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CORNERWORLD CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Introduction The following discussion should be read in conjunction with the Financial Statements and Notes thereto. Overview CornerWorld is a marketing and technology services company providing services for the increased accessibility of content across mobile, television and Internet platforms. The Company is a holding company whose wholly owned subsidiaries operate in two rapidly changing business segments: marketing services and communication services. Originally a development stage company just over two years ago, the Company has completely evolved into a fully integrated telecommunications and marketing services company servicing over 40 cell phone carriers and multiple Fortune 500 corporations. Since completing the integration of our two segments, we have developed a consistent revenue stream and gross margins that support not only our administrative and operating costs but also produce the cash-flows necessary to service our financing commitments. Our marketing services segment includes Enversa and all its subsidiaries. Enversa is an interactive media company with a focus in marketing that leverages its proprietary lead generation engine to garner qualified leads (consumers) for Fortune 1000 advertisers across social networking websites and niche based websites. In addition, Enversa, through its Gulf subsidiary, provides SEO services, domain leasing and website management services on a recurring monthly basis. We believe the marketing industry will continued to trend toward digital and social media as well as search engine optimization and we are attempting to position our marketing services segment to address the rapidly changing needs of our customers. Our key asset in our communication services segment is a patented 611 Roaming Service™ from RANGER Wireless Solutions®, which generates revenue by processing over 14 million calls per year from wireless customers and seamlessly connecting them to their service provider. Though the mobile industry has experienced and continues to experience consolidation, our communication services segment revenues continue to remain stable. However, further consolidation in the mobile industry could adversely impact our roaming revenues. Fiscal Year 2011 Highlights: · We recapitalized the Company by raising over $6.5 million of new debt; the new debt issued has substantially longer maturities than the debt it replaced. · We settled the outstanding litigation with our one-time Board member and largest creditor, Ned Timmer ("Timmer"). Pursuant to the settlement agreement with Timmer, we paid substantially all of Timmer's prior debt, removed Timmer from the Company's Board, terminated Timmer's employment and reacquired then retired all of Timmer's common stock. · We continue to generate positive operating cash flow and paid down approximately $1.3 million in principal on our outstanding debt. · After removal of legal fees totaling $944,012 along with non-cash depreciation & amortization and stock-based compensation expense totaling $247,895 and $2,277,309, respectively, the Company's pro-forma profit for the year ended April 30, 2011 would have totaled approximately $1,914,368. See the table that follows for more details. The Company expects to continue to generate positive operating cash flows for the fiscal year ended April 30, 2012. 9 -------------------------------------------------------------------------------- We define "Adjusted Net Income1" as net loss after removal of (i) legal fees and (ii) non-cash charges, including depreciation and amortization and stock-based compensation. Management believes Adjusted Net Income provides useful additional information concerning the Company's potential profitability. However, Adjusted Net Income is not a measure of financial performance under Generally Accepted Accounting Principles ("GAAP"). Accordingly, Adjusted Net Income should not be considered an alternative to net income as an indicator of operating performance. The table that follows provides a reconciliation between GAAP net income and Adjusted Net Income. ___________________ 1 This measure presented may not be comparable to similarly titled measures reported by other companies. April 30, 2011 April 30, 2010 Total Per share data Total Per share data (unaudited) (unaudited) Net Loss $ (1,554,848 ) $ (0.02 ) $ (1,770,217 ) $ (0.02 ) Legal 944,012 0.01 514,403 0.01 Non-cash charges: Stock-based compensation 247,895 0.00 256,175 0.00 Depreciation and amortization 2,277,309 0.02 2,369,9412 0.03 Total non-cash charges 2,525,204 0.02 2,626,116 0.03 Pro-Forma Net Income $ 1,914,368 $ 0.02 $ 1,370,302 $ 0.02 Weighted average common shares outstanding: Basic and diluted 99,888,432 88,490,098 _____________________ 2 Amount includes $46,666 in impairment losses on assets no longer in service. Critical Accounting Policies and Estimates In June 2009, the Financial Accounting Standards Board ("FASB") issued the FASB Accounting Standards Codification (the "ASC"), the single source of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles ("GAAP") in the United States. All guidance contained in the ASC carries an equal level of authority. The ASC supersedes all existing non-SEC accounting and reporting standards and was effective for the Company beginning July 1, 2009. The FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the ASC, provide background information about the guidance, and provide the bases for conclusions on the changes in the ASC. The adoption of the ASC did not have a material impact on our consolidated financial statements. Use of Estimates and Critical Accounting Policies In preparing our 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, 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, recoverability of long-lived assets (including goodwill), revenue recognition and stock-based compensation. In addition, please refer to Note 1 to the accompanying financial statements for further discussion of our accounting policies. 