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SITESTAR CORP - 10-Q - 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, 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. Table of Contents -10- Results of operations The following tables show financial data for the three months ended March 31, 2013. Corporate Internet Real estate Total Revenue $ - $ 719,899 $ 15,870 $ 735,769 Cost of revenue - 350,973 3,076 354,049 Gross profit - 368,926 12,794 381,720 Operating expenses 37,125 214,319 - 251,444 Income (loss) from operations (37,125 ) 154,607 12,794 130,276 Other income (expense) - (827 ) - (827 ) Income (loss) before income taxes (37,125 ) 153,780 12,794 129,449 Income taxes (expense) benefit - (47,626 ) - (47,626 ) Net income (loss) $ (37,125 ) $ 106,154 $ 12,794 $ 81,823 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 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, 2013 and 2012. Table of Contents -11- For the three months ended March 31, 2013 Corporate Internet Real estate Total EBITDA $ (37,125 ) $ 162,053 $ 12,794 $ 137,722 Interest expense - (1,330 ) - (1,330 ) Taxes - (47,626 ) - (47,626 ) Depreciation - (1,321 ) - (1,321 ) Amortization - (5,622 ) - (5,622 ) Net income (loss) $ (37,125 ) $ 106,154 $ 12,794 $ 81,823 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 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, March 31, 2013, the Company has invested approximately $2,991,994 in surplus funds and is continuing the investing process. THREE MONTHS ENDED MARCH 31, 2013 COMPARED TO MARCH 31, 2012 REVENUE Total revenue for the three months ended March 31, 2013 decreased by $571,298 or 43.7% from $1,307,067 for the three months ended March 31, 2012 to $735,769 for the same period in 2013. Internet sales decreased $99,293 or 12.1% from $819,192 for the three months ended March 31, 2012 to $719,899 for the same period in 2013. Real estate sales decreased $472,005 or 96.7% from $487,875 for the three months ended March 31, 2012 to $15,870 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. Table of Contents -12- COST OF REVENUE Total costs of revenue for the three months ended March 31, 2013 decreased by $472,543 or 57.2% from $826,592 for the three months ended March 31, 2012 to $354,049 for the same period in 2013. Cost of Internet revenue decreased $93,079 or 21.0% from $444,052 for the three months ended March 31, 2012 to $350,973 for the same period in 2013 as a result of declining revenue. Cost of real estate revenue decreased $379,464 or 99.2% from $382,540 for the three months ended March 31, 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 three months ended March 31, 2013 increased $36,888 or 17.2% from $214,556 for the three months ended March 31, 2012 to $251,444 for the same period in 2013. This increase is primarily due to bad debt expense. Bad debt expense increased $55,695 from $(18,129) for the three months ended March 31, 2012 to $37,566 for the same period in 2013. INCOME TAXES For the three months ended March 31, 2013 and March 31, 2012 corporate income tax expenses of $47,626 and $99,949 were accrued. INTEREST EXPENSE Interest expense for the three months ended March 31, 2013 decreased by $759 or 36.3% from $2,089 for the three months ended March 31, 2012 to $1,330 for the same period in 2013. MARCH 31, 2013 COMPARED TO DECEMBER 31, 2012 FINANCIAL CONDITION Net accounts receivable increased $52,439 or 172.0% from $30,488 on December 31, 2012 to $82,927 on March 31, 2013. This increase is due to back billing for a wholesale internet customer. Investment in real estate increased net $73,731 or 2.5% from $2,918,263 on December 31, 2012 to $2,991,994 on March 31, 2013. Accounts payable increased by $8,999 or 27.4% from $32,879 on December 31, 2012 to $41,878 on March 31, 2013. Deferred revenue decreased by $31,670 or 8.2% from $387,258 on December 31, 2012 to $355,588 on March 31, 2013 representing decreased volume of customer accounts that have been prepaid. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $135,979 and $148,590 at March 31, 2013 and at December 31, 2012. EBITDA was $137,722 for the three months ended March 31, 2013 as compared to $275,630 for the same period in 2012. 2013 2012 EBITDA For the three months ended March 31, $ 137,722 $ 275,630 Interest Expense (1,330 ) (2,089 ) Taxes (47,626 ) (99,949 ) Depreciation (1,321 ) (2,921 ) Amortization (5,622 ) (7,321 )Net income for the three months ended March 31, $ 81,823 $ 163,350 Table of Contents -13- The aging of accounts receivable as of March 31, 2013 and December 31, 2012 is as shown: 2013 2012 Current $ 51,699 62 % $ 26,007 43 % 30 < 60 4,364 5 % 13,862 23 % 60+ 26,864 33 % 20,896 34 % Total $ 82,927 100 % $ 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. |