ITEM 1. BUSINESS
Overview and Plan of Operation
Company History
Cornerworld Corporation (hereinafter referred to as “Cornerworld”, the “Company", “we” “our” or “us”) was incorporated on November 9, 2004, in the State of Nevada. Effective May 2007, we changed our name to Cornerworld Corporation. Our principal executive offices are currently located at 13101 Preston Road, Suite 100, Dallas, Texas 75240. Our telephone number is (888) 837-3910 and our fiscal year-end is April 30.
The Company is a marketing and technology services company creating opportunities from the increased accessibility of content across mobile, television and internet platforms. Our key asset is the patented 611 Roaming ServiceTM from RANGER Wireless Solutions ®, which generates revenue by processing over 14 million calls from roaming wireless customers per year and seamlessly connecting them to their service provider.
On August 27, 2008, Cornerworld entered into a Share Exchange Agreement and Plan of Merger (the “Enversa Agreement”) with Enversa Companies LLC, a Texas limited liability company (“Enversa”), Leadstream LLC, a Texas limited liability company (“Leadstream”), and the holders of the membership interests of Leadstream. Pursuant to the Enversa Agreement, on August 27, 2008, Leadstream merged with and into Enversa (the “Merger”), of which Cornerworld is the sole member. Enversa was the surviving company in the Merger and, as such, acquired all right, title and interest in and to all real estate and other property of Leadstream and became responsible for all liabilities and obligations of Leadstream and Enversa. As a result of the Merger, Enversa became a subsidiary of Cornerworld.
Enversa offers a full menu of services for brand and direct response customer acquisition campaigns, including media buying and planning for online and mobile media. It provides customer relationship marketing and interactive services, as well as customer data collection and analysis tools used for planning and targeting client marketing efforts across a network of partner, representative and owned content sites, including CornerWorld.com. Moreover, Enversa operates several ad networks and a proprietary request for proposal (RFP) technology that highlights promotional offers from a variety of corporate clients. Enversa uses an established media auction technology to deliver significantly more inventory than current market rates. Enversa effectively enables media properties to compete against each other, empowering advertisers to extend their marketing budgets beyond typical marketplace levels through fair and free market competition. Using its proprietary technology, Enversa identifies qualified leads for advertisers thereby connecting them with potential consumers. Enversa also utilizes a pay-for-performance pricing model which is very appealing to clients because it insures that they are billed solely for campaign performance. Finally, Enversa’s Gulf Media Solutions, LLC (“Gulf”) subsidiary, provides search engine optimization services (“SEO”), domain leasing and website management services on a recurring monthly basis to over 300 customers.
On February 23, 2009, Cornerworld completed its acquisition (the “Woodland Acquisition”) of all of the issued and outstanding equity interests of each of Woodland Wireless Solutions, Ltd. (“Woodland Wireless”), West Michigan Co-Location Services, L.L.C. (“WMCLS”) and T2 TV, L.L.C. (“T2 TV”), and forty voting member units of S Squared, LLC, doing business in the state of Michigan as “Ranger Wireless LLC” (“Ranger”), through its newly-formed wholly-owned subsidiary, Woodland Holdings Corp. (“Woodland Holdings”), pursuant to the terms of a Stock Purchase Agreement, dated February 23, 2009 (the “Effective Date”), by and among Woodland Holdings, Cornerworld, Ned B. Timmer and HCC Foundation (“HCC Foundation”). Immediately following the Woodland Acquisition, the forty voting member units of Ranger that were purchased by Woodland Holdings were contributed to Woodland Wireless and all other issued and outstanding voting member units of Ranger remained held by Woodland Wireless.
As a result of the Woodland Acquisition, Ranger became a wholly-owned subsidiary of Woodland Wireless. In addition, pursuant to a Unit Purchase Agreement (the “Unit Purchase Agreement”) entered into on the Effective Date among Woodland Holdings, Phone Services and More, L.L.C., doing business as Visitatel (“PSM”), T2 Communications, L.L.C. (“T2 Communications”) and Ned B. Timmer, Woodland Holdings agreed to purchase all of the outstanding voting member units of each of PSM and T2 Communications, for an aggregate purchase price of $300,000. Final consummation of the transactions contemplated by the Unit Purchase Agreement took place on March 30, 2011.
Subsequent to the closing of the Unit Purchase Agreement, the Company slightly adjusted the manner in which it managed the assets acquired in the Woodland Acquisition. These assets comprise 100% of the Company’s Communication Services Segment. As a result of the closing of the Unit Purchase Agreement, Woodland Wireless, Ranger and WMCLS are collectively referred to herein as the “Ranger Wireless Group”. T2 Communications, T2TV and PSM are collectively referred to herein as the “T2 Group”.
RANGER® is a shortcode application service provider to the wireless industry. The core service offered is 611 Roaming Service™, a patented application providing seamless means for connecting wireless subscribers to reach their home providers customer service call center while roaming on another provider’s network. Calls are sent to RANGER® for treatment from nearly 40 wireless providers throughout North America. On an annual basis, RANGER® processes approximately 14 million calls with an infrastructure capable of handling millions more. RANGER® also manages an online portal which allows carriers access to their monthly statements and reporting on call volume to and from their company.
As a provider of Internet Protocol Television (IPTV), Internet and VoIP services, T² Communications delivers leading-edge technology to residential and business customers in Michigan. Offerings include: phone lines, Internet connections, 275 all-digital television stations, colocation, long distance and toll-free services. T² is a Competitive Local Exchange Carrier (CLEC) that manages its own Fiber to the Premise (FTTP) network with a 10 gigabit backbone and up to 1 gigabit per second connections to end users.
PSM holds an FCC 214 License as a wholesale long distance service provider to the carrier community and large commercial users of transport minutes. Serving service providers, WMCLS offers telecommunications equipment storage and leasing.
Business Segments
Our business consists primarily of two integrated business segments: (i) marketing services and (ii) communications services. Our marketing services segment is comprised of Enversa and its subsidiaries. Our communication services segment consists of the Ranger Wireless Group and the entities comprising the T2 Group. Our corporate administrative functions are tracked separately and the associated costs are not pushed down to the operating segments. For financial information relating to our business segments, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”
Regulatory Matters
Portions of our operations, particularly our application services to the cellular industry, are highly regulated and subject to a variety of federal and state laws, including environmental laws, which require that we obtain various licenses, permits and approvals. We must obtain and maintain various federal, state and local governmental licenses, permits and approvals in order to provide our services. We believe we are in material compliance with all applicable licensing and similar regulatory requirements.
Employees
As of April 30, 2011, we had an aggregate of 47 full-time employees. None of these employees are represented by collective bargaining agreements and the Company considers it relations with its employees to be good.
Corporate Information
CornerWorld, Corporation is a Nevada corporation with principal executive offices located at 13101 Preston Road, Suite 100, Dallas, Texas 75240. Our website address is www.cornerworld.com. We make available on our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments to such reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.
The following discussion and analysis should be read in conjunction with the financial statements of Cornerworld Corporation, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
ITEM 1A.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently leases office space that it shares with Enversa consisting of approximately 7,670 square feet. This office space is located in Dallas, Texas and expires January 31, 2016. The Company also leases approximately 1,074 square feet in a different floor in the same office building; this lease is month to month and the Company may vacate these premises at any time.
The Company also maintains an office consisting of approximately 2,655 square feet of leased space in Holland, Michigan for all its Michigan operations. The lease agreement for this property expires January 31, 2012.
The Company also leases approximately 5,662 square feet in Houston, Texas; this lease is month to month and the Company may vacate these premises at any time.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On December 11, 2009, the Company, received a letter (the “Notice”) from an attorney representing Mr. Ned Timmer (“Timmer”) which alleged certain defaults with respect to that certain Secured Debenture issued by the Company and the Company’s wholly-owned subsidiary, Woodland Holdings, in favor of Timmer, with a maturity date of February 23, 2012, that certain Purchase Money Note issued by Woodland Holdings in favor of Timmer with a maturity date of February 23, 2012, and certain related security agreements and collateral perfection agreements all of which were in connection with the Woodland Acquisition. Further, on December 14, 2009, the Company received documents from Timmer pursuant to which Timmer purported to appoint new directors and officers of each of the Woodland’s subsidiaries.
The Company believed that the events described in the Notice did not constitute defaults and, on December 14, 2009 the Company filed an action against Timmer, another member of the Company’s Board of Directors, and certain other parties in the United States District Court for the Western District of Michigan for fraud, breach of contract, breach of fiduciary duty, conversion and other matters and requesting, among other things, injunctive relief and damages.
On December 21, 2009, the Company presented its arguments in the United States District Court for the Western District of Michigan. On December 22, 2009, the judge issued an order (the “Order”) which denied Timmer’s request for an injunction against the Company and granted the Company’s request for injunction against Timmer. Among other things, the injunction ordered: (1) The actions taken by Timmer on December 10, 2009 to gain corporate control over Woodland are deemed null and void; (2) Timmer shall return to CornerWorld all collateral and/or property belonging to the Company over which he has asserted control, including, but not limited to, the funds contained in bank accounts; and (3) Timmer shall be removed from active management of the Woodland employees, but shall be retained on the Board of Directors of the Company. The Company immediately moved to comply with the Order.
On December 31, 2009, Timmer filed a motion for reconsideration and the Company immediately responded.
On January 7, 2010, Timmer’s motion for reconsideration was denied.
The Company entered into mediation discussions with Mr. Timmer on June 21, 2010 and again on August 11, 2010. The parties did not agree to a settlement as a result of those mediation discussions.
On November 16, 2010, the judge in the United States District Court for the Western District of Michigan issued two orders (the “Second Orders”) which dismissed most of Timmer’s default claims while also simultaneously denying his request for relief from the preliminary injunction entered on December 22, 2009. The Second Orders also denied CornerWorld’s claim for summary judgment.
On February 3, 2011, the Company and Timmer (collectively the “Parties”), entered into a Settlement Agreement (the “Settlement Agreement”) pursuant to which:
· Timmer canceled an aggregate of $6.1 million principal on outstanding notes payable. These notes were comprised of the Secured Debenture, dated as of February 23, 2009, issued by Woodland Holdings to Timmer, and the Purchase Money Note dated as of February 23, 2009, issued by Woodland Holdings Corporation to Timmer. These notes had outstanding balances totaling $1.9 million and $4.2 million as of February 3, 2011, respectively.
· Timmer returned all collateral stock certificates/membership interests of the Company’s subsidiaries in his possession, including Woodland Holdings, T2TV, WMCLS, Woodland Wireless, Ranger, T2 Communications and PSM.
· Timmer returned all CornerWorld common stock beneficially owned by him representing approximately 35% of the total outstanding stock of the Company. This included 31,450,000 shares held by the Ned Timmer Trust and 2,100,000 shares in the name of Ned Timmer. In addition, Timmer returned 400,000 shares held by HCC Foundation and warrants to purchase 2,750,000 shares. Finally, Timmer agreed that he will never purchase, own or control any CornerWorld Common stock.
· Timmer resigned from the CornerWorld Board of Directors, resigned his position as an officer of the Company and his employment agreement was terminated.
