NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Accelerize Inc., a Delaware corporation, incorporated on November 22, 2005, owns and operates CAKE, a Software-as-a-Service, or SaaS, platform providing online tracking and analytics solutions for advertisers and online marketers.

 

The Company provides software solutions for businesses interested in expanding their online advertising spend.

 

The condensed consolidated balance sheet presented as of December 31, 2015 has been derived from our audited consolidated financial statements. The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the annual financial statements and notes for the year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the SEC on March 17, 2016.  In the opinion of management, all adjustments, consisting of normal, recurring adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results of operations for the three and nine-month periods ended September 30, 2016 are not necessarily indicative of the results for the year ending December 31, 2016.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the results of operations of Cake Marketing UK Ltd., or the Subsidiary. All material intercompany accounts and transactions between the Company and the Subsidiary have been eliminated in consolidation.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Actual results will differ from those estimates. Included in these estimates are assumptions about collection of accounts receivable, useful life of fixed assets and intangible assets, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

 

 

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. The Company has restricted cash as a result of its corporate card program through its bank. The bank requires a collateral which is placed in a money market account and can be increased or decreased at any time at the discretion of the Company. The Company’s restricted cash amounted to $200,000 at September 30, 2016.

   

 

 

 

Accounts Receivable

 

The Company’s accounts receivable are due primarily from advertisers and marketers. Collateral is currently not required. The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments. The Company periodically reviews these estimated allowances, including an analysis of the customers’ payment history and creditworthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to make payments as well as historical collection trends for its customers as a whole. Based on this review, the Company specifically reserves for those accounts deemed uncollectible or likely to become uncollectible. When receivables are determined to be uncollectible, principal amounts of such receivables outstanding are deducted from the allowance.  

  

		September 30, 2016				December 31, 2015
Allowance for doubtful accounts		$	366,198			$	395,147

  

Concentration of Credit Risks

 

The Company is subject to concentrations of credit risk primarily from cash and cash equivalents and accounts receivable.

 

The Company’s cash and cash equivalents accounts are held at a financial institution and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. During the nine-month period ended September 30, 2016, the Company has reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such financial institutions, the Company periodically evaluates the credit quality of the financial institution in which it holds deposits.

 

The Company's accounts receivable are due from customers, generally located in the United States, Europe, Asia, and Canada. None of the Company’s customers accounted for more than 10% of its accounts receivable at September 30, 2016 or December 31, 2015.  The Company does not require any collateral from its customers.

 

  Revenue Recognition

 

The Company recognizes revenue on arrangements in accordance with ASC Topic 605, Revenue Recognition. Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured.

 

The Company’s SaaS revenues are generated from implementation and training fees and a monthly license fee, supplemented by per transaction fees paid by customers for monthly platform usage. The initial term of the customer contract is generally one year with one of two general cancellation policies. Each party may cancel the contract within the initial period or after the initial period, with 30-days’ prior notice. The Company does not provide any general right of return for its delivered items. Services associated with the implementation and training fees have standalone value to the Company’s customers, as there are third-party vendors who offer similar services to the Company’s services. Accordingly, they qualify as separate units of accounting. The Company allocates a fair value to each element deliverable at the recognition date and recognizes such value when the services are provided. The Company bases the fair value of the implementation and training fees on third-party evidence and the monthly license fee on vendor-specific objective evidence. Fees charged by third-party vendors for implementation and training services do not vary significantly from the fees charged by the Company. Services associated with implementation and training fees are generally rendered within a month from the initial contract date. The value attributed to the monthly license fees as well as the fees associated with monthly transaction-based platform usage are recognized in the corresponding period.

 

Product Concentration

 

The Company generates its revenues from software licensing, usage, and related transaction fees.

 

 

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.

 

  Additional Disclosures Regarding Fair Value Measurements

 

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

 

 

Advertising

 

The Company expenses advertising costs as incurred.

 

 

 

Income Taxes

 

Income taxes are accounted for in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.

 

Foreign Currency Translation

 

The Company’s reporting currency is U.S. Dollars. The functional currency of the Company’s Subsidiary in the United Kingdom is British Pounds. The translation from British Pounds to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using the average exchange rate in effect during the period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss. Foreign currency translation gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the unaudited condensed consolidated statements of operations. 

