Edgar Filing: SITESTAR CORP

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to _______________

000-27763

(Commission file number)

SITESTAR CORPORATION

(Exact name of small business issuer as specified in its charter)

NEVADA		88-0397234
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7109 Timberlake Road, Lynchburg, VA 24502

(Address of principal executive offices)

(434) 239-4272

(Issuer's telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer (Do not check if a smaller reporting Company) o Smaller Report Company x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes o No x

As of August 13, 2010, the issuer had 91,326,463 shares of common stock issued and 75,239,705 outstanding.

SITESTAR CORPORATION

Index

		Page Number
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	3-4

	Condensed Consolidated Statements of Income for the three months ended June 30, 2010 and 2009	5

	Condensed Consolidated Statements of Income for the six months ended June 30, 2010 and 2009	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	7-8

	Notes to Condensed Consolidated Financial Statements	9-18

Item 2.	Management's Discussion and Analysis	18-25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25-26

Part II. OTHER INFORMATION		27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Submission of Matters to a Vote of Security Holders	27

Item 5.	Other Information	27

Item 6.	Exhibits	27

SIGNATURES		28

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2010 AND DECEMBER 31, 2009

ASSETS

	2010		2009
CURRENT ASSETS	Unaudited
Cash and cash equivalents	$	1,150,484	$	1,090,807
Accounts receivable, net of allowance of $9,387 and $14,316		178,443		455,773
Prepaid expenses		181,072		1,430

Total current assets		1,509,999		1,548,010

PROPERTY AND EQUIPMENT, net		185,780		193,715
CUSTOMER LIST, net of accumulated amortization of $11,185,178 and $10,216,778		1,049,975		2,018,375
GOODWILL, net of impairment		1,288,559		1,288,559
DEFERRED TAX ASSETS		848,339		760,861
OTHER ASSETS		315,281		496,314

TOTAL ASSETS	$	5,197,933	$	6,305,834

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

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS, continued

JUNE 30, 2010 AND DECEMBER 31, 2009

LIABILITIES AND STOCKHOLDERS’ EQUITY

	2010			2009
CURRENT LIABILITIES	Unaudited
Accounts payable	$	54,577		$	131,598
Accrued income taxes		155,815			414,815
Accrued expenses		44,908			29,052
Deferred revenue		698,700			861,235
Notes payable		900,615			900,615

Total current liabilities		1,854,615			2,337,315

NOTES PAYABLE, less current portion		-			-
NOTES PAYABLE - STOCKHOLDERS, less current portion		267,072			547,245

TOTAL LIABILITIES		2,121,687			2,884,560

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 2010 and 2009 and 75,199,705 and 76,199,705 shares outstanding in 2010 and 2009		91,326			91,326
Additional paid-in capital		13,880,947			13,880,947
Treasury stock, at cost, 16,126,758 and 15,126,758 common shares		(775,124	)		(735,696	)
Accumulated deficit		(10,120,903	)		(9,815,303	)

Total stockholders’ equity		3,076,246			3,421,274

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	5,197,933		$	6,305,834

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

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

	2010			2009
REVENUE	$	1,296,598		$	2,051,732

COST OF REVENUE		593,580			846,685

GROSS PROFIT		703,018			1,205,047

OPERATING EXPENSES:
Selling general and administrative expenses		845,572			1,158,512

INCOME (LOSS) FROM OPERATIONS		(142,554	)		46,535

OTHER INCOME (EXPENSES)		(5,217	)		(29,288	)

INCOME (LOSS) BEFORE INCOME TAXES		(147,771	)		17,247

INCOME TAXES (EXPENSE) BENEFIT		(165,867	)		(27,688	)

NET INCOME (LOSS)	$	(313,638	)	$	(10,441	)

BASIC AND DILUTED EARNINGS PER SHARE	$	0.00		$	0.00

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED		75,231,353			77,766,500

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

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

	2010			2009

REVENUE	$	2,758,610		$	4,429,842

COST OF REVENUE		1,251,309			1,672,721

GROSS PROFIT		1,507,301			2,757,121

OPERATING EXPENSES:
Selling general and administrative expenses		1,623,892			2,263,334

INCOME (LOSS) FROM OPERATIONS		(116,591	)		493,787

OTHER INCOME (EXPENSES)		(32,718	)		(50,581	)

