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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)


 

R

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

 

 

 

 

 

For the Quarterly Period Ended October 31, 2012

 

 

 

 

£

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: 000-54419


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 December 13, 2012 was 157,313,704.

 

 


CORNERWORLD CORPORATION


INDEX


Item
Number

 

 

Page

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

1

 

Financial Statements (Unaudited):

 

1

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of October 31, 2012 and April 30, 2012 (Audited)

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended October 31, 2012 and 2011

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Deficit for the Six Months Ended October 31, 2012

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended October 31, 2012 and 2011

 

4

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

5

 

 

 

 

 

2

 

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

 

13

 

 

 

 

 

3

 

Quantitative and Qualitative Disclosure about Market Risk

 

18

 

 

 

 

 

4

 

Controls and Procedures

 

18

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

1

 

Legal Proceedings

 

19

 

 

 

 

 

1A

 

Risk Factors

 

19

 

 

 

 

 

2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

19

 

 

 

 

 

3

 

Defaults Upon Senior Securities

 

19

 

 

 

 

 

4

 

Mine Safety Disclosures

 

19

 

 

 

 

 

5

 

Other Information

 

19

 

 

 

 

 

6

 

Exhibits

 

19

 

 

 

 

 

 

 

Signatures

 

20




PART I – FINANCIAL INFORMATION


Item 1. Financial Statements


CornerWorld Corporation

Condensed Consolidated Balance Sheets


 

 

October 31, 2012

 

April 30, 2012

 

 

 

(unaudited)

 

(audited)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

1,119,797

 

$

890,415

 

Accounts receivable (net of allowance for doubtful accounts of $212,782 and
$118,597 at October 31, 2012 and April 30, 2012, respectively)

 

 

1,095,164

 

 

1,070,293

 

Prepaid expenses and other current assets

 

 

124,587

 

 

132,036

 

Total current assets

 

 

2,339,548

 

 

2,092,744

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

111,791

 

 

154,673

 

Goodwill

 

 

2,136,836

 

 

2,136,836

 

Patent

 

 

5,192,756

 

 

5,971,670

 

Other assets

 

 

28,032

 

 

28,729

 

TOTAL ASSETS

 

$

9,808,963

 

$

10,384,652

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,533,117

 

$

1,894,043

 

Accrued expenses

 

 

704,013

 

 

708,874

 

Notes payable, current portion, net of unamortized discount of $336,528 and
$340,303 at October 31, 2012 and April 30, 2012, respectively

 

 

1,806,023

 

 

1,196,013

 

Notes payable related parties, current portion, net of unamortized discount of
$53,837 and $161,685 at October 31, 2012 and April 30, 2012, respectively

 

 

677,567

 

 

1,627,524

 

Lease payable, current portion

 

 

10,704

 

 

10,704

 

Deferred revenue

 

 

632,836

 

 

385,146

 

Total current liabilities

 

 

5,364,260

 

 

5,822,304

 

Long-term liabilities:

 

 

 

 

 

 

 

Notes payable, net of current portion, net of unamortized discount of $368,151 and
$530,268 at October 31, 2012 and April 30, 2012, respectively

 

 

3,196,390

 

 

4,249,731

 

Notes payable related parties, net of current portion, net of unamortized discount of
$0 and $7,045 at October 31, 2012 and April 30, 2012, respectively

 

 

1,819,693

 

 

2,225,041

 

Lease payable, non-current portion

 

 

14,105

 

 

18,988

 

Other liabilities

 

 

811,832

 

 

754,091

 

Total liabilities

 

 

11,206,280

 

 

13,070,155

 

 

 

 

 

 

 

 

 

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;
157,313,704 and 147,547,607 shares issued and outstanding, at
October 31, 2012 and April 30, 2012, respectively

 

 

157,313

 

 

147,547

 

Additional paid-in capital

 

 

11,702,890

 

 

10,164,724

 

Retained earnings (accumulated deficit)

 

 

(13,257,520

)

 

(12,997,774

)

Total stockholders’ deficit

 

 

(1,397,317

)

 

(2,685,503

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

9,808,963

 

$

10,384,652

 


See Notes to Condensed Consolidated Financial Statements.