10 --------------------------------------------------------------------------------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. 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. 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Stock-Based Compensation The Company accounts for awards made under its two stock-based compensation plans pursuant to the fair value provisions of ASC No. 718. ASC No. 718 requires the recognition of stock-based compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. ASC No. 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company accounts for stock-based compensation in accordance with ASC No. 718 and estimates its fair value based on using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including: (a) The expected volatility of our common stock price, which we determine based on historical volatility of our common stock over the prior eighteen month period; (b) Expected dividends (which do not apply, as we do not anticipate issuing dividends); 11 -------------------------------------------------------------------------------- (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 9 - "Stock Based Compensation Plans"- to the consolidated financial statements contained in this report for additional information regarding our accounting policies for stock-based compensation. Recent Accounting Pronouncements There were various accounting standards and interpretations issued during the year ended April 30, 2011, none of which are expected to have a material impact on the Company's consolidated financial position, operations, or cash flows. Comparison of the year ended April 30, 2011 to the year ended April 30, 2010 Marketing services Revenues and Gross profit: Our marketing segment had revenues totaling $5,586,604 for the year month period ended April 30, 2011 as compared to $4,530,341 for the year ended April 30, 2010. This increase is due to the investment in our sales organization and in our search engine optimization ("SEO") and performance marketing lines of business. The investment in the sales organization increased personnel focused on selling our services which, in turn, generated increases in revenues. For the same reasons, gross profit at our marketing segment increased for the year ended April 30, 2011 to $2,762,903 from $2,122,754 for the year ended April 30, 2010. Similar to the increase in revenues as stated above, the increase in personnel focused solely on revenue generation and the corresponding increase in revenues has also led to an expansion of our gross profit. Gross profit as a percentage of revenue increased from 46.9% to 49.5% due to an increase in sales of higher margin SEO services. Selling, General and Administrative Expenses: SG&A expenses totaled $2,567,996 for the year ended April 30, 2011 as compared to $1,587,388 for the prior year. The increase of $980,608 is primarily due to the aforementioned investments in our sales force and SEO business which created corresponding increases in headcount, rent and utilities. Net Loss Net operating loss totaled $152,647 for the year ended April 30, 2011 as compared to net operating income of $100,946 for the prior year. The difference is primarily due to the SG&A increases associated with aforementioned investments in our sales force and SEO business which created corresponding increases in headcount, rent and utilities. In addition, we recorded bad debt expense of $27,445 during the three month period ended July 31, 2010 related to problems associated with revenues from one customer. 12 -------------------------------------------------------------------------------- Communications services Revenues and Gross profit: Our communications services segment had revenues totaling $6,174,949 for the year ended April 30, 2011 as compared to $6,916,359 for the year ended April 30, 2010. This decrease is primarily due to the fact that our two largest customers merged in the second half of calendar year 2009 and, accordingly, the Company experienced a reduction in roaming revenues. Because the merger was completed in the second half of 2009, the Company believes the merger's impact on revenues has been fully realized but can make no guarantees that there will not be additional revenue declines in the future. For the same reasons, gross profit decreased for the year ended April 30, 2011 to $5,046,492 from $5,722,032 for the year ended April 30, 2010. Gross profit as a percentage of revenue decreased slightly to 81.7% during the year ended April 30, 2011 versus 82.7% during the prior year. Selling, General and Administrative Expenses: SG&A expenses totaled $2,056,569 for the year ended April 30, 2011 as compared to $2,437,699 for the prior year. The decrease of $381,130 is primarily due to the reduction of headcount in the Communication services segment. Net Income: Net income totaled $742,076 for the year ended April 30, 2011 as compared to net income of $541,947 for the corresponding period in the prior year. The improvement of $200,129 is primarily due the fact that one of our subsidiaries received a favorable legal settlement during the year ended April 30, 2011 which totaled approximately $400,000. In addition, interest expenses were down resulting from the pay down of debt. Corporate Selling, General and Administrative Expenses: SG&A expenses totaled $1,875,412 for the year ended