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SITESTAR CORP - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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. Table of Contents 18 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. Table of Contents 19 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 $ - $ 819,192 $ 487,875 $ 1,307,067 Cost of revenue - 444,052 382,540 826,592 Gross profit - 370,127 110,348 480,475 Operating expenses 42,926 171,630 - 214,556 Income (loss) from operations (42,926 ) 198,497 110,348 265,919 Other income (expense) - (2,620 ) - (2,620 ) Income (loss) before income taxes (42,926 ) 195,877 110,348 263,299 Income taxes (expense) benefit - (59,964 ) (39,985 ) (99,949 ) Net income (loss) $ (42,926 ) $ 135,913 $ 70,363 $ 163,350 Table of Contents 20 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 $ - $ 1,054,518 $ - $ 1,054,518 Cost of revenue - 491,485 - 491,485 Gross profit - 563,033 - 563,033 Operating expenses 33,115 351,729 - 384,844 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 - (67,658 ) - (67,658 ) Net income (loss) $ (33,115 ) $ 143,690 $ - $ 110,575 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. Table of Contents 21 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 ) $ 208,208 $ 110,348 $ 275,630 Interest expense - (2,089 ) - (2,089 ) Taxes - (59,964 ) (39,985 ) (99,949 ) Depreciation - (2,921 ) - (2,921 ) Amortization - (7,321 ) - (7,321 ) Net income (loss) $ (42,926 ) $ 135,913 $ 70,363 $ 163,350 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 - (67,658 ) - (67,658 ) Depreciation - (2,921 ) - (2,921 ) Amortization - (132,958 ) - (132,958 ) Net income (loss) $ (33,115 ) $ 143,690 $ - $ 110,575 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. Table of Contents 22 SITESTAR CORPORATION 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 $252,549 or 23.9% from $1,054,518 for the three months ended March 31, 2011 to $1,307,067 for the same period in 2012. Internet sales decreased $235,326 or 22.3% from $1,054,518 for the three months ended March 31, 2011 to $819,192 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. Table of Contents 23 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 $170,288 or 44.2% from $384,844 for the three months ended March 31, 2011 to $214,556 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 of $99,949 and $67,658 were incurred. 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 forthe 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. Table of Contents 24 SITESTAR CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued 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. Table of Contents 25 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. |