- 1 -



CornerWorld Corporation

Condensed Consolidated Statements of Operations

(unaudited)


 

 

For the Three Months
Ended October 31,

 

For the Six Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Sales, net

 

$

1,868,331

 

$

2,914,058

 

$

4,043,398

 

$

5,855,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

 

351,502

 

 

728,924

 

 

776,478

 

 

1,580,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

1,516,829

 

 

2,185,134

 

 

3,266,920

 

 

4,275,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

711,827

 

 

1,619,189

 

 

1,693,769

 

 

2,955,200

 

Depreciation and amortization

 

 

411,044

 

 

518,505

 

 

821,796

 

 

1,095,756

 

Total Operating expenses

 

 

1,122,871

 

 

2,137,694

 

 

2,515,565

 

 

4,050,956

 

Operating income

 

 

393,958

 

 

47,440

 

 

751,355

 

 

224,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(499,005

)

 

(581,100

)

 

(1,011,001

)

 

(1,277,082

)

Other income (expense), net

 

 

 

 

62,252

 

 

(100

)

 

59,660

 

Total other expense, net

 

 

(499,005

)

 

(518,848

)

 

(1,011,101

)

 

(1,217,422

)

Loss before income taxes

 

 

(105,047

)

 

(471,408

)

 

(259,746

)

 

(993,068

)

Income taxes

 

 

 

 

 

 

 

 

 

Net loss

 

$

(105,047

)

$

(471,408

)

$

(259,746

)

$

(993,068

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$

0.00

 

$

0.00

 

$

0.00

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number shares outstanding

 

 

147,547,607

 

 

147,207,875

 

 

147,547,607

 

 

147,090,388

 


See Notes to Condensed Consolidated Financial Statements.


- 2 -



CornerWorld Corporation

Condensed Consolidated Statements of Stockholders’ Deficit

(unaudited)


 

 

 

 

 

 

 

 

Additional
Paid-in
Capital

 

Accumulated
Deficit

 

Total
Stockholders’
Deficit

 

 

 

Common Shares

 

 

 

 

 

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 30, 2012

 

 

147,547,607

 

$

147,547

 

$

10,164,724

 

$

(12,997,774

)

$

(2,685,503

)

Stock-based compensation expense

 

 

 

 

 

 

83,016

 

 

 

 

83,016

 

Conversion of debt to common stock

 

 

9,766,097

 

 

9,766

 

 

1,455,150

 

 

 

 

1,464,916

 

Net loss

 

 

 

 

 

 

 

 

(259,746

)

 

(259,746

)

Balance, October 31, 2012

 

 

157,313,704

 

$

157,313

 

$

11,702,890

 

$

(13,257,520

)

$

(1,397,317

)


See Notes to Condensed Consolidated Financial Statements.


- 3 -



CornerWorld Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)


 

 

For the Six Months ended October 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net loss

 

$

(259,746

)

$

(993,068

)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

 

 

Depreciation and amortization

 

 

821,796

 

 

1,095,756

 

Amortization of discount on debt

 

 

281,562

 

 

469,384

 

Provision for doubtful accounts

 

 

112,258

 

 

136,457

 

Stock-based compensation

 

 

83,016

 

 

74,892

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

(137,129

)

 

(411,986

)

Prepaid expenses and other current assets

 

 

7,449

 

 

19,200

 

Goodwill

 

 

 

 

 

Other assets

 

 

697

 

 

(278

)

Accounts payable

 

 

(350,925

)

 

(746,700

)

Accrued expenses

 

 

94,856

 

 

230,787

 

Deferred revenue

 

 

247,690

 

 

240,174

 

Other liabilities

 

 

57,741

 

 

57,664

 

Net cash provided by operating activities

 

 

959,265

 

 

172,282

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Proceeds from sale of fixed assets

 

 

 

 

5,900

 

Purchases of property and equipment

 

 

(469

)

 

(14,601

)

Net cash used in investing activities

 

 

(469

)

 

(8,701

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Fees paid for debt issuance

 

 

 

 

(62,500

)

Payments on capital leases

 

 

(4,414

)

 

 

Principal payments on related party notes payable

 

 

(115,000

)

 

(204,984

)

Principal payments on debt

 

 

(610,000

)

 

(250,000

)

Net cash used in financing activities

 

 

(729,414

)

 

(517,484

)

Net increase (decrease) in cash

 

 

229,382

 

 

(353,903

)

Cash at beginning of period

 

 

890,415

 

 

934,250

 

Cash at end of period

 

$

1,119,797

 

$

580,347

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

473,622

 

$

717,657

 

Income taxes

 

$

 

$

 


See Notes to Condensed Consolidated Financial Statements.


