Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 20152017 (the last business day of the registrant's most recently completed second fiscal quarter) was $16,510,586$6,861,087 based on the closing bid price of the registrant's common stock (its only outstanding equity security) of $8.40$1.91 per share (after reflecting a 1-for-20 reverse stock split) on that date. All executive officers and directors of the registrant and all 10% or greater stockholders have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.
i
PART IExplanatory Note
Overview
As previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on Monday, April 3, 2018, the Audit Committee of the Board of Directors (“the Audit Committee”) of IZEA, Inc. (together with its wholly-owned subsidiaries, “we,” “us,” “our,” “IZEA” or the “Company”) on the recommendation of management, and after consultation with the Company’s independent registered public accounting firm, BDO USA, LLP, concluded that the Company’s previously issued financial statements included in its Annual Reports on Form 10-K for the years ended December 31, 2015 and 2016 and Quarterly Reports on Form 10-Q for each quarterly period for the years ended December 31, 2015 and 2016, and for the first three quarters for the year ended December 31, 2017 (collectively, the “Restated Periods”) should no longer be relied upon because of certain accounting errors.
In addition to the standard required financial statements for the year ended December 31, 2017, this Annual Report on Form 10-K for the year ended December 31, 2017 (this "Annual Report") includes (i) audited restated consolidated statements of operations for the years ended December 31, 2015 and 2016; (ii) unaudited restated consolidated statements of operations for each quarter within the years ended December 31, 2015 and 2016, and the first three quarters for the year ended December 31, 2017; and (iii) footnotes reconciling previously filed annual and quarterly consolidated statements of operations to the restated consolidated statements of operations.
Background
In connection with our year-end financial statement close process, our process of evaluating the adoption of the new accounting pronouncement for revenue recognition, and preparation of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, we determined that there were errors in our previously issued financial statements related to our presentation of revenue related to the self-service Content Workflow portion of our revenue and our classification of cost of revenue related to our Managed Services.
We have determined that our revenue from our Content Workflow services should have been reported on a net transaction basis. We historically reported revenue from transactions generated by the self-service use of our platforms by marketers to handle their content workflow from initial content request to payment of content received or distributed (“Content Workflow”) as the gross amounts billed to marketers for their transactions, because we previously concluded that we were a principal in these transactions. We determined that we are more appropriately considered as an agent arranging the sale between our self-service customers and our creators in the Content Workflow transactions, which requires reporting revenue on a net transaction basis. As such, the direct costs associated with these transactions previously reported as cost of revenue should be netted directly against revenue in our consolidated statements of operations. Additionally, we determined that our cost of revenue related to our managed services when a marketer (typically a brand, agency or partner) pays us to provide custom content, influencer marketing or amplification services (“Managed Services”) only included the direct cost of the content that was being purchased by our customers, and did not appropriately include the cost of our internal personnel responsible for fulfilling these services. We historically considered and reported the cost of our campaign fulfillment personnel as part of our sales and marketing expenses.
As part of our restatement process, we have elected to present depreciation and amortization expense as a separate line item for better visibility of this expense. Additionally, we have elected to change our consolidated statement of operations presentation from a two-step presentation, where cost of sales are deducted from revenue to report a gross profit line, to a one-step presentation, where total costs and expenses are deducted from revenue. Because we report some of our revenue on a gross basis and other portions of our revenue on a net basis, we believe that this presents a more appropriate representation of our business operations.
Effects of Restatement
The effects of this restatement consist of a reclassification of expenses within our previously reported consolidated statements of operations and disclosures regarding revenue, gross profit and operating expenses. The errors had no impact on our previously reported loss from operations, net loss, loss per share, or on any of the Company's consolidated balance sheets, statements of cash flows, and statements of stockholders' equity. For discussions of the restatement adjustments, see Item 1A, “Risk Factors” and Item 8, “Financial Statements,” including Notes 2 and 14 of the Notes to the Consolidated Financial Statements.
In connection with the errors noted above, our management, including our chief executive officer and chief financial officer, have concluded that there was a material weakness in the Company’s internal control over financial reporting as of
December 31, 2017 and is engaged in a focused review of its financial reporting practices and remediation of the related control weakness. For a discussion of our controls and procedures, the material weakness identified and our actions to remediate such weakness see Item 9A, “Controls and Procedures.”
Previously Filed Reports
We believe that presenting all of this information regarding the Restated Periods in this Annual Report allows investors to review all pertinent data in a single presentation. Therefore, we do not plan to amend our previously filed Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for the periods affected by the restatement. Accordingly, investors should no longer rely upon the Company’s previously released financial statements for these periods and any earnings releases or other communications relating to these periods. The financial information that has been previously filed or otherwise reported for the Restated Periods is superseded by the information in this Annual Report. Unless otherwise stated, all financial information and discussion related to the consolidated statements of operations contained in this Annual Report for periods prior to December 31, 2017 are presented on a restated basis.
Cautionary Note Regarding Forward-Looking Information
This Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. The statements, which are not historical facts contained in this report, including the 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,” “would,” “could,” “should,” “expects,” “anticipates,” “estimates,” “believes,” “intends,” 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 inherent risks, uncertainties and changes in circumstances that are difficult to predict and many of which are outside of our control. Future events and our actual results and financial condition may differ materially from those reflected in these forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that might cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, but are not limited to, the following:
our ability to raise additional funding;
customer cancellations;
our ability to maintain and grow our business;
variability of operating results;
our ability to establish effective disclosure controls and procedures and internal control over financial reporting;
our ability to satisfy the requirements for continued listing of our common stock on the Nasdaq Capital Market;
our ability to maintain and enhance our brand;
our development and introduction of new products and services;
the successful integration of acquired companies, technologies and assets into our portfolio of software 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 customers;
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 the other risks and uncertainties described in the Risk Factors and in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of this Annual Report.
All forward-looking statements in this document are based on our current expectations, intentions and beliefs using information currently available to us as of the date of this Annual Report, and we assume no obligation to update any forward-looking statements, except as required by law. 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.
PART I
ITEM 1 – BUSINESS
Our Mission
Our mission is to champion the world's creators.creators by helping them monetize their content, creativity, and influence.
Our CompanyBusiness
IZEA Inc. ("IZEA", "we" or "our")creates and operates online marketplaces that facilitate transactions between brands and influentialconnect marketers with content creators. TheseThe creators produceare compensated by IZEA for producing unique content such as long and distributeshort form text, videos, photos, status updates, and photosillustrations for marketers or distributing such content on behalf of brandsmarketers through their personal websites, blogs, and social media channels. Our technology enablesbrings the marketers and creators together, enabling their transactions to be completed at scale through the management of custom content workflow, creator search and targeting, bidding, analytics and payment processing. Our primary source of revenue is derived from the sale of our services to our customers.
BrandsMarketers, including brands, agencies, and Publishers (collectively “Brands”)publishers, engage IZEA in orderus to gain access to our industry expertise, technology, analytics, and network of creators. These companies are our primary customer and where we generate theThe majority of our revenue. Theythe marketers engage us to perform these services on their behalf, but they also have the ability to use our marketplaces on a self-service basis. Our technology is used for two primary purposes;purposes: the engagement of online influencerscreators for sponsored socialinfluencer marketing campaigns (“Sponsored Social”(also known as “Influencer Marketing”), or the creationengagement of creators to create stand-alone custom content for the marketers' own use and distribution through their owned channels (“Custom Content”).
Sponsored Social.Influencer Marketing. IZEA worksWe work with brandsmarketers to facilitate sponsored socialenable influencer marketing campaigns at scale. Sponsored SocialA subset of influencer marketing known as “Sponsored Social” is when a company compensates an online influencer such as a blogger or tweeter (“creators”) to share sponsored content with theirthe creator's social network following. This sponsored content is included within the body of the content stream, a practice also referred to as “native advertising”, and "sponsored content."stream. We believe that we pioneered the concept of a marketplace for sponsorships on the social web in 2006 with the launch of our first platform, PayPerPost, and have focused on scaling theseour product and service offerings ever since.
Custom Content. IZEA worksWe also work with brands and publishersmarketers to augment or replace their content development efforts. These clients use our platform toOur network of creators produce both editorial and marketing content that iscan be published both online and offline. Our network of creators includes professional journalists, subject matter experts, bloggers and everyday content creators, allowing our clientscustomers to produce content ranging from complex white papers to simple product descriptions. Many of our content customers use this service to create a steady stream of posts for their corporate blog. We first began offering custom content services in 2015 after the acquisition of Ebyline, Inc. (“Ebyline”), a leading marketplace in the editorial content space.space, and continued to expand this offering with our acquisition of ZenContent, Inc. (“ZenContent”) in July 2016, a company that predominantly focused on e-commerce-related asset creation.
Our Platforms
IZEA.com and The IZEA Exchange. We launched a public beta of IZEA.com powered by The IZEA Exchange ((“IZEAx”) in March 2014 and unveiled our latest version 1.02.0 of the platform in October 2015.February 2017. IZEAx is designed to provide a unified ecosystem that enables the creation and publication of multiple types of custom content including blog posts, status updates, videosthrough our creator's personal websites, blogs, and photos through a wide variety of social media channels including blogs, Twitter, Facebook, Instagram and Tumblr,Instagram, among others. The systemWe extensively use this platform to manage Sponsored Social campaigns on behalf of our marketers. This platform is also available directly to our customers and partners via a self-serve portal,marketers as a managed service orself-service tool and as a licensed white label. IZEAx is engineered from the ground-up to replace all of our previous 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 completed the sunset of our previous platforms in November 2014 and currently use IZEAx as the only automated system for managing social sponsorships.
Ebyline.In January 2015 we acquired Ebyline, Inc. including the Ebyline technology platform. Ebyline is a content marketplace which was originally designed to replace editorial newsrooms located within newspapers with a “Virtual Newsroom.” IZEA has evolved Ebyline’s model to focus on producing content for brands in addition to newspapers by using the same technology platform. The majority of all content transactions for both brands and editorial publishers currently flow through this platform. In October 2015, IZEA introduced content profiles in IZEAx, signaling the beginning of a transition from the Ebyline technology platform to IZEAx. The current Ebyline platform and its current activity is scheduled to be transitioned completely to IZEAx in 2017.
Our Brands and Creators
IZEAx and Ebyline were designed to streamline transactions between brands and creators. We utilize our proprietary technology to create efficiencies and economies of scale for both parties. Each platform provides brands with access to a large
network of creators along with complete workflow management, content control, payment processing and performance tracking.
efficient. For sponsored socialinfluencer marketing campaigns, IZEAx provides integrated mechanisms for Federal Trade Commission (FTC)(“FTC”) legal compliance. In particular, the integrated FTC compliance framework requires creators to provide disclosure to their followers with respect to the sponsored nature of the content and allows advertisersmarketers to review the content for FTC compliance. If
Ebyline.In January 2015, we acquired Ebyline and its technology platform that was created to source and compensate creators specifically for the advertiser chooses, sponsorships can be managed end-to-end without the need for interaction with onecreation and delivery of our team members throughprofessional editorial content. Ebyline was originally designed as a self-service interface.content marketplace to replace editorial newsrooms in the news agencies with a “virtual newsroom” to handle their content workflow. After the acquisition, we began to utilize the creators in the
InEbyline platform to produce professional custom content for brands, in addition to the above self-service platforms, we also offer turnkey account management servicesfunctionality used by newspapers. We are incorporating certain functions of this platform into IZEAx in order to manage campaigns on behalf ofhave one consolidated platform in the customer. This includes working with brandsfuture. We do not allocate any engineering resources to optimize the opportunity that is presented to creators, providing clear instructions on what is required to fill the opportunity, identifying and sourcing the creators that are the best fit for the opportunity, managing the offer and acceptance process with the creators, verifying that the creators’ content, once submitted, meets the requirements of the opportunity and managing the overall campaign to meet the goals of the brand. Account managers also provide clients with progress updates on their campaign that include campaign metrics and all postings created throughout the campaign. Additionally, they assemble comprehensive campaign recaps at the conclusion of the campaign and work with the advertisers on plans for follow-up strategies after the initial campaign has ended.
In both platforms, brands, or our account management staff actingnew feature development on the brands’ behalfEbyline platform. This is a legacy platform with declining revenue from a declining
customer base that will eventually be sunsetted. We plan to transition any remaining customers into our IZEAx platform in the future.
