UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

[X]     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

[  ]    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 [ ]

 

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 [ ] Accelerated Filer [ ] Non-Accelerated Filer (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 [ ] No

 

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

 

As of August 14, 2012, the issuer had 91,326,463 shares of common stock issued and 74,085,705 outstanding

 

SITESTAR CORPORATION AND SUBSIDIARIES

 

EXPLANATORY NOTE

 

This Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, initially filed with the Securities and Exchange Commission on August 14, 2012, is being filed to reflect restatements of Sitestar Corporation’s Condensed Consolidated Balance Sheets as of June 30, 2012, and the related Condensed Consolidated Statement of Income and Condensed Consolidated Statement of Cash Flows for the three and six months then ended (the “Financial Statements”). The restatements reflect the effects of adjustments for the accounting related to various matters detailed in Note 1 to the Financial Statements. These restatements reflect adjustments related to errors in calculation of income tax related accounts including deferred tax assets, income taxes payable, and current and deferred tax expense.  Additionally, our independent auditors advised us to re-evaluate our historical and current practices with respect to recognition of deferred revenue and whether it is being properly recorded in accordance with generally accepted accounting principles in the United States (GAAP), which led to restatements of revenue and general and administrative expenses.

 

In addition, results for 2011 have been restated with respect to the accounting for such matters where appropriate.

 

Sitestar Corporation is also revising the discussion under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 4, Controls and Procedures in order to reflect the effects of these restatements.

 

Except with respect to these matters, the Financial Statements in this Form 10-Q/A do not reflect any events that have occurred after the 2012 Form 10-Q was originally filed.

 

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION

Index

			Page Number
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011		4-5
		Condensed Consolidated Statements of Income for the three months ended June 30, 2012 and 2011		6
		Condensed Consolidated Statements of Income for the six months ended June 30, 2012 and 2011		7
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011		8-9
		Notes to Condensed Consolidated Financial Statements		10-20
Item 2.		Management's Discussion and Analysis		20-28
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		28
Item 4.		Controls and Procedures		28
Part II.		OTHER INFORMATION		30
Item 1.		Legal Proceedings		30
Item 1A.		Risk Factors		30
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.		Defaults Upon Senior Securities		30
Item 4		Submission of Matters to a Vote of Security Holders		30
Item 5		Other Information		30
Item 6.		Exhibits		30
SIGNATURES				31

 

PART I. FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2012 AND DECEMBER 31, 2011

 

ASSETS

		2012 (Unaudited)				2011
		Restated
CURRENT ASSETS
Cash and cash equivalents		$	135,538			$	17,268
Accounts receivable, net of allowance of $2,562      and $2,586			44,907				53,090
Prepaid expenses			90,789				75,883
Real estate, at cost			2,663,183				2,464,694
Total current assets			2,934,417				2,610,935
PROPERTY AND EQUIPMENT, net			158,317				164,159
CUSTOMER LIST, net of accumulated amortization of $12,300,964 and $12,286,712			19,708				33,961
GOODWILL, net of impairment			1,288,559				1,288,559
DEFERRED TAX ASSETS			272,742				433,550
OTHER ASSETS			265,819				266,180
TOTAL ASSETS		$	4,939,562			$	4,797,344

 

 

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

 

 

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS, continued

JUNE 30, 2012 AND DECEMBER 31, 2011

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

		2012 (Unaudited)				2011
		Restated
CURRENT LIABILITIES
Accounts payable		$	8,914			$	71,136
Accrued expenses			45,837				31,433
Deferred revenue			434,093				461,640
Notes payable, current portion			900,615				900,615
Total current liabilities			1,389,459				1,464,824
NOTES PAYABLE – STOCKHOLDERS, less current portion			50,753				95,958
TOTAL LIABILITIES			1,440,212				1,560,782
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 2012 and 2011 and 74,085,705 shares outstanding in 2012 and 2011			91,326				91,326
Additional paid-in capital			13,880,947				13,880,947
Treasury stock, at cost, 17,240,758 common shares			(789,518	)			(789,518	)
Accumulated deficit			(9,683,405	)			(9,946,193	)
Total stockholders’ equity			3,499,350				3,236,562
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	4,939,562			$	4,797,344

 

 

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

 

 

 

 

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011

(UNAUDITED)

 

