UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] 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 (IRS Employer
of incorporation or organization) Identification No.)
16133 VENTURA BOULEVARD, SUITE 635, ENCINO, CA 91436
(Address of principal executive offices)
(818) 981-4519
(Issuer's telephone number)
(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 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity. As of November 14, 2000 - 26,953,657 shares of Common Stock
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
SITESTAR CORPORATION
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2000 3-4
Condensed Consolidated Statements of Operations for
the three months ended September 30, 2000 and 1999
(Unaudited) 5
Condensed Consolidated Statements of Operations for
the nine months ended September 30, 2000 and 1999 (Unaudited) 6
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 and 1999 (Unaudited) 7-8
Notes to Condensed Consolidated Financial Statements 9-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Change in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
Part III. EXHIBITS
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 77,455
Marketable securities 705,697
Accounts receivable, less allowance for
doubtful accounts of $140,000 142,199
Other current assets 68,822
---------------
Total current assets 994,173
PROPERTY AND EQUIPMENT, net 396,913
DEFERRED LOAN COSTS 271,565
CUSTOMER LIST, net 1,930,085
EXCESS OF COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED, net 2,358,621
INVESTMENTS 160,000
OTHER ASSETS 16,045
---------------
TOTAL ASSETS $ 6,127,402
===============
See the accompanying notes to the consolidated financial statements
3
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, Continued
SEPTEMBER 30, 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 195,604
Accrued expenses 201,066
Deferred revenue 121,309
Due to stockholder 20,000
Convertible debenture 985,000
Note payable - stockholders, current portion 233,025
Notes payable, current portion 72,050
Capital lease obligations, current portion 49,185
---------------
Total current liabilities 1,877,239
NOTES PAYABLE - STOCKHOLDERS, less current portion 53,884
NOTES PAYABLE, less current portion 422,823
CAPITAL LEASE OBLIGATIONS, less current portion 10,068
---------------
TOTAL LIABILITIES 2,364,014
---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, 0 shares issued and outstanding -
Common Stock, $.001 par value, 75,000,000 shares
authorized, 25,735,816 shares issued and outstanding 25,736
Additional paid-in capital 9,127,327
Accumulated deficit (5,389,675)
---------------
Total stockholders' equity 3,763,388
---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,127,402
===============
See the accompanying notes to the consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
2000 1999
--------------- ---------------
<S> <C> <C>
REVENUE $ 474,387 $ 18,684
COST OF REVENUE 203,082 22,740
--------------- ---------------
GROSS PROFIT (LOSS) 271,305 (4,056)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 743,710 2,094,687
LOSS (GAIN) FROM OPERATIONS OF BUSINESS
TRANSFERRED UNDER CONTRACTUAL
OBLIGATIONS - (53,223)
--------------- ----------------
LOSS FROM OPERATIONS (472,405) (2,045,520)
OTHER INCOME (EXPENSES)
Gain on sale of assets - -
Increase in market value of marketable securities 30,697 -
Interest expense (149,445) (11,772)
---------------- ----------------
LOSS BEFORE INCOME TAXES (591,153) (2,057,292)
INCOME TAXES - -
--------------- ---------------
NET LOSS $ (591,153) $ (2,057,292)
================ ================
BASIC AND DILUTED LOSS PER SHARE $ (0.02) $ (0.11)
=============== ================
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 24,999,007 18,600,036
=============== ===============
</TABLE>
See the accompanying notes to the consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
2000 1999
--------------- ---------------
<S> <C> <C>
REVENUE $ 1,290,774 $ 18,684
COST OF REVENUE 639,467 22,740
--------------- ---------------
GROSS PROFIT (LOSS) 651,307 (4,056)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,090,377 2,198,517
LOSS FROM OPERATIONS OF BUSINESS
TRANSFERRED UNDER CONTRACTUAL
OBLIGATIONS 42,233 40,786
--------------- ---------------
LOSS FROM OPERATIONS (1,481,303) (2,243,359)
OTHER INCOME (EXPENSES)
Gain on sale of assets 363,831 -
Increase in market value of marketable securities 30,697 -
Interest expense (252,648) (11,772)
---------------- ----------------
LOSS BEFORE INCOME TAXES (1,339,423) (2,255,131)
INCOME TAXES - -
--------------- ---------------
NET LOSS $ (1,339,423) $ (2,255,131)
