# IZEA Worldwide, Inc.: Form 10-Q/A for the period ended Jun 30, 2012

- Company: [IZEA Worldwide, Inc.](/companies/izea.md) (CIK 1495231)
- Form: 10-Q/A
- Filed: 2012-09-13
- Accepted by EDGAR: Sep 13, 2012, 12:05 ET
- Period: 2012-06-30
- Accession: 0001495231-12-000055
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1495231/000149523112000055/izea12063010qa.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1495231/000149523112000055/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-04-01 to 2012-06-30 | $1.2m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2012-01-01 to 2012-06-30 | $2.8m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2012-04-01 to 2012-06-30 | $500.5k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2012-01-01 to 2012-06-30 | $1.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2012-04-01 to 2012-06-30 | $703.5k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2012-01-01 to 2012-06-30 | $1.7m | us-gaap:GrossProfit |
| Operating income | 3 months, 2012-04-01 to 2012-06-30 | −$1.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-01-01 to 2012-06-30 | −$2.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-04-01 to 2012-06-30 | $27.5k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2012-01-01 to 2012-06-30 | $44.3k | us-gaap:InterestExpense |
| Net income | 3 months, 2012-04-01 to 2012-06-30 | −$1.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2012-01-01 to 2012-06-30 | −$2.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-04-01 to 2012-06-30 | −$1.44 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2012-01-01 to 2012-06-30 | −$2.46 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2012-01-01 to 2012-06-30 | −$1.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2012-01-01 to 2012-06-30 | $9.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-06-30 | $190.2k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-06-30 | $1.2m | us-gaap:AssetsCurrent |
| Total assets | at 2012-06-30 | $1.4m | us-gaap:Assets |
| Current liabilities | at 2012-06-30 | $3.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-06-30 | $3.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2012-06-30 | −$2.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,210 characters.

### Special Note Regarding Forward-Looking Information

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our consolidated financial statements and related notes included elsewhere in this Report. Historical results and percentage relationships among any amounts in these financial statements are not necessarily indicative of trends in operating results for any future period. This report contains “forward-looking statements.” The statements, which are not historical facts contained in this report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, and notes to our consolidated financial statements, particularly those that utilize terminology such as “may” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements. Such statements are based on currently available operating, financial and competitive information, and are subject to various risks and uncertainties. Future events and our actual results may differ materially from the results reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to raise additional funding, our ability to maintain and grow our business, variability of operating results, our ability to maintain and enhance our brand, our expansion and development of new products and services, marketing and other business development initiatives, competition in the industry, general government regulation, economic conditions, dependence on key personnel, the ability to attract, hire and retain personnel who possess the technical skills and experience necessary to meet the service requirements of our clients, our ability to protect our intellectual property, the potential liability with respect to actions taken by our existing and past employees, risks associated with international sales, and other risks described herein and in our other filings with the Securities and Exchange Commission.

The safe harbor for forward-looking statements provided by Section 21E of the Securities Exchange Act of 1934 excludes issuers of “penny stock” (as defined in Rule 3a51-1 under the Securities Exchange Act of 1934). Our common stock currently falls within that definition.

All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

### Company History

IZEA, Inc., formerly known as IZEA Holdings, Inc., and before that Rapid Holdings, Inc., was incorporated in Nevada on March 22, 2010. On May 12, 2011, we completed a share exchange pursuant to which we acquired all of the capital stock of IZEA Innovations, Inc. ("IZEA"), which became our wholly owned subsidiary. IZEA was incorporated in the state of Florida in February 2006 and was later reincorporated in the state of Delaware in September 2006 and changed its name to IZEA, Inc. from PayPerPost, Inc. on November 2, 2007. In connection with the share exchange, we discontinued our former business and continued the SMS business of IZEA as our sole line of business. On November 23, 2011, our name changed from "IZEA Holdings, Inc." to "IZEA, Inc." and the name of our subsidiary changed from "IZEA, Inc." to "IZEA Innovations, Inc."

The share exchange was accounted for as a reverse merger and recapitalization where IZEA was the acquirer for accounting purposes and IZEA, Inc. was the acquired company. Accordingly, IZEA's historical financial statements for periods prior to the acquisition have become ours retroactively restated for, and giving effect to, the number of shares received in the share exchange. The assets, liabilities and accumulated earnings, along with operations, reported in the financial statements prior to the share exchange are those of IZEA and are recorded at the historical cost basis.

On July 30, 2012, we filed a Certificate of Change with the Secretary of State of Nevada to effect a reverse stock split of the issued and outstanding shares of our common stock at a ratio of one share for every 40 shares outstanding prior to the effective date of the reverse stock split. Additionally, our authorized shares of common stock were decreased from 500,000,000 shares to 12,500,000 shares. All current and historical information contained herein related to the share and per share information for our common stock or stock equivalents issued on or after May 12, 2011 reflects the 1-for-40 reverse stock split of our outstanding shares of common stock that became market effective on August 1, 2012.

### Company Overview

We are a leading company in the growing social media sponsorship (SMS) segment of social media, where a company compensates a social media publisher to share sponsored content within their social network. We accomplish this by operating multiple marketplaces that include our premier platforms *SocialSpark, SponsoredTweets* and *WeReward,* as well as our legacy platforms *PayPerPost* and *InPostLinks*. Our advertisers include a wide range of small and large businesses, including Fortune 500 companies, as well as advertising agencies. We generate our primary revenue through the sale of SMS to our advertisers. We fulfill the SMS through our marketplace platforms by connecting our social media publishers such as bloggers, tweeters and mobile application users with our advertisers.