- 4 -



CornerWorld Corporation

Notes to Condensed Consolidated Financial Statements

October 31, 2012

(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 October 31, 2012 and for the three and six month periods ended October 31, 2012 and 2011 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 and six month periods ended October 31, 2012 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 audited consolidated financial statements as of and for the year ended April 30, 2012, as filed with the SEC on Form 10-K on July 30, 2012.


Organization


The Company was incorporated in the State of Nevada, on November 9, 2004.


The Company provides certain marketing services through its operating subsidiary Enversa Companies LLC, a Texas limited liability company (“Enversa”).  CornerWorld is the sole member of 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.    Enversa also provides search engine optimization services (“SEO”), domain leasing and website management services on a recurring monthly basis to over 300 customers.


The Company provides telecommunications services through its wholly-owned subsidiary, Woodland Holdings Corp. (“Woodland Holdings”).  Woodland Holdings is the owner of S Squared, LLC, doing business in the state of Michigan as “Ranger Wireless LLC” (“Ranger”).   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.


Woodland Holdings also provides telephony and internet services through its subsidiaries Phone Services and More, L.L.C., doing business as Visitatel (“PSM”) and T2 Communications, L.L.C. (“T2 Communications”).  As a provider of Internet Protocol Television (IPTV), Internet and VoIP services, T2 Communications delivers leading-edge technology to business customers in Michigan. Offerings include: phone lines, Internet connections, long distance and toll-free services. T2 Communications is a Competitive Local Exchange Carrier (CLEC).  PSM holds an FCC 214 License as a wholesale long distance service provider to the carrier community and large commercial users of transport minutes.


The Company’s year-end is April 30th.


- 5 -



CornerWorld Corporation

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


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.


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. Revenue is also recognized monthly as SEO services are provided or in the form of revenues from domain leases.


At Ranger, revenue is recognized monthly as telecommunications services, such as minutes and calls, among other things, are provided to customers. For T2 Communication, the majority of revenue is derived from month-to-month, bundled service contracts for the phone 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.


- 6 -



CornerWorld Corporation

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


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 October 31, 2012.


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. 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:


 

 

October 31,
2012

 

April 30,
2012

 

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

 

 

(6,712,036

)

 

(5,933,122

)

 

 

 

 

 

$

5,192,756

 

$

5,971,670

 

 

 

 


Amortization expense related to identifiable intangible assets totaled $389,457 and $417,227 for the three month periods ended October 31, 2012 and 2011, respectively, and $778,914 and $890,018 for the six month periods ended October 31, 2012 and 2011, respectively.


- 7 -



CornerWorld Corporation

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


4. Debt


 

 

As of

 

 

 

October 31,
2012

 

April 30,
2012

 

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 notes’ floor utilizes a minimum LIBOR of 3%. At October 31, 2012 the total rate was 15%. These notes are collateralized by all assets of the Company.

 

$

4,250,000

 

$

4,500,000

 

Note payable IU Holdings, LP; the note matures February 28, 2015. At October 31, 2012, 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.

 

 

1,500,000

 

 

1,500,000

 

Note payable to IU Investments, LLC, due March 31, 2016. At October 31, 2012, 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

 

 

527,915

 

Notes payable to Internet University and the other selling members of Enversa; the notes were converted to equity on October 31, 2012. See also note 8, Related Party Transactions.

 

 

 

 

1,364,199

 

Note payable to Internet University; the note matures April 30, 2013. At October 31, 2012, 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.

 

 

185,000

 

 

300,000

 

Note payable to Ned B. Timmer; the note matures April 30, 2016. At October 31, 2012, the interest rate was 10%. This note is collateralized by all assets of Woodland Holdings, Corporation, including the Ranger patent.

 

 

1,440,000

 

 

1,800,000

 

Note payable to CEO; the note matures July 31, 2015. At October 31, 2012, 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

 

 

338,958

 

Note payable to Kelly Larabee Morlan; the note matures December 31, 2013. At October 31, 2012, the interest rate was 10%. This note is not collateralized.

