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 March 31, 2014
[ ] 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]
There were 74,085,705 shares of common stock with a par value of $0.001 per share outstanding at May 15, 2014.
SITESTAR CORPORATION
Table of Contents
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Readers are cautioned that, although the Company believes that its expectations are based on reasonable assumptions, forward-looking statements involve risks and uncertainties which may affect our actual results to be materially different than those expressed in our forward-looking statements. These risks and uncertainties include: the Company's businesses and prospects, including changes in economic and market conditions, acceptance of the Company’s products, maintenance of strategic alliances, real estate appreciation or depreciation in our target markets and the supply of single-family homes in our target markets, our ability to contain renovation, maintenance, marketing, and other operating costs for our properties, our ability to lease or re-lease our rental homes to qualified residents on attractive terms or at all, and other factors discussed elsewhere in this Form 10-Q. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2014 AND DECEMBER 31, 2013
| | | 2014
(Unaudited) | | 2013 |
| | | | | | | | | |
| ASSETS | | | | | | | | |
| Real estate – held-for-resale | | $ | 2,497,343 | | | $ | 2,712,441 | |
| Real estate – held for investment, net | | | 795,194 | | | | 531,165 | |
| Cash and cash equivalents | | | 155,724 | | | | 118,469 | |
| Accounts receivable, net | | | 23,777 | | | | 35,129 | |
| Prepaid expenses | | | 1,347 | | | | 1,394 | |
| Property, plant and equipment, net | | | 146,314 | | | | 146,314 | |
| Goodwill, net | | | 1,166,494 | | | | 1,166,494 | |
| Deferred tax assets | | | 74,276 | | | | 74,276 | |
| Other assets | | | 217,563 | | | | 217,563 | |
| Total assets | | $ | 5,078,032 | | | $ | 5,003,245 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS EQUITY | | | | | | | | |
| LIABILITIES | | | | | | | | |
| Accounts payable | | $ | 28,528 | | | $ | 12,121 | |
| Accrued expenses | | | 19,356 | | | | 19,129 | |
| Deferred revenue | | | 317,705 | | | | 312,898 | |
| Notes payable | | | 900,615 | | | | 900,615 | |
| Notes payable – stockholder | | | 60,990 | | | | 59,826 | |
| Total liabilities | | | 1,327,194 | | | | 1,304,589 | |
| | | | | | | | | |
| 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 2013 and 2012 and 74,085,705 shares outstanding in 2013 and 2012 | | | 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 | | | (9,431,917 | ) | | | (9,484,099 | ) |
| | | | | | | | | |
| Total stockholders’ equity | | | 3,750,838 | | | | 3,698,656 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 5,078,032 | | | $ | 5,003,245 | |
| | | | | | | | | |
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 MARCH 31, 2014 AND 2013
(UNAUDITED)
| | | 2014 | | 2013 |
| | | | | | | | | |
| REVENUE | | | | | | | | |
| Internet | | $ | 519,235 | | | $ | 719,899 | |
| Real estate | | | 159,889 | | | | 15,870 | |
| | | | 679,124 | | | | 735,769 | |
| | | | | | | | | |
| COST OF REVENUE | | | | | | | | |
| Internet | | | 198,776 | | | | 350,973 | |
| Real estate | | | 138,680 | | | | 3,076 | |
| | | | 337,456 | | | | 354,049 | |
| | | | | | | | | |
| GROSS PROFIT | | | 341,668 | | | | 381,720 | |
| | | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | |
| Selling general and administrative expenses | | | 288,908 | | | | 251,444 | |
| | | | | | | | | |
| INCOME FROM OPERATIONS | | | 52,760 | | | | 130,276 | |
| | | | | | | | | |
| OTHER INCOME (EXPENSES): | | | | | | | | |
| Other income | | | 586 | | | | 503 | |
| Interest expense | | | (1,164 | ) | | | (1,330 | ) |
| TOTAL OTHER INCOME (EXPENSE) | | | (578 | ) | | | (827 | ) |
| | | | | | | | | |
| | | | | | | | | |
| INCOME BEFORE INCOME TAXES | | | 52,182 | | | | 129,449 | |
| | | | | | | | | |
| INCOME TAXES (EXPENSE) BENEFIT | | | — | | | | (47,626 | ) |
| | | | | | | | | |
| NET INCOME | | $ | 52,182 | | | $ | 81,823 | |
| | | | | | | | | |
| BASIC AND DILUTED EARNINGS (LOSS) PER SHARE | | $ | 0.00 | | | $ | 0.00 | |
| | | | | | | | | |
| WEIGHTED AVERAGE SHARES | | | | | | | | |
| OUTSTANDING - BASIC AND DILUTED | | | 74,085,705 | | | | 74,085,705 | |
See the accompanying notes to the unaudited condensed consolidated financial statements.