INCOME (LOSS) BEFORE INCOME TAXES		(149,309	)		443,206

INCOME TAXES EXPENSE (BENEFIT)		156,289			(91,218	)

NET INCOME (LOSS)	$	(305,598	)	$	534,424

BASIC AND DILUTED EARNINGS PER SHARE	$	0.00		$	0.01

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED		75,399,401			77,766,500

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

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(305,598	)	$	534,424
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense		1,053,864			1,287,293
Allowance for doubtful accounts		(4,929	)		(13,696	)
(Increase) decrease in:
Accounts receivable		282,259			(395,370	)
Prepaid expenses		(179,642	)		(70	)
Other assets		101,741			137,711
Deferred tax asset		(87,478	)		(390,130	)
Increase (decrease) in:
Accounts payable		(77,021	)		(68,855	)
Accrued expenses		15,856			(7,382	)
Deferred revenue		(162,535	)		15,479
Accrued income taxes		(259,000	)		298,912

Net cash provided by operating activities		377,517			1,398,316

CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets held for resale		1,761			(403	)
Purchase of property and equipment		-			(3,000	)
Purchase of non-compete		-			(1,000	)
Purchase of customer list		-			(67,398	)

Net cash provided by (used in) investing activities		1,761			(71,803	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable – stockholders		(280,173	)		(54,984	)
Purchase treasury stock		(39,428	)		(593,657	)
Repayment of notes payable		-			(317,258	)

Net cash (used in) financing activities		(319,601	)		(965,900	)

NET (DECREASE) IN CASH AND CASH EQUIVALENTS		59,677			360,614

CASH AND CASH EQUIVALENTS –BEGINNING OF PERIOD		1,090,807			527,553

CASH AND CASH EQUIVALENTS -END OF PERIOD	$	1,150,484		$	888,167

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

SITESTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

During the six months ended June 30, 2010 and 2009, the Company used cash to pay income taxes of $489,000 and $0 and paid interest expense of approximately $20,000 and $48,000, respectively.

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 1 – BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements have been prepared by Sitestar Corporation (the “Company” or “Sitestar”), pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K. The results for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.

NOTE 2 – EARNINGS PER SHARE

GAAP requires dual presentation of basic and diluted earnings per share on the face of the statements of income and requires a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculation. Basic earnings per share are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted income per share is computed using weighted average shares outstanding adjusted to reflect the dilutive effect of all potential common shares that were outstanding during the period.

For the three months ended June 30, 2010 and 2009:

	2010			2009
Net income (loss) available to common shareholders	$	(313,638	)	$	(10,441	)
Weighted average number of common shares		75,231,353			77,766,500
Basic and diluted income per share	$	0.00		$	0.00

For the six months ended June 30, 2010 and 2009:

	2010			2009
Net income (loss) available to common shareholders	$	(305,598	)	$	534,424
Weighted average number of common shares		75,399,401			77,766,500
Basic and diluted income per share	$	0.00		$	0.01

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 3 – COMMON STOCK

During the six months ended June 30, 2010, the Company issued no shares of common stock and repurchased 1,000,000 treasury shares.

NOTE 4 – SEGMENT INFORMATION

The Company has two business units that have been aggregated into two reportable segments: Corporate and Internet.

The Corporate group is the holding company and oversees the operation of the other business unit. The Corporate group also arranges financing for the entire organization. The Company’s Internet group consists of multiple sites of operation and services customers throughout the U.S. and Canada.

The Company evaluates the performance of its operating segments based on income from operations before income taxes, accounting changes, non-recurring items and interest income and expense.

Summarized financial information concerning the Company's reportable segments is shown in the following table for the three months ended June 30, 2010 and 2009:

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

SITESTAR CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 4 – SEGMENT INFORMATION, continued

	June 30, 2009
	Corporate			Internet		Consolidated
Revenue	$	-		$	2,051,732	$	2,051,732
Operating Income (loss)	$	(52,500	)	$	99,035	$	46,535
Depreciation and amortization	$	-		$	624,409	$	624,409
Interest expense	$	-		$	26,567	$	26,567
Intangible assets	$	-		$	4,624,501	$	4,624,501
Total assets	$	-		$	7,577,078	$	7,577,078

Summarized financial information concerning the Company's reportable segments is shown in the following table for the six months ended June 30, 2010 and 2009:

