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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


(Mark One)


x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the Quarterly Period Ended July 31, 2011

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from_________ to_______


Commission File Number: 333-128614


CORNERWORLD CORPORATION
(Exact name of registrant as specified in its charter)


Nevada

 

98-0441869

(State of incorporation)

 

(I.R.S. Employer Identification No.)


13101 Preston Road, Suite 100
Dallas, Texas 75240
(Address of principal executive offices)


(888) 837-3910
(Registrant’s telephone number including area code)


Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    X     No ____


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes    X     No ____


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ___   Accelerated filer ____   Non-accelerated filer ____    Smaller reporting company    X   


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ____   No    X   


The number of shares outstanding of the registrant’s common stock, $0.001 par value per share, as of September 9, 2011 was 146,972,901.

 

 


CORNERWORLD CORPORATION


INDEX


Item
Number

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

1

Financial Statements (Unaudited):

 

 

Condensed Consolidated Balance Sheets as of July 31, 2011 and April 30, 2011

1

 

Condensed Consolidated Statements of Operations for the Three Months Ended July 31, 2011 and 2010

2

 

Condensed Consolidated Statement of changes in stockholders’ deficit for the Three Months Ended July 31, 2011

3

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended July 31, 2011 and 2010

4

 

Notes to Condensed Consolidated Financial Statements

5

2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

3

Quantitative and Qualitative Disclosures about Market Risk

20

4

Controls and Procedures

20

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

1

Legal Proceedings

21

1A

Risk Factors

21

2

Unregistered Sales of Equity Securities and Use of Proceeds

21

3

Defaults Upon Senior Securities

21

4

[Removed and Reserved]

21

5

Other Information

21

6

Exhibits

21

 

 

 

 

Signatures

22




PART I – FINANCIAL INFORMATION


Item 1. Financial Statements


CornerWorld Corporation
Condensed Consolidated Balance Sheets


 

 

July 31, 2011

 

April 30, 2011

 

 

 

 

 

 

 

 

 

Assets

 

(unaudited)

 

(audited)

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

444,986

 

$

934,250

 

Accounts receivable (net of allowance for doubtful accounts of $70,908 and $48,936 at July 31, 2011 and April 30, 2011, respectively)

 

 

1,500,010

 

 

1,777,704

 

Prepaid expenses and other current assets

 

 

191,509

 

 

112,972

 

 

 

 

 

 

 

 

 

Total current assets

 

 

2,136,505

 

 

2,824,926

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

387,177

 

 

478,536

 

Goodwill

 

 

2,136,836

 

 

2,136,836

 

Patent

 

 

7,140,041

 

 

7,529,498

 

Intangibles, net

 

 

27,770

 

 

111,104

 

Other assets

 

 

28,395

 

 

28,132

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

11,856,724

 

$

13,109,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,332,374

 

$

2,962,995

 

Accrued expenses

 

 

636,055

 

 

600,726

 

Notes payable, current portion, net of unamortized discount of $319,920 and  $316,516 at July 31, 2011 and April 30, 2011, respectively

 

 

565,396

 

 

543,484

 

Notes payable related parties, current portion, net of unamortized discount of $412,542 and  $402,824 at July 31, 2011 and April 30, 2011, respectively

 

 

1,054,869

 

 

1,444,145

 

Deferred revenue

 

 

329,934

 

 

460,415

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

4,918,628

 

 

6,011,765

 

Long-term liabilities:

 

 

 

 

 

 

 

Notes payable, net of current portion, net of unamortized discount of $788,147 and  $880,916 at July 31, 2011 and April 30, 2011, respectively

 

 

5,026,853

 

 

5,059,084

 

Notes payable related parties, net of current portion, net of unamortized discount of $105,079 and  $280,149 at July 31, 2011 and April 30, 2011, respectively

 

 

2,459,082

 

 

2,134,254

 

Other liabilities

 

 

675,345

 

 

642,899

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

13,079,908

 

 

13,848,002

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding

 

 

 

 

 

Common stock, $0.001 par value, 250,000,000 shares authorized; 146,972,901 shares issued and outstanding, at July 31, 2011 and April 30, 2011

 

 

146,972

 

 

146,972

 

Additional paid-in capital

 

 

10,044,231

 

 

10,006,785

 

Accumulated deficit

 

 

(11,414,387

)

 

(10,892,727

)

 

 

 

 

 

 

 

 

Total stockholders’ deficit

 

 

(1,223,184

)

 

(738,970

)

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

11,856,724

 

$

13,109,032

 

 

 

 

 

 

 

 

 


See Notes to Condensed Consolidated Financial Statements.


1



CornerWorld Corporation
Condensed Consolidated Statements of Operations
(unaudited)


 

 

For the Three Months Ended July 31,

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales, net

 

$

2,941,673

 

$

2,877,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

 

851,497

 

 

1,028,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

2,090,176

 

 

1,849,219

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

1,336,011

 

 

1,421,404

 

Depreciation and amortization

 

 

577,251

 

 

568,000

 

 

 

 

 

 

 

 

 

Total Operating expenses

 

 

1,913,262

 

 

1,989,404

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

176,914

 

 

(140,185

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

Interest expense

 

 

(695,982

)

 

(259,511

)

Other income (expense), net

 

 

(2,592

)

 

418,440

 

 

 

 

 

 

 

 

 

Total other income (expense), net

 

 

(698,574

)

 

158,929

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(521,660

)

 

18,744

 

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(521,660

)

$

18,744

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share

 

$

(0.00

)

$

0.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number shares outstanding

 

 

146,972,901

 

 

95,518,317

 


See Notes to Condensed Consolidated Financial Statements.


