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

- Company: [IZEA Worldwide, Inc.](/companies/izea.md) (CIK 1495231)
- Form: 10-Q
- Filed: 2011-11-08
- Accepted by EDGAR: Nov 8, 2011, 16:51 ET
- Period: 2011-09-30
- Accession: 0001521536-11-000372
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1495231/000152153611000372/izea9301110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1495231/000152153611000372/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-07-01 to 2011-09-30 | $1.1m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2011-01-01 to 2011-09-30 | $2.8m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2011-07-01 to 2011-09-30 | $483.7k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2011-01-01 to 2011-09-30 | $1.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2011-07-01 to 2011-09-30 | $568.9k | us-gaap:GrossProfit |
| Gross profit | 9 months, 2011-01-01 to 2011-09-30 | $1.5m | us-gaap:GrossProfit |
| Operating income | 3 months, 2011-07-01 to 2011-09-30 | −$1.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2011-01-01 to 2011-09-30 | −$2.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-07-01 to 2011-09-30 | $4.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2011-01-01 to 2011-09-30 | $17.1k | us-gaap:InterestExpense |
| Net income | 3 months, 2011-07-01 to 2011-09-30 | −$1.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2011-01-01 to 2011-09-30 | −$2.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-07-01 to 2011-09-30 | −$0.04 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2011-01-01 to 2011-09-30 | −$0.14 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2011-01-01 to 2011-09-30 | −$3.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2011-01-01 to 2011-09-30 | $3.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-09-30 | $1.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-09-30 | $2.7m | us-gaap:AssetsCurrent |
| Total assets | at 2011-09-30 | $2.9m | us-gaap:Assets |
| Current liabilities | at 2011-09-30 | $2.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-09-30 | $3.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-09-30 | −$725.5k | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 28,202 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, our ability to raise additional funding, our ability to maintain and grow our business, variability of operating results, our ability to maintain and enhance our brand, our expansion and development of new products and services, marketing and other business development initiatives, competition in the industry, general government regulation, economic conditions, dependence on key personnel, the ability to attract, hire and retain personnel who possess the technical skills and experience necessary to meet the service requirements of our clients, our ability to protect our intellectual property, the potential liability with respect to actions taken by our existing and past employees, risks associated with international sales, and other risks described herein and in our other filings with the Securities and Exchange Commission.

The safe harbor for forward-looking statements provided by Section 21E of the Securities Exchange Act of 1934 excludes issuers of “penny stock” (as defined 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, SponsoredTweets, SocialSpark, PayPerPost* and *InPostLinks*. 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.

### Results of Operations for Three Months Ended September 30, 2011 Compared to September 30, 2010

|  | Three Months Ended September 30, 2011 | 2010 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $1,052,675 | $823,030 | $229,645 | 27.9% |
| Cost of sales | 483,729 | 442,832 | 40,897 | 9.2% |
| Gross profit | 568,946 | 380,198 | 188,748 | 49.6% |
| Operating expenses: |  |  |  |  |
| General and administrative | 1,950,248 | 884,692 | 1,065,556 | 120.4% |
| Sales and marketing | 249,888 | 180,586 | 69,302 | 38.4% |
| Total operating expenses | 2,200,136 | 1,065,278 | 1,134,858 | 106.5% |
| Loss from operations | (1,631,190) | (685,080) | (946,110) | 138.1% |
| Other income (expense): |  |  |  |  |
| Interest expense, net | (3,964) | (9,058) | 5,094 | (56.2)% |
| Change in fair value of warrant liability | 43,780 | — | 43,780 | —% |
| Other income (expense), net | — | — | — | —% |
| Total other income (expense) | 39,816 | (9,058) | 48,874 | (539.6)% |
| Net loss | $(1,591,374) | $(694,138) | $(897,236) | 129.3% |

### Revenues

Revenues for the three months ended September 30, 2011 increased by $229,645, or 27.9%, compared to the same period in 2010. The increase was primarily attributable to growth of our customer base through our expanded sales force and through budget increases among existing customers in our product lines.