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

	June 30, 2009
	Corporate			Internet		Consolidated
Revenue	$	-		$	2,378,110	$	4,429,842
Operating Income (loss)	$	(79,615	)	$	573,402	$	493,787
Depreciation and amortization	$	-		$	1,287,293	$	1,287,293
Interest expense	$	-		$	48,451	$	48,451
Intangible assets	$	-		$	4,624,501	$	4,624,501
Total assets	$	-		$	7,577,078	$	7,577,078

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 5 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS

In April 2009, the Financial Accounting Standard Board (FASB) issued FASB Accounting Standard Codification (ASC) 320-10, Recognition and Presentation of Other-Than-Temporary Impairments. FASB ASC 320-10 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments in the financial statements. The most significant change FASB ASC 320-10 brings is a revision to the amount of other-than-temporary loss of a debt security recorded in earnings. FASB ASC 320-10 is effective for interim and annual reporting periods ending after June 15, 2009 The Company’s adoption of FASB ASC 320-10 did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued FASB ASC 820-10, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FASB ASC 820-10 provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. FASB ASC 820-10 also includes guidance on identifying circumstances that indicate a transaction is not orderly. This emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FASB ASC 820-10 is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The Company’s adoption of FASB ASC 820-10 did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued FASB ASC 825-10, Interim Disclosures about Fair Value of Financial Instruments. FASB ASC 825-10 amends previous guidance, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FASB ASC 825-10 also requires those disclosures in summarized financial information at interim reporting periods. FASB ASC 825-10 is effective for interim and annual reporting periods ending after June 15, 2009. The Company’s adoption of FASB ASC 825-10 did not have a material impact on the Company’s condensed consolidated financial statements.

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 5 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, continued

In June 2009, the FASB issued FASB ASC 105-10, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. FASB ASC 105-10 establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. The only other source of authoritative GAAP is the rules and interpretive releases of the SEC which only apply to SEC registrants. The Codification superseded all the existing non-SEC accounting and reporting standards upon its effective date. Since the issuance of the Codification is not intended to change or alter existing GAAP, adoption of this statement did not have an impact on the Company’s financial position or results of operations, but changed the way in which GAAP is referenced in the Company’s financial statements. FASB ASC 105-10 is effective for interim and annual reporting periods ending after September 15, 2009.

In May 2009, the FASB issued FASB ASC 855-10, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The Company adopted FASB ASC 855-10 effective April 1, 2009 and has evaluated subsequent events after the balance sheet date of June 30, 2010 through the date the financial statements were issued.

In October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605)”. This Update provides amendments to the criteria in Subtopic 605-24 for separating consideration in multiple-deliverable revenue arrangements. It establishes a hierarchy of selling prices to determine the selling price of each specific deliverable which includes vendor-specific objective evidence (if available), third-party evidence (if vendor-specific evidence is not available), or estimated selling price if neither of the first two are available. This Update also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement. Finally, this Update expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements. This Update is effective for fiscal years beginning on or after June 15, 2010. We do not anticipate any material impact from this Update.

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 6 – ACQUISITIONS

Pulaski Networks, LLC

Effective February 10, 2009, the Company entered into an Asset Purchase Agreement pursuant to which it acquired the Internet related assets of Pulaski Networks, LLC, a Virginia-based ISP. The total purchase price was $24,907 representing the fair value of the assets acquired which consisted of applying the amount owed to the Company by Pulaski Networks for wholesale dial-up service to the purchase price.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition. Sitestar has assessed the valuations of certain intangible assets as represented below.

Equipment	$	3,000
Customer list		62,907
Non-compete agreement		1,000
Deferred revenue		(42,000	)
Purchase price	$	24,907

Because the acquisition of Pulaski Networks was consummated effective February 10, 2009, there are limited results of operations of Pulaski Networks in the condensed consolidated financial statements for the three months ended June 30, 2010.

The following table presents the unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 2009 and reflects the results of operations of the Company as if the acquisition of Pulaski Networks had been effective January 1, 2009. The pro forma amounts are not necessarily indicative of the combined results of operations had the acquisitions been effective as of that date, or of the anticipated results of operations, due to cost reductions and operating efficiencies that are expected as a result of the acquisitions.

	2009
Net sales	$	4,439,062
Gross profit	$	2,762,141
Selling, general and administrative expenses	$	2,265,257
Net income	$	537,520
Basic income per share	$	0.01

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 6 – ACQUISITIONS, continued

Jellico.com, Inc.

