UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
[ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File Number:000-52635
ACCELERIZE INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-3858769 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
20411 SW BIRCH STREET, SUITE 250
NEWPORT BEACH,
CALIFORNIA 92660
(Address of principal executive offices)
(949) 548 2253
(Registrant’s Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No [X]
The number of shares outstanding of the registrant’s Common Stock, $0.001 par value per share, as of November 9, 2015, was 65,059,540.
When used in this quarterly report, the terms “Accelerize,” “the Company,” “we,” “our,” and “us” refer to Accelerize Inc., a Delaware corporation.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q contains certain forward-looking statements. Forward-looking statements may include our statements regarding our goals, beliefs, strategies, objectives, plans, including product and service developments, future financial conditions, results or projections or current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. For example, when we discuss our expectations that our revenues will increase in the remainder of 2015, our expansion plans, our new products, our intentions to grow revenues by investing in sales and marketing efforts, and our spending on research and development, training and support personnel, and other expected expenses, we are using forward-looking statements. These statements are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. These factors include, but are not limited to, our ability to implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. The business and operations of Accelerize Inc. are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described under “Item 1A. Risk Factors” in our annual report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, on March 19, 2015, in our quarterly report on Form 10-Q as filed with the SEC on August 13, 2015, and in this report. Readers are also urged to carefully review and consider the various disclosures we have made in this report and in our annual report on Form 10-K.
ACCELERIZE INC.
INDEX
| Page | |||||
| PART I - FINANCIAL INFORMATION: | 1 | ||||
Item 1. | Financial Statements (Unaudited) | 1 | |||
|
|
| |||
Item 2. | Management’s Discussion and Analysis of Financial Position and Results of Operations | 15 | |||
|
|
| |||
Item 4. | Controls and Procedures | 22 | |||
|
|
| |||
PART II - OTHER INFORMATION: | 23 | ||||
Item 1. | Legal Proceedings | 23 | |||
Item 1A. | Risk Factors | 24 | |||
Item 6. | Exhibits | 24 | |||
| SIGNATURES | 25 | ||||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ACCELERIZE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
| 2015 | 2014 | ||||||
(Unaudited) | ||||||||
| ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 519,645 | $ | 1,130,667 | ||||
Accounts receivable, net of allowance for bad debt of $113,944 and $212,113, respectively | 2,411,266 | 1,749,566 | ||||||
Prepaid expenses and other assets | 336,836 | 204,268 | ||||||
Total current assets | 3,267,747 | 3,084,501 | ||||||
Property and equipment, net of accumulated depreciation of $1,586,970 and $826,802, respectively | 1,755,770 | 1,424,858 | ||||||
Customer relationships, net of accumulated amortization of $1,000,000 and $703,704, respectively | - | 296,296 | ||||||
Deferred financing costs, net of accumulated amortization of $49,598 and $19,317, respectively | 48,258 | 37,750 | ||||||
Other assets | 129,841 | 132,988 | ||||||
Total assets | $ | 5,201,616 | $ | 4,976,393 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
Current Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 2,450,167 | $ | 1,202,495 | ||||
Deferred revenues | 19,384 | 206,475 | ||||||
Other current liabilities | 2,310 | - | ||||||
Total current liabilities | 2,471,861 | 1,408,970 | ||||||
Line of credit | 4,215,000 | 2,900,000 | ||||||
Total liabilities | 6,686,861 | 4,308,970 | ||||||
Commitments and contingencies | ||||||||
Stockholders' Equity (Deficit): | ||||||||
Common Stock; $0.001 par value; 100,000,000 shares authorized; 65,069,326 and 62,816,554 shares issued and outstanding, respectively | 65,068 | 62,815 | ||||||
Additional paid-in capital | 23,003,998 | 19,618,153 | ||||||
Accumulated deficit | (24,539,005 | ) | (19,002,574 | ) | ||||
Accumulated other comprehensive loss | (15,306 | ) | (10,971 | ) | ||||
Total stockholders’ equity (deficit) | (1,485,245 | ) | 667,423 | |||||
Total liabilities and stockholders’ equity (deficit) | $ | 5,201,616 | $ | 4,976,393 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
ACCELERIZE INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three-month periods ended September 30, | Nine-month periods ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenues: | $ | 5,288,628 | $ | 4,317,325 | $ | 15,954,114 | $ | 11,650,931 | ||||||||
Cost of revenue | 1,797,056 | 1,143,336 | 4,706,167 | 2,982,103 | ||||||||||||
Gross profit | 3,491,572 | 3,173,989 | 11,247,947 | 8,668,828 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1,391,301 | 640,177 | 3,593,093 | 1,817,222 | ||||||||||||
Sales and marketing | 1,824,046 | 1,865,805 | 5,873,023 | 4,888,813 | ||||||||||||
General and administrative | 2,394,092 | 1,921,127 | 7,199,968 | 4,291,637 | ||||||||||||
Total operating expenses | 5,609,439 | 4,427,109 | 16,666,084 | 10,997,672 | ||||||||||||
Operating (loss) income | (2,117,867 | ) | (1,253,120 | ) | (5,418,137 | ) | (2,328,844 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 9,475 | 3,729 | 63,840 | 10,773 | ||||||||||||
Interest expense | (73,897 | ) | (5,823 | ) | (182,134 | ) | (11,244 | ) | ||||||||
Total other (expense) | (64,422 | ) | (2,094 | ) | (118,294 | ) | (471 | ) | ||||||||
Net loss | $ | (2,182,289 | ) | $ | (1,255,214 | ) | $ | (5,536,431 | ) | $ | (2,329,315 | ) | ||||
Net loss per share: | ||||||||||||||||
Basic | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.04 | ) | ||||
Diluted | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.04 | ) | ||||
Basic weighted average common shares outstanding | 63,876,095 | 61,711,315 | 63,184,579 | 60,180,184 | ||||||||||||
Diluted weighted average common shares outstanding | 63,876,095 | 61,711,315 | 63,184,579 | 60,180,184 | ||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
ACCELERIZE INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three-month periods ended September 30, | Nine-month periods ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net loss | $ | (2,182,289 | ) | $ | (1,255,214 | ) | $ | (5,536,431 | ) | $ | (2,329,315 | ) | ||||
Foreign currency translation loss | (6,363 | ) | (2,737 | ) | (4,335 | ) | (338 | ) | ||||||||
Total other comprehensive loss | (6,363 | ) | (2,737 | ) | (4,335 | ) | (338 | ) | ||||||||
Comprehensive loss | $ | (2,188,652 | ) | $ | (1,257,951 | ) | $ | (5,540,766 | ) | $ | (2,329,653 | ) | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
ACCELERIZE INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-month periods ended September 30, | ||||||||
2015 | 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (5,536,431 | ) | $ | (2,329,315 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 1,065,624 | 892,036 | ||||||
Amortization of debt discount | 30,282 | 5,625 | ||||||
Provision for bad debt | (98,169 | ) | 28,911 | |||||
Fair value of options and warrants | 1,632,029 | 461,264 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (563,531 | ) | (679,898 | ) | ||||
Prepaid expenses | (130,258 | ) | (44,822 | ) | ||||
Accounts payable and accrued expenses | 1,244,171 | (314,415 | ) | |||||
