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ACLZ > SEC Filings for ACLZ > Form 10-K on 25-Mar-2014All Recent SEC Filings

Show all filings for ACCELERIZE NEW MEDIA INC

Form 10-K for ACCELERIZE NEW MEDIA INC


25-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with our financial statements and accompanying notes included in this Annual Report on Form 10-K.

Overview

We own and operate CAKE, and getcake.com, a marketing technology that provides a comprehensive suite of innovative marketing intelligence tools. Our powerful SaaS enterprise solution has been an industry standard for ad networks, publishers, brands, and agencies to measurably improve and optimize digital spend. We currently have over 400 customers driving over 2 billion consumer actions monthly through the CAKE enterprise platform.

CAKE's multi-channel performance marketing platform merges attribution analytics from display, mobile, retail, lead generation, and affiliate channels. By significantly increasing visibility across the entire customer digital journey, CAKE takes marketing intelligence to a new deeper level that's easily accessible to all marketers. We have also launched cupCAKE, a campaign management solution for small and medium sized affiliate marketers.

Our revenue model is based on a monthly license, a usage fee (based on volume of clicks, impressions, or leads), and a training and implementation fee. Clients purchase annual or monthly subscriptions with an additional usage fee.

Our training, account management, support personnel, hosting and cloud-based infrastrucure contribute to our cost of operating the business. We anticipate more spending in these areas while we continue to grow and could foresee some savings in infrastructure cost due to economies of scale. However, we want to continue to invest in these areas to support our growth.

We have experienced 66% year over year growth for the last year. 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.

We intend to grow revenues by investing in sales, marketing, and product development and innovation. 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.


Results of Operations

                           ACCELERIZE NEW MEDIA, INC.

                       CONSOLIDATED RESULTS OF OPERATIONS



                                                                            Increase/       Increase/
                                                   Years Ended             (Decrease)       (Decrease)
                                                  December 31,              in $ 2013       in % 2013
                                              2013            2012           vs 2012         vs 2012

Revenue:                                   $ 9,653,865     $ 5,800,622       3,853,243             66.4 %

Operating expenses:
Cost of revenues                             2,063,481       1,069,574         993,907             92.9 %
Research and development                     1,425,215         933,034         492,181             52.8 %
Sales and marketing                          3,829,175       2,109,833       1,719,342             81.5 %
General and administrative                   2,520,631       1,307,244       1,213,387             92.8 %
Total operating expenses                     9,838,502       5,419,685       4,418,817             81.5 %

Operating income (loss)                       (184,637 )       380,937         565,574           -148.5 %

Other income (expense):
Interest income                                 14,745           1,729         (13,016 )             NM
Interest expense                               (39,869 )      (167,551 )       127,682            -76.2 %
                                               (25,124 )      (165,822 )      (140,698 )          -84.8 %

Income (loss) from continuing operations      (209,761 )       215,115         424,876             -198 %

Discontinued operations
Loss from discontinued operations                    -         (48,050 )        48,050               NM
Gain from the disposal of discontinued
operations                                     303,537         325,883         (22,346 )             -7 %
Income from discontinued operations, net       303,537         277,833          25,704                9 %

Net income                                 $    93,776     $   492,948     $   399,172              -81 %

NM: Not Meaningful

Revenues



                                              %
                                           Change
              2013            2012

Revenues   $ 9,653,865     $ 5,800,622        61.1 %

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.

The increase in our software licensing revenues during 2013, when compared to the prior year, 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 44% during 2013, when compared to the prior year, and our average monthly fee per customer increased 16% during 2013 when compared to the prior year. The increase in the number of customers using our SaaS products and services during 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 2013.

We believe that our SaaS revenues will continue to increase during 2014.


Cost of Revenues



                           Years ended                %
                          December 31,             Change
                      2013            2012

Cost of Revenues $ 2,063,481 $ 1,069,574 92.9 %

Cost of revenue 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 2013, when compared to the prior year, cost of revenues significantly increased reflecting the higher number of employees we hired to support customer on-boarding and training activities, which increased our personnel costs by approximately $494,000, when compared to 2012, as well as web hosting fees incurred to support our increased number of clients and platform usage, which increased by approximately $451,000, when compared to 2012.

We believe that our cost of revenues will continue to increase, at lower percentages than our anticipated increase in revenues, for 2014.

Research and Development Expenses



                                  Years ended               %
                                 December 31,            Change
                              2013           2012

Research and development $ 1,425,215 $ 933,034 52.8 %

Research and development expenses consist primarily of personnel costs associated with the enhancement and the maintenance of our SaaS product offerings, consisting of salaries, benefits, and related infrastructure, offset by capitalized software development costs.

Our research and development expenses increased during 2013, when compared to the prior year, due to increased staff assigned to the enhancement and maintenance of our software services, which translated into increased personnel costs, offset by the capitalization of software development costs aggregating $565,000 during 2013. We did not capitalize software development costs during 2012 as we did not meet the accounting criteria to do so.

