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CORNERWORLD CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Overview CornerWorld Corporation (hereinafter referred to as "CornerWorld," the "Company," "we," "our," or "us") is a marketing and telecommunication services company building services for the increased accessibility of content across mobile, television and Internet platforms. Six Months ended October 31, 2013 Highlights: · On September 30, 2013 the Company sold its largest asset, Ranger. Ranger was sold to an unrelated third party investor which had no previous association with any of the Company's directors or officers for $7.5 million in cash plus an additional $800,000 contingent receivable; the Company collected the contingent $800,000 receivable in November 2013. In addition, WWS signed a royalty contract enabling WWS to participate in revenues resulting from Ranger's acquisition of customers in the future. With the sale of Ranger, the Company was able to payoff substantially all of its secured creditors while simultaneously substantially improving its ratio of current assets to current liabilities. The Company had previously been in default to all of its secured lenders. · The Company's 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 terminated the employment of Marc A. Pickren, the President of the marketing division. The Company cannot be certain how much further its marketing services revenues could deteriorate as a result of these material operating changes. Service Offerings Our business consists primarily of two integrated business segments: (i) marketing services and (ii) communications services. Our corporate administrative functions are tracked separately and the associated costs are not pushed down to the operating segments. See also Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements - Business Segments for additional segment information. Critical Accounting Policies and Estimates Use of Estimates and Critical Accounting Policies In preparing our condensed consolidated unaudited financial statements, we make estimates, assumptions and judgments that can have a significant effect on our revenues, income (loss) from operations, and net income (loss), as well as on the value of certain assets on our consolidated balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance as these policies affect the reported amounts of revenues, expenses and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include allowance for doubtful accounts, impairment of long-lived assets (including goodwill), revenue recognition and stock-based compensation. In addition, please refer to Note 2 of the Notes to the Unaudited Condenses Consolidated Financial Statements for further discussion of our accounting policies. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on an estimate of buckets of customer accounts receivable, stratified by age, that, historically, have proven to be uncollectible; in addition, in certain cases, the allowance estimate is supplemented by specific identification of larger customer accounts and our best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. We evaluate the collectibility of our receivables at least quarterly. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The differences could be material and could significantly impact cash flows from operating activities. - 13 - -------------------------------------------------------------------------------- Impairment of Long-Lived Assets The Company's management assesses the recoverability of its long-lived assets by determining whether the depreciation and of long-lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment is measured based on fair value and is charged to operations in the period in which long-lived asset impairment is determined by management. Income Taxes 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. Revenue Recognition 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. Stock-Based Compensation 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: (a) The expected volatility of our common stock price, which we determine based on comparable companies; (b) Expected dividends (which do not apply, as we do not anticipate issuing dividends); (c) Expected life of the award, which is estimated based on the historical award exercise behavior of our employees; and (d) The risk-free interest rate which we determine based on the yield of a U.S. Treasury bond whose maturity period equals the options expected term. 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. - 14 - -------------------------------------------------------------------------------- Recent Accounting Pronouncements There were various accounting standards and interpretations issued during the three months ended October 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 October 31, 2013 to the three months ended October 31, 2012 Consolidated CornerWorld Corporation Revenues: We had revenues totaling $216,070 for the three month period ended October 31, 2013 as compared to $471,347 for the three month period ended October 31, 2012. The decrease of $255,277, or 54.2%, 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 increased churn in our CLEC as the Company ceased investing resources in that division. Depreciation and Amortization: Depreciation and amortization expenses totaled $11,960 for the three month period ended October 31, 2013 as compared to $18,893 for the three month period ended October 31, 2012. The decrease of $6,933 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 $420,028 for the three months ended October 31, 2013 as compared to a net loss of $422,113 for the corresponding period in the prior year. The improvement of $2,085 is primarily due to reductions in selling, general and administrative ("SG&A") expenses and depreciation expenses as well as decreases in interest expenses. Net Income (loss): Net Income totaled $2,508,479 for the three months ended October 31, 2013 as compared to a net loss of $105,047 for the corresponding period in the prior year. The improvement of $2,613,526 is primarily due to the gain recognized on the divestiture of our Ranger asset. Marketing services Our marketing services segment consists of our Enversa division. Revenues: Our marketing services