2



CornerWorld Corporation
Condensed Consolidated Statements of Stockholders’ Deficit
(unaudited)


 

 

Common Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Additional
Paid-in
Capital

 

Accumulated
Deficit

 

Total
Stockholders’
Deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 30, 2011

 

 

146,972,901

 

$

146,972

 

$

10,006,785

 

$

(10,892,727

)

$

(738,970

)

Stock-based compensation expense

 

 

 

 

 

 

37,446

 

 

 

 

37,446

 

Net income

 

 

 

 

 

 

 

 

(521,660

)

 

(521,660

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 31, 2011

 

 

146,972,901

 

$

146,972

 

$

10,044,231

 

$

(11,414,387

)

$

(1,223,184

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


See Notes to Condensed Consolidated Financial Statements.


3



CornerWorld Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)


 

 

For the Three Months

Ended July 31,

 

 

 

 

 

 

 

2011

 

2010

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income (loss)

 

$

(521,660

)

$

18,744

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities

 

 

 

 

 

 

 

Depreciation and amortization

 

 

577,251

 

 

568,000

 

Amortization of loan discount

 

 

255,217

 

 

 

Provision for doubtful accounts

 

 

34,371

 

 

27,445

 

Stock-based compensation

 

 

37,446

 

 

37,256

 

Changes in operating assets and liabilities, net of acquisitions and divestitures:

 

 

 

 

 

 

 

Accounts receivable

 

 

243,323

 

 

276,932

 

Prepaid expenses and other current assets

 

 

(78,537

)

 

19,448

 

Other assets

 

 

(263

)

 

3,051

 

Accounts payable

 

 

(630,621

)

 

(380,806

)

Accrued expenses

 

 

97,829

 

 

(40,499

)

Deferred revenue

 

 

(130,481

)

 

(101,441

)

Other liabilities

 

 

32,446

 

 

295,910

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

(83,679

)

 

724,040

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(13,101

)

 

(4,543

)

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(13,101

)

 

(4,543

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Fees paid for debt issuance

 

 

(62,500

)

 

 

Principal payments on related party notes payable

 

 

(204,984

)

 

(330,000

)

Payments on related party line of credit

 

 

 

 

(75,000

)

Principal payments on debt

 

 

(125,000

)

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(392,484

)

 

(405,000

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(489,264

)

 

314,497

 

Cash at beginning of period

 

 

934,250

 

 

590,163

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

444,986

 

$

904,660

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

372,810

 

$

258,260

 

Income taxes

 

$

 

$

 


See Notes to Condensed Consolidated Financial Statements.


4



CornerWorld Corporation
Notes to Condensed Consolidated Financial Statements July 31, 2010
(unaudited)


1. Basis of Presentation


Interim Unaudited Condensed Consolidated Financial Statements


The unaudited interim condensed consolidated financial statements of CornerWorld Corporation (“CornerWorld” or the “Company”) as of July 31, 2011 and for the three months ended July 31, 2011 and 2010 contained in this Quarterly Report (collectively, the “Unaudited Interim Condensed Consolidated Financial Statements”) were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for all periods presented. The results of operations for the three month period ended July 31, 2011 are not necessarily indicative of the results that may be expected for the entire fiscal year.


The accompanying Unaudited Interim Condensed Consolidated Financial Statements have been prepared in accordance with the regulations for interim financial information of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited accompanying statements of financial condition and related interim statements of operations, cash flows, and stockholders’ deficit include all adjustments (which consist only of normal and recurring adjustments) considered necessary for a fair presentation in conformity with U.S. GAAP. These Unaudited Interim Condensed Consolidated Financial Statements should be read in conjunction with the CornerWorld consolidated financial statements as of and for the year ended April 30, 2011, as filed with the SEC on Form 10-K.


Organization


The Company was incorporated in the State of Nevada, on November 9, 2004 as Olympic Weddings International, Inc. Effective May 1, 2007, we changed our name to CornerWorld Corporation.


The Company entered into a Share Exchange Agreement and Plan of Merger (the “Agreement”) with Enversa Companies LLC, a Texas limited liability company (“Enversa”), Leadstream LLC, a Texas limited liability company (“Leadstream”), and the holders of the membership interests of Leadstream on August 27, 2008. Pursuant to the Agreement, on August 27, 2008, Leadstream merged with and into Enversa (the “Merger”), of which CornerWorld is the sole member. Enversa was the surviving company in the merger and, as such, acquired all right, title and interest in and to all real estate and other property of Leadstream and became responsible for all liabilities and obligations of Leadstream and Enversa.


Enversa  is a technology-oriented direct response marketing company. Using its proprietary technology, Enversa identifies qualified leads for advertisers thereby connecting them with potential consumers. Enversa utilizes a pay-for-performance pricing model which is very appealing to clients because it ensures that they are billed solely for campaign performance. Enversa also operates several ad networks and a proprietary request for proposal (RFP) technology that highlights promotional offers from a variety of corporate clients.   Finally, Enversa’s Gulf Media Solutions, LLC (“Gulf”) subsidiary, provides search engine optimization services (“SEO”), domain leasing and website management services on a recurring monthly basis to over 300 customers.


On February 23, 2009, the Company completed its acquisition (the “Woodland Acquisition”) of all of the issued and outstanding equity interests of each of Woodland Wireless Solutions, Ltd. (“Woodland Wireless”), West Michigan Co-Location Services, L.L.C. (“WMCLS”) and T2 TV, L.L.C. (“T2 TV”), and forty voting member units of S Squared, LLC, doing business in the state of Michigan as “Ranger Wireless LLC” (“Ranger”), through its newly-formed wholly-owned subsidiary, Woodland Holdings Corp. (“Woodland Holdings”), pursuant to the terms of a Stock Purchase Agreement, dated February 23, 2009 (the “Effective Date”), by and among Woodland Holdings, the Company, Ned B. Timmer and HCC Foundation (“HCC Foundation”). Immediately following the Woodland Acquisition, the forty voting member units of Ranger that were purchased by Woodland Holdings were contributed to Woodland Wireless and all other issued and outstanding voting member units of Ranger remained held by Woodland Wireless.


