ACCELERIZE NEW MEDIA, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION, DESCRIPTION OF BUSINESS AND GOING CONCERN:
Accelerize New Media, Inc., or the Company, a Delaware corporation, incorporated on November 22, 2005, is a software developer and an online marketing services provider.
The Company offers a comprehensive online media solution for clients to reach their target audience on the Internet. The Company provides multifaceted online marketing services specializing in the development of performance based marketing programs and related software solutions for businesses interested in expanding their online advertising presence. In February 2011, the Company decided to allocate more resources to its software solutions, discontinued its lead generation business, and disposed of this segment to a third-party for an up-front consideration of $20,000 and a percentage of future revenues that might be generated by the third-party through February 2012.
The balance sheet presented as of December 31, 2011 has been derived from our audited financial statements. The unaudited 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 financial statements and notes included herein should be read in conjunction with the annual financial statements and notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed with the SEC on March 29, 2012. 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-month period ended March 31, 2012 are not necessarily indicative of the results for the year ending December 31, 2012.
The accompanying financial statements have been prepared on a going concern basis. The Company has used net cash in its operating activities of approximately $59,000 during the three-month period ended March 31, 2012. The Company's ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, to fund possible future acquisitions, and to generate profitable operations in the future. Management plans may continue to provide for the Company’s capital requirements by issuing additional equity securities and debt. The outcome of these matters cannot be predicted at this time and there are no assurances that if achieved, the Company will have sufficient funds to execute its business plan or generate positive operating results.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of 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.
Loss from Continuing Operations
The loss from continuing operations was $284,989 and $415,475 during the three-month periods ended March 31, 2012 and 2011, respectively. Revenues were $1,181,398 and $702,313 for the three-month periods ended March 31, 2012 and 2011, respectively. Operating expenses were $1,413,007 and $920,650 for the three-month periods ended March 31, 2012 and 2011, respectively. Interest expense was $53,380 and $197,138 during the three-month periods ended March 31, 2012 and 2011, respectively.
Net Income from Discontinued Operations
The net income from discontinued operations amounted to $17,205 during the three-month period ended March 31, 2011. The net income from discontinued operations during the three-month period ended March 31, 2011 consists of revenue from discontinued operations of $139,668, operating expenses of $142,463, and gain from the disposal of discontinued operations of $20,000. During the three-month period ended March 31, 2011, the Company wrote down its goodwill by $38,000, which is included in the net income from discontinued operations.
The Company did not have discontinued operations during the three-month period ended March 31, 2012.
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 advertising, affiliate marketing and lead generation companies. 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. The allowance for doubtful accounts was $25,053 and $95,301 as of March 31, 2012 and December 31, 2011, respectively.
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 three-month period ended March 31, 2012, 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 a few customers, generally located in the United States. None of the Company’s customers accounted for more than 10% of its accounts receivable at March 31, 2012 or December 31, 2011.
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with ASC Topic 605-10-S99, Revenue Recognition-Overall-SEC Materials. 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 a set-up fee and monthly license fee, supplemented by per transaction fees that customers pay for platform usage.
The Company’s online marketing service revenues are generated from banner design and website development, targeted content creation and syndication, contact management solutions and banner ad sales via its portfolio of websites.
Effective February 2011, the Company discontinued its lead generation business.
Product Concentration
The Company generates its revenues from the following two activities: software licensing and online marketing 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:
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Observable inputs such as quoted market prices in active markets for identical assets or liabilities.
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Level 2:
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Observable market-based inputs or unobservable inputs that are corroborated by market data.
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Level 3:
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Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
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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 other expenses section in the Company’s statements of operations.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, note and convertible promissory notes payable approximate their fair value due to the short 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 needs to determine 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 it has no derivative liabilities associated with such instruments at March 31, 2012 because the Company believes that it will not issue additional consideration, beyond those already granted, 1) to the holders of the 12% Convertible Notes Payable, a substantial number of which have converted their 12% Convertible Note Payable during the first quarter of 2012, and 2) 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.
Advertising
The Company expenses advertising costs as incurred. Advertising expense amounted to $16,037 and $42,203 during the three-month periods ended March 31, 2012 and 2011, respectively.
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.
Software Development Costs
Costs incurred in the research and development of software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs are capitalized in accordance with ASC No. 985-30, Software-Research and Development. Costs of maintenance and customer support will be charged to expense when related revenue is recognized or when those costs are incurred, whichever occurs first. The Company believes that the current process for developing software is essentially completed concurrently with the establishment of technological feasibility; accordingly, no software development costs have been capitalized at March 31, 2012.
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 generates revenues from two sources: 1) SaaS, and 2) online marketing services. 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).