### Results of Operations for the Three Months Ended June 30, 2012 Compared to June 30, 2011

|  | Three Months Ended June 30, 2012 | 2011 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $1,204,018 | $845,901 | $358,117 | 42.3% |
| Cost of sales | 500,490 | 381,199 | 119,291 | 31.3% |
| Gross profit | 703,528 | 464,702 | 238,826 | 51.4% |
| Operating expenses: |  |  |  |  |
| General and administrative | 1,687,771 | 934,317 | 753,454 | 80.6% |
| Sales and marketing | 604,056 | 143,953 | 460,103 | 319.6% |
| Total operating expenses | 2,291,827 | 1,078,270 | 1,213,557 | 112.5% |
| Loss from operations | (1,588,299) | (613,568) | (974,731) | (158.9)% |
| Other income (expense): |  |  |  |  |
| Interest expense | (27,523) | (6,179) | (21,344) | 345.4% |
| Loss on exchange and change in fair value of derivatives, net | (224,021) | 29,791 | (253,812) | (852.0)% |
| Other income (expense), net | 454 | — | 454 | 100.0% |
| Total other income (expense) | (251,090) | 23,612 | (274,702) | 1,163.4% |
| Net loss | $(1,839,389) | $(589,956) | $(1,249,433) | (211.8)% |

### Revenues

We derive revenue from three sources: revenue from an advertiser for the use of our network of social media publishers to fulfill advertiser sponsor requests for a blog post, tweet, click, purchase, or action ("Sponsored Revenue"), revenue from the posting of targeted display advertising ("Media Revenue") and revenue derived from various service fees charged to advertisers for management, maintenance and enhancement of their accounts, and to publishers for maintenance and enhancement of their accounts ("Service Fee Revenue").

Revenues for the three months ended June 30, 2012 increased by $358,117, or 42.3%, compared to the same period in 2011. The increase was attributable to a $357,000 increase in our Sponsored Revenue and $69,000 from our new revenue stream, Media Revenue, offset by $68,000 decline in Service Fee Revenue. In the three months ended June 30, 2012, Sponsored Revenue was 82%, Media Revenue was 6% and Service Fee Revenue was 12% of total revenue compared to Sponsored Revenue of 75% and Service Fee Revenue of 25% in the three months ended June 30, 2011. The increase in Sponsored Revenue was primarily attributable to increased sales growth in our premier social media platforms, *Social Spark* and *SponsoredTweets*. This exponential growth was brought about by a focus on localized client development through the increase in number of our executive sales team in Orlando, New York City, Chicago, Seattle and Dallas. This resulted in an increase in the number of customers starting campaigns and an increase in the average revenue per customer. The increase in Media Revenue was due to the implementation of *IZEAMedia,* our display advertising solution, for our platforms. *IZEAMedia* is a new feature that allows our publishers to place targeted display advertising in three of our platforms, *SocialSpark, PayPerPost* and *Staree*, for which we share revenue with the publisher. Service fees declined during the period because a majority of the fees were initially assessed to our customers in the second quarter of 2011 when new service fee policies were implemented.

While we expect that revenue from our legacy platforms, *PayPerPost* and *InPostLinks,* will continue to decline in amount and as a percentage of our total revenue, we still expect to increase our total revenue by over 100% in 2012 by expanding our professional sales staff, increasing average revenue per customer, adding features to our existing platforms and introducing new platforms to take advantage of social media activities. We have expanded and plan to continue the expansion our sales staff with outside sales executives that are located in major markets outside of our corporate headquarters. We believe that locating outside sales executives in close proximity to our customers will help drive a closer relationship with our customers resulting in increased repeat spending and an increase in average revenue per customer. We also plan to expand our internal sales representatives to augment the efforts of our outside sales executives so that we can take advantage of the doubling of potential revenue opportunities for our Company in the past year. We have seen total qualified revenue opportunities for our sales team grow from $4 million in June 2011 to over $9 million in June 2012. We continuously review our existing platforms and our industry in order to add new features and additional revenue streams. Two current examples are the new revenue stream from *IZEAMedia* and the introduction of our new platform, www.staree.com. Our *Staree* platform allows us to further our efforts in social media sponsorships with a site that allows the sharing of sponsored photos and videos.

### Cost of Sales and Gross Profit

Our cost of sales comprise primarily of amounts paid to our social media publishers for fulfilling an advertiser’s sponsor request for a blog post, tweet, click, purchase or action.

Cost of sales for the three months ended June 30, 2012 increased by $119,291, or 31.3%, compared to the same period in 2011. Cost of sales increased as a direct result of the increase in our Sponsored Revenue and the direct publisher costs to generate such revenue. Publisher costs typically range from 50% to 80% of the advertising campaign depending on the type of publisher used in the campaign. Celebrity publishers typically used in our *SponsoredTweets* marketplace cost more than our average publisher cost of 50% in other marketplaces.