 

 

16,316

 

 

16,316

 

Total debt

 

 

8,258,189

 

 

10,347,388

 

Less current portion of long-term debt

 

 

(2,093,225

)

 

(3,325,525

)

Non-current portion of long-term debt

 

$

6,164,964

 

$

7,021,863

 


On March 29, 2011, the Company issued common stock purchase warrants to the Senior Lender (the “Warrants”), 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 Warrants have a 5 year term and contain certain put and call provisions. The Warrants are not exercisable prior to March 30, 2014. Using the Black-Scholes model, the original value of the Warrants issued to the Senior Lender were less than the net present value of the minimum $1,000,000 cash put 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 Warrants are 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 $758,516 and $1,039,302 at October 31 and April 30, 2012, respectively, and is reflected as a loan discount to the outstanding balance of $8,258,189 at October 31, 2012.


The notes payable to the Senior Lender includes certain restrictive covenants with respect to the Company’s earnings, leverage and accounts payable. As of October 31, 2012, the Company believes that it is 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.


- 8 -



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 no stock options pursuant to this plan during the three and six months ended October 31, 2012.


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 and six months ended October 31, 2012.


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


 

October 31, 2012

 

 

Shares Reserved
for Grant

 

Awards Available
for Grant

 

 

 

 

 

Incentive Stock Plan

 

4,000,000

 

2,105,000

Stock Compensation Plan

 

4,000,000

 

3,075,000

 

 

8,000,000

 

5,180,000


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.


- 9 -



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 October 31

 

For the six month periods Ended October 31

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

  

 

Expected term (in years)

 

 

 

5.0

 

 

 

 

5.0

 

 

Expected volatility

 

%

 

99.1

%

 

%

 

99.1

%

 

Risk-free interest rate

 

%

 

1.0

%

 

%

 

1.0

%

 

Dividend yield

 

%

 

0.0

%

 

%

 

0.0

%

 


A summary of activity under the Stock Plans and changes during the period ended October 31, 2012 is presented below:


 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

Shares

 

Exercise
Price

 

Remaining
Contractual
Term (Years)

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at May 1, 2012

 

 

2,910,000

 

$

0.35

 

 

3.12

 

$

44,600

 

Issued

 

 

 

 

 

 

 

 

 

Cancelled/forfeited

 

 

(90,000

)

 

0.20

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

Outstanding at October 31, 2012

 

 

2,820,000

 

$

0.35

 

 

2.26

 

$

 

Options vested and expected to vest*

 

 

2,635,000

 

$

0.36

 

 

2.17

 

$

 

Options exercisable at end of period

 

 

1,912,500

 

$

0.39

 

 

1.63

 

$

 

 

 

*

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.


For the three month periods ended October 31, 2012 and 2011, the Company recognized $41,507 and $37,446  of stock-based compensation expense, respectively, and for the six month periods ended October 31, 2012 and 2011, the Company recognized $83,016 and $74,892 of stock-based compensation expense, respectively. As of October 31, 2012 there was $225,750 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 2.26 weighted average years.


- 10 -



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:


 

 

Marketing
Services

 

Communications
Services

 

Corporate
Overhead

 

Consolidated

 

Three Months Ended October 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

425,545

 

$

1,442,786

 

$

 

$

1,868,331

 

Income (loss) from continuing operations before tax

 

 

186,374

 

 

390,844

 

 

(682,265

)

 

(105,047

)

Net (loss) income

 

 

186,374

 

 

390,844

 

 

(682,265

)

 

(105,047

)

Total assets

 

 

354,252

 

 

8,726,239

 

 

728,472

 

 

9,808,963

 

Intangibles

 

 

 

 

5,192,756

 

 

 

 

5,192,756

 

Goodwill

 

 

 

 

1,581,850

 

 

554,986

 

 

2,136,836

 

Depreciation and amortization

 

 

1,546

 

 

396,751

 

 

12,747

 

 

411,044

 


 

 

Marketing
Services

 

Communications
Services

 

Corporate
Overhead

 

Consolidated

 

Three Months Ended October 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,234,927

 

$

1,679,131

 

$

 

$

2,914,058

 

Income (loss) from continuing operations before tax

 

 

48,371

 

 

499,934

 

 

(1,019,713

)

 

(471,408

)

Net (loss) income

 

 

48,371

 

 

499,934

 

 

(1,019,713

)

 

(471,408

)