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March 31,
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March 31,
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2012
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2011
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Numerator:
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Net loss from continuing operations
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$ |
(284,989 |
) |
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$ |
(415,475 |
) |
Preferred stock dividends
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(83,232 |
) |
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(100,122 |
) |
Numerator for basic earnings per share- net loss from continuing operations attributable to common stockholders-as adjusted
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$ |
(368,221 |
) |
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$ |
(515,597 |
) |
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Net income from discontinued operations
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$ |
- |
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$ |
17,205 |
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Denominator:
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Denominator for basic earnings per share--weighted average shares
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42,139,371 |
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33,940,507 |
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Effect of dilutive securities- for discontinued operations only:
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Stock options
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- |
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- |
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Warrants
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- |
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- |
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Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions
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42,139,371 |
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33,940,507 |
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Earnings (loss) per share:
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Basic
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Continuing operations, as adjusted
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$ |
(0.01 |
) |
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$ |
(0.02 |
) |
Discontinued operations
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$ |
- |
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$ |
0.00 |
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Net earnings (loss) per share- basic
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$ |
(0.01 |
) |
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$ |
(0.01 |
) |
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Diluted
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Continuing operations, as adjusted
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$ |
(0.01 |
) |
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$ |
(0.02 |
) |
Discontinued operations
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$ |
- |
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$ |
0.00 |
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Net earnings(loss) per shares-diluted
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$ |
(0.01 |
) |
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$ |
(0.01 |
) |
The weighted-average anti-dilutive common share equivalents are as follows:
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Three-month periods ended
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March 31,
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2012
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2011
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Series A Preferred Stock
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1,196,667 |
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4,700,000 |
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Series B Preferred Stock
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5,831,250 |
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11,662,500 |
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Convertible notes payable
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1,011,977 |
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1,274,000 |
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Options
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9,030,000 |
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9,135,000 |
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Warrants
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11,985,005 |
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11,263,333 |
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29,054,899 |
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38,034,833 |
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The anti-dilutive common shares outstanding at March 31, 2012 and 2011 are as follows:
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Three-month periods ended
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March 31,
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2012
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2011
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Series A Preferred Stock
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|
- |
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4,700,000 |
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Series B Preferred Stock
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- |
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11,662,500 |
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Convertible notes payable
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461,250 |
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1,274,000 |
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Options
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9,030,000 |
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9,135,000 |
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Warrants
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11,985,005 |
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11,263,333 |
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21,476,255 |
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38,034,833 |
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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:
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March 31,
2012
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December 31,
2011
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Computer equipment and software
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$ |
49,427 |
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$ |
45,537 |
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Office furniture and equipment
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34,224 |
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33,030 |
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83,651 |
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78,567 |
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Accumulated depreciation
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(27,848 |
) |
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(20,878 |
) |
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$ |
55,803 |
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57,689 |
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Depreciation expense amounted to $6,971 and $2,331 during the three-month periods ended March 31, 2012 and 2011, respectively.
NOTE 3: PREPAID EXPENSES
At March 31, 2012, the prepaid expenses consisted primarily of prepaid insurance and rent.
NOTE 4: GOODWILL
At December 31, 2010, the Company wrote-down the value of its goodwill. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350-30-35-4 “Intangibles-Goodwill and Other” requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. The Company wrote-down $0 and $38,000 during the three-month periods ended March 31, 2012 and 2011, respectively. The $38,000 carrying value of goodwill was reclassified to discontinued operations in 2011.
NOTE 5: DEFERRED REVENUES
The Company’s deferred revenues which amounted to approximately $39,000 and $75,000 at March 31, 2012 and December 31, 2011, respectively, consists 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.
NOTE 6: CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
10% Convertible Notes Payable
The Company had 10% convertible promissory notes, or 10% Convertible Notes Payable, aggregating $530,000 outstanding at December 31, 2010. The 10% Convertible Notes Payable bore interest at 10% 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 based on the closing price, as quoted on the Over-the-Counter Bulletin Board, or OTCBB, of the trading day immediately prior to the interest payment date. The interest was payable commencing June 1, 2008 and every quarter thereafter, until the obligations under the 10% Convertible Notes Payable were satisfied. The 10% Convertible Notes Payable matured between March and June 2011.
On January 3, 2011, the Company issued 1,325,000 shares of its Common Stock pursuant to the conversion of 10% Convertible Notes Payable with principal aggregating $530,000, at $0.40 per share. The fair value of the inducement to the holders of the 10% Convertible Notes Payable amounted to $159,000 and was included in interest expense for the three-month period ended March 31, 2011.
12% Convertible Notes Payable
The Company had 12% convertible promissory notes, including accrued interest, aggregating $194,713 and $625,081 outstanding at March 31, 2012 and December 31, 2011, respectively. The 12% Convertible Notes Payable bear interest at 12% per annum. Accrued interest may be payable, at the note holder’s option, in cash or in shares of Common Stock. If the accrued interest is paid in shares of Common Stock, the number of shares issuable to satisfy the accrued interest is 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 is payable every quarter thereafter, until the obligations under the 12% Convertible Notes Payable are satisfied. The 12% Convertible Notes Payable mature ten days after the maturity date of the Company’s 12% note, or 12% Note. Effective May 29, 2009, on the maturity date, each holder has the option of having the 12% Convertible Notes Payable prepaid 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 may 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 shall be 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. The Company may prepay the 12% Convertible Notes Payable without premium. Each note holder may convert, at his option, the outstanding principal of the 12% Convertible Notes Payable , after July 1, 2009 and prior to January 10, 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.