· On March 30, 2011, CornerWorld paid Timmer (1) $6.0 million in cash (the “Lump Sum Payment”) and (2) issued a Promissory Note (the “Note”) for $1.8 million. The Note is payable in five annual payments of $360,000 with the first payment coming due April 30, 2012. In addition, the Note bears interest at 10%. The Note is secured by existing collateral held by Timmer as set forth in the Pledge and Security Agreements dated February 23, 2009 made by the Company, CornerWorld, Inc., Enversa Companies, LLC, Woodland Holdings Corp., Woodland Wireless Solutions Ltd., S Squared LLC, West Michigan Co-Location Services, LLC and T2 TV, LLC in favor of Ned B. Timmer and is subordinated to any third party financing of the Lump Sum Payment, among other things.
· The lease between Woodland Holdings, a CornerWorld subsidiary, and Sol Danzer Enterprises, LLC (“SD”) was terminated.
· The Parties agreed that the second closing of the Unit Purchase Agreement for the purchase of 100% of the member voting units of T2 Communications, LLC and Phone Services and More, LLC took place contemporaneously with the funding of the Lump Sum Payment.
· The Parties agreed to dismiss all legal proceedings within 5 business days of the funding of the Lump Sum Payment.
The Settlement Agreement was contingent upon the Company obtaining third party financing for the Lump Sum Payment by March 30, 2011. On March 30, 2011, the Company consummated the Settlement Agreement Timmer by making a payment to Timmer totaling $6.0 million, among other things. In accordance with the Settlement Agreement, subsequently, the Company and Timmer dismissed all legal proceedings against each other.
From time to time, the Company is involved in litigation matters relating to claims arising from the ordinary course of business. While the results of such claims and legal actions cannot be predicted with certainty, the Company’s management does not believe that there are 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, financial condition or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market for Common Equity and Related Stockholder Matters
The Company’s common stock is currently traded on the OTCBB under the symbol "CWRL". The closing price of our common stock on the OTCBB on July 27, 2011 was $0.35/share. The following table sets forth the range of high and low prices per share of our common stock for each period indicated.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily reflect actual transactions.
Trading in our common stock in the over-the-counter market has been limited and sporadic and the quotations set forth below are not necessarily indicative of actual market conditions.
On October 6, 2006 the Company obtained regulatory approval to post common shares for quoting on the OTC Bulletin Board.
As of April 26, 2011, there were approximately154 holders of record of our common stock. Because brokers and other institutions hold many of the shares on behalf of shareholders, we are unable to determine the actual number of shareholders represented by these record holders.
The Company has two equity compensation plans. Please see the information found under the “Executive Compensation” section in this document.
Dividends
We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain all future earnings to fund the operation of our business and do not anticipate paying dividends on our common stock in the foreseeable future. Pursuant to its credit agreement, the Company is precluded from paying dividends.
Penny Stock
The Company’s common stock is subject to provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly referred to as the “penny stock rule.” Section 15(g) sets forth certain requirements for transactions in penny stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines a penny stock to be any equity security that has a market price less than $5 per share, subject to certain exceptions. The Company is subject to the SEC’s Penny Stock rules.
Since the Company’s common stock is deemed to be penny stock, trading in the shares is subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. “Accredited investors” are persons with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt the rules require the delivery, prior to the first transaction of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information to the limited market in penny stocks. Consequently, these rules may restrict the ability of broker-dealer to trade and/or maintain a market in the Company’s Common Stock and may affect the ability of the Company’s stockholders to sell their shares.
Recent Issuances of Unregistered Stock
On March 30, 2011, concurrent with the financing of the Lump Sum Payment, the Board of the Company approved the following issuances of common stock:
The Company received no cash proceeds as a result of any of the above stock grants. No consideration was tendered for the grants with the exception of the shares issued to Mr. Beck, Ms. Larabee, IU Holdings II, LP and Internet University, Inc., each of them received shares as a result of either extending terms on existing debt or for converting certain current liabilities to debt with extended terms. See also Item 13, Certain Relationships and Related Transactions for more information. These transactions were purely grants and there were no associated conversion or exercise terms. These stock grants are not subject to vesting or other restrictions. They were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
In addition, on March 30, 2011, concurrent with the financing of the Lump Sum Payment, the Board of the Company approved the following issuances of warrants to purchase the Company ‘s common stock:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The statements of operations data for the years ended April 30, 2011, 2010 and 2009 and the balance sheet data at April 30, 2011 and 2010 are derived from our audited financial statements which are included elsewhere in this Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods.
Consolidated Statements of Operations Data:
Consolidated Balance Sheet Data:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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.
_____________________
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.
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);
(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.
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.
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.
Contractual Obligations
The following table presents our contractual obligations as of April 30, 2011:
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s consolidated financial statements and supplementary data are included in pages through of this Annual Report on Form 10-K.
Quarterly Results of Operation (Unaudited)
The following table presents the Company’s unaudited quarterly statements of operations for each of the eight quarters in the two-year period ended April 30, 2011. The information in the table should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained elsewhere in this report. The underlying unaudited financial statements are prepared on the same basis as the audited consolidated financial statements included in this report, which include all adjustments, consisting only of normal recurring adjustments, that are considered necessary for the fair presentation of the Company’s financial position and operating results for the quarters presented. Operating results for any quarter are not necessarily indicative of results for any future periods.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. 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 chief 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 April 30, 2011. Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of that date, the Company’s disclosure controls and procedures, were not effective at a reasonable assurance level.
Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Section 13a-15(f) of the Securities Exchange Act of 1934, as amended). Internal control over financial reporting is a process designed by, or under the supervision of, the Company's CEO and the Company’s CFO and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in conformity with U.S. GAAP and include those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
As of April 30, 2011, management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the criteria established by COSO management concluded that the Company's internal control over financial reporting was not effective as of April 30, 2011, as a result of the identification of the material weakness described below.
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
The Company's management has identified a material weakness in the effectiveness of internal control over financial reporting related to a shortage of resources in the accounting department required to assure appropriate segregation of duties.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities Exchange Commission that permit the Company to provide only management’s report in this annual report.
Management's Remediation Plan
Management determined that a material weakness existed due to an inability to appropriately segregate duties in the accounting department due to a lack of the number of personnel in the accounting department. The Company has hired a chief financial officer and has replaced selected accounting personnel with more seasoned professionals, including additional certified public accountants, to help perform certain accounting and financial functions. In addition, management has included additional reviews and controls to mitigate the size of the accounting department and the overlap of responsibilities. Management believes the foregoing efforts will effectively remediate this material weakness but the Company can give no assurance that the additional controls will be effective. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. We cannot assure you that, as circumstances change, any additional material weakness will not be identified.
Changes in Internal Control over Financial Reporting
Except as noted above, 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.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The Company currently has 2 Directors. The term of each Director expires at the Company’s annual meeting each year. The persons whose names are listed below will serve until the Annual Meeting in 2011 or until his successor has been elected and qualified. Our Board of Directors is not currently divided into classes.
Name of Director
Age
Positions with CornerWorld Since
Scott N. Beck
Chief Executive Officer, Chairman and Director, 2007
Marc Blumberg
Director, 2008
Scott N. Beck was appointed Chairman and CEO of CornerWorld after founding CornerWorld in 2007. Prior to founding CornerWorld Corporation, from 2004 to present, Mr. Beck has served as Chairman and President of Beck Ventures, a venture capital firm that he founded. Prior to founding Beck Ventures, Mr. Beck worked as an Associate Vice-President at JP Morgan Chase and Co’s Lab Morgan where he focused on new business formation and corporate strategy for the bank globally. Prior to joining JP Morgan Chase, Mr. Beck was a member of SG Cowen’s leveraged Finance Group, where he provided support to clients who access the high yield and leveraged finance capital markets. Preceding SG, Mr. Beck was a senior auditor at Ernst and Young LLP. Mr. Beck received a Masters of Accounting from the McCombs School of Business at the University of Texas at Austin where he completed his B.B.A. Mr. Beck is a member of the Board of Directors of United Texas Bank and is President of Beck Properties Trophy Club. The Board of Directors has determined that Mr. Beck’s prior experience working as an investment banker on Wall Street with both high-tech and public companies make him uniquely qualified to serve as the Chairman of CornerWorld.
Marc Blumberg was appointed Director subsequent to CornerWorld’s August 27, 2008 acquisition of Enversa Companies. Mr. Blumberg has been with imc2, one of the largest independently owned digital advertising agencies in the United States, since 1997 and currently serves as their President. He leads their clients in developing innovative and effective marketing strategies. Mr. Blumberg helped build the company from six to a staff of over 500 people providing services to Procter & Gamble, The Coca-Cola Company, and GlaxoSmithKline. Before joining imc2, Mr. Blumberg was a strategy consultant for Gemini Consulting’s MAC Group and for the New England Consulting Group. Mr. Blumberg has spent his professional career consulting with FORTUNE 500 companies. He holds a Bachelor of Science in Economics from the University of Pennsylvania’s Wharton School of Business. The Board of Directors has determined that Mr. Blumberg’s joint experience with imc2 and serving as a consultant to FORTUNE 500 companies adequately qualifies him to serve on the Board of Directors.
The business and affairs of the Company are managed under the direction of the Board of Directors. The Board believes that good corporate governance is a critical factor in achieving business success and in fulfilling the Board’s responsibilities to stockholders. The Board believes that its practices align management and stockholder interests. Highlights of our corporate governance practices are described below.
Additional Executive Officers
Marc Pickren, age 40, has served as our President since his appointment on May 9, 2011. Prior to his appointment as President of CornerWorld, he served at the Company’s Chief Marketing Officer and as President of the Company’s Enversa division, which he co-founded with Marc Blumberg. He is responsible for strategic vision, process architecture, and sales and marketing. Before founding Enversa, Mr. Pickren spent nearly three years with J. Walter Thompson as a partner in their Government and Direct-Response Practice where he directed a worldwide team of account managers and online strategists. Prior to J. Walter Thompson, Mr. Pickren was with TMP Worldwide/Monster.com, where he helped the private yellow pages agency grow to a leading public Internet media concern that would become one of the most successful public offerings of the late 1990’s.
V. Chase McCrea III, age 43, has served as our Chief Financial Officer since his appointment September 18, 2009. Mr. McCrea is a CPA with over 18 years of experience working with and for public companies serving in a variety of capacities. Until July 2007, Mr. McCrea had served as the Interim Chief Financial Officer and Vice President of Finance of Home Solutions of America, Inc., a publicly traded construction concern. Prior to that, he worked as the Director of Finance for Penson Worldwide, Inc., an international securities clearing firm dating to the summer of 2006, and also as a Manager of SEC Reporting for chemical giant Celanese dating to the summer of 2005. For several years prior to 2005 Mr. McCrea had served as the Director of SEC Reporting for technology company DG Systems (the predecessor company to DG/FastChannel, Inc.) as well as serving as the Director of Finance for approximately five years for a telecommunications provider. Mr. McCrea’s experience includes over eight years working for Big Four accounting firms, where he attained the level of assurance manager. Mr. McCrea holds a Bachelor’s of Science in Accounting from the highly regarded accounting school at the University of Southern California. The Board of Directors has determined that Mr. McCrea’s experience working with and for publicly traded companies adequately qualifies him to serve as Chief Financial Officer.
