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will be recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”), which superseded Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”).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 nine months ended January 31, 2013, 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 January 31, 2013 to the three months ended January 31, 2012
Consolidated CornerWorld Corporation
Revenues and Gross profit:
We had revenues totaling $1,680,494 for the three month period ended January 31, 2013 as compared to $2,292,764 for the three month period ended January 31, 2012. The decrease of $612,270, or 26.7%, is primarily due to revenue decreases in our marketing services segment resulting from the deterioration of the market for lead generation in the for-profit education space. In addition, to a much smaller extent, our communications services segment experienced a smaller decrease due to the fact that, as our customers built out their networks, the Company experienced a reduction in roaming revenues.
Similarly, gross profit decreased 26.8% for the three months ended January 31, 2013 to $1,403,012 from $1,696,416 for the three month period ended January 31, 2012 which was consistent with the revenue decrease.
Selling, General and Administrative Expenses:
Selling, General and Administrative expenses (“SG&A”) expenses totaled $705,663 for the three months ended January 31, 2013 as compared to $1,320,049 for the corresponding period in the prior year. The decrease of $614,386 is primarily due to the cost savings resulting from staff reductions, office closures and other cost cutting measures.
Depreciation and Amortization:
Depreciation and amortization expenses totaled $409,358 for the three month period ended January 31, 2013 as compared to $489,163 for the three month period ended January 31, 2012. The decrease of $79,805 is due to the fact that several of our larger telecommunications fixed assets have become fully depreciated.
Loss from Continuing Operations Before Taxes and Net Loss:
Loss from Continuing Operations Before Taxes andNet loss totaled $123,408 for the three months ended January 31, 2013 as compared to a net loss of $643,506 for the corresponding period in the prior year. The improvement of $520,098 is primarily due to the aforementioned reductions in SG&A and depreciation as well as decreases in interest expenses.
Marketing services
Our marketing services segment consists of our Enversa division.
Revenues:
Our marketing services segment had revenues totaling $387,673 for the three month period ended January 31, 2013 as compared to $934,868 for the three month period ended January 31, 2012. This decrease is due to the deterioration in the for-profit educational lead generation space and significant ongoing challenges and customer churn in our search engine optimization and website leasing businesses.
Depreciation and Amortization:
Our marketing services segment had depreciation expenses totaling $1,545 for the three month period ended January 31, 2013 as compared to $1,545 for the three month period ended January 31, 2012. There were no changes due to the fact that our marketing services segment does not require substantial continuing fixed asset investment.
Income from Continuing Operations Before Taxes and Net Income:
Income from continuing operations before taxes and net income totaled $185,390 for the three months ended January 31, 2013 as compared to a loss $86,768 for the corresponding period in the prior year. The increase is primarily due to reallocation of certain functions to corporate and significant cost savings measures corresponding to the decreases in revenues.
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Communications services
Our communications services segment consists of our Woodland division.
Revenues:
Our communications services segment had revenues totaling $1,292,851for the three month period ended January 31, 2013 as compared to $1,357,896 for the three month period ended January 31, 2012. This decrease is primarily due to the reduction of roaming traffic and call volumes resulting from the continued buildout of nationwide mobile carrier networks.
Depreciation and Amortization:
Our communications services segment had depreciation and amortization expenses totaling $396,752 for the three month period ended January 31, 2013 as compared to $475,250 for the three month period ended January 31, 2012. The decrease of $78,498 is due to the fact that several of our larger fixed assets have become fully depreciated.
Income from Continuing Operations Before Taxes and Net Income:
Income from continuing operations before taxes and net income totaled $257,682 for the three months ended January 31, 2013 as compared to a net income of $241,557 for the corresponding period in the prior year. The increase of $16,125 is primarily due to the aforementioned decreases in depreciation expenses and decreases in interest expenses as a result of our continued paydown of debt. These expense decreases were offset, to some extent, by decreases in revenues and gross profit as well as slight increases in selling, general and administrative expenses.
