# IZEA Worldwide, Inc.: Form 10-Q/A for the period ended Jun 30, 2011

- Company: [IZEA Worldwide, Inc.](/companies/izea.md) (CIK 1495231)
- Form: 10-Q/A
- Filed: 2011-09-09
- Accepted by EDGAR: Sep 9, 2011, 15:14 ET
- Period: 2011-06-30
- Accession: 0001521536-11-000201
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1495231/000152153611000201/q1100146_10qa-izea.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1495231/000152153611000201/

## Management's discussion and analysis

As filed, 26,442 characters.

### General

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed 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 operation, and notes to our unaudited condensed 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, dependence on existing and future key strategic and strategic end-user customers, limited ability to establish new strategic relationships, ability to sustain and manage growth, variability of operating results, our expansion and development of new service lines, marketing and other business development initiatives, the commencement of new engagements, competition in the industry, general 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, 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 under Rule 3a51-1 of 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 Holdings, Inc. (the “Company” “we” or “us”) was incorporated as a Nevada corporation on March 22, 2010 for the purpose of entering the business of making loans which are fully secured by a first lien on a customer’s automobile. On May 11, 2011, we filed an amendment to our Articles of Incorporation in order to change our name from “Rapid Holdings, Inc.” to “IZEA Holdings, Inc.” On May 11, 2011, our board of directors declared a dividend of an additional 14.28117 shares of common stock on each share of our common stock outstanding on May 11, 2011 with a payment date of May 23, 2011.

On May 12, 2011, we entered into a Share Exchange Agreement (the “Exchange Agreement”) with IZEA, Inc., a privately held Delaware corporation (“IZEA”) and the shareholders of IZEA. Upon closing of the transaction contemplated under the Exchange Agreement, on May 12, 2011, the shareholders of IZEA transferred all of the issued and outstanding capital stock of IZEA to us in exchange for shares of our common stock. Such exchange caused IZEA to become our wholly-owned subsidiary. Immediately following the closing of the exchange, under an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations, the Company transferred all of its pre-exchange assets and liabilities to a wholly-owned subsidiary, RTL Holdings, Inc. (“SplitCo”) and thereafter, pursuant to a stock purchase agreement, transferred all of the outstanding capital stock of SplitCo to Anthony Barron, our former officer and director, in exchange for the cancellation of shares of our common stock he owned. Upon closing of the exchange, the business of IZEA became our business.

IZEA, Inc. was incorporated in the state of Florida in February 2006 and reincorporated in the state of Delaware in September 2006.

### Company Overview

We are a leader in social media sponsorships (SMS), a rapidly growing segment within social media that connects social media publishers with advertisers. We accomplish this through our five online marketplaces: *WeReward.com, SponsoredTweets.com, SocialSpark.com, PayPerPost.com* and *InPostLinks.com*. Our customers include a wide range of small and large businesses, including Fortune 500 companies, as well as advertising agencies. We generate our revenue through the sale of social media sponsorships to our customers. We fulfill these sponsorships through our marketplace platforms connecting social media publishers such as bloggers, tweeters and mobile application users.

### Comparison of Three Months Ended June 30, 2011 to June 30, 2010

### Revenues

Revenues for the three months ended June 30, 2011 increased to $845,901 from $794,018 as compared to the same period in 2010, an increase of 6%. The increase is primarily attributable to growth of our customer base through our expanded sales force and through budget increases among existing customers in all of our product lines.

Given the continued overall growth in online advertising, coupled with other strategic initiatives undertaken by IZEA, including the continued enhancement of our technology platform and our continued ability to acquire bloggers, tweeters, and other consumer content creators, we expect to continue to increase our advertising customer base and revenues for the foreseeable future.

### Cost of Sales and Gross Profit

Cost of sales for the three months ended June 30, 2011 decreased to $381,199 from $420,199 as compared to the same period in 2010, a decrease of 9%. The decrease is primarily attributable to the increased fees charged to manage advertising campaigns and inactivity fees, resulting in revenue for the three months ended June 30, 2011 of approximately $200,000. There is no associated cost of sales for these revenue classes, resulting in the decrease in cost of sales for the three months ended June 30, 2011 compared to June 30, 2010. Cost of sales is comprised primarily of the amounts we pay to social media publishers in IZEA’s online network. Cost of sales represented 45% of revenues for the three months ended June 30, 2011 compared to 53% of revenues for the same period in 2010.

Gross profit for the three months ended June 30, 2011 increased to $464,702 from $373,819 for the same period in 2010, an increase of 24%. Our gross margin increased to 55% for the three months ended June 30, 2011 as compared to 47% for the same period in 2010. The gross margin increase is primarily attributable to increased fees charged to manage advertising campaigns and inactivity fees, resulting in revenue for the three months ended June 30, 2011 of approximately $200,000.