Total assets

 

 

964,246

 

 

10,176,725

 

 

783,710

 

 

11,924,681

 

Intangibles

 

 

 

 

6,750,584

 

 

 

 

6,750,584

 

Goodwill

 

 

 

 

1,581,850

 

 

554,986

 

 

2,136,836

 

Depreciation and amortization

 

 

29,316

 

 

472,777

 

 

16,412

 

 

518,505

 


 

 

Marketing
Services

 

Communications
Services

 

Corporate
Overhead

 

Consolidated

 

Six Months Ended October 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,092,339

 

$

2,951,059

 

$

 

$

4,043,398

 

Income (loss) from continuing operations before tax

 

 

349,509

 

 

874,584

 

 

(1,483,839

)

 

(259,746

)

Net (loss) income

 

 

349,509

 

 

874,584

 

 

(1,483,839

)

 

(259,746

)

Total assets

 

 

354,252

 

 

8,726,239

 

 

728,472

 

 

9,808,963

 

Intangibles

 

 

 

 

5,192,756

 

 

 

 

5,192,756

 

Goodwill

 

 

 

 

1,581,850

 

 

554,986

 

 

2,136,836

 

Depreciation and amortization

 

 

3,092

 

 

793,502

 

 

25,202

 

 

821,796

 


 

 

Marketing
Services

 

Communications
Services

 

Corporate
Overhead

 

Consolidated

 

Six Months Ended October 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,704,500

 

$

3,151,231

 

$

 

$

5,855,731

 

Income (loss) from continuing operations before tax

 

 

77,009

 

 

798,419

 

 

(1,868,496

)

 

(993,068

)

Net (loss) income

 

 

77,009

 

 

798,419

 

 

(1,868,496

)

 

(993,068

)

Total assets

 

 

964,246

 

 

10,176,725

 

 

783,710

 

 

11,924,681

 

Intangibles

 

 

 

 

6,750,584

 

 

 

 

6,750,584

 

Goodwill

 

 

 

 

1,581,850

 

 

554,986

 

 

2,136,836

 

Depreciation and amortization

 

 

114,013

 

 

949,157

 

 

32,586

 

 

1,095,756

 


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


- 11 -



CornerWorld Corporation

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


8. Related Party Transactions


On August 27, 2008 the Company entered into promissory notes (collectively the “Tier 4 Junior Notes”) totaling $1,500,000 with Internet University, Inc., Marc Blumberg and Marc Pickren. 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. The Company recorded interest of $69,726 and $93,029 on this facility during the six month periods ended October 31, 2012 and 2011, respectively. On October 31, 2012, the Company converted the balance of these notes totaling $1,364,199 as well as all outstanding accrued interest in the amount of $100,716, into 9,766,097 shares of the Company’s common stock at a rate of $0.15 per share. The average trading price of the Company’s common stock for the five days prior to the conversion was $0.04 and the difference was accounted for as paid in capital from a related party in the amount of $1,455,150. The conversion price was determined based on negotiation between the Company and the holders of the Tier 4 Junior Notes.


On February 23, 2009, the Company entered into a promissory note (the “Tier 3 Junior Note”) totaling $1,900,000 with IU Investments, LLC (“IUI”). IUI is an entity owned by the family of the Company’s Chief Executive Officer.  Interest is payable at the Company’s discretion at a rate of 10% per annum.  The Company recorded interest of $26,992 and $28,384 on this facility during the six month periods ended October 31, 2012 and 2011, respectively.   The balance of this note totaled $527,915 at October 31, 2012.


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”). Interest on the outstanding principal amount under the Tier 2 Junior Note is payable at the Company’s discretion at a rate of 10% per annum.  As additional consideration to induce IUH to enter into the Tier 2 Junior Note, the Company issued to IUH, 48,414,132 shares of CornerWorld Corporation Common stock. IUH is a partnership whose limited partners include the family of the Company’s Chief Executive Officer.  Steve Toback, the uncle of the Company’s Chief Executive Officer, serves as the manager of IU Holdings, GP, LLC which is the general partner of IUH.  The Company recorded approximately $75,616 and $85,726 in interest on this facility, during the six month periods ended October 31, 2012 and 2011, respectively.  The balance of this note totaled $1,500,000 at October 31, 2012.