Gross profit for the three months ended June 30, 2012 increased by $238,826, or 51.4%, compared to the same period in 2011. Our gross margin improved to 58% for the three months ended June 30, 2012 as compared to 55% for the same period in 2011. The gross margin increase was primarily attributable to service fees received from advertisers and publishers that have minimal costs associated with the revenue along with improved margins in our *SponsoredTweets* marketplace.

### Operating Expenses

Operating expenses consist of general and administrative, and sales and marketing expenses. Total operating expenses for the three months ended June 30, 2012 increased by $1,213,557, or 112.5%, compared to the same period in 2011. The increase was primarily attributable to increased payroll expenses, professional fees, costs of being a public company and increases in sales and marketing expenses.

General and administrative expenses consist primarily of payroll, general operating costs, public company costs, facilities costs, insurance, depreciation, professional fees, and investor relations fees. General and administrative expenses for the three months ended June 30, 2012 increased by $753,454 or 80.6%, compared to the same period in 2011. The increase was primarily attributable to a $29,000 increase in rent expense with the addition of three new office space locations in mid-2011, a $295,000 increase in payroll, personnel and related benefit expenses due to salary increases and additional employees, a $43,000 increase in travel related to additional personnel in multiple locations, a $167,000 increase in professional fees and reporting costs as a result of the abandoned financing transactions, a $116,000 increase in costs for investor relations as a result of being a public company, and an increase in stock-based compensation of $69,000. We expect that personnel costs and professional fees will continue to increase over prior levels as we continue to expand our sales force, work on financing transactions, and incur a full year of reporting costs and investor relations activities as a public company.

Sales and marketing expenses consist primarily of compensation for sales and marketing and related support resources, sales commissions and trade show expenses. Sales and marketing expenses for the three months ended June 30, 2012 increased by $460,103 or 319.6%, compared to the same period in 2011. The increase was primarily attributable to the increase in tradeshow activities, the addition of more outside contractors to support our customers and promotional expenses to launch our new products and services, *Staree* in particular. In May 2012, we entered into four agreements to issue a total of 75,521 shares of restricted common stock for celebrity endorsements of our products and services (primarily to related to the launch of our new *Staree* platform). In the majority of the agreements, the restricted stock vested 25% immediately upon the signing of the agreements and then vests 6.25% per month over the following twelve months. In addition to the shares, we paid cash payments of $100,000. We recorded a total of $254,223 in marketing expense for the value of the restricted awards vested and the cash payments earned during the three months ended June 30, 2012. Future compensation related to nonvested restricted awards expected to vest and unearned cash compensation of $236,245 is estimated to be recognized over the remaining individual contract terms of up to eleven months.

### Other Income (Expense)

Other income (expense) consists primarily of interest expense and the change in the fair value of derivatives.

Interest expense during the three months ended June 30, 2012 increased by $21,344 compared to the same period in 2011 primarily due to the issuance of a senior secured promissory note in the principal amount of $550,000 in February 2012 and a $75,000 promissory note in May 2012. The carrying value and the direct finance costs on the notes are subject to amortization, through charges to interest expense, over the term to maturity using the effective interest method.

We entered into financing transactions during the three months ended June 30, 2012 and 2011 that gave rise to derivative liabilities. These financial instruments are carried as derivative liabilities, at fair value, in our financial statements. Changes in the fair value of derivative financial instruments are required to be recorded in other income (expense) in the period of change. We recorded income resulting from the change in the fair value of certain warrants during the three months ended June 30, 2012 and 2011 in the amount of $832,422 and $29,791, respectively. We recognized a $764,513 loss on exchange when we redeemed certain warrants to purchase an aggregate of 123,052 shares of common stock for the same number of shares without the Company receiving any further cash consideration during the three months ended June 30, 2012. Additionally, we recorded $82,536 in expense resulting from the change in the fair value of our compound embedded derivatives in our promissory notes during the three months ended June 30, 2012. The net effect of these changes in fair values and loss on exchange of warrants resulted in a total expense of $224,021 and income of $29,791 during the six months ended June 30, 2012 and 2011, respectively. We have no control over the amount of change in the fair value of our derivative instruments as this is a factor based on fluctuating rates and market conditions outside of our control.

### Net Loss

Net loss for the three months ended June 30, 2012 was $1,839,389 which increased from the net loss of $589,956 for the same period in 2011. As discussed above, although gross profit increased over the prior year due to increased revenue, these improvements were exceeded by the large increase in operating expenses attributable to increased headcount, professional fees, public company and other sales and marketing expenses.

### Results of Operations for the Six Months Ended June 30, 2012 Compared to June 30, 2011

|  | Six Months Ended June 30, 2012 | 2011 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $2,849,385 | $1,768,679 | $1,080,706 | 61.1% |
| Cost of sales | 1,159,771 | 822,734 | 337,037 | 41.0% |
| Gross profit | 1,689,614 | 945,945 | 743,669 | 78.6% |
| Operating expenses: |  |  |  |  |
| General and administrative | 3,471,752 | 1,896,531 | 1,575,221 | 83.1% |
| Sales and marketing | 797,595 | 311,434 | 486,161 | 156.1% |
| Total operating expenses | 4,269,347 | 2,207,965 | 2,061,382 | 93.4% |
| Loss from operations | (2,579,733) | (1,262,020) | (1,317,713) | (104.4)% |
| Other income (expense): |  |  |  |  |
| Interest expense | (44,267) | (15,032) | (29,235) | 194.5% |
| Loss on exchange and change in fair value of derivatives, net | (133,034) | 29,791 | (162,825) | (546.6)% |
| Other income (expense), net | 455 | 38 | 417 | 1,097.4% |
| Total other income (expense) | (176,846) | 14,797 | (191,643) | 1,295.1% |
| Net loss | $(2,756,579) | $(1,247,223) | $(1,509,356) | (121.0)% |