		2012				2011
		Restated				Restated
REVENUE
Internet		$	743,066			$	1,004,058
Real estate			85,688				—
			828,754				1,004,058
COST OF REVENUE
Internet			393,609				494,984
Real estate			59,997				—
			453,606				494,984
GROSS PROFIT			375,148				509,074
OPERATING EXPENSES:
Selling general and administrative expenses			213,733				373,348
INCOME FROM OPERATIONS			161,415				135,726
OTHER INCOME (EXPENSES):
Other income (expenses)			842				(585	)
Interest expense			(1,960	)			(2,218	)
TOTAL OTHER INCOME (EXPENSE)			(1,118	)			(2,803	)
INCOME BEFORE INCOME TAXES			160,297				132,923
INCOME TAXES EXPENSE			(60,858	)			(60,192	)
NET INCOME		$	99,439			$	72,731
BASIC AND DILUTED EARNINGS PER SHARE		$	0.00			$	0.00
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED			74,085,705				74,480,125

 

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

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(UNAUDITED)

 

		2012				2011
		Restated				Restated
REVENUE
Internet		$	1,553,433			$	2,058,576
Real estate			582,388				—
			2,135,821				2,058,576
COST OF REVENUE
Internet			837,660				986,469
Real estate			442,538				—
			1,280,198				986,469
GROSS PROFIT			855,623				1,072,107
OPERATING EXPENSES:
Selling general and administrative expenses			428,288				758,192
INCOME FROM OPERATIONS			427,335				313,915
OTHER INCOME (EXPENSES):
Other income			310				324
Interest expense			(4,049	)			(3,082	)
TOTAL OTHER INCOME (EXPENSE)			(3,739	)			(2,758	)
INCOME BEFORE INCOME TAXES			423,596				311,157
INCOME TAXES EXPENSE			(160,807	)			(127,850	)
NET INCOME		$	262,789			$	183,307
BASIC AND DILUTED EARNINGS PER SHARE		$	0.00			$	0.00
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED			74,085,705				74,480,125

 

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

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(UNAUDITED) 

		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:			Restated				Restated
Net income		$	262,789			$	183,307
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense			20,456				232,326
Allowance for doubtful accounts			(24	)			(1,794	)
Deferred income taxes			160,807				127,850
Decrease in accounts receivable			8,207				15,142
Increase in prepaid expenses			(14,906	)			(36	)
Increase in real estate			(198,488	)			(1,179,699	)
(Decrease) increase in accounts payable			(62,222	)			22,945
Increase in accrued expenses			14,403				88
Decrease in deferred revenue			(27,547	)			(66,215	)
Decrease in accrued income taxes			—				(35,934	)
Net cash provided by (used in) operating activities			163,475				(702,020	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets held for resale			—				(1	)
Purchase of property and equipment			—				(2,000	)
Purchase of non-compete			—				(1,000	)
Purchase of deferred revenue			—				10,000
Purchase of customer list			—				(97,000	)
Net cash used in investing activities			—				(90,001	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable – stockholders			(45,205	)			(49,460	)
Proceeds from notes payable - stockholders			—				89,920
Proceeds from notes payable			—				33,000
Purchase of treasury stock			—				(4,494	)
Net cash provided by (used in) financing activities			(45,205	)			68,966
NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS			118,270				(723,055	)
CASH AND CASH EQUIVALENTS – BEGINNING OF  PERIOD			17,268				939,328
CASH AND CASH EQUIVALENTS – END OF  PERIOD		$	135,538			$	216,273

 

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

 

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(UNAUDITED)

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

During the six months ended June 30, 2012 and 2011, the Company paid income taxes of $64,000 and $100,746 and paid interest expense of approximately $4,000 and $3,000, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 1-RESTATEMENT OF FINANCIAL STATEMENTS

 

The Company is restating its condensed consolidated financial statements for the quarters ended June 30, 2012 and 2011 to reflect adjustments for errors in the calculation of income tax related accounts including deferred tax assets, income taxes payable, and current and deferred tax expense balances.  Additionally, during our audit for the year ended December 31, 2012, our independent auditors advised us to re-evaluate our historical and current practices with respect to recognition of deferred revenue and whether it is being properly recorded in accordance with generally accepted accounting principles in the United States (GAAP).  As a result of that review, it was determined that changes in deferred revenue were not being properly classified in the income statement, which has resulted in restatements to revenue and operating expenses.