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
(UNAUDITED)
| | | 2014 | | 2013 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net income | | $ | 52,182 | | | $ | 81,823 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | |
| Depreciation and amortization expense | | | 5,278 | | | | 6,943 | |
| Allowance for doubtful accounts | | | (2,223 | ) | | | 5,040 | |
| Deferred income taxes | | | — | | | | 47,626 | |
| (Increase) decrease in accounts receivable | | | 13,575 | | | | (57,479 | ) |
| (Increase) decrease in prepaid expenses | | | 47 | | | | 6,861 | |
| (Increase) decrease in real estate | | | (54,209 | ) | | | (73,731 | ) |
| Decrease in accounts payable | | | 16,407 | | | | 8,999 | |
| (Increase) decrease in accrued expenses | | | 1,391 | | | | (7,024 | ) |
| Decrease in deferred revenue | | | 4,807 | | | | (31,670 | ) |
| | | | | | | | | |
| Net cash provided by (used in) operating activities | | | 37,255 | | | | (12,612 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| (Increase) decrease in other assets held for resale | | | — | | | | 1 | |
| | | | | | | | | |
| Net cash provided by (used in) investing activities | | | — | | | | 1 | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Repayment of notes payable – stockholders | | | — | | | | — | |
| | | | | | | | | |
| Net cash provided by (used in) financing activities | | | — | | | | — | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 37,255 | | | | (12,611 | ) |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD | | | 118,469 | | | | 148,590 | |
| CASH AND CASH EQUIVALENTS - END OF PERIOD | | $ | 155,724 | | | $ | 135,979 | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For the three months ended March 31, 2014 and 2013, the Company paid $0 and $0 of income taxes and paid interest expense of $1,164 and $1,330.
See the accompanying notes to the unaudited condensed consolidated financial statements.
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 notes for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K. The results for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
Significant Accounting Policies
See the Notes to Consolidated Financial Statements in the Company’s 2013 Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
No new accounting pronouncement issued or effective during this fiscal quarter has had or is expected to have a material impact on the consolidated financial statements.
Income Per Share
The basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company has no potentially dilutive securities. The following table represents the calculations of basic and diluted income per share:
For the three months ended March 31, 2014 and 2013:
| | | 2014 | | 2013 |
| Net income available to common shareholders | | $ | 52,182 | | | $ | 81,823 | |
| Weighted average number of common shares | | | 74,085,705 | | | | 74,085,705 | |
| | | | | | | | | |
| Basic and diluted income per share | | $ | 0.00 | | | $ | 0.00 | |
NOTE 2 – COMMON STOCK
During the three months ended March 31, 2014, the Company issued no shares of common stock and repurchased no treasury shares.
NOTE 3 – SEGMENT INFORMATION
The Company has three business units with separate management and reporting infrastructures that offer different products and services. The business units have been aggregated into three reportable segments: Corporate, Real estate and Internet. The Corporate group is the holding company which oversees the operating of the Internet group and arranges financing. The real estate group invests in, refurbishes and markets real estate for resale. The Internet group provides Internet access to 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.
