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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to __________

Commission File Number: 000-52635

 
ACCELERIZE NEW MEDIA, INC.
(Exact name of registrant specified in charter)
 
 
Delaware
20-3858769
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
2244 WEST COAST HIGHWAY
NEWPORT BEACH,
CALIFORNIA 92663
(Address of principal executive offices)

 
(949) 515 2141
 (Issuer’s telephone number)
 
204 RIVERSIDE AVENUE,
NEWPORT BEACH,
CALIFORNIA 92663
 (Former name, former address and former fiscal year, if changed since last report)
 

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 o

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 o

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if smaller reporting company)
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

The number of shares outstanding of the registrant’s Common Stock, $0.001 par value per share, as of September 30, 2011, was 39,656,372.
 
 
 

 
 
When used in this quarterly report, the terms “Accelerize,” “the Company,” “ we,” “our,” and “us” refer to Accelerize New Media, Inc., a Delaware corporation.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

This quarterly report on Form 10-Q contains certain forward-looking statements. Forward-looking statements may include our statements regarding our goals, beliefs, strategies, objectives, plans, including product and service developments, future financial conditions, results or projections or current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. These statements are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. These factors include, but are not limited to, our ability to implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. The business and operations of Accelerize New Media, Inc. are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described under “Item 1A. Risk Factors” in our annual report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, on March 31, 2011. Readers are also urged to carefully review and consider the various disclosures we have made in this report and in our annual report on Form 10-K.


ACCELERIZE NEW MEDIA, INC.

INDEX
 
          
Page
   
PART I - FINANCIAL INFORMATION:
1
   
Item 1.
Financial Statements (Unaudited)
1
     
Item 2.
Management’s Discussion and Analysis And Results of Operations
13
     
Item 4.
Controls and Procedures
18
     
PART II - OTHER INFORMATION:
18
   
Item 1.
Legal Proceedings
18
     
Item 2.    
Unregistered Sales of Equity Securities and Use of Proceeds
19
     
Item 6.
Exhibits
19
     
SIGNATURES
20

 
 

 
 
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
 
ACCELERIZE NEW MEDIA, INC.
 
BALANCE SHEETS
 
             
   
September 30,
   
December 31,
 
ASSETS
 
2011
   
2010
 
   
(Unaudited)
      (1)  
Current Assets:
             
  Cash
  $ 63,046     $ 91,603  
  Accounts receivable, net of allowance for bad debt of $65,182 and $70,813, respectively
    452,093       182,296  
  Prepaid expenses and other assets
    31,755       32,151  
  Marketable securities
    12,000       -  
    Total current assets
    558,894       306,050  
                 
    Website development costs, net of accumulated amortization of $346,850 and $342,939, respectively
    -       3,911  
                 
  Property and equipment, net of accumulated depreciation of $22,671and $13,701, respectively
    50,479       15,067  
                 
  Deferred financing fees
    8,703       24,584  
     Total assets
  $ 618,076     $ 349,612  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
Current Liabilities:
               
  Accounts payable and accrued expenses
  $ 234,079     $ 306,416  
  Net assets and liabilities of discontinued operations
    -       7,033  
  Convertible notes payable and accrued interest, net of debt discount of $0 and $5,250
    -       531,667  
    Total current liabilities
    234,079       845,116  
                 
  Note payable and accrued interest, net of debt discount of $105,597 and $0
    399,603       -  
  Convertible notes payable and accrued interest, net of debt discount of $36,493and $88,765, respectively
    618,652       559,555  
     Total liabilities
    1,252,334       1,404,671  
                 
Stockholders' Deficit:
               
  Preferred stock, $0.001 par value, 2,000,000 shares authorized:
               
    Series A,  23,934 and 53,000 issued and outstanding
    322,339       713,567  
    Series B, 116,625 issued and outstanding
    3,565,813       3,565,813  
  Common stock; $.001 par value; 100,000,000 shares authorized; 39,256,372 and 33,524,932 issued and outstanding
    39,256       33,525  
  Additional paid-in capital
    11,284,035       9,333,911  
  Accumulated deficit
    (15,845,701 )     (14,701,875 )
                 
     Total stockholders’ deficit
    (634,258 )     (1,055,059 )
                 
     Total liabilities and stockholders’ deficit
  $ 618,076     $ 349,612  
                 
(1) Derived from audited financial statements
               
 
See Notes to Unaudited Financial Statements.
 
 
1

 
 
ACCELERIZE NEW MEDIA, INC.
 
STATEMENTS OF OPERATIONS
 
                         
   
Three-month periods ended
   
Nine-month periods ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Revenues:
                       
  Online marketing services
  $ 216,621     $ 217,365     $ 908,501     $ 727,834  
  Software-as-a-Service
    670,348       133,102       1,492,108       259,408  
    Total revenues:
    886,969       350,467       2,400,609       987,242  
                                 
Operating expenses:
                               
  Cost of revenues
    90,626       69,318       348,557       250,431  
  Research and development
    142,153       110,000       383,254       296,080  
  Selling, general and administrative
    853,292       660,517       2,164,965       1,530,778  
    Total operating expenses
    1,086,071       839,835       2,896,776       2,077,289  
                                 
 Operating loss
    (199,102 )     (489,368 )     (496,167 )     (1,090,047 )
                                 
Other expense:
                               