Corporate
Depreciation and Amortization:
Our corporate segment had depreciation expenses totaling $11,061 for the three month period ended January 31, 2013 as compared to $12,368 for the three month period ended January 31, 2012. The slight decrease of $1,307 is due to the fact that several of our larger fixed assets have become fully depreciated.
Loss from Continuing Operations Before Taxes and Net Loss:
Loss from continuing operations and net loss totaled $566,480 for the three months ended January 31, 2013 as compared to a net loss of $798,295 for the corresponding period in the prior year. The decrease of $231,815 is primarily due to decreases in selling, general and administrative expenses resulting from cost savings measures including reductions in headcount and related expenses. In addition, interest expenses decreased $124,412 as a result of our continued paydown of debt.
Comparison of the nine months ended January 31, 2013 to the nine months ended January 31, 2012
Consolidated CornerWorld Corporation
Revenues and Gross profit:
We had revenues totaling $5,723,892 for the nine month period ended January 31, 2013 as compared to $8,148,495 for the nine month period ended January 31, 2012. The decrease of $2,424,603 is primarily due to revenue decreases in our marketing services segment resulting from the deterioration of the market for lead generation in the for-profit education space and the loss of a significant enterprise client in October 2011. In addition, to a much smaller extent, our communications services segment experienced a decrease in revenues due to the fact that, as our customers built out their networks, the Company experienced a reduction in roaming traffic.
Similarly, gross profit decreased for the nine months ended January 31, 2013 to $4,669,932 from $5,971,726 for the nine month period ended January 31, 2012. This decrease was consistent with the revenue decrease.
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Selling, General and Administrative Expenses:
SG&A expenses totaled $2,399,432 for the nine months ended January 31, 2013 as compared to $4,275,249 for the corresponding period in the prior year. The decrease of $1,875,817 is primarily due to the cost savings resulting from staff reductions, office closures and other cost cutting measures.
Depreciation and Amortization:
Depreciation and amortization expenses totaled $1,231,154 for the nine month period ended January 31, 2013 as compared to $1,584,919 for the nine month period ended January 31, 2012. The decrease of $353,765 is due to the fact that several of our larger telecommunications fixed assets have become fully depreciated.
Loss from Continuing Operations Before Taxes and Net Loss:
Loss from continuing operations before taxes andnet loss totaled $383,154 for the nine months ended January 31, 2013 as compared to a net loss of $1,636,574 for the corresponding period in the prior year. The improvement of $1,253,420 is primarily due to the aforementioned reductions in SG&A and depreciation as well as decreases in interest expenses resulting from the Company’s continued repayment of debt.
Marketing services
Revenues:
Our marketing services segment had revenues totaling $1,479,982 for the nine month period ended January 31, 2013 as compared to $3,639,368 for the six month period ended January 31, 2012. This decrease is due to the loss of a significant enterprise client, deterioration in the for-profit educational lead generation space and significant ongoing challenges and customer churn in our search engine optimization and website leasing businesses.
Depreciation and Amortization:
Our marketing services segment had depreciation expenses totaling $4,637 for the nine month period ended January 31, 2013 as compared to $115,558 for the nine month period ended January 31, 2012. The significant decrease is due to the fact that previously capitalized customer list became fully amortized August 31, 2011.
Income from Continuing Operations Before Taxes and Net Income:
Income from continuing operations before taxes and net income totaled $534,899 for the nine months ended January 31, 2013 as compared to a loss $9,759 for the corresponding period in the prior year. The increase is primarily due to reallocation of certain functions to corporate and significant cost savings measures corresponding to the decreases in revenues.
Communications services
Revenues:
Our communications services segment had revenues totaling $4,243,910 for the nine month period ended January 31, 2013 as compared to $4,509,127 for the nine month period ended January 31, 2012. The decrease of $265,217 was primarily due to the reduction of roaming traffic and call volumes resulting from the continued buildout of nationwide mobile carrier networks
Depreciation and Amortization:
Our communications services segment had depreciation and amortization expenses totaling $1,190,254 for the nine month period ended January 31, 2013 as compared to $1,424,407 for the nine month period ended January 31, 2012. The decrease of $234,153 is primarily due to the fact that several of our larger fixed assets have become fully depreciated.
