Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - ENTERPRISE DIVERSIFIED, INC.Financial_Report.xls
EX-32 - ENTERPRISE DIVERSIFIED, INC.v228864_ex32.htm
EX-31.2 - ENTERPRISE DIVERSIFIED, INC.v228864_ex31-2.htm
EX-31.1 - ENTERPRISE DIVERSIFIED, INC.v228864_ex31-1.htm
 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 June 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 (Do not check if a smaller reporting Company) o   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 July 28, 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 June
 
30, 2011 and December 31, 2010
3-4
   
Condensed Consolidated Statements of Income for the
 
three months ended June 30, 2011 and 2010
5
   
Condensed Consolidated Statements of Income for the
 
six months ended June 30, 2011 and 2010
5
   
Condensed Consolidated Statements of Cash Flows for the
 
six months ended June 30, 2011 and 2010
7-8
   
Notes to Condensed Consolidated Financial Statements
9-18
   
Item 2. Management's Discussion and Analysis
19-25
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
25
   
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
JUNE 30, 2011 AND DECEMBER 31, 2010
 
ASSETS
   
2011
   
2010
 
   
(Unaudited)
       
CURRENT ASSETS
 
 
       
Cash and cash equivalents
  $ 216,273     $ 939,328  
Accounts receivable, net of allowance of $3,639 and $5,433
    58,322       74,669  
Prepaid expenses
    1,535       1,500  
                 
Total current assets
    276,130       1,015,497  
                 
PROPERTY AND EQUIPMENT, net
    173,430       177,844  
CUSTOMER LIST, net of accumulated amortization of $12,190,566 and $11,977,598
    163,107       279,075  
GOODWILL, net of impairment
    1,288,559       1,288,559  
DEFERRED TAX ASSETS
    953,152       763,033  
REAL ESTATE HELD FOR INVESTMENT
    1,694,902       515,202  
OTHER ASSETS
    296,307       305,250  
                 
TOTAL ASSETS
  $ 4,845,587     $ 4,344,460  
 
See the accompanying notes to the unaudited condensed consolidated financial statements.

 
3

 
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
JUNE 30, 2011 AND DECEMBER 31, 2010
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
   
2011
   
2010
 
   
(Unaudited)
       
CURRENT LIABILITIES
           
Accounts payable
  $ 38,513     $ 15,565  
Accrued income taxes
    19,530       147,717  
Accrued expenses
    22,615       22,528  
Deferred revenue
    537,822       594,038  
Notes payable
    933,615       900,615  
                 
Total current liabilities
    1,552,095       1,680,463  
                 
  NOTES PAYABLE - STOCKHOLDERS
    89,920       49,460  
                 
  TOTAL LIABILITIES
    1,642,015       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
    (9,979,183 )     (10,572,712 )
                 
Total stockholders’ equity
    3,203,572       2,614,537  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 4,845,587     $ 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 JUNE 30, 2011 AND 2010
(UNAUDITED)
 
   
2011
   
2010
 
             
REVENUE
  $ 953,745     $ 1,296,598  
                 
COST OF REVENUE
    494,984       593,580  
                 
GROSS PROFIT
    458,761       703,018  
                 
OPERATING EXPENSES:
               
Selling general and administrative expenses
     323,035       845,572  
                 
INCOME (LOSS) FROM OPERATIONS
    135,726       (142,554 )
                 
OTHER INCOME (EXPENSES)
    (2,803 )     (5,217 )
                 
INCOME (LOSS) BEFORE INCOME TAXES
    132,923       (147,771 )
                 
INCOME TAXES (EXPENSE) BENEFIT
     5,616       (165,867 )
                 
NET INCOME (LOSS)
  $ 138,539     $ (313,638 )
                 
BASIC AND DILUTED EARNINGS PER SHARE
  $ 0.00     $ 0.00  
                 
WEIGHTED AVERAGE SHARES
               
OUTSTANDING - BASIC AND DILUTED
    74,480,125       75,231,353  

See the accompanying notes to the unaudited condensed consolidated financial statements.

 
5

 
 
 SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(UNAUDITED)
 
   
2011
   
2010
 
             
REVENUE
  $ 2,002,360     $ 2,758,610  
                 
COST OF REVENUE
    986,469       1,251,309  
                 
GROSS PROFIT
    1,015,891       1,507,301  
                 
OPERATING EXPENSES:
               
Selling general and administrative expenses
     701,976       1,623,892  
                 
INCOME (LOSS) FROM OPERATIONS
    313,915       (116,591 )
                 
OTHER INCOME (EXPENSES)
    (2,758 )     (32,718 )
                 
INCOME (LOSS) BEFORE INCOME TAXES
    311,157       (149,309 )
                 
INCOME TAXES (EXPENSE) BENEFIT
     282,372       (156,289 )
                 
NET INCOME (LOSS)
  $ 593,529     $ (305,598 )
                 
BASIC AND DILUTED EARNINGS PER SHARE
  $ 0.01     $ 0.00  
                 
WEIGHTED AVERAGE SHARES
               
OUTSTANDING - BASIC AND DILUTED
    74,480,125       75,399,401  

See the accompanying notes to the unaudited condensed consolidated financial statements.

