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, 2015
[ ] 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 August 14, 2015.
This Amendment to our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2015, initially filed with the Securities and Exchange Commission on August 14, 2015, is being filed to in order to correct certain previously reported amounts.
The restatements reflect adjustments related to the under-accrual of legal fees for a settlement entered into on February 6, 2015. In addition, the Company has reclassified certain expenses from the Internet division to the Real estate division. The results for the three and six month periods ended June 30, 2015, have been restated with respect to this accounting for such matters where appropriate. (See Note 1 of the financial statements.)
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 2015 Form 10-Q was originally filed.
SITESTAR CORPORATION
| PART I. FINANCIAL INFORMATION | Page Number | |||
| Item 1. Financial Statements (Unaudited) | ||||
| Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 | 1 | |||
| Condensed Consolidated Statements of Income for the three months ended June 30, 2015 and 2014 | 2 | |||
| Condensed Consolidated Statements of Income for the six months ended June 30, 2015 and 2014 | 3 | |||
| Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 | 4 | |||
| Notes to Condensed Consolidated Financial Statements | 5-10 | |||
| Item 2. Management's Discussion and Analysis | 11-18 | |||
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 18 | |||
| Item 4. Controls and Procedures | 19-20 | |||
| PART II. OTHER INFORMATION | 21 | |||
| Item 1. Legal Proceedings | 21 | |||
| Item 1A. Risk Factors | 21 | |||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 21 | |||
| Item 3. Defaults upon Senior Securities | 21 | |||
| Item 4. Mine Safety Disclosures | 21 | |||
| Item 5. Other Information | 21 | |||
| Item 6. Exhibits | 21 | |||
| SIGNATURES | 22 |
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
JUNE 30, 2015 AND DECEMBER 31, 2014
2015 | 2014 | |||||||
| ASSETS | ||||||||
| Real estate – held-for-resale | $ | 2,394,825 | $ | 2,293,061 | ||||
| Real estate – held for investment, net | 1,281,590 | 1,107,402 | ||||||
| Cash and cash equivalents | 155,493 | 369,694 | ||||||
| Accounts receivable, net | 20,187 | 21,811 | ||||||
| Prepaid expenses | 1,361 | 1,340 | ||||||
| Property, plant and equipment, net | 146,314 | 146,314 | ||||||
| Goodwill, net | 1,166,494 | 1,166,494 | ||||||
| Other assets | 200,052 | 200,056 | ||||||
| Total assets | $ | 5,366,316 | $ | 5,306,172 | ||||
| LIABILITIES | ||||||||
| Accounts payable | $ | 57,112 | $ | 14,963 | ||||
| Accrued expenses | 36,654 | 34,315 | ||||||
| Deferred revenue | 273,085 | 273,440 | ||||||
| Notes payable | 900,615 | 900,615 | ||||||
| Total liabilities | 1,267,466 | 1,223,333 | ||||||
| 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 2015 and 2014 and 74,085,705 shares outstanding in 2015 and 2014 | 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 | (9,083,905 | ) | (9,099,916 | ) | ||||
| Total stockholders’ equity | 4,098,850 | 4,082,839 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 5,366,316 | $ | 5,306,172 | ||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
| 1 |
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2015 AND 2014
(UNAUDITED)
2015 Restated | 2014 | |||||||
| REVENUE | ||||||||
| Internet | $ | 407,079 | $ | 499,618 | ||||
| Real estate | 23,823 | 31,820 | ||||||
| 430,902 | 531,438 | |||||||
| COST OF REVENUE | ||||||||
| Internet | 108,941 | 175,836 | ||||||
| Real estate | 36,712 | 14,147 | ||||||
| 145,653 | 189,983 | |||||||
| GROSS PROFIT | 285,249 | 341,455 | ||||||
| OPERATING EXPENSES: | ||||||||
| Selling general and administrative expenses | 203,828 | 187,632 | ||||||
| INCOME FROM OPERATIONS | 81,421 | 153,823 | ||||||
| OTHER INCOME (EXPENSES): | ||||||||
| Other income (expense) | (452 | ) | (54 | ) | ||||
| Interest expense | — | (1,201 | ) | |||||
| TOTAL OTHER INCOME (EXPENSE) | (452 | ) | (1,255 | ) | ||||
| INCOME BEFORE INCOME TAXES | 80,969 | 152,568 | ||||||
| INCOME TAXES (EXPENSE) BENEFIT | — | (74,275 | ) | |||||
| NET INCOME | $ | 80,969 | $ | 78,293 | ||||
| BASIC AND DILUTED EARNINGS 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.