  Unrealized loss- marketable securities
    (12,000 )     -       (12,000 )     -  
  Interest expense
    (61,026 )     (32,346 )     (366,484 )     (97,034 )
      (73,026 )     (32,346 )     (378,484 )     (97,034 )
                                 
Net loss from continuing operations
    (272,128 )     (521,714 )     (874,651 )     (1,187,081 )
                                 
Discontinued operations
                               
  Income from discontinued operations
    2,159       338,097       5,218       676,561  
  Gain from the disposal of discontinued operations
    -       -       36,621       -  
    Net income from discontinued operations
    2,159       338,097       41,839       676,561  
                                 
Less dividends series A and B preferred stock
    (121,047 )     (101,725 )     (311,014 )     (305,047 )
                                 
Net loss attributable to common stock
  $ (391,016 )   $ (285,342 )   $ (1,143,826 )   $ (815,567 )
                                 
Earnings per share:
                               
Basic
                               
  Continuing operations
  $ (0.01 )   $ (0.02 )   $ (0.03 )   $ (0.05 )
  Discontinued operations
    -       0.01       -       0.02  
  Net per share
  $ (0.01 )   $ (0.01 )     (0.03 )     (0.03 )
                                 
Diluted
                               
  Continuing operations
  $ (0.01 )   $ (0.02 )   $ (0.03 )   $ (0.05 )
  Discontinued operations
    -       0.01       -       0.02  
  Net per share
  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.03 )
 
                               
                                 
Basic weighted average common shares outstanding
    39,256,372       31,700,157       38,658,465       31,086,704  
Diluted weighted average common shares outstanding-continuing operations     39,256,372       31,700,157       38,658,465       31,086,704  
Diluted weighted average common shares outstanding-discontinued operations     43,603,539       33,806,428       43,920,499       33,192,975  
 
See Notes to Unaudited Financial Statements.
 
 
2

 
 
ACCELERIZE NEW MEDIA, INC.
 
STATEMENTS OF CASH FLOWS
 
             
   
Nine-month periods ended
 
   
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities:
           
Net loss from continuing operations
  $ (874,651 )   $ (1,187,081 )
Adjustments to reconcile net loss from continuing operations to net cash used in
 
 operating activities:
               
  Depreciation and amortization
    142,482       141,620  
  Fair value of options
    241,589       103,087  
  Fair value of warrant modifications
    26,645       -  
  Fair value of inducement to convertible note holders
    159,000       -  
  Fair value of shares issued for interest payment
    -       50,685  
Changes in operating assets and liabilities:
               
  Accounts receivable
    (293,797 )     (28,380 )
  Other assets
    1,422       2,800  
  Prepaid expenses
    (10,140 )     17,287  
  Accrued interest
    5,108       750  
  Accounts payable and accrued expenses
    (72,338 )     12,866  
Net cash used in continuing operations
    (674,680 )     (886,366 )
Net cash (used in) provided by discontinued operations
    (1,815 )     275,417  
Net cash used in operating activities
    (676,495 )     (610,949 )
                 
Cash flows used in investing activities:
               
  Proceeds from sale of lead generation business
    36,621       -  
  Capital expenditures
    (43,807 )     (6,186 )
                 
Net cash used in investing activities
    (7,186 )     (6,186 )
                 
Cash flows from financing activities:
               
  Proceeds from notes payable
    600,000       -  
  Principal repayments on notes payable
    (100,000 )     -  
  Proceeds from exercise of warrants
    172,624       -  
  Net proceeds from issuance of common stock
    -       741,040  
  Repurchase of shares of common stock
    (17,500 )     (14,000 )
                 
Net cash provided by financing activities
    655,124       727,040  
                 
 Net (decrease) increase in cash
    (28,557 )     109,905  
                 
Cash, beginning of period
    91,603       128,167  
                 
Cash, end of period
  $ 63,046     $ 238,072  
                 
Supplemental disclosures of cash flow information:
               
  Cash paid for interest
  $ 96,658     $ 97,080  
                 
  Cash paid for income taxes
  $ -     $ -  
                 
Non-cash investing and financing activities:
               
  Write-off of fully depreciated fixed assets
  $ 640     $ 32,069  
  Retirement of treasury stock
  $ -     $ 58,000  
  Preferred stock dividends
  $ 311,014     $ 305,047  
  Fair value of shares issued as finder's fees
  $ -     $ 105  
  Beneficial conversion feature
  $ 141,256     $ -  
  Conversion of Series A Preferred Stock to Common Stock
  $ 363,000     $ -  
  Conversion of notes payable to common stock
  $ 530,000     $ -  
 
See Notes to Unaudited Financial Statements.
 
 
3

 
 
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, provides software as a service, or SaaS, and online marketing solutions.

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, 2010 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, 2010 included in our Annual Report on Form 10-K filed with the SEC on March 31, 2011.  In the opinion of management, all adjustments, consisting of normal, recurring adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results of operations for the nine-month period ended September 30, 2011 are not necessarily indicative of the results for the year ending December 31, 2011.

The accompanying financial statements have been prepared on a going concern basis. The Company has used net cash in its operating activities of approximately $676,000 during the nine-month period ended September 30, 2011. 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 its 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 valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

Reclassification

The financial statements for the nine-month period ended September 30, 2010 have been reclassified to reflect the Company’s discontinued operations and the Company’s research and development expenses, which were previously included in selling, general, and administrative expenses.

