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 June 30, 2013

 

[  ]    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 August 14, 2013, 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			2
Item 1.  Financial Statements (Unaudited)			2
Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012			3
Condensed Consolidated Statements of Income for the three months ended June 30, 2013 and 2012			4
Condensed Consolidated Statements of Income for the six months ended June 30, 2013 and 2012			5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012			6
Notes to Condensed Consolidated Financial Statements			7-12
Item 2.   Management's Discussion and Analysis			13-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			17
Item 4.   Controls and Procedures			17-18
Part II.  OTHER INFORMATION			19
Item 1.  Legal Proceedings			19
Item 1A. Risk Factors			19
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds			19
Item 3.  Defaults Upon Senior Securities			19
Item 4.  Submission of Matters to a Vote of Security Holders			19
Item 5.  Other Information			19
Item 6.  Exhibits			19
SIGNATURES			20

PART I. FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2013 AND DECEMBER 31, 2012

 

		June 30, 2013 (Unaudited)				December 31, 2012
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	69,146			$	148,590
Accounts receivable, net of allowance of $1,648 and $1,614			21,604				30,488
Prepaid expenses			43,896				50,411
Real estate, at cost			3,124,514				2,918,263
Total current assets			3,259,160				3,147,752
PROPERTY AND EQUIPMENT, net			146,314				148,957
CUSTOMER LIST, net of accumulated amortization of $12,320,673 and $12,315,218			—				5,455
GOODWILL, net of impairment			1,288,559				1,288,559
DEFERRED TAX ASSETS			146,639				209,699
OTHER ASSETS			217,761				218,097
TOTAL ASSETS		$	5,058,433			$	5,018,519
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	17,210			$	32,879
Accrued expenses			38,825				45,074
Deferred revenue			345,630				387,258
Notes payable, current portion			900,615				900,615
Total current liabilities			1,302,280				1,365,826
NOTES PAYABLE – STOCKHOLDERS, less current portion			50,280				50,280
TOTAL LIABILITIES			1,352,560				1,416,106
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 2013 and 2012 and 74,085,705 shares outstanding in 2013 and 2012			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			(9,476,882	)			(9,580,342	)
Total stockholders’ equity			3,705,873				3,602,413
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	5,058,433			$	5,018,519
See the accompanying notes to the unaudited condensed consolidated financial statements.

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012

(UNAUDITED)

 

			June 30, 2013				June 30, 2012
REVENUE
Internet		$	594,274			$	743,066
Real estate			15,122				85,688
Total Revenues			609,396				828,754
COST OF REVENUE
Internet			312,454				393,609
Real estate			—				59,997
Total Cost Of Revenues			312,454				453,606
GROSS PROFIT			296,942				375,148
OPERATING EXPENSES:
Selling general and administrative expenses			258,653				213,733
INCOME FROM OPERATIONS			38,289				161,415
OTHER INCOME (EXPENSES):
Other income (expenses)			1,221				842
Interest expense			(1,141	)			(1,960	)
TOTAL OTHER INCOME (EXPENSE)			80				(1,118	)
INCOME BEFORE INCOME TAXES			38,369				160,297
INCOME TAXES (EXPENSE) BENEFIT			(16,731	)			(60,858	)
NET INCOME		$	21,638			$	99,439
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE		$	0.00			$	0.00
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED			74,085,705				74,085,705
See the accompanying notes to the unaudited condensed consolidated financial statements.