 

 

Software Development Costs

 

Costs incurred in the research and development of software products and significant upgrades and enhancements thereto during the preliminary project stage and the post-implementation operation stage are expensed as incurred. Costs incurred for maintenance and relatively minor upgrades and enhancements are expensed as incurred. Costs associated with the application development stage of new software products and significant upgrades and enhancements thereto are capitalized when 1) management implicitly or explicitly authorizes and commits to funding a software project and 2) it is probable that the project will be completed and the software will be used to perform the function intended. The Company capitalized internal-use software development costs of $1,606,887 during the nine months ended September 30, 2016. The Company amortizes such costs once the new software products and significant upgrades and enhancements are completed. The unamortized internal-use software development costs amounted to $2,584,007 and $1,548,085 at September 30, 2016 and December 31, 2015, respectively. The Company’s amortization expenses associated with capitalized software development costs amounted to $195,387 and $570,966 during the three and nine-month periods ended September 30, 2016, respectively, and $200,133 and $539,265 during the three and nine-month periods ended September 30, 2015, respectively. Amortization of internal-use software is reflected in cost of revenues.

 

Share-Based Payment

 

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is the vesting period.

 

The Company has elected to use the BSM option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense recognized in the statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

Segment Reporting

 

The Company generated revenues from one source, its SaaS business, during the nine-month periods ended September 30, 2016 and 2015. The Company's chief operating decision maker evaluates the performance of the Company based upon revenues and expenses by functional areas as disclosed in the Company's statements of operations.

 

Recent Accounting Pronouncements

 

The Company applied ASU 2015-03: Interest – Imputation of Interest, which simplifies the presentation of debt issuance costs, and netted debt issue costs previously reported as assets with the related liability for presentation purposes. Other accounting pronouncements have been issued but deemed by management to be outside the scope of relevance to the Company.  

 

Reclassification

 

The balance sheet, and related footnotes, for the year ended December 31, 2015 has been reclassified to reflect the adoption of ASU 2015-03 which changes the presentation of debt issuance costs in financial statements and requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset.

 

 

Basic and Diluted Earnings Per Share

 

Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the modified-treasury stock method).

 

		Three months ended September 30								Nine months ended September 30
		2016				2015				2016				2015
Numerator:
Net loss		$	(133,997	)		$	(2,182,289	)		$	(1,050,503	)		$	(5,536,431	)
Denominator:
Denominator for basic earnings per share--weighted average shares			65,121,621				63,876,095				65,086,886				63,184,579
Effect of dilutive securities- when applicable:
Stock options			-				-				-				-
Warrants			-				-				-				-
Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions			65,121,621				63,876,095				65,086,886				63,184,579
Loss per share:
Basic		$	(0.00	)		$	(0.03	)		$	(0.02	)		$	(0.09	)
Diluted		$	(0.00	)		$	(0.03	)		$	(0.02	)		$	(0.09	)
Weighted-average anti-dilutive common share equivalents			18,087,545				16,562,631				18,501,508				17,146,481

 

Property and Equipment

 

Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives of three years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized.

  

Property and equipment consist of the following at:

 

		September 30, 2016				December 31, 2015
Internal use software costs		$	4,333,096			$	2,726,209
Computer equipment and software			389,150				563,892
Office furniture and equipment			125,789				222,061
Leasehold improvements			290,086				299,053
			5,138,121				3,811,215
Accumulated depreciation			(2,355,962	)			(1,854,351	)
		$	2,782,159			$	1,956,864

 

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2016				2015				2016				2015
Depreciation expense		$	52,203			$	74,851			$	226,265			$	230,063
Amortization expense on internal software		$	195,387			$	200,133			$	570,966			$	539,265

 

During the nine-month period ended September 30, 2016, the Company sold approximately $15,000 in computer equipment with a net book value of approximately $6,000 for proceeds of approximately $6,000.

 

During the nine-month period ended September 30, 2016, the Company wrote off approximately $280,000 in fixed assets with a net book value of approximately $31,000, which was recorded under the depreciation expense account.

NOTE 3: PREPAID EXPENSES

 

At September 30, 2016 and December 31, 2015, the Company’s prepaid expenses consisted primarily of prepaid insurance and rent.