Deferred revenues | (187,091 | ) | 9,152 | |||||
Other assets | 1,574 | (135,117 | ) | |||||
Net cash used in operating activities | (2,541,800 | ) | (2,106,579 | ) | ||||
Cash flows from investing activities: | ||||||||
Capitalized software for internal use | (952,216 | ) | (551,684 | ) | ||||
Capital expenditures | (152,080 | ) | (328,760 | ) | ||||
Proceeds from sale of assets | 5,630 | - | ||||||
Net cash used in investing activities | (1,098,666 | ) | (880,444 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from line of credit | 1,315,000 | 2,180,000 | ||||||
Payment of financing costs | - | (40,000 | ) | |||||
Net proceeds from exercise of options and warrants | 9,586 | 1,079,031 | ||||||
Net proceeds from issuance of shares of Common Stock | 1,852,362 | - | ||||||
Payments related to issuance of shares of Common Stock | (143,169 | ) | - | |||||
Net cash provided by financing activities | 3,033,779 | 3,219,031 | ||||||
Effect of exchange rate changes on cash | (4,335 | ) | (338 | ) | ||||
Net (decrease) increase in cash | (611,022 | ) | 231,670 | |||||
Cash, beginning of period | 1,130,667 | 1,157,315 | ||||||
Cash, end of period | $ | 519,645 | $ | 1,388,985 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 179,484 | $ | - | ||||
Cash paid for income taxes | $ | - | $ | - | ||||
Non-cash investing and financing activities: | ||||||||
Fair value of warrants issued in connection with line of credit | $ | 37,289 | $ | 32,067 | ||||
Capital expenditure included in accounts payable | $ | - | $ | - | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
ACCELERIZE INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
Accelerize Inc., a Delaware corporation, incorporated on November 22, 2005, owns and operates CAKE, a Software-as-a-Service, or SaaS, platform providing online tracking and analytics solutions for advertisers and online marketers.
The Company provides software solutions for businesses interested in expanding their online advertising spend.
The condensed consolidated balance sheet presented as of December 31, 2014 has been derived from our audited consolidated financial statements. The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the annual financial statements and notes for the year ended December 31, 2014 included in our Annual Report on Form 10-K filed with the SEC on March 19, 2015. In the opinion of management, all adjustments, consisting of normal, recurring adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results of operations for the three and nine-month periods ended September 30, 2015 are not necessarily indicative of the results for the year ending December 31, 2015.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the results of operations of Cake Marketing UK Ltd., or the Subsidiary. All material intercompany accounts and transactions between the Company and the Subsidiary have been eliminated in consolidation.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Actual results will differ from those estimates. Included in these estimates are assumptions about collection of accounts receivable, useful life of fixed assets and intangible assets, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.
Reclassification
The financial statements for the three and nine-month periods ended September 30, 2014 have been reclassified to reflect the increase in personnel last year which allowed for more clearly defined roles and allocation of certain unallocated general and administrative expenses to the Company’s functional areas.
Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased, to be cash equivalents.
Accounts Receivable
The Company’s accounts receivable are due primarily from advertisers and marketers. Collateral is currently not required. The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments. The Company periodically reviews these estimated allowances, including an analysis of the customers’ payment history and creditworthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to make payments as well as historical collection trends for its customers as a whole. Based on this review, the Company specifically reserves for those accounts deemed uncollectible or likely to become uncollectible. When receivables are determined to be uncollectible, principal amounts of such receivables outstanding are deducted from the allowance.
September 30, 2015 | December 31, 2014 | |||||||
Allowance for doubtful accounts | $ | 113,944 | $ | 212,113 | ||||
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and cash equivalents and accounts receivable.
The Company’s cash and cash equivalents accounts are held at a financial institution and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. During the nine-month period ended September 30, 2015, the Company has reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such financial institutions, the Company periodically evaluates the credit quality of the financial institution in which it holds deposits.
The Company's accounts receivable are due from customers, generally located in the United States, Europe, Asia, and Canada. None of the Company’s customers accounted for more than 10% of its accounts receivable at September 30, 2015 or December 31, 2014. The Company does not require any collateral from its customers.
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with ASC Topic 605, Revenue Recognition. Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured.
The Company’s SaaS revenues are generated from implementation and training fees and a monthly license fee, supplemented by per transaction fees paid by customers for monthly platform usage. The initial term of the customer contract is generally one year with one of two general cancellation policies. Each party may cancel the contract within the initial period or after the initial period, with 30-days’ prior notice. The Company does not provide any general right of return for its delivered items. Services associated with the implementation and training fees have standalone value to the Company’s customers, as there are third-party vendors who offer similar services to the Company’s services. Accordingly, they qualify as separate units of accounting. The Company allocates a fair value to each element deliverable at the recognition date and recognizes such value when the services are provided. The Company bases the fair value of the implementation and training fees on third-party evidence and the monthly license fee on vendor-specific objective evidence. Fees charged by third-party vendors for implementation and training services do not vary significantly from the fees charged by the Company. Services associated with implementation and training fees are generally rendered within a month from the initial contract date. The value attributed to the monthly license fees as well as the fees associated with monthly transaction-based platform usage are recognized in the corresponding period.
Product Concentration
The Company generates its revenues from software licensing, usage, and related transaction fees.
Fair Value of Financial Instruments
The Company accounts for assets and liabilities measured at fair value on a recurring basis in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities. |
|
|
Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data. |
|
|
Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. |
Additional Disclosures Regarding Fair Value Measurements
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and lines of credit approximate their fair value due to the short term maturity of these items.
Advertising
The Company expenses advertising costs as incurred.