### Operating Expenses

Operating expenses consist of general and administrative and sales and marketing expenses. Total operating expenses for the three months ended June 30, 2011 increased to $1,079,219 from $1,002,576 for the same period in 2010, an increase of 7.6%. The increase is primarily attributable to increased payroll and operating expenses offset by a slight decrease in sales and marketing expenses.

General and administrative expenses consist primarily of executive, administrative, operations and product development and support compensation, facilities costs, insurance, depreciation, professional fees, investor relations fees and bad debt expense. General and administrative expenses for the three months ended June 30, 2011 increased to $1,000,517 from $914,677 for the same period in 2010, an increase of 9.4%. The increase is primarily attributable to increased payroll and operating expenses due to increased activity in all of our platforms.

Sales and marketing expenses consist primarily of compensation for sales and marketing and related support resources, sales commissions and trade show expenses. Sales and marketing expenses for the three months ended June 30, 2011 decreased to $78,702 from $87,899 for the same period in 2010, a decrease of 10%. The decrease is primarily attributable to decreased marketing expenses

### Interest Expense

Interest expense decreased to $(6,179) during the three months ended June 30, 2011 as compared to $(20,693) during the same period in the prior year as a result of principal payments made on our note payable to the bank.

### Change in Fair Value of Warrant Liability

We recognized other income for a change in fair value of our warrant liability of $29,791 during the three months ended June 30, 2011 related to warrants issued in connection with a Financing Arrangement in May 2011 as further discussed below.

### Net Loss

Net loss for the three months ended June 30, 2011was $(590,894) which is fairly consistent with the net loss of $(649,235) for the same period in 2010. As discussed above, although gross profit increased over the prior quarter due to increased revenue and interest expense declined as a result of the conversion of debt in 2010, this was offset by an increase in operating expenses attributable to increased headcount and sales and marketing expenses.

### Comparison of Six Months Ended June 30, 2011 to June 30, 2010

### Revenues

Revenues for the six months ended June 30, 2011 increased to $1,768,679 from $1,426,861 as compared to the same period in 2010, an increase of 24%. The increase is primarily attributable to growth of our customer base through our expanded sales force and through budget increases among existing customers in all of our product lines.

Given the continued overall growth in online advertising, coupled with other strategic initiatives undertaken by IZEA, including the continued enhancement of our technology platform and our continued ability to acquire bloggers, tweeters, and other consumer content creators, we expect to continue to increase our advertising customer base and revenues for the foreseeable future.

### Cost of Sales and Gross Profit

Cost of sales for the six months ended June 30, 2011 increased to $822,734 from $749,211 as compared to the same period in 2010, an increase of 10%. The increase is primarily attributable to the growth in advertising campaigns requiring the purchase of appropriate levels of sponsorships from publishers. Cost of sales is comprised primarily of the amounts we pay to social media publishers in IZEA’s online network. Cost of sales represented 47% of revenues for the six months ended June 30, 2011 compared to 53% of revenues for the same period in 2010.

Gross profit for the six months ended June 30, 2011 increased to $945,945 from $677,650 for the same period in 2010, an increase of 40%. Our gross margin increased to 53% for the six months ended June 30, 2011 as compared to 47% for the same period in 2010. The gross margin increase is primarily attributable to increase in fees charged to manage advertising campaigns and inactivity fees, resulting in revenue for the six months ended June 30, 2011 of approximately $350,000.

### Operating Expenses

Operating expenses consist of general and administrative, and sales and marketing expenses. Total operating expenses for the six months ended June 30, 2011 increased to $2,209,863 from $1,909,595 for the same period in 2010, an increase of 15.7%. The increase is primarily attributable to increased payroll, operating expenses and increased sales and marketing expenses.

General and administrative expenses consist primarily of executive, administrative, operations and product development and support compensation, facilities costs, insurance, depreciation, professional fees, investor relations fees and bad debt expense. General and administrative expenses for the six months ended June 30, 2011 increased to $1,933,639 from $1,685,909 for the same period in 2010, an increase of 14.7%. The increase is primarily attributable to increased payroll and operating expenses due to increased activity in all of our platforms.

