CFN Enterprises Inc. - Quarter Report: 2013 September (Form 10-Q)

CONSOLIDATED BALANCE SHEETS

(1) Derived from audited financial statements

See Notes to Unaudited Consolidated Financial Statements.

ACCELERIZE NEW MEDIA, INC.

NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS

Accelerize New Media, Inc., or the Company, a Delaware corporation, incorporated on November 22, 2005, is a Software-as-a-Service 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 presence.

In September 2012, the Company sold its online marketing services business to a third party to allocate more resources to its software solutions business.

The balance sheet presented as of December 31, 2012 has been derived from our audited consolidated financial statements. The unaudited 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 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, 2012 included in our Annual Report on Form 10-K filed with the SEC on March 7, 2013.  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 nine-month period ended September 30, 2013 are not necessarily indicative of the results for the year ending December 31, 2013.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the results of operations of Cake Marketing UK Ltd. from inception (November 2012) through September 30, 2013. All material intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of unaudited 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 recovery of assets from discontinued operations 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 2012 have been reclassified to reflect the Company’s discontinued operations and to reflect our sales and marketing expenses separately from our general and administrative expenses.

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 generally 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. Based on this review, the Company specifically reserves for those accounts deemed uncollectible. When receivables are determined to be uncollectible, principal amounts of such receivables outstanding are deducted from the allowance.

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, 2013, 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, Canada, and Europe. None of the Company’s customers accounted for more than 10% of its accounts receivable at September 30, 2013 or December 31, 2012.  The Company does not require any collateral from its customers.

The Company’s note receivable was due from the purchaser of its online marketing services division. The Company has a security interest in all of the assets sold to the purchaser.

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 Software-as-a-Service, or 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 and each party may cancel the contract within that period with a 30-day 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 SaaS. 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 based on third-party evidence and the monthly license fee base 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.

Effective September 2012, the Company discontinued its online marketing services.

Product Concentration

The Company generates its revenues from software licensing and hosting and related implementation and training services.

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.

Marketable securities consist of equity securities of a publicly-traded company.  These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. The Company regarded the decline in fair value of its marketable securities to be “other than temporary;” accordingly the unrealized loss was recorded in the net income from discontinued operations in the Company’s statements of operations as these securities were sold in connection with the disposition of the Company’s online marketing services division.

 Additional Disclosures Regarding Fair Value Measurements

The carrying value of cash and cash equivalents, accounts receivable, note receivable, accounts payable and accrued expenses, note and convertible promissory notes payable approximate their fair value due to the short term maturity of these items.

Convertible Instruments

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities, or ASC 815.

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with ASC 470-20, Debt with Conversion and Other Options. Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

ASC 815-40, Contracts in Entity’s own Equity, provides that, among other things, generally, if an event is not within the entity’s control, such contract could require net cash settlement and shall be classified as an asset or a liability.

The Company determined whether the instruments issued in the transactions are considered indexed to the Company’s own stock.  While the Company’s 12% convertible promissory notes, or 12% Convertible Notes Payable, and the warrants issued in connection with the Company’s 12% note payable, or 12% Note Payable, did not provide variability involving sales volume, stock index, commodity price, revenue targets, among other things, they do provide for variability involving future equity offerings and issuance of equity-linked financial instruments.  While the instruments did not contain an exercise contingency, the settlement of the 12% Convertible Notes Payable and the warrants issued in connection with the 12% Note Payable would not equal the difference between the fair value of a fixed number of shares of the Company’s Common Stock and a fixed stock price. Accordingly, they are not indexed to the Company’s stock price.

However, the Company believes that there is no value to the derivative liabilities associated with such instruments at September 30, 2013. The Company’s obligations under its 12% Convertible Notes Payable have been satisfied without issuing additional consideration to its holders. Additionally, the likelihood that the Company will trigger the subsequent financing reset provision of the warrants issued in connection with the 12% Note Payable is more remote than possible, but certainly not probable, which is partly based on the fact that the Company does not need equity-based or equity-related financing issued at steep discounts from its existing stock price as quoted on the market and that the risk-neutral probability that the Company’s price of its common stock would be less than the warrants’ exercise price between now and expiration is low ( 31% at September 30, 2013).

 Advertising

The Company expenses advertising costs as incurred.

