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EX-31 - RULE 13A-14(A) CERTIFICATION BY CFO - Cornerworld Corpex_31-2.htm

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 March 31, 2014

 

 

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 510
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 May 14, 2014 was 162,937,110.




CORNERWORLD CORPORATION


INDEX


Item
Number

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

1

Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 (Audited)

1

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2014 and 2013

2

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2014

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2014 and 2013

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

2

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

11

 

 

 

3

Quantitative and Qualitative Disclosures about Market Risk

15

 

 

 

4

Controls and Procedures

15

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

1

Legal Proceedings

16

 

 

 

1A

Risk Factors

16

 

 

 

2

Unregistered Sales of Equity Securities and Use of Proceeds

16

 

 

 

3

Defaults Upon Senior Securities

16

 

 

 

4

Mine Safety Disclosures

16

 

 

 

5

Other Information

16

 

 

 

6

Exhibits

16

 

 

 

 

Signatures

17




PART I – FINANCIAL INFORMATION


Item 1. Financial Statements


CornerWorld Corporation

Condensed Consolidated Balance Sheets


 

 

March 31, 2014

 

December 31, 2013

 

Assets

 

 

(Unaudited)

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

640,454

 

$

857,954

 

Accounts receivable, net

 

 

83,368

 

 

119,904

 

Prepaid expenses and other current assets

 

 

91,807

 

 

152,317

 

Total current assets

 

 

815,629

 

 

1,130,175

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

10,709

 

 

19,486

 

Other assets

 

 

28,002

 

 

28,000

 

TOTAL ASSETS

 

$

854,340

 

$

1,177,661

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

155,723

 

$

225,064

 

Accrued expenses

 

 

361,816

 

 

347,967

 

Notes payable related parties

 

 

140,206

 

 

101,968

 

Lease payable, current portion

 

 

10,514

 

 

10,704

 

Deferred revenue

 

 

34,494

 

 

70,322

 

Total current liabilities

 

 

702,753

 

 

756,025

 

Long-term liabilities:

 

 

 

 

 

 

 

Notes payable related parties, net of current portion

 

 

198,752

 

 

236,990

 

Lease payable, net of current portion

 

 

 

 

2,383

 

Total liabilities

 

 

901,505

 

 

995,398

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (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; 162,937,110 and 157,313,704  shares issued and outstanding, at March 31, 2014 and December 31, 2013, respectively

 

 

162,937

 

 

156,813

 

Additional paid-in capital

 

 

11,798,865

 

 

11,801,224

 

Accumulated deficit

 

 

(12,008,967

)

 

(11,775,774

)

Total stockholders’ equity (deficit)

 

 

(47,165

)

 

182,263

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

$

854,340

 

$

1,177,661

 


See Notes to Condensed Consolidated Financial Statements.


- 1 -



CornerWorld Corporation

Condensed Consolidated Statements of Operations

(unaudited)


 

 

For the Three Months
Ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Sales, net

 

$

279,399

 

$

311,755

 

 

 

 

 

 

 

 

 

Costs of goods sold

 

 

162,502

 

 

134,434

 

 

 

 

 

 

 

 

 

Gross profit

 

 

116,897

 

 

177,321

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

331,491

 

 

734,462

 

Depreciation and amortization

 

 

8,775

 

 

17,058

 

Total operating expenses

 

 

340,266

 

 

751,520

 

Operating loss

 

 

(223,369

)

 

(574,199

)

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

Interest expense

 

 

(6,511

)

 

(3,071

)

Other income (expense), net

 

 

(3,313

)

 

 

Total other expense, net

 

 

(9,824

)

 

(3,071

)

Loss from continuing operations before income taxes

 

 

(233,193

)

 

(577,270

)

Income taxes

 

 

 

 

 

Loss from continuing operations

 

 

(233,193

)

 

(577,270

)

Income from discontinued operations, net of tax

 

 

 

 

227,687

 

Gain from discontinued operations, net of tax

 

 

 

 

 

Net loss

 

$

(233,193

)

$

(349,583

)

 

 

 

 

 

 

 

 

Basic and diluted earnings loss per share from continuing operations

 

$

0.00

 

$

0.00

 

Basic and diluted earnings per share from discontinued operations

 

$

0.00

 

$

0.00

 

Basic and diluted earnings (loss) per share

 

$

0.00

 

$

0.00

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number shares outstanding

 

 

158,650,726

 

 

157,313,704

 


See Notes to Condensed Consolidated Financial Statements.