### Revenues

We derive revenue from three sources: revenue from an advertiser for the use of our network of social media publishers to fulfill advertiser sponsor requests for a blog post, tweet, click, purchase, or action ("Sponsored Revenue"), revenue from the posting of targeted display advertising ("Media Revenue") and revenue derived from various service fees charged to advertisers for management, maintenance and enhancement of their accounts, and to publishers for maintenance and enhancement of their accounts ("Service Fee Revenue").

Revenues for the six months ended June 30, 2012 increased by $1,080,706, or 61.1%, compared to the same period in 2011. The increase was attributable to a $1,011,000 increase in our Sponsored Revenue and $132,000 from our new revenue stream, Media Revenue, offset by a $62,000 decline in Service Fee Revenue. In the six months ended June 30, 2012, Sponsored Revenue was 84%, Media Revenue was 5% and Service Fee Revenue was 11% of total revenue compared to Sponsored Revenue of 79% and Service Fee Revenue of 21% in the six months ended June 30, 2011. The increase in Sponsored Revenue was primarily attributable to increased sales growth in our premier social media platforms, *Social Spark* and *SponsoredTweets*. This exponential growth was brought about by a focus on localized client development through the increase in number of our executive sales team in Orlando, New York City, Chicago, Seattle and Dallas. This resulted in an increase in the number of customers starting campaigns and an increase in the average revenue per customer. The increase in Media Revenue was due to the implementation of *IZEAMedia,* our display advertising solution, for our platforms. *IZEAMedia* is a new feature that allows our publishers to place targeted display advertising in three of our platforms, *SocialSpark, PayPerPost* and *Staree*, for which we share revenue with the publisher. Service fees declined during the period because a majority of the fees were initially assessed to our customers in the second quarter of 2011 when new service fee policies were implemented.

While we expect that revenue from our legacy platforms, *PayPerPost* and *InPostLinks,* will continue to decline in amount and as a percentage of our total revenue, we still expect to increase our total revenue by over 100% in 2012 by expanding our professional sales staff, increasing average revenue per customer, adding features to our existing platforms and introducing new platforms to take advantage of social media activities. We have expanded and plan to continue the expansion our sales staff with outside sales executives that are located in major markets outside of our corporate headquarters. We believe that locating outside sales executives in close proximity to our customers will help drive a closer relationship with our customers resulting in increased repeat spending and an increase in average revenue per customer. We also plan to expand our internal sales representatives to augment the efforts of our outside sales executives so that we can take advantage of the doubling of potential revenue opportunities for our Company in the past year. We have seen total qualified revenue opportunities for our sales team grow from $4 million in June 2011 to over $9 million in June 2012. We continuously review our existing platforms and our industry in order to add new features and additional revenue streams. Two current examples are the new revenue stream from *IZEAMedia* and the introduction of our new platform, www.staree.com. Our *Staree* platform allows us to further our efforts in social media sponsorships with a site that allows the sharing of sponsored photos and videos.

### Cost of Sales and Gross Profit

Our cost of sales comprise primarily of amounts paid to our social media publishers for fulfilling an advertiser’s sponsor request for a blog post, tweet, click, purchase or action.

Cost of sales for the six months ended June 30, 2012 increased by $337,037, or 41.0%, compared to the same period in 2011. Cost of sales increased as a direct result of the increase in our Sponsored Revenue and the direct publisher costs to generate such revenue. Publisher costs typically range from 50% to 80% of the advertising campaign depending on the type of publisher used in the campaign. Celebrity publishers typically used in our *SponsoredTweets* marketplace cost more than our average publisher cost of 50% in other marketplaces.

Gross profit for the six months ended June 30, 2012 increased by $743,669, or 78.6%, compared to the same period in 2011. However, our gross margin remained at 59% for the six months ended June 30, 2012 and 2011. The increase in gross profit is a result of the higher revenue.

### Operating Expenses

Operating expenses consist of general and administrative, and sales and marketing expenses. Total operating expenses for the six months ended June 30, 2012 increased by $2,061,382, or 93.4%, compared to the same period in 2011. The increase was primarily attributable to increased payroll expenses, professional fees, costs of being a public company and increases in sales and marketing expenses.

General and administrative expenses consist primarily of payroll, general operating costs, public company costs, facilities costs, insurance, depreciation, professional fees, and investor relations fees. General and administrative expenses for the six months ended June 30, 2012 increased by $1,575,221 or 83.1%, compared to the same period in 2011. The increase was primarily attributable to a $52,000 increase in rent expense with the addition of three new office space locations in mid-2011, a $670,000 increase in payroll, personnel and related benefit expenses due to salary increases and additional employees, a $90,000 increase in travel related to additional personnel in multiple locations, a $432,000 increase in professional fees and reporting costs as a result of the abandoned financing transactions, a $116,000 increase in costs for investor relations as a result of being a public company, and an increase in stock-based compensation of $103,000. We expect that personnel costs and professional fees will continue to increase over prior levels as we continue to expand our sales force, work on financing transactions, and incur a full year of reporting costs and investor relations activities as a public company.