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 the respective local currency. The translation from the applicable foreign currency 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 Income (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 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 approximately $227,000 during the nine-months ended September 30, 2013. The Company will amortize such costs once the new software products and significant upgrades and enhancements are completed. The unamortized internal-use software development costs amounted to approximately $227,000 at September 30, 2013.

Amortization of internal-use software will be 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 in the nine-month period ended September 30, 2013: SaaS. The Company generated revenues from two sources in 2012: 1) SaaS, and 2) online marketing services. The online marketing services division was discontinued in September 2012, and accordingly, the financial statements were adjusted retroactively to reflect only the operations of the SaaS division as continuing operations. 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).

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:

NOTE 3: DISCONTINUED OPERATIONS

In September 2012, the Company completed the sale of its online marketing services division to a third-party, or the Buyer. The total consideration received on the sale date by the Company is as follows:

Because of the contingent nature of the $500,000 note receivable, the Company recognized any gain from the disposal of discontinued operations associated with such note if and when the services are provided by the Buyer. As of June 10, 2013,-the date of the amendment to the note receivable of $500,000-, $120,250 in in-kind services had been received in lieu of the note receivable.

Additionally, for purposes of computing the gain on disposal of the online marketing services division, the Company used $100,000 of the $162,000 note receivable.

The components of the gain from disposal of discontinued operations are as follows: 

The components of the loss from discontinued operations are as follows:

NOTE 4: NOTE RECEIVABLE

As part of the consideration received from the Buyer of the Company’s online marketing services division, the Company received on the sale date a note receivable with a face value of $162,000 and a maturity date of February 15, 2015. The note bears interest at an annual rate of 5%. The Buyer was able to satisfy this obligation by paying $100,000 plus accrued interest by January 1, 2013, which it did not do. The note provides for monthly principal repayments of $6,000, plus accrued interest, commencing in November 2012.

The excess of the face value of the note receivable of $162,000 over the payment of $100,000 which could have satisfied the obligation by January 1, 2013 was recorded as original issue discount.

June 2013 Amendment

On June 10, 2013, the Company modified the terms of the $162,000 note receivable and $500,000 note receivable by 1) cancelling the $162,000 note upon receipt of a $50,000 payment in June 2013, and 2) applying the remaining $70,427 balance of the $162,000 note to the remaining $380,699 balance of the $500,000 note receivable. Upon application of the $70,427 balance to the remaining $380,699 balance of the $500,000 note receivable, the total outstanding balance, including accrued interest, of $451,127 of the $500,000 note receivable was cancelled. In connection with this cancellation, the Buyer agreed to pay $451,127, which may be paid with in-kind services, plus interest accruing quarterly at a rate of 3.25% per annum pursuant to a note receivable on December 27, 2014.

Because of the contingent nature of the $451,127 note receivable, the Company wrote down the value of the pre-existing $162,000 note receivable to $0, and will recognize any gain from the disposal of discontinued operations associated with such note if and when the in-kind services are provided by the Buyer. As of September 30, 2013, the remaining balance to be received as in-kind services under the note receivable amounted to $389,573.

NOTE 5: PREPAID EXPENSES

At September 30, 2013 and December 31, 2012, the prepaid expenses consisted primarily of prepaid insurance, rent, and consulting services.

NOTE 6: DEFERRED REVENUES

The Company’s deferred revenues consist of prepayments made by certain of the Company’s customers and undelivered implementation and training fees.  The Company decreases the deferred revenues by the amount of the services it renders to such clients when provided.

NOTE 7: CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE

12% Convertible Notes Payable

The Company had 12% convertible promissory notes, including accrued interest, aggregating $0 and $176,244 outstanding at September 30, 2013 and December 31, 2012, respectively.  The 12% Convertible Notes Payable bore interest at 12% per annum.  Accrued interest was payable, at the note holder’s option, in cash or in shares of Common Stock. If the accrued interest was paid in shares of Common Stock, the number of shares issuable to satisfy the accrued interest was primarily based on the closing price, as quoted on the OTCBB of the trading day immediately prior to the interest payment date.  The interest payable commenced June 1, 2009 and was payable every quarter thereafter, until the obligations under the 12% Convertible Notes Payable were satisfied.  The 12% Convertible Notes Payable matured on August 17, 2013, ten days after the maturity date of the Company’s 12% Note Payable.  Effective May 29, 2009, on the maturity date, each holder had the option of having the 12% Convertible Notes Payable repaid in cash or shares of Common Stock as follows: 1) if the average closing price of the Common Stock on the last five trading days prior to the maturity date is $0.50 or more, then the holder could elect to have the principal paid in shares of Common Stock. In such case, the number of shares of Common Stock to be issued to the holder was determined by dividing the principal amount outstanding on the maturity date by $0.50, or 2) if the average closing price of the Common Stock on the last five trading days prior to the maturity date is less than $0.50, then the principal may only be paid in cash.   Each note holder could convert, at his option, the outstanding principal of the 12% Convertible Notes Payable, after July 1, 2009 and prior to September 11, 2013 at the lesser of: 1)  $0.40 or 2) the effective price per share of a subsequent financing of the Company occurring prior to the maturity date. The 12% Convertible Notes Payable were subordinated to the 12% Note Payable.