Loss from Continuing Operations

The loss from continuing operations was $874,651and $1,187,081 during the nine-month periods ended September 30, 2011 and 2010, respectively. Revenues were $2,400,609 and $987,242 for the nine-month periods ended September 30, 2011 and 2010, respectively.  Operating expenses were $2,896,776 and $2,077,289 for the nine-month periods ended September 30, 2011 and 2010, respectively.  Interest expense was $366,484 and $97,034 during the nine-month periods ended September 30, 2011 and 2010, respectively.  Unrealized loss on marketable securities held for sale amounted to $12,000 during the nine-month period ended September 30, 2011.
 
 
4

 
 
Net Income from Discontinued Operations

Net income from discontinued operations amounted to $41,839 and $676,561 during the nine-month periods ended September 30, 2011 and 2010, respectively. The net income from discontinued operations during the nine-month periods ended September 30, 2011 and 2010, consists of revenue from discontinued operations of $140,144 and $1,931,720, respectively, operating expenses of $134,926 and $1,255,159, respectively, and gain from the disposal of discontinued operations of $36,621 and $0, respectively. During the nine-month period ended September 30, 2011 and 2010, the Company wrote down its goodwill by $0 and $25,000, respectively, which is included in the net income from discontinued operations.
 
Assets and Liabilities from Discontinued Operations

Comparative balance sheets of the discontinued operations are as follows:

   
September 30,
2011
   
December 31,
2010
 
Accounts receivable, net
 
$
-
   
$
56,246
 
Property and equipment, net
   
-
     
2,367
 
Goodwill
   
-
     
38,000
 
  Total assets
 
$
-
   
$
96,613
 
                 
Accounts payable
 
$
-
   
$
39,910
 
Deferred revenue
   
-
     
63,736
 
  Total liabilities
 
$
-
   
$
103,646
 

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.

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 financial institutions and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. During the nine-month period ended September 30, 2011, 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 institutions in which it holds deposits.

The Company's accounts receivable are due from a few customers, with a majority of them located in the United States. None of the Company’s customers accounted for more than 10% of its accounts receivables at September 30, 2011.  One of the Company’s customers accounted for 12% of its accounts receivable at December 31, 2010.  

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 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 our portfolio of websites.
 
Effective February 2011, the Company discontinued its lead generation business.
 
 
5

 
 
Product Concentration

The Company generates its revenue in the following proportions: software licensing 62% and 26% and online marketing services 38% and 74%, during the nine-month period ended September 30, 2011 and 2010, respectively.

Fair Value of Financial Instruments

The Company accounts, for assets and liabilities measured at fair value on a recurring basis, in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.
 
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
 
Level 1:    
Observable inputs such as quoted market prices in active markets for identical assets or liabilities.
Level 2:    
Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3:    
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
 
The Company did not have any Level 2 or Level 3 assets or liabilities as of September 30, 2011 and December 31, 2010, with the exception of its convertible promissory notes.  The carrying amounts of the convertible promissory notes at September 30, 2011 and December 31, 2010, approximate their respective fair value based on the Company’s incremental borrowing rate.
 
Cash and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of September 30, 2011 and December 31, 2010, respectively. 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.
 
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, 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 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.
 
 
6

 
 
However, the Company believes that it has no derivative liabilities associated with such instruments at September 30, 2011 because the holders of the Company’s 10% convertible promissory notes, or 10% Convertible Notes Payable, converted their instruments in January 2011 and the Company believes that it will not issue additional consideration, beyond those already granted, to the holders of the 12% Convertible Notes Payable, which mature in 2012.

Advertising

The Company expenses advertising costs as incurred. Advertising expense amounted to $47,633 and $56,818 during the nine-month periods ended September 30, 2011 and 2010, 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.

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 Black-Scholes-Merton, or 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 the following sources:  SaaS and online marketing services.

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 shares of Common Stock outstanding during each period. Diluted earnings per share are computed using the weighted average number of shares of Common Stock and dilutive Common Stock share equivalents outstanding during the period. Dilutive Common Stock share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the modified-treasury stock method).
 
 
7

 
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Numerator:
                       
   Net loss from continuing operations
  $ (272,128 )   $ (521,714 )   $ (874,651 )   $ (1,187,081 )
   Preferred stock dividends
    (121,047 )     (101,725 )     (311,014 )     (305,047 )
Numerator for basic earnings per share- net loss
                               
   from continuing operations attributable to common stockholders-as adjusted
  $ (393,175 )   $ (623,439 )     $ (1,185,665 )   $ (1,492,128 )
                                 
Net income from discontinued operations
  $ 2,159     $ 338,097     $ 41,839     $ 676,561  
                                 
Denominator:
                               
   Denominator for basic earnings per share--weighted
                               
      average shares
    39,256,372       31,700,157       38,658,465       31,086,704  
   Effect of dilutive securities- for discontinued operations only:
                               
      Stock options
    3,734,054       -       3,921,667       -  
      Warrants
    613,113       2,106,271       1,340,367       2,106,271  
Denominator for diluted earnings per share--adjusted
                               
   weighted-average shares and assumed conversions
    43,603,539       33,806,428       43,920,499       33,192,975  
                                 
Earnings (loss) per share:
                               
