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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 20 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 21 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 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 - 715,773 139,850 855,623 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 Table of Contents 22 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 six months ended June 30, 2011. Corporate Internet Real estate Total Revenue $ - $ 2,058,576 $ - $ 2,058,576 Cost of revenue - 986,469 - 986,469 Gross profit - 1,072,107 - 1,072,107 Operating expenses 59,338 698,854 - 758,192 Income (loss) from operations (59,338 ) 373,253 - 313,915 Other income (expense) - (2,758 ) - (2,758 ) Income (loss) before income taxes (59,338 ) 370,495 - 311,157 Income taxes (expense) benefit - (127,850 ) - (127,850 ) Net income (loss) $ (59,338 ) $ 242,645 $ - $ 183,307 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, 2012 and 2011. Table of Contents 23 SITESTAR CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued 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 For the six months ended June 30, 2011 Corporate Internet Real estate Total EBITDA $ (59,338 ) $ 605,903 $ - $ 546,565 Interest expense - (3,082 ) - (3,082 ) Taxes - (127,850 ) - (127,850 ) Depreciation - (6,414 ) - (6,414 ) Amortization - (225,912 ) - (225,912 ) Net income (loss) $ (59,338 ) $ 242,645 $ - $ 183,307 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 24 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, June 30, 2012, the Company has invested approximately $2,663,183 in surplus funds and is continuing the investing process. SIX MONTHS ENDED JUNE 30, 2012 COMPARED TO JUNE 30, 2011 REVENUE Total revenue for the six months ended June 30, 2012 increased by $77,245 or 3.8% from $2,058,576 for the six months ended June 30, 2011 to $2,135,821 for the same period in 2012. Internet sales decreased $505,143 or 24.5% from $2,058,576 for the six months ended June 30, 2011 to $1,553,433 for the same period in 2012. Real estate sales for the six months ended June 30, 2012 were $582,388 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 six months ended June 30, 2012 increased by $293,729 or 29.8% from $986,469 for the six months ended June 30, 2011 to $1,280,198 for the same period in 2012. Cost of Internet revenue decreased $148,809 or 15.1% from $986,469 for the six months ended June 30, 2011 to $837,660 for the same period in 2012 as a result of declining revenue. Cost of real estate revenue increased $442,538 or 100.0% from zero for the six months ended June 30, 2011 to $442,538 for the same period in 2012. Table of Contents 25 SITESTAR CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued OPERATING EXPENSES Operating expenses for the six months ended June 30, 2012 decreased $329,904 or 43.5% from $758,192 for the six months ended June 30, 2011 to $428,288 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 $211,298 or 93.5% from $225,912 for the six months ended June 30, 2011 to $14,614 for the same period in 2012. INCOME TAXES For the six months ended June 30, 2012 and June 30, 2011 corporate income tax expenses of $160,807 and $127,850 were incurred. INTEREST EXPENSE Interest expense for the six months ended June 30, 2012 increased by $967 or 31.4% from $3,082 for the six months ended June 30, 2011 to $4,049 for thesame period in 2012. JUNE 30, 2012 COMPARED TO DECEMBER 31, 2011 FINANCIAL CONDITION Net accounts receivable decreased $8,183 or 15.4% from $53,090 on December 31, 2011 to $44,907 on June 30, 2012. Investment in real estate increased net $198,489 or 8.1% from $2,464,694 on December 31, 2011 to $2,663,183 on June 30, 2012. Accounts payable decreased by $62,222 or 87.5% from $71,136 on December 31, 2011 to $8,914 on June 30, 2012. Deferred revenue decreased by $27,547 or 6.0% from $461,640 on December 31, 2011 to $434,093 on June 30, 2012 representing decreased volume of customer accounts that have been prepaid. Long-term notes payable to shareholders decreased $45,205 or 47.1% from $95,958 on December 31, 2011 to $50,753 on June 30, 2012. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $135,538 and $17,268 at June 30, 2012 and at December 31, 2011. EBITDA was $448,101 for the six months ended June 30, 2012 as compared to $546,565 for the same period in 2011. Table of Contents 26 SITESTAR CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued The aging of accounts receivable as of June 30, 2012 and December 31, 2011 is as shown: 2012 2011 Current $ 23,161 52 % $ 33,362 63 % 30 < 60 12,611 28 % 13,123 25 % 60+ 9,135 20 % 6,605 12 % Total $ 44,907 100 % $ 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. 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. Table of Contents 27 SITESTAR CORPORATION |