During the nine-month period ended September 30, 2012, certain holders of the 12% Convertible Note Payable converted principal of $462,500 of such notes into 1,156,250 shares of the Company’s Common Stock. During the nine-month period ended September 30, 2013, certain holders of the 12% Convertible Notes Payable converted principal and interest aggregating $52,564 of such notes into 131,411 shares of the Company’s Common Stock. The Company made principal repayments of $122,500 on its 12% Convertible Notes Payable during the nine-month period ended September 30, 2013.

The Company satisfied its remaining obligations under the 12% Convertible Notes Payable in August 2013.

12% Note Payable

During 2011, the Company issued a note payable, aggregating $500,000.  The 12% Note Payable bore interest at a rate of 12% per annum and was initially scheduled to mature on March 31, 2012. Interest was payable monthly.  Effective April 1, 2011, the Company made monthly principal payments of $20,000. In connection with the issuance of the 12% Note Payable, the Company granted warrants to the holder to purchase 283,019 shares of the Company’s Common Stock. The exercise price for the warrants was equal to the lower of (i) $0.53 per share, or (ii) the price per share at which the Company sells or issues its Common Stock after the issue date of the 12% Note Payable in a transaction or series of transactions in which the Company receives at least $500,000.  The exercise price of such warrants, adjusted for subsequent financing reset provision, may not have been less than $0.35 per share.

August 2011 Amendment

During August 2011, the Company modified the terms of the 12% Note Payable by 1) extending the maturity to December 31, 2012, 2) increasing the amount borrowed under the 12% Note Payable by an additional $100,000, 3) amending the payment schedule for principal payments from monthly commencing on April 1, 2011 to monthly commencing on January 1, 2012, 4) increasing the monthly principal payments to $30,000, 5) cancelling the initial warrants issued in January 2011, and 6) granting 600,000 warrants to the holder at an exercise price of $0.35 per share with an expiration date of August 23, 2016.

The Company accounted for the cancellation of the initial warrants in January 2011 and the grant of 600,000 warrants in August 2011, as a modification of terms for the grants of 283,019 warrants issued in January 2011, and a new grant of 316,981 warrants.  As a result of the grants and modification of warrants, the Company recognized as a beneficial conversion feature and debt discount of $141,257, which is reflected in the accompanying unaudited consolidated financial statements as additional paid-in capital and corresponding debt discount.

September 2012 Amendment

During September 2012, the Company further modified the terms of the 12% Note Payable by 1) prepaying $50,000 of outstanding principal, 2) extending the maturity date to September 1, 2013, 3) reducing the monthly principal repayment to $15,000, 4) cancelling the 600,000 warrants granted to the holder in August 2011 in connection with the prior amendment and 5) granting 650,000 warrants to the holder at an exercise price of $0.35 per share with an expiration date of August 23, 2016.

The Company accounted for the cancellation of the warrants granted in August 2011 and the issuance of warrants in September 2012 as a new grant of 50,000 warrants. As a result of the grant of warrants, the Company recognized $9,850 as debt discount, which is reflected in the accompanying unaudited consolidated financial statements as additional paid-in capital and corresponding debt discount.

The Company made principal repayments of $142,500 and $320,000 on its 12% Note Payable during the nine-month periods ended September 30, 2013 and 2012, respectively. The Company satisfied its remaining obligations under the 12% Note Payable in August 2013.