Basic
                               
Continuing operations, as adjusted
  $ (0.01 )   $ (0.02 )   $ (0.03 )   $ (0.05 )
Discontinued operations
  $ 0.00     $ 0.01     $ 0.00     $ 0.02  
Net earnings (loss) per share- basic
  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.03 )
                                 
Diluted
                               
Continuing operations, as adjusted
  $ (0.01 )   $ (0.02 )   $ (0.03 )   $ (0.05 )
Discontinued operations
  $ 0.00     $ 0.01     $ 0.00     $ 0.02  
Net earnings(loss) per shares-diluted
  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.03 )
 
The weighted-average anti-dilutive common share equivalents are as follows:

   
Three-month period ended
   
Nine-month period ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Series A Preferred Stock
    3,790,000       5,300,000       3,846,700       5,300,000  
Series B Preferred Stock
    11,662,500       11,662,500       11,662,500       11,662,500  
Convertible notes payable
    1,274,000       1,274,000       1,274,000       1,274,000  
Options
    9,225,000       7,677,500       9,225,000       7,677,500  
Warrants
    12,815,255       13,382,505       12,815,255       13,382,505  
      38,766,755       39,296,505       38,823,455       39,296,505  


 
8

 
 
 The anti-dilutive common shares outstanding at September 30, 2011 and 2010 are as follows:

   
2011
   
2010
 
             
Series A Preferred Stock
    2,393,400       5,300,000  
Series B Preferred Stock
    11,662,500       11,662,500  
Convertible notes payable
    1,274,000       1,274,000  
Options
    9,245,000       7,677,500  
Warrants
    12,815,255       13,382,505  
      37,390,155       39,296,505  
 
NOTE 3: CONVERTIBLE NOTES PAYABLE

10% Convertible Notes Payable

The Company had 10% convertible promissory notes 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 converted the 10% Convertible Notes Payable with principal aggregating $530,000 into 1,325,000 shares of its Common Stock, 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 is included in interest expense in the accompanying statement of operations for the nine-month period ended September 30, 2011.
 
12% Convertible Notes Payable

The Company had 12% convertible promissory notes aggregating $637,000 outstanding at September 30,2011 and December 31, 2010.  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.
 
The interest and amortization expense associated with the 12% Convertible Notes Payable amounted to $275,009 and $156,421 during the nine-month periods ended September 30, 2011 and 2010, respectively. The unamortized debt discount amounted to $36,493 at September 30, 2011.
 
NOTE 4: NOTE PAYABLE

During the nine-month period ended September 30, 2011, the Company issued a note payable, aggregating $500,000.  The 12% Note 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 issuance of the 12% Note, 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 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.
 
 
9

 
 
During August 2011, the Company modified the terms of the 12% Note by 1) extending the maturity to December 31, 2012, 2) increasing the amount borrowed under the 12% Note 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 was accounted for as 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 beneficial conversion features a debt discount of $141,257, which is reflected in the accompanying unaudited financial statements as additional paid-in capital and corresponding debt discount.

The interest and amortization expense associated with the 12% Note amounted to $88,180 and $0 during the nine-month periods ended September 30, 2011 and 2010, respectively. The unamortized debt discount amounted to $105,597 at September 30, 2011.

NOTE 5: STOCKHOLDERS’ DEFICIT

Common Stock
 
A summary of the issuance of shares of Common Stock, related consideration and fair value of transaction, for the nine-month period ended September 30, 2010 is as follows:
 
   
Number of Shares
of Common Stock
   
Fair Value
 at Issuance
   
Fair Value at Issuance
(per share)
 
Payment of Preferred Stock dividends
   
883,101
   
$
305,047
   
$
0.35
 
Payment of interest on 10% and 12% Convertible Notes Payable
   
92,175
 
 
$
              50,685
   
$
0.55
 
Private placement, net of finder’s fee of $70,460
   
2,028,750
   
741,040
   
$
0.40
 
Finder’s fee
   
105,125
   
$
66,844
   
$
0.55 - $0.73
 

During the nine-month period ended September 30, 2010, the Company repurchased 140,000 shares of its Common Stock from a stockholder for an aggregate consideration of $14,000.

During the nine-month period ended September 30, 2010, the Company retired 640,000 shares of Common Stock from its treasury which shares have been previously repurchased from a stockholder during 2009 and during the nine-month period ended September 30, 2010.

 A summary of the issuance of shares of Common Stock, related consideration and fair value of transaction, for the nine-month period ended September 30, 2011 is as follows:

   
Number of Shares
of Common Stock
   
Fair Value
 at Issuance
   
Fair Value at Issuance
(per share)
 
Payment of Preferred Stock dividends
   
883,274
   
$
311,014
   
$
0.35
 
Conversion of 10% Convertible Notes Payable into shares of Common Stock
   
1,325,000
   
689,000
   
$
0.60
 
Exercise of warrants
   
527,500
   
$
172,625
   
$
0.33
 
Cashless exercise of 600,000 warrants
   
264,000
   
$
264
   
$
0.001
 
Conversion of 2,907 shares of Series A Preferred Stock into shares of Common Stock
   
2,906,600
   
391,288
   
$
0.134
 

During the nine-month period ended September 30, 2011, the Company repurchased 175,000 shares of its Common Stock from a stockholder for an aggregate consideration of $17,500.  The repurchased shares were cancelled upon repurchase.
 