Sales and marketing expenses consist primarily of compensation for sales and marketing and related support resources, sales commissions and trade show expenses. Sales and marketing expenses for the six months ended June 30, 2011 increased to $276,224 from $223,686 for the same period in 2010, an increase of 23%. The increase is primarily attributable to our increased sales-force expansion focusing primarily on *SocialSpark.com* and *SponsoredTweets.com.*

### Interest Expense

Interest expense decreased to $(13,134) during the six months ended June30, 2011 as compared to $(51,630) during the same period in the prior year as a result of the conversion of $1,444,800 of related party notes payable in May 2010 and principal payments made on our note payable to the bank .

### Change in Fair Value of Warrant Liability

We recognized other income for a change in fair value of our warrant liability of $29,791 during the six months ended June 30, 2011 related to warrants issued in connection with a Financing Arrangement in May 2011 as further discussed below.

### Net Loss

Net loss for the six months ended June 30, 2011was $(1,247,223) which is fairly consistent with the net loss of $(1,283,817) for the same period in 2010. As discussed above, although gross profit increased over the prior quarter due to increased revenue and interest expense declined as a result of the conversion of debt in 2010, this was offset by an increase in operating expenses attributable to increased headcount and sales and marketing expenses.

### Capital Resources and Liquidity

Our cash position was $2,091,988 as of June 30, 2011 as compared to $1,503,105 as of December 31, 2010, an increase of $588,883. Cash used for operating activities was $(2,243,665) during the six months ended June 30, 2011 and was primarily a result of our net loss during the period of $(1,247,223) and prepayment of future marketing and other expenses of $(1,234,066). Cash provided by financing activities was $2,832,548 during the six months ended June 30, 2011 primarily as a result of net proceeds of $3,007,473 received from the issuance of common and preferred stock and warrants and exchange of promissory notes in a financing arrangement as further discussed below. This was offset by scheduled principal payments of $(175,330) on our bank note payable.

Significant losses from operations have been incurred since inception and there is an accumulated deficit of $(15,399,415) as of June 30, 2011. Continuation as a going concern is dependent upon attaining profitable operations through achieving revenue growth targets while maintaining current fixed expense levels. Cost reductions were implemented during 2010 through headcount and overhead cost reductions. Cash provided by operations is relied upon to satisfy the Company’s projected working capital, capital expenditure needs and debt obligations through June 30, 2012.

On May 24, 2011 and May 26, 2011, the Company entered into Subscription Agreements (the “Agreements”) with certain investors (the “Investors”) whereby it sold an aggregate of 328 units (the “Units”) at a purchase price of $10,000 per Unit (the “Offering”) for an aggregate purchase price of $3,280,000. Of the gross proceeds received, (i) $500,000 was received on May 11, 2011 under a promissory note that was contractually exchangeable into 50 Units under the Offering, and (ii) $50,000 was received for the purchase of 5 Units from the Company’s Chief Executive Officer. Each Unit consisted of either (i) 30,303 shares of the Company’s common stock or (ii) one share of the Company’s recently designated Series A Preferred Stock, which is convertible into 30,303 shares of Common Stock, plus a five-year warrant to purchase 18,182 shares of Common Stock for $9,091 or $0.50 per linked Common Share (the “Warrants”).

As a result of the Offering, Investors who purchased 230 Units elected to receive preferred stock and Investors who purchased 98 Units elected to receive Common Stock. Accordingly, the Company issued (i) 2,969,694 shares of Common Stock, (ii) 230 shares of Series A Preferred Stock, which are linked by conversion to 6,969,690 shares of Common Stock and (iii) 328 Warrant Contracts that are linked by exercise to an aggregate of 5,963,696 shares of Common Stock.

Direct expenses associated with the Offering amounted to $290,127 and included (i) placement agent, legal and other fees for cash of $272,527 and (ii) a warrant to the placement agent to purchase 100,000 shares of Common Stock under the same terms and conditions as the Warrants, which had a fair value of $17,600. Accordingly, net cash proceeds from the Offering amounted to $3,007,473.

The Company has entered into registration rights agreements (the “Registration Rights Agreements”) with the Investors, pursuant to which the Company has agreed to file a “resale” registration statement with the SEC covering all shares of the Common Stock sold in the Offering and underlying any Warrants, as well as Common Stock underlying the warrants issued to the placement agent(s) within six (6) months (the “Filing Date”). The Company has agreed to maintain the effectiveness of the registration statement from the effective date until all securities have been sold or are otherwise able to be sold pursuant to Rule 144. The Company has agreed to use its reasonable best efforts to have the registration statement declared effective within nine (9) months (the “Effectiveness Deadline”). The Company is obligated to pay to Investors a fee of 1% per month of the Investors’ investment, payable in cash, for every thirty (30) day period up to a maximum of 6%, (i) following the Filing Date that the registration statement has not been filed and (ii) following the Effectiveness Deadline that the registration statement has not been declared effective; provided, however, that the Company shall not be obligated to pay any such liquidated damages if the Company is unable to fulfill its registration obligations as a result of rules, regulations, positions or releases issued or actions taken by the SEC pursuant to its authority with respect to “Rule 415”, provided the Company registers at such time the maximum number of shares of common stock permissible upon consultation with the staff of the SEC and provided further that the Company shall not be obligated to pay liquidated damages at any time following the one year anniversary of the Final Closing Date (as defined in the Agreements). For a period of 18 months following the Final Closing Date, the Company has agreed not to file any registration statement on Form S-8 with the SEC without the approval of holders of a majority of the Shares sold in the offering.