Code of ethics
The Company has not currently adopted a code of ethics. The Company only recently settled its lawsuit with a Board member, significant shareholder and creditor. The issues surrounding the lawsuit occupied all Board of Directors meetings and hindered the Board from conducting certain issues in the ordinary course of business. With the Settlement Agreement completed, the Company expects to adopt of code of ethics during the current fiscal year.
Director Independence
Our common stock is currently quoted on the OTCBB and is not listed on the Nasdaq Stock Market or any other national securities exchange. Accordingly, we are not currently subject to the Nasdaq continued listing requirements or the requirements of any other national securities exchange. Nevertheless, in determining whether a director or nominee for director should be considered "independent" the board utilizes the definition of independence set forth in Rule 5605(a)(2) of the Nasdaq Marketplace Rules. The Company currently does not have an independent director.
Board meetings
The Board of Directors held 3 meetings during the fiscal year ended April 30, 2011. Mr. Beck and Mr. Blumberg attended all three meetings. Directors receive no compensation for meeting attendance.
Board committees
We do not have an audit, nominating or compensation committee. We intend, however, to establish an audit committee and a compensation committee of our Board of Directors in the future. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and our system of internal controls. The compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers.
We do not have an audit committee financial expert on our Board because we do not have an audit committee and hiring an expert would be cost prohibitive.
Board Structure
Our Board has not chosen to separate the positions of Chief Executive Officer and Chairman of the Board in recognition of the fact that our operations are sufficiently limited that such separation would not serve any useful purpose. Our Chairman and Chief Executive Officer is responsible for setting the strategic direction for our company and for the day-to-day leadership of our Company, as well as setting the agenda for Board meetings and presiding over meetings of the full Board.
Role of Board in Risk Oversight Process
Management is responsible for the day-to-day management of risk and for identifying our risk exposures and communicating such exposures to our Board. Our Board is responsible for designing, implementing and overseeing our risk management processes. The Board does not have a standing risk management committee, but administers this function directly through the Board as a whole. The whole Board considers strategic risks and. opportunities and receives reports from its officers regarding risk oversight in their areas of responsibility as necessary. We believe our Board’s leadership structure facilitates the division of risk management oversight responsibilities and enhances the Board’s efficiency in fulfilling its oversight function with respect to different areas of our business risks and our risk mitigation practices.
Communications with the Board of Directors
Stockholders with questions about the Company are encouraged to contact the Company by sending communications to the attention of the Chief Executive Officer at 13101 Preston Road Suite 100, Dallas Texas 75240. If stockholders feel that their questions have not been sufficiently addressed through communications with the Chief Executive Officer, they may communicate with the Board of Directors by sending their communications to the Board of Directors, c/o the Chief Executive Officer at the same address.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table on the following page sets forth the compensation earned by our Chief Executive Officer, our President , who had previously served as our Chief Marketing Officer, and our Chief Financial Officer for the last three fiscal years. We do not have any other executive officers who were awarded, earned or were paid over $100,000.
(1) The amounts in column (e) reflect the dollar amount recognized for financial statement reporting purposes for the applicable fiscal year, in accordance with ASC Topic 718 (formerly FAS 123[R]) of stock awards granted to each named executive officer, and therefore include amounts from awards granted in and prior to the applicable fiscal year. Assumptions used in the calculation of this amount are included in footnote 8 to the Company’s audited financial statements for the fiscal year ended April 30, 2010 included in the Company’s Annual Report on Form 10-K.
(2) The amounts in column (f) reflect the dollar amount recognized for financial statement reporting purposes for the applicable fiscal year, in accordance with ASC 718 with respect to outstanding stock options granted to each executive officer, whether granted in that fiscal year or in prior fiscal years. These balances have not been adjusted for the potential impact of estimated forfeitures. Assumptions used in the calculation of this amount are included in footnote 9 to the Company’s audited financial statements for the fiscal year ended April 30, 2009 included in this Annual Report on Form 10-K.
(3) Amounts reported reflect a fee earned for completion of the Woodland Acquisition.
(4) Amounts reported include salary and consulting compensation earned prior to Mr. McCrea being named Chief Financial Officer effective September 18, 2009.
(5) Mr. Beck’s bonus was accrued at April 30, 2011 and is payable in cash pursuant to a schedule provided in his employment agreement.
(6) A portion of Mr. Pickren’s bonus was cash settled prior to April 30, 2011 and a portion is payable in cash over the 6 month period following April 30, 2011.
(7) A portion of Mr. McCrea’s bonus was paid in cash prior to April 30, 2011 and a portion was accrued at April 30, 2011, with the remaining portion payable in cash by August 31, 2011. The discretionary portion of his bonus has not yet been determined but could include up to an additional $10,209.
Executive Employment Agreements
Mr. Beck is employed subject to an employment agreement dated July 28, 2011. Pursuant to his employment agreement, Mr. Beck is paid an annual base salary of $400,000, an annual performance based cash bonus subject to the discretion of the Board of Directors, a bonus fee of 2.00% of all equity and debt raised during the time of his contract, a 3.50% fee for the transaction value of all acquisitions as defined in his employment agreement, warrants equal to 3.25% of the equity issued pursuant to any debt and equity raised during the time of his employment agreement, a warrant equal to 3.25% of the transaction value of any equity issued in association with all acquisitions and a $5.0 million buyout fee in the case of termination without cause or a change in control. Mr. Beck’s employment agreement continues through July 27, 2021.
Mr. Pickren is not currently employed subject to an employment agreement. The Company and Mr. Pickren are currently working towards a mutually agreeable agreement for the future.
Mr. McCrea is employed subject to his employment agreement which became effective August 1, 2010. Pursuant to his employment agreement, Mr. McCrea is paid an annual base salary of $165,000 and a cash bonus equivalent up to 25% of his base salary. With respect to Mr. McCrea’s bonus, 33% is at the discretion of the CEO, 33% is payable to the extent the Company’s EBITDA exceeds $1.5 million and 33% if the Company completes its public filings in a timely manner. Mr. McCrea is also to be paid a severance equal to six months of his base salary should he be terminated without cause. Mr. McCrea’s employment agreement continues through July 31, 2012.
During the year ended April 30, 2011, there has been no occurrence of the re-pricing of an outstanding option or other equity-based award and no waiver or modification of any specified performance target with respect to any amount included in non-stock incentive plan compensation.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table sets forth information regarding stock option awards previously granted which were outstanding at April 30, 2011.
Stock Compensation Plans:
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. 25% of shares vest on the six month anniversary of the date of grant, the Initial Vesting Date, while the remaining options vest annually in 25% increments beginning on the first anniversary of the Initial Vesting Date. The options expire 10 years from the grant date.
The number of shares outstanding under the Company’s 2007 Incentive Stock Plan as of April 30, 2011 was 1,670,000.
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.
As of April 30, 2011, 850,000 authorized shares under the Company’s 2007 Stock Compensation Plan had been granted.
POTENTIAL PAYMENTS ON TERMINATION OR CHANGE IN CONTROL
Each of Mr. Beck and Mr. McCrea are named Executive Officers currently employed subject to employment agreements. Pursuant to their respective employment agreements, they are entitled to payments for termination for reasons other than cause or resulting from a change in control described as follows:
Should Mr. Beck be terminated prior to the expiration of his contract for a reason other than cause, as defined in his employment agreement, he is entitled to the following:
a) Payment of the full amount of base salary for the days remaining of the contract for the full ten (10) year period of the contract; paid in full on the six month anniversary of the date of termination
b) Any bonus amount that would otherwise have been payable to Employee, payable on the next date on which a bonus amount would have otherwise been payable to Employee following the termination Date, prorated through the Termination Date;
c) any vacation pay accrued but unpaid as of the Termination Date, payable in a single lump sum payment on the Termination Date; and
d) the lump sum payment of One Million Dollars ($5,000,000) paid in full on the six month anniversary date of the date of termination.
Should Mr. McCrea be terminated prior to the expiration of his contract for a reason other than cause, as defined in his employment agreement, he is entitled to the following:
a) Payment of his base salary for 180 days payable in accordance with the customary payroll practices of the Company for a period of 180 days
b) Any bonus amount that would otherwise have been payable to Employee, payable on the next date on which a bonus amount would have otherwise been payable to Employee following the termination Date, prorated through the Termination Date; and
c) any vacation pay accrued but unpaid as of the Termination Date, payable in a single lump sum payment on the Termination Date.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The table on the following page sets forth, as of April 30, 2011 (except where otherwise noted), certain information with respect to shares beneficially owned by (i) each person who is known by the Company to be the beneficial owner of more than five percent of the Company’s outstanding shares of Common Stock, (ii) each of the Company’s Directors, (iii) each of the executive officers and (iv) all current Directors and executive officers as a group. Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within sixty (60) days of the date as of which the information is provided; in computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date. As of April 30, 2011, the Directors and executive officers of the Company held a total of 41,994,038 shares of Common Stock entitled to vote, representing 27.8% of the then outstanding shares of Common Stock.
(1) The number of shares of Common Stock outstanding as of April 30, 2011 was 146,972,901. The number of beneficially owned shares includes shares issuable pursuant to stock options that may be exercised within sixty (60) days after April 30, 2011 as well as warrants that are immediately exercisable. In addition, the table contemplates the issuance of shares and warrants to certain individuals and entities as detailed in Item 10, “Recent Sales of Unregistered Securities”. At the time of this filing, all warrants had been issued but the share issuances had not yet been completed.
(2) Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the officers and Directors named in the table have sole voting and investment power with respect to all shares of Common Stock. Unless otherwise indicated, the business address of each beneficial owner listed is 13101 Preston Road, Suite 100, Dallas, Texas 75240.
(3) Includes 1,321,000 shares issuable upon exercise of warrants immediately exercisable as of April 30, 2011.
(4) Includes 1,500,000 warrants to purchase common stock exercisable within sixty (60) days of April 30, 2011. In addition, the number includes 375,000 shares issuable upon exercise of stock options exercisable or that vest within 60 days of April 30, 2011.
(5) Includes 275,000 shares issuable upon exercise of stock options exercisable or that vest within 60 days of April 30, 2011.
(6) Includes 175,000 shares issuable upon exercise of stock options exercisable or that vest within 60 days of April 30, 2011.
(7) Mr. Blumberg is a shareholder and the President of Internet University, Inc. His business address and the business address of this entity is 12404 Park Central, Suite 400, Dallas, Texas 75251.
(8) The business address of this entity is 5005 LBJ, Freeway, Suite 370 Occidental Tower Management, Dallas, TX 75244.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Company’s Enversa division receives administrative support from its former parent company, Internet University, Inc. (“Internet University”). Included in such administrative support are human resources, payroll, information technology and facilities services. Prior to moving on February 1, 2011, Enversa operated from office space provided by Internet University and utilized furniture and equipment provided by Internet University in such office space. The costs of such services have been billed to Cornerworld and are reflected in the income statements in the total amount of $253,999, $256,862 and $264,796 for the years ended April 30, 2011, 2010 and 2009, respectively.
