# IZEA Worldwide, Inc.: Form 10-Q for the period ended Sep 30, 2013

- Company: [IZEA Worldwide, Inc.](/companies/izea.md) (CIK 1495231)
- Form: 10-Q
- Filed: 2013-11-07
- Accepted by EDGAR: Nov 7, 2013, 12:14 ET
- Period: 2013-09-30
- Accession: 0001495231-13-000067
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1495231/000149523113000067/izea13093010q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1495231/000149523113000067/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-07-01 to 2013-09-30 | $1.6m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2013-01-01 to 2013-09-30 | $4.7m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2013-07-01 to 2013-09-30 | $499.1k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2013-01-01 to 2013-09-30 | $1.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2013-07-01 to 2013-09-30 | $1.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2013-01-01 to 2013-09-30 | $2.8m | us-gaap:GrossProfit |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | −$652.4k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2013-01-01 to 2013-09-30 | −$2.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-07-01 to 2013-09-30 | $14.4k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2013-01-01 to 2013-09-30 | $52.4k | us-gaap:InterestExpense |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | −$975.3k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-01-01 to 2013-09-30 | −$2.8m | us-gaap:NetIncomeLoss |
| Operating cash flow | 9 months, 2013-01-01 to 2013-09-30 | −$2.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2013-01-01 to 2013-09-30 | $15.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-09-30 | $1.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-09-30 | $3.0m | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $3.4m | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $2.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-09-30 | $4.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2013-09-30 | −$1.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,729 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 development and introduction 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 social sponsorship business of IZEA as our sole line of business.

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 total authorized shares of common stock were decreased from 500,000,000 shares to 12,500,000 shares and subsequently increased to 100,000,000 shares in February 2013. 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 social sponsorship space. We currently operate multiple online properties including our premiere platforms, *SocialSpark* and *SponsoredTweets*, as well as our legacy platform *PayPerPost*. In 2012, we launched a new platform called *Staree* and a display-advertising network to use within our platforms called *IZEAMedia*. Social sponsorship is when a company compensates a social media publisher or influencer such as a blogger or tweeter ("creators") to share sponsored content with their social network audience. This sponsored content is shared within the body of a content stream, a practice known as “native advertising.” We generate our revenue primarily through the sale of sponsorship campaigns to our advertisers. We fulfill these campaigns through our platforms by utilizing our creators to complete sponsorship opportunities for our advertisers. We also generate revenue from the posting of targeted display advertising and from various service fees.

### Results of Operations for the Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012

*Unaudited*

|  | Three Months Ended September 30, 2013 | September 30, 2012 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $1,565,851 | $1,058,836 | $507,015 | 47.9% |
| Cost of sales | 499,127 | 434,019 | 65,108 | 15.0% |
| Gross profit | 1,066,724 | 624,817 | 441,907 | 70.7% |
| Operating expenses: |  |  |  |  |
| General and administrative | 1,655,727 | 1,335,858 | 319,869 | 23.9% |
| Sales and marketing | 63,436 | 219,584 | (156,148) | (71.1)% |
| Total operating expenses | 1,719,163 | 1,555,442 | 163,721 | 10.5% |
| Loss from operations | (652,439) | (930,625) | 278,186 | 29.9% |
| Other income (expense): |  |  |  |  |
| Interest expense | (14,439) | (33,495) | 19,056 | (56.9)% |
| Loss on exchange of warrants and debt | (93,482) | (37,610) | (55,872) | 148.6% |
| Change in fair value of derivatives and notes payable carried at fair value, net | (215,092) | 50,160 | (265,252) | (528.8)% |
| Other income (expense), net | 150 | — | 150 | 100.0% |
| Total other income (expense) | (322,863) | (20,945) | (301,918) | (1,441.5)% |
| Net loss | $(975,302) | $(951,570) | $(23,732) | (2.5)% |

### Revenues

We derive revenue from three sources: revenue from an advertiser for the use of our network of social media content creators to fulfill advertiser sponsor requests for a blog post, tweet, click 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 creators for services, maintenance and enhancement of their accounts ("Service Fee Revenue").

