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

   2012   2011 
EBITDA for the three months ended March 31,  $275,630   $314,976 
Interest expense   (2,089)   (864)
Taxes   (55,280)   276,756 
Depreciation   (2,921)   (2,921)
Amortization   (7,321)   (132,958)
           
Net income for the three months ended March 31,  $208,019   $454,989 

  

The aging of accounts receivable as of March 31, 2012 and December 31, 2011 is as shown:

 

   2012   2011 
Current  $26,007    43%  $33,362    63%
30 < 60   13,862    23%   13,123    25%
60+   20,896    34%   6,605    12%
                     
Total  $60,765    100%  $53,090    100%

 

OFF-BALANCE SHEET TRANSACTIONS

 

The Company is not a party to any off-balance sheet transactions.

 

CRITICAL ACCOUNTING POLICY AND ESTIMATES

 

The Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses its condensed consolidated financial statements, which have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation.

 

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SITESTAR CORPORATION

 

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the condensed consolidated financial statements included in this quarterly report.

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

None.

 

Item 4.    Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures:

 

Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of March 31, 2012. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and on a timely basis.

 

Changes in Internal Control over Financial Reporting:

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. .

 

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SITESTAR CORPORATION

 

PART II.  OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

None

 

Item 1A.   Risk Factors

 

Not required for small business.

 

Item 2.     Unregistered Sales of Equity Securities and use of Proceeds

 

None.

 

  Item 3.     Defaults Upon Senior Securities

 

None.

 

Item 4.     Submission of Matters to a Vote of Security Holders

 

None.

 

Item 5.     Other Information

 

None

 

Item 6.     Exhibits

 

(a)The following are filed as exhibits to this form 10-Q:

 

31.1Certification of President Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2Certification of Chief Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

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SITESTAR CORPORATION

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   SITESTAR CORPORATION
     
Date: May 14, 2012    
. By: /s/ Frank Erhartic, Jr.
    Frank Erhartic, Jr.
    President, Chief Executive Officer
    (Principal Executive Officer and
    Principal Accounting Officer)
     
Date: May 14, 2012    
 By: /s/ Daniel A. Judd.
    Daniel A. Judd
    Chief Financial Officer
    (Principal Financial Officer)

 

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