### Cost of Sales and Gross Profit

Cost of sales for the three months ended September 30, 2011 increased by $40,897, or 9.2%, compared to the same period in 2010. The increase was primarily attributable to growth in revenue and related increase in cost of sales. Cost of sales is comprised primarily of the amounts we pay to social media publishers in the IZEA online network. Cost of sales represented 46% of revenues for the three months ended September 30, 2011 compared to 54% of revenues for the same period in 2010.

Gross profit for the three months ended September 30, 2011 increased by $188,748, or 49.6%, compared to the same period in 2010. Our gross margin increased to 54% for the three months ended September 30, 2011 as compared to 46% for the same period in 2010. The gross margin increase was primarily attributable to increased fees charged to manage advertising campaigns and inactivity fees, resulting in revenue for the three months ended September 30, 2011 of approximately $85,000.

### Operating Expenses

Operating expenses consist of general and administrative and sales and marketing expenses. Total operating expenses for the three months ended September 30, 2011 increased by $1,134,858, or 106.5%, compared to the same period in 2010. The increase was primarily attributable to increased payroll and operating expenses, costs of being a public company and increases in sales and marketing expenses.

General and administrative expenses consist primarily of payroll, general operating costs, public company costs, facilities costs, insurance, depreciation, professional fees and investor relations fees. General and administrative expenses for the three months ended September 30, 2011 increased by $1,065,556 or 120.4%, compared to the same period in 2010. The increase was primarily attributable to expenses incurred for investor relations services. We paid $1,190,000 and issued 500,000 shares of common stock valued at $165,000 for investor relation services in August 2011 of which $677,500 was expensed in September 2011 and the remaining $677,500 will be expensed in the fourth quarter of 2011.

Sales and marketing expenses consist primarily of advertising, general marketing, public relations and trade show expenses. Sales and marketing expenses for the three months ended September 30, 2011 increased by $69,302 or 38.4%, compared to the same period in 2010. The increase was primarily attributable to increased trade show expenses.

### Other Income (Expense)

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

Interest expense during the three months ended September 30, 2011 decreased by $5,094, or 56.2%, compared to the same period in 2010 as a result of the overall reduction in our notes payable to the bank through scheduled principal payments.

We recognized other income for a change in fair value of our warrant liability of $43,780 during the three months ended September 30, 2011 related to warrants issued in connection with a Financing Arrangement as further discussed below.

### Net Loss

Net loss for the three months ended September 30, 2011 was $1,591,374 compared to a net loss of $694,138 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 exceeded by an increase in operating expenses attributable to increased headcount, investor relations and other sales and marketing expenses.

### Results of Operations for Nine Months Ended September 30, 2011 Compared to September 30, 2010

|  | Nine Months Ended September 30, 2011 | 2010 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $2,821,354 | $2,249,891 | $571,463 | 25.4% |
| Cost of sales | 1,306,463 | 1,192,043 | 114,420 | 9.6% |
| Gross profit | 1,514,891 | 1,057,848 | 457,043 | 43.2% |
| Operating expenses: |  |  |  |  |
| General and administrative | 3,883,887 | 2,570,601 | 1,313,286 | 51.1% |
| Sales and marketing | 526,112 | 404,272 | 121,840 | 30.1% |
| Total operating expenses | 4,409,999 | 2,974,873 | 1,435,126 | 48.2% |
| Loss from operations | (2,895,108) | (1,917,025) | (978,083) | 51.0% |
| Other income (expense): |  |  |  |  |
| Interest expense, net | (17,060) | (60,654) | 43,594 | (71.9)% |
| Change in fair value of warrant liability | 73,571 | — | 73,571 | —% |
| Other income (expense), net | — | (276) | 276 | (100.0)% |
| Total other income (expense) | 56,511 | (60,930) | 117,441 | (192.7)% |
| Net loss | $(2,838,597) | $(1,977,955) | $(860,642) | 43.5% |

### Revenues

Revenues for the nine months ended September 30, 2011 increased by $571,463, or 25.4%, compared to the same period in 2010. The increase was 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.