Revenues for the three months ended September 30, 2013 increased by $507,015, or 47.9%, compared to the same period in 2012. The increase was attributable to a $419,000 increase in our Sponsored Revenue, a $34,000 increase from Media Revenue and a $54,000 increase in Service Fee Revenue. In the three months ended September 30, 2013, Sponsored Revenue was 85%, Media Revenue was 7% and Service Fee Revenue was 8% of total revenue compared to Sponsored Revenue of 86%, Media Revenue of 7% and Service Fee Revenue of 7% of total revenue in the three months ended September 30, 2012. The increase in Sponsored Revenue was primarily attributable to our concentrated sales efforts toward larger IZEA managed campaigns and generating repeat business from existing customers. Media revenue increased primarily due to coupling of media sales with larger sponsorship campaigns. Service fees increased in the three months ended September 30, 2013 primarily due to fees received from inactive self-service advertisers.

Our net bookings for the three months ended September 30, 2013 are 69% higher than the comparable prior year quarter. We anticipate that our revenue will continue to exceed prior year quarters. Net bookings is a measure of sales and contracts minus any cancellations or refunds in a given period. Management uses net bookings as a leading indicator of future revenue recognition as revenue is typically recognized within 90 days of booking. We experienced higher bookings as a result of new customers, larger IZEA managed campaigns and an increase in repeat clients.

### Cost of Sales and Gross Profit

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

Cost of sales for the three months ended September 30, 2013 increased by $65,108, or 15.0%, compared to the same period in 2012. Cost of sales increased as a direct result of the increase in our Sponsored Revenue and the direct creator costs to generate such revenue.

Gross profit for the three months ended September 30, 2013 increased by $441,907, or 70.7%, compared to the same period in 2012. Our gross margin improved by nine percentage points from 59% for the three months ended September 30, 2012 to 68% for the same period in 2013. The gross margin increase is primarily attributable to an increase in larger advertisers using our managed campaign services during the three months ended September 30, 2013 as compared to smaller and more self-service campaigns in 2012.

### Operating Expenses

Operating expenses consist of general and administrative, and sales and marketing expenses. Total operating expenses for the three months ended September 30, 2013 increased by $163,721, or 10.5%, compared to the same period in 2012. The increase was primarily attributable to higher non-cash stock compensation and professional fees along with decreases in promotional 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 September 30, 2013 increased by $319,869 or 23.9%, compared to the same period in 2012. The increase was primarily attributable to increases in professional fees for legal and accounting services and an increase in non-cash stock compensation expense. During the three months ended September 30, 2013, legal fees increased by approximately $116,000 related to our patent litigation defense against Blue Calypso, as more fully described under "Legal Proceedings" below and accounting fees for financial consultants increased by approximately $49,000. In connection with the 2013 Private Placement, the Board awarded to Mr. Murphy, our President and CEO, a bonus of $50,000 and granted him a stock option to purchase 4,398,978 shares of common stock at an exercise price of $0.25 per share, expiring ten years from the issuance date. As a result of this option grant and others, our non-cash stock compensation expense increased nearly $159,000 in the three months ended September 30, 2013 compared to the same period in 2012. We are in the process of developing a new platform called the Native Ad Exchange (NAX). This platform will be utilized both internally and externally to facilitate native advertising campaigns on a greater scale. We have filed a patent application covering important features of this platform and have submitted a trademark application for “Native Ad Exchange,” which are currently pending approval. We capitalized $146,031 in payroll and benefit costs related to NAX to software development costs during the three months ended September 30, 2013.

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 September 30, 2013 decreased by $156,148 or 71.1%, compared to the same period in 2012. The decrease was primarily attributable to lower promotional expenses related to the launch of new platforms and no expenses incurred for our WeRewards program that we discontinued in November 2012. During May and July 2012, we entered into seven agreements to issue a total of 135,548 shares of restricted common stock for celebrity endorsements of our platforms, primarily 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 12 months. In addition to the shares, we made cash payments of $100,000. We recorded a total of $1,222 in marketing expense for the value of cash payments earned and the restricted awards vested during the three months ended September 30, 2013 compared to a total of $100,838 in the three months ended September 30, 2012.

### Other Income (Expense)

Other income (expense) consists primarily of interest expense, a loss on exchange of warrants and debt and the change in the fair value of derivatives and notes payable carried at fair value.

Interest expense during the three months ended September 30, 2013 decreased by $19,056 compared to the same period in 2012 primarily due lower debt balances as a result of the conversion of all of our outstanding debt by August 15, 2013. The carrying value and the direct finance costs on the notes are subject to amortization, through charges to interest expense, over their terms to maturity using the effective interest method.