================ ================
BASIC AND DILUTED LOSS PER SHARE $ (0.05) $ (0.12)
=============== ================
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 24,507,376 18,600,036
=============== ===============
</TABLE>
See the accompanying notes to the consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,339,423) $ (2,255,131)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization expense 1,147,082 8,273
Compensation expense paid by principal shareholders 2,000,000
Amortization of debt financing costs 148,792 -
Gain on the sale of assets (363,831) -
Increase in market value of marketable securities (30,697)
Loss from operations of business transferred under
contractual arrangements 42,233 40,786
Stock issued in lieu of compensation
and professional fees 224,313 -
(Increase) decrease in:
Accounts receivable (7,925) -
Other assets 2,801 -
Increase (decrease) in:
Accounts payable and accrued expenses 102,429 (149,137)
Deferred revenue (37,650) -
Advances from stockholder - 27,000
--------------- ---------------
Net cash used in operating activities (111,876) (328,209)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (26,446) (5,830)
Purchase of marketable securities (675,000) (75,000)
Proceeds from sale of assets 34,703 -
--------------- ---------------
Net cash used in investing activities (666,743) (80,830)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in book overdraft - 36,973
Advances from stockholder, net 24,450 215,696
Proceeds from notes payable - 416,309
Proceeds from convertible debenture 1,000,000 -
Proceeds from capital contributions 155,671
Payment of loan fees (110,000) -
Repayment of notes payable (45,719) (354,218)
Repayment of notes payable - stockholders (20,479) -
Payment on capital lease obligation (37,506) (6,583)
--------------- ----------------
Net cash provided by financing activities 810,746 463,848
--------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 32,127 54,809
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 45,328 -
--------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 77,455 $ 54,809
=============== ================
</TABLE>
See the accompanying notes to the consolidated financial statements
7
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (continued)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the nine months ended September 30, 2000 and 1999, the Company paid no
income taxes and interest of approximately $74,000 and
$11,700, respectively.
NON-CASH INVESTING AND FINANCING TRANSCATIONS:
During the nine months ended September 30, 2000, the Company converted $471,372
of debt, which includes $224,313 of compensation and professional services, into
1,575,990 shares of the Company's common stock.
See the accompanying notes to the consolidated financial statements
8
<PAGE>
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. 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 generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The results of the
nine months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2000.
NOTE 2 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. There are no common stock equivalents.
NOTE 3 - SALE OF ASSETS
On September 30, 1999, the Company sold all of the assets related to the
Company's international food distribution business, also known as Holland
American International Specialties ("HAIS"). The acquirer of the assets is a
partnership with the partners being a group of stockholders of the Company.
Given that the sale was not an arms-length transaction, the Company had the
business valued by an independent appraiser to determine the fair value purchase
price. The sales price was $900,000, which is to be paid as follows: 1) $200,000
is to be offset against the Company's liability to the a stockholder, 2)
$654,000 for the buyer's assumption of all trade, short-term and long-term
liabilities, and 3) the remaining $46,000 in the form of a note payable to the
Company in six annual installments of $15,333 each plus accrued interest at 8%
per annum. The Company was required to defer the gain on this sale until such
time as the purchasers are able to refinance the debt of HAIS. During the 2nd
quarter of 2000 the purchasers were able to refinance the debt and the Company
has recognized a $314,515 gain on the sale of HAIS.
In January 2000, the Company sold certain assets and liabilities of its wholly
owned subsidiary, Sitestar, Inc. for $34,703 in cash plus a note receivable in
the amount of $10,000. The Company recognized a gain on sale of these certain
assets of $49,316. The Company retained the "Sitestar" trademark and
"Sitestar.com" URL.
