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EX-32 - EXHIBIT 32 - ENTERPRISE DIVERSIFIED, INC.v239540_ex32.htm
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EXCEL - IDEA: XBRL DOCUMENT - ENTERPRISE DIVERSIFIED, INC.Financial_Report.xls
 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 September 30, 2011
 
o 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 o

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 o Accelerated Filer o
Non-Accelerated Filer o
(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    o No

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o No x

As of November 14, 2011, 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
     
         
Item 1.
Financial Statements (Unaudited)
     
         
 
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010
    3 - 4  
           
 
Condensed Consolidated Statements of Income for the three months ended September 30, 2011 and 2010
    5  
           
 
Condensed Consolidated Statements of Income for the nine months ended September 30, 2011 and 2010
    6  
           
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010
    7 - 8  
           
 
Notes to Condensed Consolidated Financial Statements
    9 - 19  
           
Item 2.
Management's Discussion and Analysis
    20 - 26  
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    26  
           
Item 4.
Controls and Procedures
    26  
           
Part II.
OTHER INFORMATION
    27  
           
Item 1.
Legal Proceedings
    27  
           
Item 1A.
Risk Factors
    27  
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    27  
           
Item 3.
Defaults Upon Senior Securities
    27  
           
Item 4.
Submission of Matters to a Vote of Security Holders
    27  
           
Item 5.
Other Information
    27  
           
Item 6.
Exhibits
    27  
           
SIGNATURES
    28  
 
 
2

 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2011 AND DECEMBER 31, 2010
 
ASSETS
 
   
2011
   
2010
 
   
(Unaudited)
       
CURRENT ASSETS
 
 
       
   Cash and cash equivalents
  $ 300,174     $ 939,328  
   Accounts receivable, net of allowance of $3,722 and $5,433                
    48,157       74,669  
   Prepaid expenses
    5,162       1,500  
                 
       Total current assets
    353,493       1,015,497  
                 
PROPERTY AND EQUIPMENT, net
    168,795       177,844  
CUSTOMER LIST, net of accumulated amortization of $12,251,295 and $11,977,598
    102,378       279,075  
GOODWILL, net of impairment
    1,288,559       1,288,559  
DEFERRED TAX ASSETS
    866,042       763,033  
REAL ESTATE HELD FOR INVESTMENT
    1,984,146       515,202  
OTHER ASSETS
    295,609       305,250  
                 
TOTAL ASSETS
  $ 5,059,022     $ 4,344,460  
 
See the accompanying notes to the unaudited condensed consolidated financial statements.
 
 
3

 
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
SEPTEMBER 30, 2011 AND DECEMBER 31, 2010
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
   
2011
   
2010
 
   
(Unaudited)
       
CURRENT LIABILITIES
           
  Accounts payable
  $ -     $ 15,565  
  Accrued income taxes
    27,278       147,717  
  Accrued expenses
    23,074       22,528  
  Deferred revenue
    501,116       594,038  
  Notes payable
    933,615       900,615  
                 
     Total current liabilities
    1,485,083       1,680,463  
                 
  NOTES PAYABLE - STOCKHOLDERS
    256,674       49,460  
                 
  TOTAL LIABILITIES
    1,741,757       1,729,923  
                 
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 2011 and 2010 and 74,085,705 and 74,735,705 shares outstanding in 2011 and 2010
      91,326          91,326  
Additional paid-in capital
    13,880,947       13,880,947  
Treasury stock, at cost, 17,240,758 and 16,590,758 common shares
    (789,518 )      (785,024 )
Accumulated deficit
    (9,865,490 )     (10,572,712 )
                 
     Total stockholders’ equity
    3,317,265       2,614,537  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 5,059,022     $ 4,344,460  
 
See the accompanying notes to the unaudited condensed consolidated financial statements.
 
