# IZEA Worldwide, Inc.: Form 10-Q for the period ended Sep 30, 2014

- Company: [IZEA Worldwide, Inc.](/companies/izea.md) (CIK 1495231)
- Form: 10-Q
- Filed: 2014-11-13
- Accepted by EDGAR: Nov 13, 2014, 07:41 ET
- Period: 2014-09-30
- Accession: 0001495231-14-000049
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1495231/000149523114000049/izea14093010q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1495231/000149523114000049/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-07-01 to 2014-09-30 | $1.9m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2014-01-01 to 2014-09-30 | $5.9m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-07-01 to 2014-09-30 | $692.2k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2014-01-01 to 2014-09-30 | $2.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2014-07-01 to 2014-09-30 | $1.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2014-01-01 to 2014-09-30 | $3.9m | us-gaap:GrossProfit |
| Operating income | 3 months, 2014-07-01 to 2014-09-30 | −$1.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2014-01-01 to 2014-09-30 | −$3.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2014-07-01 to 2014-09-30 | $5.5k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2014-01-01 to 2014-09-30 | $20.6k | us-gaap:InterestExpense |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | $685.4k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-01-01 to 2014-09-30 | $2.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2014-01-01 to 2014-09-30 | $0.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2014-01-01 to 2014-09-30 | $0.04 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-07-01 to 2014-09-30 | 69,428,993 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2014-01-01 to 2014-09-30 | 63,663,192 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2014-01-01 to 2014-09-30 | −$3.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2014-01-01 to 2014-09-30 | $160.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-09-30 | $7.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-09-30 | $10.0m | us-gaap:AssetsCurrent |
| Total assets | at 2014-09-30 | $10.8m | us-gaap:Assets |
| Current liabilities | at 2014-09-30 | $2.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-09-30 | $7.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-09-30 | $3.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,722 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 SEC.

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. was founded in February 2006 under the name PayPerPost, Inc. and became a public company incorporated in the state of Nevada in May 2011. We are headquartered in Winter Park, Florida with offices in Chicago and Los Angeles and a sales presence in New York, London and Detroit.

### Company Overview

IZEA is a leader and pioneer in the social sponsorship space. We believe that we pioneered the concept of a marketplace for sponsorships on the social web in 2006 with the launch of PayPerPost.com and have focused on scaling our offerings ever since.

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 network of creators to complete sponsorship opportunities for its advertisers. We also generate revenue from the posting of targeted display advertising and from various service fees.

We currently operate multiple online properties including *SocialSpark.com* and *SponsoredTweets.com*. In March 2014, we launched *The IZEA Exchange (IZEAx*), a social sponsorship platform designed to replace our older platforms with current technology and provide the infrastructure necessary to support a larger and more diverse social sponsorship ecosystem. *IZEAx* is designed to provide a unified ecosystem that enables the creation of multiple types of content including blog posts, status updates, videos and photos through a wide variety of social channels including blogs, Twitter, Facebook, Instagram, Tumblr and LinkedIn, among others. We are in the process of sunsetting all of our older platforms by the end of 2014 and moving all of our transactions to *IZEAx.*

Our platforms take the existing concepts of product placement and endorsements commonly found in movies, television and radio and apply them to the social web. We democratize the sponsorship process, allowing everyone from college students and stay at home moms to celebrities the opportunity to monetize their content, creativity and influence in social media. We direct bloggers, tweeters and other types of social media content creators to share information about companies, products, websites and events within their social media content streams. Advertisers benefit from buzz, traffic, awareness and sales, and creators earn cash compensation in exchange for their posts.

### Results of Operations for the Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

*(unaudited)*

|  | Three Months Ended September 30, 2014 | September 30, 2013 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $1,931,671 | $1,565,851 | $365,820 | 23.4% |
| Cost of sales | 692,217 | 499,127 | 193,090 | 38.7% |
| Gross profit | 1,239,454 | 1,066,724 | 172,730 | 16.2% |
| Operating expenses: |  |  |  |  |
| General and administrative | 2,320,142 | 1,655,727 | 664,415 | 40.1% |
| Sales and marketing | 482,045 | 63,436 | 418,609 | 659.9% |
| Total operating expenses | 2,802,187 | 1,719,163 | 1,083,024 | 63.0% |
| Loss from operations | (1,562,733) | (652,439) | (910,294) | (139.5)% |
| Other income (expense): |  |  |  |  |
| Interest expense | (5,519) | (14,439) | 8,920 | (61.8)% |
| Loss on exchange of warrants and debt | — | (93,482) | 93,482 | (100.0)% |
| Change in fair value of derivatives and notes payable carried at fair value, net | 2,250,344 | (215,092) | 2,465,436 | (1,146.2)% |
| Other income (expense), net | 3,278 | 150 | 3,128 | 2,085.3% |
| Total other income (expense) | 2,248,103 | (322,863) | 2,570,966 | 796.3% |
| Net income (loss) | $685,370 | $(975,302) | $1,660,672 | 170.3% |

### Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), we consider certain financial measures that are not prepared in accordance with U.S. GAAP, including Operating EBITDA. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

We believe that Operating EBITDA provides useful information to investors as it excludes transactions not related to the core cash operating business activities including non-cash transactions. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash operations. All companies do not calculate EBITDA in the same manner, and Operating EBITDA as presented by IZEA may not be comparable to EBITDA presented by other companies. IZEA defines Operating EBITDA as earnings or loss before interest, taxes, depreciation and amortization, non-cash stock related compensation, gain or loss on asset disposals or impairment and all other income and expense items such as loss on exchanges and changes in fair value of derivatives, if applicable.

*(unaudited)*

| Reconciliation of Net Income (Loss) to Operating EBITDA: | Three Months Ended September 30, 2014 | September 30, 2013 |
| --- | ---: | ---: |
| Net income (loss) | $685,370 | $(975,302) |
| Non-cash stock-based compensation | 142,252 | 190,877 |
| Non-cash stock issued for payment of services | 18,750 | 301,803 |
| Change in the fair value of derivatives | (2,250,344) | 215,092 |
| Loss on exchange of warrants | — | 93,482 |
| Loss/(Gain) on disposal of equipment | 16,593 | — |
| Interest expense | 5,519 | 14,439 |
| Depreciation | 24,903 | 11,449 |
| Amortization of software development costs and other assets | 47,406 | 4,500 |
| Operating EBITDA | $(1,309,551) | $(143,660) |

### 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, 2014 increased by $365,820, or 23.4%, compared to the same period in 2013. The increase was attributable to a $340,000 increase in our Sponsored Revenue, a $44,000 decrease from Media Revenue and a $70,000 increase in Service Fee Revenue. In the three months ended September 30, 2014, Sponsored Revenue was 87%, Media Revenue was 3% and Service Fee Revenue was 10% 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, 2013. The increase in Sponsored Revenue income was primarily attributable to our concentrated sales efforts toward larger IZEA managed campaigns rather than smaller advertiser self-service campaigns and generating repeat business from existing customers. Service fees increased in the three months ended September 30, 2014 due to more fees received from inactive self-service advertisers and creators. Media Revenue is decreasing due to a tactical shift from display advertising to focus on our Sponsored Revenue.

Our net bookings of $2.02 million for the three months ended September 30, 2014 were approximately 8% higher than the net bookings of $1.87 million for the three months ended September 30, 2013. 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. These bookings are expected to translate into higher revenue in 2014 as compared to 2013.

### 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, 2014 increased by $193,090, or 38.7%, compared to the same period in 2013. The increase in cost of sales was primarily related to the increase in our sales.

Gross profit for the three months ended September 30, 2014 increased by $172,730, or 16.2%, compared to the same period in 2013. Additionally, our gross profit as a percentage of revenue decreased by four percentage points from 68% for the three months ended September 30, 2013 to 64% for the same period in 2014. The gross profit decrease during the three months ended September 30, 2014 compared to 2013 was primarily attributable to the higher utilization of premium creators in campaigns in 2014 that provide us with lower margins.

### Operating Expenses

Operating expenses consist of general and administrative, and sales and marketing expenses. Total operating expenses for the three months ended September 30, 2014 increased by $1,083,024, or 63.0%, compared to the same period in 2013. The increase was primarily attributable to higher personnel costs, depreciation and amortization expense and advertising and promotional costs.

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, 2014 increased by $664,415, or 40.1%, compared to the same period in 2013. The increase was primarily attributable to an increase in personnel costs of approximately $586,000 as a result of the increase in the number of our personnel by nearly 85% and additional commissions paid to personnel for the increase in customer bookings; and an increase in depreciation and amortization expense of approximately $73,000 as a result of the amortization of software development costs for *IZEA Exchange (IZEAx),* our new web-based advertising exchange platform, after its release in March 2014 and depreciation on additional equipment required to support the increase in our personnel.

