It is the Company’s policy that revenue from product sales or services will be recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”), which superseded Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”). SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
The Company accounts for awards made under its two stock-based compensation plans pursuant to the fair value provisions of ASC No. 718. ASC No. 718 requires the recognition of stock-based compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. ASC No. 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company accounts for stock-based compensation in accordance with ASC No. 718 and estimates its fair value based on using the Black-Scholes option valuation model.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:
These factors could change in the future, affecting the determination of stock-based compensation expense in future periods. In the future, we may elect to use different assumptions under the Black-Scholes valuation model or a different valuation model, which could result in a significantly different impact on our net income or loss.
The Company’s determination of fair value of share-based payment awards is made as of their respective dates of grant using the Black Scholes option valuation model. Because the Company’s options have certain characteristics that are significantly different from traded options, the Black Scholes option valuation model may not provide an accurate measure of the fair value of the Company’s options. Although the fair value of the Company’s options is determined in accordance with ASC No. 718, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The calculated compensation cost is recognized on a straight-line basis over the vesting period of the options.
See also Note 6 – Stock Based Compensation of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding our accounting policies for stock-based compensation.
There were various accounting standards and interpretations issued during the six months ended October 31, 2011, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows.
Results of Operations
Comparison of the three months ended October 31, 2011 to the three months ended October 31, 2010
Marketing services
Our marketing services segment consists of our Enversa division.
Revenues and Gross profit:
Our marketing segment had revenues totaling $1,234,927 for the three month period ended October 31, 2011 as compared to $1,282,356 for the three month period ended October 31, 2010. This slight decrease is due to the loss of a significant enterprise client which was offset, to some degree, by the addition of revenues from search engine optimization and site leases at our Gulf division.
As a result of selling the higher margin Gulf products, gross profit at our marketing services segment increased for the three months ended October 31, 2011 to $753,069 from $686,385 for the three month period ended October 31, 2010. Gross profit as a percentage of revenue decreased from 61.0% to 56.9%.
Selling, General and Administrative Expenses:
Selling, general and administrative (“SG&A”) expenses totaled $675,382 for the three months ended October 31, 2011 as compared to $550,036 for the corresponding period in the prior year. The increase of $125,346 is primarily due to increases in headcount, rent and utilities associated with the build-up of our Gulf division.
Net Income:
Net income totaled $48,371 for the three months ended October 31, 2011 as compared to net income of $50,644 for the corresponding period in the prior year. The slight decrease is primarily due to our aforementioned SG&A increases associated with our growing Gulf business.
Communications services
Our communications services segment consists of all the businesses acquired in the Woodland Acquisition.
Revenues and Gross profit:
Our communications services segment had revenues totaling $1,679,131 for the three month period ended October 31, 2011 as compared to $1,667,938 for the three month period ended October 31, 2010. This increase is primarily due to the fact that, as a result of our two largest customers merging in the second half of calendar year 2009, the Company acquired a new customer as a result of the divestiture of certain overlapping customer bases. Because the merger was completed in the second half of 2009 and the divestiture of certain markets was just recently completed, the Company believes the merger’s impact on revenues has been fully realized but can make no guarantees that there will not be additional revenue fluctuations as a result of the acquisition of the new customer.
Gross profit increased for the three months ended October 31, 2011 to $1,432,065 from $1,349,131 for the three month period ended October 31, 2010 due to implementation of new agreements with lower rates from the carriers who provide our network infrastructure which resulted in lower rates paid by the Company. Gross profit as a percentage of revenue increased substantially to 85.3% from 80.9% during the three months ended October 31, 2010 as a result of these initiatives.
Selling, General and Administrative Expenses:
SG&A expenses totaled $125,863 for the three months ended October 31, 2011 as compared to $679,973 for the corresponding period in the prior year. The decrease of $554,110 is primarily due to the absence of non-recurring legal expenses totaling $246,894 incurred during the three month period ended October 31, 2010 along with cost savings resulting from staff reductions, relocation of offices to cheaper space and other cost cutting measures.
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Net Income:
Net income totaled $499,934 for the three months ended October 31, 2011 as compared to a net loss of $7,057 for the corresponding period in the prior year. The improvement of $506,991 is primarily due to the absence of non-recurring legal fees totaling $246,894 as well as the impact of the aforementioned cost reductions both in cost of sales and SG&A.
