News Column

SITESTAR CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

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. Table of Contents 13 SITESTAR CORPORATION



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

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. Table of Contents 14 SITESTAR CORPORATION



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

Results of operations The following tables show financial data for the six months ended June 30, 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 - 644,242 31,769 676,011 Operating expenses 93,678 375,751 - 469,429 Income (loss) from operations (93,678 ) 268,491 31,769 206,582 Other income (expense) - (1,832 ) - (1,832 )

Income (loss) before income taxes (93,678 ) 266,659 31,769 204,750 Income taxes (expense) benefit - 74,275

- 74,275 Net income (loss) $ (93,678 )$ 192,384$ 31,769$ 130,475 The following tables show financial data for the six months ended June 30, 2013. Corporate Internet Real estate Total Revenue $ - $ 1,265,375$ 30,992$ 1,296,367 Cost of revenue - 663,426 3,076 666,502 Gross profit - 601,949 27,916 629,865 Operating expenses 88,115 373,185 - 461,300 Income (loss) from operations (88,115 ) 228,764 27,916 168,565 Other income (expense) - (748 ) - (748 )

Income (loss) before income taxes (88,115 ) 228,016 27,916 167,817 Income taxes (expense) benefit - (64,357 )

- (64,357 ) Net income (loss) $ (88,115 )$ 163,659$ 27,916$ 103,460 Table of Contents 15 SITESTAR CORPORATION



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

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



The following tables show a reconciliation of EBITDA to the GAAP presentation of net income for the six months ended June 30, 2014 and 2013.

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 ) Depreciation - - (10,831 ) (10,831 ) Amortization - - - - Net income (loss) $ (93,678 )$ 266,659$ 31,769$ 130,475 For the six months ended June 30, 2013 Corporate Internet Real estate Total EBITDA $ (88,115 )$ 238,918$ 27,916$ 178,719 Interest expense - (2,471 ) - (2,471 ) Taxes - (64,357 ) - (64,357 ) Depreciation - (2,643 ) - (2,643 ) Amortization - (5,788 ) - (5,788 ) Net income (loss) $ (88,115 )$ 163,659$ 27,916$ 103,460 Table of Contents 16 SITESTAR CORPORATION



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

THREE AND SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO JUNE 30, 2013

REVENUE

Total revenue for the three months ended June 30, 2014 decreased by $77,958 or 12.8% from $609,396 for the three months ended June 30, 2013 to $531,438 for the same period in 2014. Internet sales decreased $94,656 or 15.9% from $594,274 for the three months ended June 30, 2013 to $499,618 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. Real estate sales increased $16,698 or 110.4% from $15,122 for the three months ended June 30, 2013 to $31,820 for the same period in 2014. 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. Total revenue for the six months ended June 30, 2014 decreased by $85,805 or 6.6% from $1,296,367 for the six months ended June 30, 2013 to $1,210,562 for the same period in 2014. Internet sales decreased $246,521 or 19.5% from $1,265,375 for the six months ended June 30, 2013 to $1,018,854 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. Real estate sales increased $160,716 or 518.6% from $30,992 for the six months ended June 30, 2013 to $191,708 for the same period in 2014. This represents the sale of a residential property in addition to increased rental income. 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, 2014 decreased by $122,471 or 39.2% from $312,454 for the three months ended June 30, 2013 to $189,983 for the same period in 2014. Cost of Internet revenue decreased $136,618 or 43.7% from $312,454 for the three months ended June 30, 2013 to $175,836 for the same period in 2014. Cost of real estate revenue increased $14,147 or 100.0% from $0 for the three months ended June 30, 2013 to $14,147 for the same period in 2014. Internet cost of revenue decreased 17.4% 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. 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. Table of Contents 17 SITESTAR CORPORATION



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

Total costs of revenue for the six months ended June 30, 2014 decreased by $131,951 or 19.8% from $666,502 for the six months ended June 30, 2013 to $534,551 for the same period in 2014. Cost of Internet revenue decreased $288,814 or 43.5% from $663,426 for the six months ended June 30, 2013 to $347,612 for the same period in 2014. Cost of real estate revenue increased $156,863 or 510.0% from $3,076 for the six months ended June 30, 2013 to $156,863 for the same period in 2014. Internet cost of revenue decreased 15.6% 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 a residential property. 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, 2014 increased $8,129 or 1.8% from $461,300 for the six months ended June 30, 2013 to $469,429 for the same period in 2014. This increase is primarily due to an increase in professional fees for the six months ended June 30, 2014 compared to the same period in 2013. INCOME TAXES



For the six months ended June 30, 2014 and June 30, 2013 corporate income tax expenses of $74,275 and $64,537 were accrued.

INTEREST EXPENSE

Interest expense for the six months ended June 30, 2014 decreased by $106 or 4.3% from $2,471 for the six months ended June 30, 2013 to $2,365 for the same period in 2014. SITESTAR CORPORATION



MARCH 31, 2014 COMPARED TO DECEMBER 31, 2013

FINANCIAL CONDITION

Net accounts receivable decreased $13,253 or 37.7% from $35,129 on December 31, 2013 to $21,876 on June 30, 2014. Real estate increased net $147,559 or 4.5% from $3,243,606 on December 31, 2013 to $3,391,165 on June 30, 2014. Real estate held for investment increased $286,470 or 53.9% representing an increase in properties that have been refurbished and ready for rental placement, shifting costs from real estate held for resale which decreased $138,911 or 5.1% to $2,573,530 on June 30, 2014 from $2,712,441 on December 31, 2013. Accounts payable increased by $44,485 or 367.0% from $12,121 on December 31, 2013 to $56,606 on June 30, 2014. Certain payments to Internet vendors were suspended to encourage them to correct their billings and have since been corrected and paid current. Deferred revenue decreased by $8,724 or 2.8% from $312,898 on December 31, 2013 to $304,174 on June 30, 2014 representing increased volume of customer accounts that have been prepaid. Table of Contents 18 SITESTAR CORPORATION



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

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $238,185 and $118,469 at June 30, 2014 and at December 31, 2013. EBITDA was $217,946 for the six months ended June 30, 2014 as compared to $178,719 for the same period in 2013. 2014 2013 EBITDA for the six months ended June 30, $ 217,946$ 178,719 Interest expense (2,365) (2,471) Taxes (74,275) (64,357) Depreciation (10,831) (2,643) Amortization - (5,788)



Net income for the six months ended June 30, $ 130,475$ 103,460

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 11.0% of total accounts receivable from December 31, 2013 to 67.0% on June 30, 2014. The balance in the 30+ day category maintained 21.0% of total accounts receivable from December 31, 2013 to June 30, 2014. The balance in the 60+ day category increased from 15% to 68% of total accounts receivable from December 31, 2013 to June 30, 2014. 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. Table of Contents 19 The aging of accounts receivable as of June 30, 2014 and December 31, 2013 is as shown: 2014 2013 Current $ 14,589 67 % $ 4,021 11 % 30 < 60 4,584 21 % 7,273 21 % 60+ 2,703 12 % 23,835 68 % Total $ 21,876 100 % $ 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.


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