*IZEAx* 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 which is currently pending approval. On March 17, 2014, we launched a public beta of IZEA.com powered by *IZEAx.* Personnel costs and all the other variable costs related to an increase in personnel are expected to increase throughout 2014 as we increase our sales efforts and continue to develop and support our *IZEAx*. Rent expense is expected to increase over our 2013 levels, because our rent for 2013 was lower than standard market rates pursuant to our one-year sublease. Additionally, with our personnel growth, we increased the amount of office space that we are leasing in Winter Park, Florida in the third quarter of 2014.

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, 2014 increased by $418,609 or 659.9%, compared to the same period in 2013. The increase was primarily attributable to increased planned promotional expenses related to the development of brand recognition for IZEA and additional trade shows in 2014. We contributed only $63,000 towards promotional costs in 2013 while we were focusing our efforts and awaiting the completion of *IZEAx.*

### 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, 2014 decreased by $8,920 compared to the same period in 2013 primarily due to lower debt balances in 2014 after all debt was converted into equity in our 2013 Private Placement pursuant to the terms of our various then outstanding notes payable or by separate agreement.

On May 4, 2012, we issued an unsecured 30-day promissory note to two of our existing shareholders in the principal amount of $75,000. On August 15, 2013, we satisfied all of our remaining obligations under this note when the noteholders converted the $75,000 in principal, plus $12,366 of accrued interest, into 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 as discussed in Note 4 of the Financial Statements. Since there was no conversion provision in effect on the note at the time, the conversion was treated as an exchange wherein the difference between the fair value of the newly issued common stock and the carrying value of the note received in the exchange was recognized as a loss on exchange of debt in the amount of $93,482 during the three months ended September 30, 2013.

During the current periods and in prior periods, we entered into financing transactions that gave rise to derivative liabilities. These financial instruments are carried 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 $2,250,344 and $207,462, resulting from the increase in the fair value of certain warrants during the three months ended September 30, 2014 and 2013, respectively. Additionally, we recorded expense from the increase in fair value of certain notes payable of during the three months ended September 30, 2013 in the amount of $422,554. The net effect of these changes in fair values resulted in income of $2,250,344 and expense of $215,092 during the three months ended September 30, 2014 and 2013, 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. We have 35,910,554 warrants that are required to be fair valued each period. When the price of our stock decreases, it causes the fair value of our warrant liability in our consolidated balance sheets to decrease causing substantial income from the change in fair value in our consolidated statement of operations. Alternatively, when the price of our stock increases, it causes the fair value of our warrant liability to increase causing a substantial loss from the change in fair value.

### Net Income (Loss)

Net income for the three months ended September 30, 2014 was $685,370, compared to a net loss of $975,302 for the same period in 2013. The increase in net income was primarily the result of income recorded for the change in fair value of derivative financial instruments offset by increases in operating expenses as discussed above.

### Results of Operations for the Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

*(unaudited)*

|  | Nine Months Ended September 30, 2014 | September 30, 2013 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $5,857,946 | $4,666,399 | $1,191,547 | 25.5% |
| Cost of sales | 1,998,406 | 1,846,130 | 152,276 | 8.2% |
| Gross profit | 3,859,540 | 2,820,269 | 1,039,271 | 36.9% |
| Operating expenses: |  |  |  |  |
| General and administrative | 6,340,796 | 4,594,888 | 1,745,908 | 38.0% |
| Sales and marketing | 986,195 | 272,695 | 713,500 | 261.6% |
| Total operating expenses | 7,326,991 | 4,867,583 | 2,459,408 | 50.5% |
| Loss from operations | (3,467,451) | (2,047,314) | (1,420,137) | (69.4)% |
| Other income (expense): |  |  |  |  |
| Interest expense | (20,587) | (52,435) | 31,848 | (60.7)% |
| Loss on exchange of warrants and debt | — | (94,214) | 94,214 | (100.0)% |
| Change in fair value of derivatives and notes payable carried at fair value, net | 5,625,555 | (558,869) | 6,184,424 | (1,106.6)% |
| Other income (expense), net | 7,677 | 230 | 7,447 | 3,237.8% |
| Total other income (expense) | 5,612,645 | (705,288) | 6,317,933 | 895.8% |
| Net income (loss) | $2,145,194 | $(2,752,602) | $4,897,796 | 177.9% |