 
6

 
 
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(UNAUDITED) 
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 593,529     $ (305,598 )
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization expense
    232,326       1,053,864  
Allowance for doubtful accounts
    (1,794 )     (4,929 )
Deferred income taxes
    (190,119 )     (87,478 )
(Increase) decrease in:
               
Accounts receivable
    15,142       282,259  
Prepaid expenses
    (36 )     (179,642 )
Other assets
    -       101,741  
Increase (decrease) in:
               
Accounts payable
    22,945       (77,021 )
Accrued expenses
    88       15,856  
Deferred revenue
    (66,215 )     (162,535 )
Accrued income taxes
    (128,187 )     (259,000 )
                 
Net cash provided by operating activities
    477,679        377,517  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Other assets held for resale
    (1 )     1,761  
Purchase of property and equipment
    (2,000 )     -  
Purchase of real estate held for investment
    (1,179,699 )     -  
Purchase of non-compete
    (1,000 )     -  
Purchase of deferred revenue
    10,000       -  
Purchase of customer list
     (97,000 )     -  
                 
Net cash provided by (used in) investing activities
    (1,269,700 )      1,761  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of notes payable – stockholders
    (49,460 )     (280,173 )
Proceeds from note payable
    33,000       -  
Purchase of treasury stock
    (4,494 )     (39,428 )
                 
Proceeds from notes payable - stockholders
    89,920       -  
                 
Net cash provided by (used in) financing activities
    68,966       (319,601 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS
    (723,055 )     59,677  
                 
CASH AND CASH EQUIVALENTS – BEGINNING OF  PERIOD
    939,328       1,090,807  
                 
CASH AND CASH EQUIVALENTS – END OF  PERIOD
  $ 216,273     $ 1,150,484  
 
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 SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(UNAUDITED)
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
During the six months ended June 30, 2011 and 2010, the Company used cash to pay income taxes of $100,746 and $489,000 and paid interest expense of approximately $3,000 and $20,000, 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 six months ended June 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 June 30, 2011 and 2010:
   
2011
   
2010
 
Net income available to common shareholders
  $ 138,539     $ (313,638 )
Weighted average number of common shares
    74,480,125       75,231,353  
                 
Basic and diluted income per share
  $ 0.00     $ 0.00  

For the six months ended June 30, 2011 and 2010:
   
2011
   
2010
 
Net income available to common shareholders
  $ 593,529     $ (305,598 )
Weighted average number of common shares
    74,480,125       75,319,705  
                 
Basic and diluted income per share
  $ 0.01     $ 0.00  

 
9

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

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

The Company has two 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 unit. 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 table for the three months ended June 30, 2011and 2010:

June 30, 2011
   
Corporate
   
Internet
   
Consolidated
 
Revenue
  $ -     $ 953,745     $ 953,745  
Operating Income (loss)
  $ (26,224 )   $ 161,950     $ 135,726  
Depreciation and amortization
  $ -     $ 96,448     $ 96,448  
Interest expense
  $ -     $ 2,218     $ 2,218  
Real estate held for investment
  $ 1,694,902     $ -     $ 1,694,902  
Intangible assets
  $ -     $ 1,455,943     $ 1,455,943  
Total assets
  $ 1,694,902     $ 3,150,685     $ 4,845,587  

 
10

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

June 30, 2010
   
Corporate
   
Internet
   
Consolidated
 
Revenue
  $ -     $ 1,296,598     $ 1,296,598  
Operating Income (loss)
  $ (61,593 )   $ (80,961 )   $ (142,554 )
Depreciation and amortization
  $ -     $ 526,029     $ 526,029  
Interest expense
  $ -     $ 8,141     $ 8,141  
Real estate held for investment
  $ -     $ -     $ -  
Intangible assets
  $ -     $ 2,409,617     $ 2,409,617  
Total assets
  $ -     $ 5,197,933     $ 5,197,933  

Summarized financial information concerning the Company's reportable segments is shown in the following table for the six months ended June 30, 2011and 2010:

June 30, 2011
   
Corporate
   
Internet
   
Consolidated
 
Revenue
  $ -     $ 2,002,360     $ 2,002,360  
Operating Income (loss)
  $ (59,338 )   $ 373,253     $ 313,915  
Depreciation and amortization
  $ -     $ 232,326     $ 232,326  
Interest expense
  $ -     $ 3,082     $ 3,082  
Real estate held for investment
  $ 1,694,902     $ -     $ 1,694,902  
Intangible assets
  $ -     $ 1,455,943     $ 1,455,943  
Total assets
  $ 1,694,902     $ 3,150,685     $ 4,845,587  