9
<PAGE>
SITESTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 4 - CONVERTIBLE DEBENTURE
On May 11, 2000 the Company issued two convertible debentures aggregating
$500,000. The debentures bear interest at 12% per annum and are due on May 1,
2001. The debentures are convertible into common stock at a rate equal to the
lowest of $.70 or 60% of the average of the three lowest closing bid price for
the common stock during the 20 trading days immediately preceding the conversion
date. In addition, the Company also issued three-year warrants to purchase an
aggregate of 250,000 shares of common stock at an initial exercise price of
$0.77 per share. Due to the preferential conversion feature of these debentures
the Company will capitalize $242,857 (which represents the value of additional
shares issuable upon conversion at the $.70 conversion price verses the number
of shares issuable upon conversion at the market value at the date of issuance)
as debt issuance costs and amortize this amount over the term of the debentures.
In addition, the warrants issued in connection with these debentures have an
exercise price below the market value of the Company's stock on the date of
issuance, therefore the Company will capitalize an additional $67,500 (which
represents the difference in the market value at the date of issuance less the
$.77 exercise price times the number of warrants issued) of debt issuance costs
associated with the issuance of the 250,000 warrants that will be amortized over
the term of these debentures.
The Company and the above debenture holders have also agreed that, upon the
declaration of effectiveness of the Registration Statement to be filed pursuant
to the Registration Rights Agreement, provided that the trading price of the
Common Stock is at least $1.00 for the ten (10) consecutive trading days
immediately preceding the Effective Date, the debenture holders will be
obligated to purchase, and the Company shall be obligated to sell and issue to
the debenture holders, additional debentures in the aggregate principal amount
of Five Hundred Thousand ($500,000) and additional warrants to purchase an
aggregate of 250,000 shares of Common Stock for an aggregate purchase price of
Five Hundred Thousand Dollars ($500,000), with the closing of such purchase to
occur within thirty (30) days of the Effective Date. The terms of the Additional
Debentures and the Additional Warrants shall be identical to the terms of the
Debentures and the Warrants as described above, provided that the Initial
Conversion Price (as defined in the Debentures) for the Additional Debentures
shall be seventy-seven hundredths of one dollar ($.77).
On August 14, 2000, the Company issued another Convertible Debenture for
$500,000 to the holders of the above-mentioned debenture for the same terms
described above. Thus, bringing the total to $1,000,000.
Note 5 - MARKETABLE SECURITIES
The Company currently classifies all its marketable securities as trading, which
are presented as current assets. Securities accounted for as trading include
common stock of a publicly traded company and are reported at fair value,
adjusted for changes in market value. Realized gains and losses and unrealized
holding gains and losses, net of tax, on trading securities are included in
earnings. Realized gains or losses on the sale of securities are determined
using the specific-identification method.
10
<PAGE>
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 footnotes for
the year ended December 31, 1999 included in its Annual Report on Form 10-KSB.
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
--------
We changed our corporate focus from that of a food holding company to an
Internet holding company with the acquisition of Sitestar, Inc. in July 1999.
Soon after concluding this acquisition, we started focusing on acquiring and
investing in Internet-based enterprises. Our mission is to develop our Internet
operating subsidiaries and future investments in other Internet enterprises into
highly focused and successful stand-alone Internet businesses. We intend to
achieve a fast-track development process by tapping the services, support and
knowledge of individuals and organizations that have extensive experience in
developing Internet concepts and technologies.
In July 1999, we began to implement our current strategy of acquiring and
investing in emerging Internet based enterprises to create a broad and diverse
set of core Internet businesses which deliver a variety of online solutions. In
addition to developing and integrating Internet-based technologies, our primary
objective is to create a mix of Internet operating companies and
Internet-related portfolio investments that will enhance the value of its core
holdings.
Our Internet services subsidiary began providing Internet services to its
customers in 1996 by providing Internet access and enhanced products and
services to small and medium sized enterprises in selected high growth markets.
We target primarily small and medium sized enterprise customers located in
selected high growth secondary markets. We currently provide our customers with
Internet access and enhanced products and services in the mid-Atlantic area of
the United States. We have designed our comprehensive suite of enhanced products
and services to meet the expanding needs of our customers and to increase our
revenue per customer. The products and services we provide include:
o Internet access services;
o Web design services;
o Web hosting services;
o End to end e-commerce solutions;
o Online marketing consulting; and
o Management of mission critical Internet applications.
We just recently announced that we will spin off the content services
division of our wholly owned subsidiary, Sitestar.net, Inc. (formerly Neocom
Microspecialists, Inc.) into a separate public company focused in content
development. This spin off should take place in the first quarter of 2001.