We believe that our research and development expenses will continue to increase during 2014 as we continue to enhance some of the features of our SaaS platform, offset by the amount of internal-use software development costs which would otherwise be capitalized.

Sales and Marketing Expenses



                              Years Ended                %
                             December 31,             Change
                         2013            2012

Sales and Marketing $ 3,829,175 $ 2,109,833 81.5 %

Sales and marketing expenses primarily consists of personnel costs associated with the sale and the 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 2013, when compared to the prior year, 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.

We believe that our sales and marketing expenses will continue to increase in 2014 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. Additionally, the amortization of the customer relationships we acquired from one of our competitors in November 2013 will amount to approximately $667,000 during 2014, while we amortized less than $50,000 for such customer relationships during 2013.


General and Administrative Expenses



                                     Years Ended                %
                                    December 31,             Change
                                2013            2012

General and administrative $ 2,520,631 $ 1,307,244 113.7 %

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 2013, when compared with the prior year, is primarily due to the increased number of employees assigned to support our organization. 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 during 2014 as we expect that the scope of our operations will continue to increase.

Interest Income

Years Ended %
December 31, Change
2013 2012

Interest Income $ 14,745 $ 1,729 NM

Interest income consists of interest payments associated with our note receivable issued in connection with the sale of our online marketing services division and the amortization of the related original issuance discount.

The increase in interest income during 2013, when compared to the prior year, is due to the issuance of our note receivable during September 2012, in connection with the disposal of our former online marketing services division.

Due to the amendment of the note receivable on June 10, 2013, which resulted in its cancellation, we do not expect to recognize any further interest income from the note receivable during 2014.

Interest Expense

Years Ended %
December 31, Change
2013 2012

Interest Expense $ 39,869 $ 139,996 -66.6 %

Interest expense consists of interest charges and amortization of debt discount associated with our 12% convertible promissory notes, or 12% Convertible Notes Payable and our 12% note payable, or 12% Note Payable.

The decrease in interest expense during 2013, when compared to the prior year, 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 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 2012 and (iii) the lower costs of modification, when compared to the prior year, of the 12% Note Payable incurred in September 2012 which was amortized during 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 2012.

Due to the satisfaction of all of our interest-bearing liabilities during the third quarter of 2013, we do not believe that our interest expense will increase during 2014, unless we finance the working capital from increased operations through an interest-bearing loan.


Income from discontinued operations, net

                                                          Years Ended              %
                                                         December 31,           Change
                                                      2013          2012

Loss from discontinued operations                   $       -     $ (48,050 )        NM
Gain from the disposal of discontinued operations     303,537       325,883          -7 %
Income from discontinued operations, net            $ 303,537     $ 277,833

The 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 2012 and 2013.

The income (loss) from discontinued operations during 2012 consisted primarily of revenues and expenses from our discontinued online marketing services division. The gain during the 2013 and 2012 resulted primarily from disposition proceeds received either in cash or as a note receivable or as in-kind services from our former online marketing services division.

We do not anticipate recognizing additional gains or losses from the disposal of discontinued operations during 2014.

Liquidity and Capital Resources

                                               Ending balance at            Average balance during
                                                 December 31,              years ended December 31,
                                              2013           2012            2013              2012
Cash                                       $ 1,157,315     $ 231,926     $     694,621       $ 168,338
Accounts receivable                          1,041,671       673,818           857,745         515,794

Accounts payable and accrued expenses        1,703,007       284,526           993,767         348,924
Convertible notes payable excluding debt
discount                                             -       176,244            88,122         409,807
Notes payable, excluding debt discount               -       144,374            72,187         326,109

At December 31, 2013 and 2012, 54% and 83%, 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 379,000. 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 items, with the exception of tenant improvements, net of reimbursements from the landlord, amounting to approximately $75,000, which will be incurred during the first quarter of 2014. We routinely purchase computer equipment and technology to maintain or enhance the productivity of our employees and such capital expenditures were $216,307 and $41,770, respectively, during 2013 and 2012. During 2013, we acquired a license to use certain technology which we believe will improve our software development for upgrades to our SaaS platform.

We have material commitments for payments under an agreement with a former competitor, Digital River, Inc., from whom we purchased certain customer relationships, as referenced on our consolidated balance sheet at December 31, 2013, related to our business. Pursuant to the agreement, we will pay $1 million payable in four installments of $250,000 effective February 2014 and every three quarters thereafter. Additionally, the former competitor will refer potential clients to us. The consideration for the referrals amounts to 25% of the revenues generated from such customers for a period of up to a year.

On March 17, 2014, we entered into a loan and security agreement, or the Loan Agreement with Square 1 Bank, or the Lender to borrow up to a maximum of $3,000,000 at our discretion. 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. 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 a fully-funded business plan acceptable to Lender by January 15, 2016 and no event of default has occurred.