 
10

 
 
Preferred Stock- Series A

The holders of the Series A Preferred Stock are 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 elects to pay any dividend in shares of Common Stock, the number of shares of Common Stock to be issued to each holder shall be an amount equal to the quotient of (i) the dividend payment divided by (ii) $0.15 per share.

The shares of Series A Preferred Stock include a liquidation preference corresponding to the amount invested.  All issued or accrued but unpaid dividends may also be converted at the election of the holder at $0.15 per share. The shares of Series A Preferred Stock are convertible into shares of Common Stock, at any time, at the option of the holder, at a rate of 100 shares of Common Stock for each 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 of less than $0.15 per share. In the event a public market is established for the Company’s Common Stock, the Series A Preferred Stock is subject to mandatory conversion by the Company upon a 30 day notice if the average closing price of its Common Stock is $0.40 or more per share for 10 consecutive trading days and the average daily volume is at least 100,000 shares. This has not occurred as of September 30, 2011.
 
During the nine-month period ended September 30, 2011, the Company issued 2,906,600 shares of Common Stock to thirteen holders of Series A Preferred Stock, pursuant to a conversion of 29,066 shares of Series A Preferred Stock.

Preferred Stock- Series B

The holders of the Series B Preferred Stock are 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 elects to pay any dividend in shares of Common Stock, the number of shares of Common Stock to be issued to each holder shall be an amount equal 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 include a liquidation preference corresponding to the amount invested. All issued or accrued but unpaid dividends may also be converted at the election of the Holder, and converted at $0.35 per share. The shares of Series B Preferred Stock are convertible into shares of Common Stock, at any time, at the option of the holder  at a rate of 100 shares of Common Stock for each share of Series B Preferred Stock, subject to anti-dilution provisions in the case of stock splits, dividends or if the Company issues shares of Common Stock or other securities convertible into shares of Common Stock at an effective price less than $0.35 per share.  In the event a public market is established for the Company’s Common Stock, the Series B Preferred Stock is subject to mandatory conversion by the Company upon a 30 day notice if the average closing price of its Common Stock is $1.00 or more per share for 10 consecutive trading days. This has not occurred as of September 30, 2011.

The rights of the holders of the Series B Preferred Stock are subordinate to the rights of the holders of the Series A Preferred Stock.
 
Warrants

During the nine-month period ended September 30, 2011, in connection with the issuance of the 12% Note the Company issued warrants to purchase 283,019 shares of the Company’s Common Stock. The exercise price for the warrants is equal to the lower of (i) $0.53 or (ii) the price per share at which the Company sells or issues its capital stock during the period the warrants are outstanding 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.  The warrants expire in January 2016.

During August 2011, the Company in connection with the modification of the terms of the Company’s 12% Note, cancelled the initial warrants issued in January 2011, and granted 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 was accounted for as 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 beneficial conversion features a debt discount of $141,257, which is reflected in the accompanying unaudited financial statements as additional paid-in capital and corresponding debt discount.
 
On January 3, 2011 the Company’s board approved the reduction of the exercise price of the warrants issued in connection with both the 10% Convertible Notes Payable 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 interest expense and as an increase to additional paid-in capital.

 
11

 
 
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 15,000,000 shares of Common Stock, from either authorized but unissued shares or treasury shares, as of September 30, 2011. 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.

During May 2011, the Company increased the number of authorized shares issuable pursuant to the Plan from 10,000,000 to 15,000,000 shares.

At September 30, 2011, options to purchase 9,100,000 shares of Common Stock were outstanding.  The outstanding options are exercisable at a weighted average price of $0.29 per share. The outstanding options vest over periods ranging from two to three years.

The value of share-based payments is based on the fair value of the outstanding options amortized over the requisite period of service for option holders, which is generally the vesting period of the options.
 
The fair value of stock options granted was estimated at the date of grant using the BSM option pricing model. The Company used the following assumptions for determining the fair value of options granted under the BSM option pricing model:

   
September 30, 2011
   
September 30, 2010
 
Exercise Price
  $ 0.35 - $ 0.60     $ 0.52 - $ 0.55  
Market price at date of grant
  $ 0.35 - $ 0.60     $ 0.52 - $ 0.55  
Expected volatility
    56 %  
57 to 62 %
 
Risk-free interest rate
    0.81 – 1.60 %  
1.33 to 2.64 %
 
 
The following activity occurred under our plan:
 
    Nine-month periods ended September 30,  
                
  2011     2010  
Weighted-average grant-date fair value of options granted
  $ 0.44     $ 0.29  
Fair value of options recognized as expense:
  $ 241,589       103,087  
Number of options granted
    1,267,850       325,000  
 
The expected volatility was based on the average historical volatility of comparable publicly-traded companies considering the Company's period of observable historical data is shorter than the terms of the options.

The total compensation cost related to non-vested awards not yet recognized amounted to approximately $468,000 at September 30, 2011 and the Company expects that it will be recognized over the remaining weighted-average period of 27 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 provide 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.

 
12

 

NOTE 6: LITIGATION AND CONTINGENCIES

During the nine-month period ended September 30, 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.