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(UNAUDITED)

 

			June 30, 2013				June 30, 2012
REVENUE
Internet		$	1,265,375			$	1,553,433
Real estate			30,992				582,388
Total Revenues			1,296,367				2,135,821
COST OF REVENUE
Internet			663,426				837,660
Real estate			3,076				442,538
Total Cost of Revenues			666,502				1,280,198
GROSS PROFIT			629,865				855,623
OPERATING EXPENSES:
Selling general and administrative expenses			461,300				428,288
INCOME FROM OPERATIONS			168,565				427,335
OTHER INCOME (EXPENSES):
Other income (expenses)			1,723				310
Interest expense			(2,471	)			(4,049	)
TOTAL OTHER INCOME (EXPENSE)			(748	)			(3,739	)
INCOME BEFORE INCOME TAXES			167,817				423,596
INCOME TAXES (EXPENSE) BENEFIT			(64,537	)			(160,807	)
NET INCOME		$	103,460			$	262,789
BASIC AND DILUTED EARNINGS PER SHARE		$	0.00			$	0.00
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED			74,085,705				74,085,705
See the accompanying notes to the unaudited condensed consolidated financial statements.

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(UNAUDITED) 

			June 30, 2013				June 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	103,460			$	262,789
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense			8,431				20,456
Allowance for doubtful accounts			34				(24	)
Deferred income taxes			63,060				160,807
Increase in accounts receivable			8,850				8,207
(Increase) decrease in prepaid expenses			6,515				(14,906	)
Increase in real estate			(206,251	)			(198,488	)
Decrease in accounts payable			(15,669	)			(62,222	)
Increase (decrease) in accrued expenses			(6,249	)			14,403
Decrease in deferred revenue			(41,628	)			(27,547	)
Net cash provided by (used in) operating activities			(79,447	)			163,475
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in other assets held for resale			3				—
Net cash provided by investing activities			3				—
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable – stockholders			—				(45,205	)
Net cash provided by (used in) financing activities			—				(45,205	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(79,444	)			118,270
CASH AND CASH EQUIVALENTS – BEGINNING OF  PERIOD			148,590				17,268
CASH AND CASH EQUIVALENTS – END OF  PERIOD		$	69,146			$	135,538
See the accompanying notes to the unaudited condensed consolidated financial statements.

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

During the six months ended June 30, 2013 and 2012, the Company used cash to pay income taxes of $1,696 and $64,000 and paid interest expense of approximately $2,471 and $4,049, respectively.

 

 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, 2012 included in the Company’s Annual Report on Form 10-K.  The results for the six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.

 

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 June 30, 2013 and 2012:

		2013				2012
Net income available to common shareholders		$	21,638			$	99,439
Weighted average number of common shares			74,085,705				74,085,705
Basic and diluted income per share		$	0.00			$	0.00

 

For the six months ended June 31, 2013 and 2012:

			2013				2012
Net income available to common shareholders		$	103,460			$	262,789
Weighted average number of common shares			74,085,705				74,085,705
Basic and diluted income per share		$	0.00			$	0.00

 

NOTE 3 – COMMON STOCK

 

During the six months ended June 30, 2013, 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 June 30, 2013 and 2012:

 

June 30, 2013			Corporate				Real estate				Internet				Consolidated
Revenue		$	—			$	15,122			$	594,274			$	609,396
Operating income (loss)		$	(50,990	)		$	15,122			$	74,157			$	38,289
Depreciation and amortization		$	—			$	—			$	1,488			$	1,488
Interest expense		$	—			$	—			$	1,141			$	1,141
Real estate		$	—			$	3,124,514			$	—			$	3,124,514
Intangible assets		$	—			$	—			$	1,288,809			$	1,288,809
Total assets		$	—			$	3,124,514			$	1,933,919			$	5,058,433

 

June 30, 2012			Corporate				Real estate				Internet				Consolidated
Revenue		$	—			$	85,688			$	743,066			$	828,754
Operating income (loss)		$	(19,647	)		$	25,691			$	155,371			$	161,415
Depreciation and amortization		$	—			$	—			$	10,214			$	10,214
Interest expense		$	—			$	—			$	1,960			$	1,960
Real estate		$	—			$	2,663,183			$	—			$	2,663,183
Intangible assets		$	—			$	—			$	1,309,183			$	1,309,183
Total assets		$	—			$	2,663,183			$	2,276,379			$	4,939,562

 

Summarized financial information concerning the Company's reportable segments is shown in the following tables as of and for the six months ended June 30, 2013 and 2012:

 

June 30, 2013			Corporate				Real estate				Internet				Consolidated
Revenue		$	—			$	30,992			$	1,265,375			$	1,296,367
Operating income (loss)		$	(88,115	)		$	27,916			$	228,764			$	168,565
Depreciation and amortization		$	—			$	—			$	8,431			$	8,431
Interest expense		$	—			$	—			$	2,471			$	2,471
Real estate		$	—			$	3,124,514			$	—			$	3,124,514
Intangible assets		$	—			$	—			$	1,288,809			$	1,288,809
Total assets		$	—			$	3,124,514			$	1,933,919			$	5,058,433

 

June 30, 2012			Corporate				Real estate				Internet				Consolidated
Revenue		$	—			$	582,388			$	1,553,433			$	2,135,821
Operating income (loss)		$	(62,573	)		$	139,850			$	350,058			$	427,335
Depreciation and amortization		$	—			$	—			$	20,456			$	20,456
Interest expense		$	—			$	—			$	4,049			$	4,049
Real estate		$	—			$	2,663,183			$	—			$	2,663,183
Intangible assets		$	—			$	—			$	1,309,183			$	1,309,183
Total assets		$	—			$	2,663,183			$	2,276,379			$	4,939,562

 

NOTE 5 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

No new accounting pronouncement issued or effective during the six months ended June 30, 2013 has had or is expected to have a material impact on the condensed consolidated financial statements.

 

NOTE 6 – ACQUISITIONS

 

None

 

NOTE 7 -- PROVISION FOR INCOME TAXES

 

The provision for federal and state income taxes for the three months ended June 30, 2013 and 2012 included the following: 

 

		2013				2012
Current provision:
Federal			—				—
State			1,696				—
Deferred provision:
Federal			12,537				51,729
State			2,498				9,129
Total income tax provision			16,731				60,858

 

The provision for federal and state income taxes for the six months ended June 30, 2013 and 2012 included the following: 

 

		2013				2012
Current provision:
Federal		$	—			$	—
State			1,696				—
Deferred provision:
Federal			52,635				135,390
State			10,026				25,417
Total income tax provision		$	64,357			$	160,807

 

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 June 30, 2013 and December 31, 2012 are as follows:

 

		2013				2012
Accounts receivable		$	1,618			$	1,614
Amortization of Intangible assets			2,567,268				2,630,332
Less valuation allowance			(2,422,247	)			(2,422,247	)
Deferred tax asset		$	146,639			$	209,699

 

At June 30, 2013 and December 31, 2012, 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 2009 through 2012 remain open to examination.

 

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 $5,788 and $14,614 for the six months ended June, 30, 2013 and 2012.

 

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.

 

NOTE 10 - NOTES PAYABLE

 

Notes payable at June 30, 2013 and December 31, 2012 consist of the following:

 

		June 30, 2013				December 31, 2012
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  June 30, 2014			$	900,615
	Twelve months ending  June 30, 2015				—
	Twelve months ending  June 30, 2016				—
	Twelve months ending  June 30, 2017				—
	Twelve months ending  June 30, 2018				—
	Thereafter				—
	Total			$	900,615

 

NOTE 11 - NOTES PAYABLE – STOCKHOLDERS

 

Notes payable - stockholders at June 30, 2013 and December 31, 2012 consist of the following: 

 

		2013				2012
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, 2020.		$	280			$	280
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, 2020.			50,000				50,000
Totals			50,280				50,280
Less current portion			—				—
Long-term portion		$	50,280			$	50,280

The future principal maturities of these notes are as follows:

 

	Twelve months ending June 30, 2014			$	—
	Twelve months ending June 30, 2015				—
	Twelve months ending June 30, 2016				—
	Twelve months ending June 30, 2017				—
	Twelve months ending June 30, 2018				—
	Twelve months ending June 30, 2019				—
	Twelve months ending June 30, 2020				50,280
	Total			$	50,280

 

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, 2012 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.