ZenContent. In July 2016, we acquired ZenContent including its custom content creation workflow technology and database of creators. ZenContent’s platform enables us to produce highly scalable, multi-part production of content for both e-commerce entities, as part of the account management services we offer, have the ability to review the creators’ content to verify whether or not it conforms to the requirements of the opportunity. Our platforms provide for the ability to review creators’ content prior to publishing, and all the other platforms provide for a review after the content is published. If the content does not conform, the creator is requested to make any necessary adjustments. If the creator refuses, the opportunity is deemed to have been withdrawn. Neither thewell as brand nor our account management staff modifies creators’ content without the creators’ involvement and consent.
customers. The value proposition we offer to both brands and creators strengthens our position as a trusted partner andZenContent platform allows us to derive revenue from both customer bases. As more brands utilizeparse work out to a wide array of qualified creators who together can develop custom content assets with unmatched quality, speed, and price. This platform is currently utilized by our marketplaces, we increasecampaign fulfillment team to service orders for custom content. We plan to integrate certain functions of the breadth and depth of monetization opportunities for creators, attracting more creators and further enhancing value for our advertisers.
As of December 31, 2015, weZenContent platform into IZEAx in order to have more than 629,000 user connections from 358,000 user accountsone consolidated platform in IZEAx. The approximate aggregate reach of those connections is 3.5 billion, which represents the total number of non-unique fans and followers of IZEAx users. Creators in our system include bloggers, leading social influencers and A-list celebrities.
Our total number of user accounts may be higher than the number of our actual individual creators because some creators may have created multiple accounts. We define a user connection as a social account or blog that has been added to IZEAx under a user account. It is possible for one user to add as many user connections as they like, and it is common for talent managers and large publishers to add many connections under a single account. The aggregate reach number includes current and naturally expired O-Auth connections, but does not include manual disconnects. We define naturally expired O-Auth connections as a social media user authentication that has timed out for any number of reasons. Our creators currently publish sponsored content to blogs and Twitter and reach other existing platforms such as Facebook, Pinterest, Tumblr, LinkedIn, Google and Bing through syndication or sharing of that content.future.
We are currently limited inIZEAx, Ebyline and ZenContent were designed with the same purpose: to streamline transactions between our ability to service the needs of all brandsinternal campaign fulfillment team, marketers and creators. We haveutilize these proprietary technologies to create efficiencies and economies of scale for all parties. Combined, these platforms provide marketers with access to a large numbernetwork of brandscreators along with complete workflow management, content control, payment processing and creators that we cannot currently match for sponsorship or content opportunities. related performance tracking.
We believe that IZEAx should improve our ability to more efficiently match marketplace participants by providing access to more social media channels and by offering a larger inventory of quality brands and creators. However, we are still limited byas the number of brandsmarketers and creators using our platforms to bring more liquidity and transactions to the creators in the marketplace. In October 2015, we announced the public beta of SocialLinks, a new offering inside of IZEAx. SocialLinks is designed to provide creators with an unlimited ability to monetize their social channels through an affiliate marketing model which compensates them for generating sales for IZEA partners. IZEA secured a relationship with eBay for the initial launch of the program. This system remains in beta and will continue to be modified over the coming year.
platform increases. To date, we have completed over 3.53.7 million social sponsorship transactions for customers ranging from small local businesses to Fortune 500 companies. We consider each individual piece of custom content, sponsored blog post, tweet or other status update as an individual transaction so long as the creator of that content is being compensated for such post, tweet or other status update.
We derive the majority of our revenue from brands 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). We derive the remaining portion
of our revenue from the creation of content (Content Revenue) and from various service fees charged to advertisers and creators for services, maintenance and enhancement of their accounts (Service Fee Revenue).transaction.
Industry Background and Trends
Despite the inherently conversational nature of social mediainfluencer and content marketing as part of the larger digitalbroader integrated marketing landscape, many brandmarketer budgets are currently allocated towardstoward traditional display advertising and paid search, including banner ads and text links on social sites. While most advertisersmarketers understand the value of word of mouth marketing, peer recommendations, and product reviews, the industry is nascent and few understand how to effectively and efficiently engage social mediainfluencers and content creators and produce custom content appropriately for these purposes. Those who effectively attempt an approachventure into this area without experience are quickly limitedoften overwhelmed by the amount of effort and attention required to adequately manage and measure a truly integrated campaign.campaign that complies with applicable government regulations.
The social sponsorship space hasinfluencer and content marketing categories have been limited primarily by the current inefficiencies of the market. The social media advertiser universe isDue to their large and highly fragmented among topic, quality and platform. Brandsnature, marketers have been forced to utilize a variety of highly inefficient sources and processes to navigate the complicated landscape, of sponsorship, often resulting in low returns on their time investment or worse-yet, questionable results. We believe this is largely due to advertisersmarketers and creators lacking an efficient way to identify and engage each other in the marketplace.
At the same time, social mediainfluencers and content creators that would like to monetize their community and work product are faced with significant challenges in making advertisersmarketers aware of their blog, Twitter, or Facebook profileservices and in finding quality advertisersmarketers who are motivated to sponsor them. In addition, those creators with smaller networks simply lack the individual influence and audience needed to warrant the processing of a micro-transaction. In many cases, it costs an advertisera marketer more money to issue a check to a small creator than the value of the sponsorship payment itself.
Further complicating the sponsorship process for both parties are FTC regulations around social media endorsements, IRSInternal Revenue Service (“IRS”) tax reporting generally applicable to anyone receiving income for services, and the associated campaign tracking required to provide compliance. While many advertisersmarketers would prefer to be “part of the conversation,” we believe the complexity and cost of individual sponsorship often deters them from doing so.
We believe that the current challenges in social sponsorshipefficiency and measurable success represent a significant opportunity for us. We address these challenges with targeted, scalable marketplaces that aggregate social media content creators and advertisers.marketers. In doing so, we offer an efficient, innovative way for creators and advertisersmarketers of all sizes to find each other and completeform a sponsorship transaction.compensated relationship.
Since our inception in 2006, we have worked diligently to establish and leverage key strengths in our business model, including:
A culture of innovation and creativity. We believe the only way to survive and thrive in our rapidly changing world is to change ahead of it. We are in a state of constant evolution and re-invention; this is “The IZEA Way.” We have created a culture committed to innovation and creativity that challenges convention and breaks new ground. IZEA team members are
protective and proud of our culture by applying its “humble, yet hungry” attitude to all facets of our business. Our people and their innovations ultimately provide us with our largest competitive advantage.
First-mover advantage with a highly disruptive business model. We believe that by pioneering the social sponsorship space and investing heavily in innovation, acquisitions and marketing, we were first to develop positive rapport among creators and brandsmarketers alike. This loyalty has resulted in consistent revenue growth and high levels of repeat business.
Scalable and leverageable operations. Our business model allows revenue to be derived in a variety of ways, all of which rely on our marketplace as a hub. We intendcontinue to introduce multiple newand innovate product offerings within IZEAx withoutto substantially increasingdecrease our operations and support expense.expense over time as revenue grows.
Experienced management team, board of directors, and strategic advisors. Our management team includes not only a highly experienced team of entrepreneurs and executives from the digital media, technology and entertainment industries, but also outstanding strategic advisory board members who are experts in social media and integrated marketing campaigns.their respective fields. See “Management”Item 10 under Part III of this Annual Report for details.
Our Growth Strategy
After nineeleven years of working in and developing the social sponsorship category,influencer and content marketing categories, we believe our business model is market-tested and ready for growth.market-tested. Our development efforts have included assembling a diverse and experienced senior management team and advisory board,engineering team, launching and optimizing our proprietary marketplaces, developing a cross-platform sales force and refining our message to the market. Key elements of our strategy to accelerate revenue growth and continue product development include:
An integrated approach. We believe we are the only company that can currently provide both custom content productioncreation and sponsored socialinfluencer marketing at scale. It is our opinion that this provides a significant advantage for us in the market and we have already seen strong sales response to proposals that include both content and sponsored social. Moving forward we believe that content revenuesthis integrated approach will continue to play a significant role in IZEA’s growth.
Large client services team. We expect the growth of our client development team to be the primary driver of near-term revenues. We have been developing a comprehensive on-boarding and on-going education curriculum that led to record bookings in 2015. We intend to add additional client development personnel who receive a commission for meeting sales targets to more effectively service clientscustomers throughout North America and Canada. The majority of these team membersAmerica. These individuals will be locatedbased across our various offices in the Orlando, Chicago, Los Angeles, San Francisco and Toronto metro areas.
Large network of users. We help power the creator economy, allowing everyone from college students and stay-at-home individuals to celebrities and accredited journalists the opportunity to monetize their content, creativity and influence through our headquartersmarketers. As of December 31, 2017, we had more than 729,000 user accounts in Winter Park, FloridaIZEAx. These accounts have connections to over 920,000 social media accounts with an approximate aggregate reach to 5.9 billion non-unique fans and will conduct sales activitiesfollowers of IZEAx creators. Our total number of user accounts may be higher than the number of our actual individual creators because some creators may have created multiple user accounts.
Creators are able to join our platforms for free, but they may also pay to upgrade their account to enable additional services. The creators are compensated by IZEA for producing content for our marketers or distributing such content on behalf of marketers through phone, emailtheir personal websites, blogs, and videoconferencing.social media channels. We continually seek for ways to increase the ability for our creators to generate revenue. As such, we implement the ability for them to earn referral fees, for a period of time, based on revenue generated by other creators they refer into IZEAx.
By developing our creator network, we make our marketplace more attractive to our marketers who seek a wide variety of creators to fulfill their content and advertising needs. As marketers utilize our marketplace to a greater extent, we expect to increase the monetization opportunities for creators, which should, in turn, attract even more creators and further enhance value for our marketers.
Strategic partnerships. We continueare working to developimprove functionality within IZEAx to create strategic partnerships and reseller agreements with companies that can provide additional growth in our base of creators and advertisers.marketers. IZEAx is designed to be easily “white labeled,” allowing partners to operate their own “node” on the exchange. IZEAx is also designed to be resoldlicensed by partners that do not require a custom-branded solution. As of December 31, 2015, we have signed 29 partners, including The Marketing Arm, Meredithsolution, but instead seek an internal workflow tool to manage and Viacom.service their content and marketing needs.
Product innovationdevelopment. We will continue to recruit additional engineering and product innovation team members to enhance IZEAx to develop new technology ideas within this platform that complement our mission as a company. In 2016 and 2017,2018, we intend to focus our efforts on completing the Ebyline integration intorelease version 3.0 of IZEAx,, developing our mobile app which will allow marketers to make offers that require a single creator to complete multiple tasks or deliverables and unlocking additional revenue generating opportunities utilizing our existing platforms and users.it will also allow the system to source multiple creators to produce a combined deliverable for the marketer.
ComplementaryAccretive acquisitions. We continually seek to identify and acquire companies, technologies, and assets to add to our portfolio of software services that will drive additional near and long-term revenue. In July 2011, we acquired Germany’s Magpie Twitter advertising network that included approximately 12,000 advertisers and 20,000 Twitter creators in 143 countries. In December 2012, we acquired FeaturedUsers, one of the first advertising networks specifically designed to help Twitter users grow their followers. In January 2015, we acquired Ebyline, Inc., as described below.
Ebyline Acquisition
On January 30, 2015, we purchased all of the outstanding shares of capital stockequity of Ebyline, Inc. (“Ebyline”), pursuant to the terms of a Stock Purchase Agreement, dated as of January 27, 2015, by and among IZEA, Ebyline and the stockholders of Ebyline. The aggregate consideration payable by us was to be an amount up to $8,850,000, including a cash payment at closing of $1,200,000, a stock issuance valued at $250,000 paid onin July 30, 2015, $1,877,064 in two equal installments of $938,532 on the first and second anniversaries2016, we acquired all of the closing, and up to $5,500,000 in contingent performance payments, subject to Ebyline meeting certain revenue targets for eachoutstanding equity of ZenContent. The purposes of the three years ending December 31, 2015, 2016acquisitions were to integrate their proprietary technologies and 2017. The $1,877,064to add custom content services in annual payments and the $5,500,000 in contingent performance payments may be made in cash or common stock, at our option. The performance payments are to be made only if Ebyline achieves at least 90% of Content Revenue targets of $17,000,000 in 2015, $27,000,000 in 2016 and $32,000,000 in 2017. If Ebyline achieves at least 90%, but less than 100% of the Content Revenue targets, the performance payments owed of $1,800,000, $1,800,000 and $1,900,000 for each of the three years ending December 31, 2015, 2016 and 2017, respectively, will be subject to adjustment. Anything below 90% of the Content Revenue targets will not be eligible for any performance payment. Based on actual results for 2015 and our current projections for Content Revenue for 2016-2017, we do not believe that these targets will be met within each of the respective years. As a result, we do not believe that we will be required to make any of the $5,500,000 in contingent performance payments and we currently expect that the total consideration to be paid for the Ebyline acquisition will be $3,327,064.
Future cash payments and common stock issuances may be withheld to satisfy indemnifiable claims made by us with respect to any misrepresentations or breaches of warranty under the Stock Purchase Agreement by Ebyline or the stockholders of Ebyline within two years after the closing of the acquisition.