Additionally, for the period from August 2008 through April 2011, all of CornerWorld’s and Enversa’s employees were leased to Enversa through a certain Transition Services Agreement between Cornerworld, Enversa, and Internet University, Inc. CornerWorld and Enversa employees were paid under the federal employer identification number and are included in the employee benefit programs, such as life, health and disability insurance and 401(k) of a subsidiary of Internet University. The selling, general and administrative expenses on the income statement reflects a total of $2,531,345, $1,493,279 and $492,885 of actual salaries for CornerWorld’s corporate and Enversa personnel during the years ended April 30, 2011, 2010 and 2009, respectively, as well as an allocation of payroll taxes and employee benefits calculated at 15% of salary. Subsequent to April 30, 2011, all employees are being paid under the Company’s federal employer identification number.
On August 27, 2008, Enversa entered into a $500,000 line of credit with Internet University which was originally intended to expire on February 23, 2009. From time to time, Enversa and Internet University amended the line of credit, which extended the maturity date until December 31, 2010 and provided a schedule for payments. The line of credit bears interest at 8.00% per annum and is secured by a second priority security interest in CornerWorld’s membership interests in Enversa, a first priority security interest in all of Enversa’s assets and in all products, proceeds, revenues, distributions, dividends, stock dividends, securities and other property, rights and interests that Cornerworld and Enversa receives or is at any time entitled to receive. There was no outstanding balance under the line of credit at April 30, 2011 and the Company no longer has access to the unused portion. The Company recognized interest expenses totaling $6,944 and $23,575 during the years ended April 30, 2011 and 2010, respectively, related to this line of credit.
As part of the Enversa acquisition, the Company borrowed $1,500,000 from Internet University, Inc., Marc Blumberg and Marc Pickren (collectively, the “Enversa Sellers”). Mr. Blumberg is a member of the Company’s Board of Director as well as the president of Internet University, Inc. and Mr. Pickren is the President of the Company. On March 30, 2011, the Company entered into amendments to its promissory notes with the Enversa Sellers (collectively the “Tier 4 Junior Notes”). The amendments to the Tier 4 Junior Notes revised the repayment schedules of the Tier 4 Junior Notes such that principal payments would be payable annually beginning on March 31, 2012 until such time as the Tier 4 Junior Notes mature on March 31, 2016. Interest payments will be payable monthly at a revised rate of 15% per annum. The Company recorded interest of $65,997 and $115,247 on this facility during the years ended April 30, 2011 and 2010, respectively. The balance of these notes totaled $1,364,199 at April 30, 2011.
On February 23, 2009 the Company completed the acquisition of all of its Michigan-based operating divisions (the “Woodland Acquisition”). As a result of the Woodland Acquisition, the Company issued debt and equity securities to Mr. Ned Timmer (“Timmer”) who became a member of the Board of Directors and the President of the Company’s Woodland division. Timmer was the holder of a $4,200,000 secured debenture as well as a holder of the Company’s $3,100,000 purchase money note.
As part of the February 23, 2009 Woodland Acquisition, the Company borrowed $1,900,000 from IU Investments LLC. On March 30, 2011, the Company entered into Amendment No. 3 (“IU Amendment No. 3”) to its Promissory Note to IU Investments, LLC (the “Tier 3 Junior Note”). IU Amendment No. 3 revised the repayment schedule of the Tier 3 Junior Note such that the Company will make principal payments totaling $27,417/month until February 28, 2012, after which time the Company will pay $67,200 annually beginning March 31, 2012 until such time as the Tier 3 Junior Note is paid in full on March 31, 2016. Interest payments will be payable monthly at a rate of 10% per annum. A member of the Company’s Board of Director as well as one of the selling partners of Enversa is an employee of the parent of IU Investments, LLC. The Company recorded interest of $104,324 and $177,219 on this facility during the years ended April 30, 2011 and 2010, respectively. The balance of this note totaled $610,166 at April 30, 2011.
On December 22, 2009, the judge in the United States District Court for the Western District of Michigan issued an order (the “Order”) which, among other things, ordered: (1) The actions taken by Timmer on December 10, 2009 to gain corporate control over Woodland are deemed null and void; (2) Timmer shall return to CornerWorld all collateral and/or property belonging to the Company over which he has asserted control, including, but not limited to, the funds contained in bank accounts; and (3) Timmer shall be removed from active management of the Holland employees, but shall be retained on the Board of Directors of the Company.
As detailed in the Form 8-K filed on February 16, 2011, on February 3, 2011, CornerWorld and Timmer entered into a Settlement Agreement the principal terms of which were as follows:
· Timmer canceled an aggregate of $6.1 million principal on outstanding notes payable. These notes had outstanding balances totaling $1.9 million and $4.2 million, respectively. The Company paid interest expenses to Timmer totaling approximately $729,533 and $886,333 on these two facilities during the years ended April 30, 2011 and 2010, respectively.
· Timmer returned all collateral stock certificates/membership interests in his possession.
· Timmer returned all CornerWorld common stock in his possession representing approximately 35% of the total outstanding stock of the Company. This included 31,450,000 shares held by the Ned Timmer Trust and 2,100,000 shares in the name of Ned Timmer. In addition, Timmer returned 400,000 shares held by HCC Foundation and warrants to purchase 2,750,000 shares.
· Timmer resigned from the CornerWorld Board of Directors, resigned his position as an officer of the Company and his employment agreement was terminated.
· Timmer terminated the lease between Woodland Holdings, a CornerWorld subsidiary, and Sol Danzer Enterprises, LLC. During the years ended April 30, 2011 and 2010, the Company paid approximately $211,644 and $211,644 in rent and management fees to Timmer as a result of this lease.
On March 30, 2011, CornerWorld paid Timmer $7.8 million. The payment was comprised of (1) $6.0 million in cash (the “Lump Sum Payment”) and (2) a Promissory Note (the “Timmer Note”) for $1.8 million. Subsequent to the Lump Sum Payment and the issuance of the Timmer Note, Timmer is no longer affiliated with the Company as an employee, a shareholder or a member of its Board of Directors. Accordingly, subsequent to March 30, 2011, Timmer is no longer a related party.
The Company funded the Lump Sum Payment with a combination of third party and related party financing as desscribed in the Company’s Form 8-K filed on April 5, 2011.
A portion of the Lump Sum Payment was sourced from IU Holdings, LP (“IUH”). On March 30, 2011, the Company entered into a subordinated $1.5 million promissory note with IUH (the “Tier 2 Junior Note”). Principal under the Tier 2 Junior Note is payable in quarterly installments of $187,500 commencing on May 31, 2011 until such point as the Tier 2 Junior Note matures on February 28, 2013. Interest on the outstanding principal amount under the Tier 2 Junior Note is payable monthly in arrears at a rate of 12% per annum. As additional consideration to induce the Tier 2 Junior Lender to enter into this Promissory Note, the Company issued the Tier 2 Junior Lender, 48,414,132 shares of CornerWorld Corporation Common stock. IUH is a partnership whose limited partners include friends and family of the Company’s Chief Executive Officer. The Company paid approximately $15,500 in interest during the year ended April 30, 2011 to IUH as a result of this note. The balance of this note totaled $1,500,000 at April 30, 2011.
On March 30, 2011, the Company entered into a subordinated $400,000 promissory note (the “Tier 5 Junior Note”) with Internet University. Principal under the Tier 5 Junior Note is payable in monthly installments of $25,000 commencing on April 30, 2011 until such point as the Tier 5 Junior Note matures on April 30, 2012. Interest on the outstanding principal amount under the Tier 5 Junior Note is payable monthly in arrears at a rate of 15% per annum. As additional consideration to induce the Tier 5 Junior Lender to enter into this Promissory Note, the Company issued the Tier 5 Junior Lender, 12,910,435 shares of CornerWorld Corporation Common stock. The Company recorded interest of $5,000 on this facility during the year ended April 30, 2011. The balance of this note totaled $375,000 at April 30, 2011.
On March 30, 2011, the Company entered into a subordinated $389,942 promissory note (the “Tier 7 Junior Note”) with Scott N. Beck, the Company’s Chief Executive Officer. Principal under the Tier 7 Junior Note is payable in monthly installments of $12,746 commencing on April 30, 2011 until such point as the Tier 7 Junior Note matures on September 30, 2013. Interest on the outstanding principal amount under the Tier 7 Junior Note is payable monthly in arrears at a rate of 10% per annum. As additional consideration to induce Mr. Beck to enter into this Promissory Note, the Company issued Mr. Beck 12,585,802 shares of CornerWorld Corporation Common stock. The Tier 7 Junior Note consists primarily of prior accounts payable; as of April 30, 2010, the Company has accrued liabilities totaling approximately $315,000 to our Chief Executive Officer. The Company recorded interest of $3,250 on this facility during the year ended April 30, 2011. The balance of this note totaled $377,196 at April 30, 2011.
On March 30, 2011, the Company entered into an unsecured $37,976 promissory note (the “Tier 8 Junior Note”) with Kelly Larabee Morlan; Ms. Morlan is the Secretary of the Company. Principal under the Tier 8 Junior Note is payable in monthly installments of $3,165 commencing on April 30, 2011 until such point as the Tier 8 Junior Note matures on March 30, 2012. Interest on the outstanding principal amount under the Tier 8 Junior Note is payable monthly in arrears at a rate of 10% per annum. As additional consideration to induce Ms. Morlan to enter into this Promissory Note, the Company issued Ms. Morlan 1,194,215 shares of CornerWorld Corporation Common stock. The Tier 8 Junior Note is unsecured. The Company recorded interest of $316 on this facility during the year ended April 30, 2011. The balance of this note totaled $34,811 at April 30, 2011.
On February 1, 2011, the Company entered into a lease for office space with an entity that is controlled by the family of the Company’s CEO. The lease is for 5 years with minimum annual rentals of $148,464 in year one, $153,660 in year two, $159,038 in year three, $164,605 in year four and $170,366 in year five.
Policy Regarding Transactions with Related Persons
We do not have a formal, written policy for the review, approval or ratification of transactions between us and any director or executive officer, nominee for director, 5% stockholder or member of the immediate family of any such person that are required to be disclosed under Item 404(a) of Regulation S-K. However, our policy is that any activities, investments or associations of a director or officer that create, or would appear to create, a conflict between the personal interests of such person and our interests must be assessed by our Chief Executive Officer and our Chief Financial Officer.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of fees and services approved by the Company and performed by Schumacher and Associates, Inc. for the fiscal years ended April 30, 2010 and 2009.
(1) Audit Fees. This represents the aggregate fees billed to us in each of fiscal 2011 and fiscal 2010 for professional services rendered by Schumacher and Associates, Inc. for (i) the audit of our annual financial statements included in our annual report on Form 10-K and (ii) the review of our interim financial statements included in the quarterly reports.
(2) Audit-Related Fees. The aggregate fees billed to us in each of fiscal 2011 and fiscal 2010 for professional services rendered by Schumacher and Associates, Inc. for audit-related fees including statutory and regulatory filings was zero. We do not currently engage Schumacher and Associates, Inc. to perform internal control testing.