During the three months ended September 30, 2013 and 2012, we incurred a $93,482 and $37,610, respective loss on exchange when we exchanged our $75,000 notes payable for equity in 2013 and redeemed certain warrants to purchase an aggregate of 12,730 shares of common stock for the same number of shares of our common stock without receiving any cash consideration for the exchange in 2012.

We entered into financing transactions 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 of $207,462 and $10,903, resulting from the decrease in the fair value of certain warrants during the three months ended September 30, 2013 and 2012, respectively. Additionally, we recorded expense resulting from the increase in the fair value of the compound embedded derivatives during the three months ended September 30, 2013 and 2012 in the amount of $0 and $39,257, respectively, and expense resulting from the increase in fair value of certain notes payable of $422,554 during the three months ended September 30, 2013. The net effect of these changes in fair values resulted in expense of $215,092 and income of $50,160 during the three months ended September 30, 2013 and 2012, 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 interest rates and stock prices and other market conditions outside of our control.

### Net Loss

Net loss for the three months ended September 30, 2013 was $975,302 which increased from the net loss of $951,570 for the same period in 2012. The increase was primarily due to the non-cash stock compensation expense, loss on exchange of debt and equity instruments and the change in fair market value of derivatives accounting for a total change of $499,451 for the period offset by the increase in gross profit margin.

### Results of Operations for the Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

*Unaudited*

|  | Nine Months Ended September 30, 2013 | September 30, 2012 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $4,666,399 | $3,876,508 | $789,891 | 20.4% |
| Cost of sales | 1,846,130 | 1,593,790 | 252,340 | 15.8% |
| Gross profit | 2,820,269 | 2,282,718 | 537,551 | 23.5% |
| Operating expenses: |  |  |  |  |
| General and administrative | 4,594,888 | 4,807,610 | (212,722) | (4.4)% |
| Sales and marketing | 272,695 | 985,466 | (712,771) | (72.3)% |
| Total operating expenses | 4,867,583 | 5,793,076 | (925,493) | (16.0)% |
| Loss from operations | (2,047,314) | (3,510,358) | 1,463,044 | 41.7% |
| Other income (expense): |  |  |  |  |
| Interest expense | (52,435) | (77,762) | 25,327 | (32.6)% |
| Loss on exchange of warrants and debt | (94,214) | (802,123) | 707,909 | (88.3)% |
| Change in fair value of derivatives and notes payable carried at fair value, net | (558,869) | 681,639 | (1,240,508) | (182.0)% |
| Other income (expense), net | 230 | 455 | (225) | (49.5)% |
| Total other income (expense) | (705,288) | (197,791) | (507,497) | (256.6)% |
| Net loss | $(2,752,602) | $(3,708,149) | $955,547 | 25.8% |

### Revenues

We derive revenue from three sources: revenue from an advertiser for the use of our network of social media content creators to fulfill advertiser sponsor requests for a blog post, tweet, click 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 creators for services, maintenance and enhancement of their accounts ("Service Fee Revenue").

Revenues for the nine months ended September 30, 2013 increased by $789,891, or 20.4%, compared to the same period in 2012. The increase was attributable to a $716,000 increase in our Sponsored Revenue, a $73,000 increase from Media Revenue and a $1,000 increase in Service Fee Revenue. In the nine months ended September 30, 2013, Sponsored Revenue was 87%, Media Revenue was 6% and Service Fee Revenue was 7% of total revenue compared to Sponsored Revenue of 86%, Media Revenue of 5% and Service Fee Revenue of 9% of total revenue in the nine months ended September 30, 2012. The increase in Sponsored Revenue was primarily attributable to our concentrated sales efforts toward larger IZEA managed campaigns and generating repeat business from existing customers. Media revenue increased primarily due to coupling of media sales with larger sponsorship campaigns. Service fees increased in the nine months ended September 30, 2013 due to additional fees received from inactive self-service advertisers.

Our net bookings for the nine months ended September 30, 2013 are 31% higher than the comparable prior year period. We received $5.1 million in net bookings during the first nine months of 2013, or $7.1 million on an annualized run-rate basis. Net bookings is a measure of sales and contracts minus any cancellations or refunds in a given period. Management uses net bookings as a leading indicator of future revenue recognition as revenue is typically recognized within 90 days of booking. We experienced higher bookings as a result of new customers, larger IZEA managed campaigns and an increase in repeat clients.