NOTE 8: STOCKHOLDERS’ EQUITY

Common Stock

A summary of the issuance of shares of Common Stock, related consideration and fair value of transaction, for the nine-month period ended September 30, 2012 is as follows:

A summary of the issuance of shares of Common Stock, related consideration and fair value of transaction, for the nine-month period ended September 30, 2013 is as follows:

Preferred Stock- Series A

Between August 2006 and October 2006 the Company issued 54,000 shares of 10% Series A Convertible Preferred Stock, or Series A Preferred Stock, with a par value of $0.001 per share, resulting in gross proceeds of $728,567 to the Company after financing fees of $81,433.

The holders of the Series A Preferred Stock were entitled to cumulative preferential dividends at the rate of 10% per annum, payable quarterly in arrears on each of September 1, December 1, March 1, and June 1, commencing on the first quarter after the issuance date beginning September 1, 2006 in cash or shares of the Company’s Common Stock. If the Company elected to pay any dividend in shares of Common Stock, the number of shares of Common Stock to be issued to each holder equaled the quotient of (i) the dividend payment divided by (ii) $0.15 per share.

The shares of Series A Preferred Stock were convertible into shares of common stock, at any time, at the option of the holder and a conversion price of $0.15 per share, at an initial rate of conversion of 100 shares of common stock for each one share of Series A Preferred Stock, subject to anti-dilution provisions in the case of stock splits, dividends or if the Company issues shares of common stock or other securities convertible into shares of common stock at an effective price less than $0.15 per share.

Following conversions of all outstanding shares of Series A Preferred Stock up to and through March 23, 2012, no shares of Series A Preferred Stock were outstanding at September 30, 2013.

Preferred Stock- Series B

Between June 2007 and September 2007, the Company issued 118,875 shares of 8% Series B Convertible Preferred Stock, or Series B Preferred Stock, with a par value of $0.001 per share, which generated net proceeds of $3,244,563 to the Company, after financing fees of $516,063 and conversion of notes payable of $400,000.

The holders of the Series B Preferred Stock were entitled to cumulative preferential dividends at the rate of 8% per annum, payable quarterly in arrears on each of September 1, December 1, March 1, and June 1, commencing on December 1, 2007. If the Company elected to pay any dividend in shares of Common Stock, the number of shares of Common Stock to be issued to each holder equaled to the higher of (i) the average of the closing bid prices for the common stock over the five trading days immediately prior to the dividend date or (ii) $0.35.

The shares of Series B Preferred Stock were convertible into shares of common stock, at any time, at the option of the holder and a conversion price of $0.35 per share, at an initial rate of conversion of 100 shares of common stock for each one share of Series B Preferred Stock, subject to anti-dilution provisions in the case of stock splits, dividends or if the Company issues shares of common stock or other securities convertible into shares of common stock at an effective price less than $0.35 per share.  The rights of the holders of the Series B Preferred Stock were subordinate to the rights of the holders of Series A Preferred Stock.

Following mandatory conversion of all outstanding shares of Series B Preferred Stock on March 31, 2012, no shares of Series B Preferred Stock were outstanding at September 30, 2013.

Warrants

During September 2012, in connection with the amendment of the 12% Note Payable, the Company granted additional warrants to purchase 50,000 shares of the Company’s Common Stock at an exercise price of $0.35 per share with an expiration date of August 23, 2016. As a result of the grant of warrants, the Company recognized a debt discount of $9,850, which is reflected as additional paid-in capital and corresponding debt discount.

Stock Option Plan

On December 15, 2006, the Company's Board of Directors and stockholders approved the Accelerize New Media, Inc. Stock Option Plan, or the Plan. The total number of shares of capital stock of the Company that may be subject to options under the Plan is 22,500,000 shares of common stock, following an increase from 10,000,000 shares to 15,000,000 shares of common stock in May 2011, and from 15,000,000 shares to 22,500,000 shares of Common Stock on March 27, 2012, 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.

Because the period on which the Company can base the computation of its historical volatility is shorter than the terms used to value the options granted by the Company, the expected volatility is based on the historical volatility of publicly-traded companies comparable to the Company.

The Company generally recognizes its share-based payment over the vesting terms of the underlying options.

