CFN Enterprises Inc. - Quarter Report: 2015 June (Form 10-Q)

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2015

For the transition period from ________ to ________

Commission File Number: 000-52635

ACCELERIZE INC.

(Exact name of registrant as specified in its charter)

20411 SW BIRCH STREET, SUITE 250

NEWPORT BEACH

CALIFORNIA 92660

 (Address of principal executive offices)

(949) 515 2141

 (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.

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 August 11, 2015, was 62,914,540.

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

ACCELERIZE INC.

INDEX

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ACCELERIZE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 See Notes to Unaudited Condensed Consolidated Financial Statements.  

 ACCELERIZE INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 See Notes to Unaudited Condensed Consolidated Financial Statements.

ACCELERIZE INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

See Notes to Unaudited Condensed Consolidated Financial Statements.

ACCELERIZE INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 See Notes to Unaudited Condensed Consolidated Financial Statements.

ACCELERIZE INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 affiliate networks, advertisers, 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 17% and 30% growth in our client base outside of the United States during the three and six-month period ended June 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. To go-to-market with our recently released new product, CAKE for Advertisers, enterprise sales representatives were added and marketing programs were created to properly launch and market the product to global advertisers. In addition, development resources continued to design and develop CAKE for Advertisers.

We experienced 46% year over year growth in revenue during the six-month period ended June 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 intend to grow revenues by investing in sales, marketing, and product development and innovation. We continued to hire sales executives globally to target specific verticals and accounts with both agencies and advertisers. We allocated a significant 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. We also began development on a third product family, CAKE for Publishers, a supply-side platform for use by online publishers.

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, Australia, 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) 515-2141. 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

Discussion of Results for Three-Month and Six-Month Periods Ended June 30, 2015 and 2014

Revenues

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 six-month periods ended June 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 average clients increased 16% during the three and six-month periods ended June 30, 2015, when compared to the prior year periods, and our average monthly fee per customer increased 14% and 11% during the three and six-month periods ended June 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 six-month periods ended June 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

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 six-month periods ended June 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 six-month periods ended June 30, 2015 by approximately $233,000 and $582,000, 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

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 six-month periods ended June 30, 2015, when compared to the prior year periods, due to increased staff assigned to the enhancement and maintenance of our software services, which translated to increased personnel costs, offset by the capitalization of software development costs which amounted to $190,617 and $368,041 for the three and six-month periods ended June 30, 2015, respectively.

We believe that our research and development expenses will continue to increase during the remainder of 2015, when compared to 2014, as we continue to enhance the features of our SaaS platform.

Sales and Marketing Expenses

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 increase in sales and marketing expenses during the three and six-month periods ended June 30, 2015, when compared to the prior year periods, is primarily due to the increased number of employees associated with the sale of our products as well as increased expenditures in our marketing programs, primarily trade shows. Company rebranding program expenses in mid 2014 contributed to the smaller increase in the three-month period ended June 30, 2015 when compared to the same period in the prior year.

We believe that our sales and marketing expenses will continue to increase in 2015 as we continue to hire more sales and marketing personnel in the U.S. and in Europe in anticipation of increased revenues 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 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 fees, accounting services and legal fees, as well as professional fees, insurance and other corporate expenses such as investor relations.

The increase in general and administrative expenses during the three and six-month periods ended June 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, recruiting, 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 continue to increase during the remainder of 2015 as we expect that the scope of our operations will continue to increase prior to a commensurate increase in revenues.

Other Income/Interest Income

Other Income during the three and six-month periods ended June 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

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 six-month periods ended June 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

At June 30, 2015 and 2014, 57% and 63%, 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. Most recently, we have entered into the Line of Credit.

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 June 30, 2015, we were in compliance with these covenants. 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 $4,500,000 under the Line of Credit at June 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

Six months ended June 30, 2015

The slight decrease in accounts receivable as of June 30, 2015 when compared to the same period in 2014, is primarily due to improved collection efforts while revenues continued to increase. Accounts payable and accrued expenses increased during the six-month period ended June 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 six-month period ended June 30, 2015 consists of purchases of computer equipment and other capital expenditures of approximately $115,000, and capitalization of development costs for internal-use software of approximately $368,000.

Cash provided by financing activities during the six-month period ended June 30, 2015 resulted from the proceeds from the exercise of options of approximately $10,000 and a $1,600,000 draw down on the Line of Credit.

Despite an increase in revenues, the decrease in net operating cash flows during the six-month period ended June 30, 2015 was mainly due to a higher increase in correlated web-hosting and payroll costs.

Six months ended June 30, 2014

The increase in accounts receivable as of June 30, 2014, when compared to the same period in the prior year, is primarily due to a commensurate increase in revenues. The increase in accounts payable and accrued expenses during the six-month period ended June 30, 2014, when compared to the same period in the prior year, is primarily due to the accrual of the second payment of $250,000 to a former competitor in relation to the purchase of customer relationships.

Cash used in investing activities during the six-month period ended June 30, 2014 consists of purchases of computer equipment and other capital expenditures of approximately $187,000, and capitalization of development costs for internal-use software of approximately $311,000.

Cash provided by financing activities during the six-month period ended June 30, 2014 resulted from the proceeds from the exercise of warrants of approximately $571,000 and $1,000,000 of draw downs on the Line of Credit on June 2014. This amount was offset by $40,000 in financing costs related to the Line of Credit.

Despite an increase in revenues, the decrease in net operating cash flows during the six-month period ended June 30, 2014 was 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 six-month period ended June 30, 2015.