June 30, 2010
   
Corporate
   
Internet
   
Consolidated
 
Revenue
  $ -     $ 2,758,610     $ 2,758,610  
Operating Income (loss)
  $ (64,677 )   $ (51,914 )   $ (116,591 )
Depreciation and amortization
  $ -     $ 1,053,864     $ 1,053,864  
Interest expense
  $ -     $ 19,631     $ 19,631  
Real estate held for investment
  $ -     $ -     $ -  
Intangible assets
  $ -     $ 2,409,617     $ 2,409,617  
Total assets
  $ -     $ 5,197,933     $ 5,197,933  

 
11

 
 
  SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
NOTE 5 – 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.

 
12

 
 
  SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
NOTE 5 – 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.

 
13

 
 
  SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 6 – 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  
 
 
14

 
 
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 6 – ACQUISITIONS, continued

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  

The following table presents the unaudited pro forma condensed consolidated statement of operations for the six months ended June 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
  $ 2,044,844  
Gross profit
  $ 1,040,776  
Selling, general and administrative expenses
  $ 710,217  
Net income
  $ 601,770  
Basic income per share
  $    0.01  

 
15

 
 
    SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 7 -- PROVISION FOR INCOME TAXES

The provision for federal and state income taxes for the six months ended June 30, 2011 and 2010 included the following: 
  
 
 
2011
   
2010
 
Current provision:
           
Federal
  $ (78,415 )   $ 207,201  
State
    (13,837 )     36,566  
Deferred provision:
               
Federal
    (161,602 )     (74,356 )
State
    (28,518 )     (13,122 )
                 
Total income tax provision
  $ (282,372 )   $ 156,289
 

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 June 30, 2011 and December 31, 2010 are as follows:
 
   
2011
   
2010
 
Accounts receivable
  $ 3,639     $ 5,420  
Amortization of Intangible assets
    3,501,933       3,446,206  
Less valuation allowance
    (2,552,420 )     (2,552,420 )
                 
Deferred tax asset                  
  $ 953,152     $ 899,206  

At June 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.

 
16

 
 
   SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 8 – 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 $225,912 and $1,045,928 for the six months ended June 30, 2011 and 2010.

NOTE 9 – 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.

NOTE 10 - NOTES PAYABLE

Notes payable at June 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
  $ -     $ -  

 
17

 

   SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

The future principal maturities of these notes are as follows:
 
Twelve months ending  June 30, 2012
 
$
     933,615
 
Twelve months ending  June 30, 2013
   
     -
 
Twelve months ending  June 30, 2014
   
     -
 
Twelve months ending  June 30, 2015
   
     -
 
Twelve months ending  June 30, 2016
   
                -
 
Thereafter
   
                -
 
         
Total
 
$
  933,615
 

NOTE 11 - NOTES PAYABLE – STOCKHOLDERS

Notes payable - stockholders at June 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.       
  $ 89,920     $ 49,460  
                 
Totals
    89,920       49,460  
Less current portion
    -       -  
                 
Long-term portion
  $ 89,920     $ 49,460  

The future principal maturities of these notes are as follows:
 
Year ending June 30, 2012
 
$
-
 
Year ending June 30, 2013
   
-
 
Year ending June 30, 2014
   
89,920
 
Year ending June 30, 2015
   
-
 
Year ending June 30, 2016
   
           -
 
         
Total
   $
89,920
 
 
 
18

 
 
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.

 
19

 
 
SITESTAR CORPORATION

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

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.

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.

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

   
For the six months ended June 30, 2011
 
   
Corporate
   
Internet
   
Total
 
Revenue
  $ -     $ 2,002,360     $ 2,002,360  
Cost of revenue
     -       986,469       986,469  
                         
Gross profit
    -       1,015,891       1,015,891  
                         
Operating expenses
    59,338       642,638       701,976  
                         
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
    -       282,372       282,372  
                         
Net income (loss)
  $ (59,338 )   $ 652,867     $ 593,529  

 
20

 
 
SITESTAR CORPORATION

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

   
For the six months ended June 30, 2010
 
   
Corporate
   
Internet
   
Total
 
Revenue
  $ -     $ 2,758,610     $ 2,758,610  
Cost of revenue
     -       1,251,309       1,251,309  
                         
Gross profit
    -       1,507,301       1,507,301  
                         
Operating expenses
    64,677       1,559,215       1,623,892  
                         
Income (loss) from operations
    (64,677 )     (51,914 )     (116,591 )
Other income (expense)
    -       (32,718 )     (32,718 )
                         
Income (loss) before income taxes
    (64,677 )     (84,632 )     (149,309 )
Income taxes (expense) benefit
    -       (156,289 )     (156,289 )
                         
Net income (loss)
  $ (64,677 )   $ (240,921 )   $ (305,598 )

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, 2011 and 2010.  