The total compensation cost related to non-vested awards not yet recognized amounted to approximately $1,713,000 at September 30, 2013 and the Company expects that it will be recognized over the following weighted-average period of 23 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 9: COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes changes in equity related to foreign currency translation adjustments. The following table sets forth the reconciliation from net income to comprehensive income for the nine-month periods ended September 30, 2013 and 2012:

The following table sets forth the balance in accumulated other comprehensive loss as of September 30, 2013 and December 31, 2012, respectively:

NOTE 10: SEGMENTS

During the nine-month period ended September 30, 2012, the Company operated in two segments. In September 2012, the Company discontinued its online marketing services division and as of September 27, 2012, operates in one business segment. The accompanying unaudited consolidated financial statements have been retroactively adjusted to reflect the operations of the SaaS business segment. The percentages of sales for the SaaS division by geographic region for the nine-month periods ended September 30, 2013 and 2012 were approximately as follows:

* less than 1%

ITEM 2. Management's Discussion and Analysis 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, 2012. 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.

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The CAKE platform’s breath of capabilities provides opportunities in many of the major verticals like finance, travel, entertainment, and gaming. Recent product features and enhancements have also contributed to new opportunities in mobile and retail.

CAKE’s mobile tracking technology allows a marketer to track application, or app, installs and more importantly events that take place within the app, so the digital marketer knows that the app was installed and what the user is doing within that app: for example, buying items, depositing funds, and referring friends. This all contributes to the marketer’s understanding the value of that user and may effectively alter advertising spends to target profitable users.

Retail tracking is an opportunity CAKE has introduced into the suite of features. This enables retailers to track the effectiveness of an online campaign at the individual product or SKU level. Retail tracking provides insight into the real value or actual products that are being sold from a specific digital ad. This is important to enable marketers to track which products are being sold from the advertisement placements. In the retail market CAKE has developed a technology that is enabling advertisers to work directly with publishers in the affiliate channel cutting out traditional fully-managed affiliate networks. Advertisers today pay traditional fully-managed affiliate networks a license fee and commission to manage their affiliate relationships. By replacing the traditional fully-managed affiliate network with the CAKE platform advertisers now eliminate paying commission fees, develop direct relationships with the affiliates, and gain the transparency needed to make decisions to positively effect their digital spend return on investment.

Our revenue model is based on a monthly license, usage fee (based on volume of clicks, impressions, or leads), and a training and implementation fee. Clients purchase annual subscriptions with a discounted monthly usage program or a monthly subscription and usage fee. A majority of our revenues is derived from clients in the United States but we have seen 345% growth in revenues this past year from our European client base.

Our training, account management, and support personnel contribute to our cost of operating the business second only to our cloud based infrastructure. 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 both of these areas to support our growth.

We have experienced in excess of 100% year on year growth since 2011 with minimal sales effort and limited marketing budget. The organic growth has been a result of providing the performance marketing industry a comprehensive suite of business intelligence tools through innovation and what we believe to be a superior product and customer experience.

Our success has also been seen with our revenues growing 61.1% from $1,570,948 during the third quarter of 2012 to $2,531,479 during the third quarter of 2013. This success has enabled us to eliminate all our interest-bearing debt as of September 30, 2013 and become a profitable company with cash and working capital of $1,030,099 and $1,693,894 as of September 30, 2013.

We intend to grow revenues by investing in sales and marketing efforts. We are currently hiring and will continue to hire sales executives globally to target specific verticals and accounts with both agencies and advertisers. Marketing will allocate significant 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.

During November 2012, we formed Cake Marketing UK Ltd, a private limited company, which is our wholly-owned subsidiary located in the United Kingdom in order to better provide our services in the European market.

Our principal offices are located at 2244 West Coast Highway, Suite 250, Newport Beach, CA 92663. Our telephone number there is: (949) 515-2141. Our corporate website is: www.accelerizenewmedia.com, the contents of which are not part of this quarterly report.

Our Common Stock is quoted on the Over-the-Counter Bulletin Board and OTCQB Marketplace under the symbol “ACLZ”.

Business Environment

SaaS

The business environment for our SaaS platform is characterized as follows:

ACCELERIZE NEW MEDIA, INC.

CONSOLIDATED RESULTS OF OPERATIONS

NM: Not Meaningful

Discussion of Results for Three-Month and Nine-Month Periods Ended September 30, 2013 and 2012

Revenues

We generate revenues from a training and implementation fee and a monthly licensing fee, supplemented by per-transaction fees paid by customers for monthly platform usage.

The increase in our software licensing revenues during the three and nine-month periods ended September 30, 2013, 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 average clients increased 58% and 65% during the three and nine-month periods ended September 30, 2013, respectively, when compared to the prior year periods, and our average monthly fee per customer increased 9% during the nine-month periods ended September 30, 2013 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, 2013 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, most of which usage occurred during the first half of fiscal 2013.