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 3 - SEGMENT INFORMATION (continued)
Summarized financial information concerning the Company's reportable segments is shown in the following tables for the three months ended March 31, 2014 and 2013:
March 31, 2014
| | | Corporate | | Real estate | | Internet | | Consolidated |
| | | | | | | | | | | | | | | | | |
| Revenue | | $ | — | | | $ | 159,889 | | | $ | 519,235 | | | $ | 679,124 | |
| Operating income (loss) | | $ | (59,999 | ) | | $ | 12,794 | | | $ | 98,664 | | | $ | 52,760 | |
| Depreciation and amortization | | $ | — | | | $ | — | | | $ | 5,278 | | | $ | 5,278 | |
| Interest expense | | $ | — | | | $ | — | | | $ | 1,164 | | | $ | 1,164 | |
| Real estate | | $ | — | | | $ | 3,292,537 | | | $ | — | | | $ | 3,292,537 | |
| Intangible assets | | $ | — | | | $ | — | | | $ | 1,166,494 | | | $ | 1,166,494 | |
| Total assets | | $ | — | | | $ | 3,292,537 | | | $ | 1,785,495 | | | $ | 5,078,032 | |
March 31, 2013
| | | Corporate | | Real estate | | Internet | | Consolidated |
| | | | | | | | | | | | | | | | | |
| Revenue | | $ | — | | | $ | 487,875 | | | $ | 819,192 | | | $ | 1,307,067 | |
| Operating income (loss) | | $ | (42,926 | ) | | $ | 105,335 | | | $ | 203,510 | | | $ | 165,919 | |
| Depreciation and amortization | | $ | — | | | $ | — | | | $ | 10,242 | | | $ | 10,242 | |
| Interest expense | | $ | — | | | $ | — | | | $ | 2,089 | | | $ | 2,089 | |
| Real estate | | $ | — | | | $ | 2,504,107 | | | $ | — | | | $ | 2,504,107 | |
| Intangible assets | | $ | — | | | $ | — | | | $ | 1,316,477 | | | $ | 1,316,477 | |
| Total assets | | $ | — | | | $ | 2,504,107 | | | $ | 2,397,965 | | | $ | 4,902,072 | |
NOTE 5 - NOTES PAYABLE
This USA Telephone note payable is due and is currently in litigation. At March 31, 2014, and December 31, 2013, the balance consist of the following:
| | | 2014 | | 2013 |
| | | | | | | | | |
| Non-interest bearing amount due on acquisition of USA Telephone customers per contract payable in thirty six monthly installments starting January 2008. | | $ | 900,615 | | | $ | 900,615 | |
Litigation
United Systems Access, Inc., et al. v. SiteStar Corporation, Civil Action, Docket No. CV-13-161, (York County Superior Court). This is a breach of contract claim, whereby Plaintiff has alleged that SiteStar has failed to pay the amounts owed on a Promissory Note. SiteStar has filed a counterclaim for damages for overpayments and breach of contract associated with Plaintiff’s misrepresentation of the customer lists and was shorted revenues associated the number of customers contracted for. Plaintiff seeks monetary damages in the amount of $900,615. Litigation is currently in the discovery phase of litigation. The parties have exchanged documents but have not yet taken depositions. SiteStar is currently contesting the Litigation. A mediation hearing in the matter took place on April 25, 2014, as required by the Maine Rules of Civil Procedure, however, no ruling has yet been issued. The estimate of the upper limit of a potential loss is $900,615 which has been accrued. Management is vigorously defending this claim.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes for the year ended December 31, 2013 included in the Annual Report on Form 10-K. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.
Overview
Internet
SiteStar is an Internet Service Provider (ISP) that offers consumer and business-grade Internet access, wholesale managed modem services for downstream ISPs and Web hosting. SiteStar also delivers value-added services including spam, virus and spyware protection, pop-up ad blocking and web acceleration. The Company maintains multiple sites of operation and provides services to customers throughout the U.S. and Canada.
The products and services that the Company provides include:
| · | | Internet access services; |
| · | | Web acceleration services; |
| · | | Web hosting services; |
The Company’s Internet division markets and sells narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic and wireless), and supports these products utilizing its own infrastructure and affiliations. Value-added services include web acceleration, spam and virus filtering, as well as, spyware protection. Additionally, the Company markets and sells web hosting and related services to consumers and businesses.
Real Estate
SiteStar is also a real estate investment entity that acquires distressed real estate primarily from foreclosure auctions at a substantial discount from market value. The acquired properties are initially evaluated to determine if they will be held for lease or resale and for their condition of repair, location and refurbish costs.
When the intended use has been determined and the nature and quality of the refurbishing is determined, the work is scheduled as soon as possible. For example, if a property is intended for rental use the quality of the refurbishing would be less than if it were to be showcased for resale because a tenant would more than likely diminish the value of the higher quality work as opposed to a resale that would need to show well. Other work for a rental unit might involve adding rooms in a basement or dividing the property into multi-family units that would bring in more rental income but not be as desirable from a single home owner’s perspective.