segment had revenues totaling $190,602 for the three month period ended October 31, 2013 as compared to $425,545 for the three month period ended October 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 $403 for the three month period ended October 31, 2013 as compared to $1,546 for the three month period ended October 31, 2012. The decrease was due to more assets becoming fully depreciated. Income (loss) from Continuing Operations Before Taxes and Net Income: Loss from continuing operations before taxes totaled $138,708 for the three months ended October 31, 2013 as compared to net income of $186,374 for the corresponding period in the prior year. The decrease is due to the aforementioned reduction in revenue as well as the fact that we had previously classified most of our marketing personnel, including our former president, in corporate. - 15 - -------------------------------------------------------------------------------- Communications services Our communications services segment consists of our Woodland division. Revenues: Our communications services segment had revenues totaling $25,468 for the three month period ended October 31, 2013 as compared to $45,802 for the three month period ended October 31, 2012. This decrease is due to 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 $4,090 for the three month period ended October 31, 2013 versus $4,600 for the corresponding period in 2012. The decrease is due to some of our telecom assets becoming fully depreciated. Net Income: Net Income totaled $2,650,088 for the three months ended October 31, 2013 as compared to $390,844 for the corresponding period in the prior year. The improvement of $2,259,244 is primarily due to the gain recognized on the divestiture of our Ranger asset. Comparison of the six months ended October 31, 2013 to the six months ended October 31, 2012 Consolidated CornerWorld Corporation Revenues: We had revenues totaling $515,503 for the six month period ended October 31, 2013 as compared to $1,181,531 for the corresponding period in the prior year. The decrease of $666,028, or 56.4%, 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. Depreciation and Amortization: Depreciation and amortization expenses totaled $26,833 for the six month period ended October 31, 2013 as compared to $37,493 for the six month period ended October 31, 2012. The decrease of $10,660 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 $886,968 for the six months ended October 31, 2013 as compared to $989,556 for the corresponding period in the prior year. The improvement of $102,588 is primarily due to reductions in SG&A. Net Income (loss): Net Income totaled $2,440,143 for the six months ended October 31, 2013 as compared to a net loss of $259,746 for the corresponding period in the prior year. The improvement of $2,699,889 is primarily due to the gain recognized on the divestiture of our Ranger asset. Marketing services Revenues: Our marketing services segment had revenues totaling $458,876 for the six month period ended October 31, 2013 as compared to $1,092,339 for the six month period ended October 31, 2012. This decrease of 58.0% 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. - 16 - -------------------------------------------------------------------------------- Depreciation and Amortization: Our marketing services segment had depreciation expenses totaling $3,211 for the six month period ended October 31, 2013 as compared to $3,092 for the three month period ended October 31, 2012. The increase was not material. Income (loss) from Continuing Operations Before Taxes and Net Income: Loss from continuing operations before taxes totaled $46,962 for the six months ended October 31, 2013 as compared to net income of $349,509 for the corresponding period in the prior year. The decrease is due to the aforementioned reduction in revenue as well as the fact that we had previously classified most of our marketing personnel in corporate. Communications services Revenues: Our communications services segment had revenues totaling $56,627 for the six month period ended October 31, 2013 as compared to $89,192 for the six month period ended October 31, 2012. 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 $8,689 for the six month period ended October 31, 2013 versus $9,199 for the corresponding period in 2012. The decrease is due to our telecom assets becoming fully depreciated. Net Income: Net Income totaled $2,985,493 for the six months ended October 31, 2013 as compared to $874,584 for the corresponding period in the prior year. The improvement of $2,110,909 is primarily due to the gain recognized on the divestiture of our Ranger asset. Liquidity and Capital Resources As of October 31, 2013, we had positive working capital for the first time in the Company's history totaling $246,946 which including cash of $587,057. Our working capital includes one large account payable associated with our 2009 Woodland Acquisition. We consider our relationship with that single vendor to be positive. 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 just subsequent to the balance sheet date of this report. As a result of the sale of Ranger, the Company was able to retire the notes payable, the accrued interest on the notes payable 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 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"). On November 4, 2013, Mr. Beck amended the CEO Note such that 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. Our investing activity for the six months ended October 31, 2013, consisted of $4,439 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 October 31, 2013 included interest of $303 related to the financing of the equipment pursuant to the aforementioned capital lease. As previously noted, the Company completely paid off the Senior Lender as well as the Paid-in-Full Junior Lenders as a result of the sale of Ranger. 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. - 17 - -------------------------------------------------------------------------------- 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 cannot be certain how much further its marketing services revenues could deteriorate as a result of these industry-wide changes. 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. |