 

The following is a summary of the effects of these changes on the Company’s condensed consolidated balance sheets, statements of income and cash flows:

 

 

 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 1-RESTATEMENT OF FINANCIAL STATEMENTS, continued

 

Consolidated Balance Sheets
As of June 30, 2012		As Previously Reported				Adjustments				As Restated
Prepaid expenses			1,463				89,326				90,789
Deferred tax asset			667,309				(394,567	)			272,742
Total assets			5,244,803				(305,241	)			4,939,562
Accrued income taxes			15,523				(15,523	)			—
Total current liabilities			1,404,982				(15,523	)			1,389,459

 

Consolidated Statements of Income
For the Three Months Ended June 30, 2012		As Previously Reported				Adjustments				As Restated
Revenue internet			720,532				22,534				743,066
Selling general and administrative expenses			191,199				22,534				213,733
Income tax (expense) benefit			(668	)			(60,190	)			(60,858	)
Net income			159,629				(60,190	)			99,439
Basic and diluted income per share			.00				.00				.00

 

For the Six Months Ended June 30, 2012		As Previously Reported				Adjustments				As Restated
Revenue internet			1,525,886				27,547				1,553,433
Selling general and administrative expenses			400,741				27,547				428,288
Income tax (expense) benefit			(55,948	)			(104,859	)			(160,807	)
Net income			367,648				(104,859	)			262,789
Basic and diluted income per share			.00				.00				.00

 

Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2012		As Previously Reported				Adjustments				As Restated
Net income			367,648				(104,859	)			262,789
Deferred income taxes			95,298				65,509				160,807
(Increase) decrease in prepaid expenses			11,574				(26,480	)			(14,906	)

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 1-RESTATEMENT OF FINANCIAL STATEMENTS, continued

 

Consolidated Balance Sheets
As of June 30, 2011		As Previously Reported				Adjustments				As Restated
Deferred tax asset			953,152				(346,587	)			606,565
Total assets			4,845,587				(346,587	)			4,499,000
Accrued income taxes			19,530				35,362				54,892
Total current liabilities			1,642,015				35,362				1,677,377

 

Consolidated Statements of Income
For the Three Months Ended June 30, 2011		As Previously Reported				Adjustments				As Restated
Revenue Internet			953,745				50,313				1,004,058
Selling general and administrative expenses			323,035				50,313				373,348
Income tax (expense) benefit			5,616				(65,808	)			(60,192	)
Net income			138,539				(65,808	)			72,731
Basic and diluted income per share			.00				(.00	)			.00

 

For the Six Months Ended June 30, 2011		As Previously Reported				Adjustments				As Restated
Revenue Internet			2,002,360				56,216				2,058,576
Selling general and administrative expenses			701,976				56,216				758,192
Income tax (expense) benefit			282,372				(410,222	)			(127,850	)
Net income			593,529				(410,222	)			183,307
Basic and diluted income per share			.01				(.01	)			.00

 

Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2011		As Previously Reported				Adjustments				As Restated
Net income			593,529				(410,222	)			183,307
Decrease in accrued income taxes			(128,187	)			92,253				(35,934	)
Deferred income taxes			(190,119	)			317,969				127,850

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 2 – 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, 2011 included in the Company’s Annual Report on Form 10-K.  The results for the six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

 

NOTE 3 – 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, 2012 and 2011:

		2012				2011
Net income available to common shareholders		$	99,439			$	72,731
Weighted average number of common shares			74,085,705				74,480,125
Basic and diluted income per share		$	0.00			$	0.00

 

For the six months ended June 30, 2012 and 2011:

		2012				2011
Net income available to common shareholders		$	262,789			$	183,307
Weighted average number of common shares			74,085,705				74,480,125
Basic and diluted income per share		$	0.00			$	0.00

 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 4 – COMMON STOCK

 

During the six months ended June 30, 2012, the Company issued no shares of common stock and repurchased no treasury shares.