  

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.

 

Results of operations

 

The following tables show financial data for the six months ended June 30, 2013.

 

			Corporate				Internet				Real estate				Total
Revenue		$	—			$	1,265,375			$	30,992			$	1,296,367
Cost of revenue			—				663,426				3,076				666,502
Gross profit			—				601,949				27,916				629,865
Operating expenses			88,115				373,185				—				461,300
Income (loss) from operations			(88,115	)			228,764				27,916				168,565
Other income (expense)			—				(748	)			—				(748	)
Income (loss) before income taxes			(88,115	)			228,016				27,916				167,817
Income taxes (expense) benefit			—				(4,357	)			—				(64,357	)
Net income (loss)		$	(88,115	)		$	163,659			$	27,916			$	103,460

 

The following tables show financial data for the six months ended June 30, 2012.

 

			Corporate				Internet				Real estate				Total
Revenue		$	—			$	1,553,433			$	582,388			$	2,135,821
Cost of revenue			—				837,660				442,538				1,280,198
Gross profit			—				715,773				139,850				885,623
Operating expenses			62,573				365,715				—				428,288
Income (loss) from operations			(62,573	)			350,058				139,850				427,335
Other income (expense)			—				(3,739	)			—				(3,739	)
Income (loss) before income taxes			(62,573	)			346,319				139,850				423,596
Income taxes (expense) benefit			—				(107,719	)			(53,088	)			(160,807	)
Net income (loss)		$	(62,573	)		$	238,600			$	86,762			$	262,789

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 six months ended June 30, 2013 and 2012.

  

For the six months ended June 30, 2013			Corporate				Internet				Real estate				Total
EBITDA		$	(88,115	)		$	238,918			$	27,916			$	178,719
Interest expense			—				(2,471	)			—				(2,471	)
Taxes			—				(64,357	)			—				(64,357	)
Depreciation			—				(2,643	)			—				(2,643	)
Amortization			—				(5,788	)			—				(5,788	)
Net income (loss)		$	(88,115	)		$	163,659			$	27,916			$	103,460

  

For the six months ended June 30, 2012			Corporate				Internet				Real estate				Total
EBITDA		$	(62,573	)		$	370,824			$	139,850			$	448,101
Interest expense			—				(4,049	)			—				(4,049	)
Taxes			—				(107,719	)			(53,088	)			(160,807	)
Depreciation			—				(5,842	)			—				(5,842	)
Amortization			—				(14,614	)			—				(14,614	)
Net income (loss)		$	(62,573	)		$	238,600			$	86,762			$	262,789

 

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.

 

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, June 30, 2013, the Company has invested approximately $3,124,514 in surplus funds and is continuing the investing process.

 

SIX MONTHS ENDED JUNE 30, 2013 COMPARED TO JUNE 30, 2012 

 

REVENUE

 

Total revenue for the six months ended June 30, 2013 decreased by $839,454 or 39.3% from $2,135,821 for the six months ended June 30, 2012 to $1,296,367 for the same period in 2013. Internet sales decreased $288,058 or 18.5% from $1,553,433 for the six months ended June 30, 2012 to $1,265,375 for the same period in 2013. Real estate sales decreased $551,396 or 94.7% from $582,388 for the six months ended June 30, 2012 to $30,992 for the same period in 2013.

 

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 new real estate division while sales are down is preparing properties for the market and is still providing a profitable revenue stream.

  

COST OF REVENUE

 

Total costs of revenue for the six months ended June 30, 2013 decreased by $613,696 or 47.9% from $1,280,198 for the six months ended June 30, 2012 to $666,502 for the same period in 2013.  Cost of Internet revenue decreased $174,234 or 20.8% from $837,660 for the six months ended June 30, 2012 to $663,426 for the same period in 2013 as a result of declining revenue. Cost of real estate revenue decreased $439,462 or 99.3% from $442,538 for the six months ended June 30, 2012 to $3,076 for the same period in 2013. Cost of real estate revenue is a direct result of lower sales.