 
4

 
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)
 
   
2011
   
2010
 
             
REVENUE
  $ 857,465     $ 1,196,920  
                 
COST OF REVENUE
    398,778       555,294  
                 
GROSS PROFIT
    458,687       641,626  
                 
 OPERATING EXPENSES:
               
   Selling general and administrative expenses
     238,970       798,126  
                 
INCOME (LOSS) FROM OPERATIONS
    219,717       (156,500 )
                 
OTHER INCOME (EXPENSES):
               
   Other expenses
    (3,673 )     (1,413 )
   Gain on sale of real estate held for investment
    148,145       -  
      144,472       (1,413 )
                 
INCOME (LOSS) BEFORE INCOME TAXES
    364,189       (157,913 )
                 
INCOME TAXES (EXPENSE) BENEFIT
     (250,496 )     (303,238 )
                 
NET INCOME (LOSS)
  $ 113,693     $ (461,151 )
                 
BASIC AND DILUTED EARNINGS PER SHARE
  $ 0.00     $ (0.01 )
                 
WEIGHTED AVERAGE SHARES
               
  OUTSTANDING - BASIC AND DILUTED
    74,085,705       75,124,922  
 
See the accompanying notes to the unaudited condensed consolidated financial statements.
 
 
5

 
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)
 
   
2011
   
2010
 
   
 
       
REVENUE
  $ 2,859,825     $ 3,955,530  
                 
COST OF REVENUE
    1,385,247       1,806,604  
                 
GROSS PROFIT
    1,474,578       2,148,926  
                 
 OPERATING EXPENSES:
               
   Selling general and administrative expenses
     940,946       2,422,018  
                 
INCOME (LOSS) FROM OPERATIONS
    533,632       (273,092 )
                 
OTHER INCOME (EXPENSES):
               
   Other expenses
    (6,431 )     (34,131 )
   Gain on sale of real estate held for investment
    148,145       -  
      141,714       (34,131 )
                 
INCOME (LOSS) BEFORE INCOME TAXES
    675,346       (307,223 )
                 
INCOME TAXES (EXPENSE) BENEFIT
     31,876       (459,527 )
                 
NET INCOME (LOSS)
  $ 707,222     $ (766,750 )
                 
BASIC AND DILUTED EARNINGS PER SHARE
  $ 0.01     $ (0.01 )
                 
WEIGHTED AVERAGE SHARES
               
  OUTSTANDING - BASIC AND DILUTED
    74,347,207       75,306,903  
 
See the accompanying notes to the unaudited condensed consolidated financial statements.
 
 
6

 
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED) 
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 707,222     $ (766,750 )
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization expense
    295,385       1,580,830  
Allowance for doubtful accounts
    (1,711 )     (8,025 )
Deferred income taxes
    (103,009 )     (42,301 )
Gain on sale of real estate held for investment
    (148,145 )     -  
(Increase) decrease in:
               
Accounts receivable
    28,223       296,472  
Prepaid expenses
    (3,662 )     (168,594 )
Other assets
    -       101,742  
Increase (decrease) in:
               
Accounts payable
    (15,565 )     (95,232 )
Accrued expenses
    546       33,387  
Deferred revenue
    (92,922 )     (217,430 )
Accrued income taxes
    (120,439 )     (144,000 )
                 
Net cash provided by operating activities
    545,923        570,099  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Other assets held for resale
    2       1,762  
Purchase of property and equipment
    (2,000 )     -  
Purchase of real estate held for investment
    (2,110,210 )     (254,424 )
Proceeds from sale of real estate held for investment
    789,411          
Purchase of non-compete
    (1,000 )     (1,000 )
Purchase of customer list
     (97,000 )     (21,520 )
                 
Net cash provided by (used in) investing activities
    (1,420,797 )     (275,182 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of notes payable – stockholders
    (17,500 )     (391,678 )
Proceeds from notes payable – stockholders
    224,714       17,020  
Proceeds from note payable
    33,000       -  
Purchase of treasury stock
    (4,494 )     (43,508 )
                 
Net cash provided by provided by (used in) financing activities
    235,720       (429,921 )
                 
   NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS
    (639,154 )     (135,004 )
                 
   CASH AND CASH EQUIVALENTS – BEGINNING OF  PERIOD
    939,328       1,090,807  
                 
   CASH AND CASH EQUIVALENTS – END OF  PERIOD
  $ 300,174     $ 955,803  
 
See the accompanying notes to the unaudited condensed consolidated financial statements.
 