5



CornerWorld Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements – (Continued)


As a result of the Woodland Acquisition, Ranger became a wholly-owned subsidiary of Woodland Wireless. In addition, pursuant to a Unit Purchase Agreement (the “Unit Purchase Agreement”) entered into on the Effective Date among Woodland Holdings, Phone Services and More, L.L.C., doing business as Visitatel (“PSM”), T2 Communications, L.L.C. (“T2 Communications”) and Ned B. Timmer, Woodland Holdings agreed to purchase all of the outstanding voting member units of each of PSM and T2 Communications, for an aggregate purchase price of $300,000. Final consummation of the transactions contemplated by the Unit Purchase Agreement took place on March 30, 2011. Prior to March 30, 2011, the Company accounted for PSM and T2 Communications as Variable Interest Entities (“VIE’s”) and consolidated them for accounting purposes.

 

Subsequent to the closing of the Unit Purchase Agreement, the Company slightly adjusted the manner in which it managed the assets acquired in the Woodland Acquisition; these assets comprise 100% of the Company’s Communication Services Segment. As a result of the closing of the Unit Purchase Agreement, Woodland Wireless, Ranger and WMCLS are collectively referred to herein as the “Ranger Wireless Group”. T2 Communications, T2TV and PSM are collectively referred to herein as the “T2 Group”.

 

RANGER® is a shortcode application service provider to the wireless industry. The core service offered is 611 Roaming Service, a patented application providing seamless means for connecting wireless subscribers to reach their home providers customer service call center while roaming on another provider’s network. Calls are sent to RANGER® for treatment from nearly 40 wireless providers throughout North America. On an annual basis, RANGER® processes approximately 14 million calls with an infrastructure capable of handling millions more. RANGER® also manages an online portal which allows carriers access to their monthly statements and reporting on call volume to and from their company.

 

As a provider of Internet Protocol Television (IPTV), Internet and VoIP services, T² Communications delivers leading-edge technology to residential and business customers in Michigan. Offerings include: phone lines, Internet connections, 275 all-digital television stations, colocation, long distance and toll-free services. T² Communications is a Competitive Local Exchange Carrier (CLEC) that manages its own Fiber to the Premise (FTTP) network with a 10 gigabit backbone and up to 1 gigabit per second connections to end users.

 

PSM holds an FCC 214 License as a wholesale long distance service provider to the carrier community and large commercial users of transport minutes. Serving service providers, WMCLS offers telecommunications equipment storage and leasing.


The Company’s year-end is April 30th.


Principles of Consolidation


The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and joint ventures as well as all entities deemed to qualify as VIE’s. All significant intercompany transactions and balances have been eliminated in consolidation.


2. Summary of Significant Accounting Policies


This summary of significant accounting policies is presented to assist in understanding the Company’s condensed consolidated financial statements. The condensed consolidated financial statements and notes are representations of the Company’s management who is responsible for their integrity and objectivity. These accounting policies conform to US GAAP and have been consistently applied in the preparation of the financial statements. The financial statements are stated in United States of America dollars.


Use of Estimates


The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, among others, the realizability of accounts receivable, recoverability of property and equipment, intangibles and goodwill and valuation of stock-based compensation and deferred tax assets. Actual results could differ from these estimates.


6



CornerWorld Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements – (Continued)


Fair Value of Financial Instruments


Accounting Standards Codification (“ASC”) No. 850 requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amount of the Company’s cash and cash equivalents, accounts receivable, accounts receivable-related party, accounts payable, accounts payable-related party, accrued liabilities, and notes payable approximate their estimated fair values due to their short-term maturities.


Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial statements.


Revenue Recognition


The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as revised by SAB 104. As such, the Company recognizes revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable and collectibility is probable. Sales are recorded net of sales discounts.


At Enversa, revenue is recognized along with the related cost of revenue as leads are delivered. 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. Amounts billed to clients in advance of delivery of leads are classified under current liabilities as deferred revenue. At Gulf, revenue is recognized monthly as SEO services are provided or in the form of revenues from domain leases.


For Woodland Wireless, the majority of revenue is derived from month-to-month, bundled service contracts for the phone, television and internet services used by each customer. Revenue is recognized as the services are provided.


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.


Long-Lived Assets


The Company accounts for its long-lived assets in accordance with the ASC. The Company’s primary long-lived assets are website development costs, Goodwill, a patent, identifiable intangible assets and property and equipment. The ASC requires a company to assess the recoverability of its long-lived assets whenever events and circumstances indicate the carrying value of an asset or asset group may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. Management does not believe the Goodwill, patent and identifiable intangible assets associated with its recent acquisitions are impaired. No impairment charges have been recorded as of July 31, 2011.


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 pricing model.


7



CornerWorld Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements – (Continued)


The Company’s determination of fair value of share-based payment awards is made as of their respective dates of grant using that option pricing model and is affected by the Company’s stock price as well as a number of subjective assumptions. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behavior. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods. The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s options have certain characteristics that are significantly different from traded options, the existing valuation models 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 using an option-pricing model, 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, for more details.


Reclassifications


Certain prior year accounts have been reclassified to conform to the current year’s presentation.