| 2 |
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(UNAUDITED)
2015 Restated | 2014 | |||||||
| REVENUE | ||||||||
| Internet | $ | 826,053 | $ | 1,018,854 | ||||
| Real estate | 61,798 | 191,708 | ||||||
| 887,851 | 1,210,562 | |||||||
| COST OF REVENUE | ||||||||
| Internet | 255,498 | 374,612 | ||||||
| Real estate | 60,074 | 159,939 | ||||||
| 315,572 | 534,551 | |||||||
| GROSS PROFIT | 572,279 | 676,011 | ||||||
| OPERATING EXPENSES: | ||||||||
| Selling general and administrative expenses | 553,895 | 469,429 | ||||||
| INCOME FROM OPERATIONS | 18,384 | 206,582 | ||||||
| OTHER INCOME (EXPENSES): | ||||||||
| Other income (expense) | (2,374 | ) | 533 | |||||
| Interest expense | — | (2,365 | ) | |||||
| TOTAL OTHER INCOME (EXPENSE) | (2,374 | ) | (1,832 | ) | ||||
| INCOME BEFORE INCOME TAXES | 16,010 | 204,750 | ||||||
| INCOME TAXES (EXPENSE) BENEFIT | — | (74,275 | ) | |||||
| NET INCOME | $ | 16,010 | $ | 130,475 | ||||
| BASIC AND DILUTED EARNINGS 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.
| 3 |
SITESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(UNAUDITED)
2015 Restated | 2014 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 16,010 | $ | 130,475 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization expense | 17,108 | 10,831 | ||||||
| Allowance for doubtful accounts | (362 | ) | (2,689 | ) | ||||
| Deferred income taxes | — | 26,767 | ||||||
| (Increase) decrease in accounts receivable | 1,986 | 15,942 | ||||||
| (Increase) decrease in prepaid expenses | (21 | ) | 34 | |||||
| (Increase) decrease in real estate held for investment | 635 | (158,388 | ) | |||||
| (Increase) decrease in real estate held for resale | (293,690 | ) | ||||||
| Increase (decrease) in accounts payable | 42,149 | 44,483 | ||||||
| Increase (decrease) in accrued expenses | 2,339 | 60,985 | ||||||
| Decrease in deferred revenue | (355 | ) | (8,724 | |||||
| Net cash provided by (used in) operating activities | (214,201 | ) | 119,716 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Net cash provided by (used in) investing activities | — | — | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net cash provided by (used in) financing activities | — | — | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (214,201 | ) | 119,716 | |||||
| CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD | 369,694 | 118,469 | ||||||
| CASH AND CASH EQUIVALENTS – END OF PERIOD | $ | 155,493 | $ | 238,185 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For the six months ended June 30, 2015 and 2014, the Company paid $0 and $0 of income taxes and paid interest expense of $0 and $0.
SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING ACTIVITIES:
For the six months ended June 30, 2015, the Company reclassified $191,926 from real estate held-for-resale to real estate held-for-investment.
See the accompanying notes to the unaudited condensed consolidated financial statements.
| 4 |
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 six months ended June 30, 2015 for errors identified in its professional fees, accounts payable, and accrued expenses. The Compnay adjusted its records to accrue $23,239 in additional legal fees to its corporate counsel.
Additionally, a portion of wages and rental expenses, $12,144 and $3,000, have been reclassified from its internet segment to its real estate segment to appropriately reflect costs directly incurred by the real estate segment.