*(unaudited)*

| Reconciliation of Net Income (Loss) to Operating EBITDA: | Nine Months Ended September 30, 2014 | September 30, 2013 |
| --- | ---: | ---: |
| Net income (loss) | $2,145,194 | $(2,752,602) |
| Non-cash stock-based compensation | 389,002 | 359,251 |
| Non-cash stock issued for payment of services | 147,860 | 416,768 |
| Change in the fair value of derivatives | (5,625,555) | 558,869 |
| Loss on exchange of warrants | — | 94,214 |
| Loss/(Gain) on disposal of equipment | 16,192 | — |
| Interest expense | 20,587 | 52,435 |
| Depreciation | 65,683 | 36,377 |
| Amortization of software development costs and other assets | 94,812 | 13,500 |
| Operating EBITDA | $(2,746,225) | $(1,221,188) |

23

### 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, 2014 increased by $1,191,547, or 25.5%, compared to the same period in 2013. The increase was attributable to a $1,141,000 increase in our Sponsored Revenue, a $76,000 decrease in Media Revenue and a $127,000 increase in Service Fee Revenue. In the nine months ended September 30, 2014, Sponsored Revenue was 89%, Media Revenue was 4% and Service Fee Revenue was 7% of total revenue compared to Sponsored Revenue of 88%, Media Revenue of 6% and Service Fee Revenue of 6% of total revenue in the nine months ended September 30, 2013. The increase in Sponsored Revenue income was primarily attributable to our concentrated sales efforts toward larger IZEA managed campaigns rather than smaller advertiser self-service campaigns and generating repeat business from existing customers. Service fees increased in the nine months ended September 30, 2014 due to additional fees received from inactive self-service advertisers and creators. Media Revenue is decreasing due to a tactical shift from display advertising to focus on our Sponsored Revenue.

Our net bookings of $6.3 million for the nine months ended September 30, 2014 were approximately 18% higher than the net bookings of $5.3 million for the nine months ended September 30, 2013. 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. These bookings are expected to translate into higher revenue in 2014 as compared to 2013.

### 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, 2014 increased by $152,276, or 8.2%, compared to the same period in 2013. The increase in cost of sales was primarily related to the increase in our sales.

Gross profit for the nine months ended September 30, 2014 increased by $1,039,271, or 36.9%, compared to the same period in 2013. Additionally, our gross profit as a percentage of revenue increased by six percentage points from 60% for the nine months ended September 30, 2013 to 66% for the same period in 2014. The gross profit increase during the nine months ended September 30, 2014 compared to 2013 was primarily attributable to an increase in larger advertisers using our managed campaign services, where we manage all aspects of their sponsored social advertising, as compared to smaller or self-service advertisers who manage their own campaigns using our platforms. Additionally, a larger portion of revenue was derived from service fees during the nine months ended September 30, 2014, which have little or no cost associated with them.

### Operating Expenses

Operating expenses consist of general and administrative, and sales and marketing expenses. Total operating expenses for the nine months ended September 30, 2014 increased by $2,459,408, or 50.5%, compared to the same period in 2013. The increase was primarily attributable to higher personnel and related costs, stock compensation and investor relations expenses, along with higher travel and promotional marketing expenses for our new platform.

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, 2014 increased by $1,745,908, or 38.0%, compared to the same period in 2013. The increase was primarily attributable to an increase in personnel costs of approximately $1,114,000 as a result of the increase in the number of our personnel by nearly 85% and additional commissions paid to personnel for the increase in customer bookings; an increase in investor relations expenses of approximately $103,000 due to the retainer of several investor relation firms to help further promote our Company in the current year; a $94,000 increase in software and subscription costs as a result of increased personnel and additional systems used to manage our growing business; a $109,000 increase in travel costs related to the launch tour of our new platform and increase in outside personnel; an increase in non-cash stock compensation expense of approximately $30,000 due to several large option grants in the third quarter of 2013 that are vesting in the current year; a

$127,000 increase in depreciation and amortization expense as a result of the amortization of software development costs for *IZEA Exchange (IZEAx*); and a $81,000 increase in rent for our new facilities.

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, 2014 increased by $713,500 or 261.6%, compared to the same period in 2013. The increase was primarily attributable to increased planned promotional expenses related to the launch of *IZEAx* and development of brand recognition for IZEA.