3. Intangible Assets


Identifiable intangibles acquired in connection with business acquisitions accounted for under the purchase method are recorded at their respective fair values. The Company is amortizing the identifiable intangibles over their estimated useful lives, ranging from three to seven years. Intangibles consist of the following:


 

 

July 31, 2011

 

April 30, 2011

 

Estimated Useful
Life (Years)

 

 

 

 

 

 

 

 

 

 

 

 

Patent

 

$

10,904,792

 

$

10,904,792

 

 

7

 

Customer list

 

 

1,000,000

 

 

1,000,000

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,904,792

 

 

11,904,792

 

 

 

 

Accumulated amortization

 

 

(4,736,981

)

 

(4,264,190

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,167,811

 

$

7,640,602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Amortization expense related to identifiable intangible assets totaled $472,791 and $472,791 for the three months ended July 31, 2011 and 2010, respectively.


8



CornerWorld Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements – (Continued)


4. Debt


 

 

As of

 

 

 

July 31, 2011

 

April 30, 2011

 

Long-term Debt

 

 

 

 

 

 

 

Notes payable to Emerald Crest Capital (the “Senior Lender”); the notes mature March 31, 2015. The interest rate was floating at LIBOR plus 12%; the note’s floor utilizes a minimum LIBOR of 3%. At July 31, 2011 the total rate was 15%. These notes are collateralized by all assets of the Company.

 

$

4,875,000

 

$

5,000,000

 

Note payable IU Holdings, LP; the note matures February 28, 2013.  At July 31, 2011, the interest rate was 12%. This note is collateralized by all assets of the Company save for the Ranger patent. See also note 8, Related Party Transactions.

 

 

1,500,000

 

 

1,500,000

 

Note payable to IU Investments, LLC, due December 31, 2010. At July 31, 2011, the interest rate was 10%. These notes are collateralized by all assets of the Company save for the Ranger patent. See also note 8, Related Party Transactions.

 

 

527,915

 

 

610,166

 

Notes payable to Internet University and the other selling members of Enversa; the notes mature March 31, 2016.  At July 31, 2011 the interest rate was 15.0%. These notes are collateralized by all assets of the Company save for the Ranger patent. See also note 8, Related Party Transactions.

 

 

1,364,199

 

 

1,364,199

 

Note payable to Internet University; the note matures April 30, 2012.  At July 31, 2011, the interest rate was 15%. This note is collateralized by all assets of the Company save for the Ranger patent. See also note 8, Related Party Transactions.

 

 

300,000

 

 

375,000

 

Note payable to Timmer; the note matures April 30, 2016.  At July 31, 2011, the interest rate was 10%. This note is collateralized by all assets of Woodland Holdings, Corporation, including the Ranger patent.

 

 

1,800,000

 

 

1,800,000

 

Note payable to CEO; the note matures September 30, 2013.  At July 31, 2011, the interest rate was 10%. This note is collateralized by all assets of the Company save for the Ranger patent. See also note 8, Related Party Transactions.

 

 

338,958

 

 

377,196

 

Note payable to Kelly Larabee Morlan; the note matures March 31, 2012.  At July 31, 2011, the interest rate was 10%. This note is not collateralized.

 

 

25,316

 

 

34,811

 

Total debt

 

 

10,731,888

 

 

11,061,372

 

Less current portion of long-term debt

 

 

(2,352,727

)

 

(2,706,973

)

Non-current portion of long-term debt

 

$

8,378,661

 

$

8,354,399

 


On March 29, 2011, the Company also entered into a warrant purchase agreement with the Senior Lender.  Pursuant to the Purchase Agreement, the Company issued the Senior Lender a common stock purchase warrant (the "Warrant"), pursuant to which the Senior Lender may purchase up to 8,762,008 shares of the Company's common stock for an aggregate price of $100.  The warrant has a 5 year term and contains certain put and call provisions.  The Warrant is not exercisable prior to March 30, 2014.  Using the Black-Scholes model, the original value of the warrant issued to the Senior Lender was less than the net present value of the minimum $1,000,000 cash value of the warrants. Therefore, the net present value of $1,000,000, totaling $642,899 was recorded as a loan discount, which is being amortized to earnings as additional interest expense over the remaining term of the loan.  The warrant is revalued at each reporting date, and adjusted to earnings. In addition, other loan fees of $717,569 were incurred from the issuance of 75,104,584 shares of the Company’s stock, $512,750 was paid or accrued, and $52,467 was incurred from the grant of additional warrants during March 2011. These fees are being amortized to earnings as additional interest over the remaining term of the loans. The unamortized balance of these deferred costs was $1,624,411 and $1,880,406 at July 31 and April 30, 2011, respectively, and is reflected as a loan discount to the outstanding balance of $10,731,888 at July 31, 2011.


The notes payable to the Senior Lenders include certain restrictive covenants with respect to the Company’s earnings, leverage and accounts payable. As of July 31, 2011, the Company believes it was in compliance with all restrictive covenants.


The notes are collateralized by 100% of the assets of the Company and its companies and the notes themselves are all cross-defaulted.


9



CornerWorld Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements – (Continued)


5. Commitments and Contingencies


Litigation


The Company is occasionally involved in litigation matters relating to claims arising from the ordinary course of business. The Company’s management believes that there are no claims or actions pending or threatened against the Company, the ultimate disposition of which would have a material adverse effect on our business, results of operations and financial condition.


6. Stock-Based Compensation


Incentive Stock Plan


On August 17, 2007, the Company’s board of directors adopted and implemented the Company’s 2007 Incentive Stock Plan. Under the Incentive Stock Plan, the Company is authorized to issue 4,000,000 shares of its common stock to the Company’s directors, officers, employees, advisors or consultants.


Any Incentive Stock Option granted to an employee of the Company shall become exercisable over a period of no longer than 5 years, and no less than 20% of the shares covered thereby shall become exercisable annually. 20% of shares vest annually beginning on the first anniversary of the grant. The options expire 10 years from the grant date.


The Company issued 35,000 stock options at a strike price of $0.24/share pursuant to this plan during the three months ended July 31, 2011.