---

NOTE 4: DEFERRED REVENUES

 

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

 

 

		September 30, 2016				December 31, 2015
Deferred revenues		$	70,278			$	10,436

 

NOTE 5: LINE OF CREDIT AND LOANS

 

Line of Credit

 

		September 30, 2016				December 31, 2015
Line of credit			4,635,000				4,635,000
Repayment of Line of credit			(4,635,000	)			-
Less: Deferred financing cost			-				(36,559	)
		$	-			$	4,598,441

 

On September 30, 2014, the Company entered into an amendment of its line of credit, or the Line of Credit, with Pacific Western Bank, as successor in interest by merger to Square 1 Bank, or the Lender, to borrow up to a maximum of $6,000,000 at the Company’s discretion, an increase from up to $3,000,000 that the Company was permitted to borrow under the original Line of Credit entered into on March 17, 2014. Amounts borrowed accrued interest at the prime rate in effect from time to time plus 1.25%, not to be less than 5.5% per annum, provided that in no event shall the accrued interest payable with respect to any month be less than $10,000. Accrued interest on amounts borrowed was payable monthly. All other amounts borrowed were to be payable in full on the maturity date of March 17, 2016; however, this date was extended by the Lender until May 31, 2016. This maturity extension was granted concurrently with a waiver issued by the Lender pursuant to an amendment to the Line of Credit on March 11, 2016, which amendment waived any default due to breach of the Line of Credit minimum liquidity covenant during the specified time period, adjusts the Minimum Adjusted EBITDA covenant, and reduces the credit limit to $5,135,000. A condition precedent to the waiver was the funding of a $625,000 subordinated loan, or the Agility Loan, from Agility Capital II, LLC, or Agility Capital, which funded on March 11, 2016. The Line of Credit may be earlier terminated without a prepayment fee. The Company also made a repayment of $62,777 in March 2016.

 

In connection with the original Line of Credit, the Company issued to the Lender a warrant to purchase up to 46,875 shares of the Company’s Common Stock at an exercise price of $1.60 per share. The warrant expires on March 17, 2017. The fair value of the warrant amounted to $32,067. On March 27, 2015, in connection with an obligation under the Line of Credit when borrowings thereunder exceed $3,000,000, the Company issued to the Lender a warrant to purchase 58,824 shares of the Company’s Common Stock at an exercise price of $1.53 per share. This warrant expires on March 27, 2018. The fair value of the warrant amounted to $37,289.

 

As further described below, on May 5, 2016, the Company entered into a loan and security agreement, or the SaaS Capital Loan, with SaaS Capital Funding II, LLC to borrow up to a maximum of $8,000,000. On May 5, 2016, the Company drew down $5,000,000 as the initial advance from the SaaS Capital Loan and used a portion of the proceeds, $4,572,223, to repay the outstanding Line of Credit balance.

 

As of September 30, 2016, the Company had no outstanding balance under the Line of Credit.

 

 

The Company paid approximately $50,000 to the Lender in financing costs through December 31, 2015, and approximately $69,000 through May 5, 2016. The deferred financing costs associated with the Line of Credit were fully expensed at June 30, 2016.

 

Agility Loan 

 

		September 30, 2016				December 31, 2015
Agility Loan			625,000				-
Principal Payment of Agility Loan			(100,000	)			-
Less: Deferred financing cost			(7,893	)			-
		$	517,107			$	-

 

On March 11, 2016, the Company entered into a subordinated loan with Agility Capital which provides for total availability of $625,000 and matures on March 31, 2017. The Agility Loan has a fixed interest rate of 12% per year and requires $25,000 monthly amortization payments beginning on June 1, 2016. The Agility Loan also requires fees of approximately $130,000 over the life of the loan, and is subject to a total aggregate minimum interest of $50,000 in the event of a prepayment. The Agility Loan contains covenants to achieve specified Adjusted EBITDA levels, as defined, limiting capital expenditures, restricting the Company’s ability to pay dividends, purchase and sell assets outside the ordinary course and incur additional indebtedness. As of September 30, 2016, the Company was in compliance with these covenants. The Agility Loan requires a security interest in all of the Company’s personal property and intellectual property, second in priority to the Lender and to SaaS Capital Funding II, LLC.

