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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 nine months ended September 30, 2012. Corporate Internet Real estate Total Revenue $ - $ 2,241,611 $ 617,274 $ 2,858,885 Cost of revenue - 1,208,176 468,207 1,676,383 Gross profit - 1,033,435 149,067 1,182,502 Operating expenses 72,981 520,192 - 593,173 Income (loss) from operations (72,981 ) 513,243 149,067 589,329 Other income (expense) - (9,152 ) - (9,152 ) Income (loss) before income taxes (72,981 ) 504,091 149,067 580,177 Income taxes (expense) benefit - (191,795 ) (28,950 ) (220,745 ) Net income (loss) $ (72,981 ) $ 312,296 $ 120,117 $ 359,432 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 nine months ended September 30, 2011. Corporate Internet Real estate Total Revenue $ - $ 2,952,747 $ 789,411 $ 3,742,158 Cost of revenue - 1,385,247 641,266 2,026,513 Gross profit - 1,567,500 148,145 1,715,645 Operating expenses 8,443 1,025,425 - 1,033,868 Income (loss) from operations (8,443 ) 542,075 148,145 681,777 Other income (expense) - (6,431 ) - (6,431 ) Income (loss) before income taxes (8,443 ) 535,644 148,145 675,346 Income taxes (expense) benefit - (200,129 ) (56,233 ) (256,362 ) Net income (loss) $ (8,443 ) $ 335,515 $ 91,912 $ 418,984 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 nine months ended September 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 nine months ended September 30, 2012 Corporate Internet Real estate Total EBITDA $ (72,981 ) $ 540,166 $ 149,067 $ 616,252 Interest expense - (5,404 ) - (5,404 ) Taxes - (191,795 ) (28,950 ) (220,745 ) Depreciation - (8,764 ) - (8,764 ) Amortization - (21,907 ) - (21,907 ) Net income (loss) $ (72,981 ) $ 312,296 $ 120,117 $ 359,432 For the nine months ended September 30, 2011 Corporate Internet Real estate Total EBITDA $ (8,443 ) $ 838,991 $ 148,145 $ 978,693 Interest expense - (7,962 ) - (7,962 ) Taxes - (200,129 ) (56,233 ) (256,362 ) Depreciation - (11,050 ) - (11,050 ) Amortization - (284,335 ) - (284,335 ) Net income (loss) $ (8,443 ) $ 335,515 $ 91,912 $ 418,984 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, September 30, 2012, the Company has invested approximately $2,900,149 in surplus funds and is continuing the investing process. NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO SEPTEMBER 30, 2011 REVENUE Total revenue for the nine months ended September 30, 2012 decreased by $883,273 or 23.6% from $3,742,158 for the nine months ended September 30, 2011 to $2,858,885 for the same period in 2012. Internet sales decreased $711,136 or 24.1% from $2,952,747 for the nine months ended September 30, 2011 to $2,241,611 for the same period in 2012. Real estate sales decreased $172,137 or 21.8% from $789,411 for the nine months ended September 30, 2011 to $617,274 for the same period in 2012. 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 nine months ended September 30, 2012 decreased by $350,130 or 17.3% from $2,026,513 for the nine months ended September 30, 2011 to $1,676,383 for the same period in 2012. Cost of Internet revenue decreased $177,071 or 12.8% from $1,385,247 for the nine months ended September 30, 2011 to $1,208,176 for the same period in 2012 as a result of declining revenue. Cost of real estate revenue decreased $173,059 or 27.0% from $641,266 for the nine months ended September 30, 2011 to $468,207 for the same period in 2012. Cost of real estate revenue is a direct result of lower sales while the cost of revenue as a percentage of sales decreased 5.3% from 81.2% for the nine months ended September 30, 2011 to 75.9% 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 nine months ended September 30, 2012 decreased $440,695 or 42.6% from $1,033,868 for the nine months ended September 30, 2011 to $593,173 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 $262,428 or 92.3% from $284,335 for the nine months ended September 30, 2011 to $21,907 for the same period in 2012. INCOME TAXES For the nine months ended September 30, 2012 and September 30, 2011 corporate income tax expenses of $220,745 and $256,362 were incurred. INTEREST EXPENSE Interest expense for the nine months ended September 30, 2012 decreased by $2,558 or 32.1% from $7,962 for the nine months ended September 30, 2011 to $5,404 for the same period in 2012. SEPTEMBER 30, 2012 COMPARED TO DECEMBER 31, 2011 FINANCIAL CONDITION Net accounts receivable decreased $15,809 or 29.8% from $53,090 on December 31, 2011 to $37,281 on September 30, 2012. Investment in real estate increased net $435,455 or 17.7% from $2,464,694 on December 31, 2011 to $2,900,149 on September 30, 2012. Accounts payable decreased by $25,567 or 35.9% from $71,136 on December 31, 2011 to $45,569 on September 30, 2012. Deferred revenue decreased by $49,650 or 10.8% from $461,640 on December 31, 2011 to $411,990 on September 30, 2012 representing decreased volume of customer accounts that have been prepaid. Long-term notes payable to shareholders decreased $45,685 or 47.6% from $95,958 on December 31, 2011 to $50,273 on September 30, 2012. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $45,636 and $17,268 at September 30, 2012 and at December 31, 2011. EBITDA was $616,252 for the nine months ended September 30, 2012 as compared to $978,693 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 September 30, 2012 and December 31, 2011 is as shown: 2012 2011 Current $ 21,074 57 % $ 33,362 63 % 30 < 60 8,522 23 % 13,123 25 % 60+ 7,685 20 % 6,605 12 % Total $ 37,281 100 % $ 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 27 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. |