IZEA

Business Context and Reporting Period

Company: IZEA Worldwide, Inc. (IZEA, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2013
Business Overview: IZEA operates in the sponsored influence space, a subset of native advertising. The company connects advertisers with social media publishers (bloggers, tweeters) via platforms including SocialSpark, SponsoredTweets, PayPerPost, and InPostLinks. Revenue is generated primarily through sponsored campaigns, display advertising, and service fees.

Key Financial Metrics

Material Changes vs. Prior Comparable Period

• Revenue Growth: Revenue increased 42.5% for the three months ended June 30, 2013, compared to the same period in 2012, driven by a $538,000 increase in Sponsored Revenue. For the six-month period, revenue increased 10.0%.
• Operating Expenses: Total operating expenses decreased significantly by 35.4% ($812,168) for the three months ended June 30, 2013, compared to the prior year. This was primarily due to reduced payroll, professional fees, and the discontinuation of the "WeRewards" promotional program.
• Net Loss Reduction: Net loss decreased by 51.4% for the three months ended June 30, 2013, compared to the prior year, largely attributable to the reduction in operating costs.
• Derivative Valuation Impact: The company recorded a $343,353 expense related to the change in fair value of notes payable carried at fair value during the three months ended June 30, 2013. This contrasts with a $540,492 gain in the same period in 2012.
• Liquidity: Cash and cash equivalents decreased from $657,946 at December 31, 2012, to $69,862 at June 30, 2013, a reduction of $588,084.

Guidance, Outlook, Risks, and Unusual Items

• Going Concern: The company's independent auditors have expressed substantial doubt about its ability to continue as a going concern due to significant accumulated deficits ($24.6 million) and recurring losses. Continued operations depend on raising additional capital.
• Financing Activities: The company secured short-term loans totaling $1.27 million from a director (Brian W. Brady) between April and June 2013, due August 31, 2013. These notes bear interest at 7% (12% default) and are convertible into equity upon the closing of a future private placement expected in Q3 2013.
• Defaulted Debt: A $75,000 promissory note matured on December 4, 2012, and remains in default, accruing interest at 18% per annum.
• Outlook: Management anticipates revenue will continue to exceed prior year levels, citing a 56% increase in net bookings for the quarter. However, there is no assurance that future financing will be available on acceptable terms.
• Unusual Items: Significant non-cash expenses were recorded related to the fair value adjustments of derivative liabilities and notes payable. Additionally, $98,847 in payroll costs were capitalized as software development costs for the new "Native Ad Exchange" (NAX) platform.

Investor Verification Checklist

• Capital Raise Status: Verify the status of the anticipated Q3 2013 private placement required to convert the $1.27 million in director loans and fund operations.
• Defaulted Note Resolution: Confirm plans to repay or refinance the $75,000 promissory note currently in default with 18% interest.
• Cash Burn Rate: Assess the sustainability of operations given the cash balance of $69,862 and a working capital deficit of $2.8 million.
• Derivative Liability Volatility: Monitor the fair value of the $1.16 million notes payable carried at fair value, as fluctuations in stock price directly impact net income.
• Legal Proceedings: Review the status of the patent infringement lawsuit filed by Blue Calypso, Inc. in October 2012.