 
7

 
 
 SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
During the nine months ended September 30, 2011 and 2010, the Company used cash to pay income taxes of $191,572 and $632,000 and paid interest expense of approximately $8,000 and $26,000, respectively.

 
8

 

SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

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, 2010 included in the Company’s Annual Report on Form 10-K.  The results for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

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 September 30, 2011 and 2010:
 
   
2011
   
2010
 
Net income available to common shareholders
  $ 113,693     $ (461,151 )
Weighted average number of common shares
    74,085,705       75,124,922  
                 
Basic and diluted income per share
  $ 0.00     $ (0.01 )

For the nine months ended September 30, 2011 and 2010:
 
   
2011
   
2010
 
Net income available to common shareholders
  $ 707,222     $ (766,750 )
Weighted average number of common shares
    74,347,207       75,306,903  
                 
Basic and diluted income per share
  $ 0.01     $ (0.01 )

 
9

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 3 – COMMON STOCK
 
During the nine months ended September 30, 2011, the Company issued no shares of common stock and repurchased 650,000 treasury shares.
 
NOTE 4 – SEGMENT INFORMATION

The Company has three business units that have been aggregated into two reportable segments: Corporate 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 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 September 30, 2011 and 2010:

September 30, 2011
 
   
Corporate
   
Internet
   
Consolidated
 
Revenue
  $ -     $ 857,465     $ 857,465  
Operating income (loss)
  $ (8,443 )   $ 228,160     $ 219,717  
Depreciation and amortization
  $ -     $ 67,559     $ 67,559  
Interest expense
  $ -     $ 4,880     $ 4,880  
Real estate held for investment
  $ 1,984,146     $ -     $ 1,984,146  
Intangible assets
  $ -     $ 1,393,020     $ 1,393,020  
Total assets
  $ 1,984,146     $ 3,074,876     $ 5,059,022  

 
10

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
NOTE 4 – SEGMENT INFORMATION, continued

September 30, 2010
 
   
Corporate
   
Internet
   
Consolidated
 
Revenue
  $ -     $ 1,196,920     $ 1,196,920  
Operating income (loss)
  $ (25,040 )   $ 181,540     $ (156,500 )
Depreciation and amortization
  $ -     $ 526,967     $ 526,967  
Interest expense
  $ -     $ 4,638     $ 4,638  
Real estate held for investment
  $ 254,424     $ -     $ 254,424  
Intangible assets
  $ -     $ 2,712,300     $ 2,712,300  
Total assets
  $ 254,424     $ 4,431,464     $ 4,685,888  

Summarized financial information concerning the Company's reportable segments is shown in the following tables as of and for the nine months ended September 30, 2011 and 2010:

September 30, 2011
 
   
Corporate
   
Internet
   
Consolidated
 
Revenue
  $ -     $ 2,859,825     $ 2,859,825  
Operating income (loss)
  $ (8,443 )   $ 542,075     $ 533,632  
Depreciation and amortization
  $ -     $ 295,385     $ 295,385  
Interest expense
  $ -     $ 7,962     $ 7,962  
Real estate held for investment
  $ 1,984,146     $ -     $ 1,984,146  
Intangible assets
  $ -     $ 1,393,020     $ 1,393,020  
Total assets
  $ 1,984,146     $ 3,074,876     $ 5,059,022  

 
11

 

  SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
NOTE 4 – SEGMENT INFORMATION, continued

September 30, 2010

   
Corporate
   
Internet
   
Consolidated
 
Revenue
  $ -     $ 3,955,530     $ 3,955,530  
Operating income (loss)
  $ (89,718 )   $ (183,374     $ (273,092 )
Depreciation and amortization
  $ -     $ 1,580,830     $ 1,580,830  
Interest expense
  $ -     $ 25,682     $ 25,682  
Real estate held for investment
  $ 254,424     $ -     $ 254,424  
Intangible assets
  $ -     $ 2,712,300     $ 2,712,300  
Total assets
  $ 254,424     $ 4,431,464     $ 4,685,888  
 
NOTE 5 – REAL ESTATE HELD FOR INVESTMENT

Real estate held for investment consists of multiple units of residential and commercial properties held for resale. 
 