We believe that our SaaS revenues will continue to increase sequentially for the remainder of 2013.

Cost of Revenues

Cost of revenues consists primarily of web hosting and domain registration fees. 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, while certain customers prefer to have their services hosted on dedicated servers.

During the three and nine-month periods ended September 30, 2013, when compared to the prior year periods, cost of revenues significantly increased, reflecting higher web hosting costs incurred to support our increased number of clients requesting non-dedicated servers, which allows us economies of scale because it maximizes the utilization of servers for such clients as our revenues increases, but at a lower cost for each additional $1 of revenues.

We believe that our cost of revenues will continue to increase at lower percentages than our anticipated increase in revenues for the remainder of 2013.

Research and Development Expenses

Research and development expenses consist primarily of payroll expenses and related benefits and facility costs associated with enhancement of our SaaS products.  

Our research and development expenses decreased and increased during the three and nine-month periods ended September 30, 2013, when compared to the prior year periods, due to increased staff assigned to the enhancement of our software services, which translated into increased payroll costs and related benefits, offset by the capitalization of internal-use software development costs incurred during the three and nine month periods ended September 30, 2013 which amounted to approximately $227,000. We did not capitalize internal-use software development costs during the comparable prior year periods.

We believe that our research and development expenses will continue to increase sequentially as we continue to enhance some of the features of our SaaS platform for the remainder of 2013, offset by the amount of internal-use software development costs which would otherwise be capitalized.

Sales and Marketing Expenses

Sales and marketing expenses primarily consists of payroll and related expenses associated with sales and marketing personnel, as well as marketing programs we use to market our products.

The increase in sales and marketing expenses during the three and nine-month periods ended September 30, 2013, when compared to prior year periods, is primarily due to the increase number of employees associated with the sale of our products as well as increased expenditures in our marketing programs.

We believe that our sales and marketing expenses will continue to increase sequentially as we continue to hire more sales and marketing personnel in the U.S. and in Europe and as we increase our expenditures in certain marketing programs, such as trade shows.

General and Administrative Expenses

General and administrative expenses primarily consist of payroll expenses associated with supporting customer service and onboarding activities, as well as other general and administrative expenses, including payroll expenses necessary to support our existing and anticipated growth in our revenues, and legal expenses and professional fees.

The increase in general and administrative expenses during the three and nine-month periods ended September 30, 2013, when compared with the prior year periods, is primarily due to the increased number of employees assigned to support customer acquisition activities, such as training and account management, which resulted in increased payroll costs and related benefits. Additionally, as we started to expand into Europe in the last quarter of 2012, we incurred increased up-front expenses related to developing and integrating our operations in Europe prior to a commensurate increase in revenues. Furthermore, we have increased our efforts in investor relations since the last quarter of 2012.

We believe that our general and administrative expenses will continue to increase sequentially as we continue to hire employees to increase our training and account management capacity, as well as continue to develop and integrate our European operations and continue to expand our investor relations efforts for the remainder of 2013.

Interest Income

Interest income consists of interest payments associated with our note receivable and the amortization of the related original issuance discount.

The increase in interest income during the nine-month period ended September 30, 2013, when compared to the prior year period, is due to the issuance of our note receivable during September 2012.

Due to the amendment of the note receivable on June 10, 2013, we do not expect to recognize any further interest income for the remainder of 2013.

Interest Expense

Interest expense consists of interest charges and amortization of debt discount associated with our 12% Convertible Notes Payable and 12% Note Payable.

The decrease in interest expense during the three and nine-month periods ended September 30, 2013, when compared to the prior year periods, is primarily due to a decrease in the effective interest rate of interest-bearing obligations as a result of (i) the higher amortization of debt discount during the three and nine-month period ended September 30, 2012 resulting from the higher costs of modification of the 12% Note Payable which were incurred during the 2011 fiscal year and which were amortized through December 2012, (ii) the amortization of the modification of certain 12% Convertible Notes Payable aggregating $462,500 which were satisfied during the nine-month period ended September 30, 2012 and (iii) the lower costs of modification, when compared to the prior year period, of the 12% Note Payable incurred in September 2012 which was amortized during the nine-month period ended September 30, 2013 and, to a lesser extent, a decrease in the weighted-average principal balance of our interest-bearing obligations, of which a substantial portion was converted into shares of our common stock during the nine-month period ended September 30, 2012.