(3) Tax Fees. We do not currently engage Schumacher and Associates, Inc. to perform tax services.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report:
(1.) Financial Statements
The reports of our independent registered public accounting firm and our consolidated financial statements are listed below and begin on page of this Annual Report on Form 10-K.
Financial Information
(2.) Schedules
None.
(3.) Exhibits
The exhibits to this report are listed in the exhibit index below.
(b) Description of exhibits
INDEX TO EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
July 28, 2011 By: /s/ Scott Beck
Scott Beck
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Scott Beck
Chairman of the Board of Directors and
July 28, 2011
Scott Beck
Chief Executive Officer
(Principal Executive Officer)
/s/ V. Chase McCrea III
Chief Financial Officer
July 28, 2011
V. Chase McCrea III
(Principal Financial and Accounting Officer)
/s/ Marc Blumberg
Director
July 28, 2011
Marc Blumberg
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
CornerWorld Corporation
We have audited the accompanying consolidated balance sheets of CornerWorld Corporation as of April 30, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years ended April 30, 2011, 2010 and 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CornerWorld Corporation as of April 30, 2011 and 2010, and the consolidated results of its operations and cash flows for the years ended April 30, 2011, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America.
/s/ SCHUMACHER & ASSOCIATES, INC.
Denver, Colorado
July 28, 2011
CornerWorld Corporation
Consolidated Balance Sheets
(Dollars and shares in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements
CornerWorld Corporation
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements
CornerWorld Corporation
Consolidated Statement of Stockholders’ Equity (Deficit)
The accompanying notes are an integral part of these consolidated financial statements
CornerWorld Corporation
Consolidated Statements of Cash Flow
The accompanying notes are an integral part of these consolidated financial statements
Cornerworld Corporation
Notes to Consolidated Financial Statements
April 30, 2011
1. Basis of Presentation
Organization
Cornerworld Corporation (“the Company”, “Cornerworld”, “we”, “our” or “us”) was incorporated in the State of Nevada, on November 9, 2004 as Olympic Weddings International, Inc. Effective May 1, 2007, we changed our name to Cornerworld Corporation.
The Company is a marketing and technology services company creating opportunities from the increased accessibility of content across mobile, television and internet platforms. Our key asset is the patented 611 Roaming ServiceTM from RANGER Wireless Solutions ®, which generates revenue by processing over 14 million calls from roaming wireless customers per year and seamlessly connecting them to their service provider.
	 On August 27, 2008, Cornerworld entered into a Share Exchange Agreement and Plan of Merger (the “Enversa Agreement”) with Enversa Companies LLC, a Texas limited liability company (“Enversa”), Leadstream LLC, a Texas limited liability company (“Leadstream”), and the holders of the membership interests of Leadstream. Pursuant to the Enversa Agreement, on August 27, 2008, Leadstream merged with and into Enversa (the “Merger”), of which Cornerworld is the sole member. Enversa was the surviving company in the Merger and, as such, acquired all right, title and interest in and to all real estate and other property of Leadstream and became responsible for all liabilities and obligations of Leadstream and Enversa. As a result of the Merger, Enversa became a subsidiary of Cornerworld. Prior to the Merger, the Company was in the development stage and had not realized any revenues from its operations. See also Note 3, Acquisitions, for more detail.
Enversa offers a full menu of services for brand and direct response customer acquisition campaigns, including media buying and planning for online and mobile media. It provides customer relationship marketing and interactive services, as well as customer data collection and analysis tools used for planning and targeting client marketing efforts across a network of partner, representative and owned content sites, including CornerWorld.com. Moreover, Enversa operates several ad networks and a proprietary request for proposal (RFP) technology that highlights promotional offers from a variety of corporate clients. Enversa uses an established media auction technology to deliver significantly more inventory than current market rates. Enversa effectively enables media properties to compete against each other, empowering advertisers to extend their marketing budgets beyond typical marketplace levels through fair and free market competition. Using its proprietary technology, Enversa identifies qualified leads for advertisers thereby connecting them with potential consumers. Enversa also utilizes a pay-for-performance pricing model which is very appealing to clients because it insures that they are billed solely for campaign performance. Finally, Enversa’s Gulf Media Solutions, LLC (“Gulf”) subsidiary, provides search engine optimization services (“SEO”), domain leasing and website management services on a recurring monthly basis to over 300 customers.
On February 23, 2009, Cornerworld completed its acquisition (the “Woodland Acquisition”) of all of the issued and outstanding equity interests of each of Woodland Wireless Solutions, Ltd. (“Woodland Wireless”), West Michigan Co-Location Services, L.L.C. (“WMCLS”) and T2 TV, L.L.C. (“T2 TV”), and forty voting member units of S Squared, LLC, doing business in the state of Michigan as “Ranger Wireless LLC” (“Ranger”), through its newly-formed wholly-owned subsidiary, Woodland Holdings Corp. (“Woodland Holdings”), pursuant to the terms of a Stock Purchase Agreement, dated February 23, 2009 (the “Effective Date”), by and among Woodland Holdings, Cornerworld, Ned B. Timmer and HCC Foundation (“HCC Foundation”). Immediately following the Woodland Acquisition, the forty voting member units of Ranger that were purchased by Woodland Holdings were contributed to Woodland Wireless and all other issued and outstanding voting member units of Ranger remained held by Woodland Wireless.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
	As a result of the Woodland Acquisition, Ranger became a wholly-owned subsidiary of Woodland Wireless. In addition, pursuant to a Unit Purchase Agreement (the “Unit Purchase Agreement”) entered into on the Effective Date among Woodland Holdings, Phone Services and More, L.L.C., doing business as Visitatel (“PSM”), T2 Communications, L.L.C. (“T2 Communications”) and Ned B. Timmer, Woodland Holdings agreed to purchase all of the outstanding voting member units of each of PSM and T2 Communications, for an aggregate purchase price of $300,000. Final consummation of the transactions contemplated by the Unit Purchase Agreement took place on March 30, 2011. Prior to March 30, 2011, the Company accounted for PSM and T2 Communications as Variable Interest Entities (“VIE’s”) and consolidated them for accounting purposes. At April 30, 2010, the carrying amount of the assets of the T2 Communications and PSM totaled $215,133 while the carrying amount of the liabilities was $402,481. With respect to the assets, $126,333 were classified as non-current while all the liabilities were considered to be current.
Subsequent to the closing of the Unit Purchase Agreement, the Company slightly adjusted the manner in which it managed the assets acquired in the Woodland Acquisition; these assets comprise 100% of the Company’s Communication Services Segment. As a result of the closing of the Unit Purchase Agreement, Woodland Wireless, Ranger and WMCLS are collectively referred to herein as the “Ranger Wireless Group”. T2 Communications, T2TV and PSM are collectively referred to herein as the “T2 Group”.
RANGER® is a shortcode application service provider to the wireless industry. The core service offered is 611 Roaming Service™, a patented application providing seamless means for connecting wireless subscribers to reach their home providers customer service call center while roaming on another provider’s network. Calls are sent to RANGER® for treatment from nearly 40 wireless providers throughout North America. On an annual basis, RANGER® processes approximately 14 million calls with an infrastructure capable of handling millions more. RANGER® also manages an online portal which allows carriers access to their monthly statements and reporting on call volume to and from their company.
As a provider of Internet Protocol Television (IPTV), Internet and VoIP services, T² Communications delivers leading-edge technology to residential and business customers in Michigan. Offerings include: phone lines, Internet connections, 275 all-digital television stations, colocation, long distance and toll-free services. T² is a Competitive Local Exchange Carrier (CLEC) that manages its own Fiber to the Premise (FTTP) network with a 10 gigabit backbone and up to 1 gigabit per second connections to end users.
PSM holds an FCC 214 License as a wholesale long distance service provider to the carrier community and large commercial users of transport minutes. Serving service providers, WMCLS offers telecommunications equipment storage and leasing.
The Company’s year-end is April 30th.
2. Summary of Significant Accounting Policies
This summary of significant accounting policies is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles (“GAAP”) in the United States of America and have been consistently applied in the preparation of the financial statements. The financial statements are stated in United States of America dollars.
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 Codification 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 condensed consolidated financial statements.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
Receivables
Accounts receivable include uncollateralized customer obligations due under normal trade terms requiring payment within 30-60 days from invoice date. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
The carrying amount of accounts receivable is reduced by a valuation allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected based on historical collection trends. The allowance for doubtful accounts was $48,936 and $63,012 as of April 30, 2011 and 2010, respectively.
Selling, General and Administrative Expenses
The Company receives administrative support from Enversa’s former parent company, Internet University, Inc. (“Internet University”). Included in such administrative support are human resources, payroll, information technology and facilities services. Prior to February 1, 2011, the Company operated from office space provided by Internet University and utilized furniture and equipment provided by Internet University in such office space. The costs of such services have been billed to Cornerworld and are reflected in the income statements in the total amount of $253,999, $256,862 and $264,796 for the years ended April 30, 2011, 2010 and 2009, respectively. Subsequent to February 1, 2011, the Company relocated to new office space and only compensates Internet University for limited human resources support services.
Additionally, all of CornerWorld’s and Enversa’s employees were leased to the Company through an agreement between Cornerworld, Enversa, and Internet University. CornerWorld and Enversa employees were paid under the federal employer identification number and are included in the employee benefit programs, such as life, health and disability insurance and 401(k) of a subsidiary of Internet University. The selling, general and administrative expenses on the income statement reflects a total of $2,531,345, $1,493,279 and $492,885 of actual salaries for CornerWorld’s corporate and Enversa personnel during the years ended April 30, 2011, 2010 and 2009, respectively, as well as an allocation of payroll taxes and employee benefits calculated at 15% of salary. Subsequent to April 30, 2011, all employees began being paid under the Company’s federal employer identification number.
Fair Value of Financial Instruments
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 and accrued liabilities approximate their estimated fair values due to their short-term maturities. Notes payable are carried at their face value net of their issuance costs which management believes is a reasonable approximation for their fair value. Warrants with put features are carried at their minimum cash put value discounted for the time value of money. 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.
Organizational and Start-up Costs
Until August 27, 2008, CornerWorld Corporation was in the development stage. Costs of start-up activities, including organization costs, were expensed as incurred.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
Income Taxes
The Company accounts for income taxes 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.
Basic and Diluted Loss Per Share
In accordance with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share, if any, is computed similar to basic loss per share except that the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities were exercised or converted into common stock. Potentially dilutive securities were not included in the calculation of the diluted loss per share as their effect would be anti-dilutive.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as revised by SAB 104. As such, the Company recognizes revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable and collectibility is probable. Sales are recorded net of sales discounts.
At Enversa, revenue is recognized along with the related cost of revenue as leads are delivered. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. Amounts billed to clients in advance of delivery of leads are classified under current liabilities as deferred revenue. At Gulf, revenue is recognized monthly as SEO services are provided or in the form of revenues from domain leases.
For Woodland, the majority of revenue is derived from month-to-month, bundled service contracts for the phone, television and internet services used by each customer. Revenue is recognized as the services are provided.