 

On March 30, 2011, the Company entered into a subordinated $400,000 promissory note (the “Tier 5 Junior Note”) with Internet University.   Interest on the outstanding principal amount under the Tier 5 Junior Note is payable at the Company’s discretion at a rate of 10% per annum.  As additional consideration to induce Internet University to enter into the Tier 5 Junior Note, the Company issued to Internet University, 12,910,435 shares of CornerWorld Corporation Common stock.  The Company recorded interest of $12,641 and $22,068 on this facility during the six month periods ended October 31, 2012 and 2011, respectively.  The balance of this note totaled $185,000 at October 31, 2012.


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.   Interest on the outstanding principal amount under the Tier 7 Junior Note is payable at the Company’s discretion 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 $17,087 and $17,730 on this facility during the six month periods ended October 31, 2012 and 2011, respectively.  The balance of this note totaled $338,958 at October 31, 20112.


The Company is party to a lease agreement with 13101 Preston Road, LP. pursuant to which it leases office space for its corporate headquarters.  The limited partners of 13101 Preston Road, LP are trusts controlled by the family of the Company’s Chief Executive Officer. The Company paid $61,972 and $101,522 in rent during the six month periods ended October 31, 2012 and 2011, respectively.


In addition, the Company provides accounting, human resources and certain IT services to an entity controlled by the family of the Company’s Chief Executive Officer for $5,000 per month.  The Company received $30,000 from this entity during the six month period ended October 31, 2012.


9. Subsequent Events


Subsequent to the date of this report, there were no occurrences that had a material impact on the financial statements.


- 12 -



RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q


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 11 million calls per year from wireless customers and seamlessly connecting them to their service provider.


Six Months ended October 31, 2012 Highlights:


 

·

We paid down $725,000 in principal on our outstanding debt.

 

 

 

 

·

We converted $1,364,199 in principal on our outstanding debt as well as $100,716 of accrued interest to equity via the issuance of common shares at the rate of $0.15/share.

 

 

 

 

·

After removal of non-cash amortization of loan discounts (interest expense) totaling $281,562, bad debt expense totaling $112,258, depreciation & amortization and stock-based compensation expense totaling $821,796 and $83,016, respectively, the Company’s pro-forma profit for the three months ended October 31, 2012 would have totaled approximately $1,038,886. See the table that follows for more details. The Company expects to continue generating positive operating cash flows for the fiscal year ending April 30, 2013.

 

 

 

 

·

As noted in our quarterly report on Form 10-Q for the three month period ended July 31, 2012 as well as our annual report on Form 10-K for the year ended April 30, 2012, during the quarter ended October 31, 2011, we lost a significant enterprise client. This loss was due to the client discontinuing the outsourcing of its lead generation campaigns resulting from significant decreases in federal funding of for-profit educational institutions.


We define “Adjusted Net Income1” as net loss after removal of non-cash charges including amortization of loan discounts (interest expense), bad debt 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 the United States’ Generally Accepted Accounting Principles (“US 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 US 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 US GAAP Net Income and Adjusted Net Income:


 

 

For the six
month period ended
October 31, 2012

 

Per share data

 

 

 

 

 

 

 

Net loss

 

$

(259,746

)

$

(0.01

)

 

 

 

 

 

 

 

 

Non-cash charges:

 

 

 

 

 

 

 

Amortization of loan discounts (interest)

 

 

281,562

 

 

0.00

 

Bad debt expense

 

 

112,258

 

 

0.00

 

Stock-based compensation

 

 

83,016

 

 

0.00

 

Depreciation and amortization

 

 

821,796

 

 

0.01

 

Total non-cash charges

 

 

1,298,632

 

 

0.01

 

 

 

 

 

 

 

 

 

Pro-forma net income

 

$

1,038,886

 

$

0.01

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic and diluted

 

 

147,547,607

 

 

147,547,607

 


- 13 -



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 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.


Recent Accounting Pronouncements


There were various accounting standards and interpretations issued during the three months ended October 31, 2012, 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, 2012 to the three months ended October 31, 2011


Marketing services


Our marketing services segment consists of our Enversa division.


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Revenues and Gross profit:


Our marketing segment had revenues totaling $425,545 for the three month period ended October 31, 2012 as compared to $1,234,927 for the three month period ended October 31, 2011. This decrease is due to the loss of a significant enterprise client, 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.