- 2 -



CornerWorld Corporation

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(unaudited)


 

 

 

 

Additional

 

 

 

Total

 

 

 

Common Shares

 

Paid-in

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

 

156,813,704

 

$

156,813

 

$

11,801,224

 

$

(11,775,774

)

$

182,263

 

Stock-based compensation expense

 

 

 

 

 

 

3,765

 

 

 

 

3,765

 

Cash-less exercise of warrants

 

 

6,123,406

 

 

6,124

 

 

(6,124

)

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(233,193

)

 

(233,193

)

Balance, March 31, 2014

 

 

162,937,110

 

$

162,937

 

$

11,798,865

 

$

(12,008,967

)

$

(47,165

)


See Notes to Condensed Consolidated Financial Statements.


- 3 -



CornerWorld Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)


 

 

For the Three Months ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net loss

 

$

(233,193

)

$

(349,583

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,775

 

 

17,058

 

Provision for doubtful accounts

 

 

10,874

 

 

40,031

 

Stock-based compensation

 

 

3,765

 

 

41,508

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

25,662

 

 

117,136

 

Prepaid expenses and other current assets

 

 

60,510

 

 

11,178

 

Other assets

 

 

(2

)

 

(7

)

Accounts payable

 

 

(69,341

)

 

(123,395

)

Accrued expenses

 

 

13,849

 

 

45,247

 

Deferred revenue

 

 

(35,828

)

 

(17,395

)

Changes in assets and liabilities of discontinued operations

 

 

 

 

423,231

 

Net cash provided by (used in) operating activities

 

 

(214,929

)

 

205,009

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

 

(125

)

Net cash used in investing activities

 

 

 

 

(125

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Payments on capital leases

 

 

(2,571

)

 

(2,487

)

Principal payments on related party notes payable

 

 

 

 

(105,000

)

Principal payments on notes payable

 

 

 

 

(275,000

 

Net cash used in financing activities

 

 

(2,571

)

 

(382,487

)

Net decrease in cash

 

 

(217,500

)

 

(177,603

)

Cash at beginning of period

 

 

857,954

 

 

1,415,260

 

Cash at end of period

 

$

640,454

 

$

1,237,657

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

 

$

152,615

 

Income taxes

 

$

 

$

 


See Notes to Condensed Consolidated Financial Statements.


- 4 -



CornerWorld Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014


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 March 31, 2014 and for the three month periods ended March 31, 2014 and 2013 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 March 31, 2014 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 December 31, 2013, as filed with the SEC on Form 10-K.


Organization


The Company was incorporated in the State of Nevada, on November 9, 2004. Effective May 1, 2007, the Company changed its name to CornerWorld Corporation.


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.  Enversa also provides search engine optimization services (“SEO”), domain leasing and website management services on a recurring monthly basis.


The Company provides telecommunications services, including telephony and internet services, through its wholly-owned subsidiary, Woodland Holdings Corp. (“Woodland Holdings”) who provides such services through its wholly owned 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 and VoIP services, T2 Communications delivers leading-edge technology to business customers in Michigan and Texas. Offerings include: phone lines, Internet connections, long distance and toll-free services. T2 Communications is a Competitive Local Exchange Carrier (CLEC).  PSM, also a CLEC, 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 December 31st.


- 5 -



CornerWorld Corporation

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


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 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.  For T2 Communications, 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.


Long-Lived Assets


The Company accounts for its long-lived assets in accordance with the ASC. The Company’s only long-lived assets are a patent 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. The patent, which was issued on March 4, 2014, is currently being valued at its net realizable value of $0. Management does not believe that its fixed assets are impaired. No impairment charges have been recorded as of March 31, 2014.