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original maturity of three (3) months or less to be cash equivalents.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
Property and equipment
Property and equipment are recorded at cost and depreciated over their estimates useful lives using the straight-line method as follows:
Expenditures for maintenance and repairs which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations. Management periodically reviews the carrying value of its property and equipment for impairment. The property and equipment had not incurred any impairment loss at April 30, 2010.
Website development costs representing capitalized costs of design, configuration, coding, installation and testing of the Company’s website are capitalized until initial implementation. Upon implementation, the asset is amortized to expense over its estimated useful life of three (3) years using the straight-line method. Ongoing website post-implementation costs of operation, including training and application maintenance, will be charged to expense as incurred.
Long-Lived Assets
The Company accounts for its long-lived assets in accordance with the ASC. The Company’s primary long-lived assets are website development costs, Goodwill, a patent, identifiable intangible assets and property and equipment. The ASC requires a company to assess the recoverability of its long-lived assets whenever events and circumstances indicate the carrying value of an asset or asset group may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. Management does not believe the Goodwill, patent and identifiable intangible assets associated with its recent acquisitions are impaired. No impairment charges have been recorded as of April 30, 2011.
Stock-Based Compensation
The Company accounts for awards made under its two stock-based compensation plans pursuant to the fair value provisions of ASC No. 718. ASC No. 718 requires the recognition of stock-based compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. ASC No. 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company accounts for stock-based compensation in accordance with ASC No. 718 and estimates its fair value based on using the Black-Scholes option pricing model.
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 7 Stock Based Compensation, for more details.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of CornerWorld Corporation, its wholly owned subsidiaries and entities determined to meet the definition of VIE’s. All significant intercompany transactions and balances have been eliminated in consolidation.
Concentrations of cash and cash equivalents
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Federal Deposit Insurance Corporation (FDIC) currently insures accounts at each institution for up to $250,000. At times, cash balances may exceed the FDIC insurance limit of $250,000. At April 30, 2011 and 2010, the Company had $303,455 and $81,652, respectively, in excess of that which is insured by the FDIC.
Concentration of credit risk
Credit is extended based on an evaluation of the customer’s financial condition, and the Company does not require collateral. Write-offs of accounts receivable have historically been nominal. During the year ended April 30, 2010, the Company’s two largest customers merged. After consideration of the aforementioned merger, approximately 32.2%, 38.5% and 43.0% of total revenue was derived from the Company’s largest customer during the years ended April 30, 2011, 2010 and 2009, respectively.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued during 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.
Issuance of Stock for Non-Cash Consideration
All issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling either the market value of the shares issued or the value of consideration received, whichever is more readily determinable.
Reclassifications
Certain prior year accounts have been reclassified to conform to the current year’s presentation.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
3. Acquisitions
Acquisition of Leadstream
On August 27, 2008, Leadstream LLC merged with and into Enversa. The results of Leadstream’s operations have been included in the consolidated financial statements since that date. This business combination was accounted for as a purchase of Leadstream by Cornerworld Corporation in accordance with ASC 805, Business Combinations (“ASC 805”). The aggregate purchase price was $1,662,000 which was comprised of $1,500,000 in promissory notes, and 3,600,000 shares of common stock valued at $162,000. Because the Company’s common stock is so thinly traded, the value of the 3,600,000 common shares issued was determined based on the Company’s estimated enterprise value as of August 27, 2008.
The following table summarizes the carrying values of the assets acquired and liabilities assumed at the date of acquisition.
The $1,000,000 of intangible assets relates to customer lists that have an expected useful life of three years. The excess of the purchase price over the tangible net assets and identifiable intangible assets was allocated to Goodwill. Accordingly, the Company recorded $554,987 in Goodwill as a result of the Enversa acquisition.
Woodland Acquisition
	On February 23, 2009, Cornerworld completed the Woodland Acquisition. The results of Woodland’s operations have been included in the consolidated financial statements since that date. This business combination was accounted for as a purchase in accordance with ASC 805. The aggregate purchase price was $13,696,300 which was comprised of $1,900,000 in cash, a $3,100,000 Secured Debenture, a $4,200,000 Purchase Money Note, an earn-out of $2,700,000, $300,000 in payables subject to obtaining certain regulatory approvals, $1,383,800 for warrants to purchase 31,450,000 shares of the Company’s common stock and 2,500,000 shares of the Company’s common stock valued at $112,500. In addition, the Company capitalized fees totaling $513,000 associated with the issuance of the debt raised to pay the $1,900,000 cash consideration to the Woodland seller. These fees were expensed in their entirety during the year ended April 30, 2010. Due to the fact that Company’s common stock is so thinly traded, the value of the common shares and warrants issued was determined based on the Company’s estimated enterprise value as of February 23, 2009.
The following table summarizes the carrying values of the assets acquired and liabilities assumed at the date of acquisition.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
The $10,904,792 patent is being amortized over its expected useful life of seven years. The excess of the purchase price over the tangible net assets and identifiable intangible assets was allocated to Goodwill. Accordingly, the Company recorded $1,086,763 in Goodwill as a result of the Woodland acquisition. The Woodland purchase price is expected to be finalized after the Company completes its assessment of the fair values of the fixed assets acquired in this acquisition.
Pro Forma Summary Financial Data
The following un-audited condensed pro forma summary financial data presents our pro forma condensed combined financial information as if we had completed the acquisitions of Enversa and the businesses acquired in the Woodland Acquisition at the beginning of the year ended April 30, 2009:
4. Property and Equipment
Property and equipment is summarized as follows at April 30:
Depreciation expense for property and equipment for the years ended April 30, 2011, 2010 and 2009 was $386,145, $478,777 and $259,514, respectively.
During the year ended April 30, 2010, the Company reclassified $416,922 from fixed assets to Goodwill as a result of an appraisal of the fair value of fixed assets acquired in the Woodland Acquisition.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
5. Intangible Assets and Goodwill
Intangible Assets
Identifiable intangibles acquired in connection with business acquisitions accounted for under the purchase method are recorded at their respective fair values. The Company is amortizing the identifiable intangibles over their estimated useful lives, ranging from three to seven years. Intangibles consist of the following at April 30:
Amortization expense related to identifiable intangible assets totaled $1,891,164, $1,891,164 and $481,862 for the years ended April 30, 2011, 2010 and 2009, respectively. The estimated amortization for the next five years is as follows:
Goodwill
Goodwill represents the excess of acquisition cost over the net assets acquired in a business combination and is not amortized in accordance with ASC 350. The provisions of ASC 350 require that the Company allocate its goodwill to its various reporting units, determine the carrying value of those businesses, and estimate the fair value of the reporting units so that a two-step goodwill impairment test can be performed. In the first step of the goodwill impairment test, the fair value of each reporting unit is compared to its carrying value. 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 discounted operating cash flows. If an impairment of the carrying value were to be indicated by this review, the Company would perform the second step of the goodwill impairment test in order to determine the amount of goodwill impairment, if any.
The changes in the carrying amounts of goodwill for the two year period ended April 30, 2011 is as follows: (see Note 3 - Acquisitions and Disposals):
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
6. Debt
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
On March 29, 2011, the Company also entered into a warrant purchase agreement with the Senior Lender. Pursuant to the Purchase Agreement, the Company issued the Senior Lender a common stock purchase warrant (the "Warrant"), pursuant to which the Senior Lender may purchase up to 8,762,008 shares of the Company's common stock for an aggregate price of $100, have a 5 year term and contain certain put and call options. The Warrant is not exercisable prior to March 30, 2014. Using the Black-Scholes model, the value of the warrant issued to the Senior Lender was less than the net present value of the minimum $1,000,000 cash value of the warrants. Therefore, the net present value of $1,000,000, totaling $642,899 was recorded as a loan discount, which is being amortized to earnings as additional interest expense over the remaining term of the loan. The warrant will be revalued at each reporting date, and adjusted to earnings. In addition, other loan fees of $717,569 were incurred from the issuance of 75,104,584 shares of the Company’s stock, $512,750 was paid or accrued, and $52,467 was incurred from the grant of additional warrants during March 2011. These fees are being amortized to earnings as additional interest over the remaining term of the loans. The unamortized balance of these deferred costs was $1,880,406 at April 30, 2011, and is reflected as a loan discount to the outstanding balance of $11,061,372 at April 30, 2011.
The notes payable to the Senior Lenders include certain restrictive covenants with respect to the Company’s earnings, leverage and accounts payable. As of April 30, 2011, the Company believes it was in compliance with all restrictive covenants.
Future minimum principal payments pursuant to the above long term debt and line of credit agreements are as follows:
7. Leases
The Company leases its facilities under non-cancelable operating lease agreements. The leases expire on various dates through 2016 and provide for minimum monthly rents of approximately $19,511. Rent expense for the years ended April 30, 2011, 2010 and 2009 was approximately $539,947, $501,663 and $126,391, respectively. See also Note 12, Related Party Transactions, for more details.
Future minimum lease payments under non-cancelable leases are as follows:
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
8. Equity
Preferred Stock
The Company’s authorized preferred stock consists of 10,000,000 shares with a par value of $0.001 per share. There were no issued and outstanding preferred shares as of April 30, 2010.
Common Stock
The Company’s authorized common stock consists of 250,000,000 shares with a par value of $0.001 per share. As of April 30, 2011, 146,972,901 shares of common stock were issued and outstanding.
On August 27, 2008, Cornerworld acquired Leadstream in exchange for 3,600,000 shares of Cornerworld stock (the “Acquisition Shares”) and a $1,500,000 note payable. After this exchange, the company had a total of 46,968,317 shares of common stock outstanding. The Acquisition Shares, which are restricted securities as defined under the U.S. securities laws, are subject to a leakout provision. The holders of the membership interests of Leadstream (the “Leadstream Members”) agreed that during the two-year period following the Closing Date, they would not sell the Acquisition Shares in the aggregate in excess of 1% of CornerWorld’s outstanding shares (i.e. each Leadstream Member would be entitled to sell up to its pro rata portion of such 1%).
On February 17, 2009, Cornerworld issued an aggregate of 420,000 shares of Cornerworld common stock to the holders of certain promissory notes issued by its wholly-owned subsidiary, Cornerworld, Inc. (the “Cornerworld, Inc. Promissory Notes”), in connection with amendments extending the maturity of the Cornerworld, Inc. Promissory Notes from 2009 until 2010. The aggregate principal amount of the Cornerworld, Inc. Promissory Notes was $70,000 and the holders include (i) Scott Beck, CornerWorld’s Chief Executive Officer, (ii) a trust for the benefit of Mr. Beck’s mother and (iii) Mr. Beck’s second cousin.
On February 23, 2009, the Company issued an aggregate of 2,500,000 shares of Cornerworld common stock to Mr. Ned Timmer in conjunction with the Woodland acquisition. See also Note 3 to these financial statements for more details with respect to that transaction.
Also, on February 23, 2009 and in conjunction with the Woodland Acquisition, the Company borrowed $1,900,000 from IU Investments, LLC. The Company issued 11,400,000 shares of its common stock to IU Investments, LLC pursuant to this note.
The Company also issued 3,000,000 shares to Internet University, Inc. as consideration for Internet University, Inc.’s extension of the due date of the line of credit payable to them by one calendar year.