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Advertising expense | $ | 114,824 | $ | 168,235 | $ | 349,907 | $ | 287,545 | ||||||||
Income Taxes
Income taxes are accounted for in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.
Foreign Currency Translation
The Company’s reporting currency is U.S. Dollars. The functional currency of the Company’s Subsidiary in the United Kingdom is British Pounds. The translation from British Pounds to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using the average exchange rate in effect during the period. The resulting translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss. Foreign currency translation gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the unaudited condensed consolidated statements of operations.
Software Development Costs
Costs incurred in the research and development of software products and significant upgrades and enhancements thereto during the preliminary project stage and the post-implementation operation stage are expensed as incurred. Costs incurred for maintenance and relatively minor upgrades and enhancements are expensed as incurred. Costs associated with the application development stage of new software products and significant upgrades and enhancements thereto are capitalized when 1) management implicitly or explicitly authorizes and commits to funding a software project and 2) it is probable that the project will be completed and the software will be used to perform the function intended. The Company capitalized internal-use software development costs of $952,216 during the nine-months ended September 30, 2015. The Company amortizes such costs once the new software products and significant upgrades and enhancements are completed. The unamortized internal-use software development costs amounted to $1,254,675 and $841,724 at September 30, 2015 and December 31, 2014, respectively. The Company’s amortization expenses associated with capitalized software development costs amounted to $200,133 and $539,265 during the three and nine-month periods ended September 30, 2015, respectively, and $104,437 and $271,898 during the three and nine-month periods ended September 30, 2014, respectively. Amortization of internal-use software is reflected in cost of revenues.
Share-Based Payment
The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is the vesting period.
The Company has elected to use the BSM option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense recognized in the statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Segment Reporting
The Company generated revenues from one source, its SaaS business, during the nine-month periods ended September 30, 2015 and 2014. The Company's chief operating decision maker evaluates the performance of the Company based upon revenues and expenses by functional areas as disclosed in the Company's statements of operations.
Recent Accounting Pronouncements
Recent accounting pronouncements have been issued but deemed by management to be outside the scope of relevance to the Company.
Basic and Diluted Earnings Per Share
Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the modified-treasury stock method).
Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (2,182,289 | ) | $ | (1,255,214 | ) | $ | (5,536,431 | ) | $ | (2,329,315 | ) | ||||
Denominator: | ||||||||||||||||
Denominator for basic earnings per share--weighted average shares | 63,876,095 | 61,711,315 | 63,184,579 | 60,180,184 | ||||||||||||
Effect of dilutive securities- when applicable: | ||||||||||||||||
Stock options | - | - | - | - | ||||||||||||
Warrants | - | - | - | - | ||||||||||||
Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions | 63,876,095 | 61,711,315 | 63,184,579 | 60,180,184 | ||||||||||||
Loss per share: | ||||||||||||||||
Basic | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.04 | ) | ||||
Diluted | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.04 | ) | ||||
Weighted-average anti-dilutive common share equivalents | 16,562,631 | 14,880,778 | 17,146,481 | 15,507,539 | ||||||||||||
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives of three years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized.
Property and equipment consist of the following at:
September 30, 2015 | December 31, 2014 | |||||||
Internal use software costs | $ | 2,241,583 | $ | 1,289,367 | ||||
Computer equipment and software | 577,149 | 476,963 | ||||||
Office furniture and equipment | 223,184 | 187,263 | ||||||
Leasehold improvements | 300,824 | 298,067 | ||||||
| 3,342,740 | 2,251,660 | |||||||
Accumulated depreciation | (1,586,970 | ) | (826,802 | ) | ||||
| $ | 1,755,770 | $ | 1,424,858 | |||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Depreciation expense | $ | 74,851 | $ | 42,653 | $ | 230,063 | $ | 120,137 | ||||||||
Amortization expense on internal software | $ | 200,133 | $ | 104,437 | $ | 539,265 | $ | 271,898 | ||||||||
During the nine-month period ended September 30, 2015, the Company sold approximately $13,000 in computer equipment with a net book value of approximately $5,500 for proceeds of approximately $5,600.
NOTE 3: PREPAID EXPENSES
At September 30, 2015 and December 31, 2014, the Company’s prepaid expenses consisted primarily of prepaid insurance and rent.
NOTE 4: CUSTOMER RELATIONSHIPS
During November 2013, the Company completed its acquisition of certain customer relationships of a former competitor. Pursuant to the acquisition, the Company paid $1 million payable in four installments of $250,000 every quarter, beginning March 2014. The Company paid the final installment of $250,000 in December 2014 and has no outstanding balance under this arrangement. The Company has capitalized the acquisition cost, which approximates fair value of the customer relationships, which amounts to $1,000,000 and is fully amortized at September 30, 2015. The Company amortizes such customer relationships over a period of 18 months. The Company incurred amortization expense related to the customer relationships of $0 and $296,296 during the three and nine-month periods ended September 30, 2015, respectively and $166,667 and $500,001 during the three and nine-month periods ended September 30, 2014, respectively.
NOTE 5: DEFERRED REVENUES
The Company’s deferred revenues consist of prepayments made by certain of the Company’s customers. The Company decreases the deferred revenues by the amount of the services it renders to such clients when provided.
September 30, 2015 | December 31, 2014 | |||||||
Deferred revenues | $ | 19,384 | $ | 206,475 | ||||
NOTE 6: LINE OF CREDIT
On September 30, 2014, the Company entered into an amendment of its line of credit, or the Line of Credit, with Square 1 Bank, or the Lender, to borrow up to a maximum of $6,000,000 at the Company’s discretion, an increase from up to $3,000,000 that the Company was permitted to borrow under the original Line of Credit entered into on March 17, 2014. Amounts borrowed will accrue interest at the prime rate in effect from time to time plus 1.25%, not to be less than 5.5% per annum, provided that in no event shall the accrued interest payable with respect to any month be less than $10,000. Accrued interest on amounts borrowed is payable monthly and all other amounts borrowed will be payable in full on the maturity date of March 17, 2016, which maturity date may be extended to March 17, 2017 if the Company provides the Lender with a fully-funded business plan acceptable to the Lender by January 15, 2016 and no event of default has occurred. The Line of Credit may be earlier terminated without a prepayment fee.