Summarized financial information concerning the Company's real estate investments is shown in the following table as of and for the three months ended September 30, 2011 and 2010:
 
   
2011
   
2010
 
Real estate held for investment
  $ 1,984,146     $ 254,424  
Proceeds from sales of real estate
  $ 789,411     $ -  
Gain (loss) on sale of real estate
  $ 148,145     $ -  

Summarized financial information concerning the Company's real estate investments is shown in the following table as of and for the nine months ended September 30, 2011 and 2010:
 
   
2011
   
2010
 
Real estate held for investment
  $ 1,984,146     $ 254,424  
Proceeds from sales of real estate
  $ 789,411     $ -  
Gain (loss) on sale of real estate
  $ 148,145     $ -  

 
12

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
NOTE 6 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In April 2009, the Financial Accounting Standard Board (FASB) issued FASB Accounting Standard Codification (ASC) 320-10, Recognition and Presentation of Other-Than-Temporary Impairments. FASB ASC 320-10 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments in the financial statements. The most significant change FASB ASC 320-10 brings is a revision to the amount of other-than-temporary loss of a debt security recorded in earnings. FASB ASC 320-10 is effective for interim and annual reporting periods ending after June 15, 2009 The Company’s adoption of FASB ASC 320-10 did not have a material impact on the Company’s condensed consolidated financial statements.
 
In April 2009, the FASB issued FASB ASC 820-10, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FASB ASC 820-10 provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. FASB ASC 820-10 also includes guidance on identifying circumstances that indicate a transaction is not orderly. This emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FASB ASC 820-10 is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The Company’s adoption of FASB ASC 820-10 did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued FASB ASC 825-10, Interim Disclosures about Fair Value of Financial Instruments. FASB ASC 825-10 amends previous guidance, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FASB ASC 825-10 also requires those disclosures in summarized financial information at interim reporting periods.  FASB ASC 825-10 is effective for interim and annual reporting periods ending after June 15, 2009. The Company’s adoption of FASB ASC 825-10 did not have a material impact on the Company’s condensed consolidated financial statements.

 
13

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
NOTE 6 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, continued
 
In June 2009, the FASB issued FASB ASC 105-10, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. FASB ASC 105-10 establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. The only other source of authoritative GAAP is the rules and interpretive releases of the SEC which only apply to SEC registrants. The Codification superseded all the existing non-SEC accounting and reporting standards upon its effective date. Since the issuance of the Codification is not intended to change or alter existing GAAP, adoption of this statement did not have an impact on the Company’s financial position or results of operations, but changed the way in which GAAP is referenced in the Company’s financial statements. FASB ASC 105-10 is effective for interim and annual reporting periods ending after September 15, 2009.

In May 2009, the FASB issued FASB ASC 855-10, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The Company adopted FASB ASC 855-10 effective April 1, 2009 and has evaluated subsequent events after the balance sheet date of June 30, 2011 through the date the financial statements were issued.

In October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605)”. This Update provides amendments to the criteria in Subtopic 605-24 for separating consideration in multiple-deliverable revenue arrangements. It establishes a hierarchy of selling prices to determine the selling price of each specific deliverable which includes vendor-specific objective evidence (if available), third-party evidence (if vendor-specific evidence is not available), or estimated selling price if neither of the first two are available. This Update also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement. Finally, this Update expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements. This Update is effective for fiscal years beginning on or after June 15, 2010. The Company’s adoption of this Update did not have a material impact on the Company’s condensed consolidated financial statements.

 
14

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
NOTE 7 – ACQUISITIONS

Jellico.com, Inc.
 
Effective August 1, 2010, the Company entered into an Asset Purchase Agreement pursuant to which it acquired the Internet related assets of Jellico.com, Inc., a Tennessee-based Internet Service Provider.  The total purchase price was $17,020 representing the fair value of the assets acquired which consisted of a $10,000 cash payment at closing with the remaining balance paid in 4 monthly installments beginning September 2010.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition.  Sitestar has assessed the valuations of certain intangible assets as represented below.