During the fiscal quarter ended January 31, 2009, the Company issued 30,000 shares of common stock in connection with the settlement of certain outstanding claims.
On March 30, 2011, the Company issued 75,104,584 shares to certain creditors with respect to the issuance of debt or extension of terms of their outstanding commitments. Similarly, on March 30, 2011, the Company issued 10,300,000 shares to certain officers and key employees.
On March 30, 2011, in connection with the February 3, 2011 Settlement Agreement, the Company retired 33,950,000 shares. See also Note 10, Commitments and Contingencies, for more detail.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
Warrants
The following summarizes the Company’s warrant transactions for the years ended April 30, 2011, 2010 and 2009:
The following table summarizes information about warrants outstanding as of April 30, 2011:
As part of the Woodland Acquisition, the Company issued warrants to the Timmer, Woodland seller, who later became an employee and a member of the Board of Directors. One warrant allowed Timmer to purchase 31,450,000 shares of the Company’s common stock for consideration of $100. Timmer exercised this warrant on July 23, 2009 and acquired 31,450,000 shares of the Company’s common stock. This stock was returned as part of the February 3, 2011 Settlement Agreement (the “Settlement Agreement”) between the Company and Timmer. See also Note 10, Commitments and Contingencies, for more detail.
In connection with the closing of the Woodland Acquisition, the Company issued 1,321,000 warrants to our Chief Executive Officer to purchase the Company’s common stock at an exercise price of $0.20 per share.
Pursuant to the financing of the Settlement Agreement, the Company issued the warrants to one of the lenders purchase up to 8,762,008 shares of the Company’s Common stock. These warrants contain certain put and call features, including a put feature that the warrants will not be exercisable for less than $1.0 million in cash, and are not exercisable prior to March 30, 2014.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
In connection with the sourcing of capital required to fund the Settlement Agreement, the Company issued warrants to Dragonfly Capital Partners LLC (the “Dragonfly Warrants”) to purchase up to 6,133,406 shares of the Company’s common stock. The warrants can be exercised for an aggregate price of $100 and have a 5 year term.
9. Stock Based Compensation Plans
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. 25% of shares vest on the six month anniversary of the date of grant, the Initial Vesting Date, while the remaining options vest annually in 25% increments beginning on the first anniversary of the Initial Vesting Date. The options expire 10 years from the grant date.
The number of shares outstanding under the Company’s 2007 Incentive Stock Plan as of April 30, 2011 was 1,670,000.
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.
As of April 30, 2011, 850,000 authorized shares under the Company’s 2007 Stock Compensation Plan had been granted.
A summary of the shares reserved for grant and awards available for grant under each Stock Plan is as follows:
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.
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:
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
A summary of activity under the Stock Plans and changes during the years ended April 30, 2010, 2009 and 2008 is presented below:
* Due to the Company’s limited operating history, no estimate for forfeitures has been made in these financial statements as there has been no turnover of employees to whom options were granted.
** Upon review of the instruments, the Company reclassified these options to warrants.
During the years ended April 30, 2011, 2010 and 2009, the Company recognized $149,570, $256,175 and $379,916 of stock-based compensation expense, respectively. As of April 30, 2011, 2010 and 2009 there was $362,548, $755,683 and $1,178,576, respectively, 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 3.36 weighted average years.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
10. Commitments and Contingencies
Litigation
On December 11, 2009, the Company, received a letter (the “Notice”) from an attorney representing Timmer which alleged certain defaults with respect to that certain Secured Debenture issued by the Company and the Company’s wholly-owned subsidiary, Woodland Holdings, in favor of Timmer, with a maturity date of February 23, 2012, that certain Purchase Money Note issued by Woodland Holdings in favor of Timmer with a maturity date of February 23, 2012, and certain related security agreements and collateral perfection agreements all of which were in connection with the Woodland Acquisition. Further, on December 14, 2009, the Company received documents from Timmer pursuant to which Timmer purported to appoint new directors and officers of each of the Woodland’s subsidiaries.
The Company believed that the events described in the Notice did not constitute defaults and, on December 14, 2009 the Company filed an action against Timmer, another member of the Company’s Board of Directors, and certain other parties in the United States District Court for the Western District of Michigan for fraud, breach of contract, breach of fiduciary duty, conversion and other matters and requesting, among other things, injunctive relief and damages.
On December 21, 2009, the Company presented its arguments in the United States District Court for the Western District of Michigan. On December 22, 2009, the judge issued an order (the “Order”) which denied Timmer’s request for an injunction against the Company and granted the Company’s request for injunction against Timmer. Among other things, the injunction ordered: (1) The actions taken by Timmer on December 10, 2009 to gain corporate control over Woodland are deemed null and void; (2) Timmer shall return to CornerWorld all collateral and/or property belonging to the Company over which he has asserted control, including, but not limited to, the funds contained in bank accounts; and (3) Timmer shall be removed from active management of the Woodland employees, but shall be retained on the Board of Directors of the Company. The Company immediately moved to comply with the Order.
On December 31, 2009, Timmer filed a motion for reconsideration and the Company immediately responded.
On January 7, 2010, Timmer’s motion for reconsideration was denied.
The Company entered into mediation discussions with Mr. Timmer on June 21, 2010 and again on August 11, 2010. The parties did not agree to a settlement as a result of those mediation discussions.
On November 16, 2010, the judge in the United States District Court for the Western District of Michigan issued two orders (the “Second Orders”) which dismissed most of Timmer’s default claims while also simultaneously denying his request for relief from the preliminary injunction entered on December 22, 2009. The Second Orders also denied CornerWorld’s claim for summary judgment.
As previously noted, on February 3, 2011, the Company and Timmer (collectively the “Parties”), entered into the Settlement Agreement, pursuant to which:
· Timmer canceled an aggregate of $6.1 million principal on outstanding notes payable. These notes were comprised of the Secured Debenture, dated as of February 23, 2009, issued by Woodland Holdings to Timmer, and the Purchase Money Note dated as of February 23, 2009, issued by Woodland Holdings Corporation to Timmer. These notes had outstanding balances totaling $1.9 million and $4.2 million as of February 3, 2011, respectively.
· Timmer returned all collateral stock certificates/membership interests of the Company’s subsidiaries in his possession, including Woodland Holdings, T2TV, WMCLS, Woodland Wireless, Ranger, T2 Communications and PSM.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
· Timmer returned all CornerWorld common stock beneficially owned by him representing approximately 35% of the total outstanding stock of the Company. This included 31,450,000 shares held by the Ned Timmer Trust and 2,100,000 shares in the name of Ned Timmer. In addition, Timmer returned 400,000 shares held by HCC Foundation and warrants to purchase 2,750,000 shares. Finally, Timmer agreed that he will never purchase, own or control any CornerWorld Common stock.
· Timmer resigned from the CornerWorld Board of Directors, resigned his position as an officer of the Company and his employment agreement was terminated.
· On or prior to March 30, 2011, CornerWorld paid Timmer (1) $6.0 million in cash (the “Lump Sum Payment”) and issued (2) a Promissory Note (the “Note”) for $1.8 million. The Note is payable in five annual payments of $360,000 with the first payment coming due April 30, 2012. In addition, the Note bears interest at 10%. The Note is secured by existing collateral held by Timmer as set forth in the Pledge and Security Agreements dated February 23, 2009 made by the Company, CornerWorld, Inc., Enversa Companies, LLC, Woodland Holdings Corp., Woodland Wireless Solutions Ltd., S Squared LLC, West Michigan Co-Location Services, LLC and T2 TV, LLC in favor of Ned B. Timmer and will be subordinated to any third party financing of the Lump Sum Payment, among other things.
· The lease between Woodland Holdings, a CornerWorld subsidiary, and Sol Danzer Enterprises, LLC (“SD”) was terminated.
· The Parties agreed that the second closing of the Unit Purchase Agreement for the purchase of 100% of the member voting units of T2 Communications, LLC and Phone Services and More, LLC took place contemporaneously with the funding of the Lump Sum Payment.
· The Parties agreed to dismiss all legal proceedings within 5 business days of the funding of the Lump Sum Payment.
The Settlement Agreement was contingent upon the Company obtaining third party financing for the Lump Sum Payment by March 30, 2011. On March 30, 2011, the Company consummated the Settlement Agreement with Timmer by making a payment to Timmer totaling $6.0 million, among other things. In accordance with the Settlement Agreement, subsequently, the Company and Timmer dismissed all legal proceedings against each other.
From time to time, the Company is involved in litigation matters relating to claims arising from the ordinary course of business. While the results of such claims and legal actions cannot be predicted with certainty, the Company’s management does not believe that there are 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, financial condition or cash flows.
Employment Agreements
The Company has an employment contract with its Chairmen of the Board of Directors who also serves as the Chief Executive Officer. The contract provides for an annual salary of $400,000 and includes certain discretionary bonus provisions as well as provisions related to certain financing transactions. This agreement expires in 2021. The agreement contains certain severance payments, upon termination of employment (except for cause), as defined in his employment agreement.
The Company has an employment contract with its Chief Financial Officer. The contract provides for an annual salary of $165,000 and includes certain bonus provisions up to 25% of his base salary based on the company achieving certain earnings thresholds, among other things. This agreement expires in 2012. The agreement contains certain severance payments, upon termination of employment (except for cause), as defined in his employment agreement.
The Company had an employment contract with Timmer, the seller of Woodland, an employee and a member of the Board of Directors. The contract provided for an annual salary of $50,000, bonuses and earnout provisions. This employment contract was terminated pursuant to the Settlement Agreement.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
The Company had an employment contract with its President, who previously served as the Chief Marketing Officer. The contract provided for an annual salary of $200,000 and included certain bonus provisions based on Enversa achieving certain earnings thresholds. This agreement expired in 2010. The Company and its President are in the process of negotiating a revised, mutually beneficial employment agreement at this time.
The Company had an employment contract with its Chief Technology Officer. The contract provides for an annual salary of $92,000 and included certain bonus provisions. This agreement expired in April 2011.
The Company had employment contracts with two other critical employees. The contracts provide for annual salaries of $78,000 and $48,000, respectively, along with certain bonus provisions. Each agreement expired in April 2011.
11. Segment Reporting
The Company operates in three integrated business segments: (i) marketing services, (ii) communications services and (iii) Corporate, formerly, on-line media networks:
There were no material intersegment sales. Operating income is defined as third party sales less operating expenses. All of the Company’s business activities are conducted within the United States geographic boundaries.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
12. RELATED PARTY TRANSACTIONS
During a portion of the year ended April 30, 2009, the Company used the offices of its Chief Executive Officer for its minimal office facility needs for no consideration. No provision for these costs has been provided since it has been determined that they are immaterial.
The Company’s Enversa division receives administrative support from its former parent company, Internet University, Inc. (“Internet University”). Included in such administrative support are human resources, payroll, information technology and facilities services. Prior to moving on February 1, 2011, Enversa operated from office space provided by Internet University and utilized furniture and equipment provided by Internet University in such office space. The costs of such services have been billed to Cornerworld and are reflected in the income statements in the total amount of $253,999, $256,862 and $264,796 for the years ended April 30, 2011, 2010 and 2009, respectively.
