The Company accounts for income tax in accordance with ASC No. 740 which requires the use of the asset and liability method of accounting of income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
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will be recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”), which superseded Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”).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 5 – 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 March 31, 2014, 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 March 31, 2014 to the three months ended March 31, 2013
Consolidated CornerWorld Corporation
Revenues:
We had revenues totaling $279,399 for the three month period ended March 31, 2014 as compared to $311,755 for the three month period ended March 31, 2013. The decrease of $32,356, or 10.4%, 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. The decreases were offset, to some extent, by increased billings in our communications services segment.
Depreciation and Amortization:
Depreciation and Amortization expenses totaled $8,775 for the three month period ended March 31, 2014 as compared to $17,058 for the three month period ended March 31, 2013. The decrease of $8,283 is due to the fact that several of our larger telecommunications fixed assets have become fully depreciated.
Loss from Continuing Operations Before Taxes:
Loss from Continuing Operations Before Taxes totaled $233,194 for the three month period ended March 31, 2014 as compared to a loss of $577,270 for the corresponding period in the prior year. The improvement of $344,076 is primarily due to reductions in selling, general and administrative (“SG&A”) expenses which included the termination of the former President of the Company, among other personnel.
Net Loss:
Net Loss totaled $233,194 for the three months ended March 31, 2014 as compared to a net loss of $349,583 for the corresponding period in the prior year. The difference between the Net Income improvement of $116,389 versus the Income from Continuing Operations Before Taxes improvement of $344,076 is due to the fact that prior year Net Income numbers included earnings from the divested Ranger asset totaling $227,687.
Marketing services
Our marketing services segment consists of our Enversa division.
Revenues:
Our marketing services segment had revenues totaling $208,528 for the three month period ended March 31, 2014 as compared to $271,011 for the three month period ended March 31, 2013. 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 $0 for the three month period ended March 31, 2014 as compared to $1,546 for the three month period ended March 31, 2013. The decrease was due to all of our marketing fixed assets becoming fully depreciated.
Income from Continuing Operations Before Taxes and Net Income:
Income from Continuing Operations Before Taxes and Net Income totaled $10,481 for the three months ended March 31, 2014 as compared to net income of $49,934 for the corresponding period in the prior year. The decrease is due to the aforementioned reduction in revenue.
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Communications services
Our communications services segment consists of our Woodland division.
Revenues:
Our communications services segment had revenues totaling $70,871 for the three month period ended March 31, 2014 as compared to $40,744 for the three month period ended March 31, 2013. The increase in revenue is due to a new contract signed by one of our CLEC’s that enables it to bill and collect revenues from carrier access billing.
Depreciation and Amortization:
Our communications services segment had depreciation and amortization expenses totaling $2,677 for the three month period ended March 31, 2014 versus $4,599 for the corresponding period in the prior year. 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 $9,133 for the three month period ended March 31, 2014 as compared to a loss totaling $118,346 for the corresponding period in the prior year. The improvement of $109,213 is primarily due to reductions in selling, general and administrative (“SG&A”) expenses which included the closure of our Michigan office along with the termination of its associated personnel.
Net Income (Loss):
Net loss totaled $9,133 for the three months ended March 31, 2014 as compared to net income of $188,493 for the corresponding period in the prior year. The decrease of $197,626 is due to income earned by our divested Ranger asset during the prior year.
Corporate
Depreciation and Amortization:
Corporate had depreciation and amortization expenses totaling $6,098 for the three month period ended March 31, 2014 versus $10,913 for the corresponding period in 2013. The decrease is due to the disposal of selected fixed assets as we downsized our corporate operations.
Loss from Continuing Operations Before Taxes:
Loss from Continuing Operations Before Taxes totaled $234,542 for the three month period ended March 31, 2014 as compared to a loss of $508,858 for the corresponding period in the prior year. The improvement of $274,316 is primarily due to significant reductions in headcount at Corporate, the largest of which was the elimination of the salary of the Company’s former president.
Net Loss:
Net Loss totaled $234,542 for the three months ended March 31, 2014 as compared to $588,010 for the corresponding period in the prior year. The Net Loss improvement of $353,468 as compared to the Net Loss from Continuing Operations Before Taxes improvement of $274,316 is due to the elimination of interest expenses at Corporate associated with our recently divested Ranger asset.
Liquidity and Capital Resources
As of March 31, 2014, we continued to have positive working capital totaling $112,876 which included cash of $640,454. Our main operations consist of our two CLEC’s and our marketing Company, Enversa. We anticipate that one of our CLECs will generate positive future cash flow as a result of its ability to generate carrier access revenues. We are in the process of reconfiguring our telecom network in an effort to grow revenues from that division. Enversa’s revenues have generally stabilized and it provides small cash flow to assist in covering our corporate overhead. The Company is not currently generating positive operational cash flow.
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Our only debt is the secured note payable to the Company’s CEO, Scott Beck (the “CEO Note”) which contains a blanket lien across all assets of the Company. 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.
We had no investing activity for the three months ended March 31, 2014 while our entire financing activities consisted of $2,571 in payments on our lone capital lease.
We have no other bank financing or other external sources of liquidity. Now that we have sold our largest asset, there can be no assurance that, going forward, our operations will generate positive operating cash flow.
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 March 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
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 |
| |
July 25, 2014 | /s/ V. Chase McCrea III |
| V. Chase McCrea III |
| Chief Financial Officer |
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