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 three months ended July 31, 2013, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows.
We had revenues totaling $1,532,236 for the three month period ended July 31, 2013 as compared to $2,175,067 for the three month period ended July 31, 2012. The decrease of $642,831, or 29.6%, 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 our communications services segment experienced a 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 8.8% for the three months ended July 31, 2013 to $1,270,303 from $1,750,091 for the three month period ended July 31, 2012 which was consistent with the revenue decrease.
Depreciation and Amortization:
Depreciation and amortization expenses totaled $407,025 for the three month period ended July 31, 2013 as compared to $410,752 for the three month period ended July 31, 2012. The decrease of $3,727 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 and Net loss totaled $115,445 for the three months ended July 31, 2013 as compared to a net loss of $154,699 for the corresponding period in the prior year. The improvement of $39,254 is primarily due to 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 $268,274 for the three month period ended July 31, 2013 as compared to $666,794 for the three month period ended July 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 $2,808 for the three month period ended July 31, 2013 as compared to $1,546 for the three month period ended July 31, 2012. The increase was due to the acquisition of a new computer.
Income from Continuing Operations Before Taxes and Net Income:
Income from continuing operations before taxes and net income totaled $91,746 for the three months ended July 31, 2013 as compared to $163,135 for the corresponding period in the prior year. The 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.
Communications services
Our communications services segment consists of our Woodland division.
Revenues:
Our communications services segment had revenues totaling $1,263,962 for the three month period ended July 31, 2013 as compared to $1,508,273 for the three month period ended July 31, 2012. This decrease is due to a reduction of roaming traffic at our largest customer and decreases in roaming 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 $396,751 for the three month periods ended July 31, 2013 and 2012.
Income from Continuing Operations Before Taxes and Net Income:
Income from continuing operations before taxes and net income totaled $312,361 for the three months ended July 31, 2013 as compared to a net income of $483,740 for the corresponding period in the prior year. The decrease of $171,319 is primarily due to the reduction of roaming traffic and call volumes resulting from the continued buildout of nationwide mobile carrier networks.
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Corporate
Depreciation and Amortization:
Our corporate segment had depreciation expenses totaling $7,466 for the three month period ended July 31, 2013 as compared to $12,455 for the three month period ended July 31, 2012. The decrease of $4,989 is due to the fact that several fixed assets have become fully depreciated.
Loss from Continuing Operations Before Taxes and Net Loss:
Loss from continuing operations and net loss totaled $495,486 for the three months ended July 31, 2013 as compared to a net loss of $801,571 for the corresponding period in the prior year. The improvement of $303,088 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 $141,404 as a result of our continued paydown of debt.
Liquidity and Capital Resources
As of July 31, 2013, we had a working capital deficit of approximately $5.6 million and cash of $1,340,888. 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.
The notes payable to Emerald Crest Capital (the “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, depending on the particular covenant, creating a “Paydown Event.” Effective April 30, 2013, the Company was required to comply with an additional “Paydown Event” covenant, pursuant to which the Company’s marketing segment was required to maintain a minimum level of earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined in the credit agreement with the Company’s Senior Lender. Prior to April 30, 2013, the Company received written notice from its Senior Lender that it would be calling an event of default on April 30, 2013. As a result of the Senior Lender’s notice, the Company believed that, pursuant to the Credit Agreement with the Senior Lender, the Company was precluded from paying any principal or interest to any junior creditors.
As of April 30, 2013, the Company did not have sufficient Adjusted EBITDA to be in compliance with the minimum EBITDA covenant for the marketing division and the Company did not have sufficient cash reserves to completely make the anticipated Paydown Event to the Senior Lenders. Accordingly, the Company stopped paying all Junior Creditors and received a notice of default from two junior creditors, Ned Timmer and IU Holdings, LP, shortly thereafter. The Company has paid neither principal nor interest to any secured creditor since April 1, 2013 and is currently in default to its Senior Lender and all its junior lenders. The Senior Lender has not yet exercised any remedies with respect to their collateral.
In the second half of July 2013, the Company and its Senior Lender reached an agreement in principle whereby the Paydown Event and all requirements with respect to the Company’s marketing division, including the Paydown Event, would be removed via an amendment to the credit agreement with the Senior Lender. In addition, the Senior Lender agreed in principle to waive the default related to the Paydown Event, modify the Company’s interest rate and adjust the Company’s amortization schedule, among other things. The Company and its Senior Lender are currently in the process of memorializing the modifications to the Company’s credit agreement with the Senior Lender but, as a condition precedent, the Company’s multiple junior lenders must also agree to settlements as well which has not yet taken place. Assuming we are successful in completing the proposed amendment with the Senior Lender, negotiating settlements with our junior lenders and our operations remain consistent with their historical levels, all of which are subject to significant uncertainty, we anticipate we will have adequate cash to support our existing operations over the next twelve months. However, there can be no assurance that we will consummate the proposed amendment with the Senior Lender or the junior lenders or that our operations will remain consistent. Should we be unsuccessful in executing the proposed amendments, the Senior Lender could move to seize the underlying collateral which would have a material adverse effect on the Company.
Our investing activity for the three months ended July 31, 2013, consisted primarily of $1,860 of capital expenditures, primarily associated with the leasing of a certain piece of equipment pursuant to a capital lease.
Our financing activities for the three months ended July 31, 2013 included interest of $162 related to the financing of the equipment pursuant to the aforementioned capital lease. The Company made no payments of principal or interest to the Senior Lenders or any junior lender during the three months ended July 31, 2013.
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We have no other bank financing or other external sources of liquidity. We source all of our liquidity through our operations and this was our second consecutive year where the Company’s operations generated positive operating cash flow. We expect that trend to continue assuming the debt modifications noted above.
As previously noted, the Company’s revenues in both operating segments have been adversely impacted by industry forces. The marketing services division continues to be adversely affected by the deterioration in the for-profit educational lead generation space while simultaneously experiencing significant ongoing challenges and customer churn in our search engine optimization and website leasing businesses. In addition, the Company’s communication services division has experienced an approximately 26% drop in revenues from its largest customer due to continued buildout of the customer’s network. The Company cannot be certain how much further its telecommunications service revenues could deteriorate as a result of this continued buildout.
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.
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 July 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 hired a chief financial officer and 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. |
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 |
| |
September 18, 2013 | /s/ V. Chase McCrea III |
| V. Chase McCrea III |
| Chief Financial Officer |
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