April 30, 2011 as compared to $1,495,867 for the corresponding period in the prior year. The increase of $379,545 is primarily associated with an increase of legal fees at our corporate offices totaling $326,271. Absent legal fees, SG&A expenses would have totaled $1,549,141 translating to a small increase of $53,274 over the prior year period. This increase is mainly due to continual build-out of our corporate infrastructure. Results of Operations - Year ended April 30, 2010 compared to April 30, 2009 Marketing services Our marketing services segment consists of our Enversa division. As previously noted, Enversa was acquired on August 27, 2008 and this annual report only includes operating data for that segment since that date. Accordingly, presentation of an analysis of current year's operating results versus prior year operating results would be misleading. Please see Note 3 Acquisitions, in the attached financial statements for pro-forma financial data for the year ended April 30, 2009. Communications services Our communications services segment consists of all businesses acquired in the Woodland Acquisition. As previously noted, we closed the Woodland Acquisition on February 23, 2009 and this annual report only includes operating data for that segment since that date. Accordingly, presentation of an analysis of current year's operating results versus prior year operating results would be misleading. Please see Note 3 Acquisitions, in the attached financial statements for pro-forma financial data for the year ended April 30, 2009. 13 --------------------------------------------------------------------------------Corporate Selling, General and Administrative Selling, general and administrative (SG&A) totaled $1,495,867 for the year ended April 30, 2010 versus $2,588,830 for the corresponding period in the prior year. The decrease of $1,092,963 is primarily due to the impact of non-recurring legal fees and other merger related costs incurred in the year ended April 30, 2009 associated with our Enversa and Woodland acquisitions. This decrease was offset, to some extent, by increased headcount expenses associated with increasing our corporate infrastructure. Net Loss For the year ended April 30, 2010, we incurred a net loss of $2,413,110 as compared to a net loss of $2,352,751 for the year ended April 30, 2009. The increase in net loss is primarily attributable to increases in interest expenses recognized as a result of debt incurred in connection with the Enversa and Woodland acquisitions. Liquidity and Capital Resources As of April 30, 2011, we had a working capital deficit of approximately $3.2 million and cash of $934,250. Our working capital deficit is primarily related to certain large accounts payable associated with our 2009 Woodland Acquisition as well as the short-term nature of selected tranches of the debt we issued in March 2011 when we recapitalized the Company. Our working capital deficit has decreased substantially from our April 30, 2010 year end deficit which totaled approximately $4.3 million. This decrease is primarily due to the fact that, as a result of the March 2011 recapitalization, we extended the maturities of substantially all of our debt. We believe the cash flows from our existing operations will be adequate to manage our debt commitments and we have good relationships with the vendors associated with the large accounts payable who we continue to pay with excess cash flow. Management expects that its current cash and operational cash flow will sustain the Company. Our investing activity for the year ended April 30, 2011, consisted primarily of $164,294 of capital expenditures, primarily associated with the relocation of several of our facilities, including our home office. Management believes the reduced rents in the new locations will more than offset the capital expenditures. Our financing activities for the year ended April 30, 2011 included raising $5.0 million of third party cash as well as an additional $1.5 million in cash from related parties. We paid $6.0 million in cash and issued a $1.8 million promissory note to Timmer, a former Board member, shareholder and creditor in consideration for $9.1 million in liabilities and to reacquire 33,950,000 shares of our common stock. In addition, at terms of up to five years, the new debt had maturities substantially longer than the maturities of the debt that it replaced which, prior to recapitalizing, would have become current as of April 30, 2011. See also Note 6 - "Debt"- to the consolidated financial statements contained in this report for additional information regarding the Company's existing debt arrangements and maturities. We have no other bank financing or other external sources of liquidity. We source all of our liquidity through our operations and this was our second consecutive year where the Company's operations generated positive operating cash flow. 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. 14 --------------------------------------------------------------------------------Contractual Obligations The following table presents our contractual obligations as of April 30, 2011: Payments Due by Period Less than More than Contractual Obligations Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years Notes payable to related parties $ 4,261,372 $ 1,846,973 $ 2,054,364 $ 360,036 $ - Notes payable 6,800,000 860,000 5,580,000 360,000 - Operating leases 774,312 165,063 481,476 127,773 - Total $ 11,835,684 $ 2,872,036 $ 8,115,840 $ 847,809 $ - Off-balance sheet arrangements We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Inflation We believe that, for the year ended April 30, 2011, inflation has not had a material effect on our operations. |