### 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, 2014 decreased by $31,848 compared to the same period in 2013 primarily due to lower debt balances in 2014 after all debt was converted into equity in our 2013 Private Placement pursuant to the terms of our various then outstanding notes payable or by separate agreement.

During the nine months ended September 30, 2013, we recognized a $94,214 loss on exchange when we settled the payment of a $75,000 note payable and accrued interest thereon through an exchange of shares of our common stock and we redeemed certain warrants to purchase an aggregate of 4,546 shares of common stock for the same number of shares of our common stock without receiving any cash consideration for the exchange.

During the current periods and in prior periods, we entered into financing transactions that gave rise to derivative liabilities. These financial instruments are carried 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 $5,625,555 and $207,682, resulting from the increase in the fair value of certain warrants during the nine months ended September 30, 2014 and 2013, respectively. Additionally, we recorded a $765,907 expense from the increase in fair value of certain notes payable and a $644 expense from the increase in fair value of compound embedded derivatives during the nine months ended September 30, 2013. The net effect of these changes in fair values resulted in income of $5,625,555 and expense of $558,869 during the nine months ended September 30, 2014 and 2013, 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. We have 35,910,554 warrants that are required to be fair valued each period. When the price of our stock decreases, it causes the fair value of our warrant liability in our consolidated balance sheets to decrease causing substantial income from the change in fair value in our consolidated statement of operations. Alternatively, when the price of our stock increases, it causes the fair value of our warrant liability to increase causing a substantial loss from the change in fair value.

### Net Income (Loss)

Net income for the nine months ended September 30, 2014 was $2,145,194, which increased from a net loss of $2,752,602 for the same period in 2013. The increase in net income was primarily the result of income recorded for the change in fair value of derivative financial instruments offset by increases in operating expenses as discussed above.

### Liquidity and Capital Resources

Our cash position was $7,879,918 as of September 30, 2014 as compared to $530,052 as of December 31, 2013, an increase of $7,349,866 primarily as a result of proceeds received in our 2014 Private Placement described below. We have incurred significant net losses and negative cash flow from operations since our inception which has resulted in a total accumulated deficit of $23,980,220 as of September 30, 2014.

Cash used for operating activities was $3,268,674 during the nine months ended September 30, 2014 and was primarily a result of our loss from operations during the period of $3,467,451. Cash used for investing activities was $377,570 during the nine months ended September 30, 2014 due primarily to the capitalization of software development costs for *IZEAx* that launched in March 2014 and increases in computer equipment purchases. Cash provided by financing activities was $10,996,110 during the nine months ended September 30, 2014 and was primarily a result of net proceeds of $10,932,912 from the sale of our common stock, as discussed below. Financing activities were reduced by loan costs and principal payments on our capital leases of $49,602. In July 2014, 450,000 of our $0.25 warrants issued in our 2013 Private Placement were exercised for total proceeds of $112,500 and employee stock options were exercised into 1,250 shares of common stock for cash proceeds of $300.

To date, we have financed our operations through internally generated revenue from operations and the sale of our equity securities.

On February 21, 2014, we completed a private placement pursuant to a Purchase Agreement dated as of February 12, 2014, for the issuance and sale of 34,285,728 shares of our common stock, at a purchase price of $0.35 per share for gross proceeds of $12,000,000. As part of the private placement, the investors received warrants to purchase up to 17,142,864 shares of our common stock at an exercise price of $0.35 per share and warrants to purchase up to another 17,142,864 shares of our common stock at an exercise price of $0.50 per share. The warrants expire on February 21, 2019, five years after the date on which they were issued. The net proceeds from the private placement, following the payment of offering-related expenses, are being used by us to focus on revenue growth through the acceleration of our sales and client relations activities and marketing initiatives, establishment of strategic partnerships and continuation of technology and engineering enhancements to our platforms, as well as to fund our working capital and capital expenditure requirements.

The effect of the above transactions has provided us with a positive working capital balance and sufficient cash reserves for the foreseeable future.

### 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. Uncollectibility 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 creator 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 collectibility 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, 2014. 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, 2014 and 2013.