Equipment
  $ -  
Customer list          
    21,520  
Non-compete agreement
    1,000  
Deferred revenue
    (5,500 )
         
Purchase price
  $ 17,020  

NCISP.net
 
Effective March 1, 2011, the Company entered into an Asset Purchase Agreement pursuant to which it acquired the Internet related assets of NCISP.net, a North Carolina-based Internet Service Provider.  The total purchase price was $88,000 representing the fair value of the assets acquired which consisted of a $55,000 cash payment at closing with the remaining balance paid in 6 monthly installments beginning April 2011.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition.  Sitestar has assessed the valuations of certain intangible assets as represented below.

Equipment
  $ -  
Customer list          
    97,000  
Non-compete agreement
    1,000  
Deferred revenue
    (10,000 )
         
Purchase price
  $  88,000  

 
15

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 7 – ACQUISITIONS, continued

The following table presents the unaudited pro forma condensed consolidated statement of operations for the nine months ended September 30, 2011 and reflects the results of operations of the Company as if the acquisition of NCISP.net had been effective January 1, 2011. The pro forma amounts are not necessarily indicative of the combined results of operations had the acquisition been effective as of that date, or of the anticipated results of operations, due to cost reductions and operating efficiencies that are expected as a result of the acquisition.

   
2011
 
Net sales
  $ 2,865,000  
Gross profit
  $ 1,477,000  
Selling, general and administrative expenses
  $ 941,000  
Net income
  $ 708,000  
Basic income per share
  $    0.01  

NOTE 8 -- PROVISION FOR INCOME TAXES

The provision for federal and state income taxes for the nine months ended September 30, 2011 and 2010 included the following: 

   
2011
   
2010
 
Current provision:
       
 
 
  Federal
  $ 60,463     $ 426,554  
  State
    10,670       75,274  
Deferred provision:
               
  Federal
    (87,558 )     (35,956 )
  State
    (15,451 )     (6,345 )
                 
Total income tax provision
  $ (31,877 )   $ 459,527  

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 September 30, 2011 and December 31, 2010 are as follows:

 
16

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 8 – PROVISION FOR INCOME TAXES, continued

   
2011
   
2010
 
Accounts receivable
  $ 3,722     $ 6,291  
Amortization of Intangible assets
    3,414,740       3,349,291  
Less valuation allowance
    (2,552,420 )     (2,552,420 )
                 
Deferred tax asset                  
  $ 866,042     $ 803,162  

At September 30, 2011 and December 31, 2010, the Company has provided a valuation allowance for the deferred tax asset since management has not been able to determine that the realization of that asset 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 taxes purposes, tax years 2007 through 2010 remain open to examination.

NOTE 9 – 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 $288,836 and $1,568,927 for the nine months ended September, 30, 2011 and 2010.

NOTE 10 – 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
 
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.

 
17

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 11 - NOTES PAYABLE

Notes payable at September 30, 2011 and December 31, 2010 consist of the following:
 
 
 
2011
   
2010
 
Non-interest bearing amount due on acquisition of USA Telephone.
  $ 900,615     $ 900,615  
 
               
Non-interest bearing amount due on acquisition of NCISP
    33,000       -  
 
               
Totals
    933,615       900,615  
Less current portion
    (933,615 )     (900,615 )
 
               
Long-term portion
  $ -     $ -  
 
The future principal maturities of these notes are as follows:
 
Twelve months ending  September 30, 2012
 
$
     933,615
 
Twelve months ending  September 30, 2013
   
     -
 
Twelve months ending  September 30, 2014
   
     -
 
Twelve months ending  September 30, 2015
   
     -
 
Twelve months ending  September 30, 2016
   
                -
 
Thereafter
   
                -
 
         
Total
 
$
  933,615
 

 
18

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 12 - NOTES PAYABLE – STOCKHOLDERS

Notes payable - stockholders at September 30, 2011 and December 31, 2010 consist of the following: 
 
   
2011
   
2010
 
Note payable to officer and stockholder on a line of credit of $750,000 at an annual interest rate of 10% interest.  The accrued interest and principal are due on January 1, 2014.       
  $ 206,674     $ 49,460  
                 
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, 2014.       
    50,000          
                 
Totals
    256,674       49,460  
Less current portion
    -       -  
                 
Long-term portion
  $ 256,674     $ 49,460  
 
The future principal maturities of these notes are as follows:
 
Year ending September 30, 2012
 
$
-
 
Year ending September 30, 2013
   
-
 
Year ending September 30, 2014
   
256,674
 
Year ending September 30, 2015
   
-
 
Year ending September 30, 2016
   
           -
 
Total
 
$
256,674
 

 
19

 
 
SITESTAR CORPORATION
 
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, 2010 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
 
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;
 
 
·
End-to-end e-commerce solutions; and
 
 
·
Toner and ink cartridge remanufacturing services.