- 6 -



CornerWorld Corporation

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


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


On April 29, 2014, the Company announced that it had changed its fiscal year end from April 30 to December 31.  As such, these financial statements have been compiled in a manner to reflect the change in the Company’s fiscal year end.  Accordingly, certain prior year accounts have been reclassified to conform to the current year’s presentation.


3. Debt


 

 

As of

 

 

 

March 31,
2014

 

December 31,
2013

 

Long-term Debt

 

 

 

 

 

 

 

Note payable to CEO; the note matures July 31, 2016. At January 31, 2014, the interest rate was 6.25%. 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

 

Total debt

 

 

338,958

 

 

338,958

 

Less current portion of long-term debt

 

 

(140,206

)

 

(101,968

)

Non-current portion of long-term debt

 

$

198,752

 

$

236,990

 


The note payable, due to the Company’s CEO, contains no restrictive covenants or events of default other than non-payment.


4. Commitments and Contingencies

Litigation


On October 10, 2013, the Company’s former President, Marc A. Pickren (“Pickren”) filed a lawsuit in Dallas County District court alleging, among other things, that the Company had wrongfully terminated his employment; Pickren’s suit seeks claims approximating $265,000 which represent one year’s severance and costs to provide health insurance.  As noted in the Company’s form 8-K filed on October 4, 2013, Pickren’s employment agreement expired on September 15, 2013, Pickren’s employment agreement was not renewed and Pickren was removed as President of CornerWorld on October 4, 2013, though he remained employed as the President of Enversa, the Company’s only remaining operating subsidiary. Pickren was later terminated for cause on October 8, 2013.  The Company filed a counter-claim and has filed a motion for summary judgment to dismiss Pickren’s entire cause of action.  The Company intends to vigorously defend itself against Pickren’s claims.


- 7 -



CornerWorld Corporation

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


The Company is occasionally involved in other 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.


5. 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 5 years from the grant date.


The Company issued 1,500,000 options pursuant to this plan during the three month period ended March 31, 2014.


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 month period ended March 31, 2014.


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


 

March 31, 2014

 

 

Shares Reserved
for Grant

 

Awards Available
for Grant

 

 

 

 

 

Incentive Stock Plan

 

4,000,000

 

1,935,000

Stock Compensation Plan

 

4,000,000

 

3,925,000

 

 

8,000,000

 

5,860,000


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.


- 8 -



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 March 31

 

 

2014

 

2013

 

 

 

 

 

Expected term (in years)

 

5.0

 

 

5.0

 

Expected volatility

 

125.0

%

 

99.1

%

Risk-free interest rate

 

1.5

%

 

1.0

%

Dividend yield

 

0.0

%

 

0.0

%


A summary of activity under the Stock Plans and changes during the three month period ended March 31, 2014 is presented below:


 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

Shares

 

Exercise
Price

 

Remaining
Contractual
Term (Years)

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2013

 

 

640,000

 

$

0.22

 

 

1.63

 

$

 

Issued

 

 

1,500,000

 

 

0.13

 

 

 

 

 

Cancelled/forfeited

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2014

 

 

2,140,000

 

$

0.15

 

 

3.88

 

$

 

Options expected to vest

 

 

2,140,000

 

$

0.15

 

 

3.88

 

$

 

Options exercisable at end of period

 

 

527,500

 

$

0.22

 

 

1.22

 

$

 

 

For the three month periods ended March 31, 2014 and 2013, the Company recognized $3,765 and $41,508 of stock-based compensation expense, respectively. As of March 31, 2014 there was $17,625 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 3.88 weighted average years.


- 9 -



CornerWorld Corporation

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


6. 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 March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

208,528

 

$

70,871

 

$

 

$

279,399

 

Income (loss) from continuing operations before tax

 

 

10,481

 

 

(9,133

)

 

(234,542

 

(233,193

Net (loss) income

 

 

10,481

 

 

(9,133

)

 

(234,542

 

(233,193

Total assets

 

 

121,065

 

 

133,287

 

 

599,988

 

 

854,340

 

Depreciation and amortization

 

 

 

 

2,677

 

 

6,098

 

 

8,775

 



 

 

Marketing
Services

 

Communications
Services

 

Corporate
Overhead

 