The Line of Credit, as amended, contains covenants including, but not limited to, covenants to achieve specified Adjusted EBITDA levels, as defined, and customer renewal levels, limiting capital expenditures, requiring minimum liquidity and restricting the Company’s ability to pay dividends, purchase and sell assets outside the ordinary course and incur additional indebtedness. As of September 30, 2015, the Company was in compliance with these covenants, except for the Minimum Adjusted EBITDA covenant, the compliance with which the Company is currently discussing with the Lender. The occurrence of a material adverse change, as defined, will be an event of default under the Line of Credit, in addition to other customary events of default. The Company granted the Lender a security interest in all of the Company’s personal property and intellectual property.
On June 24, 2015, the Company entered into an amendment of the Line of Credit with the Lender, which amended certain covenants until September 1, 2015.
The Company paid down $285,000 on the Line of Credit during the three-month period ended September 30, 2015. The Company owed $4,215,000 under the Line of Credit at September 30, 2015. The interest rate for the amount borrowed was 5.5% per annum.
In connection with the original Line of Credit, the Company issued to the Lender a warrant to purchase up to 46,875 shares of the Company's Common Stock at an exercise price of $1.60 per share. The warrant expires on March 17, 2017. The fair value of the warrant amounted to $32,067. On March 27, 2015, in connection with an obligation under the Line of Credit when borrowings thereunder exceed $3,000,000, the Company issued to the Lender a warrant to purchase 58,824 shares of the Company’s Common Stock at an exercise price of $1.53 per share. This warrant expires on March 27, 2018. The fair value of the warrant amounted to $37,289.
Additionally, the Company paid $2,000 to the Lender in financing costs related to the issuing of the amendment on June 24, 2015, which were capitalized as deferred financing costs at September 30, 2015. The Company recognized amortization and interest expenses in connection with the line of credit for the three and nine-month periods ended September 30, 2015 and 2014 as follows.
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense associated with line of credit |
| $ | 11,699 |
|
| $ | 5,883 |
|
| $ | 30,282 |
|
| $ | 11,767 |
|
Interest expense associated with line of credit |
| $ | 60,898 |
|
| $ | 3,940 |
|
| $ | 149,198 |
|
| $ | 4,551 |
|
NOTE 7: STOCKHOLDERS’ EQUITY
Common Stock
During the nine-month periods ended September 30, 2015 and 2014, the Company generated proceeds of $9,586 and $1,079,031 from the exercise of 11,457 and 3,082,875 warrants, respectively.
During the nine-month period ended September 30, 2015, the Company issued 96,316 shares of its Common Stock pursuant to the cashless exercise of 143,541 options. During the nine-month period ended September 30, 2014, the Company issued 1,288,314 and 50,390 shares of its Common Stock pursuant to the cashless exercise of 1,695,000 and 79,158 warrants and options, respectively.
During the nine-month period ended September 30, 2015 the Company sold to investors an aggregate of 2,145,000 shares of its Common Stock at a price of $1.00 per share and warrants to purchase up to an aggregate of 1,287,000 shares of its Common Stock at an exercise price of $1.32 per share for an aggregate gross consideration of $2,145,000 and net proceeds of approximately $1,700,000.
Warrants
During the nine-month period ended September 30, 2015, the Company issued 58,824 warrants to the Lender. The warrants are exercisable at the price of $1.53 per share and expire on March 27, 2018. The fair value of these warrants which amounted to $37,289, has been recognized as deferred financing fees and is amortized using the effective interest method over the terms of the associated Line of Credit.
The fair value of the warrants granted during the nine-month period ended September 30, 2015 is based on the BSM model using the following assumptions:
Effective Exercise price | $ | 1.60 | ||
Effective Market price | $ | 1.60 | ||
Volatility | 64 | % | ||
Risk-free interest | 0.9 | % | ||
Term (years) | 3 | |||
Expected dividend rate | 0 | % |
During the three and nine-month periods ended September 30, 2015, the Company recorded expenses of $320,024 and $852,278, respectively, related to warrants granted to employees in prior years. The Company recorded no such expenses in 2014.
Stock Option Plan
The Company has a Stock Option Plan, or the Plan, under which the total number of shares of capital stock of the Company that may be subject to options under the Plan is currently 22,500,000 shares of Common Stock from either authorized but unissued shares or treasury shares. The individuals who are eligible to receive option grants under the Plan are employees, directors and other individuals who render services to the management, operation or development of the Company or its subsidiaries and who have contributed or may be expected to contribute to the success of the Company or a subsidiary. Every option granted under the Plan shall be evidenced by a written stock option agreement in such form as the Board shall approve from time to time, specifying the number of shares of Common Stock that may be purchased pursuant to the option, the time or times at which the option shall become exercisable in whole or in part, whether the option is intended to be an incentive stock option or a non-incentive stock option, and such other terms and conditions as the Board shall approve.
The share-based payment is based on the fair value of the outstanding options amortized over the requisite period of service for option holders, which is generally the vesting period of the options. The fair value of the options granted during the nine-month periods ended September 30, 2015 and 2014 is based on the BSM model using the following assumptions:
September 30, 2015 | September 30, 2014 | |||||||||
Effective Exercise price | $0.80 | - | 1.43 | $1.10 | - | 1.80 | ||||
Effective Market price | $0.80 | - | 1.43 | $1.10 | - | 1.80 | ||||
| Volatility | 61 | – | 68% | 64% | ||||||
| Risk-free interest | 0.9 | – | 1.0% | 0.9% | ||||||
Terms (years) | 2 | - | 4 | 4 | ||||||
Expected dividend rate | 0% | 0% | ||||||||
The Company generally recognizes its share-based payment over the vesting terms of the underlying options.
Nine-month periods ended | ||||||||
September 30, 2015 | September 30, 2014 | |||||||
Weighted-average grant date fair value | $ | 0.51 | $ | 0.26 | ||||
Fair value of options, recognized as selling, general, and administrative expenses | $ | 779,751 | $ | 461,264 | ||||
Number of options granted | 740,000 | 1,545,000 | ||||||
The total compensation cost related to non-vested awards not yet recognized amounted to approximately $1,377,186 at September 30, 2015 and the Company expects that it will be recognized over the following weighted-average period of 48 months.