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Income from Continuing Operations Before Taxes and Net Income:
Income from continuing operations before taxes and net income totaled $1,132,266 for the nine months ended January 31, 2013 as compared to a net income of $1,039,978 for the corresponding period in the prior year. The increase of $92,290 is primarily due to the aforementioned decreases in depreciation expenses and decreases in interest expenses as a result of our continued paydown of debt. These expense decreases were offset, to some extent, by decreases in revenues and gross profit as well as slight increases in selling, general and administrative expenses.
Corporate
Loss from Continuing Operations Before Taxes and Net Loss:
Loss from continuing operations and net loss totaled $2,050,319 for the nine months ended January 31, 2013 as compared to a net loss of $2,666,791 for the corresponding period in the prior year. The decrease of $616,472 is primarily due to decreases in selling, general and administrative expenses resulting from cost savings measures including reductions in headcount and related expenses. In addition, interest expenses decreased $333,747 as a result of our continued paydown of debt.
Liquidity and Capital Resources
As of January 31, 2013, we have a working capital deficit of approximately $2.3 million and cash of $1,379,303. Our working capital deficit is primarily related to certain large accounts payable associated with our 2009 acquisition of Woodland Holdings as well as the short-term nature of selected tranches of the debt we issued in March 2011 when we recapitalized the Company. We have good relationships with the vendors associated with the large accounts payable who we continue to pay with excess cash flow. 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. See Note 4 and Note 8 to the financial statements for a description of the material terms of the outstanding debt of the Company.
As previously noted, the notes payable to our Senior Lender contain certain restrictive covenants, the failure to comply with which would result in the acceleration of all or part of the notes payable to the Senior Lender, depending on the particular covenant, creating a “Paydown Event.” Through the date of this filing, the Company has been in compliance with all such covenants and, as of January 31, 2013, the Company believes that it is in compliance with all other restrictive covenants with respect to the notes payable to the Senior Lender.
Effective for the period ended April 30, 2013, the Company will also be required to comply with an additional “Paydown Event” covenant, pursuant to which the Company’s marketing segment must maintain a minimum level of earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined in the credit agreement with the Senior Lender. The Company believes that should its marketing division continue to perform consistent with recent operating results, the Company will not have sufficient Adjusted EBITDA to be in compliance with this covenant. Accordingly, the Company forecasts it will have a Paydown Event as of April 30, 2013, resulting in a requirement under the current terms of the notes to paydown approximately an additional $1.3 million on June 30, 2013. The Company is currently in negotiations with our Senior Lender to either obtain a waiver or to amend the provisions related to this Paydown Event; however, there can be no assurance that the Company will be successful with respect to these negotiations. The failure to obtain such a waiver or amendment would entitle the Senior Lender to declare an Event of Default under the Notes, which could lead to an acceleration of all other amounts payable under the Notes. This would entitle the Senior Lender to exercise its remedies under the notes, including foreclosing upon the collateral securing the notes. Any failure to obtain a waiver or amendment of this Paydown Event could inhibit the Company’s ability to continue as a going concern and would result in a material adverse effect on the Company.
We are currently investigating other financial alternatives, including additional equity and/or debt financing, including, but not limited to, refinancing all of our notes payable with our Senior Lender. 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. Based on our current cash balances, we expect we will need approximately $1.3 million in additional cash by June 30, 2013 should we be unsuccessful in negotiating a waiver of the Paydown Event with our Senior Lender. Assuming we are successful negotiating a waiver and our operations remain consistent with their historical levels, we anticipate we will have adequate cash to support our existing operations over the next twelve months.
We had substantially no investing activity for the nine month period ended January 31, 2013.
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Off-balance sheet arrangements
We have not entered into any off-balance sheet arrangements.
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 January 31, 2013. 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 will effectively remediate 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.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other information
None.
Item 6. Exhibits
The following exhibits are filed as part of this report:
| | | | |
Exhibit
Numbers | | Description | | Method of
Filing |
| | | | |
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. |
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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 |
| |
March 25, 2013 | /s/ V. Chase McCrea III |
| V. Chase McCrea III |
| Chief Financial Officer |
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