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:
| Consolidated Balance Sheets | ||||||||||||
| As of June 30, 2015 | As Previously Reported | Adjustments | As Restated | |||||||||
| Total Assets | $ | 5.366.316 | $ | — | $ | 5,366,316 | ||||||
| Accounts payable | 33,873 | 23,239 | 57,112 | |||||||||
| Total Liabilities | 1,244,227 | 23,239 | 1,267,466 | |||||||||
| Accumulated deficit | (9,060,666 | ) | (23,239 | ) | (9,083,905 | ) | ||||||
| Total stockholders’ equity | 4,122,089 | (23,239 | ) | 4,098,850 | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | 5,366,316 | $ | — | $ | 5,366,316 | ||||||
| Consolidated Statement of Income | ||||||||||||
| For the Three MonthsEnded June 30, 2015 | As Previously Reported |
Adjustments |
As Restated | |||||||||
| Revenue | $ | 430,902 | $ | — | $ | 430,902 | ||||||
| Cost of Revenue- Internet | 116,513 | (7,572 | ) | 108,941 | ||||||||
| Cost of Revenue- Real Estate | 29,140 | 7,572 | 36,712 | |||||||||
| Total Cost of Revenue | 145,653 | — | 145,653 | |||||||||
| Selling, general and administrative expenses | 180,589 | 23,239 | 203,828 | |||||||||
| INCOME (LOSS) FROM OPERATIONS | 104,660 | (23,239 | ) | 81,421 | ||||||||
| Other Income (Expense) | (452 | ) | — | (452 | ) | |||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 104,208 | (23,239 | ) | 80,969 | ||||||||
| INCOME TAXES (EXPENSE) | — | — | — | |||||||||
| NET INCOME (LOSS) | $ | 104,208 | $ | — | $ | 80,969 | ||||||
| 5 |
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1-RESTATEMENT OF FINANCIAL STATEMENTS, continued
| For the Six MonthsEnded June 30, 2015 | As Previously Reported |
Adjustments |
As Restated | |||||||||
| Revenue | $ | 887,851 | $ | — | $ | 887,851 | ||||||
| Cost of Revenue- Internet | 270,642 | (15,144 | ) | 255,498 | ||||||||
| Cost of Revenue- Real Estate | 44,930 | 15,144 | 60,074 | |||||||||
| Total Cost of Revenue | 315,572 | — | 315,572 | |||||||||
| Selling, general and administrative expenses | 530,656 | 23,239 | 553,895 | |||||||||
| INCOME (LOSS) FROM OPERATIONS | 41,623 | (23,239 | ) | 18,384 | ||||||||
| Other Income (Expense) | (2,374 | ) | — | (2,374 | ) | |||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 39,249 | (23,239 | ) | 16,010 | ||||||||
| INCOME TAXES (EXPENSE) | — | — | — | |||||||||
| NET INCOME (LOSS) | $ | 39,249 | $ | (23,239 | ) | $ | 16,010 | |||||
| Consolidated Statement of Cash Flows | ||||||||||||
| For the Six MonthsEnded June 30, 2015 | As Previously Reported |
Adjustments |
As Restated | |||||||||
| Net Income (Loss) | $ | 39,249 | $ | (23,239 | ) | $ | 16,010 | |||||
| (Increase) decrease in real estate held-for-investment | 37,824 | (37,189 | ) | 635 | ||||||||
| (Increase) decrease in real estate held-for-resale | (293,059 | ) | (631 | ) | (293,690) | |||||||
| Increase (decrease) in accounts payable | (18,910 | ) | 61,059 | 42,149 | ||||||||
| Net cash provided by (used in) operating activities | (214,201 | ) | — | (214,201 | ) | |||||||
| Net cash provided by (used in) investing activities | — | — | — | |||||||||
| Net cash provided by (used in) financing activities | — | — | — | |||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | (214,201 | ) | — | (214,201 | ) | |||||||
| CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD | 369,694 | — | 369,694 | |||||||||
| CASH AND CASH EQUIVALENTS- END OF PERIOD | $ | 155,493 | $ | — | $ | 155,493 | ||||||
| 6 |
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 2 – 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, 2014 included in the Company’s Annual Report on Form 10-K. The results for the six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.
Significant Accounting Policies
See the Notes to Consolidated Financial Statements in the Company’s 2014 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 June 30, 2015 and 2014:
| Restated 2015 | 2014 | |||||||
| Net income (loss) available to common shareholders | $ | 80,969 | $ | 78,293 | ||||
| Weighted average number of common shares | 74,085,705 | 74,085,705 | ||||||
| Basic and diluted income per share | $ | 0.00 | $ | 0.00 | ||||
For the six months ended June 30, 2015 and 2014:
| Restated 2015 | 2014 | |||||||
| Net income (loss) available to common shareholders | $ | 16,010 | $ | 130,475 | ||||
| Weighted average number of common shares | 74,085,705 | 74,085,705 | ||||||
| Basic and diluted income per share | $ | 0.00 | $ | 0.00 | ||||
NOTE 3 – COMMON STOCK
During the six months ended June 30, 2015 and 2014, the Company issued no shares of common stock and repurchased no treasury shares.
| 7 |
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 4 – 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 operations 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.