If any options granted under the Plan expire or terminate without having been exercised or cease to be exercisable, such options will be available again under the Plan. All employees of the Company and its subsidiaries are eligible to receive incentive stock options and non-qualified stock options. Non-employee directors and outside consultants who provided bona-fide services not in connection with the offer or sale of securities in a capital raising transaction are eligible to receive non-qualified stock options. Incentive stock options may not be granted below their fair market value at the time of grant or, if to an individual who beneficially owns more than 10% of the total combined voting power of all stock classes of the Company or a subsidiary, the option price may not be less than 110% of the fair value of the Common Stock at the time of grant. The expiration date of an incentive stock option may not be longer than ten years from the date of grant. Option holders, or their representatives, may exercise their vested options up to three months after their employment termination or one year after their death or permanent and total disability. The Plan provides for adjustments upon changes in capitalization.
The Company’s policy is to issue shares pursuant to the exercise of stock options from its available authorized but unissued shares of Common Stock. It does not issue shares pursuant to the exercise of stock options from its treasury shares.
NOTE 8: COMPREHENSIVE INCOME (LOSS)
Comprehensive loss includes changes in equity related to foreign currency translation adjustments. The following table sets forth the reconciliation from net loss to comprehensive income for the three and nine-month periods ended September 30, 2015 and 2014:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net loss | $ | (2,182,289 | ) | $ | (1,255,214 | ) | $ | (5,536,431 | ) | $ | (2,329,315 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustment | (6,363 | ) | (2,737 | ) | (4,335 | ) | (338 | ) | ||||||||
Comprehensive loss | $ | (2,188,652 | ) | $ | (1,257,951 | ) | $ | (5,540,766 | ) | $ | (2,329,653 | ) | ||||
The following table sets forth the balance in accumulated other comprehensive loss as of September 30, 2015 and December 31, 2014, respectively:
September 30, 2015 | December 31, 2014 | |||||||
Accumulated other comprehensive loss | $ | (15,306 | ) | $ | (10,971 | ) | ||
NOTE 9: SEGMENTS
The Company operates in one business segment. Percentages of sales by geographic region for the three and nine-month periods ended September 30, 2015 and 2014 were approximately as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
United States | 69 | % | 75 | % | 71 | % | 77 | % | ||||||||
Europe | 19 | % | 17 | % | 19 | % | 16 | % | ||||||||
Other | 12 | % | 8 | % | 10 | % | 7 | % | ||||||||
NOTE 10: COMMITMENTS AND CONTINGENCIES
During January 2014, the Company entered into a four year lease for certain office space in Newport Beach, effective February 1, 2014. Under the terms of the lease, the Company initially pays monthly base rent of approximately $22,000 increasing incrementally to approximately $25,000.
During May 2014, the Company entered into a two year sublease in Newport Beach, effective May 1, 2014. The Company initially pays monthly base rent of approximately $10,000 per month, increasing to approximately $11,000 per month by the end of the lease term.
During July 2014, the Company entered into a five year lease for certain office space in a business center in London, England, which commenced on July 30, 2014. The base rent is GBP 89,667 per year and the estimated service charges for the lease are GBP 45,658 per year.
NOTE 11: SUBSEQUENT EVENTS
None.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2014. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements. See “Cautionary Statement Regarding Forward Looking Information” elsewhere in this report. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We own and operate CAKE, and getcake.com, a marketing technology that provides a comprehensive suite of innovative marketing intelligence tools. Our powerful software-as-a service, or SaaS, solution has been an industry standard for advertisers, networks, publishers, and agencies to measurably improve and optimize their digital spend. We currently have over 500 customers driving billions of consumer actions monthly through the CAKE enterprise platform.
Our revenue model is based on a monthly license fee, a usage fee (based on volume of clicks, impressions, or leads), a training and implementation fee, and in certain cases, professional services fees and royalties. Clients purchase annual or monthly subscriptions with an additional usage fee. A majority of our revenue is derived from clients in the United States but we have seen a 24% and 26% growth in our client base outside of the United States during the three and nine-month periods ended September 30, 2015, respectively, when compared to the same periods in 2014.
Our training, support personnel, hosting and cloud-based infrastructure contribute to our cost of operating the business. We anticipate more spending in these areas while we continue to grow and could foresee some savings in infrastructure cost due to economies of scale. However, we want to continue to invest in these areas to support our growth.
We experienced 37% year over year growth in revenue during the nine-month period ended September 30, 2015 when compared to the same period in 2014. The organic growth has been a result of providing the marketing technology industry a comprehensive suite of marketing intelligence tools through innovation and what we believe to be a superior product and customer experience.
We allocated a portion of our marketing budget to being present at tradeshows, industry publications, and providing the support documentation required by sales initiatives. Additional efforts will be made to speak at industry events and write for online publications, increasing awareness of the CAKE suite of products and the thought leadership driving product development.
Our business is headquartered in Newport Beach, California, with offices in Santa Monica, New York and London, allowing us to provide global support to our client base. We are looking to expand our footprint with additional locations in the United States, Europe, India and Israel. The CAKE platform supports multiple languages and currencies so online marketers can track the performance of their marketing campaigns and better target their digital spend on a global scale.
Our principal offices are located at 20411 SW Birch Street, Suite 250, Newport Beach, CA 92660. Our telephone number there is: (949) 548-2253. Our corporate website is: www.accelerize.com, the contents of which are not part of this quarterly report.
Our Common Stock is quoted on the OTCQB Marketplace under the symbol "ACLZ."
Results of Operations
ACCELERIZE INC.