Effective August 1, 2010, the Company entered into an Asset Purchase Agreement pursuant to which it acquired the Internet related assets of Jellico.com, Inc., a Tennessee-based Internet Service Provider. The total purchase price was $17,020 representing the fair value of the assets acquired which consisted of a $10,000 cash payment at closing with the remaining balance due in 4 monthly installments beginning September 2010.

NOTE 7 – PROVISION FOR INCOME TAXES

The provision for federal and state income taxes for the six months ended June 30, 2010 and 2009 included the following:

	2010			2009
Current provision:
Federal	$	207,201		$	254,075
State		36,566			44,837
Deferred provision:
Federal		(74,356	)		(331,611	)
State		(13,122	)		(58,519	)
Total income tax provision	$	156,289		$	(91,218	)

Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at June 30, 2010 and December 31, 2009 are as follows:

	2010			2009
Accounts receivable	$	14,316		$	14,695
Amortization of Intangible assets		3,386,443			3,298,586
Less valuation allowance		(2,552,420	)		(2,552,420	)
Deferred tax asset	$	848,339		$	760,861

At June 30, 2010 and December 31, 2009, the Company has provided a valuation allowance for the deferred tax asset since management has not been able to determine that the realization of that asset is more likely than not. The Company is subject to Federal income taxes as well as income taxes of state jurisdictions. For Federal and state taxes purposes, tax years 2006 through 2009 remain open to examination.

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 8 – INTANGIBLE ASSETS

The Company continually monitors its intangible assets to determine whether any impairment has occurred. In making such determination with respect to these assets, the Company evaluates the performance, on an undiscounted cash flow basis, of the intangible assets or group of assets. Should impairment be identified, a loss would be reported to the extent that the carrying value of the related intangible asset exceeds its fair value using the discounted cash flow method. The Company's customer lists are being amortized over three years. Amortization expense was $1,045,928 and $1,270,065 for the six months ended June 30, 2010 and 2009.

NOTE 9 – DEFERRED REVENUE

Deferred revenue represents collections from customers in advance for services not yet performed and are recognized as revenue in the period service is provided.

Revenue Recognition

The Company sells Internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period the service relates. Sales of computer hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances.

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 10 - NOTES PAYABLE

Notes payable at June 30, 2010 and December 31, 2009 consist of the following:

	2010			2009
Non-interest bearing amount due on acquisition of USA Telephone	$	900,615		$	900,615
Totals		900,615			900,615
Less current portion		(900,615	)		(900,615	)
Long-term portion	$	-		$	-

The future principal maturities of these notes are as follows:

Twelve months ending June 30, 2011	$	900,615
Twelve months ending June 30, 2012		-
Twelve months ending June 30, 2013		-
Twelve months ending June 30, 2014		-
Twelve months ending June 30, 2015		-
Thereafter		-
Total	$	900,615

NOTE 11 - NOTES PAYABLE – STOCKHOLDERS

Notes payable - stockholders at June 30, 2010 and December 31, 2009 consist of the following:

	2010		2009
Note payable to officer and stockholder on a line of credit of $750,000 at an annual interest rate of 10% interest. The accrued interest and principal are due on January 1, 2014.	$	267,072	$	424,930
Note payable to stockholder. The note is payable on January 1, 2014 and bears interest at an annual rate of 8.0%.		-		122,315
Totals		267,072		547,245
Less current portion		-		-
Long-term portion	$	267,072	$	547,245

SITESTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 11 - NOTES PAYABLE – STOCKHOLDERS, continued

The future principal maturities of these notes are as follows:

Year ending June 30, 2011	$	-
Year ending June 30, 2012		-
Year ending June 30, 2013		-
Year ending June 30, 2014		267,072
Year ending June 30, 2015		-
Total		267,072

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

The Company is restating earnings for the quarters ended December 31, 2009 to reflect the proper revenue recognition of processing charges and late fees for customers cut off from internet service because the collectability of those charges is not reasonably assured. In addition, the Company will institute ongoing monitoring that constantly occurs in the ordinary course of operations.

Forward-looking statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the Company’s ability to expand the Company’s customer base, make strategic acquisitions, general market conditions and competition and pricing.

Although the Company believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements contained in the report will prove to be accurate.