The Company’s Internet division markets and sells narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, satellite 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.

 
20

 
 
SITESTAR CORPORATION

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

The Company also markets, sells and manufactures computer systems, computer hardware, computer software, networking services, repair services and toner and ink cartridge remanufacturing services from the Lynchburg, Virginia location.

The Company’s Real Estate division invests in residential and commercial properties, refurbishes as necessary and sells wholesale or retail to consumers in the central Virginia area.

Results of operations
 
The following tables show financial data for the nine months ended September 30, 2011 and 2010. Operating results for any period are not necessarily indicative of results for any future period. 

   
Corporate
   
Internet
   
Total
 
Revenue
  $ -     $ 2,859,825     $ 2,859,825  
Cost of revenue
    -       1,385,247       1,385,247  
                         
Gross profit
    -       1,474,578       1,474,578  
                         
Operating expenses
    8,443       932,503       940,946  
                         
Income (loss) from operations
    (8,443 )     542,075       533,632  
Other income (expense)
    148,145       (6,431 )     141,714  
                         
Income (loss) before income taxes
    139,702       535,644       675,346  
Income taxes (expense) benefit
    -       31,876       31,876  
                         
Net income (loss)
  $ 139,702     $ 567,520     $ 707,222  

 
21

 
 
SITESTAR CORPORATION

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

   
Corporate
   
Internet
   
Total
 
Revenue
  $ -     $ 3,955,530     $ 3,955,530  
Cost of revenue
    -       1,806,604       1,806,604  
                         
Gross profit
    -       2,148,926       2,148,926  
                         
Operating expenses
    89,718       2,332,300       2,422,018  
                         
Income (loss) from operations
    (89,718 )     (183,374 )     (273,092 )
Other income (expense)
    -       (34,131 )     (34,131 )
                         
Income (loss) before income taxes
    (89,718 )     (217,505 )     (307,223 )
Income taxes (expense) benefit
    -       (459,527 )     (459,527 )
                         
Net income (loss)
  $ (89,718 )   $ (677,032 )   $ (766,750 )

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, 2011 and 2010.

For the nine months ended September 30, 2011
 
   
 
Corporate
   
Internet
   
Total
 
EBITDA
  $ 139,702     $ 843,491     $ 983,193  
  Interest expense
    -       (7,962 )     (7,962 )
  Taxes
    -       31,876       31,876  
  Depreciation
    -       (11,050 )     (11,050 )
  Amortization
    -       (288,835 )     (288,835 )
                         
Net income (loss)
  $ 139,702     $ 567,520     $ 707,222  
 
 
22

 
 
SITESTAR CORPORATION

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

For the nine months ended September 30, 2010
 
   
Corporate
   
Internet
   
Total
 
EBITDA
  $ (89,718 )   $ 1,389,006     $ 1,299,288  
  Interest expense
    -       (25,681 )     (25,681 )
  Taxes
    -       (459,527 )     (459,527 )
  Depreciation
    -       (11,903 )     (11,903 )
  Amortization
    -       (1,568,927 )     (1,568,927 )
                         
Net income (loss)
  $ (89,718 )   $ (677,032 )   $ (766,750 )

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, September 30, 2011, the Company has invested approximately $1,984,000 in surplus funds and is continuing the investing process.  Management has determined that the Purchase Program will not impair the Company’s capital, cash flows or operations.

NINE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO SEPTEMBER 30, 2010

REVENUE

Total revenue for the nine months ended September 30, 2011 decreased by $1,095,705 or 27.7% from $3,955,530 for the nine months ended September 30, 2010 to $2,859,825 for the same period in 2011.
 