### Cost of Sales and Gross Profit

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

Cost of sales for the nine months ended September 30, 2013 increased by $252,340, or 15.8%, compared to the same period in 2012. Cost of sales increased as a direct result of the decrease in our Sponsored Revenue and the direct creator costs to generate such revenue.

Gross profit for the nine months ended September 30, 2013 increased by $537,551, or 23.5%, compared to the same period in 2012. Additionally, our gross margin increased by one percentage point from 59% for the nine months ended September 30, 2012 to 60% for the same period in 2013. The gross margin increase is primarily attributable to an increase in larger advertisers using our managed campaign services during the nine months ended September 30, 2013 as compared to smaller and more self-service campaigns in 2012.

### Operating Expenses

Operating expenses consist of general and administrative, and sales and marketing expenses. Total operating expenses for the nine months ended September 30, 2013 decreased by $925,493, or (16.0)%, compared to the same period in 2012. The decrease was primarily attributable to lower payroll, travel and rent expenses along with decreases in promotional 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 nine months ended September 30, 2013 decreased by $212,722 or (4.4)%, compared to the same period in 2012. The decrease was primarily attributable to a $151,000 decrease in rent and office related expense with the reduction of outside office locations in mid-2012 and the move of our corporate headquarters in December 2012, a $349,000 decrease in payroll, personnel and related benefit expenses due to fewer outside sales personnel and capitalized development costs, offset by an increase in non-cash stock compensation expense of $208,000 and public company related costs of $98,000. During the nine months ended September 30, 2013, we capitalized $244,878 in payroll and benefit costs to software development costs. We are in the process of developing a new platform called the Native Ad Exchange (NAX). This platform will be utilized both internally and externally to facilitate native advertising campaigns on a greater scale. We have filed a patent application covering important features of this platform and have submitted a trademark application for “Native Ad Exchange,” which are currently pending approval.

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 nine months ended September 30, 2013 decreased by $712,771 or (72.3)%, compared to the same period in 2012. The decrease was primarily attributable to lower promotional expenses related to the launch of new platforms and no expenses incurred for our WeRewards program that we discontinued in November 2012. During May and July 2012, we entered into seven agreements to issue a total of 135,548 shares of restricted common stock for celebrity endorsements of our platforms, primarily 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 12 months. In addition to the shares, we made cash payments of $100,000. We recorded a total of $45,277 in marketing expense for the value of cash payments earned and the restricted awards vested during the nine months ended September 30, 2013 compared to a total of $355,061 in the nine months ended September 30, 2012.

### Other Income (Expense)

Other income (expense) consists primarily of interest expense, a loss on exchange of warrants and debt and the change in the fair value of derivatives and notes payable carried at fair value.

Interest expense during the nine months ended September 30, 2013 decreased by $25,327 compared to the same period in 2012 primarily due lower debt balances as a result of the conversion of our $550,000 senior secured promissory note from October 2012 through February 2013 and the conversion of all of our other outstanding debt by August 15, 2013. The carrying value and the direct finance costs on the notes are subject to amortization, through charges to interest expense, over their terms to maturity using the effective interest method.

During the nine months ended September 30, 2013, we recognized a $94,214 loss on exchange when we exchanged our $75,000 notes payable for equity in 2013 and redeemed certain warrants to purchase an aggregate of 5,001 shares of common stock for the same number of shares of our common stock without receiving any cash consideration for the exchange. During the nine months ended September 30, 2012, we recognized a $802,123 loss on exchange when we redeemed certain warrants to purchase an aggregate of 135,782 shares of common stock for the same number of shares of our common stock without receiving any cash consideration for the exchange.

We entered into financing transactions 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 of $207,682 and $738,628, resulting from the decrease in the fair value of certain warrants during the nine months ended September 30, 2013 and 2012, respectively. Additionally, we recorded expense resulting from the increase in the fair value of the compound embedded derivatives during the nine months ended September 30, 2013 and 2012 in the amount of $644 and $56,989, respectively, and expense resulting from the increase in fair value of certain notes payable of $765,907 during the nine months ended September 30, 2013. The net effect of these changes in fair values resulted in expense of $558,869 and income of $681,639 during the nine months ended September 30, 2013 and 2012, 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 interest rates and stock prices and other market conditions outside of our control.