Based in Los Angeles, California, Ebyline operates an online marketplace that enables publishers to access a network of over 15,000 content creators ranging from writers to illustrators in 84 countries. Over 2,000 fully vetted individuals in the Ebyline network have professional journalism credentials with backgrounds at well-known media outlets. Ebyline’s proprietary workflow is utilized by leading media organizations to manage the entire customer content creation process - from creator selection through electronic payment. In addition to publishers, Ebyline is leveraged by brands to produce custom branded content for use on their owned and operated sites, as well as third party contentour existing influencer marketing and native advertising efforts. The Ebyline technology platform has been used by publishers and brands to manage over 200,000 content projects.
Customers
As of December 31, 2015, we had more than 629,000 user connections from 358,000 user accounts in services.IZEAx. The approximate aggregate reach of those connections is3.5 billion, which represents the total number of non-unique fans and followers of IZEAx users. Creators in our system include bloggers, leading social influencers and A-list celebrities.
In the case of our managed brands, we typically enter into a master agreement. Under the master agreement, the brand may submit one or more insertion orders pursuant to which we provide services for production of requested content specifically for the brand or for advertising through our creator's network of social media connections. The master agreement, according to our standard terms, is terminable by us or our customers upon 30 days prior written notice or immediately if a material breach has occurred that is not promptly cured. Each party indemnifies the other with regard to various representations made by such party, including the advertiser's representations that its content does not violate any law, or infringe any intellectual property right of another, is not false or deceptive, or defamatory or libelous, and is free of viruses and other computer programming that could damage any system data. Fees under the master agreement are typically payable within 30 days after the date of our invoice in accordance with the terms agreed to in the applicable insertion order. The master agreement additionally provides for standard service disclaimers and limitations of liability for our benefit, as well as a reciprocal confidentiality provision. We also enter into agreements with “self-service" customers who agree to our terms of service available on the applicable online platform when they create their account. These self-service customers do not separately enter into a master agreement with us.
We provide services to customers in multiple industry segments, including consumer products, retail/eTail, technology and travel. Our customers are predominantly located in the United States followed by Canada, India, the United Kingdom and over 150 other countries. Our business serves advertising and public relations agencies, as well as brands and businesses directly. In many cases, social media marketing dollars flow through the advertising or public relations agency, even when we have a direct relationship with the brand.
Below is a list of our customers who exceeded 5% of our revenue for the years ended December 31, 2015 and 2014:
|
| | | | | | |
Customer | | 2015 | | 2014 |
Journal Media Group | | 14.03 | % | | — | % |
eBay, Inc. | | 8.06 | % | | — | % |
Triad Retail Media | | 2.18 | % | | 9.97 | % |
Sales and Marketing
We primarily sell sponsored social sponsorship and custom content campaigns through our sales team, our self-service platforms and, to a lesser extent, by utilizingthrough distribution relationships such as resellers, affiliates and white label partners. We target regional, national and global brands and advertising agencies in the following ways:
Client Development Team. We have a client development team each of whom is assigned a geographic region or specific brands,marketers, primarily within the United States.States and Canada. The team members are responsible for identifying and managing sales opportunities into brands and agencies who are seeking to outsource some or all of the planning and production of their respective target areas.content and advertising needs.
ResellersPartnership Team. The partnership team initiates software as a service (“SaaS”) license opportunities with brands and White Label Partners. We have 29 independent resellers and distribution partnersagencies who are responsible for selling one or more ofseek to utilize additional functionality on our platforms under an independent contractor relationship. We maintain two types of reseller relationships: resellerson a self-service basis to facilitate custom content and white label partners. Resellers focus their efforts on selling a variety of brands throughout the United States. White label partners are complementary relationships that add additional advertisers and creators to our network. We intend to increase our number of resellers and white label partners under the IZEAx technology platform.influencer marketing campaigns.
Self-Service Platforms. IZEAx and Ebyline were developed as self-service marketplaces to enable brands, advertisers and agencies of all sizes to independently access our network of social media content creators and journalists and implement
their own social sponsorship campaigns or request the creation of specific content. Self-service customers extend our global reach and increase deal flow.
Referral Program. As more brand marketers contribute opportunities into our marketplaces, we believe we will increase the breadth and depth of the monetization value offered to our creators, attracting more creators to enroll into our platforms and thereby enhancing the value of our platforms to future brand advertisers. IZEAx contains a program designed to compensate social media content creators for referring other creators to join these platforms. In these programs, we incur the cost to pay a referral fee to the referrer equal to 5%-15% of the referee's earnings for up to a two-year period. Directly trackable creator referrals are new creator signups that we receive as the result of a current creator sharing a unique tracking link to our platform. The link allows us to determine how a new creator learned about our platform. We paid referral fees to creators approximating $46,000 and $52,000 in the years ended December 31, 2015 and 2014, respectively. These programs amplify our marketing dollars and decrease the investment required to attract new creators.
Industry Acumen. Our team possesses a strong marketing and advertising background. We focus our corporate marketing efforts on increasing brand awareness, communicating each of our platform advantages, generating qualified leads for our sales team and growing our social media creator network. Our corporate marketing plan is designed to continually elevate awareness of our brand and generate demand for social sponsorship. We rely on a number of channels in this area, including tradeshows, third partythird-party social media platforms (e.g., Facebook and Twitter), IZEA-hosted community events, paid searches, public relationscontent marketing, influencer marketing and our corporate websites.
Customers and Revenue Model
We derive revenue from three sources: revenue from a brand when it paysmanaging content services or advertising campaigns for a social media publisher or influencer such as a blogger or tweeter ("creators") to share sponsored content with their social network audience ("Sponsored Revenue"), revenue when a publisher or company purchases custom branded content for use on its owned and operated sites,our customers, as well as third partyfrom making our platforms available to allow customers the ability to purchase content directly from our creators. We categorize our revenue by three primary revenue streams: revenue from our managed services when a marketer (typically a brand, agency or partner) pays us to provide custom content, influencer marketing and native advertising efforts ("or amplification services (“Managed Services”), revenue from transactions generated by the self-service use of our platforms by marketers to handle their content workflow from initial content request to payment of content received or distributed (“Content Revenue"Workflow”), and revenue derived from various service and license fees charged to users of our platforms ("(“Service Fee Revenue"Revenue”).
We earn Sponsored Revenue either on a per post or action basis from opportunities created by advertisers using our platforms or on anprovide services to customers in multiple industry segments, including consumer products, retail/e-tail, lifestyle, technology, and travel. Our business serves advertising campaign basis where we manage the entire campaign for our customers, often using multiple platforms to accomplish a full social media campaign. Advertisers may prepay for services by placing a deposit in their account with us. The deposits are typically paid by the advertiserand public relations agencies, as well as brands and businesses directly. In many cases, influencer marketing dollars flow through the use of checks, wire transfersadvertising or credit cards. Deposits are recorded as unearned revenue until earned as described below. Typically, for each dollar an advertiser spendspublic relations agency, even when we have a direct relationship with us for sponsored services, approximately 50% of it goes to our social media content creators. Celebrity creators typically retain a higher percentage of each transaction due to the higher base price associated with these sponsorships.brand.
Sponsored Revenue is recognized and considered earned after an advertiser's sponsored content is posted through IZEAx and shared through a creator's social network for a requisite period of time. The requisite period ranges from 3 days for a tweet to 30 days for a blog, video or other form of content. Revenue is only recorded upon successful completion of these actions. IfWe generate the action was not successful, the advertiser's account would not be charged and no revenue would be recorded. IZEAx can be activated and used in a self-service fashion or with the assistancemajority of our account management team. Management fees related to Sponsored Revenuerevenue from advertising campaigns managed by us are recognized ratably over the term of the campaign which may range from a few days to months. Sponsored Revenueour Managed Services customers. Managed Services accounted for 60%approximately 98%, 96% and 92%95% of our total revenue during the twelve months ended December 31, 2017, 2016, and 2015, and 2014, respectively.
Content Revenue is recognized when the content is delivered to and accepted by the customer. Content revenueWorkflow accounted for 39%approximately 1%, 2% and 0%3% of our total revenue during the twelve months ended December 31, 2017, 2016, and 2015, and 2014, respectively.
Service Fee Revenue results when fees are charged to customers primarily related to subscription fees for different levels of service within a platform, licensing fees for white-label use of IZEAx, 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. We set certain minimum cash-out balance thresholds, typically $50, to encourage creators to help us better manage the time, Paypal fees and administrative costs that are associated with each cash-out by creators. Once a creator's account balance exceeds the minimum balance, they can request to be paid without incurring a fee. Service Fee Revenue is recognized immediately when the service is performed or at the time an account becomes dormant or is cashed out. Service Fee Revenue for subscription or licensing fees are recognized straight-line over the term of service. Self-service advertisers must prepay for services by placing a deposit in their account with the Company. The deposits are typically paid by the advertiser via credit card. Advertisers who use us to manage their social advertising campaigns or content requests may prepay for services or request credit terms. Payments received or billings in advance of services are recorded as unearned
revenue until earned as described above. Service Fee Revenue accounted for approximately 1%, 2% and 8%2% of our total revenue during the twelve months ended December 31, 2017, 2016, and 2015, respectively.
Changes in how we control and 2014, respectively.manage our platforms, our contractual terms, our business practices, or other changes in accounting standards or interpretations, may change the reporting of our revenue. Effective January 1, 2018, we became subject to new guidelines for disclosing and accounting for our revenue from contracts with customers. See “Note 1. Summary
of Significant Accounting Policies,” under Part II, Item 8 of this Annual Report for more information as it relates to our revenue recognition policies.
As IZEAx continues to gain adoption from our advertisers, creatorsOur customers are predominantly located in the United States and partners in future periods, we anticipate additional forms of revenue streams including subscription fees, listing fees, licensing fees and sponsored search fees as a result of new functionality built into the platform. Additionally, we began reporting Content Revenue after January 2015 as a resultCanada. We had no customer that accounted for more than 10% of our acquisition of Ebyline.
We were able to achieve gross margins on all our products of approximately 40% and 66% forrevenue during the yearstwelve months ended December 31, 2015 and 2014, respectively. As part2017, one customer that accounted for 11% of our commitment to increase shareholder value, we are constantly seeking methods to further increase margins by implementing technology advancementsrevenue during the twelve months ended December 31, 2016, and adjustingone customer that accounted for 12% of our revenue mix to focus on higher margin opportunities. The mixduring the twelve months ended December 31, 2015. Revenue from our Canadian customers accounted for approximately $2.0 million (8%) and $800,000 (4%) of sales between our higher margin Sponsored Revenuerevenues during the twelve months ended December 31, 2017 and our lower margin Content Revenue (particularly the self-service workflow portion of this revenue) has a significant affect on our overall gross profit percentage. Additionally, the addition of white label partners to IZEAx will translate into lower margins on our Sponsored Revenue. White label partners receive a percentage of each transaction generated by users within their system. As a result of the changes in our sales mix, we expect that our margins will average 38% to 41% in future years.2016, respectively.
Technology
IZEAx spans multiple social networks blogs and YouTube.creator-owned blog websites. We aggregate our creators in IZEAx, which allows us to create scale and targeting for our brands.marketers. We provide the ability to target our creators based on a variety of software rules and filters. We provide self-service platforms that service all business types and sizes. Unlike a traditional public relations advertisersmodel, marketers only pay for completed posts. We provide trackable results by automatically embedding tracking links and pixels, as well as support, for third-party tracking (such as DART). We also provide dashboards for real-time reporting providingand immediate feedback.
We recently announced a new research and development initiative focused on incorporating cryptocurrency and blockchain technologies into our ecosystem. We currently maintain a small alt-coin mining operation using an assortment of GPU and CPU hardware.In 2018, we developed a CPU mining software application that could pool our creator network's computing resources to mine cryptocurrency. However, due to increasing financial, legal and regulatory uncertainty, we have decided not to release our mining software to the public at this time.
Privacy and Security
We are committed to protecting the privacy, reputations and dignity of our advertisersmarketers and creators. Accordingly, we have invested heavily in many areas to prevent the misuse of information that we collect. We do not misuseAny personally identifiable information that we collect is used in accordance with our Privacy Policy, and we useemploy reasonable and suitable physical, electronic and managerial safeguards to protect such information.
Product Development
Our product development team is responsible for platform and infrastructure development, application development, user interface and application design, enterprise connectivity, Internet applications and design, quality assurance, documentation and release management. One of our core strengths is our knowledge of and experience in launching and operating scalable social mediacontent and influencer marketing marketplaces. Our product development expenses consisting primarily ofinclude salaries, paidbonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to our development personnelteam along with hosting and software subscription costs. These costs were approximately $3,214,000, $3,134,000, and $2,249,000 for the years ended December 31, 2017, 2016, and 2015, respectively and included in general and administrative expenses, were approximately $1,942,000 and $964,000 for the years ended December 31, 2015 and 2014, respectively.expense.