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.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
 
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2010. 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 are a multifaceted online marketing services company specializing in the development of performance based marketing programs and related software solutions for businesses interested in expanding their online advertising presence. The Company owns and operates www.cakemarketing.com, an internally-developed SaaS platform. Cake Marketing is a hosted software solution that provides an all-inclusive suite of management services for online marketing campaigns. From tracking and reporting to lead distribution, our patent-pending software enables advertisers, affiliate marketers and lead generators a fully scalable and accurate platform developed with a combination of innovative technology and an imaginative approach to doing business online.

The Company has an extensive portfolio of approximately 5,500 URLs, also known as domain names. Our URL portfolio is currently used to build consumer-based financial portals, microsites, blogs, and landing pages used for lead generation initiatives. In addition, we own and develop various portals, and websites, including: www.secfilings.com, which provides to subscribers real-time alerts based on reports filed by various companies and individuals with the SEC.  Also through www.accelerizefinancial.com the Company offers advertisers access to an audience of active individual investors, institutional investors, financial planners, registered advisors, journalists, investment bankers and brokers. Our financial portals and URL portfolio target a niche demographic that is qualified by the content they seek.  This media strategy drives new membership, which results in recurring user traffic to our websites and allows us to generate highly relevant responses and leads for our online advertising and lead generation customers.

In February 2011 we decided to discontinue our Lead Generation Division, in order to focus our efforts and resources on our SaaS products and services, and avoid potential conflict of interest with our SaaS customers, who are providing similar lead generation services. Subsequently, we sold certain assets related to our Lead Generation Division. Commencing March 1, 2011, we discontinued offering lead generation services.

As of the end of 2008 we closed our Debt Settlement Referrals Division, however in 2009 and 2010 we still received fees for sales and marketing support we provided in connection with debt settlement solutions prior to closing this division. These payments gradually decreased in 2009 and 2010, and we expect that we will receive the remaining payments by the end of 2011.
 
 
13

 
 
ACCELERIZE NEW MEDIA, INC.
 
RESULTS OF OPERATIONS
 
                                                 
               
Increase/
   
Increase/
               
Increase/
   
Increase/
 
   
Three-month periods ended
   
(Decrease)
   
(Decrease)
   
Nine-month periods ended
   
(Decrease)
   
(Decrease)
 
   
September 30,
   
in $ 2011
   
in % 2011
   
September 30,
   
in $ 2011
   
in % 2011
 
   
2011
   
2010
   
vs 2010
   
vs 2010
   
2011
   
2010
   
vs 2010
   
vs 2010
 
                                                 
Revenue:
                                               
  Online marketing services
  $ 216,621     $ 217,365     $ (744 )     -0.3 %   $ 908,501     $ 727,834     $ 180,667       24.8 %
  Software-as-a-Service
    670,348       133,102       537,246       403.6 %     1,492,108       259,408       1,232,700       475.2 %
    Total revenues:
    886,969       350,467       536,502       153.1 %     2,400,609       987,242       1,413,367       143.2 %
                                      -       -                  
Operating expenses:
                                    -       -                  
  Cost of revenues
    90,626       69,318       21,308       30.7 %     348,557       250,431       98,126       39.2 %
  Research and development
    142,153       110,000       32,153       29.2 %     383,254       296,080       87,174       29.4 %
  Selling, general and administrative
    853,292       660,517       192,775       29.2 %     2,164,965       1,530,778       634,187       41.4 %
    Total operating expenses
    1,086,071       839,835       246,236       29.3 %     2,896,776       2,077,289       819,487       39.4 %
                                      -       -                  
 Operating loss
    (199,102 )     (489,368 )     (290,266 )     -59.3 %     (496,167 )     (1,090,047 )     (593,880 )     -54.5 %
                                      -       -                  
Other expense:
                                    -       -                  
Unrealized loss-marketable securities
    (12,000 )     -       12,000    
NM
      (12,000 )     -       12,000    
NM
 
  Interest expense
    (61,026 )     (32,346 )     (28,680 )     88.7 %     (366,484 )     (97,034 )     (269,450 )     277.7 %
                                                                 
Net loss from continuing operations
    (272,128 )     (521,714 )     (249,586 )     -48 %     (874,651 )     (1,187,081 )     (312,430 )     -26 %
                                                                 
Discontinued operations
                                                               
  Income from discontinued operations
    2,159       338,097       (335,938 )     -99 %     5,218       676,561       (671,343 )     -99 %
  Gain from the disposal of discontinued operations
    -       -       20,000    
NM
      36,621       -       36,621    
NM
 
    Net income from discontinued operations
    2,159       338,097       (315,938 )     -93 %     41,839       676,561       (634,722 )     -94 %
                                                                 
Net loss
  $ (269,969 )   $ (183,617 )   $ 86,352       47 %   $ (832,812 )   $ (510,520 )   $ 322,292       63 %
 
NM: Not Meaningful
 
 
14

 
 
Discussion of Results for Three-Month and Nine-Month Periods Ended September 30, 2011

Revenues

The Company generates revenues from the following sources: the licensing of our SaaS and fees from online marketing services.

The increase in our software licensing revenues during the three-month and nine-month periods ended September 30, 2011, when compared to the prior year period, is due to the increased number of customers using our SaaS products and services as well as increased revenues from our existing customers resulting from higher usage of our SaaS platform.

Revenues from our online marketing services during the three-month period ended September 30, 2011 is at comparable level to those earned during the prior year period.