Corporate
Selling, General and Administrative Expenses:
SG&A costs totaled $817,944 for the quarter ended October 31, 2011 versus $478,204 for the corresponding period in the prior year. The increase of $339,740 is primarily due to the fact that we incurred approximately $230,000 in costs related to our pursuit of a potential merger which was never completed. We also incurred additional fees at Corporate primarily due to the fact that we hired additional accounting and IT personnel as necessary to develop Gulf. Expenses for this segment also include all costs associated with corporate overhead, including accounting, legal, corporate governance and other related costs involved in being a publicly traded company.
Comparison of the six months ended October 31, 2011 to the six months ended October 31, 2010
Marketing services
Revenues and Gross profit:
Our marketing services segment had revenues totaling $2,704,500 for the six month period ended October 31, 2011 as compared to $2,458,385 for the six month period ended October 31, 2010. This increase is due to the addition of revenues from search engine optimization and site leases at our Gulf division.
For the same reasons, gross profit at our marketing services segment increased for the six months ended October 31, 2011 to $1,584,392 from $1,180,700 for the six month period ended October 31, 2010. Gross profit as a percentage of revenue increased from 48.0% to 58.6% due to an increase in sales of Gulf’s higher margin products.
Selling, General and Administrative Expenses:
SG&A expenses totaled $1,390,384 for the six months ended October 31, 2011 as compared to $1,104,013 for the corresponding period in the prior year. The increase of $286,371 is primarily due to the aforementioned increase in personnel associated with our Gulf division which resulted in corresponding increases in headcount, rent and utilities.
Net Income
Net income totaled $77,009 for the six months ended October 31, 2011 as compared to net loss of $96,109 for the corresponding period in the prior year. The difference is primarily due to the margin increases at our Gulf division. In addition, we recorded bad debt expense of $27,445 during the three month period ended July 31, 2010 related to problems associated with revenues from one customer.
Communications services
Revenues, Cost of Sales and Gross profit:
Our communications services segment had revenues totaling $3,151,231 for the six month period ended October 31, 2011 as compared to $3,369,511 for the three month period ended October 31, 2010. This decrease is primarily due to the fact that our two largest customers merged in the second half of calendar year 2009 and, accordingly, the Company experienced a reduction in roaming revenues.
For similar reasons, gross profit decreased for the six months ended October 31, 2011 to $2,690,918 from $2,704,034 for the corresponding period in the prior year. Gross profit as a percentage of revenue improved to 85.4% during the six months ended October 31, 2011 versus 80.3% during the corresponding period in the prior year primarily due to the implementation of new agreements with lower rates from the carriers who provide our network infrastructure.
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Selling, General and Administrative Expenses:
SG&A expenses totaled $252,812 for the six months ended October 31, 2011 as compared to $1,209,712 for the corresponding period in the prior year. The substantial decrease of $956,900 is primarily due to non-recurring legal expenses which totaled $420,311 incurred during the six month period ended October 31, 2010. We settled this lawsuit in March 2011 and, accordingly, are no longer incurring similar fees. Absent legal expenses, the SG&A decrease is attributable primarily to staffing reductions and other cost saving measures enacted at our communications services segment during the year over year period.
Net Income
Net income totaled $798,419 for the six months ended October 31, 2011 as compared to net income of $549,107 for the corresponding period in the prior year. The increase of $249,312 is primarily due to the absence of non-recurring legal expenses which totaled $420,311 during the six month period ended October 31, 2010 which was offset, to some degree, by the fact that we received a favorable lawsuit settlement during the six month period ended October 31, 2010.
Corporate
Selling, General and Administrative Expenses:
SG&A expenses totaled $1,312,004 for the six month period ended October 31, 2011 versus $815,892 for the corresponding period in the prior year. The increase of $496,112 is primarily due to the fact that we incurred approximately $230,000 in costs related to our pursuit of a potential merger which was never completed. We also incurred additional fees at Corporate primarily due to the fact that we hired additional accounting and IT personnel as necessary to develop Gulf. Expenses for this segment also include all costs associated with corporate overhead, including accounting, legal, corporate governance and other related costs involved in being a publicly traded company.