Summarized financial information concerning the Company's reportable segments is shown in the following tables for the three months ended June 30, 2015 and 2014:
| Restated June 30, 2015 | ||||||||||||||||
| Corporate | Real estate | Internet | Consolidated | |||||||||||||
| Revenue | $ | — | $ | 23,823 | $ | 407,079 | $ | 430,902 | ||||||||
| Operating income (loss) | $ | (17,487 | ) | $ | 110,294 | $ | (11,386 | ) | $ | 81,421 | ||||||
| Depreciation and amortization | $ | — | $ | 8,512 | $ | — | $ | 8,512 | ||||||||
| Interest expense | $ | — | $ | — | $ | — | $ | — | ||||||||
| Real estate | $ | — | $ | 3,676,415 | $ | — | $ | 3,676,415 | ||||||||
| Intangible assets | $ | — | $ | — | $ | 1,166,494 | $ | 1,166,494 | ||||||||
| Total assets | $ | — | $ | 3,676,415 | $ | 1,689,901 | $ | 5,366,316 | ||||||||
| June 30, 2014 | ||||||||||||||||
| Corporate | Real estate | Internet | Consolidated | |||||||||||||
| Revenue | $ | — | $ | 31,820 | $ | 499,618 | $ | 531,438 | ||||||||
| Operating income (loss) | $ | (33,679 | ) | $ | 17,673 | $ | 136,149 | $ | 153,823 | |||||||
| Depreciation and amortization | $ | — | $ | 5,553 | $ | — | $ | 5,553 | ||||||||
| Interest expense | $ | — | $ | — | $ | 1,201 | $ | 1,201 | ||||||||
| Real estate | $ | — | $ | 3,391,165 | $ | — | $ | 3,291,165 | ||||||||
| Intangible assets | $ | — | $ | — | $ | 1,166,494 | $ | 1,166,494 | ||||||||
| Total assets | $ | — | $ | 3,391,165 | $ | 1,791,792 | $ | 5,182,957 | ||||||||
Summarized financial information concerning the Company's reportable segments is shown in the following tables for the six months ended June 30, 2015 and 2014:
| Restated June 30, 2015 | ||||||||||||||||
| Corporate | Real estate | Internet | Consolidated | |||||||||||||
| Revenue | $ | — | $ | 61,798 | $ | 826,053 | $ | 887,851 | ||||||||
| Operating income (loss) | $ | (279,881 | ) | $ | 294,497 | $ | 3,768 | $ | 18,384 | |||||||
| Depreciation and amortization | $ | — | $ | 17,108 | $ | — | $ | 17,108 | ||||||||
| Interest expense | $ | — | $ | — | $ | — | $ | — | ||||||||
| Real estate | $ | — | $ | 3,676,415 | $ | — | $ | 3,676,415 | ||||||||
| Intangible assets | $ | — | $ | — | $ | 1,166,494 | $ | 1,166,494 | ||||||||
| Total assets | $ | — | $ | 3,676,415 | $ | 1,689,901 | $ | 5,366,316 | ||||||||
| 8 |
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 4 – SEGMENT INFORMATION, continued
| June 30, 2014 | ||||||||||||||||
| Corporate | Real estate | Internet | Consolidated | |||||||||||||
| Revenue | $ | — | $ | 191,708 | $ | 1,018,854 | $ | 1,210,562 | ||||||||
| Operating income (loss) | $ | (93,678 | ) | $ | 31,769 | $ | 98,664 | $ | 52,760 | |||||||
| Depreciation and amortization | $ | — | $ | 10,831 | $ | — | $ | 10,831 | ||||||||
| Interest expense | $ | — | $ | — | $ | 2,365 | $ | 2,365 | ||||||||
| Real estate | $ | — | $ | 3,391,165 | $ | — | $ | 3,391,165 | ||||||||
| Intangible assets | $ | — | $ | — | $ | 1,166,494 | $ | 1,166,494 | ||||||||
| Total assets | $ | — | $ | 3,391,165 | $ | 1,791,792 | $ | 5,182,957 | ||||||||
NOTE 5 - NOTES PAYABLE
This USA Telephone note payable is due and is currently in litigation. At June 30, 2015, and December 31, 2014, the balance consist of the following:
| 2015 | 2014 | |||||||
| 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. A judicial settlement conference was held in June with no agreement reached. Management is vigorously defending this claim.