 

In connection with the Agility Loan, Agility Capital is entitled to purchase, under certain circumstances, fully paid and nonassessable shares of the Company’s class of securities, or Shares, at the initial exercise price per Share which is the closing price on the day prior to the issuance date, or the Warrant Price. The initial number of Shares issuable upon exercise of this Warrant is zero (0). On June 30, 2016, if any amounts under the Agility Loan remain outstanding, then the number of Shares issuable upon exercise of this Warrant shall equal $31,250 divided by the Warrant Price. In addition to the foregoing, upon the occurrence of an Event of Default, as defined in the loan agreement, pursuant to Section 5(a) or Section 5(b) of the Agility Loan, the number of Shares that may be acquired thereunder shall increase by an additional number of Shares equal to 5% of the number of Shares issuable thereunder upon the date of such Event of Default, and further increased on the 15th day following such Event of Default and on each 15th day thereafter (each, a "Measurement Date”) by a number of Shares equal to 5% of the number of Shares issuable upon such Measurement Date, until the Event of Default is cured to Agility Capital’s satisfaction or waived in writing by Agility Capital. On June 30, 2016, as a result of outstanding amounts under the Agility Loan, the Company issued to Agility Capital a warrant to purchase up to 69,444 shares of the Company’s Common Stock at an exercise price of $0.45 per share. This warrant expires on March 11, 2021. The fair value of the warrant amounted to $15,787 and was capitalized as deferred financing costs at September 30, 2016.

 

The Company owed $525,000 under the Agility Loan at September 30, 2016.

 

SaaS Capital Loan 

 

		September 30, 2016				December 31, 2015
SaaS Capital Loan			6,000,000				-
Less: Deferred financing cost			(469,531	)			-
		$	5,530,469			$	-

 

On May 5, 2016, the Company entered into the SaaS Capital Loan, with SaaS Capital Funding II, LLC to borrow up to a maximum of $8,000,000. Initial amounts borrowed will accrue interest at the rate of 10.25% per annum with future amounts borrowed bearing interest at the greater of 10.25% or 9.21% plus the three-year treasury rate at the time of advance. Accrued interest on amounts borrowed is payable monthly for the first six months and thereafter 36 equal monthly payments of principal and interest is payable. Prepayments will be subject to a 10%, 6% or 3% of principal premium if prepaid prior to 12 months, between 12 and 24 months, or between 24 months and maturity, respectively. Advances may be requested until May 5, 2018. The initial minimum advance amount of $5,000,000, on May 5, 2016, was used to repay the outstanding Line of Credit balance of $4,572,223. A facility fee of $80,000 was paid by the Company in connection with the initial advance and an additional $80,000 is payable on May 5, 2017.

 

 

11

---

 

 

The SaaS Capital Loan contains customary covenants including, but not limited to, covenants to achieve specified Adjusted EBITDA levels and revenue 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. As of September 30, 2016, the Company was in compliance with such covenants. The occurrence of a material adverse change will be an event of default under the SaaS Capital Loan, in addition to other customary events of default. The Company granted SaaS Capital Funding II, LLC a security interest in all of the Company's personal property and intellectual property through the SaaS Capital Loan and the Patent, Trademark and Copyright Security Agreement between the Company and SaaS Capital Funding II, LLC.

 

On May 5, 2016, in connection with the SaaS Capital Loan, the Company issued to SaaS Capital Partners II, LP, an affiliate of SaaS Capital Funding II, LLC, a warrant to purchase up to 1,333,333 shares of the Company's common stock at an exercise price of $0.45 per share subject to certain adjustments for dividends, splits or reclassifications. The Warrant is exercisable until the earlier of May 5, 2026, or the date that is 5 years from the date the Company’s equity securities are first listed for trading on NASDAQ. The Company paid approximately $169,000 in financing costs through September 30, 2016. The fair value of the warrant amounted to $375,831.

 

The Company owed $6,000,000 under the SaaS Capital Loan at September 30, 2016.

 

The Company recognized amortization and interest expenses in connection with the line of credit and loans for the three and nine-month periods ended September 30, 2016 and 2015 as follows.

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2016				2015				2016				2015
Amortization expense associated with line of credit and loans		$	49,385			$	11,699			$	125,183			$	30,282
Interest expense associated with line of credit and loans		$	153,750			$	60,898			$	324,842			$	149,198

 

---

NOTE 6: STOCKHOLDERS’ EQUITY

 

Common Stock

 

During the nine-month period ended September 30, 2016, the Company issued 5,714 shares of its Common Stock pursuant to the cashless exercise of 50,000 options.   