Throughout 2013 and the first quarter of 2014, we developed our new web-based advertising exchange platform,We launched IZEAx. This in March 2014 and unveiled our latest version 2.0 of the platform is being utilized both internally and externallyin February 2017. We continue to facilitate native advertising campaigns on a greater scale. We began addingadd new features and additional functionality to this platform in 2015 and will continue throughout 2016.each year. These new features will enable our platform to facilitate the contracting, workflow, and delivery of direct content.content as well as provide for invoicing, collaborating and direct payments for our SaaS customers. We incurred and capitalized software development costs of $452,571$174,379, $471,219, and $206,529452,571 in our balance sheet during the years ended December 31, 20152017, 2016, and 2014,2015, respectively.
Our team believes that constant innovation is the only way to achieve long-term growth.growth and our intention is to focus the majority of our engineering resources on the IZEAx platform for the foreseeable future. We intend to continue to invest in the creation of new technology additions that complement our core offerings.
Competition
We face competition from multiple companies in the social sponsorship industry.influencer and content marketing categories. Direct and indirect competitors in the social sponsorshipinfluencer marketing space include Facebook, Glam Media, Twitter, YouTube, BlogHer, TapInfluence and Collective Bias. We also face competition in the content marketing space from companies such as Contently, NewsCred and Scripted. In addition, there are a number of traditional advertising agencies, public relations firms and niche consultancies that provide social media programscontent development and conduct manual influencer outreach programs.
Competition for advertising placements among current and future suppliers of Internet navigational and informational services, high traffic websites and social sponsorship providers, as well as competition with other media for native advertising placements, could result in significant price competition, declining margins and reductions in advertising revenue. In addition, as we continue our efforts to expand the scope of our services with IZEAx, we may compete with a greater number of other companies across an increasing range of different services, including in vertical markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over those offered by us, our business, prospects, results of operations and financial condition could be negatively affected.
We also compete with traditional advertising media such as direct mail, television, radio, cable and print for a share of advertisers'marketers' total advertising budgets. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial, technical, sales and marketing resources.
Proprietary Rights
Proprietary rights are important to our success and our competitive position. To protectevolve and secure our proprietary rights, we rely on trademark, copyright, patentintellectual property and trade secret laws, confidentiality procedures and contractual provisions.
We currently own 57As of December 31, 2017, we owned 31 domestic trademark registrations and applications. In the United States, we own 23 trademarks registered with the U.S. Patent and Trademark Office (USPTO), including "Blogger's Choice Awards," "Champion the Creators," "Connecting Creators and Brands," "FanAds," "Get Everyone Talking," "InPostLinks," "IZEA," "IZEA Exchange," "IZEAx," "Native Ad Exchange," "PayPerPost," "Postie," "Selective Syndication," "SocialSpark," "SoundAmp," "Sponsored Music," "Sponsored Social," "Sponsorship Marketplace," "Staree," "The Creator MarketPlace," and "We Reward (Design)." Further, we have acquired registrations for "Ebyline" and "Virtual Newsroom." We also own an International Registration for the "Izea" mark, along with foreign registrations for "Izea" in Australia, New Zealand, and Norway.
In addition to these registered marks, we currently have 4 pending foreign applications for the mark "Izea" in Argentina, Brazil, Canada, and the European Union, as well as 25 trademark applications pending in the United States, with15 foreign registrations on the intention of filing additionalInternational Register, and had 4 total pending applications in both the U.S. and foreign countries where we have a bona fide commercial interest.
The pending applications(3 in the United States that have been successfully prosecuted, not challenged by any third-parties, and allowed for registration by1 foreign). During the USPTO in due course are "Community Rank," "Connecting Brandstwelve months ended December 31, 2017, we abandoned 13 U.S. applications and Creators," "ContentAmp," "Creators Choice Awards," "Influence Rank," "Influence Upfront," "InRank," "Platform Rank," and "Total Social Value." The remaining 17 pending applications, namely, "Community Rank," "ContentMarketing.com," "Content Rank," "LinkFinder," "Promoted Post," "ShareMonitor," "Social Media Rank," "Sponsored Action," "Sponsored Car," "Sponsored Chat," "Sponsored Distribution," "Sponsored Party," "Sponsored Ride," "Sponsored Snap," "Sponsored Stream," "Sponsored Syndication," and "The Content MarketPlace"were filed in 2015 and are still pending at the USPTO. Even if these applications are approved by the USPTO, there can be no assurance thatinactive trademarks. As of December 31, 2017, we will be successful in obtaining the registrations since any third-party with a concern will have an opportunity to challenge the applications during the 30 day opposition period prescribed by the USPTO. If a third party is successful in its challenge, use of the marks will be restricted unless we enter into arrangements with the opposing party that may be unavailable on commercially reasonable terms.
We also ownowned approximately 470 domain names related to the various aspects of IZEA’s products and services.
We actively protect our intellectual property rights, throughbut have encountered challenges following the prosecutionU.S. Supreme Court decision in Alice Corp. v. CLS Bank International, 573 U.S. __, 134 S. Ct. 2347 (2014) and Intellectual Ventures I LLC vs. Symantec Corp. (Fed. Cir. 2016), which changed the patent environment for software-based applications. As a result, given the difficulty in overcoming U.S. Patent and Trademark Office rejections of certain of our pending patent applications, covering the important features ofmanagement decided not to actively pursue, at this time, patent protection for our IZEA Exchange platform and the other innovationssoftware-based applications. We met with similar resistance in seeking patent protection for our software-based applications internationally. However, we continue to pioneer. We have five pending U.S. non-provisional patent applications covering various methods, systems, and computer programs related to, among other things: two-way bidding associated with an advertisement opportunity; an online marketplace for the creation and modification of content; and an online marketplace for posting and search of content associated with geopositional information. We also haveretain our pending foreign patent applicationsapplication in Australia, Brazil, Canada and the European Union directed to two-way bidding associated with an advertisement opportunity.Brazil.
We cannot provide any assurance that our proprietary rights with respect to our products or services will be viable or have value in the future since the validity, enforceability and type of protection of proprietary rights in Internet-related industries are uncertain and still evolving.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while
we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States, and effective copyright, trademark, trade secret and patent protection may not be available in those jurisdictions. Our means of protecting our proprietary rights may not be adequate to protect us from the infringement or misappropriation of such rights by others.
Further, in recent years, there has been significant litigation in the United States involving patents and other intellectual property rights, particularly in the software and Internet-related industries. We can and have been subject to intellectual property infringement claims as the number of our competitors grows and our products and services overlap with competitive offerings. These claims, even if not meritorious, could be expensive to defend and could divert management's attention from operating our company.business. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial award of damages and to develop non-infringing technology, obtain a license or cease selling the products that contain the infringing intellectual property. We may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, if at all.
Government Regulation
We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet, many of which are still evolving and could be interpreted by regulators or in the courts in ways that could harm our business. In the United States and abroad, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims. These regulations and laws may involve taxation, tariffs, creator privacy, data protection, content, copyrights, distribution, electronic contracts and other
communications, consumer protection, the provision of various online payment services, and the characteristics and quality of services. It is not entirely clear how existing laws which govern issues such as property ownership, taxation, export or import matters and personal privacy apply to the Internet, as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. In addition, it is possible that governments of one or more countries may seek to censor content available on our platforms or may even attempt to completely block access to our platforms. Accordingly, adverse legal or regulatory developments could substantially harm our business.
We are subject to a variety of federal, state and international laws and regulations governing consumer data. Many U.S. states have passed laws requiring notification to subscribers when there is a security breach of personally identifiable data. There are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies and foreign governments concerning data protection. In addition, data protection laws in Europe and other jurisdictions outside the United States can be more restrictive than those within the United States, and the interpretation and application of these laws are still uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change and/or abandon certain of our then-existing data practices, which could have an adverse effect on our business. Furthermore, the Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for linking to third-party websites that contain materials whichthat infringe copyrights or other intellectual property rights of third parties, so long as we comply with the statutory requirements of this act. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
We, as anyan e-commerce service provider are subject to Federal Trade Commission ("FTC")FTC and various state rules and regulations on advertising and marketing on the Internet. In certain cases, we are retained by advertisersmarketers to manage their advertising campaigns through our platforms, thereby increasing our exposure as not only the service provider but also the medium through which advertisements are broadcast. In addition to those requirements, the advertisers,marketers, creators, and agencies that use our platforms are subject to specific guidance and regulations regarding online advertising, such as the FTC's Dot Com Disclosures - Information about Online Advertising, the FTC’s Enforcement Policy Statement on Deceptively Formatted Advertisements, issued in 2015, and itsthe FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising (known as the Guides) that were adopted in 2009, updated and reissued by the FTC in 2013, and further clarified in 2015. Each of the foregoing are sub-categories that have been taken up by the FTC under the Federal Trade Commission Act (“FTC ActAct”) to prevent "unfair“unfair or deceptive acts and practices"practices” within advertising. These new Guides, for example, significantly extend the scope of potential liability associated with the use of testimonials and endorsements, including injecting endorsement requirements into advertising methods such as blogging.blogging, posting on Instagram, tweeting, and other online posting of sponsored advertisements by a creator. In particular, the Guides provide that bloggerscreators must always clearly and conspicuously disclose the material connection between the bloggercreator and the brand,marketer, such as if they received consideration for blogging or posting about a particular product, service, brand or the like, whether the consideration comprises something tangible (i.e., cash, discounts, objects that are provided to them at no cost, even for testing purposes) or intangible such(such as accolades and more prominent future blogging opportunities.or posting opportunities). In addition, the creator/bloggercreator must not make claims about the product or service he or she is discussing that go beyond what the brandmarketer could say about the product or service. The Guides further provide that the advertisermarketer should ensure that creators speaking on its bloggersbehalf are provided guidance and training needed to ensure their claims, statements and representations are truthful, transparent and properly substantiated.substantiated, and monitor the activities of creators speaking on its behalf. In the event a creator, blogger, agency or advertisermarketer should fail to comply with the Dot Com Disclosures, the Guides or any other FTC rule, regulation
or policy, which may be manifest by making deceptive, misleading or unsubstantiated claims and representations, failing to disclose a sponsorship relationship or otherwise, then various parties related to the advertising campaign (including the service provider of the platform over which the campaign is managed) may be subject to liability as a result of such non-compliance. In the event it was found that we (or one of our marketer customers) failed to comply with†with the FTC Act or state advertising rules, it could result in the potential imposition of equitable redress or penalties that could include monetary damages, a modification of certain business practices, or an order to cease certain aspects of our operations.
More generally, if there is negative consumer perception and mistrust of the practice of undisclosed compensation tocompensating creators to endorse the advertisers'marketers' specific products, then this could resultmarketers may become less interested in a reduction by advertisers in the use of social mediausing influencer marketing platforms like ours as a means for advertising which could, have a material adverse effect onin turn, materially adversely affect our business and financial results.
We comply withfollow the 1995 European Union Data Protection Directive with regard to data we collect from users located in the European Union. We do not transfer data collected from users located in the European Union outside of the European Union without first obtaining their express consent. Weand we are currently monitoring potential changes torequired by the 1995 European Unionrecently adopted General Data Protection DirectiveRegulation (“GDPR”), to ensure that we are compliant with relevant requirements when and to the extent they are implemented. The GDPR updates and modernizes the principles of the 1995 Data Protection Directive and significantly increases the level of sanctions for non-compliance. The European Union data protection authorities will have the power to impose administrative fines of up to a maximum of €20 million or 4% of the data controller's or data processor's total worldwide global turnover for
Asthe preceding financial year, whichever is higher. We believe that the regulation should not have a governing membermaterial impact on our business or the way our technologies operate. However, interpretations of the GDPR may vary, especially with respect to the conditions for collection of a leading marketingvalid "non-ambiguous" consent, and advertising industry association,thus there can be no assurance that this will be the Word of Mouth Marketing Association (WOMMA), wecase. The regulation will be enforced after a two-year transition period beginning May 25, 2018.
We are committed to promoting ethical social sponsorship practices and have established codesterms of ethicsservice for users of our platforms, which refer to the FTC Guides and include one or more of the following:
Mandatory Disclosure. We mandate disclosure of the sponsored relationship between the advertisermarketer and creator. A sponsorship cannot be published through the platform unless a phrase or paragraph disclosing the sponsored relationship is included. For example, a creator is required to select one of a number of disclosure phrases such as “sponsored,” “advertisement” or “ad” prior to the publication of a tweet.tweet or a post. Other social sponsorship forms may be monitored through a Disclosure Audit tool that monitors posts on an ongoing basis to make sure they continue to include disclosure after the initial posts are approved. Failure to disclose the sponsored relationship is a violation of our terms of service, which may result in the withholding of payment for the sponsorship and the creator being removed from our network.