NOTE 6 – RELATED PARTY
The Company leases its office building in Lynchburg, Virginia, from its Director and CEO on a five-year lease expiring April 30, 2017. For the six months ended June 30, 2015 and 2014, the Company paid $54,000 and $24,000 for rent on this office building. In addition, the Company rents a house used for storage of appliances and supplies which is located in Salem, VA, from this same individual. For the six months ended June 30, 2015 and 2014, the Company paid $3,000 and $3,000 for rent on this office building.
| 9 |
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 7 – SUBSEQUENT EVENTS
In a preliminary information statement filed April, 21, 2015, it was disclosed that Frank R. Erhartic, Jr, as President of the Company, and Daniel A. Judd, .as Chief Financial Officer of the Company, entered into a Settlement Agreement with Jeffrey I. Moore, Julia H. Moore, Jay B. Moore, William T. May, M & M Investments, Arquitos Capital Partners, LP, Arquitos Capital Management, LLC, Steven L. Kiel, Alesia Value Fund LLC, Alesia Asset Management LLC, Christopher Olin and Jeremy K. Gold (collectively, the “Moore Shareholder Group”). The Settlement Agreement settles and resolves certain matters relating to the Moore Shareholder Group’s proxy solicitation and the special meeting of Company stockholders that was scheduled to be held February 12, 2015 (the “Special Meeting”) as well as a lawsuit filed by the Company against the Moore Shareholder Group seeking to, among other things, enjoin the Moore Shareholder Group from voting its proxies at the Special Meeting.
In contemplation of the actions agreed to by the Company and Messrs. Erhartic, Jr. and Judd, and to avoid the significant expenses that the Company would likely incur in pursuing its lawsuit and continuing its opposition of the Moore Shareholder Group’s proxy solicitation, the Moore Shareholder Group agreed to withdraw its proxy statement for the Special Meeting and cease soliciting proxies for the election of its slate of director nominees.
Under the Settlement Agreement, the Company and the Moore Shareholder Group will each pay for their respective costs incurred in connection with the proxy solicitation, settlement of claims and related matters, except that the Company will reimburse the Moore Shareholder Group for up to $40,000 of its expenses. The Settlement Agreement also includes certain standstill provisions and a general release of claims among the Parties.
In October 2015, the Company paid the remaining $30,000 balance in legal fees related to the Settlement Agreement to its corporate counsel. (A total of $132,000 in legal fees were incurred by the Company related to this settlement.)
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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, 2014 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.
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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 three months ended June 30, 2015 restated.
| Corporate | Internet | Real estate | Total | |||||||||||||
| Revenue | $ | — | $ | 407,079 | $ | 23,823 | $ | 430,902 | ||||||||
| Cost of revenue | — | 108,941 | 36,712 | 145,653 | ||||||||||||
| Gross profit (loss) | — | 298,138 | (12,889 | ) | 285,249 | |||||||||||
| Operating expenses | 17,487 | 187,844 | 1,053 | 203,828 | ||||||||||||
| Income (loss) from operations | (17,487 | ) | 110,294 | (11,386 | ) | 81,421 | ||||||||||
| Other income (expense) | — | (452 | ) | — | (452 | ) | ||||||||||
| Income (loss) before income taxes | (17,487 | ) | 109,842 | (11,386 | ) | 80,969 | ||||||||||
| Income taxes (expense) benefit | — | — | — | — | ||||||||||||
| Net income (loss) | $ | (17,487 | ) | $ | 109,842 | $ | (11,386 | ) | $ | 80,969 | ||||||
The following tables show financial data for the three months ended June 30, 2014.
| Corporate | Internet | Real estate | Total | |||||||||||||
| Revenue | $ | — | $ | 499,618 | $ | 31,820 | $ | 531,438 | ||||||||
| Cost of revenue | — | 175,836 | 14,147 | 189,983 | ||||||||||||
| Gross profit | — | 323,782 | 17,673 | 341,455 | ||||||||||||
| Operating expenses | 33,679 | 153,953 | — | 187,632 | ||||||||||||
| Income (loss) from operations | (33,679 | ) | 169,829 | 17,673 | 153,823 | |||||||||||
| Other income (expense) | — | (1,255 | ) | — | (1,255 | ) | ||||||||||
| Income (loss) before income taxes | (33,679 | ) | 168,574 | 17,673 | 152,568 | |||||||||||
| Income taxes (expense) benefit | — | 74,275 | — | 74,275 | ||||||||||||
| Net income (loss) | $ | (33,679 | ) | $ | 94,299 | $ | 17,673 | $ | 78,293 | |||||||
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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, 2015 restated.