 

OPERATING EXPENSES

 

Operating expenses for the six months ended June 30, 2013 increased $33,012 or 7.7% from $428,288 for the six months ended June 30, 2012 to $461,300 for the same period in 2013. This increase is primarily due to bad debt expense. Bad debt expense increased $31,740 from $11,296 for the six months ended June 30, 2012 to $43,036 for the same period in 2013.

 

INCOME TAXES

 

For the six months ended June 30, 2013 and June 30, 2012 corporate income tax expenses of $64,357 and $160,807 were accrued.

 

INTEREST EXPENSE

 

Interest expense for the six months ended June 30, 2013 decreased by $1,578 or 39.0% from $4,049 for the six months ended June 30, 2012 to $2,471 for the same period in 2013.  

 

JUNE 30, 2013 COMPARED TO DECEMBER 31, 2012

 

FINANCIAL CONDITION

 

Net accounts receivable decreased $8,884 or 29.1% from $30,488 on December 31, 2012 to $21,604 on June 30, 2013.  Investment in real estate increased net $206,251 or 7.1% from $2,918,263 on December 31, 2012 to $3,124,514 on June 30, 2013. Accounts payable decreased by $15,669 or 47.7% from $32,879 on December 31, 2012 to $17,210 on June 30, 2013. Deferred revenue decreased by $41,628 or 10.8% from $387,258 on December 31, 2012 to $345,630 on June 30, 2013 representing decreased volume of customer accounts that have been prepaid.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents totaled $69,146 and $148,590 at June 30, 2013 and at December 31, 2012. EBITDA was $178,719 for the six months ended June 30, 2013 as compared to $448,101 for the same period in 2012.

 

		2013				2012
EBITDA for the six months ended June 30,			$ 178,719			$	448,101
Interest expense			(2,471	)			(4,049	)
Taxes			(64,357	)			(160,807	)
Depreciation			(2,643	)			(5,842	)
Amortization			(5,788	)			(14,614	)
Net income for the six months ended June 30,		$	103,460			$	262,789

 

The aging of accounts receivable as of June 30, 2013 and December 31, 2012 is as shown:

 

				June 30, 2013								December 31, 2012
	Current			$	11,027				51	%		$	19,319				63	%
	30 < 60				7,388				34	%			6,680				22	%
	60+				3,189				15	%			4,489				15	%
	Total			$	21,604				100	%		$	30,488				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.

 

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 June 30, 2013. 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.

 

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2013, because of the material weaknesses in internal control over financial reporting discussed in the fiscal 2012 Form 10-K.  The material weaknesses related to an overall lack of segregation of duties and the improper recording of revenues, deferred revenues, and income tax related accounts.

 

As of April 15, 2013, the Company began evaluating the aforementioned weaknesses and has partially remediated the deficiencies with additional procedures and controls including additional personnel training.  Pursuant to the material weakness related to recognition of deferred revenues, we have made changes to our revenue accounting policies and are now properly recording deferred revenue adjustments through our revenue account as they are earned. Pursuant to the material weakness related to calculation of income tax related accounts, we have reviewed all inputs and calculations to ensure accuracy. Due to limited staffing we are currently unable to remediate the material weakness related to segregation of duties.

 

Because of the material weaknesses in internal control over financial reporting described in the fiscal 2012 Form 10-K, we performed additional analyses and other post-closing procedures to ensure that our condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management, including our Chief Executive Officer and Chief Financial Officer, believes the condensed consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

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 June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the changes in our internal controls discussed above in order to remediate material weaknesses.

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:

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

  

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: August 14, 2013

By:_/s/ Frank Erhartic, Jr.

Frank Erhartic, Jr.

President, Chief Executive Officer

(Principal Executive Officer and

Principal Accounting Officer)

 

Date: August 14, 2013

By:_/s/ Daniel A. Judd.

Daniel A. Judd

Chief Financial Officer

(Principal Financial Officer)