Freedom of Choice. Creators are free to choose which sponsorships to publish. Our platforms do not auto-inject an advertiser'sa marketer's message into an influencer's social media network.
Authentic Voice. We encourage honesty of opinion in the selection of sponsorships by a creator and similarly we encourage advertisersmarketers to create opportunities that allow the creator to write the sponsorship in their own words, provided that a creator always adheres to our terms of service and code of ethics which includes disclosing their sponsored relationships at all times while using any of the platforms.
Transparency of Identity. Our platforms are designed to be open, safe environment for our advertisers,marketers, creators and users. In fact, we do not cloak the identities of advertisersmarketers or creators. Both parties involved in a potential transaction can see each other's profiles and make informed decisions before engaging with each other.
Pre-Publication AdvertiserMarketer Review. Advertisers have the abilityMarketers may choose to review their sponsored content before it is published and to request a change to the sponsored content prior to publication in the case of factual inaccuracies.
Reporting Violations. We have zero tolerance for violations of our codeterms of ethicsservice and encourage the reporting of violations through a special page on our websites dedicateddirectly to reporting violations.IZEA. If violations are reported, they arewe promptly investigated by usinvestigate them and in appropriate cases, advertisers,marketers, creators and users are removed from our network and prohibited from using our sites. In addition, we take an active role in reporting spam accounts to Twitter and Facebook.
In addition to the compliance and monitoring programs described above, we have created an FTC Survival Guide for our platform users that is available on our corporate website. We also believe, and have subsequently included requirements within our codeterms of ethics,service, based on positions taken by certain federal courts and the FTC, that communications and messages disseminated by creators through social media networks are subject to and must comply at all times with CAN-SPAM Act (Controllingof 2003(Controlling the Assault of Non-Solicited Pornography and Marketing Act) requirements.
To date, we have not been materially impacted by the rules governing messaging over social media networks and social sponsorship, including the CAN-SPAM Act and the Telephone Consumer Protection Act of 1991. However, we cannot
predict the impact of future regulations on us our advertisers or ourand marketers and creators thatwho use our platforms, ornor can we predict the impact of attempts to circumvent our mechanisms that are designed to ensure compliance.
Employees
As of March 18, 2016,April 13, 2018, we had a total of 113125 employees, of which 124 were full-time employees, including 7753 in sales and marketing, 2427 in product engineeringcampaign fulfillment, 27 in technology and 12development and 17 in administration and finance. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relationsrelationship with our employees to be good. Our future success depends on our continuing ability to attract and retain highly qualified engineers, graphic designers, computer scientists, sales and marketing, account management, and senior management personnel.
Corporate
Available Information
IZEA was founded in February 2006 under the name PayPerPost, Inc. and became a public company incorporated in the state of Nevada in May 2011.
Our executive offices are located at 480 N. Orlando Avenue, Suite 200, Winter Park, FL 32789 and our telephone number is (407) 674-6911. We maintain a corporate website at http:https://corp.izea.com. We provideizea.com. Our Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free access to various reports that we file with or furnish to the U.S. Securities and Exchange Commission throughof charge on our website, as soon as reasonably practicable after they have been filed with or furnished. These reports include, but are not limitedfurnished to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,the U.S. Securities and any amendments to those reports.Exchange Commission (“SEC”). Our SEC reports and other filings can be accessed through the investors section of our website, or through http:https://www.sec.gov. Information on our website does not constitute part of this annual report on Form10-KAnnual Report or any other report we file or furnish with the SEC.
Investors and others should note that we use social media to communicate with our subscribers and the public about our company,Company, our services, new product developments and other matters. Any information that we consider to be material to an investor's evaluation of our companyCompany will be included in filings onaccessible through the SEC EDGAR website, and may also be disseminated using our investor relations website (http:(https://corp.izea.com)izea.com) and press releases. However, we encourage investors, the media, and others interested in our companyCompany to also review our social media channels @izea on Twitter and izeainc on Facebook. The information contained in these social media channels is not part of, and is not incorporated into or included in, this annual report on Form 10-K.
Annual Report.
ITEM 1A – RISK FACTORS
In addition to the information set forth at the beginning of Management's Discussion and Analysis entitled "Special“Special Note Regarding Forward-Looking Information", investorsInformation,” you 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. These risk factors may not identify all risks that we face and our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.
Risks Related to our Business and Industry
We have a history of annual net losses, expect future losses and cannot assure you that we will achieve profitability.
We have incurred significant net losses and negative cash flow from operations for most periods since our inception, which has resulted in a total accumulated deficit of $34,249,521$47,277,420 as of December 31, 2015.2017. For the yeartwelve months ended December 31, 2015,2017, we had a net loss of $11,308,171,$5,467,699, including a $7,222,320$5,476,236 loss from operations.operations and we expect to incur a net loss for the fiscal year 2018. Although our revenue has increased since inception, we have not achieved profitability and cannot be certain that we will be able to sustainmaintain these growth rates or realize sufficient revenue to achieve profitability. If we achieve profitability, we may not be able to sustain it.
If we fail to retain existing customers or add new customers, our revenue and business will be harmed.
We depend on our ability to attract and retain customers that are prepared to offer products or services on compelling terms through IZEAx. Additionally, we rely on customers who purchase direct custom content from our creators in our platforms. We must continue to attract and retain customers in order to increase revenue and achieve profitability. We had no customer that accounted for more than 10% of our revenue during the twelve months ended December 31, 2017, one customer that accounted for 11% of our revenue during the twelve months ended December 31, 2016, and one customer that accounted for 12% of our revenue during the twelve months ended December 31, 2015.
The loss of customers or a significant reduction in revenue from our major customers could have a material adverse effect on our results of operation. Moreover, if customers do not find our marketing and promotional services effective, if they are not satisfied with content they receive, or if they do not believe that utilizing our platforms provides them with a long-term increase in value, revenue or profit, they may stop using our platforms or managed services. In addition, we may experience attrition in our customers in the ordinary course of business resulting from several factors, including losses to competitors, mergers, closures or bankruptcies. If we are unable to attract new customers in numbers sufficient to grow our business, or if too many customers are unwilling to offer products or services with compelling terms to our creators through our platforms or if too many large customers seek extended payment terms, our operating results will be adversely affected.
We have identified a material weakness in our internal control over financial reporting, and this or other material weaknesses, or inadequate remediation measures, could impair our ability to report accurate financial information in a timely manner, which could adversely affect our business and results of operations.
Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). As disclosed in Item 9A. “Controls and Procedures”, our management identified a material weakness relating to the error in our presentation of revenues and classification of expenses in our consolidated statements of operations. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective as of December 31, 2017, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and may not be available in a timely manner and we could be required to restate our financial statements which could lead to substantial additional costs for accounting and legal fees.
We make numerous estimates or judgments relating to our critical accounting policies and these estimates create complexity in our accounting. If our accounting is erroneous or based on assumptions that change or prove to be
incorrect, our operating results could change from investor expectations, which could cause our stock price to fall.
We are developing a new platformrequired to process allmake estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes in conformity with generally accepted accounting principles in the United States, or GAAP. We use significant judgments, assumptions and estimates in the preparation of our existingconsolidated financial statements including those related to revenue recognition, stock based compensation, credit risk, and values surrounding software development and intangible assets and their economic useful lives.
Various factors contribute to complexity in our accounting. For example, the recognition of our revenue is governed by certain criteria that determine whether we report revenue either on a gross basis, as a principal, or net basis, as an agent, depending upon the nature of the sales transaction. We have historically reported all our revenue on a gross basis because we concluded that we were a principal in all our transactions. In connection with our year-end financial statement close process and preparation of this Annual Report, we determined that we were more appropriately considered an agent in our Content Workflow transactions which resulted in a lower reported GAAP revenue and related cost of revenue. We continue to report our revenue on a gross basis for the Managed Services portion of our business where we have the performance obligation to provide content, sponsored social or other services to our customers. Changes in how we control and manage our platforms, our contractual terms, our business practices, or other changes in accounting standards or interpretations, may change the reporting of our revenue on a gross to net or net to gross basis. As a result, we may experience significant fluctuations in our revenue depending on the nature of our sales and our reporting of such revenue and related accounting treatment, without any change in our underlying business or net income. Our guidance or estimates about the combination of gross or net revenue are based upon the volumes and characteristics that we believe will be the mix of revenue during the period. Those estimates and assumptions may be inaccurate when made, or may be rendered inaccurate by subsequent changes in circumstances, such as changing the characteristics of our offerings or particular transactions in response to client demands, market developments, regulatory pressures, acquisitions, and growother factors. Even apparently minor changes in transaction terms from those initially envisioned can result in different accounting conclusions from those foreseen. In addition, we may incorrectly extrapolate from revenue recognition treatment of prior transactions to future transactions that we believe are similar, but that ultimately are determined to have different characteristics that dictate different revenue reporting treatment. These factors may make our financial reporting more complex and difficult for investors to understand, may make comparison of our results of operations but cannot provideto prior periods or other companies more difficult, may make it more difficult for us to give accurate guidance, and could increase the potential for reporting errors.
Further, our acquisitions have imposed purchase accounting requirements, required us to integrate accounting personnel, systems, and processes, necessitated various consolidation and elimination adjustments, and imposed additional filing and audit requirements. Ongoing evolution of our business, changes in underlying GAAP and any assurance regarding its commercial success.future acquisitions, will compound these complexities. Our operating results may be adversely affected if we make accounting errors or our judgments prove to be wrong, assumptions change or actual circumstances differ from those in our assumptions, which could cause our operating results to fall below investor expectations or guidance we may have provided, resulting in a decline in our stock price and potential legal claims.
We are continuing to develop our IZEAx platform and are in the process of transitioning certain features and customers from our legacy Ebyline and ZenContent platforms. Our updated IZEAx platform may not achieve sufficient market acceptance to be commercially viable for open marketplace or SaaS services.
We are continuing to develop our primary platform, called the IZEA Exchange (IZEAx). 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 provide an integrated offering that is improved and more efficient for the company to operate. Our intention iswe intend to focus allthe majority of our engineering resources on the IZEAx platform for the foreseeable future. Throughout 2016,2018, we will be addingcontinue to add additional features to support SaaS white-label partners and begin integratingintegrate the Ebyline and ZenContent platform offerings for custom content services within our IZEAx platform. 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. 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. ThereThe Ebyline platform is naturally declining as we are dedicating resources to the continuation and development of our IZEAx platform. We are working towards merging the two platforms and there is a risk that the merging of our Ebyline platformcustomers into IZEAx will result in a further decrease in revenue related to the self-service contentContent Workflow business if the customers do not understand the changes or perceivedo not believe that the IZEAx platform can provide them with a similar or value addedimproved service experience.from what they received in the Ebyline platform. Additionally, there is a risk that existing creators registered under our Ebyline and ZenContent platforms will either not migrate or will not participate and accept offers after their migration into IZEAx. If our advertisersmarketers 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 advertisersmarketers 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.
We have experienced rapid growth over a short period and we do not know whether this will continue to develop or whether it can be maintained.continue. If we are unable to manage our growth effectively or successfully respond to changes in the market, our business could be harmed.
Our business has grown rapidly in a relatively short period of time as publishers, brandsmarketers and creators have increasingly used our services or offerings on our platforms. We have increased our revenues over the past three years from $8,322,274 for the year ended December 31, 2014 to $24,437,649 for the year ended December 31, 2017. This growth of our business has placed, and the continued growth that we expect will continue to place, significant demands on our management team and pressure to expand our operational and financial structure. We expect we will need to hire new employees to meet growing business needs. To manage the expected growth of our operations and personnel, we will be required to:
improve existing, and implement new, operational, financial and management controls, reporting systems and procedures;
install enhanced management information systems; and
train, motivate and manage our employees.
We may be unable to install adequate management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we do not manage the growth of our business and operations effectively, the quality of our services and efficiency of our operations could suffer, which could harm our brand, results of operations, and overall business.
Although we have experienced rapid growth in the past, there is no assurance that such growth will continue. It is difficult to predict whether our platforms will continue to growrecent and whether the historical levels of growth can be maintained. We have encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies in rapidly changing industries. We expect that theour service offerings and our platforms will evolve in ways that may be difficult to predict. It is possible that brandsmarketers and creators could broadly determine that they no longer believe in the value of our current platforms. In the event of these or any other changes to the market, our continued success will depend on our ability to successfully adjust our strategy to meet the changing market dynamics. If we are unable to do so, our business, prospects, results of operationoperations and financial condition could be materially harmed.