Sales and marketing expenses consist primarily of compensation for sales and marketing and related support resources, sales commissions and trade show expenses. Sales and marketing expenses for the six months ended June 30, 2012 increased by $486,161 or 156.1%, compared to the same period in 2011. The increase was primarily attributable to the increase in tradeshow activities, the addition of more outside contractors to support our customers and promotional expenses to launch our new products and services, *Staree* in particular. In May 2012, we entered into four agreements to issue a total of 75,521 shares of restricted common stock for celebrity endorsements of our products and services (primarily to related to the launch of our new *Staree* platform). In the majority of the agreements, the restricted stock vested 25% immediately upon the signing of the agreements and then vests 6.25% per month over the following twelve months. In addition to the shares, we paid cash payments of $100,000. We recorded a total of $254,223 in marketing expense for the value of the restricted awards vested and the cash payments earned during the six months ended June 30, 2012. Future compensation related to nonvested restricted awards expected to vest and unearned cash compensation of $236,245 is estimated to be recognized over the remaining individual contract terms of up to eleven months.

### Other Income (Expense)

Other income (expense) consists primarily of interest expense and the change in the fair value of derivatives.

Interest expense during the six months ended June 30, 2012 increased by $29,235 compared to the same period in 2011 primarily due to the issuance of a senior secured promissory note in the principal amount of $550,000 in February 2012 and a $75,000 promissory note in May 2012. The carrying value and the direct finance costs on the notes are subject to amortization, through charges to interest expense, over the term to maturity using the effective interest method.

We entered into financing transactions during the six months ended June 30, 2012 and 2011 that gave rise to derivative liabilities. These financial instruments are carried as derivative liabilities, at fair value, in our financial statements. Changes in the fair value of derivative financial instruments are required to be recorded in other income (expense) in the period of change. We recorded income resulting from the change in the fair value of certain warrants during the six months ended June 30, 2012 and 2011 in the amount of $727,725 and $29,791, respectively. We recognized a $764,513 loss on exchange when we redeemed certain warrants to purchase an aggregate of 123,052 shares of common stock for the same number of shares without the Company receiving any further cash consideration during the six months ended June 30, 2012. Additionally, we recorded $96,246 in expense resulting from the change in the fair value of our compound embedded derivatives in our promissory notes during the six months ended June 30, 2012. The net effect of these changes in fair values and loss on exchange of warrants resulted in a total expense of $133,034 and income of $29,791 during the six months ended June 30, 2012 and 2011, respectively. We have no control over the amount of change in the fair value of our derivative instruments as this is a factor based on fluctuating rates and market conditions outside of our control.

### Net Loss

Net loss for the three months ended June 30, 2012 was $2,756,579 which increased from the net loss of $1,247,223 for the same period in 2011. As discussed above, although gross profit increased over the prior year due to increased revenue, these improvements were exceeded by the large increase in operating expenses attributable to increased headcount, professional fees, public company and other sales and marketing expenses.

### Liquidity and Capital Resources

Our cash position was $190,225 as of June 30, 2012 as compared to $225,277 as of December 31, 2011, a decrease of $35,052. We have incurred significant net losses and negative cash flow from operations since our inception. We incurred net losses of $2,756,579 and $3,978,592 for the six months ended June 30, 2012 and for the year ended December 31, 2011, respectively, and had an accumulated deficit of $20,887,363 as of June 30, 2012. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2011 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions.

Cash used for operating activities was $1,778,885 during the six months ended June 30, 2012 and was primarily a result of our net loss during the period of $2,756,579. Cash provided by financing activities was $1,749,192 during the six months ended June 30, 2012 and was primarily a result of net proceeds of $543,700 received from the issuance of a promissory notes and $1,221,858 received from the sale of our common stock as further discussed below. Financing activities were reduced by principal payments of $17,465 on our capital leases.

To date, we have financed our operations through internally generated revenue from operations, the sale of our equity and the issuance of notes and loans from shareholders.

On February 3, 2012, we issued a senior secured promissory note in the principal amount of $550,000 with an original issuance discount of $50,000, plus $3,500 in lender fees to two of our existing shareholders. In connection with the note, we incurred expenses of $21,800 for legal and other fees. Accordingly, net cash proceeds from the note amounted to $474,700. Unless earlier converted, exchanged or prepaid, the note matures on February 2, 2013. The note may be prepaid by us at any time. The obligations under the note are first priority senior secured obligations (subject to an equipment lease) and are secured by substantially all of our assets and assets of our subsidiary. The face value of the note may be exchanged at the option of the holders into the applicable dollar amount of equity securities issued by us in a subsequent financing. The holders may convert the outstanding principal amount of the note at a conversion price of 90% of the closing price of our common stock on the trading day prior to the date that the note becomes convertible, subject to further adjustment in the case of stock splits, reclassifications, reorganizations, certain issuances at less than the conversion price and the like. We are further subject to certain liquidated damages if we fail to timely effectuate a conversion under the terms of the note. Until such time that the note is no longer outstanding, without the consent of the holders, we are prohibited from incurring certain debt, selling any account receivable or declaring any dividend.

