Income from Continuing Operations Before Taxes and Net Income totaled $53,918 for the three months ended January 31, 2014 as compared to net income of $185,390 for the corresponding period in the prior year. The decrease is due to the aforementioned reduction in revenue.
Our communications services segment consists of our Woodland division.
Our communications services segment had revenues totaling $54,280 for the three month period ended January 31, 2014 as compared to $48,836 for the three month period ended January 31, 2013. The lower revenue in the previous year period was primarily due to several large customer credits being issued during the corresponding period during the prior year.
Our communications services segment had depreciation and amortization expenses totaling $2,677 for the three month period ended January 31, 2014 versus $4,600 for the corresponding period in 2012. The decrease is due to more of our telecom assets becoming fully depreciated.
Net loss totaled $5,944 for the three months ended January 31, 2014 as compared to net income of $257,682 for the corresponding period in the prior year. The decrease of $263,626 is due to income earned by our divested Ranger asset during the prior year.
We had revenues totaling $784,559 for the nine month period ended January 31, 2014 as compared to $1,618,010 for the corresponding period in the prior year. The decrease of $833,451, or 51.5%, 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.
Depreciation and Amortization expenses totaled $37,137 for the nine month period ended January 31, 2014 as compared to $54,699 for the nine month period ended January 31, 2013. The decrease of $17,562 is due to the fact that several of our larger telecommunications fixed assets have become fully depreciated.
Loss from Continuing Operations Before Taxes totaled $791,639 for the nine months ended January 31, 2014 as compared to $1,394,442 for the corresponding period in the prior year. The improvement of $602,803 is primarily due to reductions in interest expenses and SG&A at corporate, as well as the discounted settlement of certain large outstanding payables and the elimination of amortization expenses.
Net Income totaled $2,535,472 for the nine months ended January 31, 2014 as compared to a net loss of $383,154 for the corresponding period in the prior year. The improvement of $2,918,626 is primarily due to the gain recognized on the divestiture of our Ranger asset.
Marketing services
Revenues:
Our marketing services segment had revenues totaling $673,652 for the nine month period ended January 31, 2014 as compared to $1,479,982 for the nine month period ended January 31, 2013. This decrease of $806,330 or 54.5% 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 $3,368 for the nine month period ended January 31, 2014 as compared to $4,637 for the nine month period ended January 31, 2013. The decrease was due to more fixed assets becoming fully depreciated and the write-down of certain fixed assets related to our Gulf subsidiary.
Income from Continuing Operations Before Taxes and Net Income:
Income from Continuing Operations Before Taxes and Net Income totaled $6,956 for the nine months ended January 31, 2014 as compared to Net Income of $534,899 for the corresponding period in the prior year. The decrease is due to the aforementioned reduction in revenue.
Communications services
Revenues:
Our communications services segment had revenues totaling $110,907 for the nine month period ended January 31, 2014 as compared to $138,028 for the nine month period ended January 31, 2013. This decrease is due to experienced increased churn in our CLEC as the Company ceased investing resources in that division.
Depreciation and Amortization:
Our communications services segment had depreciation and amortization expenses totaling $11,366 for the nine month period ended January 31, 2014 versus $13,799 for the corresponding period in 2013. The decrease is due to more of our telecom assets becoming fully depreciated.
Loss from Continuing Operations Before Taxes:
Loss from Continuing Operations Before Taxes totaled $163,298 for the nine months ended January 31, 2014 as compared to $324,634 for the corresponding period in the prior year. The improvement of $161,336 is primarily due to reductions in interest expenses, SG&A and the elimination of amortization expenses.
Net Income:
Net Income totaled $2,979,549 for the nine months ended January 31, 2014 as compared to $1,132,266 for the corresponding period in the prior year. The improvement of $1,847,283 is primarily due to the gain recognized on the divestiture of our Ranger asset.
Liquidity and Capital Resources
As of January 31, 2014, we continued to have positive working capital totaling $316,412 which including cash of $732,623.
As previously noted, on September 30, 2013, the Company sold Ranger to an unrelated third party for $7.5 million plus an $800,000 contingent receivable; the contingency was met in November and the Company received $800,000 on November 6, 2013. As a result of the sale of Ranger, the Company was able to retire the notes payable, accrued interest and any accrued penalties to Emerald Crest Capital (the “Senior Lender”), IU Holdings, LP (“IUH”), IU Investments, LLC (“IUI”) and Ned Timmer (“Timmer”) (IUH, IUI and Timmer collectively the “Paid-in-Full Junior Lenders”). In addition, the Company was able to pay off the warrant which the Senior Lender could have put to the Company for $1.0 million on March 30, 2014. As a result of the sale of Ranger and the respective payoff of the Senior Lender and the Paid-in-Full Junior Lenders, the only remaining secured debt is the note payable to the Company’s CEO, Scott Beck (the “CEO Note”). No principal or interest payments are due on the CEO Note until May 31, 2014. Mr. Beck also took a significant salary reduction from $250,000 per annum to $18,000 per annum, as a result of an amendment to his employment contract.