After the property has been refurbished for its intended use, it is placed in the applicable market. Rental units are listed in local media as available for rent and are shown to those responding who are financially qualified. If a mutual decision is made to proceed, a lease is drafted and signed and the tenants will put the required deposit down and move in. The deposit is recorded as a liability on the books and rental income is recognized as collected. If the property is to be sold, it is placed in local media for sale and is shown to prospective home owners. After a purchase contract has been accepted, the closing is scheduled and the ownership of the property changes hands. The sale of the property is then recorded in accordance with the closing statement and the related costs are expensed.
Results of operations
The following tables show financial data for the three months ended March 31, 2014.
| | | Corporate | | Internet | | Real estate | | Total |
| | | | | | | | | | | | | | | | | |
| Revenue | | $ | — | | | $ | 519,235 | | | $ | 159,889 | | | $ | 679,124 | |
| Cost of revenue | | | — | | | | 198,776 | | | | 138,680 | | | | 337,456 | |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | — | | | | 320,459 | | | | 21,209 | | | | 341,668 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses | | | 59,999 | | | | 221,795 | | | | 7,114 | | | | 288,908 | |
| | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | (59,999 | ) | | | 98,664 | | | | 14,095 | | | | 52,760 | |
| Other income (expense) | | | — | | | | (578 | ) | | | — | | | | (578 | ) |
| | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | (59,999 | ) | | | 98,086 | | | | 14,095 | | | | 52,182 | |
| Income taxes (expense) benefit | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (59,999 | ) | | $ | 98,086 | | | $ | 14,095 | | | $ | 52,182 | |
The following tables show financial data for the three months ended March 31, 2013.
| | | Corporate | | Internet | | Real estate | | Total |
| | | | | | | | | | | | | | | | | |
| Revenue | | $ | — | | | $ | 719,899 | | | $ | 15,870 | | | $ | 735,769 | |
| Cost of revenue | | | — | | | | 350,973 | | | | 3,076 | | | | 354,049 | |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | — | | | | 368,926 | | | | 12,794 | | | | 381,720 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses | | | 37,125 | | | | 214,319 | | | | — | | | | 251,444 | |
| | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | (37,125 | ) | | | 154,607 | | | | 12,794 | | | | 130,276 | |
| Other income (expense) | | | — | | | | (827 | ) | | | — | | | | (827 | ) |
| | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | (37,125 | ) | | | 153,780 | | | | 12,794 | | | | 129,449 | |
| Income taxes (expense) benefit | | | — | | | | (47,626 | ) | | | — | | | | (47,626 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (37,125 | ) | | $ | 106,154 | | | $ | 12,794 | | | $ | 81,823 | |
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) consists of revenue less cost of revenue and operating expense. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is presented to enhance an understanding of the Company’s operating results and is not intended to represent cash flows or results of operations in accordance with GAAP for the periods indicated. EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures for other companies. See the Liquidity and Capital Resource section for further discussion of cash generated from operations.
The following tables show a reconciliation of EBITDA to the GAAP presentation of net income for the three months ended March 31, 2014 and 2013.
For the three months ended March 31, 2014
| | | Corporate | | Internet | | Real estate | | Total |
| | | | | | | | | | | | | | | | | |
| EBITDA | | $ | (59,999 | ) | | $ | 99,250 | | | $ | 18,072 | | | $ | 58,624 | |
| Interest expense | | | — | | | | (1,164 | ) | | | — | | | | (1,164 | ) |
| Taxes | | | — | | | | — | | | | — | | | | — | |
| Depreciation | | | — | | | | — | | | | (5,278 | ) | | | (5,278 | ) |
| Amortization | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (59,999 | ) | | $ | 98,086 | | | $ | 12,794 | | | $ | 52,182 | |
For the three months ended March 31, 2013
| | | Corporate | | Internet | | Real estate | | Total |
| | | | | | | | | | | | | | | | | |
| EBITDA | | $ | (37,125 | ) | | $ | 162,053 | | | $ | 12,794 | | | $ | 137,722 | |
| Interest expense | | | — | | | | (1,330 | ) | | | — | | | | (1,330 | ) |
| Taxes | | | — | | | | (47,626 | ) | | | — | | | | (47,626 | ) |
| Depreciation | | | — | | | | (1,321 | ) | | | — | | | | (1,321 | ) |
| Amortization | | | — | | | | (5,622 | ) | | | — | | | | (5,622 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (37,125 | ) | | $ | 106,154 | | | $ | 12,794 | | | $ | 81,823 | |
THREE MONTHS ENDED MARCH 31, 2014 COMPARED TO MARCH 31, 2013
REVENUE
Total revenue for the three months ended March 31, 2014 decreased by $56,645 or 7.7% from $735,769 for the three months ended March 31, 2013 to $679,124 for the same period in 2014. Internet sales decreased $200,664 or 27.9% from $719,899 for the three months ended March 31, 2013 to $519,235 for the same period in 2014. Real estate sales increased $144,019 or 907.5% from $15,870 for the three months ended March 31, 2013 to $159,889 for the same period in 2014.