 

NOTE 5 – SEGMENT INFORMATION

 

The Company has three business units that have been aggregated into three reportable segments: Corporate, Real estate 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 real estate group invests in, refurbishes and markets real estate for resale. 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 June 30, 2012 and 2011:

 

June 30, 2012

		Corporate				Real estate				Internet					Consolidated
Revenue		$	—			$	85,688			$	743,066			$	828,754
Operating income (loss)		$	(19,647	)		$	25,691			$	155,371			$	161,415
Depreciation and amortization		$	—			$	—			$	10,214			$	10,214
Interest expense		$	—			$	—			$	1,960			$	1,960
Real estate		$	—			$	2,663,183			$	—			$	2,663,183
Intangible assets		$	—			$	—			$	1,309,183			$	1,309,183
Total assets		$	—			$	2,663,183			$	2,276,379			$	4,939,562

 

 

 

 

 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 5 – SEGMENT INFORMATION, continued

 

June 30, 2011

		Corporate				Real estate				Internet					Consolidated
Revenue		$	—			$	—			$	1,004,058			$	1,004,058
Operating income (loss)		$	(26,224	)		$	—			$	161,950			$	135,726
Depreciation and amortization		$	—			$	—			$	96,448			$	96,448
Interest expense		$	—			$	—			$	2,218			$	2,218
Real estate		$	—			$	1,694,902			$	—			$	1,694,902
Intangible assets		$	—			$	—			$	1,455,943			$	1,455,943
Total assets		$	—			$	1,694,902			$	2,804,098			$	4,499,000

 

Summarized financial information concerning the Company's reportable segments is shown in the following tables as of and for the six months ended June 30, 2012 and 2011:

 

June 30, 2012

		Corporate				Real estate				Internet					Consolidated
Revenue		$	—			$	582,388			$	1,553,433			$	$2,135,821
Operating income (loss)		$	(62,573	)		$	139,850			$	350,058			$	$427,335
Depreciation and amortization		$	—			$	—			$	20,456			$	$20,456
Interest expense		$	—			$	—			$	4,049			$	$4,049
Real estate		$	—			$	2,663,183			$	—			$	$2,663,183
Intangible assets		$	—			$	—			$	1,309,183			$	$1,309,183
Total assets		$	—			$	2,663,183			$	2,276,379			$	$4,939,562

 

June 30, 2011

		Corporate				Real estate				Internet					Consolidated
Revenue		$	—			$	—			$	2,058,576			$	$2,058,576
Operating income (loss)		$	(59,338	)		$	—			$	373,253			$	$313,915
Depreciation and amortization		$	—			$	—			$	232,326			$	$232,326
Interest expense		$	—			$	—			$	3,082			$	$3,082
Real estate		$	—			$	1,694,902			$	—			$	$1,694,902
Intangible assets		$	—			$	—			$	1,455,943			$	$1,455,943
Total assets		$	—			$	1,694,902			$	2,804,098			$	$4,499,000

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 6 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

No new accounting pronouncement issued or effective during the six months ended June 30, 2012 has had or is expected to have a material impact on the condensed consolidated financial statements.

 

NOTE 7 – ACQUISITIONS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 8 -- PROVISION FOR INCOME TAXES

 

The provision for federal and state income taxes for the six months ended June 30, 2012 and 2011 included the following: 

 

		2012				2011
Current provision:
Federal		$	—			$	—
State			—				—
Deferred provision:
Federal			135,390				107,642
State			25,417				20,208
Total income tax provision		$	160,807			$	127,850

 

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, 2012 and December 31, 2011 are as follows:

 

		2012				2011
Accounts receivable		$	2,586			$	2,586
Amortization of Intangible assets			2,712,403				2,853,211
Less valuation allowance			(2,442,247	)			(2,442,247	)
Deferred tax asset		$	272,742			$	433,550

 

At June 30, 2012 and December 31, 2011, the Company has provided a valuation allowance for a portion of the deferred tax asset that management has not been able to determine that realization 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 tax purposes, tax years 2008 through 2011 remain open to examination.

 

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

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 $14,614 and $225,912 for the six months ended June, 30, 2012 and 2011.

 

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

 

Internet

 

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.

 

Real Estate

 

Revenue from real estate is recognized upon closing of the sale, as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time.