Consolidated

 

Three Months Ended March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

271,011

 

$

40,744

 

$

 

$

311,755

 

Income (loss) from continuing operations before tax

 

 

49,934

 

 

(118,346

)

 

(508,858

)

 

(577,270

)

Net (loss) income

 

 

49,934

 

 

188,493

 

 

(588,010

)

 

(349,583

)

Total assets

 

 

178,052

 

 

8,037,389

 

 

653,048

 

 

8,868,489

 

Goodwill

 

 

 

 

 

 

554,986

 

 

554,986

 

Depreciation and amortization

 

 

1,546

 

 

4,599

 

 

10,913

 

 

17,058

 


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


7. Related Party Transactions


On March 30, 2011, the Company entered into a subordinated $389,942 promissory note (the “Senior Note”) with Scott N. Beck, the Company’s Chief Executive Officer. Interest on the outstanding principal amount under the Senior Note is payable at the Company’s discretion at a rate of 6.25% per annum and monthly principal payments totaling $12,746 have been deferred until May 31, 2014. The Company recorded interest of $6,370 and $9,312 on this facility during the three month periods ended March 31, 2014 and 2013, respectively. The balance of this note totaled $338,958 at March 31, 2014.


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 $7,500 and $22,220 in rent during the three month periods ended March 31, 2014 and 2013, 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 $15,000 from this entity during each of the three month periods ended March 31, 2014 and 2013.


8. Subsequent Events


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


- 10 -



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 telecommunication services company building services for the increased accessibility of content across mobile, television and Internet platforms.


Three Months ended March 31, 2014 Highlights:


 

·

On March 4, 2014 the US Patent and Trademark office issued patent number 8,665,785, Systems and Methods for Establishing a Telecommunications Bridge Between a User Device and a Node, to the Company.  The Company had originally filed the patent on March 8, 2010.  


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 6 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 Unaudited Condensed Consolidated 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 Condensed 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 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.


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Income Taxes


The Company accounts for income tax in accordance with ASC No. 740 which requires the use of the asset and liability method of accounting of income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.


Revenue Recognition


It is the Company’s policy that revenue from product sales or services will be recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”), which superseded Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”). SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.


Stock-Based Compensation


The Company accounts for awards made under its two stock-based compensation plans pursuant to the fair value provisions of ASC No. 718. ASC No. 718 requires the recognition of stock-based compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. ASC No. 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company accounts for stock-based compensation in accordance with ASC No. 718 and estimates its fair value based on using the Black-Scholes option valuation model.


The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:


 

(a)

The expected volatility of our common stock price, which we determine based on comparable companies;

 

 

 

 

(b)

Expected dividends (which do not apply, as we do not anticipate issuing dividends);

 

 

 

 

(c)

Expected life of the award, which is estimated based on the historical award exercise behavior of our employees; and

 

 

 

 

(d)

The risk-free interest rate which we determine based on the yield of a U.S. Treasury bond whose maturity period equals the options expected term.


These factors could change in the future, affecting the determination of stock-based compensation expense in future periods. In the future, we may elect to use different assumptions under the Black-Scholes valuation model or a different valuation model, which could result in a significantly different impact on our net income or loss.


The Company’s determination of fair value of share-based payment awards is made as of their respective dates of grant using the Black Scholes option valuation model. Because the Company’s options have certain characteristics that are significantly different from traded options, the Black Scholes option valuation model may not provide an accurate measure of the fair value of the Company’s options. Although the fair value of the Company’s options is determined in accordance with ASC No. 718, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The calculated compensation cost is recognized on a straight-line basis over the vesting period of the options.


See also Note 5 – Stock Based Compensation of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding our accounting policies for stock-based compensation.


Recent Accounting Pronouncements


There were various accounting standards and interpretations issued during the three months ended March 31, 2014, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows.


- 12 -



Results of Operations


Comparison of the three months ended March 31, 2014 to the three months ended March 31, 2013


Consolidated CornerWorld Corporation


Revenues:


We had revenues totaling $279,399 for the three month period ended March 31, 2014 as compared to $311,755 for the three month period ended March 31, 2013. The decrease of $32,356, or 10.4%, is primarily due to revenue decreases in our marketing services segment resulting from the deterioration of the market for lead generation in the for-profit education space.  The decreases were offset, to some extent, by increased billings in our communications services segment.