### Net Loss

Net loss for the nine months ended September 30, 2013 was $2,752,602 which decreased from the net loss of $3,708,149 for the same period in 2012. We were able to reduce the overall net loss through our 16.0% reduction in operating costs as discussed above.

### Liquidity and Capital Resources

Our cash position was $1,663,688 as of September 30, 2013 as compared to $657,946 as of December 31, 2012, an increase of $1,005,742 as a result of proceeds from a private placement we completed in September 2013. We have incurred significant net losses and negative cash flow from operations since our inception. We incurred net losses of $2,752,602 and $4,672,638 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, and had an accumulated deficit of $25,556,024 as of September 30, 2013. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2012 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 $2,245,445 during the nine months ended September 30, 2013 and was primarily a result of our net loss during the period of $2,752,602. Cash provided by financing activities was $3,265,154 during the nine months ended September 30, 2013 and was primarily a result of proceeds of $1,270,000 in unsecured loans from Brian W. Brady, our director, and $169,798 received from the issuance of a secured credit facility agreement with Bridge Bank, N.A., along with proceeds, net of expenses, of $2,032,145 from the sale of our common stock, as further discussed below. Financing activities were reduced by principal payments of $206,789 on our notes and 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. The holders were permitted to convert the outstanding principal amount of the note at a conversion price of 90% of the closing price of our common stock. From October 2012 through December 2012, the holders of this promissory note converted $437,850 of note value into 2,069,439 shares of our common stock at an average conversion rate of $.21 per share. On February 4, 2013, we satisfied all of our remaining obligations under this note when the holders converted the final balance owed of $112,150 into 773,983 shares of our common stock at an average conversion rate of $.145 per share.

On January 3, 2013, we issued 60,000 shares of restricted stock pursuant to a twelve-month compensation arrangement with Mitchel J. Laskey for his service as a director and chairman of our Board of Directors. On January 3, 2013, we also issued 20,000 shares of restricted stock valued at $4,820 in order to pay for a small asset purchase.

Effective January 3, 2013, we entered into an agreement to pay $4,000 per month for twelve months beginning January 2013 to a firm who would provide investor relations services. In accordance with the agreement, we issued 100,000 shares of restricted common stock on January 15, 2013 and agreed to issue an additional 100,000 restricted shares on or before July 15, 2013. This agreement was mutually terminated on May 1, 2013 for no further cash consideration with our company agreeing to issue the final installment of 100,000 shares of restricted common stock upon the termination of the agreement.

On March 1, 2013, we entered into a secured credit facility agreement with Bridge Bank, N.A. of San Jose, California. Pursuant to this agreement, we may submit requests for funding up to 80% of our eligible accounts receivable up to a maximum total outstanding advanced amount of $1.5 million. This agreement is secured by our accounts receivable and substantially all of our other assets. The agreement requires us to pay an annual facility fee of $7,500 (0.5% of the credit facility) and an annual due diligence fee of $1,000. Interest accrues on the advances at the prime rate plus 2% per annum. The default rate of interest is prime plus 7%. If the agreement is terminated prior to March 1, 2014, then we will be required to pay a termination fee of $18,750 (1% of the credit limit divided by 80%). We incurred $31,301 in costs related to this loan acquisition. These costs have been capitalized in our consolidated balance sheet as deferred finance costs and are being amortized to interest expense over one year. As of September 30, 2013, there was no outstanding balance under this agreement.

On May 16, 2013, we issued 30,000 shares of restricted common stock valued at $6,000 to settle an outstanding balance with a vendor.

On April 11, 2013 and May 22, 2013, we entered into unsecured loan agreements with Brian W. Brady, a director of our company. Pursuant to these agreements,we received short-term loans totaling $750,000 due on May 31, 2013. The notes bear interest at 7% per annum with a default rate of interest at 12% based on a 360-day year. On May 31, 2013,we signed an extension and conversion agreement that extended the due date to August 31, 2013. Additionally, we agreed to allow these notes and all accrued interest thereon to be converted into equity upon closing of the next private placement expected to occur in the third quarter of 2013 on the same terms and conditions that will be applicable to other investors in the private placement. In consideration for the extension and conversion agreement, we issued Mr. Brady a warrant to purchase 1,000,000 shares of our common stock at $0.25 per share for a period of five years. We also agreed that upon the first closing of our next private placement, we would issue Mr. Brady an additional warrant to purchase 3,187,500 shares of our common stock at $0.25 per share for a period of five years and 1,687,500 restricted stock units which vest upon the earlier of two years after issuance or completion of a transaction resulting in a change of control of our company.