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. Currently SiteStar is concentrating its real estate resources in the rental use of properties as opposed to resale. Rental use of properties generates a larger return on investment and revenue stream over time than a sale but does not generate large current revenue compared to a sale of the properties. There is a strong demand for rental property in the geographic locations where the Company’s properties are located and given the current inventory of single family houses, rental income with the higher return on investment will provide a superior revenue stream for the future years.
COST OF REVENUE
Total costs of revenue for the three months ended March 31, 2014 decreased by $16,593 or 4.7% from $354,049 for the three months ended March 31, 2013 to $337,456 for the same period in 2014. Cost of Internet revenue decreased $152,197 or 43.4% from $350,973 for the three months ended March 31, 2013 to $152,197 for the same period in 2014. Cost of real estate revenue increased $135,604 or 440.8% from $3,076 for the three months ended March 31, 2013 to $138,680 for the same period in 2014. Internet cost of revenue decreased 10.5% as a percentage of revenue resulting primarily from restructuring the internet backbone providers to scale expenses with revenue. The Company is continuing to attempt to negotiate more favorable contracts with telecommunication vendors and making the network capacity more efficient. The Company expects to continue creating these efficiencies through wholesale business partners. The increase in real estate cost of revenue is a reflection of the costs associated with the sale of properties.
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2014 increased $37,464 or 14.9% from $251,444 for the three months ended March 31, 2013 to $288,908 for the same period in 2014. This increase is primarily due to an increase in professional fees for the three months ended March 31, 2014 compared to for the same period in 2013.
INCOME TAXES
For the three months ended March 31, 2014 and March 31, 2013 corporate income tax expenses of $0 and $47,626 were accrued.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2014 decreased by $166 or 12.5% from $1,330 for the three months ended March 34, 2013 to $1,164 for the same period in 2014.
MARCH 31, 2014 COMPARED TO DECEMBER 31, 2013
FINANCIAL CONDITION
Net accounts receivable decreased $11,352 or 32.3% from $35,129 on December 31, 2013 to $23,777 on March 31, 2014. Real estate increased net $48,931 or 1.5% from $3,243,606 on December 31, 2013 to $3,292,537 on March 31, 2014. Accounts payable increased by $16,407 or 135.4% from $12,121 on December 31, 2013 to $28,528 on March 31, 2014. Deferred revenue increased by $4,807 or 1.5% from $312,898 on December 31, 2013 to $317,705 on March 31, 2014 representing increased volume of customer accounts that have been prepaid.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $155,724 and $118,469 at March 31, 2014 and at December 31, 2013. EBITDA was $95,008 for the three months ended March 31, 2014 as compared to $137,722 for the same period in 2013.
| | | 2014 | | 2013 |
| | | | | | | | | |
| EBITDA for the three months ended March 31 | | $ | 58,624 | | | $ | 137,722 | |
| Interest expense | | | (1,164 | ) | | | (1,330 | ) |
| Taxes | | | — | | | | (47,626 | ) |
| Depreciation | | | (5,278 | ) | | | (1,321 | ) |
| Amortization | | | — | | | | (5,622 | ) |
| Net Income for the Three Months Ended March 31, | | $ | 52,182 | | | $ | 81,823 | |
Sales of Internet services which are not automatically processed via credit card or bank account drafts have been the Company’s highest exposure to collection risk. To help offset this exposure, the Company has added a late payment fee to encourage timely payment by customers. Another effort to improve customer collections was the implementation of a uniform manual invoice processing fee, which has also helped to accelerate collections procedures. These steps and more aggressive collection efforts have shifted accounts receivable to a more current status which is easier to collect. The accounts receivable balance in the Current category decreased from 63.0% of total accounts receivable from December 31, 2012 to 11.0% on December 31, 2013. The balance in the 30+ day category decreased from 22.0% to 21.0% of total accounts receivable from December 31, 2012 to December 31, 2013. The balance in the 60+ day category increased from 15% to 68% of total accounts receivable from December 31, 2012 to December 31, 2013.