The increase in our online marketing services during the nine-month period ended September 30, 2011, when compared to the prior year periods, is due to the increased number of customers using our online marketing services.

Online marketing services may be impacted by the availability of our customers’ decision makers, who are usually less available during the summer as well as the general trends and performance of the US stock markets.

We anticipate that revenues from our Saas and online marketing services will be higher for the remainder of 2011 when compared to 2010.
 
Cost of Revenues

Cost of revenues primarily consists of web hosting, web-based customer acquisition costs, such as search management, domain registration, and list management.

The increase in cost of revenues during the three-month and nine-month periods ended September 30, 2011, when compared to the prior year periods, is primarily attributable to an increase in our web hosting expenses resulting from increased customer usage of our SaaS and online marketing services.

Research and Development Expenses

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

The increase in research and development expenses during the three-month and nine-month period ended September 30, 2011, when compared with the prior year period is primarily due to increased staff assigned to the enhancement of our software services, which translated in increased payroll costs and related benefits.

Selling, General, and Administrative Expenses

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

The increase in selling, general and administrative expenses during the three-month and nine-month periods ended September 30, 2011, when compared with the prior year periods is primarily due to the increased number of employees assigned to support customer acquisition activities, which resulted in increased payroll costs and related benefits as well as increased expenses recognized due to increased fair value of options for which expenses were recognized during the three-month and nine-month periods ended September 30, 2011, resulting from larger option vested during such periods.

 
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Interest

Interest expenses consist of interest charges and amortization of debt discount associated with notes payable issued in 2008, 2009 and 2011 as well as fair value of inducement to holders of certain convertible promissory notes.   The increase in interest expenses during the three-month and nine-month periods ended September 30, 2011, when compared to the prior year periods, is primarily due to inducement to holders of certain convertible promissory notes which amounted to $159,000 during the first quarter of 2011, and, to a lesser extent, amortization of beneficial features granted to note holders during January 2011.  No such inducements were granted during the three-month and nine-month periods ended September 30, 2010.

Unrealized loss-marketable securities

Unrealized loss-marketable securities consists of unrealized losses on an investment in shares of common stock of a former client that settled their accounts with us by issuing such shares during the nine-month period ended September 30, 2011, initially valued at $24,000.  At September 30, 2011, the fair value of such shares decreased by $12,000.  No such transactions occurred during the three-month and nine-month periods ended September 30, 2011.
 
Net income from discontinued operations

The net income from discontinued operations consists of revenues and operating expenses from our lead generation division which was sold in February 2011.  The decrease in net income from discontinued operations during the three-month and nine-month periods ended September 30, 2011, when compared to the comparable prior year periods is primarily due to lower lead generation revenues during the nine-month period ended September 30, 2011 attributable to our decision in February 2011 to sell our lead generation services while we had nine full months of operations during the nine-month period ended September 30, 2010.  We do not anticipate receiving additional proceeds from the disposition of our lead generation division.
  
Liquidity and Capital Resources

At September 30, 2011, our cash amounted to approximately $63,000 and our working capital deficit amounted to approximately $294,000.

During the nine-month period ended September 30, 2011, we used cash in our operating activities amounting to approximately $676,000. Our cash used in operating activities was comprised of our net loss from continuing operations of approximately $875,000 primarily adjusted for the following:
 
 
Depreciation and amortization debt discount and to lesser extent, of capitalized web development of approximately $142,000;
 
Fair value of options of approximately $242,000;
 
Fair value of inducement to holders of convertible promissory notes of $159,000.
 
Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activity:

 
An increase in our accounts receivable of approximately $294,000, resulting from a commensurate increase in our revenues during the nine-month period ended September 30, 2011;
 
A decrease in our accounts payable and accrued expenses of approximately $72,000, resulting from quicker payment processing to vendors following the issuance of our note payable of $500,000 in January 2011.

During the nine-month period ended September 30, 2011, we used cash in our investing activities amounting to approximately $7,000, which consist of proceeds from the sale of discontinued operations of approximately $36,000 offset by recurring purchases of equipment of approximately $44,000.

During the nine-month period ended September 30, 2011, we generated cash from financing activities of approximately $655,000, which consist of the proceeds from the issuance of the 12%Note of $600,000, offset by repurchases of shares of Common Stock amounting to $17,500 and principal repayments of $100,000 on the 12% Note.

During the nine-month period ended September 30, 2010, we used cash in our operating activities amounting to approximately $611,000. Our cash used in operating activities was comprised of our net loss of approximately $1.2 million primarily adjusted for the following:
 
 
Fair value of options granted to employees approximately $103,000;
 
Amortization of capitalized web development and discount on notes payable, and depreciation of fixed assets of approximately $141,000;
 
Fair value of shares of our Common Stock issued for certain interest payment on the 10% and 12% Convertible Note Payable of approximately $51,000;
 
Net cash provided by discontinued operations of approximately $275,000.

 
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During the nine-month period ended September 30, 2011, we used cash in our investing activities amounting to approximately $7,000, which consisted of recurring purchases of equipment.

During the nine-month period ended September 30, 2010, we generated cash from financing activities of approximately $727,000, which consisted of the proceeds from the issuance of Common Stock of approximately $741,000 offset by the repurchase of shares of Common Stock of $14,000.

We do not believe that we will incur significant additional expenditures to comply with federal and states’ data privacy and security laws and regulations for the foreseeable future.