On June 7, June 14, July 25, and August 12, 2013, we entered into additional unsecured loan agreements with Mr. Brady. Pursuant to these agreements, we received short-term loans totaling $520,000 due on August 31, 2013. The notes bear interest at 7% per annum with a default rate of interest at 12% based on a 360-day year. The note issuances and the modification were approved by the disinterested members of our Board of Directors.

On August 15, 2013, Mr. Brady converted the $1,270,000 principal, plus $19,252 of accrued interest, into 51.57 Units (5,157,008 shares of common stock) on the same terms and conditions as were applicable to the other investors our 2013 Private Placement.

On May 4, 2012, we issued a 30-day promissory note to two of our existing shareholders in the principal amount of $75,000 incurring $6,000 in expenses for legal fees which resulted in net proceeds of $69,000. In June 2012, the note was extended until December 4, 2012. The note bore interest at a rate of 8% per annum. We were not able to pay the balance owed upon the maturity on December 4, 2012. Therefore, the conversion feature expired and the note was in default bearing interest at the default rate of 18% per annum. On August 15, 2013, the noteholders converted the $75,000 in principal, plus $12,366 of accrued interest into 3.5 investment units (349,464 shares of common stock and a like number of warrants) on the same terms and conditions as other investors in our 2013 Private Placement.

From August 15, 2013 through September 23, 2013, we raised $2,182,500 in cash through the sale of 8,730,000 shares of our common stock at a price of $0.25 per share in our 2013 Private Placement. Additionally, as discussed above, we converted notes payable and accrued interest thereon totaling $1,376,618 into 5,506,472 shares of our common stock at an effective price of $0.25 per share. We also issued fully-exercisable, five-year warrants to purchase 7,118,236 shares of our common stock at an exercise price of $0.25 per share and fully-exercisable, five-year warrants to purchase 7,118,236 shares of our common stock at an exercise price of $0.50 per share. Pursuant to the terms of the Securities Purchase Agreements issued in the 2013 Private Placement, we agreed to file a registration statement with the SEC for purposes of registering the resale of these shares of common stock and the shares underlying the warrants within four months after the final closing date (by January 23, 2014) and use our commercially reasonable efforts to have it declared effective no later than six months after the final closing date (by March 23, 2014). The net proceeds received from the 2013 Private Placement are being used for general working capital purposes.

On September 30, 2013, we converted $288,081 in accounts payable owed for legal services into 823,090 shares of our common stock at an effective price of $0.35 per share. Under the terms of the agreement, we agreed to register these shares upon filing of our next registration statement.

On October 1, 2013, we issued 50,000 shares of restricted common stock for investor relations services.

The effect of the above transactions has provided us with a positive working capital balance and cash reserves for future periods. However, revenues and cash generated from our operations are not presently sufficient to sustain our operations for more than one year. Our ability to continue as a going concern is dependent upon raising additional capital from financing transactions, increasing revenue totals or 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.

Financing transactions may include the issuance of equity or convertible debt securities, obtaining credit facilities, or other financing alternatives. The volatility and sharp decline in the trading price of our common stock over the past two years could make it more difficult to obtain financing through the issuance of equity or convertible debt securities. There can be no assurance that we will be successful in any future financing or that it will be available on terms that are acceptable to us.

Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities, warrants and restricted stock awards may include preferences, superior voting rights and privileges senior to those of existing holders. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal and accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Future financings may be impaired by such factors as the overall level of activity in the capital markets and our history of losses, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our cash from operations, is not sufficient to satisfy our capital needs, we may have to curtail our marketing and development plans and possibly limit 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 do not have a reserve for doubtful accounts as of September 30, 2013. We believe that this estimate is reasonable, but there can be no assurance that the estimate will not change as a result of a change in economic conditions or business conditions within the industry, the individual customers or our company. Any adjustments to this account are reflected in the consolidated statements of operations as a general and administrative expense. Bad debt expense was less than 1% of revenue for the nine months ended September 30, 2013 and 2012.