Investments in real estate are funded primarily from the cash flows generated from the Internet Service Provider division and have not and do not anticipate this to change in the near future. This course of action does not impair the cash flows of the Company. SiteStar does not commit to purchase real estate beyond the ability of the cash flows and has not borrowed money for this purpose. 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.
The aging of accounts receivable as of March 31, 2014 and December 31, 2013 is as shown:
| | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | | |
| | Current | | | $ | 12,158 | | | | 51 | % | | $ | 4,021 | | | | 11 | % |
| | 30 < 60 | | | | 5,392 | | | | 23 | % | | | 7,273 | | | | 21 | % |
| | 60+ | | | | 6,227 | | | | 26 | % | | | 23,835 | | | | 68 | % |
| | | | | | | | | | | | | | | | | | | |
| | Total | | | $ | 23,777 | | | | 100 | % | | $ | 35,129 | | | | 100 | % |
The Company is currently involved in arbitration with USAT, a company that sold us their dial-up customer base in November 2007. SiteStar has counter filed and believes strongly that it will prevail in the arbitration. The liability has been carried on the balance sheet only because the plaintiff has refused to acknowledge the financial assistance given to prevent the loss of customers during the time period they refused to hand over the data base of the customer list that was purchased. In addition, they continued to bill and collect revenue from the customers they no longer owned. Management does not anticipate any significant financial detriment to result from this arbitration. Should the arbitration result in a liability, the Company has ample resources to draw from to satisfy the liability.
OFF-BALANCE SHEET TRANSACTIONS
The Company is not a party to any off-balance sheet transactions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2014, management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed 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) of the Exchange Act. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Because of inherent limitations, any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objective. Based on material weaknesses in our internal control, as described below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2014.
Management’s Report on Internal Control over Financial Reporting
The management of SiteStar is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in theInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our management concluded that, as of March 31, 2014, our internal control over financial reporting was not effective based on such criteria. We have reviewed the results of management’s assessment with our Board of Directors. In addition, we will evaluate any changes to our internal control on a quarterly basis to determine if a material change occurred.
Material Weaknesses in Internal Controls
As defined by the Public Company Accounting Oversight Board’s Auditing Standard No. 5, a material weakness is a significant control deficiency, or a combination of significant control deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
As a result of our evaluation, we identified the following material weakness in our internal control over financial reporting as of March 31, 2014:
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.
Changes in Our Internal Control
Except as noted above, no change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within SiteStar have been detected. These inherent limitations include the realities that judgments and decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or my management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Litigation
United Systems Access, Inc., et al. v. SiteStar Corporation, Civil Action, Docket No. CV-13-161, (York County Superior Court). This is a breach of contract claim, whereby Plaintiff has alleged that SiteStar has failed to pay the amounts owed on a Promissory Note. SiteStar has filed a counterclaim for damages associated with Plaintiff’s failure to turnover certain customer lists. Plaintiff seeks monetary damages in the amount of $900,615. Litigation is currently in the discovery phase of litigation. The parties have exchanged documents but have not yet taken depositions. SiteStar is currently contesting the Litigation. A mediation hearing in the matter took place on April 25, 2014, as required by the Maine Rules of Civil Procedure, however, no ruling has yet been issued. The estimate of the upper limit of a potential loss is $900,615 which has been accrued. Management is vigorously defending this claim.
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:
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: | May 15, 2014 | | | |
| | | | By: | /s/ Frank Erhartic, Jr. |
| | | | | Frank Erhartic, Jr. |
| | | | | President, Chief Executive Officer |
| | | | | (Principal Executive Officer and Principal Accounting Officer) |
| | | | | |
| Date: | May 15, 2014 | | | |
| | | | By: | /s/ Daniel A. Judd |
| | | | | Daniel A. Judd |
| | | | | Chief Financial Officer |
| | | | | (Principal Financial Officer) |