We have been named as a defendant in a securities class action lawsuit. This litigation, and any other similar or related claims or investigations, could result in substantial damages and cost and may divert management’s time and attention from our business.
A securities lawsuit, Julian Perez v. IZEA, Inc., et al., case number 2:18-cv-02784-SVW-GJS was instituted April 4, 2018 in the U.S. District Court for the Central District of California against us and certain of our executive officers on behalf of certain purchasers of our common stock. The plaintiffs seek to recover damages for investors under federal securities laws. We are still in the early stages of this litigation and are unable to estimate a reasonably possible range of loss, if any, that may result from this matter.
The lawsuit, and any other similar or related claims or investigations could result in the diversion of management’s time and attention away from business operations, which could harm our business and also harm our relationships with existing customers, vendors and business partners. They may also materially damage our reputation and the value of our brand. Our legal expenses incurred in defending the law suit, and any other similar or related matter, could be significant, and a ruling against us, or any settlement, could have a material adverse effect on us.
There can be no assurance that any litigation to which we are, or in the future may become, a party will be resolved in our favor. This lawsuit and any other lawsuits that we may become party to are subject to inherent uncertainties, and the costs to us of defending litigation matters will depend upon many unknown factors. Any claim that is successfully decided against us may require us to pay substantial damages, including punitive damages, and other related fees, or prevent us from selling certain of our products. Regardless of whether lawsuits are resolved in our favor or if we are the plaintiff or the defendant in the litigation, any lawsuits to which we are or may become a party will likely be expensive and time consuming to defend or resolve.
Fluctuations in foreign currency exchange rates could result in unanticipated losses that could adversely affect our results of operations and financial position.
We are exposed to foreign currency exchange rate fluctuations, because a portion of our sales, expenses, assets and liabilities are denominated in foreign currencies. Changes in the value of foreign currencies, particularly the Canadian dollar, affect our results of operations and financial position. With respect to international sales initially priced using U.S. dollars as a cost basis, a decrease in the value of foreign currencies relative to the U.S. dollar would make our products less price competitive. Once the product is sold at a fixed foreign currency price, we could experience foreign currency gains or losses that could have a material effect on our operating results.
We may have increases in tax expenses and uncertain future tax liabilities due to the recent enactment of the Tax Cuts and Jobs Act.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”), was signed into law resulting in significant changes to U.S. tax law, generally effective for tax years beginning after December 31, 2017. Among other changes, the Tax Act reduces the U.S. corporate income tax rate to 21 percent from a maximum rate of 35 percent; implements a new system of taxation for non-U.S. earnings, including imposing a one-time tax on the deemed repatriation of undistributed earnings of non-U.S. subsidiaries, permitting deductions for certain dividends from non-U.S. subsidiaries and expanding income inclusions from controlled foreign corporations; imposes significant additional limitations on the deductibility of interest; and allows for the expensing of certain capital expenditures. In the absence of guidance on various ambiguities in the application of certain provisions of the Tax Act, we will use what we believe are reasonable interpretations and assumptions in applying the Tax Act. It is possible, however, that the U.S. Internal Revenue Service will issue subsequent guidance or take positions that differ from our prior interpretations and assumptions, which could have a material adverse effect on our deferred tax assets and liabilities, results of operations, and financial condition.
Delays in releasing enhanced versions of our products and services could adversely affect our competitive position.
As part of our strategy, we expect to periodically release enhanced versions of our premier platforms and related services. Even if our new versions contain the features and functionality our customers want, in the event we are unable to timely introduce these new product releases, our competitive position may be harmed. We cannot assure you that we will be able to successfully complete the development of currently planned or future products in a timely and efficient manner. Due to the complexity of these products, internal quality assurance testing and customer testing of pre-commercial releases may reveal product performance issues or desirable feature enhancements that could lead us to postpone the release of these new versions. In addition, the reallocation of resources associated with any postponement would likely cause delays in the development and release of other future products or enhancements to our currently available products. Any delay in releasing other future products or enhancements of our products could cause our financial results to be adversely impacted.
Our growth strategy depends, in part, onWe may expand our acquiringbusiness through acquisitions of other companies, technologies and assets, which may divert our management's attention or prove not to be successful or result in equity dilution.
We have completed two significant recent acquisitions, Ebyline, Inc. in January 2015 and adding themZenContent, Inc. in July 2016. We may decide to pursue other acquisitions of companies, technologies and assets in the future. Such transactions could divert our portfoliomanagement's time and focus from operating our business.
Integrating an acquired company, technology or assets is risky and may result in unforeseen operating difficulties and expenditures, including, among other things, with respect to:
incorporating new technologies into our existing business infrastructure;
consolidating corporate and administrative functions;
coordinating our sales and marketing functions to incorporate the new company, technology or assets;
maintaining morale, retaining and integrating key employees to support the new business or technology and managing our expansion in capacity; and
maintaining standards, controls, procedures and policies (including effective internal control over financial reporting and disclosure controls and procedures).
In addition, a significant portion of software servicesthe purchase price of companies we may acquire may be allocated to drive additional nearacquired goodwill and long-term revenue,other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be unablerequired to do.take charges to our earnings based on this impairment assessment process, which could harm our operating results.
Our growth strategy is based,Future acquisitions could result in part, onpotentially dilutive issuances of our ability to acquire companies, technologiesequity securities, including our common stock, or the addition of debt, contingent liabilities, amortization expenses or acquired in-process research and assets. The successdevelopment expenses,
any of this acquisition strategy will depend, in part, onwhich could harm our ability to accomplish the following:
identify suitable companies, technologies or assets to buy;
complete the purchase of those businesses on terms acceptable to us;
complete the acquisition(s) in the time framebusiness, financial condition and within the budget we expect; and
improve the results of operations of each of the businesses that we buy and successfully integrate its operations on an accretive basis.
There can be no assurance that we will be successful in any or all of the factors above. Our failureoperations. Future acquisitions may also require us to successfully implement our acquisition strategy could have an adverse effect on other aspects of our business strategy and our business in general. Weobtain additional financing, which may not be able to find appropriate acquisition candidates, accretively acquire those candidates that we identifyavailable on favorable terms, or integrate acquired businesses effectively and profitably.at all. We currently have no commitments or agreements with respect to any such acquisitions, and there can be no assurance that we will complete any acquisitions in the future.
The social sponsorship landscape is subject to numerous changes that could cause our revenue to decline.
Our social sponsorship business model may not continue to be effective in the future for a number of reasons, including the following:
social sponsorship is, by its nature, limited in content relative to other media;media (less time or fewer words are able to be used to convey meaning);
companies may be reluctant or slow to adopt social sponsorship that replaces, limits or competes with their existing direct marketing efforts;
companies may prefer other forms of advertising we do not offer, including certain forms of search engine placements;
companies such as Facebook and Twitter, may no longer grant us access to their websites in connection with our social sponsorship platforms;
companies may not utilize social sponsorship due to concerns of “click-fraud” particularly related to search engine placements (“click-fraud” is a form of online fraud whenin which a person or computer program imitates a legitimate user by
clicking on an advertisement for the purpose of generating a charge per click without having an actual interest in the target of the advertisement's link);link; and
regulatory actions may negatively impact certain business practices that we currently rely on to generate a portion of our revenue and profitability.
If the number of companies that purchase social sponsorship from us or the size of the sponsorship campaigns does not grow, our revenue could decline which would have a material adverse effect on our business, prospects, results of operations and financial condition.
IfWe rely on third-party social media platforms to provide the mechanism necessary to deliver influencer marketing, and any change in the platform terms, costs, availability, or access to these technologies could adversely affect our business.
We rely on third-party social media platforms such as Facebook, Instagram, Twitter, and YouTube to serve as the mechanism for publishing influencer marketing to targeted audiences, in order to deliver our sponsored social services to our customers. These platforms include technologies that provide some of the core functionality required to operate the sponsored social portion of our platform, as well as functionalities such as user traffic reporting, ad-serving, content delivery services and reporting. There can be no assurance that these providers will continue to make all or any of their technologies available to us on reasonable terms, or at all. Third-party social media platforms may start charging fees or otherwise change their business models in a manner that impedes our ability to use their technologies. In any event, we failhave no control over these companies or their decision-making with respect to granting us access to their social media platforms, or providing us with analytical data, and any material change in the current terms, costs, availability or use of their social media platforms or analytical data could adversely affect our business.
Our business depends on continued and unimpeded access to the Internet by us and by our customers and their end users. Internet access providers or distributors may be able to block, degrade or charge for access to our content, which could lead to additional expenses to us and our customers and the loss of end users and advertisers.
Products and services such as ours depend on our ability and the ability of our customers' users to access the Internet. Currently, this access is provided by companies that have, or in the future may have, significant market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies and government-owned service providers. Some of these providers may take, or have stated that they may take, measures that could degrade, disrupt, or increase the cost of user access to products or services such as ours by restricting or prohibiting the use of their infrastructure to support or facilitate product or service offerings such as ours, or by charging increased fees to businesses such as ours to provide content or to have users access that content. In 2015, the Federal Communications Commission (“FCC”) released an order, commonly referred to as net neutrality, that, among other things, prohibited (i) the impairment or degradation of lawful Internet traffic on the basis of content, application or service and (ii) the practice of favoring some Internet traffic over other Internet traffic based on the payment of higher fees. In December 2017, the FCC voted to overturn the net neutrality regulations imposed by the 2015 order. Internet service providers in the U.S. may now be able to impair or degrade the use of, or increase the cost of using, our products or services. Such interference could result in a loss of existing viewers, subscribers and advertisers, and increased costs, and could impair our ability to attract new viewers, subscribers and advertisers, thereby harming our revenues and growth.
In order for our social sponsorship business to be successful, we must retain existing creators, as well as continue to build our revenue and business will be harmed.network of creators.
We must continue to retain and acquire creators that publish sponsorships through IZEAx in order to increase revenue from customers and achieve profitability. If creators do not perceive our products and services to be of high value and quality or if we fail to provide value with IZEAx, we may not be able to acquire or retain creators. If we are unable to acquire new creators in numbers sufficient to grow our business, or if creators cease using our products and services, the revenue we generate may decrease and our operating results will be adversely affected. We believe that many of our new creators originate from word of mouth and other referrals from existing creators, and therefore we must ensure that our existing creators remain loyal to our service in order to continue receiving those referrals. If our efforts to satisfy our existing creators are not successful, we may not be ableunable to acquire new creators in sufficient numbers to continue to grow our business or we may be required to incur significantly higher marketing expenses in order to acquire new creators.
If we fail to retain existing customers or add new customers, our revenue and business will be harmed.
We depend on our ability to attract and retain brands that are prepared to offer products or services on compelling terms through IZEAx. We must continue to attract and retain brand customers in order to increase revenue and achieve profitability. We have one customer that accounted for 14% of our revenue during the twelve months ended December 31, 2015. If new customers do not find our marketing and promotional services effective, or if existing customers do not believe that utilizing our platforms provides them with a long-term increase in value, revenue or profit, they may stop advertising through our platforms. In addition, we may experience attrition in our customers in the ordinary course of business resulting from several factors, including losses to competitors, closures or bankruptcies. If we are unable to attract new customers in numbers sufficient to grow our business, or if too many customers are unwilling to offer products or services with compelling terms to our creators through our platforms or if too many large customers seek extended payment terms, our operating results will be adversely affected.
Intense competition in our target marketmarkets could impair our ability to grow and to achieve profitability.
The market for native advertising is highly competitive. We expect this competition to continue to increase, in part because there are no significant barriers to entry to our industry. Increased competition may result in price reductions for advertising space, reduced margins and loss of market share. Our principal competitors include other companies that provide advertisersmarketers with Internet advertising solutions and companies that offer pay per click search services.
Competition for advertising placements among current and future suppliers of Internet navigational and informational services, high traffic websites and social sponsorship providers, as well as competition with other media for native advertising placements, could result in significant price competition, declining margins and reductions in advertising revenue. In addition, as we continue our efforts to expand the scope of our services, we may compete with a greater number of other media companies across an increasing range of different services, including in vertical markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over those offered by us, our business, prospects, results of operations and financial condition could be negatively affected. We also compete with traditional advertising media, such as direct mail, television, radio, cable and print for a share of advertisers'marketers' total advertising budgets. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial, technical, sales and marketing resources. As a result, we may not be ableunable to compete successfully. If we fail to compete successfully, we could lose customers or advertising inventory and our revenue and results of operations could decline.
Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, or if we receive unfavorable media coverage, our ability to expand our base of creators and advertisersmarketers will be impaired and our business and operating results will be harmed.