Depreciation and Amortization:


Depreciation and Amortization expenses totaled $8,775 for the three month period ended March 31, 2014 as compared to $17,058 for the three month period ended March 31, 2013. The decrease of $8,283 is due to the fact that several of our larger telecommunications fixed assets have become fully depreciated.


Loss from Continuing Operations Before Taxes:


Loss from Continuing Operations Before Taxes totaled $233,194 for the three month period ended March 31, 2014 as compared to a loss of $577,270 for the corresponding period in the prior year. The improvement of $344,076 is primarily due to reductions in selling, general and administrative (“SG&A”) expenses which included the termination of the former President of the Company, among other personnel.


Net Loss:


Net Loss totaled $233,194 for the three months ended March 31, 2014 as compared to a net loss of $349,583 for the corresponding period in the prior year. The difference between the Net Income improvement of $116,389 versus the Income from Continuing Operations Before Taxes improvement of $344,076 is due to the fact that prior year Net Income numbers included earnings from the divested Ranger asset totaling $227,687.


Marketing services


Our marketing services segment consists of our Enversa division.


Revenues:


Our marketing services segment had revenues totaling $208,528 for the three month period ended March 31, 2014 as compared to $271,011 for the three month period ended March 31, 2013. This decrease is due to the deterioration in the for-profit educational lead generation space and significant ongoing challenges and customer churn in our search engine optimization and website leasing businesses.


Depreciation and Amortization:


Our marketing services segment had depreciation expenses totaling $0 for the three month period ended March 31, 2014 as compared to $1,546 for the three month period ended March 31, 2013. The decrease was due to all of our marketing fixed assets becoming fully depreciated.


Income from Continuing Operations Before Taxes and Net Income:


Income from Continuing Operations Before Taxes and Net Income totaled $10,481 for the three months ended March 31, 2014 as compared to net income of $49,934 for the corresponding period in the prior year. The decrease is due to the aforementioned reduction in revenue.


- 13 -



Communications services


Our communications services segment consists of our Woodland division.


Revenues:


Our communications services segment had revenues totaling $70,871 for the three month period ended March 31, 2014 as compared to $40,744 for the three month period ended March 31, 2013. The increase in revenue is due to a new contract signed by one of our CLEC’s that enables it to bill and collect revenues from carrier access billing.


Depreciation and Amortization:


Our communications services segment had depreciation and amortization expenses totaling $2,677 for the three month period ended March 31, 2014 versus $4,599 for the corresponding period in the prior year.  The decrease is due to more of our telecom assets becoming fully depreciated.


Loss from Continuing Operations Before Taxes:


Loss from Continuing Operations Before Taxes totaled $9,133 for the three month period ended March 31, 2014 as compared to a loss totaling $118,346 for the corresponding period in the prior year. The improvement of $109,213 is primarily due to reductions in selling, general and administrative (“SG&A”) expenses which included the closure of our Michigan office along with the termination of its associated personnel.


Net Income (Loss):


Net loss totaled $9,133 for the three months ended March 31, 2014 as compared to net income of $188,493 for the corresponding period in the prior year. The decrease of $197,626 is due to income earned by our divested Ranger asset during the prior year.


Corporate


Depreciation and Amortization:


Corporate had depreciation and amortization expenses totaling $6,098 for the three month period ended March 31, 2014 versus $10,913 for the corresponding period in 2013.  The decrease is due to the disposal of selected fixed assets as we downsized our corporate operations.


Loss from Continuing Operations Before Taxes:


Loss from Continuing Operations Before Taxes totaled $234,542 for the three month period ended March 31, 2014 as compared to a loss of $508,858 for the corresponding period in the prior year. The improvement of $274,316 is primarily due to significant reductions in headcount at Corporate, the largest of which was the elimination of the salary of the Company’s former president.