During the six months ended June 30, 2012, we issued 551 shares of common stock upon receipt of cash proceeds of $1,099 for the exercise of stock options at an average exercise price of $2.00 per share.

On May 8 and 15, 2012, we sold a total of 274,224 shares of our common stock at a purchase price of $5.00 per share, receiving gross proceeds of $1,371,120, in a private placement to accredited investors, pursuant to the terms of a Common Stock Purchase Agreement. Pursuant to the terms of a Registration Rights Agreement, we timely filed a registration statement with the SEC for purposes of registering the resale of the shares of common stock sold in the private placement on June 6, 2012. In the event the registration statement is not declared effective within 105 days following the final closing (or 135 days if the registration statement is reviewed by the SEC), we will pay the investors 0.5% of the subscription amount of their shares for every 30-day period that the registration statement is not declared effective, subject to the ability of the investors to sell their shares pursuant to Rule 144. The liquidated damages can be paid in cash or in additional shares of our common stock, at our option.

In May and June 2012, in accordance with the terms of the May 2011 Offering financing documents, investors converted 225 shares of the Series A convertible preferred stock into 170,455 shares of common stock. As of June 30, 2012, only 5 shares of the Series A convertible preferred stock remained outstanding.

In May and June 2012, pursuant to separate private transactions, nineteen warrant holders exchanged their warrants to purchase an aggregate of 123,052 shares of common stock for the same number of shares without the Company receiving any further cash consideration. These transactions were effected in order to reduce the substantial overhang represented by the warrants issued in the May 2011 reverse merger and private placement.

In July 2012, we entered into three agreements to issue a total of 60,000 shares of restricted common stock for celebrity endorsements of our products and services. In the majority of the agreements, the restricted stock vested 25% immediately upon the signing of the agreements and then vests 6.25% per month over the following twelve months.

On July 2, 2012, we issued 71,221 shares of common stock to our former legal counsel in order to pay for general legal services totaling $356,103.

On August 1, 2012, Edward H. (Ted) Murphy, our President and Chief Executive Officer, purchased 8,000 shares of our common stock directly from us in a private transaction approved by disinterested members of our board of directors. Mr. Murphy paid a total purchase price of $19,200 or $2.40 per common share, the market price on August 1, 2012.

On August 6, 2012, Ryan S. Schram, our Chief Marketing Officer, purchased 8,000 shares of our common stock directly from us in a private transaction approved by our board of directors. Mr. Schram paid a total purchase price of $19,200 or $2.40 per common share.

On August 6, 2012, Brian W. Brady, a director, made a private investment of $100,000 for the purchase of 41,667 shares of our common stock at $2.40 per share. In accordance with the terms of the stock subscription agreement, if our proposed public offering is priced and sold below $2.40 per share within 120 days following the closing of the investment, we will issue additional shares to him, effectively adjusting the purchase price per share to 10% below the public offering price, with a floor of $.50 per share. Mr. Brady also received 35,000 shares of our restricted common stock and may receive a $10,000 cash finance fee upon a closing of any equity offering or debt financing by us with net proceeds exceeding $2.0 million.

We used the proceeds from the above stock issuances for general working capital purposes. We are in the process of registering shares of our common stock for a public offering pursuant to a registration statement filed with the SEC to raise gross proceeds of at least $5,000,000 in order to meet the needs of our operations and future growth plans. Other financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity markets could make it more difficult to complete a public offering or obtain financing through the issuance of equity or debt securities. Even if we are able to raise funds in financing transactions, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock.

There can be no assurance that we will be successful in our public offering or in any other financing or that the terms of any such financing transactions will not result in the issuance, or potential issuance, of a significant amount of equity securities that will cause substantial dilution to our stockholders. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease operations.

### Off Balance Sheet Arrangements

We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.

### Critical Accounting Policies and Use of Estimates

The preparation of the accompanying financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the accompanying financial statements and the accompanying notes. The preparation of these financial statements requires managements to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements.

Accounts receivable are customer obligations due under normal trade terms. Uncollectability of accounts receivable is not significant since most customers are bound by contract and are required to fund us for all the costs of an “opportunity”, defined as an order created by an advertiser for a publisher to write about the advertiser’s product. If a portion of the account balance is deemed uncollectible, we will either write-off the amount owed or provide a reserve based on the uncollectible portion of the account. Management determines the collectability of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. We have a reserve for doubtful accounts of $10,000 at June 30, 2012 and December 31, 2011. We believe that this estimate is reasonable, but there can be no assurance that our estimate will not change as a result of a change in economic conditions or business conditions within our industry, our individual customers or our Company. Any adjustments to this account are reflected in the statements of operations as a general and administrative expense.