Other outstanding obligations at June 30, 2015

Line of Credit

During the three months ended June 30, 2015, we borrowed an additional $600,000 under the Line of Credit. As of June 30, 2015, we owed $4,500,000 under the Line of Credit.

Warrants

As of June 30, 2015, 5,380,699 shares of our Common Stock are issuable pursuant to the exercise of warrants.

Options

As of June 30, 2015, 14,708,336 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 June 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 June 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

The following supplements and amends our discussion set forth under Part II, Item 1 "Legal Proceedings" in our Quarterly Report on Form 10-Q for the period ended March 31, 2015.

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, including the following, 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.

On February 23, 2015, we commenced an action against Jeff McCollum, the former President of our CAKE division, by filing a complaint in the Superior Court of the State of California, County of Orange, Central District, asserting claims against Mr. McCollum for fraud, breach of contract, and breach of fiduciary duty, among others. Our complaint asserts that, during Mr. McCollum’s employment, he engaged in fraud, breached his fiduciary duties to us, and breached the terms of his employment contract in connection with his duties to us. We terminated Mr. McCollum’s employment on September 8, 2014 for cause as defined in Mr. McCollum’s employment agreement as a result of, among other things, Mr. McCollum having abandoned his position and professional responsibilities (which we concluded constituted, among other things, material breaches of his employment agreement and that his breaches, failures and refusals to perform were incapable of cure, thus supporting a for cause termination). Our complaint additionally asserts that following our termination of Mr. McCollum, he illegally accessed and downloaded our proprietary and confidential information, converted our property, and destroyed relevant evidence. In addition to seeking a temporary restraining order, preliminary injunction, and permanent injunction, all enjoining Mr. McCollum from further breaching his employment agreement, our initial complaint sought general and special damages, pre- and post-judgment interest, and costs of suit according to proof, plus any other legal or equitable relief as the court may deem just and proper. On March 26, 2015, we filed a First Amended Complaint clarifying the trade secret cause of action. Mr. McCollum filed a motion to strike portions of that First Amended Complaint but, on April 29, 2015, the court denied that motion in its entirety.  On May 29, 2015, Mr. McCollum filed a cross-complaint alleging breach of contract by us with respect to Mr. McCollum’s employment agreement and seeking, among other things, the remaining payments under Mr. McCollum’s employment agreement, estimated by Mr. McCollum to be approximately $1.5 million, and the right to exercise 5.825 million stock options we deemed forfeited upon Mr. McCollum’s termination for cause (per the terms of Mr. McCollum’s stock option agreements). On July 6, 2015, we answered Mr. McCollum’s cross complaint by denying Mr. McCollum’s allegations and asserting affirmative defenses.  At this point we have not actively pursued a temporary restraining order, preliminary injunction, or permanent injunction, but we continue to seek damages from Mr. McCollum based on the claims we have asserted.

On February 23, 2015, Mr. McCollum commenced a separate action by filing a complaint in the Superior Court of the State of California, County of Orange, Central District, 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. Mr. McCollum alleges that we contend that the restriction should remain on his share certificate. Mr. McCollum has requested a judicial determination as to his rights to have the restrictive legend removed from his share certificate, and an order compelling us to issue him a new certificate without a restrictive legend. He also seeks compensatory and punitive damages, pre-judgment interest, an award of costs, and any other relief the court may deem proper. On March 26, 2015, we filed a demurrer to this action, asserting that Mr. McCollum’s complaint fails to state facts sufficient to constitute a cause of action against us. On June 17, 2015, the court overruled our demurrer as to the declaratory relief claim and sustained our demurrer to the other two causes of action included in Mr. McCollum’s complaint, but granted Mr. McCollum 20 days’ leave to amend his complaint as to these two causes of action.  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 is scheduled to be heard on September 23, 2015.  

Item 1A. Risk Factors

Except as set forth below, 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.

Some of the shares issued and options granted under our stock plan may have been issued in transactions that were not exempt from registration under certain state securities laws, the result of which is that the holders of these shares and/or options may have rescission rights that could require us to reacquire the shares and/or options.

Some of the shares issued and options granted under our equity compensation plan may not have been exempt from registration or qualification under the securities laws of certain states. We recently became aware that we may not have had a valid exemption for the issuance of these options and shares exercised upon exercise of these options under certain state laws. Because of the lack of registration and, potentially, the lack of a valid exemption from registration, the options we granted and the shares issued upon exercise of these options may have been issued in violation of certain state securities laws and may be subject to rescission. In order to address this issue, we may make a rescission offer to the holders of these shares and options as soon as practicable. 

If this rescission offer is accepted, we could be required to make payments to the holders of these shares and options in an amount not yet determinable by us. If any or all of the offerees reject the rescission offer, we may continue to be liable under state securities laws for payments to the offerees. If it is determined that we offered securities without properly registering them under state law, or securing an exemption from registration, regulators could impose monetary fines or other sanctions as provided under these laws. 

We could become subject to litigation that could be costly, result in the diversion of management’s attention and require us to pay damages.

From time to time, we may become involved in legal proceedings. We are currently engaged in a litigation with Jeff McCollum, the former President of our CAKE division. Although we intend to pursue our claims against Mr. McCollum, and to defend ourselves vigorously against his claims, we cannot provide assurance that this litigation or future legal proceedings will result in damages being awarded to us or will not result in substantial costs to us or otherwise adversely impact our reputation.

Item 6.  Exhibits

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.

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