 

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 11 - NOTES PAYABLE

 

Notes payable at June 30, 2012 and December 31, 2011 consist of the following:

		2012				2011
Non-interest bearing amount due on acquisition of USA Telephone.		$	900,615			$	900,615
Totals			900,615				900,615
Less current portion			(900,615	)			(900,615	)
Long-term portion		$	—			$	—

 

The future principal maturities of these notes are as follows:

	Twelve months ending  June 30, 2013			$	900,615
	Twelve months ending  June 30, 2014				—
	Twelve months ending  June 30, 2015				—
	Twelve months ending  June 30, 2016				—
	Twelve months ending  June 30, 2017				—
	Thereafter				—
	Total			$	900,615

 

NOTE 12 - NOTES PAYABLE – STOCKHOLDERS

 

Notes payable - stockholders at June 30, 2012 and December 31, 2011 consist of the following: 

		2012				2011
Note payable to officer and stockholder on a line of credit of $750,000 at an annual interest rate of 10%.  The accrued interest and principal are due on January 1, 2014.		$	753			$	45,958
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				50,000
Totals			50,753				95,958
Less current portion			—				—
Long-term portion		$	50,753			$	95,958

 

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 12 - NOTES PAYABLE – STOCKHOLDERS, continued

 

The future principal maturities of these notes are as follows:

 

	Twelve months ending June 31, 2013			$	—
	Twelve months ending June 30, 2014				50,753
	Twelve months ending June 30, 2015				—
	Twelve months ending June 30, 2016				—
	Twelve months ending June 30, 2017				—
	Total				50,753

 

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, 2011 included in the Annual Report on Form 10-K.  The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

 

 

SITESTAR CORPORATION

 

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

 

Overview

 

Internet

 

Sitestar is an Internet Service Provider (ISP) that offers consumer and business-grade Internet access, wholesale managed modem services for downstream ISPs and Web hosting.  Sitestar also delivers value-added services including spam, virus and spyware protection, pop-up ad blocking and web acceleration.  The Company maintains multiple sites of operation and provides services to customers throughout the U.S. and Canada.

 

The products and services that the Company provides include:

·    Internet access services;

·    Web acceleration services;

·    Web hosting services;

 

The Company’s Internet division markets and sells narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic and wireless), and supports these products utilizing its own infrastructure and affiliations.  Value-added services include web acceleration, spam and virus filtering, as well as, spyware protection. Additionally, the Company markets and sells web hosting and related services to consumers and businesses.

 

Real Estate

 

The real estate group invests in, refurbishes and markets real estate for resale. The increase in real estate sales marks the beginning of the Company’s efforts to turn investments of excess cash from the Internet division into a new revenue stream. With the increased inventory of real estate investments, the sales should become a more prominent source of revenue.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION

 

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

 

Results of operations

 

The following tables show financial data for the six months ended June 30, 2012.

 

		Corporate				Internet				Real estate				Total
Revenue		$	—			$	1,553,433			$	582,388			$	2,135,821
Cost of revenue			—				837,660				442,538				1,280,198
Gross profit			—				715,773				139,850				855,623
Operating expenses			62,573				365,715				—				428,288
Income (loss) from operations			(62,573	)			350,058				139,850				427,335
Other income (expense)			—				(3,739	)			—				(3,739	)
Income (loss) before income taxes			(62,573	)			346,319				139,850				423,596
Income taxes (expense) benefit			—				(107,719	)			(53,088	)			(160,807	)
Net income (loss)		$	(62,573	)		$	238,600			$	86,762			$	262,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION

 

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

 

The following tables show financial data for the six months ended June 30, 2011.

 

		Corporate				Internet				Real estate				Total
Revenue		$	—			$	2,058,576			$	—			$	2,058,576
Cost of revenue			—				986,469				—				986,469
Gross profit			—				1,072,107				—				1,072,107
Operating expenses			59,338				698,854				—				758,192
Income (loss) from operations			(59,338	)			373,253				—				313,915
Other income (expense)			—				(2,758	)			—				(2,758	)
Income (loss) before income taxes			(59,338	)			370,495				—				311,157
Income taxes (expense) benefit			—				(127,850	)			—				(127,850	)
Net income (loss)		$	(59,338	)		$	242,645			$	—			$	183,307

 

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) consists of revenue less cost of revenue and operating expense.  EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is presented to enhance an understanding of the Company’s operating results and is not intended to represent cash flows or results of operations in accordance with GAAP for the periods indicated. EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures for other companies. See the Liquidity and Capital Resource section for further discussion of cash generated from operations.