| Corporate | Internet | Real estate | Total | |||||||||||||
| Revenue | $ | — | $ | 826,053 | $ | 61,798 | $ | 887,851 | ||||||||
| Cost of revenue | — | 255,498 | 60,074 | 315,572 | ||||||||||||
| Gross profit | — | 570,555 | 1,724 | 572,279 | ||||||||||||
| Operating expenses | 279,881 | 276,058 | (2,044 | ) | 553,895 | |||||||||||
| Income (loss) from operations | (279,881 | ) | 294,497 | 3,768 | 18,384 | |||||||||||
| Other income (expense) | — | (2,374 | ) | — | (2,374 | ) | ||||||||||
| Income (loss) before income taxes | (279,881 | ) | 292,123 | 3,768 | 16,010 | |||||||||||
| Income taxes (expense) benefit | — | — | — | — | ||||||||||||
| Net income (loss) | $ | (279,881 | ) | $ | 292,123 | $ | 3,768 | $ | 16,010 | |||||||
The following tables show financial data for the six months ended June 30, 2014.
| Corporate | Internet | Real estate | Total | |||||||||||||
| Revenue | $ | — | $ | 1,018,854 | $ | 191,708 | $ | 1,210,562 | ||||||||
| Cost of revenue | — | 374,612 | 159,939 | 534,551 | ||||||||||||
| Gross profit | — | 644,245 | 31,766 | 676,011 | ||||||||||||
| Operating expenses | 93,678 | 221,795 | — | 469,429 | ||||||||||||
| Income (loss) from operations | (93,678 | ) | 268,494 | 31,766 | 206,582 | |||||||||||
| Other income (expense) | — | (1,832 | ) | — | (1,832 | ) | ||||||||||
| Income (loss) before income taxes | (93,678 | ) | 266,662 | 31,766 | 204,750 | |||||||||||
| Income taxes (expense) benefit | — | 74,275 | — | 74,275 | ||||||||||||
| Net income (loss) | $ | (93,678 | ) | $ | 192,387 | $ | 31,766 | $ | 130,475 | |||||||
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 June 30, 2015 and 2014.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
For the three months ended June 30, 2015
| Corporate | Internet | Real estate | Total | |||||||||||||
| EBITDA | $ | (17,487 | ) | $ | 109,842 | $ | (2,790 | ) | $ | 89,565 | ||||||
| Interest expense | — | — | — | — | ||||||||||||
| Taxes | — | — | — | — | ||||||||||||
| Depreciation | — | — | (8,596 | ) | (8,596 | ) | ||||||||||
| Amortization | — | — | — | — | ||||||||||||
| Net income (loss) | $ | (17,487 | ) | $ | 109,842 | $ | (11,386 | ) | $ | 80,969 | ||||||
For the three months ended June 30, 2014
| Corporate | Internet | Real estate | Total | |||||||||||||
| EBITDA | $ | (33,679 | ) | $ | 169,775 | $ | 23,226 | $ | 159,322 | |||||||
| Interest expense | — | (1,201 | ) | — | (1,201 | ) | ||||||||||
| Taxes | — | (74,275 | ) | — | (74,275 | ) | ||||||||||
| Depreciation | — | — | (5,553 | ) | (5,553 | ) | ||||||||||
| Amortization | — | — | — | — | ||||||||||||
| Net income (loss) | $ | (33,679 | ) | $ | 94,299 | $ | 17,673 | $ | 78,293 | |||||||
The following tables show a reconciliation of EBITDA to the GAAP presentation of net income for the six months ended June 30, 2015 and 2014.
For the six months ended June 30, 2015
| Corporate | Internet | Real estate | Total | |||||||||||||
| EBITDA | $ | (279,881 | ) | $ | 292,123 | $ | 20,876 | $ | 33,118 | |||||||
| Interest expense | — | — | — | — | ||||||||||||
| Taxes | — | — | — | — | ||||||||||||
| Depreciation | — | — | (17,108 | ) | (17,108 | ) | ||||||||||
| Amortization | — | — | — | — | ||||||||||||
| Net income (loss) | $ | (279,881 | ) | $ | 292,123 | $ | 3,768 | $ | 16,010 | |||||||
For the six months ended June 30, 2014
| Corporate | Internet | Real estate | Total | |||||||||||||
| EBITDA | $ | (93,678 | ) | $ | 269,024 | $ | 42,600 | $ | 217,946 | |||||||
| Interest expense | — | (2,365 | ) | — | (2,365 | ) | ||||||||||
| Taxes | — | (74,275 | ) | — | (74,275 | ) | ||||||||||
| Depreciation | — | — | (10,831 | ) | (10,831 | ) | ||||||||||
| Amortization | — | — | — | — | ||||||||||||
| Net income (loss) | $ | (93,678 | ) | $ | 192,384 | $ | 31,769 | $ | 130,475 | |||||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
THREE MONTHS ENDED JUNE 30, 2015 COMPARED TO JUNE 30, 2014
REVENUE
Total revenue for the three months ended June 30, 2015 decreased by $100,536 or 18.9% from $531,438 for the three months ended June 30, 2014 to $430,902 for the same period in 2015.