Stock Compensation Plan


On August 17, 2007, the Company’s board of directors adopted and implemented the Company’s 2007 Stock Compensation Plan. The total number of shares of the Company’s common stock which may be purchased or granted directly by Options, Stock Awards or Warrants under the Compensation Plan shall not exceed 4,000,000 shares of the Company’s common stock.


Awards granted to a participant of the Company shall become exercisable over a period of no longer than 5 years, and may vest as determined at the Company’s discretion at the time of grant.


The Company issued no stock options pursuant to this plan during the three months ended July 31, 2011.


A summary of the shares reserved for grant and awards available for grant under each Stock Plan is as follows:


 

July 31, 2011

 

 

 

 

 

 

 

Shares Reserved
for Grant

 

Awards Available
for Grant

 

 

 

 

 

Incentive Stock Plan

 

4,000,000

 

2,295,000

Stock Compensation Plan

 

4,000,000

 

3,150,000

 

 

 

 

 

 

 

8,000,000

 

5,445,000


The Company issues awards to employees, qualified consultants and directors that generally vest over time based solely on continued employment or service during the related vesting period and are exercisable over a five to ten year service period. Options are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant.


10



CornerWorld Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements – (Continued)


The fair value of each stock-based award is estimated on the grant date using the Black-Scholes option-pricing model. Expected volatilities are based on the historical volatility of the Company’s stock price. The expected term of options granted subsequent to the adoption ASC 718 is derived using the simplified method as defined in the SEC’s SAB No. 107. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury interest rates in effect at the time of grant. The fair value of options granted was estimated using the following weighted-average assumptions:


 

 

For the three month periods
Ended July 31,

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

2010

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

 

5.0

 

 

 

Expected volatility

 

 

67.8

 

 

 

Risk-free interest rate

 

 

2.1

 

 

 

Dividend yield

 

 

0.0

 

 

 


A summary of activity under the Stock Plans and changes during the period ended July 31, 2011 is presented below:


 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

Shares

 

Exercise
Price

 

Remaining
Contractual
Term(Years)

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at May 1, 2011

 

 

2,520,000

 

$

0.35

 

 

3.36

 

$

0.00

 

Issued

 

 

35,000

 

 

0.24

 

 

4.90

 

 

0.00

 

Cancelled/forfeited

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at July 31, 2011

 

 

2,555,000

 

$

0.34

 

 

2.94

 

$

241,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and expected to vest*

 

 

1,875,000

 

$

0.36

 

 

3.32

 

$

97,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at end of period

 

 

1,348,750

 

$

0.39

 

 

2.60

 

$

97,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Due to the Company’s limited operating history, no estimate for forfeitures has been made in these financial statements as there has been no turnover of employees to whom options were granted.


As of July 31, 2011 and 2010, the Company recognized $37,446 and $37,256 of stock-based compensation expense, respectively. As of July 31, 2011 there was $325,185 of total unrecognized compensation cost, net of forfeitures, related to unvested employee and director stock option compensation arrangements. That cost is expected to be recognized on a straight-line basis over the next 2.9 weighted average years.


11



CornerWorld Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements – (Continued)


7. Business Segments


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. The following table summarizes selected financial information for each operating segment:


Three Months Ended July 31, 2011

 

Marketing
Services

 

Communications
Services

 

Corporate

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,469,573

 

$

1,472,100

 

$

 

$

2,941,673

 

Income (loss) from continuing operations before tax

 

 

28,638

 

 

298,485

 

 

(848,783

)

 

(521,660

)

Net (loss) income

 

 

28,638

 

 

298,485

 

 

(848,783

)

 

(521,660

)

Total assets

 

 

1,137,897

 

 

10,033,765

 

 

685,062

 

 

11,856,724

 

Intangibles

 

 

27,770

 

 

7,140,041

 

 

 

 

7,167,811

 

Goodwill

 

 

 

 

1,581,850

 

 

554,986

 

 

2,136,836

 

Depreciation and amortization

 

 

84,697

 

 

476,380

 

 

16,174

 

 

577,251

 


Three Months Ended July 31, 2010

 

Direct
Marketing
Services

 

Communications
Services

 

Corporate

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,176,030

 

$

1,701,573

 

$

 

$

2,877,603

 

Income (loss) from continuing operations before tax

 

 

(146,752

)

 

556,164

 

 

(390,668

)

 

18,744

 

Net (loss) income

 

 

(146,752

)

 

556,164

 

 

(390,668

)

 

18,744

 

Total assets

 

 

1,106,600

 

 

12,660,514

 

 

580,491

 

 

14,347,605

 

Intangibles

 

 

361,106

 

 

8,697,869

 

 

 

 

9,058,975

 

Goodwill

 

 

 

 

1,581,850

 

 

554,986

 

 

2,136,836

 

Depreciation and amortization

 

 

85,032

 

 

473,535

 

 

9,433

 

 

568,000

 


There were no intersegment sales. All of the Company’s business activities are conducted within the United States geographic boundaries.


8. Related Party Transactions


Enversa receives administrative support from Internet University, Inc., which was one of the three former members of Leadstream. Included in such administrative support are human resources and payroll services which totaled less than $10,000 for the three month period ended July 31, 2011.


As part of the Enversa acquisition, the Company borrowed $1,500,000 from Internet University, Inc., Marc Blumberg and Marc Pickren (collectively, the “Enversa Sellers”).   Mr. Blumberg is a member of the Company’s Board of Director as well as the president of Internet University, Inc. and Mr. Pickren is the President of the Company.  On March 30, 2011, the Company entered into amendments to its promissory notes with the Enversa Sellers (collectively the “Tier 4 Junior Notes”). The amendments to the Tier 4 Junior Notes revised the repayment schedules of the Tier 4 Junior Notes such that principal payments would be payable annually beginning on March 31, 2012 until such time as the Tier 4 Junior Notes mature on March 31, 2016. Interest payments are payable monthly at a revised rate of 15% per annum. The Company recorded interest of $52,294 and $43,552 on this facility during the three month periods ended July 31, 2011 and 2010, respectively.  The balance of the facility totaled $1,364,199 at July 31, 2011.