 

During the nine-month period ended September 30, 2015, the Company generated proceeds of $9,586 from the exercise of 11,457 options and issued 96,316 shares of its Common Stock pursuant to the cashless exercise of 143,541 options.

 

During the nine-month period ended September 30, 2015, the Company sold to investors an aggregate of 2,145,000 shares of its Common Stock at a price of $1.00 per share and warrants to purchase up to an aggregate of 1,287,000 shares of its Common Stock at an exercise price of $1.32 per share for an aggregate gross consideration of $2,145,000 and net proceeds of approximately $1,700,000.

  

Restricted Stock

 

During the nine-month period ended September 30, 2016, the Company issued 120,000 restricted shares of its Common Stock, at a value of $0.50 per share, vesting in 4 equal quarterly increments commencing on July 1, 2016, to each of its non-employee directors as partial annual compensation for services as a director.

 

Warrants

 

During the nine-month period ended September 30, 2015, the Company issued 58,824 warrants to the Lender. The warrants are exercisable at the price of $1.53 per share and expire on March 27, 2018. The fair value of these warrants which amounted to $37,289, has been recognized as deferred financing fees and is amortized using the effective interest method over the terms of the associated Line of Credit.

 

During the nine-month period ended September 30, 2016, the Company issued 69,444 and 1,333,333 warrants to Agility Capital and SaaS Capital Partners II, LP, respectively, exercisable at a price of $0.45 per share and which expire on March 11, 2021 and May 5, 2026, respectively.  The fair value of these warrants, which amounted to $15,787 and $375,831, respectively, were recognized as deferred financing fees and amortized using the effective interest method over the terms of the associated loan.

 

The fair value of the warrants granted during the nine-month period ended September 30, 2016 is based on the BSM model using the following assumptions:

 

Effective exercise price			$0.45				-				1.53
Effective market price			$0.41				-				1.53
Volatility			62				-				70%
Risk-free interest			0.7				-				0.9%
Term (years)			3				-				10
Expected dividend rate							0%

 

During the three and nine-month periods ended September 30, 2016, the Company recorded expenses of $125,867 and $680,467, respectively, related to warrants granted to employees. During the three and nine-month periods ended September 30, 2015, the Company recorded expenses of $284,093 and $852,278, respectively, related to warrants granted to employees in prior years.

 

During the nine-month period ended September 30, 2016, 2,466,760 warrants were forfeited, of which 1,650,000 warrants were forfeited and replaced with 2,000,000 new warrants issued in conjunction with the forfeiture of 650,000 options issued in December 2014.

 

As of September 30, 2016 and December 31, 2015, there were 7,603,716 and 6,667,699 warrants issued and outstanding, respectively, with a weighted average price of $0.88 and $1.25, respectively.

 

Stock Option Plan

 

The Company has a Stock Option Plan, or the Plan, under which the total number of shares of capital stock of the Company that may be subject to options under the Plan is currently 22,500,000 shares of Common Stock from either authorized but unissued shares or treasury shares. The individuals who are eligible to receive option grants under the Plan are employees, directors and other individuals who render services to the management, operation or development of the Company or its subsidiaries and who have contributed or may be expected to contribute to the success of the Company or a subsidiary. Every option granted under the Plan shall be evidenced by a written stock option agreement in such form as the Board shall approve from time to time, specifying the number of shares of Common Stock that may be purchased pursuant to the option, the time or times at which the option shall become exercisable in whole or in part, whether the option is intended to be an incentive stock option or a non-incentive stock option, and such other terms and conditions as the Board shall approve.

 

 

The share-based payment is based on the fair value of the outstanding options amortized over the requisite period of service for option holders, which is generally the vesting period of the options. The fair value of the options granted during the nine-month periods ended September 30, 2016 and 2015 is based on the BSM model using the following assumptions:

 

		September 30, 2016												September 30, 2015
Effective Exercise price			$0.32				-				0.50				$0.80				-				1.43
Effective Market price			$0.32				-				0.50				$0.80				-				1.43
Volatility							70%								61				–				68%
Risk-free interest			0.7				–				0.9%				0.9				–				1.0%
Terms (years)			3				-				4				2				-				4
Expected dividend rate							0%												0%

 

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

 

		Nine-month periods ended
		September 30, 2016				September 30, 2015
Weighted-average grant date fair value		$	0.33			$	0.51
Fair value of options, recognized as selling, general, and administrative expenses		$	326,932			$	779,751
Number of options granted			2,070,000				740,000

 

The total compensation cost related to non-vested awards not yet recognized amounted to $578,923 at September 30, 2016 and the Company expects that it will be recognized over the following weighted-average period of 48 months.