We derive our revenue from three sources: revenue from an advertiser for the use of the our network of social media publishers to fulfill advertiser sponsor requests for a blog post, tweet, click, purchase, or action ("Sponsored Revenue"), revenue from the posting of targeted display advertising ("Media Revenue") and revenue derived from various service fees charged to advertisers and publishers ("Service Fee Revenue"). Service fees to advertisers include fees charged for management of advertising campaigns through our platforms and inactivity fees for dormant accounts. Service fees to publishers include upgrade account fees for obtaining greater visibility to advertisers in advertiser searches in our platforms, early cash out fees and inactivity fees for dormant accounts. Media Revenue is generated when our publishers to place targeted display advertising in blogs. Sponsored revenue is recognized and considered earned after an advertiser's opportunity is posted on our websites and their request was completed and content listed, as applicable, by our publishers for a requisite period of time. The requisite period ranges from 3 days for an action or tweet to 30 days for a blog. Customers may prepay for services by placing a deposit in their account with us. In these cases, the deposits are recorded as unearned revenue until earned as described above. Service fees are recognized upon completion of the management of an advertiser's campaign or immediately when the maintenance or enhancement service is performed for an advertiser or publisher. All of our revenue is generated through the rendering of services and is recognized under the general guidelines of SAB Topic 13 A.1 which states that revenue will be recognized when it is realized or realizable and earned. We consider our revenue as generally realized or realizable and earned once i) persuasive evidence of an arrangement exists, ii) services have been rendered, iii) our price to the advertiser or customer is fixed (required to be paid at a set amount that is not subject to refund or adjustment) and determinable, and iv) collectability is reasonably assured. We record revenue on the gross amount earned since we generally are the primary obligor in the arrangement, establish the pricing and determine the service specifications.

Stock based compensation is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes pricing model. Options vest ratably over four years with one-fourth of options vesting one year from the date of grant and the remaining options vesting monthly, in equal increments over the remaining three-year period and generally have ten-year contract lives. We estimate the fair value of our common stock using recent independent valuations or the value paid in the most recent equity or financing transactions. We estimate the volatility of our common stock at the date of grant based on the volatility of comparable peer companies which are publicly traded. We determine the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. We use the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We estimate forfeitures when recognizing compensation expense and this estimate of forfeitures is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change. Changes also impact the amount of unamortized compensation expense to be recognized in future periods.

The following table shows the number of options granted under our 2007 Equity Incentive Plan and the assumptions used to determine the fair value of those options during the quarter ended March 31, 2011 and from April 1, 2011 through May 12, 2011, the date the 2007 Plan was canceled:

### 2007 Equity Incentive Plan Options Granted

| Period Ended | Total Options Granted | Weighted Average Fair Value of Series A Common Stock | Weighted Average Expected Term | Weighted Average Volatility | Weighted Average Risk Free Interest Rate | Weighted Average Fair Value of Options Granted |
| --- | ---: | ---: | --- | ---: | ---: | ---: |
| March 31, 2011 | 3,748,620 | $0.03 | 5 years | 54.96% | 2.37% | $0.01 |
| May 12, 2011 | 40,000 | $0.33 | 5 years | 55.08% | 1.89% | $0.16 |

The following table shows the number of options granted under our May and August 2011 Equity Incentive Plans and the assumptions used to determine the fair value of those options during the quarterly periods ended March 31, 2012 and June 30, 2012 and 2011:

### 2011 Equity Incentive Plan Options Granted

| Period Ended | Total Options Granted | Weighted Average Fair Value of Common Stock | Weighted Average Expected Term | Weighted Average Volatility | Weighted Average Risk Free Interest Rate | Weighted Average Fair Value of Options Granted |
| --- | ---: | ---: | --- | ---: | ---: | ---: |
| June 30, 2011 | 101,078 | $13.20 | 5 years | 55.08% | 1.88% | $1.70 |
| March 31, 2012 | 2,751 | $12.50 | 5 years | 54.85% | 0.82% | $3.36 |
| June 30, 2012 | 347,667 | $5.18 | 5 years | 54.93% | 0.76% | $2.26 |

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There were 374,870 options outstanding as of June 30, 2012 with a weighted average exercise price of $6.30 per share. There is no aggregate intrinsic value on the exercisable, outstanding options as of June 30, 2012 since the weighted average exercise price exceeded the market price of $3.20 of our common stock on such date.

We account for derivative instruments in accordance with ASC 815, *Derivatives and Hedging* , which requires additional disclosures about the our objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedging items affect the financial statements. We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible debt and equity instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.

We record a beneficial conversion feature (“BCF”) related to the issuance of convertible debt and equity instruments that have conversion features at fixed rates that are in-the-money when issued, and the fair value of warrants issued in connection with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their relative fair value, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature. The discounts recorded in connection with the BCF and warrant valuation are recognized a) for convertible debt as interest expense over the term of the debt, using the effective interest method or b) for preferred stock as dividends at the time the stock first becomes convertible.

### Recent Accounting Pronouncements

There are several new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") which are not yet effective. Management does not believe any of these accounting pronouncements will be applicable and therefore will not have a material impact on our financial position or operating results.

## Controls and procedures

As filed, 3,823 characters.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures.

In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, controls and procedures could be circumvented by the individual acts of some persons, by collusion or two or more people or by management override of the control. Misstatements due to error or fraud may occur and not be detected on a timely basis.

### Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2012. Based on the results of that evaluation, our management concluded that our disclosure controls and procedures were effective as of June 30, 2012.

### Changes in Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the Company’s transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements and that receipts and expenditures of the Company’s assets are made in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 7,729 characters.