12



CornerWorld Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements – (Continued)


As part of the February 23, 2009 Woodland Acquisition, the Company borrowed $1,900,000 from IU Investments LLC. On March 30, 2011, the Company entered into Amendment No. 3 (“IU Amendment No. 3”) to its Promissory Note to IU Investments, LLC (the “Tier 3 Junior Note”).  IU Amendment No. 3 revised the repayment schedule of the Tier 3 Junior Note such that the Company will make principal payments totaling $27,417/month until February 28, 2012, after which time the Company will pay $67,200 annually beginning March 31, 2012 until such time as the Tier 3 Junior Note is paid in full on March 31, 2016. Interest payments are payable monthly at a rate of 10% per annum.  A member of the Company’s Board of Directors as well as one of the selling partners of Enversa is an employee of the parent of IU Investments, LLC. The Company recorded interest of $14,892 and $26,819 on this facility during the three month periods ended July 31, 2011 and 2010, respectively.   The balance of this note totaled $527,915 at July 31, 2011.


On March 30, 2011, the Company entered into a subordinated $1.5 million promissory note (the “Tier 2 Junior Note”) with IU Holdings, LP (“IUH”).  Principal under the Tier 2 Junior Note is payable in quarterly installments of $187,500  commencing on May 31, 2011 until such point as the Tier 2 Junior Note matures on February 28, 2013.  Interest on the outstanding principal amount under the Tier 2 Junior Note is payable monthly in arrears at a rate of 12% per annum.  As additional consideration to induce the Tier 2 Junior Lender to enter into this Promissory Note, the Company issued the Tier 2 Junior Lender, 48,414,132 shares of CornerWorld Corporation Common stock.  IUH is a partnership whose limited partners include friends and family of the Company’s Chief Executive Officer.  The Company paid approximately $45,370 in interest on this facility, during the three month period ended July 31, 2011, to IUH as a result of this note.  The balance of this note totaled $1,500,000 at July 31, 2011.

 

On March 30, 2011, the Company entered into a subordinated $400,000 promissory note (the “Tier 5 Junior Note”) with Internet University.  Principal under the Tier 5 Junior Note is payable in monthly installments of $25,000  commencing on April 30, 2011 until such point as the Tier 5 Junior Note matures on April 30, 2012.  Interest on the outstanding principal amount under the Tier 5 Junior Note is payable monthly in arrears at a rate of 15% per annum.  As additional consideration to induce the Tier 5 Junior Lender to enter into this Promissory Note, the Company issued the Tier 5 Junior Lender, 12,910,435 shares of CornerWorld Corporation Common stock.  The Company recorded interest of $13,233 on this facility during the three month period ended July 31, 2011.  The balance of this note totaled $300,000 at July 31, 2011.

 

On March 30, 2011, the Company entered into a subordinated $389,942 promissory note (the “Tier 7 Junior Note”) with Scott N. Beck, the Company’s Chief Executive Officer.  Principal under the Tier 7 Junior Note is payable in monthly installments of $12,746  commencing on April 30, 2011 until such point as the Tier 7 Junior Note matures on September 30, 2013.  Interest on the outstanding principal amount under the Tier 7 Junior Note is payable monthly in arrears at a rate of 10% per annum.  As additional consideration to induce Mr. Beck to enter into this Promissory Note, the Company issued Mr. Beck 12,585,802 shares of CornerWorld Corporation Common stock.  The Tier 7 Junior Note consists primarily of prior accounts payable.  The Company recorded interest of $9,186 on this facility during the three month period ended July 31, 2011.  The balance of this note totaled $338,958 at July 31, 2011.

 

On March 30, 2011, the Company entered into an unsecured $37,976 promissory note (the “Tier 8 Junior Note”) with Kelly Larabee Morlan; Ms. Morlan is the Secretary of the Company.  Principal under the Tier 8 Junior Note is payable in monthly installments of $3,165  commencing on April 30, 2011 until such point as the Tier 8 Junior Note matures on March 30, 2012.  Interest on the outstanding principal amount under the Tier 8 Junior Note is payable monthly in arrears at a rate of 10% per annum.  As additional consideration to induce Ms. Morlan to enter into this Promissory Note, the Company issued Ms. Morlan 1,194,215 shares of CornerWorld Corporation Common stock.  The Tier 8 Junior Note is unsecured.  The Company recorded interest of $798 on this facility during the three month period ended July 31, 2011.  The balance of this note totaled $25,316 at July 31, 2011.

 

In addition, the Company leases office space with an entity that is controlled by the family of the Company’s CEO. During the three month period ended July 31, 2011, the Company paid $50,761 in rent as a result of this lease.


13



CornerWorld Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements – (Continued)


9. Subsequent Events


On September 6, 2011, the Company entered into Amendment No. 2 (“IUH Amendment No. 2”) to its Promissory Note with IU Holdings LP (the “IUH Note”) dated March 30, 2011.  IUH Amendment No. 2 revised the repayment schedule of the IUH Note such that principal payments were deferred by six months.  They will resume on February 29, 2012 and continue through November 30, 2013, after which point the IUH Note will be paid in its entirety.  In addition, the interest rate was lowered to 10% per annum but interest payment dates and other terms remained unchanged. IUH is a partnership whose limited partners include friends and family of the Company’s Chief Executive Officer.