11
<PAGE>
Results of Operation
--------------------
On September 30, 1999, the Company sold all of the assets related to the
Company's international food distribution business, also known as Holland
American International Specialties ("HAIS"). The acquirer of the assets is a
partnership with the partners being a group of stockholders of the Company.
Given that the sale was not an arms-length transaction, the Company had the
business valued by an independent appraiser to determine the fair value purchase
price. The sales price was $900,000, which is to be paid as follows: 1) $200,000
is to be offset against the Company's liability to the a stockholder, 2)
$654,000 for the buyer's assumption of all trade, short-term and long-term
liabilities, and 3) the remaining $46,000 in the form of a note payable to the
Company in six annual installments of $15,333 each plus accrued interest at 8%
per annum. The Company was required to defer the gain on this sale until such
time as the purchasers are able to refinance the debt of HAIS. During the 2nd
quarter of 2000 the purchasers were able to refinance the debt and the Company
has recognized a $314,515 gain on the sale of HAIS.
On December 15, 1999, we completed the acquisition of another Internet
Company, Neocom Microspecialists, Inc., recently renamed, Sitestar.net, Inc.
("Neocom"). The intangible assets purchased as a result of recent acquisitions
represent approximately 76% of our total assets and approximately 109% of our
stockholders' equity. Further, amortization of these intangible assets will be
the largest single expense item in our statement of operations and will be
approximately $1.4 million in 2000. This material concentration of intangible
assets increases the risk of a large charge to earnings in the event that the
recoverability of these intangible assets is impaired. If we are unable to
recover the costs of these intangible assets, our financial performance may be
negatively impacted in the coming periods through a write down or write off of
these intangible assets. In addition, the intangible assets could increase, thus
increasing the yearly amortization, if any of the 2,000,000 contingent shares
are issued in connection with the Neocom acquisition.
In January 2000, the Company sold certain assets and liabilities of its
wholly owned subsidiary, Sitestar, Inc. for $34,703 in cash plus a note
receivable in the amount of $10,000. The Company recognized a gain on sale of
these certain assets of $49,316. The Company retained the "Sitestar" trademark
and "Sitestar.com" URL.
Prior to our change in corporate focus from that of a food holding company
to that of an Internet holding company, we generated all of our revenues from
sales of specialty food products. We have historically derived a majority of our
revenues from small independent specialty food retail customers. From inception
until July 1999, we generated revenues exclusively from wholesale and retail
sales of our food products. We derived income from our wholesale and retail
sales from the excess of the wholesale and retail prices we charged our
customers over the product costs we paid our suppliers. We had a wholesale
program in which we sold bulk quantities of specialty food products to
registered retailers at wholesale prices. In this program, we purchased products
from suppliers at a distributor's discounted price and derived income from the
difference between this discounted price and the wholesale price we charged.
Additionally, our retail customers paid for orders by cash or credit card while
we paid our suppliers on extended terms. As a result, we were able to increase
our working capital between the time we received payment for orders and the time
we were required to pay suppliers.
12
<PAGE>
As a result of our change in corporate focus from a food holding company to
an Internet holding company, we now have two other sources of income. Our
e-commerce operating subsidiaries now derive our income from commissions. We are
agents of our fulfillment centers and merely generate our revenues from
commissions per transaction, which represent the gross selling price charged to
our customers less the amount we pay to the fulfillment center. Our customers
pay us directly and we remit the cost of the goods to our fulfillment centers
less our agreed upon commission amount. As a result of this arrangement, the
extent of our financial agreement with our fulfillment centers are relegated to
the periodic transfer and remittance of our product costs. We do not take title
to the goods sold on our e-commerce sites, which eliminates any inventory risks
on our part. We forward all orders directly to our fulfillment centers, which
eliminates the need to take possession of the goods and merchandise sold on our
e-commerce sites. Our fulfillment centers ship the purchased good directly to
our customers on our behalf. The shipping and handling costs related to every
transaction are added to the total cost of the goods sold which the customers
have to bear.
Our Internet service provider operating subsidiary derives its income from
the excess of the Internet service prices we charge our customers over the cost
of service we pay our suppliers. Additionally, our retail customers pay for
services by cash or credit card while we pay our suppliers on extended terms. As
a result, we are able to increase our working capital between the time we
receive payment for services and the time we are required to pay suppliers.