Internet sales decreased $92,539 or 18.5% from $499,618 for the three months ended June 30, 2014 to $407,079 for the same period in 2015. 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.
Rental income decreased $7,997 or 25.1% from $31,820 for the three months ended June 30, 2014 to $23,823 for the same period in 2015. Vacancies due to turnover of tenants led to this decrease in rental income. Repairs and maintenance for lease ups did not keep pace with turnovers. Management is focused to increase rental revenue in future periods with more units coming on line and faster unit turnaround times. No property sales occurred in the 2015 and 2014 three-month period.
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 June 30, 2015 decreased by $44,330 or 23.3% from $189,983 for the three months ended June 30, 2014 to $145,653 for the same period in 2015.
Cost of Internet revenue decreased $66,895 or 38.0% from $175,836 for the three months ended June 30, 2014 to $108,941 for the same period in 2015. Internet cost of revenue decreased 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.
Cost of real estate revenue increased $22,565 or 160.0% from $14,147 for the three months ended June 30, 2014 to $36,712 for the same period in 2015. The increase in real estate cost of revenue is a reflection of the costs associated with the renovation to lease up rental properties. Costs of revenue for rental properties is minimal compared to the sale of properties, reflecting repairs, taxes and depreciation expenses as opposed to the total costs of a property when sold.
OPERATING EXPENSES
Operating expenses for the three months ended June 30, 2015 increased $16,196 or 8.6% from $187,632 for the three months ended June 30, 2014 to $203,828 for the same period in 2015. This increase is primarily due to additional legal fees paid during the quarter ended June 30, 2015 compared to the same period in 2014.
INCOME TAXES
SiteStar recognized deferred tax expense for the three months ended June 30, 2014 of $74,275 versus no recognition of deferred tax expense in the current year 2015.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2015 decreased by $1,201 or 100.0% from the three months ended June 30, 2014. The debt of this interest expense was paid off during 2014.
SIX MONTHS ENDED JUNE 30, 2015 COMPARED TO JUNE 30, 2014
REVENUE
Total revenue for the six months ended June 30, 2015 decreased by $322,711 or 26.7% from $1,210,562 for the six months ended June 30, 2014 to $877,851 for the same period in 2015.
Internet sales decreased $192,801 or 18.9% from $1,018,854 for the six months ended June 30, 2014 to $826,053 for the same period in 2015. 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.
Real estate sales decreased $129,910 or 67.8% from $191,708 for the six months ended June 30, 2014 to $61,798 for the same period in 2015. Principally, the decrease represents the sale of a residential property for $140,000 in 2014. No property sales occurred in the 2015 six-month period.
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 six months ended June 30, 2015 decreased by $218,979 or 41.0% from $534,551 for the six months ended June 30, 2014 to $315,572 for the same period in 2015.
Cost of Internet revenue decreased $119,114 or 31.8% from $374,612 for the six months ended June 30, 2014 to $255,498 for the same period in 2015. Internet cost of revenue decreased 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.
Cost of real estate revenue decreased $99,865 or 62.4% from $159,939 for the six months ended June 30, 2014 to $60,074 for the same period in 2015. The decrease in real estate cost of revenue is a reflection of the costs associated with the sale of a residential property in 2014 but not in 2015. Costs of revenue for rental properties is minimal compared to the sale of properties, reflecting repairs, taxes and depreciation expenses as opposed to the total costs of a property when sold.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2015 increased $84,466 or 18.0% from $469,429 for the six months ended June 30, 2014 to $553,895 for the same period in 2015. This increase is primarily due to an increase in professional fees for the six months ended June 30, 2015 compared to the same period in 2014.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
INCOME TAXES
SiteStar recognized deferred tax expense for the six months ended June 30, 2014 of $74,275 versus no recognition of deferred tax expense in the current year 2015.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 2015 decreased by $2,365 or 100.0% from the six months ended June 30, 2014. The debt of this interest expense was paid off during 2014.