On September 6, 2011, the Company entered into Amendment No. 4 (“IUI Amendment No. 4”) to its Promissory Note with IU Investments, LLC (the “IUI Note”) dated February 23, 2009.  IUI Amendment No. 4 revised the repayment schedule of the IUI Note such that principal payments were deferred by six months.  They will resume with a $191,919 balloon payment on February 29, 2012 and continue through March 31, 2016, after which the IUI Note will be paid in its entirety.  In addition, the interest rate was lowered to 10% per annum but interest payment dates and other terms remained unchanged.   Internet University, Inc. is a member of IU Investments, LLC.


On September 6, 2011, the Company entered into Amendment No. 3 to each of its Promissory Notes dated August 27, 2008 with Internet University, Inc, LLC (“IU Note Amendment 3”) Marc Blumberg (“Blumberg Note Amendment 3”) and Marc Pickren (“Pickren Note Amendment 3”) (IU Note Amendment 3, Blumberg Note Amendment 3 and Pickren Note Amendment 3 collectively the “Amendments).  The Amendments lowered the interest rates on the IU Note, the Blumberg Note and the Pickren Note to 10% per annum but interest payment dates and other terms remained unchanged.   Internet University, Inc. owns 14.0% of the Company’s currently outstanding common stock. Mr. Blumberg sits on the Company’s Board of Directors and owns 2.7% of the Company’s currently outstanding common stock. Mr. Pickren is the President of the Company and owns 3.9% of the Company’s currently outstanding common stock..


On September 6, 2011, the Company entered into Amendment No. 1 (“IU Amendment No. 1”) to its Promissory Note with Internet University, Inc. (the “IU Note”) dated March 30, 2011.  IU Amendment No. 1 revised the repayment schedule of the IUI Note such that principal payments were deferred by six months.  They will resume on February 29, 2012 and continue through October 31, 2012, after which the IU Note will be paid in its entirety.  In addition, the interest rate was lowered to 10% per annum but interest payment dates and other terms remained unchanged.   Internet University, Inc. owns 14.0% of the Company’s currently outstanding common stock.


On September 6, 2011, the Company entered into Amendment No. 1 (“Beck Amendment No. 1”) to its Promissory Note with Scott Beck (the “Beck Note”) dated March 30, 2011.  Beck Amendment No. revised the repayment schedule of the Beck Note such that principal payments were deferred by six months.  They will resume on February 29, 2012 and continue through March 31, 2014, after which point the Beck Note will be paid in its entirety.  Interest payments and other terms remained unchanged.    Mr. Beck is the Company’s Chairman and Chief Executive Officer and owns 19.6% of the Company’s currently outstanding common stock.


On September 6, 2011, the Company entered into Amendment No. 1 (“Larabee Amendment No. 1”) to its Promissory Note with Kelly Larabee Morlan (the “Larabee Note”) dated March 30, 2011.  Larabee Amendment No. revised the repayment schedule of the Larabee Note such that principal payments were deferred by six months.  They will resume on February 29, 2012 and continue through September 30, 2012, after which point the Larabee Note will be paid in its entirety.  Interest payments and other terms remained unchanged.  Ms. Morlan is the Company’s secretary.


14



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Overview


CornerWorld Corporation (hereinafter referred to as “CornerWorld,” the “Company,” “we,” “our,” or “us”) is a marketing and technology services company building services for the increased accessibility of content across mobile, television and Internet platforms. Our key asset is a patented 611 Roaming Service from RANGER Wireless Solutions®, which generates revenue by processing over 14 million calls per year from wireless customers and seamlessly connecting them to their service provider.


Three Months ended July 31, 2011 Highlights:


 

We paid down approximately $329,984 in principal on our outstanding debt.

 

 

 

 

After removal of non-cash amortization of loan discounts (interest expense) totaling $255,217, depreciation & amortization and stock-based compensation expense totaling $577,251 and $37,446, respectively, the Company’s pro-forma profit for the three months ended July 31, 2011 would have totaled approximately $348,254. See the table that follows for more details. The Company expects to generate positive operating cash flows for the fiscal year ending April 30, 2012.


We define “Adjusted Net Income1” as net loss after removal of non-cash charges including amortization of loan discounts (interest expense), depreciation, amortization of intangibles and stock-based compensation. Management believes pro-forma net income provides useful additional information concerning the Company’s potential profitability. However, Adjusted Net Income is not a measure of financial performance under Generally Accepted Accounting Principles (“GAAP”). Accordingly, Adjusted Net Income should not be considered an alternative to net income as an indicator of operating performance. The table that follows provides a reconciliation between GAAP net income and Adjusted Net Income.

___________________________

1 This measure presented may not be comparable to similarly titled measures reported by other companies.


Reconciliation between GAAP Net Income and Adjusted Net Income:


 

 

For the three
month period ended
July 31, 2011

 

Per share data

 

 

 

 

 

 

 

Net loss

 

$

(521,660

)

$

0.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash charges:

 

 

 

 

 

 

 

Amortization of loan discounts (interest)

 

 

255,217

 

 

0.00

 

Stock-based compensation

 

 

37,446

 

 

0.00

 

Depreciation and amortization

 

 

577,251

 

 

0.00

 

 

 

 

 

 

 

 

 

Total non-cash charges

 

 

869,914

 

 

0.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro-forma net income

 

$

348,254

 

$

0.00

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic and diluted

 

 

146,972,901

 

 

146,972,901

 

 

 

 

 

 

 

 

 


15



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.


Impairment of Long-Lived Assets


The Company’s management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization 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.


Goodwill


Goodwill represents the excess of acquisition cost over the net assets acquired in a business combination. Management reviews, on an annual basis, the carrying value of goodwill in order to determine whether impairment has occurred. Impairment is based on several factors including the Company’s projection of future undiscounted operating cash flows. If an impairment of the carrying value were to be indicated by this review, the Company would adjust the carrying value of goodwill to its estimated fair value.