We are operating under an oral agreement with our fulfillment centers and
have no long-term obligations to continue the relationship with them if we deem,
solely at our own discretion, that it is no longer in our best interest to
continue the current arrangements. However, we intend to formalize official
written fulfillment agreements with them as soon as practicable.
Net revenues for our e-commerce subsidiaries consist of commissions earned
per transaction upon shipment of products and acceptance of products by our
customers net of any allowance for future returns.
We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as online commerce. To address these risks, we must obtain sufficient
operating capital, maintain and expand our customer base, continue to increase
our product offerings, successfully implement our business, marketing and
promotional strategies, continue to develop our order processing technology,
respond to competitive developments in the specialty food market, and attract,
retain and motivate qualified personnel. We cannot assure you that we will be
successful in addressing these risks and our failure could be harmful to our
business, prospects, financial condition and results of operations.
13
<PAGE>
Internet Operations
-------------------
Our Internet operations are represented by our current Internet service
provider and e-commerce operating subsidiaries. Due to our change in primary
corporate focus, these will be the industry segments in which we are going to
focus. Our costs would include expenses associated with running an Internet
holding company. These expenses are mainly related to the maintenance of the
corporate office, payroll, legal, accounting, public relations and other
administrative expenses.
Three Months Ended September 30, 2000
-------------------------------------
REVENUES. Net revenues for our Internet service provider subsidiary consist
of services and sales to customers. Revenues are recognized upon delivery of
service. Net revenues for our e-commerce subsidiaries consist of commissions
earned per transaction upon shipment of products and acceptance of products by
our customers net of any allowance for future returns. Revenue for the three
months ended September 30, 2000 was $474,387 of which all was related to
providing Internet and development services to customers. Revenue for the
quarter ended September 30, 2000 increase approximately 23% over the prior
quarter. As a result of our acquisition strategy and our recent acquisitions of
Internet service providers and e-commerce companies, we expect to experience
strong revenue growth in the coming years.
COST OF REVENUES. Cost of revenues consists primarily of the costs of
products and services sold to customers and actual outbound shipping and
handling costs. Cost of revenues for the three months ended September 30, 2000
was $203,082. Our cost of revenue as a percentage of sales for the three months
ended September 30, 2000 has decreased to 43% from 56% for the 1st quarter of
2000 due to an approximate 20% decrease in our telecommunications costs and the
fact that we have been able to service more customers for approximately the same
fixed cost as incurred in the prior quarters. As a result of our acquisition
strategy and our recent acquisitions of Internet service providers and
e-commerce companies, we expect to have an increase in our cost of revenues as
our revenues increase.
SELLING, GENERAL AND ADMINISTRATIVE. Sales and marketing expenses consist
primarily of advertising and promotional expenditures and payroll and related
expenses for personnel engaged in sales and marketing activities. Selling,
general and administrative expenses were $743,710 for the three months ended
September 30, 2000. This represents a decrease of $1,350,977 from the general
and administrative expense incurred for the three months ended September 30,
1999. This decrease is primarily attributable to a $2,000,000 charge incurred in
the third quarter of 1999 related to stock issued to an officer of the company
for compensation. If this charge is removed, the selling, general and
administrative expenses increased by approximately $650,000 which is attributed
to an increase in personnel, an increase in corporate expenses as a result of
our shift in corporate focus and amortization of intangible assets of $358,614.
INTEREST EXPENSE. Interest expense for the three months ended September 30,
2000 includes amortization of $97,589 of debt issuance costs associated with the
$1,000,000 convertible debentures.
14
<PAGE>
Nine Months Ended September 30, 2000
------------------------------------
REVENUES. Revenue for the nine months ended September 30, 2000 was
$1,290,774 of which all was related to providing Internet and development
services to customers. As a result of our acquisition strategy and our recent
acquisitions of Internet service providers and e-commerce companies, we expect
to experience strong revenue growth in the coming years.
COST OF REVENUES. Cost of revenues consists primarily of the costs of
products and services sold to customers and actual outbound shipping and
handling costs. Cost of revenues for the nine months ended September 30, 2000
was $639,467. As a result of our acquisition strategy and our recent
acquisitions of Internet service providers and e-commerce companies, we expect
to have a substantial increase in our cost of revenues as our revenues increase.