Net Loss:


Net Loss totaled $234,542 for the three months ended March 31, 2014 as compared to $588,010 for the corresponding period in the prior year. The Net Loss improvement of $353,468 as compared to the Net Loss from Continuing Operations Before Taxes improvement of $274,316 is due to the elimination of interest expenses at Corporate associated with our recently divested Ranger asset.


Liquidity and Capital Resources


As of March 31, 2014, we continued to have positive working capital totaling $112,876 which included cash of $640,454. Our main operations consist of our two CLEC’s and our marketing Company, Enversa.  We anticipate that one of our CLECs will generate positive future cash flow as a result of its ability to generate carrier access revenues.  We are in the process of reconfiguring our telecom network in an effort to grow revenues from that division.  Enversa’s revenues have generally stabilized and it provides small cash flow to assist in covering our corporate overhead.  The Company is not currently generating positive operational cash flow.


- 14 -



Our only debt is the secured note payable to the Company’s CEO, Scott Beck (the “CEO Note”) which contains a blanket lien across all assets of the Company.  No principal or interest payments are due on the CEO Note until May 31, 2014. Mr. Beck also took a significant salary reduction from $250,000 per annum to $18,000 per annum, as a result of an amendment to his employment contract.


We had no investing activity for the three months ended March 31, 2014 while our entire financing activities consisted of $2,571 in payments on our lone capital lease.


We have no other bank financing or other external sources of liquidity.  Now that we have sold our largest asset, there can be no assurance that, going forward, our operations will generate positive operating cash flow.


As previously noted, the Company’s marketing revenues have been adversely impacted by industry forces. The marketing services division continues to be adversely affected by the deterioration in the for-profit educational lead generation space while simultaneously experiencing significant ongoing challenges and customer churn in our search engine optimization and website leasing businesses. The Company elected to not renew the employment contract of its former president, Marc Pickren, whose main responsibility was the growth of the marketing division and the Company. Mr. Pickren has not been replaced and the Company and Enversa have eliminated the position of President. The Company cannot be certain how much further its marketing services revenues could deteriorate.


We will most likely need to obtain additional capital in order to further expand our operations. We are currently investigating other financial alternatives, including additional equity financing. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. However, there can be no assurance that any additional financing will become available to us, and if available, that such financing will be on terms acceptable to us. 


Off-balance sheet arrangements


We have not entered into any off-balance sheet arrangements.


Item 3. Quantitative and Qualitative Disclosures About Market Risk


Not applicable.


Item 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures


The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.


The Company’s management, with the participation of its principal executive officer and its chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of March 31, 2014. Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of that date, the Company’s disclosure controls and procedures, were not effective at a reasonable assurance level.


Management’s Remediation Plan


Management determined that a material weakness existed due to an inability to appropriately segregate duties in the accounting department due to the number of personnel in the accounting department. Management has included additional reviews and controls to mitigate the size of the accounting department and the overlap of responsibilities.  Management believes the foregoing efforts will effectively remediate this material weakness but the Company can give no assurance that the additional controls will be effective. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. We cannot assure you that, as circumstances change, any additional material weakness will not be identified.


- 15 -



Changes in Internal Control over Financial Reporting


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


PART II – OTHER INFORMATION


Item 1. Legal Proceedings


None.


Item 1A. Risk Factors


Not applicable.


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


None.


Item 3. Defaults Upon Senior Securities


None.


Item 4. Mine Safety Disclosures


Not applicable


Item 5. Other information


None.


Item 6. Exhibits


The following exhibits are filed as part of this report:


Exhibit
Numbers

 

Description

 

Method of
Filing

 

 

 

 

 

31.1

 

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

 

(1)

31.2

 

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

 

(1)

32.1

 

Section 1350 Certification by our chief executive officer

 

(2)

32.2

 

Section 1350 Certification by our chief financial officer

 

(2)

101

 

Interactive Data Files of Financial Statements and Notes.

 

(3)

__________

(1)

Filed herewith.

(2)

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

(3)

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


- 16 -



Signatures


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


 

CORNERWORLD CORPORATION

 

Registrant

 

 

July 25, 2014

/s/ V. Chase McCrea III

 

V. Chase McCrea III

 

Chief Financial Officer


- 17 -