 
23

 
 
SITESTAR CORPORATION
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

Sales decreased due primarily to customer attrition to broadband services and is offset in part by the addition of Internet customers from asset acquisitions.  To help offset this decline in revenues, the Company has acquired and plans to continue to acquire the assets of additional ISPs and real estate.

COST OF REVENUE

Total costs of revenue for the nine months ended September 30, 2011 decreased by $421,357 or 23.3% from $1,806,604 for the nine months ended September 30, 2010 to $1,385,247 for the same period in 2011.  Cost of revenue decreased as a result of declining revenue.

OPERATING EXPENSES
 
Operating expenses for the nine months ended September 30, 2011 decreased $1,481,072 or 61.2% from $2,422,018 for the nine months ended September 30, 2010 to $940,946 for the same period in 2011.  This decrease is primarily due to lower amortization expense as a result of intangibles being fully amortized.  Amortization expense decreased $1,284,572 or 81.9% from $1,568,927 for the nine months ended September 30, 2010 to $284,355 for the same period in 2011.  Wages decreased $130,570 or 32.5% from $402,172 for the nine months ended September 30, 2010 to $271,602 for the same period in 2011.
 
INCOME TAXES

For the nine months ended September 30, 2011 and September 30, 2010 corporate income tax expenses (benefit) of $(31,876) and $459,527 were accrued.
 
INTEREST EXPENSE

Interest expense for the nine months ended September 30, 2011 decreased by $17,719 or 69.0% from $25,681 for the nine months ended September 30, 2010 to $7,962 for the same period in 2011.  This decrease is a result of reducing debt used to finance the acquisition of additional customers.

 
24

 
 
SITESTAR CORPORATION

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

SEPTEMBER 30, 2011 COMPARED TO DECEMBER 31, 2010

FINANCIAL CONDITION

Net accounts receivable decreased $26,512 or 35.5% from $74,669 on December 31, 2010 to $48,157 on September 30, 2011.  Investment in real estate increased $1,468,944 or 285.1% from $515,202 on December 31, 2010 to $1,984,146 on September 30, 2011.  Accounts payable decreased by $15,565 or 100.0% from $15,565 on December 31, 2010 to none on September 30, 2011.  Deferred revenue decreased by $92,922 or 15.6% from $594,038 on December 31, 2010 to $501,116 on September 30, 2011 representing decreased volume of customer accounts that have been prepaid.  Long-term notes payable to shareholders increased $207,214 or 419.0% from $49,460 on December 31, 2010 to $256,674 on September 30, 2011.

LIQUIDITY AND CAPITAL RESOURCES
 
Cash and cash equivalents totaled $300,174 and $939,328 at September 30, 2011 and at December 31, 2010.  EBITDA was $983,193 for the nine months ended September 30, 2011 as compared to $1,299,288 for the same period in 2010.
 
   
2011
   
2010
 
EBITDA for the nine months ended September 30,
  $ 983,193     $ 1,299,288  
Interest expense
    (7,962 )     (25,681 )
Taxes
    31,876       (459,527 )
Depreciation
    (11,050 )     (11,903 )
Amortization
    (288,835 )     (1,568,927 )
                 
Net income for the nine months ended September 30,
  $ 707,222     $ (766,750 )
 
The aging of accounts receivable as of September 30, 2011 and December 31, 2010 is as shown:

   
2011
   
2010
 
Current
  $ 26,267       55 %   $ 38,037       51 %
30 < 60
    11,609       24 %     22,550       30 %
60 +
     10,281       21 %     14,082       19 %
                                 
Total
  $ 48,157       100 %   $ 74,669       100 %
 
 
25

 
 
SITESTAR CORPORATION

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

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 September 30, 2011. 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.
 
 
26

 

SITESTAR CORPORATION

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 September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. .

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

 
27

 

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: November 14, 2011
By:
/s/ Frank Erhartic, Jr.  
   
Frank Erhartic, Jr.
President, Chief Executive Officer
(Principal Executive Officer and
Principal Accounting Officer)
 
       
Date: November 14, 2011
By:
/s/ Daniel A. Judd.  
   
Daniel A. Judd
Chief Financial Officer
(Principal Financial Officer)
 
 
 
28