UNAUDITED CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three-month periods | Increase/ | Increase/ | Nine-month periods | Increase/ | Increase/ | |||||||||||||||||||||||||||
ended September 30, | (Decrease) | (Decrease) | ended September 30, | (Decrease) | (Decrease) | |||||||||||||||||||||||||||
2015 | 2014 | $ | % | 2015 | 2014 | $ | % | |||||||||||||||||||||||||
Revenues: | $ | 5,288,628 | $ | 4,317,325 | 971,303 | 22.5 | % | $ | 15,954,114 | $ | 11,650,931 | 4,303,183 | 36.9 | % | ||||||||||||||||||
Cost of revenue | $ | 1,797,056 | $ | 1,143,336 | 653,720 | 57.2 | % | $ | 4,706,167 | $ | 2,982,103 | 1,724,064 | 57.8 | % | ||||||||||||||||||
Gross Profit | 3,491,572 | 3,173,989 | 317,583 | 10.0 | % | 11,247,947 | 8,668,828 | 2,579,119 | 29.8 | % | ||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Research and development | $ | 1,391,301 | $ | 640,177 | 751,124 | 117.3 | % | $ | 3,593,093 | $ | 1,817,222 | 1,775,871 | 97.7 | % | ||||||||||||||||||
Sales and marketing | $ | 1,824,046 | $ | 1,865,805 | (41,759 | ) | -2.2 | % | $ | 5,873,023 | $ | 4,888,813 | 984,210 | 20.1 | % | |||||||||||||||||
General and administrative | $ | 2,394,092 | $ | 1,921,127 | 472,965 | 24.6 | % | $ | 7,199,968 | $ | 4,291,637 | 2,908,331 | 67.8 | % | ||||||||||||||||||
Total operating expenses | 5,609,439 | 4,427,109 | 1,182,330 | 26.7 | % | 16,666,084 | 10,997,672 | 5,668,412 | 51.5 | % | ||||||||||||||||||||||
Operating loss | (2,117,867 | ) | (1,253,120 | ) | 864,747 | 69.0 | % | (5,418,137 | ) | (2,328,844 | ) | (3,089,293 | ) | 132.7 | % | |||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Interest income | $ | 9,475 | $ | 3,729 | 5,746 | 154.1 | % | $ | 63,840 | $ | 10,773 | 53,067 | 492.6 | % | ||||||||||||||||||
Interest expense | $ | (73,897 | ) | $ | (5,823 | ) | 68,074 | 1169.1 | % | $ | (182,134 | ) | $ | (11,244 | ) | 170,890 | 1519.8 | % | ||||||||||||||
Total other expenses | (64,422 | ) | (2,094 | ) | 62,328 | 2976.5 | % | (118,294 | ) | (471 | ) | 117,823 | 25015.5 | % | ||||||||||||||||||
Net loss | $ | (2,182,289 | ) | $ | (1,255,214 | ) | 927,075 | 73.9 | % | $ | (5,536,431 | ) | $ | (2,329,315 | ) | 3,207,116 | 137.7 | % | ||||||||||||||
Discussion of Results for Three-Month and Nine-Month Periods Ended September 30, 2015 and 2014
Revenues
Three Months Ended September 30, | % Change | Nine Months Ended September 30, | % Change | |||||||||||||||||||||
| 2015 | 2014 | 2014 | 2013 | |||||||||||||||||||||
Revenues | $ | 5,288,628 | $ | 4,317,325 | 22.5 | % | $ | 15,954,114 | $ | 11,650,931 | 36.9 | % | ||||||||||||
We generate revenues from a training and implementation (also known as on-boarding) fee and a monthly licensing fee, supplemented by per-transaction fees paid by customers for monthly platform usage. In certain cases we also generate professional service fees and royalties.
The increase in our software licensing revenues during the three and nine-month periods ended September 30, 2015, when compared to the prior year periods, is due to the increased number of customers using our SaaS products and services, as well as increased monthly revenues from our existing customers resulting from higher usage of our SaaS platform. Our number of clients increased 20% during the three and nine-month periods ended September 30, 2015, when compared to the prior year periods, and our average monthly fee per customer increased 20% and 12% during the three and nine-month periods ended September 30, 2015, respectively, when compared to the prior year periods. The increase in the number of customers using our SaaS products and services during the three and nine-month periods ended September 30, 2014 is primarily due to the increased resources we have devoted to customer acquisition for our SaaS products. The higher usage by our existing customers of the same products is primarily due to higher market acceptance among our larger users who generate a higher volume of transactions.
We believe that our SaaS revenues will continue to increase during the remainder of 2015 when compared to 2014.
Cost of Revenues
Three Months Ended September 30, | % Change | Nine Months Ended September 30, | % Change | |||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||
Cost of Revenues | $ | 1,797,056 | $ | 1,143,336 | 57.2 | % | $ | 4,706,167 | $ | 2,982,103 | 57.8 | % | ||||||||||||
Cost of revenues consists primarily of web hosting and personnel costs associated with supporting customer on-boarding and training activities, consisting of salaries, benefits, and related infrastructure costs. Web hosting fees are partially correlated to our revenues, depending on each specific agreement we have with our clients. The majority of our clients’ services are hosted on non-dedicated servers, on which capacity can be maximized by server, while certain customers prefer to have their services hosted on dedicated servers, on which capacity can only be maximized by customer and by server. Additionally, our resources associated with on-boarding are usually allocated at the beginning of the relationship with the new customer (usually, the first two months). Accordingly, our personnel costs associated with supporting customer on-boarding activities are not necessarily correlated with our revenues.
During the three and nine-month periods ended September 30, 2015, when compared to the prior year periods, cost of revenues significantly increased reflecting the higher number of employees hired to support customer on-boarding and training activities as well as web hosting fees incurred to support our increased number of clients and platform usage, which increased during the three and nine-month periods ended September 30, 2015 by approximately $238,000 and $820,000, respectively, when compared to the same periods in 2014.
We believe that our cost of revenues will continue to increase, at lower percentages than our anticipated increase in revenues, during the remainder of 2015, when compared to 2014.
Research and Development Expenses
Three Months Ended September 30, | % Change | Nine Months Ended September 30, | % Change | |||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||
Research and Development | $ | 1,391,301 | $ | 640,177 | 117.3 | % | $ | 3,593,093 | $ | 1,817,222 | 97.7 | % | ||||||||||||
Research and development expenses consist primarily of personnel costs associated with the enhancement and maintenance of our SaaS product offerings, consisting of salaries, benefits, and related infrastructure costs, offset by capitalized software development costs.
Our research and development expenses increased during the three and nine-month periods ended September 30, 2015, when compared to the prior year periods, due to increased personnel costs associated with increased staff assigned to the enhancement and maintenance of our software services, offset by the capitalization of software development costs which amounted to $584,174 and $952,216 for the three and nine-month periods ended September 30, 2015, respectively.
While we continue to enhance the features of our SaaS platform, we believe that our research and development expenses will remain stable during the remainder of 2015.
Sales and Marketing Expenses
| Three Months EndedSeptember 30, | %Change | Nine Months Ended September 30, | %Change | |||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||
Sales and Marketing | $ | 1,824,046 | $ | 1,865,805 | -2.2 | % | $ | 5,873,023 | $ | 4,888,813 | 20.1 | % | ||||||||||||
Sales and marketing expenses consist primarily of personnel costs associated with the sale and marketing of our SaaS products, including salaries, benefits, and related infrastructure, as well as the costs of related marketing programs, such as trade shows and public relations.