We believe that the brand identity that we have developed has significantly contributed to the success of our business. We also believe that maintaining and enhancing the "IZEA"“IZEA” brand is critical to expanding our base of creators and advertisers.marketers. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to promote, maintain, and maintainprotect the "IZEA"“IZEA” brand, or if we incur excessive expenses in this effort, our business, prospects, operating results and financial condition will be materially and adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Unfavorable publicity or consumer perception of our platforms, applications, practices or service offerings, or the offerings of our advertisers,marketers, could adversely affect our reputation, resulting in difficulties in recruiting, decreased revenue and a negative impact on the number of advertisersmarketers and the size of our creator base, the loyalty of our creators and the number and variety of sponsorships we offer each day. As a result, our business, prospects, results of operation and financial condition could be materially and adversely affected.
Our total number of user accounts may be higher than the number of our actual individual advertisersmarketers or creators and may not be representative of the number of persons who are active users.
Our total number of user accounts in the IZEAx,Ebylineand Ebyline ZenContent platforms may be higher than the number of our actual individual advertisersmarketers and creators because some may have created multiple accounts for different purposes, including different user connections. We define a user connection as a social account or blog that has been added to IZEAx under a user account. It is possible for one user to add as many user connections as they like, and it is common for talent mangers and large publishers to add manyseveral connections under a single account. Given the challenges inherent in identifying these creators, we do
not have a reliable system to accurately identify the number of actual individual creators, and thus we rely on the number of total user connections and user accounts as our measure of the size of our user base. In addition, the number of user accounts includes the total number of individuals that have completed registration through a specific date, less individuals who have unsubscribed, and should not be considered as representative of the number of persons who continue to actively create to fulfill the sponsorships offered through our platforms. Many users may create an account, but domay not actively participate in marketplace activities.
Our cryptocurrency mining activities will be unsuccessful unless cryptocurrencies and their mining and trading systems are further developed and are more widely accepted by consumers, investors and government regulators.
IZEA maintains a small cryptocurrency mining operation. Our cryptocurrency mining activities will be subject to the significant risks accompanying the development or acceptance of cryptocurrencies and their mining and trading systems. Cryptocurrencies such as bitcoins which may be used, among other things, to buy and sell goods and services, are part of a new and rapidly evolving industry. The growth of this industry in general, and the use of cryptocurrencies in particular, is subject to a high degree of uncertainty. The factors affecting the further development of this industry, as well as our cryptocurrency initiative, include:
continued worldwide growth in the adoption and use of cryptocurrencies;
general economic conditions, as well as government and quasi-government regulation of cryptocurrencies and their use, or restrictions on or regulation of access to and operation of cryptocurrency trading systems;
changes in consumer demographics and public preferences;
the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using government-issued currencies; and
negative consumer sentiment and perception of cryptocurrencies
Recently, cryptocurrencies and their infrastructure and markets have been subject to increased regulation and negative public attention. For example, various media social media and internet service providers have limited the availability to market cryptocurrency related advertising. In 2018, we developed a CPU mining software application that could pool our network’s computing resources to mine cryptocurrency. However, due to increasing financial, legal and regulatory uncertainty around cryptocurrency, we have decided not to release our mining software to the public at this time. Unless and until the financial, legal and regulatory landscape with respect to, as well as the public perception of, cryptocurrencies improves, we will be hampered in our ability to further develop our cryptocurrency related activities. Any slower than expected acceptance or adoption or any decline in the acceptance or adoption of cryptocurrency could have a detrimental impact on the profit margins of our mining operations and our cryptocurrency initiative in general.
We may become subject to government regulation and legal uncertainties that could reduce demand for our products and services or increase the cost of doing business, thereby adversely affecting our financial results.
As described in the section "Business“Business - Government Regulation,"” we are subject to laws and regulations applicable to businesses generally and certain laws or regulations directly applicable to service providers for advertising and marketing Internet commerce. Due to the increasing popularity and use of the social media, it is possible that a number of laws and regulations may become applicable to us or may be adopted in the future with respect to the Internetsocial media covering issues such as:
truth-in-advertising;
user privacy;
taxation;
right to access personal data;
copyrights;
distribution; and
characteristics and quality of services.
The applicability of existing laws governing issues such as property ownership, copyrights and other intellectual property, encryption, taxation, libel, export or import matters and personal privacy to social media platforms is uncertain. The vast majority of these laws were adopted prior to the broad commercial use of social media platforms and related technologies. As a result, they do not contemplate or address the unique issues of social media and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes, could create uncertainty in the social media marketplace. Such uncertainty could reduce demand for our services or increase the cost of doing business due to increased costs of litigation or increased service delivery costs.
Our social sponsorship business is subject to the risks associated with word of mouth advertising and endorsements, such as violations of the “truth-in-advertising,” FTC Guides and other similar regulatory requirements and, more generally, loss of consumer confidence.
We do not engage in targeted or online behavioral advertising practices, nor do we compile or use information concerning consumer behavior on an individual level, but we may do so from time to time in the aggregate and on an anonymous basis to analyze our services and offerings, and to better optimize them for improved business results. As the practice
of targeted advertising has becomeis increasingly scrutinized by both regulators and the industry alike, a greater emphasis has been placed on educating consumers about their privacy choices on the Internet, and providing them with the right to opt in or opt out of certain industry practices, such as targeted advertising. The common thread throughout both targeted advertising and the FTC requirements described in detail in the section "Business“Business - Government Regulation"Regulation” is the increased importance placed on transparency between the advertisermarketer and the consumer to ensure that consumers know the difference between “information” and “advertising” on the Internet, and are afforded the opportunity to decide how their data will be used in the manner to which they are marketed. There is a risk regarding negative consumer perception “of the practice of undisclosed compensation of social media users to endorse specific products” which pertains to a risk of overall general public confidence in the FTC's ability to enforce its Guides Concerning the Use of Endorsements and Testimonials in Advertising in social media. As described in the section "Business“Business - Government Regulation,"” we undertake various measures through controls across our platforms and by monitoring and enforcing our code of ethics to ensure that advertisersmarketers and creators comply with the FTC Guides when utilizing our sites, but if competitors and other companies do not, it could create a negative overall perception for the industry. Not only will readers stop relying on blogs for useful, timely and insightful information that enrich their lives by having access to up-to-the-minute information that often bears different perspectives and philosophies, but a lack of compliance will almost inevitably result in greater governmental oversight and involvement in an already-highly regulated marketplace. If there is pervasive overall negative perception caused by others not complying with FTC Guides among its other acts, regulations and policies, then this could result in reduced revenue and results of operations and higher compliance costs for us.
New tax treatment of companies engaged in internetInternet commerce may adversely affect the commercial use of our services and our financial results.
Due to the global nature of social media, it is possible that various states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in internetInternet commerce. New or revised international, federal, state or local tax regulations may subject us or our creators to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over social media. New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over social media. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.
Failure to comply with federal, state and international privacy laws and regulations, or the expansion of current or the enactment of new privacy laws or regulations, could adversely affect our business.
A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. The existing privacy-related laws and regulations are evolving and subject to potentially differing interpretations. In addition, various federal, state and foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. For example, recently there have been Congressional hearingsthe European Union adopted the GDPR, which will go into effect in May 2018, and increased attentionrequires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its collection, use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Complying with the GDPR may cause us to incur substantial operational costs or require us to change our business practices. Despite our efforts to bring practices into compliance before the effective date of the GDPR, we may not be successful. Noncompliance could result in proceedings against us by governmental entities or others and fines up to the capturegreater of €20 million or 4% of annual global revenues and usedamage to our reputation and brand. We also may find it necessary to establish systems to maintain personal data originating from the European Union in the European Economic Area as a result of location-based information relatingchanges or restrictions to userscurrently legitimate methods of smartphoneseffectuating cross-border personal data transfers to countries outside of the European Economic Area, which may involve substantial expense and distraction from other mobile devices. aspects of our business. Additionally, there could be uncertainty as to how to comply with other European Union privacy laws, such as country-specific laws that may conflict with or deviate from European Union privacy directives, such as the GDPR.
We have posted privacy policies and practices concerning the collection, use and disclosure of creator data on our websites and platforms. Several internetInternet companies have incurred penalties for failing to abide by the representations made in
their privacy policies and practices. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, FTC requirements or orders or other federal, state or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental entities or others or other liabilities, which could adversely affect our business. In addition, a failure or perceived failure to comply with industry standards or with our own privacy policies and practices could result in a loss of creators or advertisersmarketers and adversely affect our business. Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of third-party web "cookies"“cookies” for behavioral advertising. The regulation of these cookies and other current online advertising practices could adversely affect our business.
Our business depends on our ability to maintain and scale the network infrastructure necessary to operate our platforms and applications, and any significant disruption in service on our platforms and applications could result in a loss of creators or advertisers.marketers.
Creators and advertisersmarketers access our services through our platforms and applications. Our reputation and ability to acquire, retain, and serve our creators and advertisersmarketers are dependent upon the reliable performance of our platforms and
applications and the underlying network infrastructure. AsIf our creator base continues to grow, we will need an increasing amount of network capacity and computing power. We have spent and expect to continue to spend substantial amounts for data centers and equipment and related network infrastructure to handle the traffic on our platforms and applications. The operation of these systems is expensive and complex and could result in operational failures. In the event that our creator base or the amount of traffic on our platforms and applications grows more quickly than anticipated, we may be required to incur significant additional costs. Interruptions in these systems, whether due to system failures, computer viruses or physical or electronic break-ins, could affect the security or availability of our platforms and applications, and prevent our creators and advertisersmarketers from accessing our services. A substantial portion of our network infrastructure is hosted by third-party providers. Any disruption in these services or any failure of these providers to handle existing or increased traffic could significantly harm our business. Any financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. If we do not maintain or expand our network infrastructure successfully or if we experience operational failures, we could lose current and potential creators and advertisers,marketers, which could harm our operating results and financial condition.
If our security measures are breached, or if our services are subject to attacks that degrade or deny the ability of users to access our platforms, our platforms and applications may be perceived as not being secure, advertisersmarketers and creators may curtail or stop using our services, and we may incur significant legal and financial exposure.
Our platforms and applications and the network infrastructure that is hosted by third-party providers involve the storage and transmission of advertisermarketer and creator proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and potential liability. Our security measures may be breached due to the actions of outside parties, employee error, malfeasance, security flaws in the third partythird-party hosting service that we rely upon or any number of other reasons and, as a result, an unauthorized party may obtain access to our data or our advertisers'marketers' or creators' data. Additionally, outside parties may attempt to fraudulently induce employees, advertisersmarketers or creators to disclose sensitive information in order to gain access to our data or our advertisers'marketers' or creators' data. Although we do have security measures in place, we have had instances where some customers have used fraudulent credit cards in order to pay for our services. While these breaches of our security did not result in material harm to our business, any future breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation and a loss of confidence in the security of our platforms and applications that could potentially have an adverse effect on our business. Because the techniques used to obtain and use unauthorized credit cards, obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures on a timely basis. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose advertisers,marketers, creators and vendors and have difficulty obtaining merchant processors or insurance coverage essential for our operations.
If our technology platforms contain defects, we may need to suspend their availability and our business and reputation would be harmed.
Platforms as complex as ours often contain unknown and undetected errors or performance problems. Many serious defects are frequently found during the period immediately following introduction and initial release of new platforms or enhancements to existing platforms. Although we attempt to resolve all errors that we believe would be considered serious by our customers before making our platforms available to them, our products are not error-free. These errors or performance problems could result in lost revenues or delays in customer acceptance that would be detrimental to our business and reputation. We may not be able to detect and
correct errors before releasing our product commercially. We cannot assure youensure that undetected errors or performance problems in our existing or future products will not be discovered in the future or that known errors, considered minor by us, will not result in serious issues for our customers. Any such errors or performance problems may be considered serious by our customers, resulting in a decrease in our revenues.
We may be subject to lawsuits for information by our advertisersmarketers and our creators, which may affect our business.
Laws relating to the liability of providers of online services for activities of their advertisersmarketers or of their social media content creators and for the content of their advertisers'marketers' listings are currently unsettled. It is unclear whether we could be subjected to claims for defamation, negligence, copyright or trademark infringement or claims based on other theories relating to the information we publish on our websites or the information that is published across our platforms. These types of claims have been brought, sometimes successfully, against online services as well asand print publications in the past. We may not successfully avoid civil or criminal liability for unlawful activities carried out by our advertisersmarketers or our creators. Our potential liability for unlawful activities of our advertisersmarketers or our creators or for the content of our advertisers'marketers' listings could require us to implement measures to reduce our exposure to such liability, which may require us, among other things, to spend substantial resources or to discontinue certain service offerings. Our insurance may not adequately protect us against these types of claims and the
defense of such claims may divert the attention of our management from our operations. If we are subjected to such lawsuits, it may adversely affect our business.