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) collectibility 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. 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 2013 and through September 30, 2014:

### 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, 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 |
| December 31, 2013 | 980,000 | $0.34 | 5 years | 47.55% | 1.37% | $0.14 |
| March 31, 2014 | 330,000 | $0.48 | 5 years | 43.32% | 1.60% | $0.19 |
| June 30, 2014 | 1,066,680 | $0.46 | 5 years | 41.38% | 1.66% | $0.18 |
| September 30, 2014 | 3,082,267 | $0.37 | 5 years | 40.37% | 1.75% | $0.14 |

There were 12,122,036 total options outstanding with a weighted average exercise price of $0.46 per share and 3,589,722 exercisable options outstanding with a weighted average exercise price of $0.63 per share as of September 30, 2014. There is no aggregate intrinsic value on the exercisable, outstanding options as of September 30, 2014 since the weighted average exercise price per share exceeded the market price of $0.37 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.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, *Revenue from Contracts with Customers* (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition

process than are required under existing U.S. GAAP.

The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

## Controls and procedures

As filed, 4,778 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 SEC’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 officer, 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, 2014, 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 and Accounting Officer ("PFO") 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, 2014. Based on this evaluation, our management concluded that our disclosure controls and procedures were effective as of September 30, 2014 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, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 6,965 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, 2013, 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 and 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 and Industry

***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 which has resulted in a total accumulated deficit of $23,980,220 as of September 30, 2014. 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. If we achieve profitability, we may not be able to sustain it.

***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 commercial success.***

We are developing a new platform called the *IZEA Exchange (IZEAx*) which is currently in public beta. *IZEAx* is designed to provide a unified ecosystem that enables the creation of multiple types of content through a wide variety of social channels. *IZEAx* 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 *IZEAx* 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 commercial success or growth. A portion of the proceeds of our 2014 Private Placement is being used for completion of the *IZEAx* platform, which is scheduled for continued updates and enhancements into the foreseeable future. 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 *IZEAx* may decrease and our business, prospects, results of operations and financial condition could be negatively affected.

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

As of November 11, 2014, we have 57,497,631 shares of common stock issued, outstanding stock options to purchase 12,079,108 shares of common stock at an average price of $0.46 per share, outstanding warrants to purchase 53,942,749 shares of common stock at an average price of $0.41 per share, and 1,834,023 shares of vested, yet unissued, shares of restricted common stock. Additionally, we have reserved shares to issue stock options, restricted stock or other awards to purchase or receive up to 8,005,908 shares of common stock under our May 2011 Equity Incentive Plan and 1,500,000 shares of common stock under our 2014 Employee Stock Purchase 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.

***There may be substantial sales of our common stock under the prospectus relating to our 2014 Private Placement, which could cause our stock price to drop.***

We agreed with the investors in our 2014 Private Placement to file a shelf registration statement with the SEC with respect to the resale of all of the shares of our common stock, as well as shares of common stock issuable upon the exercise of warrants, purchased by investors. We filed a registration statement on Form S-1 on April 7, 2014 and it was declared effective on May 14, 2014. The registration statement included a total of 68,571,456 shares of our common stock (of which 34,285,728 shares are presently outstanding and 34,285,728 shares are issuable upon the exercise of warrants). There are currently no agreements or understandings in place with these selling stockholders to restrict their sale of those shares. Sales of a substantial number of shares of our common stock by the selling stockholders over a short period of 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.

***Holders of warrants issued in our 2014 Private Placement have anti-dilution adjustment rights that, if triggered, could dilute the ownership interests of our existing common stockholders.***

Holders of our warrants to purchase 17,893,375 shares of common stock at an exercise price of $0.35 per share and warrants to purchase 17,893,375 shares at an exercise price of $0.50 per share issued in our 2014 Private Placement have anti-dilution adjustment rights that, if triggered, could dilute the interests of our common stockholders. The warrants contain weighted average anti-dilution protection for warrant holders if we sell another equity or equity-linked security at a price per share lower than the respective exercise prices during the five-year term of the warrants. Additionally, the warrants do not contain a negotiated floor for the exercise price. As compared with a full ratchet anti-dilution provision, which resets the exercise price at the lowest price in any subsequent sale of stock, a weighted average anti-dilution provision takes into account both the lower price and the number of shares issued at the lower price. The triggering of these anti-dilution provisions could result in the issuance of a substantial number of additional shares of common stock upon exercise of the warrants, which would dilute the ownership interests of our existing common stockholders.

Filed Nov 13, 2014.
Source: SEC EDGAR, the filing index for accession 0001495231-14-000049. Last ingested by Listed: Nov 13, 2026, 15:19 ET. No prices; not investment advice.