*In addition to the information set forth under Item 1A of Part I to our Annual Report on Form 10-K for the year ended December 31, 2011, information at the beginning of Management's Discussion and Analysis entitled "Special Note Regarding Forward-Looking Information" and updates noted below, investors should consider that there are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment.*

### Risks Related to our Business

***We have a history of losses, expect future losses and cannot assure you that we will achieve profitability.***

We have incurred significant net losses and negative cash flow from operations since our inception. We incurred net losses of $2,756,579 and $3,978,592 for the six months ended June 30, 2012 and for the year ended December 31, 2011, respectively, and had an accumulated deficit of $20,887,363 as of June 30, 2012. Although our revenue has increased since inception, we have not achieved profitability and cannot be certain that we will be able to sustain these growth rates or realize sufficient revenue to achieve profitability. We expect to increase our revenue by over 100% by expanding our sales staff, increasing average revenue per customer and adding features to our existing platforms, as well as introducing new platforms to take advantage of social media activities. Our ability to continue as a going concern is dependent upon raising capital from financing transactions, increasing revenue by over 100% and keeping operating expenses at less than 50% of our revenue levels in order to achieve positive cash flows, none of which can be assured. If we achieve profitability, we may not be able to sustain it.

***Our independent registered public accounting firm's report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern.***

As of June 30, 2012, our total stockholders' deficit was $2,085,314 and we had a working capital deficit of $2,302,270. Primarily as a result of our losses and limited cash balances, our independent registered public accounting firm has included in its report for the year ended December 31, 2011 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other factors, the sale of the shares of our common stock in our current public offering or obtaining alternate financing. If we are not able to complete this offering or obtain alternate financing, we may be forced to limit or cease our operations.

### Risks Relating to our Common Stock

***Our promissory notes have a future determined conversion price which may result in substantial dilution to the ownership interests of our existing stockholders.***

On February 3, 2012, we and our subsidiary, IZEA Innovations, Inc., jointly issued a senior secured promissory note in the principal amount of $550,000 to two of our existing shareholders. According to the terms of the note, if the note is not fully paid by maturity and the note's maturity is automatically extended until February 2, 2013, the noteholders may convert the outstanding principal amount of the note at a conversion price equal to 90% of the closing price of our common stock on the trading day prior to the date that the note becomes convertible. On May 4, 2012, we and our subsidiary, IZEA Innovations, Inc., jointly issued a 30-day promissory note to the same shareholders in the principal amount of $75,000. In June 2012, the note was extended until December 4, 2012 and the parties agreed that the noteholders could convert the note at any time on or before the maturity date into shares of common stock at a conversion price equal to the lower of (i) $5.00 per share or (ii) 90% of the then market price based on a volume weighted average price per share of our common stock as quoted on Bloomberg for the ten trading days prior to the conversion date. The note bears interest at a rate of 8% per annum with a default rate of 18% per annum. The $75,000 note will automatically convert into shares of our common stock if we complete a public offering of our securities for gross proceeds of not less than $10,000,000. No payment of accrued interest on the note is required to be made to the noteholders upon such conversion.

The notes have a conversion price based upon the future trading price of our common stock without any “floor” conversion price, which makes the ultimate maximum number of shares to be issued upon conversion indeterminable at this time. The conversion of the note will result in a significant increase in the number of our outstanding shares and substantially dilute the ownership interests of existing stockholders. We have 1,845,575 shares of common stock outstanding as of August 13, 2012. A conversion of our $75,000 promissory note would result in the issuance of 33,333 shares of common stock and a conversion of our $550,000 senior secured promissory note would result in an additional issuance of 244,445 shares of common stock. These share amounts were estimated using a conversion price of $2.25 per share (90% of the closing price of $2.50 on August 13, 2012), but the conversion price could be lower resulting in even higher share amounts.

***There may be substantial sales of our common stock after our public offering and the effective date of our registration statement, which could cause our stock price to drop.***

We have filed a registration statement contemplating the public sale of our common stock to raise gross proceeds of at least $5,000,000 and the registration of a total of 274,224 shares of our common stock purchased from us in a private placement in May 2012. There are currently no agreements or understandings in place with these selling stockholders to restrict their sale of those shares after the effective date of this registration statement. Sales of a substantial number of shares of our common stock by the selling stockholders at such time could cause the market price of our common stock to drop and could impair our ability to raise capital in the future by selling additional securities.

***Exercise of stock options, warrants and other convertible securities will dilute your percentage of ownership and could cause our stock price to fall.***

As of August 13, 2012, we have outstanding stock options and warrants to purchase 419,827 shares of common stock, preferred stock convertible into 3,788 shares of common stock and convertible promissory notes with principal amounts totaling $625,000 convertible into 277,778 shares of common stock (assuming a conversion price of $2.25 per share, as noted above) that could result in our issuing a significant number of additional shares of common stock. Additionally, we have available shares to issue stock options to purchase up to 250,865 shares of common stock under our May 2011 Equity Incentive Plan and up to 50,000 shares of common stock under our August 2011 Equity Incentive Plan. In the future, we may grant additional stock options, warrants and convertible securities. The exercise, conversion or exchange of stock options, warrants or convertible securities will dilute the percentage ownership of our other stockholders. Sales of a substantial number of shares of our common stock could cause the price of our common stock to fall and could impair our ability to raise capital by selling additional securities.

Filed Sep 13, 2012.
Source: SEC EDGAR, the filing index for accession 0001495231-12-000055. Last ingested by Listed: Nov 13, 2026, 15:19 ET. No prices; not investment advice.