General

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related footnotes for the year ended December 31, 2009 included in the Annual Report on Form 10-K. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

SITESTAR CORPORATION

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

Overview

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

The products and services that the Company provides include:

· Internet access services;

· Web acceleration services;

· Web hosting services;

· End-to-end e-commerce solutions; and

· Toner and ink cartridge remanufacturing services.

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

Additionally, the Company markets and sells web hosting and related services to consumers and businesses.

The Company also markets, sells and manufactures computer systems, computer hardware, computer software, networking services, repair services and toner and ink cartridge remanufacturing services from the Lynchburg, Virginia location.

Results of operations

The following tables show financial data for the six months ended June 30, 2010 and 2009. Operating results for any period are not necessarily indicative of results for any future period.

SITESTAR CORPORATION

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

	For the six months ended June 30, 2010
	Corporate			Internet			Total
Revenue	$	-		$	2,758,610		$	2,758,610
Cost of revenue		-			1,251,309			1,251,309

Gross profit		-			1,507,301			1,507,301

Operating expenses		64,677			1,559,215			1,623,892

Income (loss) from operations		(64,677	)		(51,914	)		(116,591	)
Other income (expense)		-			(32,718	)		(32,718	)

Income (loss) before income taxes		(64,677	)		(84,632	)		(149,309	)
Income taxes expense (benefit)		156,289			-			156,289

Net income (loss)	$	(220,966	)	$	(84,632	)	$	(305,598	)

	For the six months ended June 30, 2009
	Corporate			Internet			Total
Revenue	$	-		$	4,429,842		$	4,429,842
Cost of revenue		-			1,672,721			1,672,721

Gross profit		-			2,757,121			2,757,121

Operating expenses		102,819			2,160,515			2,263,334

Income (loss) from operations		(102,819	)		596,606			493,787
Other income (expense)		-			(50,581	)		(50,581	)

Income (loss) before income taxes		(102,819	)		546,025			443,206
Income taxes (expense) benefit		91,218			-			91,218

Net income (loss)	$	(11,601	)	$	546,025		$	534,424

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, 2010 and 2009.

	For the six months ended June 30, 2010
	Corporate			Internet			Total
EBITDA	$	(64,677	)	$	988,862		$	924,185
Interest expense		-			(19,631	)		(19,631	)
Taxes		(156,289	)		-			(156,289	)
Depreciation		-			(7,935	)		(7,935	)
Amortization		-			(1,045,928	)		(1,045,928	)

Net income (loss)	$	(220,966	)	$	(84,632	)	$	(305,598	)

	For the six months ended June 30, 2009
	Corporate			Internet			Total
EBITDA	$	(102,819	)	$	1,881,769		$	1,778,950
Interest expense		-			(48,451	)		(48,451	)
Taxes		91,218			-			91,218
Depreciation		-			(17,228	)		(17,228	)
Amortization		-			(1,270,065	)		(1,270,065	)

Net income (loss)	$	11,601		$	546,025		$	534,424

SITESTAR CORPORATION

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

SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO JUNE 30, 2009

REVENUE

Revenue for the six months ended June 30, 2010 decreased by $1,671,232 or 37.7% from $4,429,842 for the six months ended June 30, 2009 to $2,758,610 for the same period in 2010. Internet sales decreased due primarily to customer attrition to broadband services and is offset in part by the addition of Internet customers from asset acquisitions. To help offset this decline in revenues, the Company has acquired and plans to continue to acquire the assets of additional ISPs and fold them into its operations.

COST OF REVENUE

Costs of revenue for the six months ended June 30, 2010 decreased by $421,412 or 25.2% from $1,672,721 for the six months ended June 30, 2009 to $1,251,309 for the same period in 2010. Cost of revenue decreased as a result of declining revenue.

OPERATING EXPENSES

Operating expenses for the six months ended June 30, 2010 decreased $639,442 or 28.3% from $2,263,334 for the six months ended June 30, 2009 to $1,623,892 for the same period in 2010. This decrease is a reflection of lower revenue and associated variable costs. Amortization expense decreased $224,137 or 17.6% from $1,270,065 for the six months ended June 30, 2009 to $1,045,928 for the same period in 2010.

INCOME TAXES

For the six months ended June 30, 2010 and June 30, 2009 corporate income tax (expense) benefit of $(156,289) and $91,218 were accrued.

INTEREST EXPENSE

Interest expense for the six months ended June 30, 2010 decreased by $28,900 or 59.6% from $48,451 for the six months ended June 30, 2009 to $19,631 for the same period in 2010. This decrease is a result of reducing debt to finance the acquisition of additional customers.