FINANCIAL CONDITION
Net accounts receivable decreased $1,624 or 7.4% from $21,811 on December 31, 2014 to $20,187 on June 30, 2015. Real estate increased net $275,952 or 8.1% from $3,400,463 on December 31, 2014 to $3,676,415 on June 30, 2015. Real estate held for investment increased $174,188 or 15.7% representing an increase in properties that have been refurbished and ready for rental placement, shifting costs from real estate held for resale which increased $101,764 or 4.4% to $2,394,825 on June 30, 2015 from $2,293,061 on December 31, 2014. Accounts payable increased by $42,149 or 281.7% from $14,963 on December 31, 2014 to $57,112 on June 30, 2015. Professional fees incurred are the reason for the increase. Deferred revenue decreased by $355 or 0% from $273,440 on December 31, 2014 to $273,085 on June 30, 2015 representing decrease in volume of customer accounts that have been prepaid.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $155,493 and $369,694 at June 30, 2015 and at December 31, 2014. EBITDA was $56,357 for the six months ended June 30, 2015 as compared to $217,946 for the same period in 2014.
| 2015 | 2014 | |||||||
| EBITDA for the three months ended June 30, | $ | 89,565 | $ | 159,322 | ||||
| Interest expense | — | (1,201 | ) | |||||
| Taxes | — | (74,275 | ) | |||||
| Depreciation | (8,596 | ) | (5,553 | ) | ||||
| Amortization | — | — | ||||||
| Net income (loss) for the three months ended June 30, | $ | 80,969 | $ | 78,293 | ||||
| 2015 | 2014 | |||||||
| EBITDA for the six months ended June 30, | $ | 33,118 | $ | 217,946 | ||||
| Interest expense | — | (2,365 | ) | |||||
| Taxes | — | (74,275 | ) | |||||
| Depreciation | (17,108 | ) | (10,831 | ) | ||||
| Amortization | — | — | ||||||
| Net income (loss) for the six months ended June 30, | $ | 16,010 | $ | 130,475 | ||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
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 remained at 65% of total accounts receivable from December 31, 2014 to 65% on June 30, 2015. The balance in the 30+ day category decreased from 26% of total accounts receivable from December 31, 2014 to 23% on June 30 2015. The balance in the 60+ day category increased from 9% to 12% of total accounts receivable from December 31, 2014 to June 30, 2015.
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 June 30, 2015 and December 31, 2014 is as shown:
| 2015 | 2014 | |||||||||||||||||
| Current | $ | 13,136 | 65 | % | $ | 14,185 | 65 | % | ||||||||||
| 30 < 60 | 4,674 | 23 | % | 5,577 | 26 | % | ||||||||||||
| 60+ | 2,377 | 12 | % | 2,049 | 9 | % | ||||||||||||
| Total | $ | 20,187 | 100 | % | $ | 21,811 | 100 | % | ||||||||||
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. A judicial settlement conference was held in July with no agreement reached. Management is vigorously defending this claim.
The Company was able to pay $23,239 in legal fees in subsequent quarters from operating cash flows.
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.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2015, 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 June 30, 2015.
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 June 30, 2015, 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 June 30, 2015:
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.
We did not maintain appropriate controls over changes to the list of key individuals, and changes to the list tracking the number of shares held by key individuals, in the shareholder database. The Company, during this next quarter, will have an appropriate individual periodically review the list of key individuals and the complete and accurate reporting of their records in the proper periods.
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Item 4. Controls and Procedures, continued
We did not maintain appropriate controls over accounts payable. Invoices that are being disputed with the vendor are not entered into accounts payable until the disputes are resolved. In order to keep track of these invoices, and accrue appropriate amounts the Company, will begin to enter disputed invoices into the accounts payable system when they are received and a notation will be made that they are not to be paid until the dispute is resolved.
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 June 30, 2015, 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.
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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 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. A judicial settlement conference was held in July with no agreement reached. Management is vigorously defending this claim.
SITESTAR CORPORATION
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. Mine Safety Disclosures
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, Rules1 3a-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 |
| 21 |
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 | ||
| Dated: November 16, 2015 | By: | /s/ Frank Erhartic, Jr, |
| Frank Erhartic, Jr. | ||
| President, Chief Executive Officer | ||
| (Principal Executive Officer and Principal Accounting Officer) | ||
| Date: November 16, 2015 | By: | /s/ Daniel A. Judd |
| Daniel A. Judd | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
| 22 |