 
21

 
 
SITESTAR CORPORATION

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

For the six months ended June 30, 2011
   
 
Corporate
   
Internet
   
Total
 
EBITDA
  $ (59,338 )   $ 605,903     $ 546,565  
Interest expense
    -       (3,082 )     (3,082 )
Taxes
    -       282,372       282,372  
Depreciation
    -       (6,414 )     (6,414 )
Amortization
    -       (225,912 )     (225,912 )
                         
Net income (loss)
  $ (59,338 )   $ 652,867     $ 593,529  
 
For the six months ended June 30, 2010
   
Corporate
   
Internet
   
Total
 
EBITDA
  $ (64,677 )   $ 988,862     $ 924,185  
Interest expense
    -       (19,631 )     (19,631 )
Taxes
    -       (156,289 )     (156,289 )
Depreciation
    -       (7,935 )     (7,935 )
Amortization
    -       (1,045,928 )     (1,045,928 )
                         
Net income (loss)
  $ (64,677 )   $ (240,921 )   $ (305,598 )

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.

 
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, June 30, 2011, the Company has invested approximately $1,695,000 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.

SIX MONTHS ENDED JUNE 30, 2011 COMPARED TO MARCH 31, 2010

REVENUE

Revenue for the six months ended June 30, 2011 decreased by $756,250 or 27.4% from $2,758,610 for the six months ended June 30, 2010 to $2,002,360 for the same period in 2011.  Internet 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 fold them into its operations.

COST OF REVENUE

Costs of revenue for the six months ended June 30, 2011 decreased by $264,840 or 21.2% from $1,251,309 for the six months ended June 30, 2010 to $986,469 for the same period in 2011.  Cost of revenue decreased as a result of declining revenue.

OPERATING EXPENSES
 
Operating expenses for the six months ended June 30, 2011 decreased $921,916 or 56.8% from $1,623,892 for the six months ended June 30, 2010 to $701,976 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 $820,016 or 78.4% from $1,045,928 for the six months ended June 30, 2010 to $225,912 for the same period in 2011.  Wages decreased $90,497 or 32.9% from $274,791 for the six months ended June 30, 2010 to $184,294 for the same period in 2011.
 
INCOME TAXES

For the six months ended June 30, 2011 and June 30, 2010 corporate income tax expenses (benefit) of $(282,372) and $156,289 were accrued.
 
 
23

 

 
SITESTAR CORPORATION

INTEREST EXPENSE

Interest expense for the six months ended June 30, 2011 decreased by $16,549 or 84.3% from $19,631 for the six months ended June 30, 2010 to $3,082 for the same period in 2011.  This decrease is a result of reducing debt used to finance the acquisition of additional customers.

JUNE 30, 2011 COMPARED TO DECEMBER 31, 2010

FINANCIAL CONDITION

Net accounts receivable decreased $16,347 or 21.9% from $74,669 on December 31, 2010 to $58,322 on June 30, 2011.  Accounts payable increased by $22,948 or 147.4% from $15,565 on December 31, 2010 to $38,513 on June 30, 2011. Deferred revenue decreased by $56,216 or 9.5% from $594,038 on December 31, 2010 to $537,822 on June 30, 2011 representing decreased volume of customer accounts that have been prepaid. Long-term notes payable to shareholders increased $40,460 or 81.8% from $49,460 on December 31, 2010 to $89,920 on June 30, 2011.

LIQUIDITY AND CAPITAL RESOURCES
 
Cash and cash equivalents totaled $216,273 and $939,328 at June 30, 2011 and at December 31, 2010.  EBITDA was $546,565 for the six months ended June 30, 2011 as compared to $924,185 for the same period in 2010.

   
2011
   
2010
 
EBITDA for the six months ended June 30,
  $ 546,565     $ 924,185  
Interest expense
    (3,082 )     (19,631 )
Taxes
    (282,372 )     (156,289 )
Depreciation
    (6,414 )     (7,935 )
Amortization
    (225,912 )     (1,045,928 )
 
               
Net income for the six months ended June 30,
  $ 593,529     $ (305,598 )

The aging of accounts receivable as of June 30, 2011 and December 31, 2010 is as shown:
  
   
2011
   
2010
 
Current
  $ 30,292       52 %   $ 38,037       51 %
30 < 60
    18,480       32 %     22,550       30 %
60 +
     9,550       16 %     14,082       19 %
                                 
Total
  $ 58,322       100 %   $ 74,669       100 %
 
 
24

 
 
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.
 
 
25

 
 
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 June 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.

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

 
26

 

SITESTAR CORPORATION

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