 

The following tables show a reconciliation of EBITDA to the GAAP presentation of net income for the six months ended June 30, 2012 and 2011.

 

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION

 

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

 

For the six months ended June 30, 2012

 

		Corporate				Internet				Real estate				Total
EBITDA		$	(62,573	)		$	370,824			$	139,850			$	448,101
Interest expense			—				(4,049	)			—				(4,049	)
Taxes			—				(107,719	)			(53,088	)			(160,807	)
Depreciation			—				(5,842	)			—				(5,842	)
Amortization			—				(14,614	)			—				(14,614	)
Net income (loss)		$	(62,573	)		$	238,600			$	86,762			$	262,789

 

For the six months ended June 30, 2011

 

		Corporate				Internet				Real estate				Total
EBITDA		$	(59,338	)		$	605,903			$	—			$	546,565
Interest expense			—				(3,082	)			—				(3,082	)
Taxes			—				(127,850	)			—				(127,850	)
Depreciation			—				(6,414	)			—				(6,414	)
Amortization			—				(225,912	)			—				(225,912	)
Net income (loss)		$	(59,338	)		$	242,645			$	—			$	183,307

 

 

Pursuant to the approval of the board of directors, the Company’s management believes that it is in the best interests of the Corporation to implement a program to purchase (“Purchase Program”), as investments, real estate with the Company’s surplus cash flows. Any real estate purchased pursuant to the Purchase Program will be held as investment until such time or times as the Board of Directors, in its discretion, may deem advisable to sell or otherwise dispose of the property.

 

The current real estate market presents the unique opportunity to acquire properties at deep discounts from fair market value with the potential for substantial profits. Management evaluates property as it becomes available with respect to the market value versus the acquisition cost, in addition to other conditions that could affect the resale value. Renovations are made as needed to maximize the market appeal and value prior to listing for sale.

 

 

 

SITESTAR CORPORATION

 

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

 

Management believes that there is sustainable cash flow potential for the near future in real estate and is actively pursuing the program. As of the balance sheet date, June 30, 2012, the Company has invested approximately $2,663,183 in surplus funds and is continuing the investing process.

 

SIX MONTHS ENDED JUNE 30, 2012 COMPARED TO JUNE 30, 2011 

 

REVENUE

 

Total revenue for the six months ended June 30, 2012 increased by $77,245 or 3.8% from $2,058,576 for the six months ended June 30, 2011 to $2,135,821 for the same period in 2012. Internet sales decreased $505,143 or 24.5% from $2,058,576 for the six months ended June 30, 2011 to $1,553,433 for the same period in 2012. Real estate sales for the six months ended June 30, 2012 were $582,388 and were zero for the same period in 2011.

 

The decrease in Internet sales is attributed to the lack of acquisitions of Internet access and web hosting customers of ISPs. Although the Company continues to sign up new customers, competition from ubiquitous nationwide telecommunications and cable providers threatens significant and sustainable organic growth. To insure continued strength in revenues, the Company has acquired and plans to continue to acquire the assets of additional ISPs, folding them into its operations to provide future revenues. The continued success of the new real estate division is the result of providing a product with market appeal, sold at a discount while still providing a profitable revenue stream.

 

COST OF REVENUE

 

Total costs of revenue for the six months ended June 30, 2012 increased by $293,729 or 29.8% from $986,469 for the six months ended June 30, 2011 to $1,280,198 for the same period in 2012.  Cost of Internet revenue decreased $148,809 or 15.1% from $986,469 for the six months ended June 30, 2011 to $837,660 for the same period in 2012 as a result of declining revenue. Cost of real estate revenue increased $442,538 or 100.0% from zero for the six months ended June 30, 2011 to $442,538 for the same period in 2012.

 

 

 

 

 

 

 

 

 

SITESTAR CORPORATION

 

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

 

OPERATING EXPENSES

Operating expenses for the six months ended June 30, 2012 decreased $329,904 or 43.5% from $758,192 for the six months ended June 30, 2011 to $428,288 for the same period in 2012. This decrease is primarily due to lower amortization expense as a result of intangibles being fully amortized.  Amortization expense decreased $211,298 or 93.5% from $225,912 for the six months ended June 30, 2011 to $14,614 for the same period in 2012.