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.


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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 historical volatility of our common stock over the prior eighteen month period;

 

 

 

 

(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.


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Recent Accounting Pronouncements


There were various accounting standards and interpretations issued during the three months ended July 31, 2011, 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 July 31, 2011 to the three months ended July 31, 2010


Marketing services


Our marketing services segment consists of our Enversa division.


Revenues  and Gross profit:


Our marketing services segment had revenues totaling $1,469,573 for the three month period ended July 31, 2011 as compared to $1,176,030 for the three month period ended July 31, 2010. This increase is due to additional revenues generated as a result of new offerings from our growing Gulf subsidiary which did not exist at this point in the prior year.


Similarly, gross profit at our direct marketing segment increased for the three months ended July 31, 2011 to $831,323 from $494,316 for the three month period ended July 31, 2010. Gross profit as a percentage of revenue increased from 42.0% to 56.6% due to an increase in search engine optimization and site leases at Gulf which typically includes higher margin services.


Selling, General and Administrative


Selling, general and administrative (“SG&A”) expenses totaled $715,002 for the three months ended July 31, 2011 as compared to $553,977 for the corresponding period in the prior year. The increase of $161,025 is primarily due to increases in headcount, rent and utilities associated with the build-up of our Gulf division.


Net Income


Net income totaled $28,638 for the three months ended July 31, 2011 as compared to net income of $146,752 for the corresponding period in the prior year. The net income improvement is primarily due to the margin improvements associated with the investment in Gulf and cost reductions enacted in our marketing services segment.


Communications services


Our communications services segment consists of all the businesses acquired in the Woodland Acquisition.


Revenues and Gross profit:


Our communications services segment had revenues totaling $1,472,100 for the three month period ended July 31, 2011 as compared to $1,701,573 for the three month period ended July 31, 2010. This decrease is primarily due to the fact that our two largest customers merged in the second half of calendar year 2009 and, accordingly, the Company experienced a reduction in roaming revenues.  


For the same reasons, gross profit decreased for the three months ended July 31, 2011 to $1,258,853 from $1,354,903 for the three month period ended July 31, 2010. Gross profit as a percentage of revenue improved to 85.5% during the three months ended July 31, 2011 versus 79.6% during the corresponding period in the prior year.  The margin improvement was primarily due to the implementation of new agreements with lower rates from the carriers who provide our network infrastructure.


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Selling, General and Administrative


SG&A expenses totaled $126,949 for the three months ended July 31, 2011 as compared to $529,739 for the corresponding period in the prior year. The decrease of $402,790 is primarily due to the removal of all non-recurring legal expenses which totaled $173,417 incurred during the three month period ended July 31, 2010 and staffing reductions and other cost saving measures enacted at our communications services segment.


Net Income


Net income totaled $298,485 for the three months ended July 31, 2011 as compared to net income of $556,164 for the corresponding period in the prior year. The decrease of $257,679 is primarily due to the fact that we received a favorable lawsuit settlement during the quarter ended July 31, 2010.  


Corporate


Selling, General and Administrative


SG&A costs totaled $494,060 for the quarter ended July 31, 2011 versus $337,688 for the corresponding period in the prior year. The increase of $156,372 is primarily due to the fact the fact that we hired additional accounting and IT personnel at the corporate level, primarily resulting from the build-out of Gulf.  Expenses for this segment also include all costs associated with corporate overhead, including accounting, legal, corporate governance and other related costs involved in being a publicly traded company.


Liquidity and Capital Resources


As of July 31, 2011, we had a working capital deficit of approximately $2.7 million and cash of $444,986. 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. Our working capital deficit has decreased substantially from our July 31, 2010 year end deficit which totaled approximately $4.2 million. This improvement is due to the fact that, as a result of the March 2011 recapitalization, we extended the maturities of substantially all of our debt. We believe the cash flows from our existing operations will be adequate to manage our debt commitments and we have good relationships with the vendors associated with the large accounts payable who we continue to pay with excess cash flow. Management expects that its current cash and operational cash flow will be sufficient to meet our liquidity needs for the next year.

 

Our investing activity for the three month period ended July 31, 2011, consisted primarily of $13,101 of capital expenditures, primarily associated with the relocation of several of our facilities, including our home office.   Management believes the reduced rents in the new locations will more than offset the capital expenditures.

 

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.

 

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.


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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, 2011. 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. [Removed and Reserved]


Item 5. Other information


None.


Item 6. Exhibits


The following exhibits are filed as part of this report:


Exhibit
Numbers

 

Description

 

Method of
Filing

  

 

  

 

  

3.1

 

Articles of Incorporation of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated November 9, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2, filed September 27, 2005)

 

 

3.2

 

Certificate of Correction of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated November 24, 2004 (incorporated by reference to Exhibit 3.2  to the Company’s Form 10-Q, filed December 15, 2010)

 

 

3.3

 

Certificate of Change of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated October 18, 2006 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K, filed October 25, 2006)

 

 

3.4

 

Certificate of Amendment to Articles of Incorporation For Nevada Profit Corporations of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated May 4, 2007 (incorporated by reference to Exhibit 3.2  to the Company’s Form 10-Q, filed December 15, 2010)

 

 

3.5

 

Bylaws of CornerWorld Corporation, formerly known as Olympic Weddings International, Inc., dated November 9, 2004 (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form SB-2, filed September 27, 2005)

 

 

10.1

 

Employment Agreement by and between Cornerworld Corporation and Marc Pickren dated September 13, 2011

 

(1)w

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.

w

Management plan, compensatory arrangement or employment agreement.


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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

 

 

September 14, 2011

/s/ V. Chase McCrea III

 

  

 

V. Chase McCrea III

 

Chief Financial Officer


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