During the three-month period ended March 31, 2012, the Company issued 1,131,250 shares of its common stock pursuant to the conversion of 12% Convertible Notes payable with principal aggregating $452,500.
12% Note Payable
During 2011, the Company issued a note payable, aggregating $500,000. The 12% Note Payable bears interest at a rate of 12% per annum and matures on March 31, 2012. Interest is 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.
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, 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 financial statements as additional paid-in capital and corresponding debt discount.
The Company made principal repayments of $90,000 on its 12% Note Payable during the three-month period ended March 31, 2012.
The interest and amortization expense associated with the 10% and 12% Convertible Notes Payable and the 12% Note Payable amounted to $53,380 and $197,138 during the three-month periods ended March 31, 2012 and 2011, respectively.
NOTE 7: STOCKHOLDERS’ DEFICIT
Common Stock
A summary of the issuance of shares of Common Stock, related consideration and fair value of transaction, for the three-month period ended March 31, 2011 is as follows:
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Payment of Preferred Stock dividends
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309,661 |
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$ |
100,122 |
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$ |
0.15 - 0.54 |
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Conversion of Series A Preferred Stock into Common Stock
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|
600,000 |
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$ |
90,000 |
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$ |
0.15 |
|
Cashless exercise of warrants
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264,000 |
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$ |
264 |
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$ |
0.001 |
|
Conversion of 10% Notes Payable to
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Common Stock
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1,325,000 |
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$ |
689,000 |
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$ |
0.60 |
|
A summary of the issuance of shares of Common Stock, related consideration and fair value of transaction, for the three-month period ended March 31, 2012 is as follows:
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Payment of Preferred Stock dividends
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182,418 |
|
|
$ |
83,231 |
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|
$ |
0.15 - 0.49 |
|
Conversion of 23,934 Series A Preferred Stock into Common Stock
|
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|
2,393,334 |
|
|
$ |
322,339 |
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|
$ |
0.15 |
|
Conversion of 116,625 Series B Preferred Stock into Common Stock
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|
11,662,500 |
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|
$ |
3,565,814 |
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$ |
0.35 |
|
Exercise of warrants
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|
455,250 |
|
|
$ |
115,538 |
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|
$ |
0.15 - 0.35 |
|
Conversion of 12% Notes Payable to Common Stock
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1,131,250 |
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$ |
452,500 |
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$ |
0.40 |
|
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 lower than the initial rate.
No shares of Series A Preferred Stock were outstanding at March 31, 2012.
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 lower than the initial rate. The rights of the holders of the Series B Preferred Stock were subordinate to the rights of the holders of Series A Preferred Stock.
No shares of Series B Preferred Stock were outstanding at March 31, 2012.
Warrants
During the three-month period ended March 31, 2011, in connection with the issuance of the 12% Note Payable the Company issued warrants 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 or (ii) the price per share at which the Company sells or issues its capital stock after the issue date of the convertible note in a transaction or series of transactions in which the Company receives at least $500,000, provided that such price per share shall in no case be less than $0.35.
On January 3, 2011 the Company’s Board of Directors approved the reduction of the exercise price of the warrants issued in connection with both the 10% and 12% Convertible Notes Payable from $0.55 to $0.40. The fair value of these warrant modifications amounted to $17,645, and was recorded as a interest expense and as an increase to additional paid-in capital.
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 of 5,000,000 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.
|
|
Three-month period ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
Weighted-average grant date fair value
|
|
|
N/A |
|
|
$ |
0.27 |
|
Fair value of options, recognized as selling, general, and administrative expenses
|
|
$ |
55,840 |
|
|
$ |
80,593 |
|
Number of options granted
|
|
|
- |
|
|
|
2,040,000 |
|
The total compensation cost related to non-vested awards not yet recognized amounted to approximately $356,000 at March 31, 2012 and the Company expects that it will be recognized over the following weighted-average period of 21 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: CONTINGENCIES
During 2011, one of the Company’s competitors filed a complaint against the Company, three of its clients and three of their respective officers, in the United States District Court for the Eastern District of Louisiana. The plaintiff claims, among other things, that the Company, with the aid of the other defendants, engaged in computer fraud and abuse, unlawful access to electronic communications, misappropriation of trade secrets, unfair trade practices, tortious conduct and intentional interference. The plaintiff alleges among other things that the Company misappropriated trade secrets by accessing, copying and downloading proprietary information from secure websites operated by the plaintiff without its authorization. The plaintiff seeks injunctive relief and damages in excess of $1 million, plus attorneys’ fees and costs. In June 2011, the Company filed a partial motion to dismiss and five counter-claims against the plaintiff. In August 2011, the plaintiff filed a motion to dismiss the Company’s counter-claims.
On March 20, 2012, each of the motions was granted in part and denied in part, such that all parties have the right to amend their pleadings.
While the Company intends to vigorously defend this matter, there exists the possibility of adverse outcomes that the Company cannot determine. These matters are subject to inherent uncertainties and management's view of these matters may change in the future. The Company accrued $100,000 at December 31, 2011 in connection with this claim.