As a result of the decrease in revenues, gross profit at our marketing services segment also decreased for the three months ended October 31, 2012 to $298,512 from $753,069 for the three month period ended October 31, 2011. Gross profit as a percentage of revenue increased to 70.1% from 61.0% due to an increase in the sale of higher margin products as a percentage of total revenue.


Selling, General and Administrative Expenses:


Selling, general and administrative (“SG&A”) expenses totaled $110,592 for the three months ended October 31, 2012 as compared to $675,382 for the corresponding period in the prior year. The decrease of $564,790 is primarily due to decreases in headcount, the outsourcing of multiple back-office functions, the reallocation of certain functions to corporate and also closure of our Houston office.


Net Income:


Net income totaled $186,374 for the three months ended October 31, 2012 as compared to net income of $48,371 for the corresponding period in the prior year. The increase is primarily due to reallocation of certain functions to corporate.


Communications services


Our communications services segment consists of our Woodland division.


Revenues and Gross profit:


Our communications services segment had revenues totaling $1,442,786 for the three month period ended October 31, 2012 as compared to $1,679,131 for the three month period ended October 31, 2011. This decrease is primarily due to the reduction of roaming traffic and call volumes resulting from the continued buildout of nationwide mobile carrier networks.


As a result of the decrease in revenues, gross profit also decreased for the three months ended October 31, 2012 to $1,218,317 from $1,432,065 for the three month period ended October 31, 2011. Gross profit as a percentage of revenue decreased only slightly to 84.4% for the three months ended October 31, 2012 from 85.3% during the three months ended October 31, 2011.


Selling, General and Administrative Expenses:


SG&A expenses totaled $114,624 for the three months ended October 31, 2012 as compared to $125,863 for the corresponding period in the prior year. The decrease of $11,239 is primarily due to cost savings resulting from staff reductions and other cost cutting measures.


Net Income:


Net income totaled $390,844 for the three months ended October 31, 2012 as compared to a net income of $499,934 for the corresponding period in the prior year. The decrease of $109,090 is primarily due to the aforementioned decreases in revenues which were offset, to some extent, by decreases in interest expenses as a result of our continued paydown of debt.


Corporate


Selling, General and Administrative Expenses:


SG&A costs totaled $486,611 for the quarter ended October 31, 2012 versus $817,944 for the corresponding period in the prior year. The decrease of $331,333 is primarily due to a decrease in corporate personnel and rent as well as the absence of approximately $225,000 in fees related to our pursuit of a potential merger during the quarter ended October 31, 2011 that never took place. 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.


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Comparison of the six months ended October 31, 2012 to the six months ended October 31, 2011


Marketing services


Revenues and Gross profit:


Our marketing services segment had revenues totaling $1,092,339 for the six month period ended October 31, 2012 as compared to $2,704,500 for the six month period ended October 31, 2011. This decrease is due to the loss of a significant enterprise client, 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.


Similar to the decreases in revenue, gross profit at our marketing services segment decreased for the six months ended October 31, 2012 to $720,704 from $1,584,392  for the six month period ended October 31, 2011. Gross profit as a percentage of revenue increased from 58.6% to 66.0 % due to an increase in the sale of higher margin products as a percentage of total revenue.


Selling, General and Administrative Expenses:


SG&A expenses totaled $368,103 for the six months ended October 31, 2012 as compared to $1,390,384 for the corresponding period in the prior year. The decrease of $1,022,281 is primarily due to decreases in headcount, the outsourcing of multiple back-office functions, the reallocation of certain functions to corporate and closure of our Houston office.


Net Income


Net income totaled $349,509 for the six months ended October 31, 2012 as compared to net income of $77,009 for the corresponding period in the prior year. The increase is primarily due to reallocation of certain functions to corporate.


Communications services


Revenues, Cost of Sales and Gross profit:


Our communications services segment had revenues totaling $2,951,059 for the six month period ended October 31, 2012 as compared to $3,151,231 for the three month period ended October 31, 2011.   The decrease of $200,172 was primarily due to the reduction of roaming traffic and call volumes resulting from the continued buildout of nationwide mobile carrier networks


For similar reasons, gross profit decreased for the six months ended October 31, 2012 to $2,546,216 from $2,690,918 for the corresponding period in the prior year. Gross profit as a percentage of revenue improved slightly to 86.3% during the six months ended October 31, 2012 versus 85.4%.