Due to the satisfaction of all our interest-bearing liabilities during the third quarter of 2013, we do not believe that our interest expense will increase for the remainder of 2013.

Income from discontinued operations, net

The net income (loss) from discontinued operations consists of revenues and operating expenses from our online marketing services division, which was sold in September of 2012, as well as gains related to the sale during the three and nine-month periods ended September 30, 2013.

The income (loss) from discontinued operations during the three and nine-month periods ended September 30, 2012 consisted primarily of revenues and expenses from our discontinued online marketing services division. The gain during the three and nine-month periods ended September 30, 2013 resulted primarily from disposition proceeds received as in-kind services from the Company’s former online marketing services division. The gain from the disposal of discontinued operations during the three-month and nine-month periods ended September 30, 2012 consists primarily of proceeds of $200,000 we received upon disposal of our former online marketing services division in September 30, 2012 as well as the issuance of a note receivable with a carrying value of $100,000 at the date of disposal.

We anticipate recognizing additional gains from the disposal of discontinued operations of less than $100,000 for the remainder of 2013.

Liquidity and Capital Resources

At September 30, 2013 and 2012, 77% and 78%, 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 other financing activities, such as the issuance of a note payable of $500,000 in January 2011, and more recently, our cash flow from operating activities. We also completed the sale of our online marketing services division in September 2012, which generated $322,000. In August 2013, we satisfied all our interest-bearing outstanding obligations by paying the remaining principal amount of $22,500 and $122,500 on the 12% Note Payable and certain 12% Convertible Notes Payable, respectively, from existing cash on hand. Additionally, we issued 131,411 shares of our Common Stock in satisfaction of $52,564 of principal and interest on certain 12% Convertible Notes Payable . We believe we have sufficient cash to fund our operations for the next 12 months.

We do not have any material commitments for capital expenditures of tangible products. We routinely purchase computer equipment and technology to maintain or enhance the productivity of our employees and such capital expenditures have ranged between $256,146 and $27,528, respectively, during the nine-month periods ended September 30, 2013 and 2012. During the nine-month period ended September 30, 2013, we acquired a license to use certain technology which we believe will improve our software development for upgrades to our Saas platform. We also deployed capital for the build-out of two booths for trade shows.

Nine-months ended September 30, 2013 

The increase in accounts receivable as of September 30, 2013 is primarily due to a commensurate increase in revenues.

The increase in accounts payable and accrued expenses as of September 30, 2013 is primarily due to a commensurate increase in non-payroll expenses.

Cash used in investing activities during the nine-month period ended September 30, 2013 consists of proceeds from the sale of our online marketing services business of $80,000, offset by the capitalization of development costs for internal-use software of approximately $227,000 and the build-out of two tradeshows booths as well as recurring purchases of computer equipment and furniture.

Cash provided by financing activities during the nine-month period ended September 30, 2013 resulted primarily from the proceeds from the exercise of warrants of approximately $829,000, offset by the principal repayments on our notes payable of approximately $266,000.

The increase in cash flows from operating activities during the nine-month period ended September 30, 2013 is due to an increase in revenues during the nine month period ended September 30, 2013, offset by a lesser increase in correlated web-hosting and payroll costs, an increase in non-cash expenses, such as the fair value of options, and by an increase in accounts receivable and accounts payable due to commensurate increases in revenue and non-payroll costs, respectively.

Nine-months ended September 30, 2012

The increase in accounts receivable as of September 30, 2012 is primarily due to a commensurate increase in revenues.

The increase in accounts payable and accrued expenses as of September 30, 2012 is primarily due to a commensurate increase in non-payroll expenses.

Cash provided by investing activities during the nine month period ended September 30, 2012 consists of initial proceeds of $200,000 in connection with the disposal of our former online marketing services division in September 2012 offset by recurring purchases of computer equipment of approximately $28,000. We did not capitalize development costs associated with internal-use software during the nine-month period ended September 30, 2012.

Cash used in financing activities of approximately $194,000 during the nine month period ended September 30, 2012 resulted from the proceeds from the exercise of warrants of approximately $126,000, offset by the principal repayments on our notes payable of $320,000.

Capital Raising Transactions

Exercise of warrants and options