Loan Agreement Amendment

On August 23, 2011, we entered into a first amendment to loan agreement, or the Amendment, with Agility Capital II, LLC, or Agility, which Amendment modified certain terms of the loan agreement, or Loan Agreement, dated as of January 3, 2011, between the Company and Agility, with respect to the 12% Note.  The initial Loan Agreement was described in the Company’s Current Report dated January 6, 2011.  The Amendment provides for the Company to borrow an additional $100,000 from Agility.  The Amendment also amends the maturity date of the 12% Note from March 31, 2012 to December 31, 2012, the monthly payment amount of principal from $20,000 to $30,000 and the payment schedule for principal payments from monthly commencing on April 1, 2011 to monthly commencing on January 1, 2012.  The loan continues to accrue interest at a rate of 12% per annum, payable monthly.
 
In connection with the Amendment, Agility returned the warrant, or the Original Warrant, to purchase 283,019 shares of the Company’s Common Stock, originally issued in connection with the Loan Agreement, to the Company.  The Company cancelled the Original Warrant on August 23, 2011.
 
Also in connection with the Amendment, the Company issued to Agility a warrant, or the Warrant, to purchase 600,000 shares of the Company’s Common Stock at $0.35 per share, subject to certain anti-dilution and price adjustments.  The Warrant is exercisable for 5 years and expires on August 23, 2016.  Upon a default under the Loan Agreement, the number of shares Agility may purchase under the Warrant will increase up to a maximum of 350,000 additional shares of Common Stock.
 
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Going Concern

We have generated revenues since inception but they were not an adequate source of cash to fund future operations. Historically we have relied on private placement issuances of equity and convertible debt.
 
It is likely that we will need to raise additional working capital to fund our ongoing operations and growth. The amount of our future capital requirements depends primarily on the rate at which we increase our revenues and correspondingly decrease our use of cash to fund operations. Cash used for operations will be affected by numerous known and unknown risks and uncertainties including, but not limited to, our ability to successfully market our products and services and the degree to which competitive products and services are introduced to the market. As long as our cash flow from operations remains insufficient to completely fund operations, we will continue depleting our financial resources and seeking additional capital through equity and/or debt financing. If we raise additional capital through the issuance of debt, this will result in increased interest expense. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing stockholders will be reduced and those stockholders may experience significant dilution. In addition, new securities may contain rights, preferences or privileges that are senior to those of our Common Stock.

There can be no assurance that acceptable financing to fund our ongoing operations can be obtained on suitable terms, if at all. As discussed above, we recently raised $600,000 through a debt instrument. We cannot assure you that these funds will be sufficient to fund our future operations beyond the short-term. If we are unable to obtain any future financing necessary to support our operations, we may be unable to continue as a going concern. In that event, we may be forced to cease operations and our stockholders could lose their entire investment in our company.

During the nine-month period ended September 30, 2011, holders of the Company’s 10% Convertible Notes Payable converted notes aggregating $530,000 and shares of Series A Preferred Stock aggregating $391,288 into 4,231,600 shares of the Company’s Common Stock.
 
 
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Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer, who is also our principal executive and 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 Chief Executive Officer concluded that, as of September 30, 2011, our disclosure controls and procedures were 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 Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer, who serves as our principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
 
During the quarter ended September 30, 2011, 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
 
On April 8, 2011, one of our competitors, WebApps, L.L.C., filed a complaint against us, three of our clients and three of their respective officers, in the United States District Court for the Eastern District of Louisiana. We were served with the complaint on May 9, 2011. The complaint, among other things, claims that we, 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 we 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.

We believe that we have substantial legal and factual defenses to these claims and intend to defend our interests vigorously.
 
 
 
18

 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
Repurchase of the Company’s Common Stock

During the three-month period ended September 30, 2011, we repurchased 75,000 shares of our common stock from a former director for an aggregate amount of $7,500, as follows:

Period
(a)Total Number
Of Shares Purchased
(a)Average Price
Paid per Share
(c)Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs (1)
(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1 through July
31, 2011
 
50,000
 
$0.10
 
-0-
 
-0-
August 1 through
August 31, 2011
 
 
25,000
 
 
$0.10
 
 
-0-
 
 
-0-
September 1 through
September 30, 2011
 
 
 
-0-
 
 
 
-0-
 
 
 
-0-
 
 
 
-0-
Total
75,000
$0.10
-0-
-0-

 
(1)
We do not have a specific authorized repurchase plan or program.

During October 2011, we repurchased an additional 25,000 shares of our Common Stock from the same former director for $2,500.  We do not anticipate any additional repurchases of our Common Stock from this former director.
 
Item 6.  Exhibits
 
   
4.1
Warrant to Purchase Stock issued August 23, 2011
   
4.2
Warrant to Purchase Stock issued September 12, 2011
   
10.1
First Amendment to Loan Agreement, dated August 23, 2011, between Accelerize New Media, Inc. and Agility Capital II, LLC
   
31.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a)
   
32.1
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. 1350 (furnished herewith.)

101.1
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text (furnished herewith.)
 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ACCELERIZE NEW MEDIA, INC.
 
       
Dated: October 28, 2011
By:
/s/ Brian Ross                                                               
 
   
Brian Ross
President and Chief Executive Officer
(principal executive and principal financial officer)
 
 

20