Selling, General and Administrative Expenses:


SG&A expenses totaled $244,149 for the six months ended October 31, 2012 as compared to $252,812 for the corresponding period in the prior year. The decrease of $8,663 is primarily due to staffing reductions and other cost saving measures enacted at our communications services segment during the year over year period.


Net Income


Net income totaled $874,584 for the six months ended October 31, 2012 as compared to net income of $798,419 for the corresponding period in the prior year. The increase of $76,165 is primarily due to year over year decreases in interest expenses as a result of the continued paydown of debt.


Corporate


Selling, General and Administrative Expenses:


SG&A expenses totaled $1,081,517for the six month period ended October 31, 2012 versus $1,312,004 for the corresponding period in the prior year. The decrease of $230,487 is primarily due to the fact that we incurred approximately $225,000 in costs related to our pursuit of a potential merger during the six months ended October 31, 2011which was never completed.  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.


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Liquidity and Capital Resources


As of October 31, 2012, we have a working capital deficit of approximately $3.0 million and cash of $1,119,797. Our working capital deficit is primarily related to certain large accounts payable associated with our 2009 acquisition of Woodland Holdings as well as the short-term nature of selected tranches of the debt we issued in March 2011 when we recapitalized the Company. 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.

 

We had substantially no investing activity for the six month period ended October 31, 2012.


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.


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 October 31, 2012. 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 replaced selected accounting personnel with more seasoned professionals, including additional certified public accountants, to help perform certain accounting and financial functions. In addition, management has included additional reviews and controls to mitigate the size of the accounting department and the overlap of responsibilities.  Management believes the foregoing efforts will effectively remediate this material weakness but the Company can give no assurance that the additional controls will be effective. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. We cannot assure you that, as circumstances change, any additional material weakness will not be identified.


Changes in Internal Control over Financial Reporting


There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION


Item 1. Legal Proceedings


None.


Item 1A. Risk Factors


Not applicable.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.


None.


Item 3. Defaults Upon Senior Securities


None.


Item 4. Mine Safety Disclosures


Not applicable


Item 5. Other information


None.


Item 6. Exhibits


The following exhibits are filed as part of this report:


Exhibit
Numbers

 

Description

 

Method of
Filing

 

 

 

 

 

10.1

 

Amendment No. 7 to Promissory Note dated as of October 31, 2012 between CornerWorld Corporation and  IU Investments, LLC (incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K, filed November 5, 2012)

 

 

10.2

 

Amendment No. 6 to Promissory Note dated as of October 31, 2012 between CornerWorld Corporation and  Internet University, Inc. (incorporated by reference to Exhibit 10.2  to the Company’s Form 8-K, filed November 5, 2012)

 

 

10.3

 

Amendment No. 6 to Promissory Note dated as of October 31, 2012 between CornerWorld Corporation and  Marc Blumberg (incorporated by reference to Exhibit 10.3  to the Company’s Form 8-K, filed November 5, 2012)

 

 

10.4

 

Amendment No. 6 to Promissory Note dated as of October 31, 2012 between CornerWorld Corporation and  Marc Pickren (incorporated by reference to Exhibit 10.4  to the Company’s Form 8-K, filed November 5, 2012)

 

 

10.5

 

Amendment No. 4 to Promissory Note dated as of October 31, 2012 between CornerWorld Corporation and  Internet University, Inc. (incorporated by reference to Exhibit 10.5  to the Company’s Form 8-K, filed November 5, 2012)

 

 

31.1

 

Rule 13a-14(a) Certification by our chief executive officer

 

(1)

31.2

 

Rule 13a-14(a) Certification by our chief financial officer

 

(1)

32.1

 

Section 1350 Certification by our chief executive officer

 

(2)

32.2

 

Section 1350 Certification by our chief financial officer

 

(2)

101

 

Interactive Data Files of Financial Statements and Notes.

 

(3)

__________

(1)

Filed herewith.

(2)

Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K under the Exchange Act.

(3)

Furnished (and not filed) herewith pursuant to Regulation S-T under the Exchange Act.


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Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 

CORNERWORLD CORPORATION

 

Registrant

 

 

December 14, 2012

/s/ V. Chase McCrea III

 

V. Chase McCrea III

 

Chief Financial Officer


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