The decrease in sales and marketing expenses during the three-month period ended September 30, 2015 when compared to the prior year period is primarily due to the streamlining of marketing functions which resulted in reduced headcount and lower personnel costs. Additionally, amortization expense related to the customer relationships were fully amortized during the first half of 2015. The increase in sales and marketing expenses during the nine-month period ended September 30, 2015, when compared to the prior year period, is primarily due to increased expenditures in our marketing programs, trade shows, press relations, industry analyst relations and digital advertising during the first half of the year.
We believe that our sales and marketing expenses will remain stable during the remainder of 2015.
General and Administrative Expenses
Three Months Ended September 30, | % Change | Nine Months Ended September 30, | % Change | |||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||
General and administrative | $ | 2,394,092 | $ | 1,921,127 | 24.6 | % | $ | 7,199,968 | $ | 4,291,637 | 67.8 | % | ||||||||||||
General and administrative expenses consist primarily of personnel costs associated with the support of our operations consisting of salaries, benefits, and related infrastructure. Also included are non-personnel costs, such as audit, accounting services and legal fees, as well as professional fees, insurance and other corporate expenses.
The increase in general and administrative expenses during the three and nine-month periods ended September 30, 2015, when compared with the prior year periods, is primarily due to the increased number of employees hired to support our organization, mostly in HR and accounting functions. Increased legal, investor relations, rent, and stock-based compensation expenses contributed to the overall increase when compared to the same period last year.
We believe that our general and administrative expenses will remain stable during the remainder of 2015.
Other Income/Interest Income
Three Months Ended September 30, | % Change | Nine Months Ended September 30, | % Change | |||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||
Other Income/Interest Income | $ | 9,475 | $ | 3,729 | 154.1 | % | $ | 63,840 | $ | 10,773 | 492.6 | % | ||||||||||||
Other income during the three and nine-month periods ended September 30, 2015 and 2014 consisted of rent income from a sublease of our Santa Monica office space and profit from sale of non-inventory assets.
Other Expenses/Interest Expense
Three Months Ended September 30, | % Change | Nine Months Ended September 30, | % Change | |||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||
Other Expenses/Interest Expense | $ | 73,897 | $ | 5,823 | 1169.1 | % | $ | 182,134 | $ | 11,244 | 1519.8 | % | ||||||||||||
Other expense consists of interest charges and amortization of deferred financing costs associated with our Line of Credit with the Lender.
The increase in interest expenses during the three and nine-month periods ended September 30, 2015 is primarily due to borrowings we have made from time to time under the Line of Credit. Our interest expense may change during the remainder of 2015 depending on our liquidity needs and we may choose to further finance our working capital needs through our operations, from our Line of Credit, or by issuing equity securities.
Liquidity and Capital Resources
Ending balance at September 30, | Average balance during nine-months ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Cash | $ | 519,645 | $ | 1,388,985 | $ | 825,156 | $ | 1,273,150 | ||||||||
Accounts receivable, net | 2,411,266 | 1,692,658 | 2,080,416 | 1,367,165 | ||||||||||||
Accounts payable and accrued expenses | 2,450,167 | 1,363,592 | 1,826,331 | 1,533,299 | ||||||||||||
Convertible notes payable excluding debt discount | - | - | - | - | ||||||||||||
Notes payable, excluding debt discount | - | - | - | - | ||||||||||||
Line of credit | 4,215,000 | 2,180,000 | 3,557,500 | 1,090,000 | ||||||||||||
At September 30, 2015 and 2014, 56% and 60%, respectively, of our total assets consisted of cash and cash equivalents and accounts receivable.
We extend unsecured credit in the normal course of business to our customers. The determination of the appropriate amount of the reserve for uncollectible accounts is based upon a review of the amount of credit extended, the length of time each receivable has been outstanding, and the specific customers from whom the receivables are due.
The objective of liquidity management is to ensure that we have ready access to sufficient funds to meet commitments while implementing our growth strategy. Our primary sources of liquidity historically include the sale of our securities and borrowings from our Line of Credit. Most recently, in August 2015, we sold to investors an aggregate of 2,145,000 shares of our Common Stock at a price of $1.00 per share and warrants to purchase up to an aggregate of 1,287,000 shares of our Common Stock at an exercise price of $1.32 per share for an aggregate gross consideration of $2,145,000 and net proceeds of approximately $1,700,000.
We do not have any material commitments for capital expenditures of tangible items.
On September 30, 2014, we entered into an amendment of our Line of Credit with the Lender to borrow up to a maximum of $6,000,000 at our discretion, an increase from up to $3,000,000 that we were permitted to borrow under the original Line of Credit entered into on March 17, 2014. Amounts borrowed will accrue interest at the prime rate in effect from time to time plus 1.25%, not to be less than 5.5% per annum, provided that in no event shall the accrued interest payable with respect to any month be less than $10,000. Accrued interest on amounts borrowed is payable monthly and all other amounts borrowed will be payable in full on the maturity date of March 17, 2016, which maturity date may be extended to March 17, 2017 if we provide the Lender with a fully-funded business plan acceptable to the Lender by January 15, 2016 and no event of default has occurred. The Line of Credit may be earlier terminated without a prepayment fee.
The Line of Credit, as amended, contains covenants including, but not limited to, covenants to achieve specified Adjusted EBITDA levels and customer renewal levels, limiting capital expenditures, requiring minimum liquidity and restricting our ability to pay dividends, purchase and sell assets outside the ordinary course and incur additional indebtedness. As of September 30, 2015, we were in compliance with these covenants, except for the Minimum Adjusted EBITDA covenant, the compliance with which we are currently discussing with the Lender. The occurrence of a material adverse change, as defined, will be an event of default under the Line of Credit, in addition to other customary events of default. We granted the Lender a security interest in all of our personal property and intellectual property.
We owed $4,215,000 under the Line of Credit at September 30, 2015. The interest rate for the amount borrowed was 5.5% per annum.
We believe we have sufficient cash to fund our operations for the next 12 months. We currently expect to use cash balances, borrowings under the Line of Credit, and net proceeds from offerings of our equity securities to fund our future operations, capital expenditures and other expenses. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. Our ability to obtain, and the costs of, any future financings will depend primarily on our success, profitability and market conditions, among other factors.