 

If any options granted under the Plan expire or terminate without having been exercised or cease to be exercisable, such options will be available again under the Plan. All employees of the Company and its subsidiaries are eligible to receive incentive stock options and non-qualified stock options. Non-employee directors and outside consultants who provided bona-fide services not in connection with the offer or sale of securities in a capital raising transaction are eligible to receive non-qualified stock options. Incentive stock options may not be granted below their fair market value at the time of grant or, if to an individual who beneficially owns more than 10% of the total combined voting power of all stock classes of the Company or a subsidiary, the option price may not be less than 110% of the fair value of the Common Stock at the time of grant. The expiration date of an incentive stock option may not be longer than ten years from the date of grant. Option holders, or their representatives, may exercise their vested options up to three months after their employment termination or one year after their death or permanent and total disability. The Plan provides for adjustments upon changes in capitalization.

 

The Company’s policy is to issue shares pursuant to the exercise of stock options from its available authorized but unissued shares of Common Stock. It does not issue shares pursuant to the exercise of stock options from its treasury shares.

---

NOTE 7: COMPREHENSIVE LOSS

 

Comprehensive loss includes changes in equity related to foreign currency translation adjustments. The following table sets forth the reconciliation from net loss to comprehensive income for the three and nine-month periods ended September 30, 2016 and 2015:

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2016				2015				2016				2015
Net loss		$	(133,997	)		$	(2,182,289	)		$	(1,050,503	)		$	(5,536,431	)
Other comprehensive loss:
Foreign currency translation adjustment			(10,106	)			(6,363	)			(39,603	)			(4,335	)
Comprehensive loss		$	(144,103	)		$	(2,188,652	)		$	(1,090,106	)		$	(5,540,766	)

 

 

The following table sets forth the balance in accumulated other comprehensive loss as of September 30, 2016 and December 31, 2015, respectively:

  

		September 30, 2016				December 31, 2015
Accumulated other comprehensive loss		$	(61,283	)		$	(21,680	)

 

NOTE 9: COMMITMENTS AND CONTINGENCIES

 

During January 2014, the Company entered into a four year lease for certain office space in Newport Beach, effective February 1, 2014. Under the terms of the lease, the Company initially paid monthly base rent of approximately $22,000 increasing incrementally to approximately $25,000.

 

During July 2014, the Company entered into a five year lease for certain office space in a business center in London, England, which commenced on July 30, 2014. The base rent is GBP 89,667 per year and the estimated service charges for the lease are GBP 45,658 per year. 

 

Legal Proceedings

 

From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company is not presently a party to any legal proceedings, including the following, that it currently believes, if determined adversely to the Company, would individually or taken together have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.

  

McCollum Litigation

 

The Company is currently involved in a litigation with Jeff McCollum, the former President of its CAKE division, in the Superior Court of the State of California, commenced by the Company on February 22, 2015, whereby it asserted claims against Mr. McCollum for fraud, breach of contract, and breach of fiduciary duty, among others, following its termination of Mr. McCollum’s employment on September 8, 2014 for cause as a result of, among other things, Mr. McCollum having abandoned his position and professional responsibilities. Mr. McCollum filed a cross complaint alleging breach of contract by the Company with respect to Mr. McCollum’s employment agreement and commenced a separate action on February 23, 2015 in the Superior Court of the State of California asserting claims against the Company for violation of California Commercial Code §8401 and breach of fiduciary duty arising from Mr. McCollum’s request to have the restrictive legend removed from his share certificate representing 1.89 million shares of the Company’s Common Stock owned by him, and seeking declaratory relief as to whether he is entitled to have the restrictive legend removed from his share certificate. On April 27, 2016, the court granted Mr. McCollum summary adjudication as to his declaratory relief cause of action to have the restrictive legend removed from his share certificate.