### Cost of Sales and Gross Profit

Cost of sales for the nine months ended September 30, 2011 increased by $114,420, or 9.6%, compared to the same period in 2010. The increase was 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 the IZEA online network. Cost of sales represented 46% of revenues for the nine months ended September 30, 2011 compared to 53% of revenues for the same period in 2010.

Gross profit for the nine months ended September 30, 2011 increased by $457,043, or 43.2%, compared to the same period in 2010. Our gross margin increased to 54% for the nine months ended September 30, 2011 as compared to 47% for the same period in 2010. The gross margin increase was primarily attributable to increase in fees charged to manage advertising campaigns and inactivity fees, resulting in revenue for the nine months ended September 30, 2011 of approximately $218,000.

### Operating Expenses

Operating expenses consist of general and administrative, and sales and marketing expenses. Total operating expenses for the nine months ended September 30, 2011 increased by $1,435,126, or 48.2%, compared to the same period in 2010. The increase was primarily attributable to increased payroll and operating expenses, costs of being a public company and increases in sales and marketing expenses.

General and administrative expenses consist primarily of payroll, general operating costs, public company costs, facilities costs, insurance, depreciation, professional fees, and investor relations fees. General and administrative expenses for the nine months ended September 30, 2011 increased by $1,313,286 or 51.1%, compared to the same period in 2010. The increase was primarily attributable to increased payroll, costs of being a public company, investor relations costs and operating expenses due to increased activity in our platforms. We paid $1,190,000 and issued 500,000 shares of common stock valued at $165,000 in August 2011 for investor relation services of which $677,500 was expensed in September 2011 and the remaining $677,500 will be expensed in the fourth quarter of 2011.

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, 2011 increased by $121,840 or 30.1%, compared to the same period in 2010. The increase was also attributable to marketing of our increased focus on our *SocialSpark, SponsoredTweets* and *WeReward* platforms.

### Other Income (Expense)

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

Interest expense during the nine months ended September 30, 2011 decreased by $43,594 compared to the same period in 2010 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.

We recognized other income for a change in fair value of our warrant liability of $73,571 during the nine months ended September 30, 2011 related to warrants issued in connection with a Financing Arrangement as further discussed below.

### Net Loss

Net loss for the nine months ended September 30, 2011was $2,838,597 which increased from the net loss of $1,977,955 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 exceeded by an increase in operating expenses attributable to increased headcount, public company and investor relations costs, and other sales and marketing expenses.

### Liquidity and Capital Resources

Our cash position was $1,095,103 as of September 30, 2011 as compared to $1,503,105 as of December 31, 2010, a decrease of $408,002. Significant losses from operations have been incurred since inception and there is an accumulated deficit of $16,990,789 as of September 30, 2011.

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. From May until August 2011, we raised an aggregate of $3,330,000 through the sale of 330 units consisting of either (i) 30,303 shares of our common stock, or (ii) one share of our 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 “May 2011 Offering”). Of the gross proceeds received, (i) $500,000 was received under a promissory note that was contractually exchangeable into 50 units under the May 2011 Offering, and (ii) $50,000 was received for the purchase of 5 units from our Chief Executive Officer. As a result of the offering, investors who purchased 230 units elected to receive preferred stock and investors who purchased 103 Units elected to receive common stock. Accordingly, we issued (i) 3,121,210 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) 333 Warrant Contracts that are linked by exercise to an aggregate of 6,054,606 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. Accordingly, net cash proceeds from the May 2011 Offering amounted to $3,057,473.