Additionally, for the period from August 2008 through April 2011, all of CornerWorld’s and Enversa’s employees were leased to Enversa through a certain Transition Services Agreement between Cornerworld, Enversa, and Internet University, Inc. CornerWorld and Enversa employees were paid under the federal employer identification number and are included in the employee benefit programs, such as life, health and disability insurance and 401(k) of a subsidiary of Internet University. The selling, general and administrative expenses on the income statement reflects a total of $2,531,345, $1,493,279 and $492,885 of actual salaries for CornerWorld’s corporate and Enversa personnel during the years ended April 30, 2011, 2010 and 2009, respectively, as well as an allocation of payroll taxes and employee benefits calculated at 15% of salary. Subsequent to April 30, 2011, all employees are being paid under the Company’s federal employer identification number.
On August 27, 2008, Enversa entered into a $500,000 line of credit with Internet University which was originally intended to expire on February 23, 2009. From time to time, Enversa and Internet University amended the line of credit, which extended the maturity date until December 31, 2010 and provided a schedule for payments. The line of credit bears interest at 8.00% per annum and is secured by a second priority security interest in CornerWorld’s membership interests in Enversa, a first priority security interest in all of Enversa’s assets and in all products, proceeds, revenues, distributions, dividends, stock dividends, securities and other property, rights and interests that Cornerworld and Enversa receives or is at any time entitled to receive. There was no outstanding balance under the line of credit at April 30, 2011 and the Company no longer has access to the unused portion. The Company recognized interest expenses totaling $6,944 and $23,575 during the years ended April 30, 2011 and 2010, respectively, related to this line of credit.
As part of the Enversa acquisition, the Company borrowed $1,500,000 from Internet University, Inc., Marc Blumberg and Marc Pickren (collectively, the “Enversa Sellers”). Mr. Blumberg is a member of the Company’s Board of Director as well as the president of Internet University, Inc. and Mr. Pickren is the President of the Company. On March 30, 2011, the Company entered into amendments to its promissory notes with the Enversa Sellers (collectively the “Tier 4 Junior Notes”). The amendments to the Tier 4 Junior Notes revised the repayment schedules of the Tier 4 Junior Notes such that principal payments would be payable annually beginning on March 31, 2012 until such time as the Tier 4 Junior Notes mature on March 31, 2016. Interest payments will be payable monthly at a revised rate of 15% per annum. The Company recorded interest of $65,997 and $115,247 on this facility during the years ended April 30, 2011 and 2010, respectively. The balance of these notes totaled $1,364,199 at April 30, 2011.
On February 23, 2009 the Company completed the acquisition of all of its Michigan-based operating divisions (the “Woodland Acquisition”). As a result of the Woodland Acquisition, the Company issued debt and equity securities to Mr. Ned Timmer (“Timmer”) who became a member of the Board of Directors and the President of the Company’s Woodland division. Timmer was the holder of a $4,200,000 secured debenture as well as a holder of the Company’s $3,100,000 purchase money note.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
As part of the February 23, 2009 Woodland Acquisition, the Company borrowed $1,900,000 from IU Investments LLC. On March 30, 2011, the Company entered into Amendment No. 3 (“IU Amendment No. 3”) to its Promissory Note to IU Investments, LLC (the “Tier 3 Junior Note”). IU Amendment No. 3 revised the repayment schedule of the Tier 3 Junior Note such that the Company will make principal payments totaling $27,417/month until February 28, 2012, after which time the Company will pay $67,200 annually beginning March 31, 2012 until such time as the Tier 3 Junior Note is paid in full on March 31, 2016. Interest payments will be payable monthly at a rate of 10% per annum. A member of the Company’s Board of Director as well as one of the selling partners of Enversa is an employee of the parent of IU Investments, LLC. The Company recorded interest of $104,324 and $177,219 on this facility during the years ended April 30, 2011 and 2010, respectively. The balance of this note totaled $610,166 at April 30, 2011.
On December 22, 2009, the judge in the United States District Court for the Western District of Michigan issued an order (the “Order”) which, among other things, ordered: (1) The actions taken by Timmer on December 10, 2009 to gain corporate control over Woodland are deemed null and void; (2) Timmer shall return to CornerWorld all collateral and/or property belonging to the Company over which he has asserted control, including, but not limited to, the funds contained in bank accounts; and (3) Timmer shall be removed from active management of the Holland employees, but shall be retained on the Board of Directors of the Company.
As previously noted, on February 3, 2011, CornerWorld and Timmer entered into a Settlement Agreement the principal terms of which were as follows:
· Timmer canceled an aggregate of $6.1 million principal on outstanding notes payable. These notes had outstanding balances totaling $1.9 million and $4.2 million, respectively. The Company paid interest expenses to Timmer totaling approximately $729,533 and $886,333 on these two facilities during the years ended April 30, 2011 and 2010, respectively.
· Timmer returned all collateral stock certificates/membership interests in his possession.
· Timmer returned all CornerWorld common stock in his possession representing approximately 35% of the total outstanding stock of the Company. This included 31,450,000 shares held by the Ned Timmer Trust and 2,100,000 shares in the name of Ned Timmer. In addition, Timmer returned 400,000 shares held by HCC Foundation and warrants to purchase 2,750,000 shares.
· Timmer resigned from the CornerWorld Board of Directors, resigned his position as an officer of the Company and his employment agreement was terminated.
· Timmer terminated the lease between Woodland Holdings, a CornerWorld subsidiary, and Sol Danzer Enterprises, LLC. During the years ended April 30, 2011 and 2010, the Company paid approximately $211,644 and $211,644 in rent and management fees to Timmer as a result of this lease.
On March 30, 2011, CornerWorld paid Timmer $7.8 million. The payment was comprised of (1) $6.0 million in cash (the “Lump Sum Payment”) and (2) a Promissory Note (the “Timmer Note”) for $1.8 million. Subsequent to the Lump Sum Payment and the issuance of the Timmer Note, Timmer is no longer affiliated with the Company as an employee, a shareholder or a member of its Board of Directors. Accordingly, subsequent to March 30, 2011, Timmer is no longer a related party.
The Company funded the Lump Sum Payment with a combination of third party and related party financing as set forth in the Company’s Form 8-K filed on April 5, 2011.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
A portion of the Lump Sum Payment was sourced from IU Holdings, LP (“IUH”). On March 30, 2011, the Company entered into a subordinated $1.5 million promissory note with IUH (the “Tier 2 Junior Note”). Principal under the Tier 2 Junior Note is payable in quarterly installments of $187,500 commencing on May 31, 2011 until such point as the Tier 2 Junior Note matures on February 28, 2013. Interest on the outstanding principal amount under the Tier 2 Junior Note is payable monthly in arrears at a rate of 12% per annum. As additional consideration to induce the Tier 2 Junior Lender to enter into this Promissory Note, the Company issued the Tier 2 Junior Lender, 48,414,132 shares of CornerWorld Corporation Common stock. IUH is a partnership whose limited partners include friends and family of the Company’s Chief Executive Officer. The Company paid approximately $15,500 in interest during the year ended April 30, 2011 to IUH as a result of this note. The balance of this note totaled $1,500,000 at April 30, 2011.
On March 30, 2011, the Company entered into a subordinated $400,000 promissory note (the “Tier 5 Junior Note”) with Internet University. Principal under the Tier 5 Junior Note is payable in monthly installments of $25,000 commencing on April 30, 2011 until such point as the Tier 5 Junior Note matures on April 30, 2012. Interest on the outstanding principal amount under the Tier 5 Junior Note is payable monthly in arrears at a rate of 15% per annum. As additional consideration to induce the Tier 5 Junior Lender to enter into this Promissory Note, the Company issued the Tier 5 Junior Lender, 12,910,435 shares of CornerWorld Corporation Common stock. The Company recorded interest of $5,000 on this facility during the year ended April 30, 2011. The balance of this note totaled $375,000 at April 30, 2011.
On March 30, 2011, the Company entered into a subordinated $389,942 promissory note (the “Tier 7 Junior Note”) with Scott N. Beck, the Company’s Chief Executive Officer. Principal under the Tier 7 Junior Note is payable in monthly installments of $12,746 commencing on April 30, 2011 until such point as the Tier 7 Junior Note matures on September 30, 2013. Interest on the outstanding principal amount under the Tier 7 Junior Note is payable monthly in arrears at a rate of 10% per annum. As additional consideration to induce Mr. Beck to enter into this Promissory Note, the Company issued Mr. Beck 12,585,802 shares of CornerWorld Corporation Common stock. The Tier 7 Junior Note consists primarily of prior accounts payable; as of April 30, 2010, the Company has accrued liabilities totaling approximately $315,000 to our Chief Executive Officer. The Company recorded interest of $3,250 on this facility during the year ended April 30, 2011. The balance of this note totaled $377,196 at April 30, 2011.
On March 30, 2011, the Company entered into an unsecured $37,976 promissory note (the “Tier 8 Junior Note”) with Kelly Larabee Morlan; Ms. Morlan is the Secretary of the Company. Principal under the Tier 8 Junior Note is payable in monthly installments of $3,165 commencing on April 30, 2011 until such point as the Tier 8 Junior Note matures on March 30, 2012. Interest on the outstanding principal amount under the Tier 8 Junior Note is payable monthly in arrears at a rate of 10% per annum. As additional consideration to induce Ms. Morlan to enter into this Promissory Note, the Company issued Ms. Morlan 1,194,215 shares of CornerWorld Corporation Common stock. The Tier 8 Junior Note is unsecured. The Company recorded interest of $316 on this facility during the year ended April 30, 2011. The balance of this note totaled $34,811 at April 30, 2011.
On February 1, 2011, the Company entered into a lease for office space with an entity that is controlled by the family of the Company’s CEO. The lease is for 5 years with minimum annual rentals of $148,464 in year one, $153,660 in year two, $159,038 in year three, $164,605 in year four and $170,366 in year five.
CornerWorld Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2011
13. Income Taxes
The Company accounts for income taxes in accordance with ASC 740. Due to continued losses from operations, since the inception of the Company, no provision for income taxes has been made in these financial statements. The Company’s cumulative deferred tax asset is valued as follows:
The Company’s deferred tax assets are offset by a valuation allowance due to the uncertainty of the realization of the net operating loss carryforwards. Net operating loss carryforwards may be further limited by a change in company ownership and other provisions of the tax laws.
14. SUBSEQUENT EVENTS
The Company has evaluated all subsequent events through the date the financial statements were available to be issued.
As previously reported, on May 9, 2011, the Company appointed Marc A. Pickren, as its President. Currently the company is working under the economics of Mr. Pickren’s employment agreement established in 2008 and is working towards a mutually agreeable agreement for the future.
On June 3, 2011, the Company amended its debt agreement with IUH. The Company entered into Amendment No. 1 (“IUH Amendment No. 1”) to its Promissory Note with IUH (the “IUH Note”). IUH Amendment No. 1 revised the repayment schedule of the IUH Note such that principal payments were deferred by two quarters beginning with the payment due on May 31, 2011. They will resume on November 30, 2011 and continue through August 31, 2013, after which point the IUH Note will be paid in its entirety. Interest payments and other terms remained unchanged.