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Our investing activity for the nine months ended January 31, 2014, totaled $8,293,003 which consisted almost entirely of proceeds from the divestiture of our Ranger assets.
Our financing activities for the nine months ended January 31, 2014 totaled $8,007,551 which enabled the Company to completely pay off the Senior Lender as well as the Paid-in-Full Junior Lenders as a result of the sale of Ranger. The Company also paid $249,000 of investment banking fees related to the divestiture of the Ranger assets.
We have no other bank financing or other external sources of liquidity and we source all of our liquidity through our operations. However, now that we have sold our largest asset, there can be no assurance that, going forward, our operations will generate positive operating cash flow. However, as a result of the sale of Ranger, the Company believes it has enough cash left over to sustain operations in excess of one year.
As previously noted, the Company’s marketing revenues 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. The Company elected to not renew the employment contract of its former president, Marc Pickren, whose main responsibility was the growth of the marketing division and the Company. Mr. Pickren has not been replaced and the Company and Enversa have eliminated the position of President. The Company cannot be certain how much further its marketing services revenues could deteriorate.
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 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 January 31, 2014. 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 the number of personnel in the accounting department. 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.
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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.
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
On December 23, 2013, CornerWorld Corporation (“CornerWorld” or the “Company”) terminated Schumacher and Associates (“Schumacher”) as its independent registered public accounting firm. During the past two years Schumacher’s reports contained no adverse opinions, disclaimer of opinions nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except that the report contained a modification to the effect that there was substantial doubt as to the Company’s ability to continue as a going concern. The decision to change accountants was approved by the Chairman of the Board of Directors.
During the two most recent fiscal years the quarter ended October 31, 2013 and up through the December 23, 2013 termination date, there was one disagreement with the former accountant with respect to disclosure of related party transactions that, had it not been resolved to the satisfaction of the former accountant, would have caused it to make reference to the disagreement in the audit report. Specifically, the former accountant required the Company to disclose the exact familial relationship of certain related parties to the Company’s CEO, Scott N. Beck. The Company has authorized the former accountant to respond fully to any inquiries of the successor accountant concerning the subject matter of the disagreement. The Company made the disclosures required by the former accountants and the disagreement was resolved to the former accountant’s satisfaction. There were no other disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. A letter from Schumacher directed to the SEC indicating their concurrence with the events as described above is attached hereto as Exhibit 16.1 and is incorporated by reference herein.
On December 20, 2013, the Company engaged Montgomery Coscia Greilich, LLP (“MCG”) as their new its independent registered public accounting firm. During the previous two year period, the Company did not consult with MCG with respect to any issues nor was there any prior relationship between the Company and MCG.
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Item 6. Exhibits
The following exhibits are filed as part of this report:
| | | | |
Exhibit
Numbers | | Description | | Method of
Filing |
| | | | |
10.1 | | Membership Interests Purchase Agreement by and among Woodland Wireless Solutions, LTD., CornerWorld Corporation and Ranger Wireless Holdings, LLC for 100% of the Issued and Outstanding Membership Interests of S Squared, L.L.C. dated as of September 30, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed October 4, 2013) | | |
10.2 | | Pro-Forma balance sheet as of July 31, 2013 and pro-forma statement of operations for the three month period ended July 31, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed October 4, 2013) | | |
10.3 | | Amendment No. 4 to the Employment Agreement dated as of July 28, 2011 between CornerWorld Corporation and Scott Beck (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed October 4, 2013) | | |
10.4 | | Amendment No. 4 to Promissory Note dated as of March 30, 2011 between CornerWorld Corporation and Scott Beck (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed November 6, 2013) | | |
10.5 | | Amendment Number 5 to Employment Agreement dated as of July 28, 2011 between CornerWorld Corporation and Scott Beck (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed November 6, 2013) | | |
10.6 | | Amended and Restated Employment Agreement dated as of July 28, 2011 between CornerWorld Corporation and Scott Beck (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed November 6, 2013) | | |
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 |
| |
March 17, 2014 | /s/ V. Chase McCrea III |
| V. Chase McCrea III |
| Chief Financial Officer |
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