We entered into registration rights agreements (the “Registration Rights Agreement”) with the investors in the May 2011 Offering (the "Investors"), pursuant to which we agreed to file a “resale” registration statement with the SEC covering the shares of common stock issuable upon conversion of Series A Preferred Stock and the shares of common stock underlying the Warrants within six (6) months after the final closing date of the May 2011 Offering (i.e. February 15, 2012) (the “Filing Date”). We agreed to use our reasonable best efforts to have the registration statement declared effective within nine (9) months after the final closing date of the May 2011 Offering (i.e. May 15, 2012) (the “Effectiveness Deadline”) and 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 without restriction or limitation. Pursuant to the Registration Rights Agreement, we are 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 required Filing Date that the registration statement has not been filed and (ii) following the required Effectiveness Deadline that the registration statement has not been declared effective; provided, however, that we shall not be obligated to pay any such liquidated damages if we are unable to fulfill our 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 we register at such time the maximum number of shares of common stock permissible upon consultation with the staff of the SEC and provided further that we will not be obligated to pay liquidated damages at any time following the one year anniversary of the Final Closing Date (as defined in the Registration Rights Agreements) of the May 2011 Offering.

On May 24, 2011, we entered into an investor relations agreement with a consulting company to provide investor relations services for two months beginning September 1, 2011 (as amended). We paid $1,190,000 in cash with proceeds from the May 2011 Offering and issued 500,000 shares of our common stock valued at $165,000 based on $0.33 per common share in August 2011.

On July 15, 2008, we 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 $83,333 at September 30, 2011 and is required to be repaid in full during fiscal 2011.

Although our net revenues and proceeds from the May 2011 Offering are currently sufficient to fund our operating expenses until September 30, 2012, we may be required to raise additional funds in the future particularly if we are unable to generate positive cash flow as a result of our operations or require additional capital to expand our operations. Therefore our future operations may be dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.

Our ability to continue as a going concern is dependent upon attaining profitable operations through achieving revenue growth targets while lowering other expense levels.

Cash used for operating activities was $3,163,169 during the nine months ended September 30, 2011 and was primarily a result of our net loss during the period of $2,838,597. Cash provided by financing activities was $2,790,916 during the nine months ended September 30, 2011 primarily as a result of net proceeds of $3,057,473 received from the issuance of common and preferred stock and warrants and exchange of promissory notes in a financing arrangement as further discussed above offset by principal payments of $268,156 on our bank note payable and capital leases.

### 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 us 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, 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 have not recorded a reserve for doubtful accounts at December 31, 2010 and September 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 our 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. We recognize revenue in accordance with Accounting Standards Codification on *Principal Agent Considerations.* 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-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. We estimate the volatility of our common stock at the date of grant based on the volatility of comparable peer companies which are publicly traded. We determine the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. We use the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. We have never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. In addition, we separate the grants into homogeneous groups and analyzes the assumptions for each group.

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

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

### Recent Accounting Pronouncements

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

## Controls and procedures

As filed, 2,445 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 our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2011. Based on the results of that evaluation, our management concluded that our disclosure controls and procedures were effective as of September 30, 2011.

### Changes in Internal Control over Financial Reporting

For the quarter ended June 30, 2011, management concluded that our internal controls over financial reporting were not effective and resulted in a material weakness due to the incompletion of our assessment of the accounting impact of the issuance of complex and non-standard debt and equity instruments in May 2011. To address the material weakness related to the accounting and disclosure for complex and non-standard debt and stockholders' equity transactions, we implemented the use of new software and research tools and retained the services of qualified individuals who can comprehensively review the accounting and disclosure implications of such transactions on a timely basis.

There were no other changes in our internal control over financial reporting identified in connection with the evaluation (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 163 characters.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Filed Nov 8, 2011.
Source: SEC EDGAR, the filing index for accession 0001521536-11-000372. Last ingested by Listed: Nov 13, 2026, 15:19 ET. No prices; not investment advice.