Liquidity and Capital Resources
As of October 31, 2011, we had a working capital deficit of approximately $2.6 million and cash of $580,347. Our working capital deficit is primarily related to certain large accounts payable associated with our 2009 Woodland Acquisition as well as the short-term nature of selected tranches of the debt we issued in March 2011 when we recapitalized the Company. Our working capital deficit has decreased substantially from our October 31, 2010 period end deficit which totaled approximately $4.5 million. This improvement is due to the fact that, as a result of the March 2011 recapitalization, we extended the maturities of substantially all of our debt. We believe the cash flows from our existing operations will be adequate to manage our debt commitments and we have good relationships with the vendors associated with the large accounts payable who we continue to pay with excess cash flow. Management expects that its current cash and operational cash flow will be sufficient to meet our liquidity needs for the next year.
Our investing activity for the six month period ended October 31, 2011, consisted primarily of $14,601 of capital expenditures, primarily associated with the relocation of several of our facilities, including our home office. Management believes the reduced rents in the new locations will more than offset the capital expenditures.
We have no other bank financing or other external sources of liquidity. We source all of our liquidity through our operations. We expect that trend to continue.
We will most likely need to obtain additional capital in order to further expand our operations. We are currently investigating other financial alternatives, including additional equity and/or debt financing. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. However, there can be no assurance that any additional financing will become available to us, and if available, that such financing will be on terms acceptable to us.
Off-balance sheet arrangements
We have not entered into any off-balance sheet arrangements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of its principal executive officer and its chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of October 31, 2011. Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of that date, the Company’s disclosure controls and procedures, were not effective at a reasonable assurance level.
Management’s Remediation Plan
Management determined that a material weakness existed due to an inability to appropriately segregate duties in the accounting department due to a lack of the number of personnel in the accounting department. The Company has replaced selected accounting personnel with more seasoned professionals, including additional certified public accountants, to help perform certain accounting and financial functions. In addition, management has included additional reviews and controls to mitigate the size of the accounting department and the overlap of responsibilities. Management believes the foregoing efforts have effectively remediated this material weakness but the Company can give no assurance that the additional controls will be effective. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. We cannot assure you that, as circumstances change, any additional material weakness will not be identified.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not applicable.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other information
None.
Item 6. Exhibits
The following exhibits are filed as part of this report:
| | | | |
Exhibit
Numbers | | Description | | Method of
Filing |
| | | | |
3.1 | | Articles of Incorporation of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated November 9, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2, filed September 27, 2005) | | |
3.2 | | Certificate of Correction of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated November 24, 2004 (incorporated by reference to Exhibit 3.2 to the Company’s Form 10-Q, filed December 15, 2010) | | |
3.3 | | Certificate of Change of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated October 18, 2006 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K, filed October 25, 2006) | | |
3.4 | | Certificate of Amendment to Articles of Incorporation For Nevada Profit Corporations of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated May 4, 2007 (incorporated by reference to Exhibit 3.2 to the Company’s Form 10-Q, filed December 15, 2010) | | |
3.5 | | Bylaws of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated November 9, 2004 (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form SB-2, filed September 27, 2005) | | |
10.1 | | Employment Agreement by and between Cornerworld Corporation and Marc Pickren dated September 13, 2011 | | w |
10.2 | | Amendment, dated as of December 15, 2011, to Scott Beck employment agreement. | | w(1) |
10.3 | | Stock option, dated as of September 21, 2011, for Marc Pickren to purchase 250,000 shares of Common Stock | | w(1) |
31.1 | | Rule 13a-14(a) Certification by our chief executive officer | | (1) |
31.2 | | Rule 13a-14(a) Certification by our chief financial officer | | (1) |
32.1 | | Section 1350 Certification by our chief executive officer | | (2) |
32.2 | | Section 1350 Certification by our chief financial officer | | (2) |
101 | | Interactive Data Files of Financial Statements and Notes. | | (3) |
__________
| |
(1) | Filed herewith. |
(2) | Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K under the Exchange Act. |
(3) | Furnished (and not filed) herewith pursuant to Regulation S-T under the Exchange Act. |
w | Management plan, compensatory arrangement or employment agreement. |
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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.
| |
| CORNERWORLD CORPORATION |
| |
| Registrant |
| |
December 20, 2011 | /s/ V. Chase McCrea III |
| |
| V. Chase McCrea III |
| Chief Financial Officer |
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