SITESTAR CORPORATION

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

JUNE 30, 2010 COMPARED TO DECEMBER 31, 2009

FINANCIAL CONDITION

Net accounts receivable decreased $277,330 or 60.9% from $455,773 on December 31, 2009 to $178,443 on June 30, 2010. Due to the slow moving nature of inventory, management has reclassified it on the balance sheets from current assets to other assets held for resale which decreased by $1,763 or 3.8% from $45,962 on December 31, 2009 to $44,199 on June 30, 2010. Accounts payable decreased by $77,021 or 58.5% from $131,598 on December 31, 2009 to $54,577 on June 30, 2010. Accrued expenses increased by $15,856 or 54.6% from $29,052 on December 31, 2009 to $44,908 on June 30, 2010. Deferred revenue decreased by $162,535 or 18.9% from $861,235 on December 31, 2009 to $698,700 on June 30, 2010 representing decreased volume of customer accounts that have been prepaid. The current portion of notes payable was unchanged. Long-term notes payable to shareholders decreased $280,173 or 51.2% from $547,245 on December 31, 2009 to $267,072 on June 30, 2010. This is due primarily to the early payoff of one note.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $1,150,484 and $1,090,807 at June 30, 2010 and at December 31, 2009. EBITDA was $924,185 for the six months ended June 30, 2010 as compared to $1,127,973 for the same period in 2009.

	2010			2009
EBITDA for the six months ended June 30,	$	924,185		$	1,778,950
Interest expense		(19,631	)		(48,451	)
Taxes		(156,289	)		91,218
Depreciation		(7,935	)		(17,228	)
Amortization		(1,045,928	)		(1,270,065	)

Net income for the six months ended June 30,	$	(305,598	)	$	534,424

SITESTAR CORPORATION

The aging of accounts receivable as of June 30, 2010 and December 31, 2009 is as shown:

	2010				2009
Current	$	53,395	30	%	$	150,467	33	%
30 < 60		37,612	21	%		159,585	35	%
60 +		87,436	49	%		145,721	32	%
Total	$	178,443	100	%	$	455,773	100	%

OFF-BALANCE SHEET TRANSACTIONS

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

SITESTAR CORPORATION

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

CRITICAL ACCOUNTING POLICY AND ESTIMATES

The Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses its condensed consolidated financial statements, which have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the condensed consolidated financial statements included in this quarterly report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

None.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of June 30, 2010. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and on a timely basis.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2010, as related to the material weaknesses in internal control over financial reporting discussed in the fiscal 2009 Form 10-K. The material weaknesses related to proper revenue recognition of processing charges and late fees of customers cut off from internet service because the collectability of those charges is not reasonably assured and the material weakness that ongoing monitoring does not always occur in the ordinary course of operations.

As of May 21, 2010, the Company began evaluating the aforementioned weaknesses and is remediating the deficiencies with additional procedures and controls including additional personnel training. The Company has evaluated the effectiveness of its disclosure controls and procedures and internal controls over financial reporting as of June 30, 2010, including the remedial actions discussed above.

Because of the material weaknesses in internal control over financial reporting described in the fiscal 2009 Form 10-K, we performed additional analyses and other post-closing procedures to ensure that our condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management, including our Chief Executive Officer and Chief Financial Officer, believes the condensed consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting:

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the changes in our internal controls discussed above in order to remediate material weaknesses.

SITESTAR CORPORATION

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

A complaint has been filed in Belmont County, Ohio by First USA, Inc. alleging a breach of agreement for the purchase and sale of Internet Service Provider accounts dated July 1, 2006. The complaint demands judgment of approximately $150,000. The Company has vigorously defended this claim. This matter was dismissed by the plaintiff on December 11, 2009.

Item 1A. Risk Factors

Not required for small business.

Item 2. Unregistered Sales of Equity Securities and use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None

Item 6. Exhibits

(a) The following are filed as exhibits to this form 10-Q:

31.1		Certification of President Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.

32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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: August 16, 2010	By:	/s/ Frank Erhartic, Jr.
		Frank Erhartic, Jr.
		President, Chief Executive Officer
		(Principal Executive Officer and Principal Accounting Officer)


Date: August 16, 2010	By:	/s/ Daniel A. Judd.
		Daniel A. Judd
		Chief Financial Officer
		(Principal Financial Officer)