SELLING, GENERAL AND ADMINISTRATIVE. Sales and marketing expenses consist
primarily of advertising and promotional expenditures and payroll and related
expenses for personnel engaged in sales and marketing activities. Selling,
general and administrative expenses were $2,090,377 for the nine months ended
September 30, 2000. This represents a decrease of $108,140 from the general and
administrative expense incurred for the nine months ended September 30, 1999.
This decrease is primarily attributable to a $2,000,000 charge incurred in the
third quarter of 1999 related to stock issued to an officer of the company for
compensation. If this charge is removed, the selling, general and administrative
expenses increased by approximately $1.9 million which is attributed to an
increase in personnel, an increase in corporate expenses as a result of our
shift in corporate focus and amortization of intangible assets of $1,075,842.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
2000 includes amortization of $148,792 of debt issuance costs associated with
the $1,000,000 convertible debentures.
Liquidity and Capital Resources
-------------------------------
Our business plan has required, and is expected to continue to require,
substantial capital to fund the growth of our operations, capital expenditures,
and expansion of sales and marketing capabilities and acquisitions.
On May 11, 2000 we issued two convertible debentures aggregating
$500,000. The debentures bear interest at 12% per annum and are due on May 1,
2001. The debentures are convertible into common stock at a rate equal to the
lowest of $.70 or 60% of the average of the three lowest closing bid price for
the common stock during the 20 trading days immediately preceding the conversion
date. In addition, we also issued three-year warrants to purchase an aggregate
of 250,000 shares of common stock at an initial exercise price of $0.77 per
share. Due to the preferential conversion feature of these debentures we will
capitalize $242,857 (which represents the value of additional shares issuable
upon conversion at the $.70 conversion price verses the number of shares
issuable upon conversion at the market value at the date of issuance) as debt
issuance costs and amortize this amount over the term of the debentures. In
addition, the warrants issued in connection with these debentures have an
exercise price below the market value of the our stock on the date of issuance,
therefore we will capitalize an additional $67,500 (which represents the
difference in the market value at the date of issuance less the $.77 exercise
price times the number of warrants issued) of debt issuance costs associated
with the issuance of the 250,000 warrants that will be amortized over the term
of these debentures.
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We and the above debenture holders have also agreed that, upon the
declaration of effectiveness of the Registration Statement to be filed pursuant
to the Registration Rights Agreement, provided that the trading price of the
Common Stock is at least $1.00 for the ten (10) consecutive trading days
immediately preceding the Effective Date, the debenture holders will be
obligated to purchase, and we shall be obligated to sell and issue to the
debenture holders, additional debentures in the aggregate principal amount of
Five Hundred Thousand ($500,000) and additional warrants to purchase an
aggregate of 250,000 shares of Common Stock for an aggregate purchase price of
Five Hundred Thousand Dollars ($500,000), with the closing of such purchase to
occur within thirty (30) days of the Effective Date. The terms of the Additional
Debentures and the Additional Warrants shall be identical to the terms of the
Debentures and the Warrants as described above, provided that the Initial
Conversion Price (as defined in the Debentures) for the Additional Debentures
shall be seventy-seven hundredths of one dollar ($.77).
On August 14, 2000, the Company issued another Convertible Debenture for
$500,000 to the holders of the above-mentioned debenture for the same terms
described above.
We believe that our existing cash and cash equivalents, and short-term
investments, will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months. Additional financing
may not be available when needed or, if available, such financing may not be on
terms favorable to our shareholders or us. If such sources of financing are
insufficient or unavailable, or if we experience shortfalls in anticipated
revenue or increases in anticipated expenses, we may need to slow down or stop
the expansion of our e-commerce business, including our ISPs and reduce our
marketing and development efforts.
Any of these events could harm our business, financial condition or results of
operations.
Forward looking statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability to expand our Internet services, general market
conditions, and competition and pricing. Although we believe 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.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
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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
By: /s/ Frederick T. Manlunas
-------------------------
Frederick T. Manlunas
Chairman of the Board
Date: November 14, 2000
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