INCOME TAXES

 

For the six months ended June 30, 2012 and June 30, 2011 corporate income tax expenses of $160,807 and $127,850 were incurred.

INTEREST EXPENSE

 

Interest expense for the six months ended June 30, 2012 increased by $967 or 31.4% from $3,082 for the six months ended June 30, 2011 to $4,049 for the same period in 2012.  

 

JUNE 30, 2012 COMPARED TO DECEMBER 31, 2011

 

FINANCIAL CONDITION

 

Net accounts receivable decreased $8,183 or 15.4% from $53,090 on December 31, 2011 to $44,907 on June 30, 2012.  Investment in real estate increased net $198,489 or 8.1% from $2,464,694 on December 31, 2011 to $2,663,183 on June 30, 2012. Accounts payable decreased by $62,222 or 87.5% from $71,136 on December 31, 2011 to $8,914 on June 30, 2012. Deferred revenue decreased by $27,547 or 6.0% from $461,640 on December 31, 2011 to $434,093 on June 30, 2012 representing decreased volume of customer accounts that have been prepaid. Long-term notes payable to shareholders decreased $45,205 or 47.1% from $95,958 on December 31, 2011 to $50,753 on June 30, 2012.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents totaled $135,538 and $17,268 at June 30, 2012 and at December 31, 2011. EBITDA was $448,101 for the six months ended June 30, 2012 as compared to $546,565 for the same period in 2011.

 

 

SITESTAR CORPORATION

 

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

 

The aging of accounts receivable as of June 30, 2012 and December 31, 2011 is as shown:

 

				2012								2011
	Current			$	23,161				52	%		$	33,362				63	%
	30 < 60				12,611				28	%			13,123				25	%
	60+				9,135				20	%			6,605				12	%
	Total			$	44,907				100	%		$	53,090				100	%

 

OFF-BALANCE SHEET TRANSACTIONS

The Company is not a party to any off-balance sheet transactions.

CRITICAL ACCOUNTING POLICY AND ESTIMATES

 

The Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses its condensed consolidated financial statements, which have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation.

 

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the condensed consolidated financial statements included in this quarterly report.

 

 

 

 

 

SITESTAR CORPORATION

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

None. 

Item 4.    Controls and Procedures  

In connection with the restatement discussed above in the explanatory note to this Form 10-Q/A and in Note 1 to our financial statements, under the direction of our Chief Executive Officer and Chief Financial Officer, we reevaluated our disclosure controls and procedures.  We identified the following material weaknesses in our internal control over financial reporting:

 

1.

We did not maintain proper segregation of duties for the preparation of our financial statements. Due to the size of our administrative staff, all accounting and reporting functions are handled by a single individual, our Chief Financial Officer, with little or no oversight and review.

 

2.

We did not have adequate policies and procedures in place to provide reasonable assurance that revenues and deferred revenues were being properly recorded in accordance with GAAP. Historically, deferred revenues have been adjusted through our bad debt expense account, rather than through our revenue account. It has been determined that deferred revenue adjustments should properly be recorded through our revenue account to properly reflect revenues earned during the period.

 

3.

We did not have effective review procedures in place to provide reasonable assurance that calculations related to income tax account balances were free of material error. This is largely related to our inability to maintain proper segregation of duties noted above.

 

As a result of these material weaknesses, we concluded that our disclosure controls and procedures were not effective as of June 30, 2012.

 

SITESTAR CORPORATION

 

In March 2013, management implemented new procedures with regard to the recording of revenues and deferred revenues, and believes these procedures will effectively mitigate the related material weakness. We are currently unable to achieve proper segregation of duties, including sufficient review during our financial reporting close process given the size of our administrative staff. Despite this, management believes that there are no material inaccuracies or omissions of fact in this quarterly report, as amended. However, we cannot provide assurance that we will not, in the future, identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not discovered to date.

 

Changes in Internal Control over Financial Reporting:

 

Except as noted above, no change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended June 30, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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.

 

SITESTAR CORPORATION

 

 

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: April 19, 2013

By:_/s/ Frank Erhartic, Jr.

Frank Erhartic, Jr.

President, Chief Executive Officer

(Principal Executive Officer and

Principal Accounting Officer)

 

Date: April 19, 2013

By:_/s/ Daniel A. Judd.

Daniel A. Judd

Chief Financial Officer

(Principal Financial Officer)