The Loan Agreement contains covenants including, but not limited to, covenants to achieve specified Adjusted EBITDA levels and customer renewal levels, limiting capital expenditures and restricting the Company's ability to pay dividends, purchase and sell assets outside the ordinary course and incur additional indebtedness. The occurrence of a material adverse change will be an event of default under the Loan Agreement, in addition to other customary events of default. The Company granted the Lender a security interest in all of the Company's personal property and intellectual property.


                                                                   Years Ended
                                                                  December 31,
                                                              2013            2012
Cash flows from operating activities

Net income                                                 $    93,776     $   492,948
Non-cash adjustments
Gain from the disposal of discontinued operations             (303,537 )      (325,883 )
Fair value of options                                          504,511         278,487
Fair value of services in lieu of proceeds from note
receivable                                                     246,361          30,000
Depreciation and amortization                                  134,781         144,839
Other                                                           48,864               -

Changes in assets and liabilities
Accounts receivable                                           (408,717 )      (316,048 )
Accounts payable and accrued expenses                          418,480        (128,798 )
Other                                                           14,679         (55,673 )
Net cash provided by continuing operations                     749,198         119,872
Net cash provided by discontinued operations                         -          46,187
Net cash provided by operating actvities                       749,198         166,059

Cash flows provided by (used in) investing activities
Proceeds from sale of discontinued operations                  137,176         242,000
Capitalized software for internal use                         (564,644 )             -
Capital expenditures                                          (216,307 )       (41,770 )
                                                              (643,775 )       200,230

Cash flows provided by (used in) financing activities
Repayment of notes payable                                    (266,180 )      (365,000 )
Proceeds from exercise of warrants and options               1,086,146         125,887
                                                               819,966        (239,113 )

Effect of exchange rate changes on cash                              -               -

Net increase in cash                                       $   925,389     $   127,176

Year Ended December 31, 2013

The increase in the fair value of options during 2013 is primarily due to an increased number of options vesting during 2013 when compared to 2012.

The increase in fair value of services in lieu of proceeds from note receivable increased during 2013 when compared to 2012 because the underlying agreement for the provision of such services commenced in September 2012 and terminated in December 2013.

The increase in accounts receivable as of December 31, 2013 is primarily due to a commensurate increase in revenues.

The increase in accounts payable and accrued expenses as of December 31, 2013 is primarily due to a commensurate increase in non-payroll expenses.

Cash used in investing activities during 2013 consists of proceeds from the sale of our online marketing services business of $137,176 offset by the capitalization of development costs for internal-use software of approximately $564,000, a one-time license fee for software for internal use of $125,000 as well as recurring purchases of computer equipment and furniture.


Cash provided by financing activities during 2013 resulted primarily from the proceeds from the exercise of warrants of approximately $1,086,000, offset by the principal repayments on our notes payable of approximately $266,000.

The increase in net cash flows during the year ended December 31, 2013 was also due to an increase in revenues during 2013, offset by a lesser increase in correlated web-hosting and payroll costs and by costs incurred in connection with capitalized software for internal use, which are shown as an investing activity.

Year Ended December 31, 2012

The increase in accounts receivable as of December 31, 2012 is primarily due to a commensurate increase in revenues.

The decrease in accounts payable and accrued expenses as of December 31, 2012 is primarily due to a quicker payments to vendors resulting from greater liquidity in the fourth quarter of 2012 following the sale of our online marketing services division in September 2012.

Cash provided by investing activities during 2012 consists of proceeds of $242,000 in connection with the disposal of our former online marketing services division in September 2012 offset by recurring purchases of computer equipment of approximately $42,000. We did not capitalize development costs associated with internal-use software during 2012.

Cash used in financing activities of approximately $239,000 during 2012 resulted from the proceeds from the exercise of warrants of approximately $126,000, offset by the principal repayments on our notes payable of $365,000.

Capital Raising Transactions

Exercise of warrants and options

We generated proceeds of $1,085,125 from the exercise of 2,250,769 warrants and $1,021 from the exercise of 22,122 options during 2013. A substantial portion of the warrants exercised were due to expire during 2013.

Loan Agreement with Agility

We were party to a loan agreement, as amended, or the Agility Loan Agreement, with Agility, which provided for us to borrow up to $600,000 from Agility. We satisfied our obligations under the Agility Loan Agreement in August 2013 by repaying the remaining principal amount of $22,500 due thereunder to Agility. In connection with the Agility Loan Agreement, we issued to Agility warrants to purchase 650,000 shares of our common stock at $0.35 per share, subject to certain anti-dilution and price adjustments. The warrants expire on August 23, 2016.

Loan Agreement with Square 1 Bank

On March 17, 2014, we entered into a Loan Agreement with Square 1 Bank, as Lender to borrow up to a maximum of $3,000,000 at our discretion. 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. 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 a fully-funded business plan acceptable to Lender by January 15, 2016 and no event of default has occurred.

The Loan Agreement contains covenants including, but not limited to, covenants . . .

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