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CORNERWORLD CORP - 10-KT - 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 Consolidated Financial Statements and Notes thereto. Overview CornerWorld is a marketing and technology services company providing services for the increased accessibility of content across mobile 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, the Company has completely evolved into a fully integrated telecommunications and marketing services company. 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 on marketing to generate qualified leads (consumers) for its customers. In addition, Enversa provides SEO services, domain leasing and website management services on a recurring monthly basis. We believe the marketing industry will continue to trend toward digital and social media as well as search retargeting and we are attempting to position our marketing services segment to address the rapidly changing needs of our customers. Our key assets in our communication services segment are our CLEC's and their respective licenses. Eight Months ended December 31, 2013 Highlights · We sold our largest asset, Ranger. · We paid off substantially all of our secured debt and settled certain long-outstanding payables. · We received approval from the US Trademark and Patent office for our TinyDial mobile technology application. We also continued developing TinyDial and it was accepted into both the iPhone and android mobile app stores just subsequent to year end. Critical Accounting Policies Use of Estimates 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 consolidated 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 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 collectability 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. - 5 - -------------------------------------------------------------------------------- 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. When an impairment of the carrying value is indicated by this review, the Company adjusts 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 comparable companies; (b) Expected dividends (which does 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 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. - 6 - -------------------------------------------------------------------------------- Recent Accounting Pronouncements There were various accounting standards and interpretations issued during the eight-month period ended December 31, 2013, none of which are expected to have a material impact on the Company's consolidated financial position, operations, or cash flows. Comparison of the Eight Months Ended December 31, 2013 to the Eight Months Ended December 31, 2012 Consolidated CornerWorld Corporation Revenues We had revenues totaling $673,954 for the eight-month period ended December 31, 2013 as compared to $1,508,517 for the corresponding period in the prior year. The decrease of $834,563, or 55.3%, is primarily due to revenue decreases in our marketing services segment resulting from the deterioration of the market for lead generation in the for-profit education space. Depreciation and Amortization Depreciation and Amortization expenses totaled $33,755 for the eight-month period ended December 31, 2013 as compared to $48,964 for the corresponding eight-month period ended December 31, 2012. The decrease of $15,209 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 $742,877 for the eight-months ended December 31, 2013 as compared to $1,318,956 for the corresponding period in the prior year. The improvement of $576,079 is primarily due to reductions in interest expenses and SG&A at corporate, as well as the discounted settlement of certain large outstanding payables and the elimination of amortization expenses. Net Income (Loss) Net Income totaled $2,584,234 for the eight-months ended December 31, 2013 as compared to a net loss of $260,532 for the corresponding period in the prior year. The improvement of $2,844,766 is primarily due to the gain recognized on the divestiture of our Ranger asset. Marketing Services Revenues Our marketing services segment had revenues totaling $592,756 for the eight-month period ended December 31, 2013 as compared to $1,386,545 for the corresponding eight-month period ended December 31, 2012. This decrease of $793,789 or 57.2% 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 $3,368 for the eight-month period ended December 31, 2013 as compared to $4,122 for the corresponding eight-month period ended December 31, 2012. The decrease was due to more fixed assets becoming fully depreciated and the write-down of certain fixed assets related to our Gulf subsidiary. Income from Continuing Operations Before Taxes and Net Income: Income from Continuing Operations Before Taxes and Net Income totaled $1,770 for the eight-months ended December 31, 2013 as compared to Income from Continuing Operations Before Taxes and Net Income of $523,636 for the corresponding period in the prior year. The decrease is due to the aforementioned reduction in revenue. - 7 - -------------------------------------------------------------------------------- Telecommunications Services Revenues: Our telecommunications services segment had revenues totaling $81,198 for the eight-month period ended December 31, 2013 as compared to $121,972 for the corresponding eight-month period ended December 31, 2012. This decrease is due to experienced increased churn in our CLEC as the Company ceased investing resources in that division. Depreciation and Amortization: Our telecommunications services segment had depreciation and amortization expenses totaling $10,474 for the eight-month period ended December 31, 2013 versus $12,266 for the corresponding period in 2012. 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 $162,887 for the eight-months ended December 31, 2013 as compared to $283,626 for the corresponding period in the prior year. The improvement of $120,739 is primarily due to cost cutting measures with respect to selling, general and administrative expenses. Net Income: Net Income totaled $2,979,960 for the eight-month period ended December 31, 2013 as compared to $1,075,823 for the corresponding period in the prior year. The improvement of $1,904,137 is primarily due to the gain recognized on the divestiture of our Ranger asset. Corporate Loss Before Continuing Operations: Loss before continuing operations totaled $581,760 for the eight-month period ended December 31, 2013 as compared to $1,558,966 for the corresponding eight-month period ended December 31, 2012. This decrease of $977,206 or 62.7% is due to across the board reductions in rent, utilities and headcount, the biggest reduction being the elimination of the position of president and the associated salary burden. Liquidity and Capital Resources As of December 31, 2013, we had positive working capital totaling $374,150 including cash of $857,954. As previously noted, on September 30, 2013, the Company sold Ranger to an unrelated third party for $7.5 million plus an $800,000 contingent receivable; the contingency was met in November and the Company received $800,000 on November 6, 2013. As a result of the sale of Ranger, the Company was able to retire the notes payable, accrued interest and any accrued penalties to Emerald Crest Capital (the "Senior Lender"), IU Holdings, LP ("IUH"), IU Investments, LLC ("IUI") and Ned Timmer ("Timmer") (IUH, IUI and Timmer collectively the "Paid-in-Full Junior Lenders"). In addition, the Company was able to pay off the warrant which the Senior Lender could have put to the Company for $1.0 million on March 30, 2014. As a result of the sale of Ranger and the respective payoff of the Senior Lender and the Paid-in-Full Junior Lenders, the Company's only remaining secured debt is the note payable to the Company's CEO, Scott Beck (the "CEO Note"). 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 the November 1, 2013 amendment to his employment contract. Our investing activity for the eight-months ended December 31, 2013, totaled $8,293,938 which consisted almost entirely of proceeds received from the divestiture of our Ranger assets. Our financing activities for the eight-months ended December 31, 2013 totaled $8,007,632 which enabled the Company to completely pay off the Senior Lender as well as the Paid-in-Full Junior Lenders as a result of the sale of Ranger. The Company also paid $249,000 of investment banking fees related to the divestiture of the Ranger assets. - 8 - -------------------------------------------------------------------------------- We have no other bank financing or other external sources of liquidity and we source all of our liquidity through our operations. However, now that we have sold our largest asset, there can be no assurance that, going forward, our operations will generate positive operating cash flow. However, as a result of the sale of Ranger, the Company believes it has enough cash left over to sustain operations in excess of one year. 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. Upon its expiration on September 15, 2013, the Company elected to not renew the employment contract of its former president, Marc Pickren. Mr. Pickren's employment was subsequently terminated on October 8, 2013 and he has not been replaced; both the Company and Enversa have eliminated the position of President. The Company cannot be certain how much further its marketing services revenues could deteriorate and 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. Contractual Obligations The following table presents our contractual obligations as of December 31, 2013: Payments Due by Period Less than 1 - 3 3 - 5 More than Contractual Obligations Total 1 Year Years Years 5 Years Notes payable to related parties $ 338,958 $ 101,968 $ 236,990 $ - $ - Operating and capital leases 91,136 43,059 48,077 - - Total $ 430,094 $ 145,027 $ 285,067 $ - $ - 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 eight-month period ended December 31, 2013, inflation has not had a material effect on our operations. |