On May 24, 2011, we entered into an investor relations agreement with a consulting company to provide investor relations services for a period of two months for fees of $1,190,000 in cash and the issuance of 500,000 shares of our common stock.

On July 15, 2008, IZEA entered into a $1,000,000 Loan and Security Agreement (“Note Payable”) with Silicon Valley Bank, with an interest rate of 8% per annum, payable monthly. Interest only was payable through December 31, 2008. Repayment of principal is due in thirty-six consecutive equal monthly installments beginning in January 2009, or approximately $333,333 per year through December 31, 2011. The Note Payable is secured by all assets of IZEA. The principal balance outstanding on the note payable was $250,000 at March 31, 2011 and will be repaid during fiscal 2011.

On September 23, 2009, February 25, 2010 and April 16, 2010 IZEA entered into unsecured convertible promissory notes (“Convertible Notes”) with IZEA’s then current preferred stockholders to fund operations until alternative financing could be closed. Proceeds under the Convertible Notes totaled $798,561, $300,000 and $300,000 respectively for a total of $1,398,561. The Convertible Notes were senior to all obligations other than the debt owed to Silicon Valley Bank, and accrued interest at the rate of 8% per annum. In May 2010, all of the holders of the Convertible Notes converted their $1,444,800 notes payable (including accrued interest) into 4,721,563 shares of IZEA’s newly created Series A-2 Preferred Stock in connection with the sale of Series A-2 Preferred Stock.

### 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

Accounts receivable are customer obligations due under normal trade terms and are typically considered collectible since most customers are not bound by contract and are required to fund the Company for all the costs of an “opportunity”, defined as an order created by an advertiser for a blogger to write about the advertiser’s product. If a portion of the account balance is deemed uncollectible, the Company 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. The Company has not recorded a reserve for doubtful accounts at December 31, 2010 and June 30, 2011.

Revenue consists of content creator fees, service fees to establish and maintain advertiser accounts, and listing fees associated with advertiser “opportunities”. Revenue is recognized when opportunities are posted on the Company’s websites and when related payments are made to the content creators after their content has been listed for the requisite period. Customers prepay for the Company’s services, which are recorded as unearned revenue. The Company recognizes revenue in accordance with Accounting Standards Codification on *Principal Agent Considerations.* The Company records its revenue on the gross amount earned since the Company generally is the primary obligor in the arrangement, establishes the pricing and determines 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-Merton pricing model. Options vest ratably over four years with one-fourth of options vesting one year from the date of grant and the remaining options vesting monthly, in equal increments over the remaining three-year period and generally have ten-year contract lives. The Company estimates the volatility of its common stock at the date of grant based on the volatility of comparable peer companies which are publicly traded. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses 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. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company separates the grants into homogeneous groups and analyzes the assumptions for each group.

The Company accounts for derivative instruments in accordance with FASB ASC 815, *Derivatives and Hedging*, which requires additional disclosures about the Company’s 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. The Company does 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.

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

### Recent Accounting Pronouncements

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

## Controls and procedures

As filed, 2,497 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.

### Evaluation of Disclosure Controls and Procedures

The Company's management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2011. Based on the results of this assessment, our management concluded that our internal controls over financial reporting were not effective as of June 30, 2011 based on such criteria for the reasons discussed below.

In the course of management's evaluation, each of our Company's CEO and CFO considered the incompletion of our assessment of the accounting impact of the issuance of complex and non-standard debt and equity instruments in May 2011 were the result of a material weakness. To address our Company's material weakness related to the accounting and disclosure for complex and non-standard debt and stockholders' equity transactions, we are in the process of enhancing our internal control processes in order to be able to comprehensively review the accounting and disclosure implications of such transactions on a timely basis.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended June 30, 2011 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the material weakness noted above.

Filed Sep 9, 2011.
Source: SEC EDGAR, the filing index for accession 0001521536-11-000201. Last ingested by Listed: Nov 2, 2026, 16:20 ET. No prices; not investment advice.