We derive revenue from three sources: revenue from an advertiser for the use of the our network of social media content creators to fulfill advertiser sponsor requests for a blog post, tweet, click 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 creators ("Service Fee Revenue"). Sponsored revenue is recognized and considered earned after an advertiser's opportunity is posted on our online platform and their request was completed and content listed, as applicable, by our creators for a requisite period of time. The requisite period ranges from 3 days for an action or tweet to 30 days for a blog. Advertisers may prepay for services by placing a deposit in their account with us. The deposits are typically paid by the advertiser via check, wire transfer or credit card. Deposits are recorded as unearned revenue until earned as described above. Media Revenue is recognized and considered earned when our creators place targeted display advertising in blogs. Service fees are recognized immediately when the maintenance, enhancement or other service is performed for an advertiser or creator. Service fees charged to advertisers are primarily related to inactivity fees for dormant accounts and fees for additional services outside of sponsored revenue. Service fees charged to creators include upgrade account fees for obtaining greater visibility to advertisers in advertiser searches in our platforms, early cash-out fees if a creator wishes to take proceeds earned for services from their account when the account balance is below certain minimum balance thresholds and inactivity fees for dormant accounts. 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 typically 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 five or ten-year contract lives. We estimate the fair value of our common stock using the closing stock price of our common stock as quoted in the OTCQB marketplace on the date of the agreement. Prior to April 1, 2012, due to limited trading history and volume, we estimated the fair value of our common stock using recent independent valuations or the value paid in equity financing transactions. We estimate the volatility of our common stock at the date of grant based on the volatility of comparable peer companies that are publicly traded and have had a longer trading history than us. 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 May 2011 and August 2011 Equity Incentive Plans and the assumptions used to determine the fair value of those options during the quarterly periods in 2012 and through September 30, 2013:

### 2011 Equity Incentive Plans - 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 |
| --- | ---: | ---: | --- | ---: | ---: | ---: |
| 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 |
| September 30, 2012 | 26,625 | $2.20 | 5 years | 54.46% | 0.65% | $1.03 |
| December 31, 2012 | 1,250 | $0.39 | 5 years | 52.75% | 0.65% | $0.18 |
| March 31, 2013 | 2,170,834 | $0.25 | 10 years | 52.72% | 1.91% | $0.16 |
| June 30, 2013 | 975,250 | $0.25 | 6 years | 51.84% | 0.91% | $0.12 |
| September 30, 2013 | 4,493,978 | $0.35 | 10 years | 51.72% | 2.74% | $0.24 |

There were 6,921,026 options outstanding as of September 30, 2013 with a weighted average exercise price of $0.54 per share. There is no aggregate intrinsic value on the exercisable, outstanding options as of September 30, 2013 since the weighted average exercise price per share exceeded the market price of $0.33 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 have a material impact on our financial position or operating results.

## Controls and procedures

As filed, 4,821 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

In connection with the preparation of this quarterly report on Form 10-Q for the period ended September 30, 2013, an evaluation was performed under the supervision and with the participation of the Company's management including our Chief Executive Officer ("CEO") and Principal Financial Officer ("PFO"), who are the same person, to determine 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 September 30, 2013. Based on this evaluation, our management concluded that our disclosure controls and procedures were effective as of September 30, 2013 to provide reasonable assurance that the information required to be disclosed by us in reports or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including the Company's principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). 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 the preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are made only in accordance with authorizations of our management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of any 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 may not prevent or detect financial statement misstatements. Also, projections of any evaluation of internal control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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 September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 10,164 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, 2012, 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 or obtain the financing necessary for future growth.***

We have incurred significant net losses and negative cash flow from operations since our inception. We incurred net losses of $2,752,602 and $4,672,638 for the nine months ended September 30, 2013 and for the year ended December 31, 2012, respectively, and had an accumulated deficit of $25,556,024 as of September 30, 2013. 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. Our ability to continue as a going concern is dependent upon raising capital from financing transactions, increasing revenue 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.

As described under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," the 2013 Private Placement provided us with a positive working capital balance and cash reserves for future periods. However, revenues and cash generated from our operations are not presently sufficient to sustain our operations for more than one year. Our ability to continue as a going concern is dependent upon raising additional capital from financing transactions, increasing revenue totals or 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.