Changes in Cash Flows
Nine-month periods ended September 30, | ||||||||
2015 | 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (5,536,431 | ) | $ | (2,329,315 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 1,064,175 | 892,036 | ||||||
Amortization of debt discount | 30,282 | 5,625 | ||||||
Provision for bad debt | (98,169 | ) | 28,911 | |||||
Fair value of options | 1,632,029 | 461,264 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (563,531 | ) | (679,898 | ) | ||||
Prepaid expenses | (130,258 | ) | (44,822 | ) | ||||
Accounts payable and accrued expenses | 1,244,171 | (314,415 | ) | |||||
Deferred revenues | (187,091 | ) | 9,152 | |||||
Other assets | 3,036 | (135,117 | ) | |||||
Net cash used in operating activities | (2,541,787 | ) | (2,106,579 | ) | ||||
Cash flows from investing activities: | ||||||||
Capitalized software for internal use | (952,216 | ) | (551,684 | ) | ||||
Capital expenditures | (152,093 | ) | (328,760 | ) | ||||
Proceeds from sale of assets | 5,630 | - | ||||||
Net cash used in investing activities | (1,098,679 | ) | (880,444 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from line of credit | 1,315,000 | 2,180,000 | ||||||
Payment of financing costs | - | (40,000 | ) | |||||
Net proceeds from issuance of shares of Common Stock | 9,586 | 1,079,031 | ||||||
Net proceeds from exercise of options and warrants | 1,852,362 | - | ||||||
Payments related to issuance of shares of Common Stock | (143,169 | ) | - | |||||
Net cash provided by financing activities | 3,033,779 | 3,219,031 | ||||||
Effect of exchange rate changes on cash | (4,335 | ) | (338 | ) | ||||
Net (decrease) increase in cash | (611,022 | ) | 231,670 | |||||
Changes in Cash Flows During the Nine Months ended September 30, 2015
The increase in accounts receivable as of September 30, 2015, when compared to the same period in 2014, is primarily due to a commensurate increase in revenues. Accounts payable and accrued expenses increased during the nine-month period ended September 30, 2015 when compared to the same period in 2014 primarily due to improved terms with an increased number of vendors.
Cash used in investing activities during the nine-month period ended September 30, 2015 consists of purchases of computer equipment and other capital expenditures of approximately $139,000, and capitalization of development costs for internal-use software of approximately $950,000.
Cash provided by financing activities during the nine-month period ended September 30, 2015 resulted from the proceeds from the exercise of warrants of approximately $10,000, a $1,315,000 draw down on the Line of Credit, and $1,850,000 in net proceeds from the sale of shares of Common Stock offset by $143,000 in expense related to the offering.
The increase in net cash used in operating activities during the nine-month period ended September 30, 2015 was primarily due to a higher increase in correlated web-hosting and payroll costs, as well as an increase in accounts receivable due to a commensurate increase in revenues.
Capital Raising Transactions
Exercise of warrants
There were no proceeds generated from the exercise of warrants during the nine-month period ended September 30, 2015.
Other outstanding obligations at September 30, 2015
Line of Credit
During the three months ended September 30, 2015, we paid down $285,000 on the Line of Credit. As of September 30, 2015, we owed $4,215,000 under the Line of Credit.
Warrants
As of September 30, 2015, 6,667,699 shares of our Common Stock are issuable pursuant to the exercise of warrants.
Options
As of September 30, 2015, 14,499,168 shares of our Common Stock are issuable pursuant to the exercise of options.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2015, our disclosure controls and procedures are effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2015, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that we currently believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. There have been no material changes to our legal proceedings previously disclosed in our Quarterly Report on Form 10-Q for the period ended June 30, 2015 except as set forth below.
McCollum Litigation
We are currently involved in a litigation with Jeff McCollum, the former President of our CAKE division, in the Superior Court of the State of California whereby we asserted claims against Mr. McCollum for fraud, breach of contract, and breach of fiduciary duty, among others, following our termination of Mr. McCollum’s employment on September 8, 2014 for cause as a result of, among other things, Mr. McCollum having abandoned his position and professional responsibilities. Mr. McCollum filed a crosscomplaint alleging breach of contract by us with respect to Mr. McCollum’s employment agreement and commenced a separate action in the Superior Court of the State of California asserting claims against us for violation of California Commercial Code §8401 and breach of fiduciary duty arising from Mr. McCollum’s request to have the restrictive legend removed from his share certificate representing 1.89 million shares of our common stock owned by him, and seeking declaratory relief as to whether he is entitled to have the restrictive legend removed from his share certificate. On July 7, 2015, Mr. McCollum filed a First Amended Complaint alleging the same causes of action and seeking the same relief as in his original complaint.On August 10, 2015, we filed a demurrer to that First Amended Complaint, arguing that the two causes of action for damages fail to state facts sufficient to constitute causes of action against us. That demurrer was heard on September 23, 2015. The court sustained our demurrer to those two causes of action, but granted Mr. McCollum 20 days’ leave to amend his complaint as to those causes of action. On October 13, 2015, Mr. McCollum filed a Second Amended Complaint alleging the same causes of action and seeking the same relief as in his original and first amended complaints. Our response to that complaint is due on November 17, 2015. On September 14, 2015, Mr. McCollum filed a motion for summary judgment on his declaratory relief cause of action related to the removal of the restrictive legend. That motion currently is scheduled to be heard on December 9, 2015 and our opposition is due November 25, 2015.
Item 1A. Risk Factors
There have been no material changes to the Risk Factors set forth in our Annual Report on Form 10-K filed with the SEC on March 19, 2015 and in our Quarterly Report on Form 10-Q filed with the SEC on August 13, 2015.
Item 6. Exhibits
10.1 | Form of Securities Purchase Agreement (incorporated by reference from the Company’s Current Report on Form 8-K filed on August 14, 2015). |
|
| ||
10.2 | Form of Warrant Purchase Agreement (incorporated by reference from the Company’s Current Report on Form 8-K filed on August 14, 2015). |
|
| 31.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and15d-14(a).* | |
| 31.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a).* | |
| ||
32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350.** |
|
|
|
|
32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350.** |
|
|
|
|
101. | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Comprehensive (Loss) Income, (iv) the Statements of Cash Flows, and (v) related notes to these financial statements.* |
|
|
| |
|
| |
* | Filed herewith. | |
|
| |
** | Furnished herewith. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ACCELERIZE INC. |
| |
|
|
|
|
Dated: November 12, 2015 | By: | /s/ Brian Ross |
|
|
| Brian Ross President and Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
Dated: November 12, 2015 | By: | /s/ Michael Lin |
|
|
| Michael Lin |
|
|
| Chief Financial Officer |
|
|
| (Principal Financial Officer) |
|
25