***We will need to obtain financing for future growth which may be difficult to obtain and may be highly dilutive.***

Our continued operations are dependent on our ability to provide positive cash flow from operations and our ability to raise additional capital from financing transactions. Financing transactions may include the issuance of equity or convertible debt securities, obtaining credit facilities, or other financing alternatives. The volatility and sharp decline in the trading price of our common stock over the past two years could make it more difficult to obtain financing through the issuance of equity or convertible debt securities. There can be no assurance that we will be successful in any future financing or that it will be available on terms that are acceptable to us.

Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities, warrants and restricted stock awards may include preferences, superior voting rights and privileges senior to those of existing holders. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal and accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Future financings may be impaired by such factors as the overall level of activity in the capital markets and our history of losses, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our cash from operations, is not sufficient to satisfy our capital needs, we may have to curtail our marketing and development plans and possibly limit operations.

***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 September 30, 2013, our total stockholders' deficit was $1,288,605. Primarily as a result of our losses and limited cash balances, our independent registered public accounting firm included in their report for the year ended December 31, 2012 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. If we are not able to raise sufficient capital to generate positive cash flows that will sustain us for more than one year, our independent registered public accounting firm may be required to continue to include this explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their future reports. Such language in our independent registered public accounting firm's report could make it more difficult to obtain future financing.

***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 November 1, 2013, we have outstanding stock options to purchase 6,921,026 shares of common stock at an average price of $0.54 per share, outstanding warrants to purchase 18,605,999 shares of common stock at an average price of $0.36 per share,1,511,718 shares of unvested restricted common stock and 318,652 shares of vested, yet unissued, shares of restricted common stock. Additionally, we have available shares to issue stock options, restricted stock or other awards to purchase up to 4,728,955 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.

***We (and others) are currently defending a patent infringement claim related to peer-to-peer advertising between mobile communication devices seeking unspecified damages, which may materially impact our business.***

On October 17, 2012, Blue Calypso, Inc. filed a complaint against us in the U.S. District Court for the Eastern District of Texas accusing us of infringing patents related to peer-to-peer advertising between mobile communication devices seeking unspecified damages. We made a request that the Texas court transfer the matter to the Middle District of Florida, but no ruling has yet been made on that motion. On October 4, 2013, Blue Calypso, we and the other defendants submitted to the Texas court a joint claim construction and prehearing statement containing each parties’ position with regard to the meaning of the disputed claim terms of the patents. The court has also yet to rule on this matter. At this stage, we do not have an estimate of the likelihood or the amount of any potential exposure to us. Although we believe that there is no merit to this lawsuit, there can be no assurance that we will prevail in the suit. In the event that a favorable outcome for us is not obtained, we could potentially be limited in certain ways in the use of our current social sponsorship platforms. Even if the litigation is resolved in our favor, it is possible that the litigation will be protracted, resulting in substantial legal costs to defend against the action and the diversion of management's attention and other resources of our company. In either event, the continuation of this action could have a material adverse effect on our business, financial condition and results of operations.

***We are developing a new platform to process all of our existing business transactions and grow our operations, but cannot provide any assurance regarding its success.***

We are currently developing a new platform called *Native Ad Exchange (“NAX”). NAX* is designed to provide a unified ecosystem that enables the creation of multiple types of content through a wide variety of social channels. *NAX* is a brand-new system, engineered from the ground-up to replace all of our current platforms with an integrated offering that is improved and more efficient for the company to operate. Our intention is to focus all of our engineering resources on the *NAX* platform for the foreseeable future. We are spending a significant amount of time and resources on the development of this platform, but we cannot provide any assurances of its short or long-term success or growth. A portion of the proceeds of our 2013 Private Placement is being used for completion of the *NAX* platform. There is no assurance that the amount of money being allocated for the platform will be sufficient to complete it, or that such completion will result in significant revenues or profit for us. If our advertisers and creators do not perceive this platform to be of high value and quality, we may not be able to retain them or acquire new advertisers and creators. Additionally, if existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over this platform, demand for *NAX* may decrease and our business, prospects, results of operations and financial condition could be negatively affected.

Filed Nov 7, 2013.
Source: SEC EDGAR, the filing index for accession 0001495231-13-000067. Last ingested by Listed: Nov 2, 2026, 16:20 ET. No prices; not investment advice.