If we fail to detect click-fraud or other invalid clicks, we could lose the confidence of our advertisersmarketers and advertising partners as a result of lost revenue to advertisersmarketers or misappropriation of proprietary and confidential information, thereby causing our business to suffer.
“Click-fraud” is a form of online fraud when a person or computer program imitates a legitimate user by intentionally clicking on an advertisement for the purpose of generating a charge per click without having an actual interest in the target of the advertisement's link. We are exposed to the risk of fraudulent or illegitimate clicks on our sponsored listings. The security measures we have in place, which are designed to reduce the likelihood of click-fraud, detect click-fraud from time to time. WhileAlthough the instances of click-fraud that we have detected to date have not had a material effect on our business, click-fraud could result in an advertisera marketer experiencing a reduced return on their investment in our advertising programs because the fraudulent clicks will not lead to revenue for the advertisers.marketers. As a result, our advertisersmarketers and advertising partners may become dissatisfied with our advertising programs, which could lead to loss of advertisers,marketers, advertising partners and revenue. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary and confidential information or could cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to address problems caused by such breaches. Concerns over the security of the Internet and other online transactions and the privacy of users may also deter people from using the Internet to conduct transactions that involve transmitting confidential information.
If third parties claim that we infringe their intellectual property rights, it may result in costly litigation.
We cannot assure you that third parties will not claim our current or future products or services infringe their intellectual property rights. Any such claims, with or without merit, could cause costly litigation that could consume significant management time. As the number of product and services offerings in our market increases and functionalities increasingly overlap, companies such as ours may become increasingly subject to infringement claims. These claims also might require us to enter into royalty or license agreements. If required, we may not be able to obtain such royalty or license agreements, or obtain them on terms acceptable to us.
Historically, we have not relied upon patents to protect our proprietary technology, and our competitors may be able to offer similar products and services, which would harm our competitive position.
Our success depends upon our proprietary technology. We do not have registered patents on any of our current platforms, because we determined that the costs of patent prosecution outweighed the benefits given the alternative of reliance upon copyright law to protect our computer code and other proprietary technology and properties. In addition to copyright laws, we rely upon service mark and trade secret laws, confidentiality procedures and contractual provisions to establish and protect our proprietary rights. As part of our confidentiality procedures, we enter into non-disclosure agreements with our employees and consultants. Despite these precautions, third parties could copy or otherwise obtain and use our technology without authorization, or develop similar technology independently. In addition, effective protection of intellectual property rights is unavailable or limited in certain foreign countries. We cannot assure you that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products and services or design around any intellectual property rights we hold.
We have developed a new platform called the IZEA Exchange (IZEAx). IZEAx is designed to provide a unified ecosystem that enables the creation of multiple types ofThe 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 have filed a patent application covering important features of this platform and own a registered trademark for “Native Ad Exchange.”. We are aggressively pursuing a patent application with the desired outcome of receiving a patent for the platform, although there can be no assurance thereof.
Our marketsponsorship industry is subject to rapid technological change and, to compete, we must continually enhance our products and services.
We must continue to enhance and improve the performance, functionality and reliability of our products and services. The social sponsorship industry is characterized by rapid technological change, changes in user requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our products and services obsolete. In the past, we have discovered that some of our customers desire additional performance and functionality not currently offered by our products. Our success will depend, in part, on our
ability to develop new products and services that address the increasingly sophisticated and varied needs of our customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of our technology and other proprietary technology involves significant technical and business risks. We may fail to use new technologies effectively or to adapt our proprietary technology and systems to customer requirements or emerging industry standards. If we are unable to adapt to changing market conditions, customer requirements or emerging industry standards, we may not be able to increase our revenue and expand our business.
Difficulties we may encounter managing our growth could adversely affect our results of operations.
We have experienced a period of growth that has placed, and and will continue to place, a strain on our managerial and financial resources. As our business needs expand, we intend to hire new employees. To manage the expected growth of our operations and personnel, we will be required to:
improve existing, and implement new, operational, financial and management controls, reporting systems and procedures;
install enhanced management information systems; and
train, motivate and manage our employees.
We may not be able to install adequate management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable to manage growth effectively, our business would be seriously harmed.
If we lose key personnel or are unable to attract and retain additional qualified personnel we may not be able to successfully manage our business and achieve our objectives.
We believe our future success will depend upon our ability to retain our key management, including Edward H. Murphy, our President and Chief Executive Officer, and Ryan S. Schram, our Chief Operating Officer. Mr. Murphy, who is our founder, has unique knowledge regarding the social sponsorship space and business contacts that would be difficult to replace. Mr. Schram has sales, marketing and development expertise regarding our platforms that our other officers do not possess. Even though we have employment agreements in place with them, if Messrs. Murphy and Schram were to become unavailable to us, our operations would be adversely affected. WeAlthough we maintain "key-man"“key-man” life insurance for our benefit in the amount of $1,500,000 on the lifelives of Mr. Murphy but not for any other officer. Thisand Mr. Schram, this insurance may be inadequate to compensate us for the loss of Mr. Murphy. Moreover, we have no insurance to compensate us for the loss of any other of our executive officers or key employees.officers.
Our future success and our ability to expand our operations will also depend in large part on our ability to attract and retain additional qualified graphic designers, computer scientists,engineers, sales and marketing and senior management personnel. Competition for these types of employees is intense due to the limited number of qualified professionals and the high demand for them, particularly in the Orlando, Florida area where our headquarters are located. We have in the past experienced difficulty in recruiting qualified personnel. Failure to attract, assimilate and retain personnel, including key management, technical, sales and marketing personnel, would have a material adverse effect on our business and potential growth.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs and to make certain activities more time consuming and costly. As a public company, we also expect that these rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult and costly for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers.
Risks Relating to our Common Stock
There can be no assurance that we will continue to meet the requirements for our common stock to trade on the Nasdaq Capital Market.
Since becoming listed on the Nasdaq Capital Market on January 26, 2016, we have been required to comply with certain Nasdaq listing requirements, including, without limitation, with respect to our corporate governance, finances and stock price. If we fail to meet any of these requirements, our shares could be delisted. In particular, Nasdaq rules include minimum bid price, stockholders’ equity and public float requirements.
There is no assurance that we will continue to meet the continued listing requirements. For example, during the period of the delay in filing this Annual Report, on April 5, 2018, we received a notification letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC ("Nasdaq") indicating that we were not in compliance with Nasdaq Listing Rule 5250(c)(1) because we had not yet filed this Annual Report. In accordance with Nasdaq listing rules, we have 60 calendar days,
or until June 4, 2018, to submit our plan to regain compliance with the timely periodic reporting requirement. Although, upon the filing of this Annual Report for the year ended December 31, 2017, we are now current in our filing of periodic reports under the Exchange Act and have therefore regained compliance with Nasdaq’s continued listing requirements, there is no assurance that we will be able to maintain compliance with other applicable Nasdaq listing requirements in the future.
Nasdaq requires us to maintain at least $2.5 million in stockholders’ equity and a minimum bid price of $1. We cannot provide assurance that we will be able to maintain the stockholders’ equity balance or a minimum bid price above these minimum thresholds. If we fall below the minimum requirements, we will need to develop a plan to regain compliance. Such plans may include the need to raise additional capital in order to comply. Sales of a substantial number of shares of our common stock or securities convertible or exercisable into shares of our common stock could cause the market price of our common stock to drop and could dilute your percentage of ownership. If our plans are unsuccessful, our common stock may be delisted from the Nasdaq Capital Market.
If our common stock were delisted from the Nasdaq Capital Market, it would likely lead to a number of negative implications, including an adverse effect on the price of our common stock, reduced liquidity in our common stock, the loss of federal preemption of state securities laws and greater difficulty in obtaining financing. In the event of a delisting, we would expect to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock or prevent future non-compliance with Nasdaq’s listing requirements.
Exercise of stock options, warrants and other securities will dilute your percentage of ownership and could cause our stock price to fall.
As of March 18, 2016April 13, 2018, we had 5,339,9445,819,246 shares of common stock issued, outstanding stock options to purchase 845,0831,040,757 shares of our common stock at an average exercise price of $8.63$5.95 per share, and outstanding warrants to purchase 523,115514,012 shares of our common stock at an average exercise price of $9.15$8.47 per share.
Additionally, weWe also have reserved shares to issue stock options, restricted stock or other awards to purchase or receive up to 159,167306,004 shares of common stock under our May 2011 Equity Incentive Plan and 61,21533,594 shares of common stock under our 2014 Employee Stock Purchase Plan. In the future, we may grant additional stock options, restricted stock units, warrants and convertible securities.securities, as well as issue additional shares of common stock pursuant to the earn-out provisions of the stock purchase agreements in connection with our Ebyline and ZenContent acquisitions. The exercise, conversion or exchange by holders of stock options, restricted stock units, warrants or convertible securities for shares of common stock, and the issuance of new shares pursuant to acquisition earn-out provisions, 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 2013 and 2014 Private Placements, which could cause our stock price to drop.effective shelf registration.
We have twoan effective shelf registration statementsstatement on Form S-3 (File No. 333-191743 and File No. 333-197482) covering333-212247) for the resalesale of 1,378,276sharesup to $75,000,000 of our common stock that may be offered by certain stockholders who participatedstock. Currently, under Form S-3 rules, we can only sell our securities in our 2013 Private Placement and loan consideration from August through September 2013 or who obtained shares of common stock for services. The number of shares the selling stockholders may sell consists of 1,278,300 shares of common stock that are currently issued and outstanding and 99,976 shares of common stock that they may receive if they exercise their warrants.
We also have a third effective registration statement (File No. 333-195081) covering the resale of 3,503,665 sharespublic primary offering with a value not exceeding one-third of our common stock that may be offered by certain stockholders who participatedpublic float in any 12-month period, because our 2014 Private Placement. The number of shares the selling stockholders may sell consists of 3,107,129 shares of common stock that are currently issued and outstanding and 396,536 shares of common stock that they may receive if they exercise their warrants.
There are currently no agreements or understandings in place with these selling stockholders to restrict their sale of those shares.public float is below $75,000,000. Sales of a substantial number of shares of our common stock byor securities convertible or exercisable into shares of our common stock under the selling stockholders over a short period of timeshelf registration statement could cause the market price of our common stock to drop and could impairdilute your percentage of ownership.
Issuance of stock to pay future obligations will dilute your percentage of ownership and could cause our abilitystock price to fall.
On July 31, 2016, we purchased all of the outstanding shares of capital stock of ZenContent, Inc. pursuant to the terms of a Stock Purchase Agreement by and among our company, ZenContent and the stockholders of ZenContent for a maximum purchase price to be paid over the next three years of $4,500,000. Upon closing we made a cash payment of $400,000 and issued 86,207 shares of our common stock valued at $600,000 (using the 30 trading-day volume-weighted average closing price of our common stock of $6.96 per share as of July 29, 2016). The agreement also requires (i) three equal annual installment payments totaling $1,000,000 commencing 12 months following the closing and (ii) contingent performance payments of up to an aggregate of $2,500,000 over the three 12-month periods following the closing, based upon ZenContent achieving certain minimum revenue thresholds. Of these payments, 33% of each such annual installment or contingent performance payment will be in the form of cash and the remainder of such payment will be in the form of either cash or additional shares of our common stock, determined at our option. If we issue stock as payment for up to 67% of the future amounts owed, there is no stated maximum on the number of shares that we may issue. This may result in the issuance of
substantial amount of shares because the number of shares will be determined using the 30 trading-day volume-weighted average closing price of our common stock prior to the payment. The issuance of a substantial number of shares of our common stock to the former stockholders of ZenContent or our other stockholders or the perception that such sales may occur could cause our stock price to decline, make it more difficult for us to raise capitalfunds through future offerings of our common stock or acquire other businesses using our common stock as consideration.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they adversely change their recommendations regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that securities or industry analysts may publish about us, our business, our market, or our competitors. No person is under any obligation to publish research or reports on us, and any person publishing research or reports on us may discontinue doing so at any time without notice. If adequate research coverage is not maintained on our company or if any of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business or provide relatively more favorable recommendations about our competitors, our stock price would likely decline. If any analysts who cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the future by selling additional securities.financial markets, which in turn could cause our stock price or trading volume to decline.
Our earnings are subject to substantial quarterly and annual fluctuations and to market downturns.
Our revenues and earnings may fluctuate significantly in the future. General economic or other political conditions may cause a downturn in the market for our products or services. Despite the recent improvements in market conditions, aA future downturn in the market for our products or services could adversely affect our operating results and increase the risk of substantial quarterly and annual fluctuations in our earnings. Our future operating results may be affected by many factors, including, but not limited to: our ability to retain existing or secure anticipated advertisersmarketers and creators; our ability to develop, introduce and market new products and services on a timely basis; changes in the mix of products developed, produced and sold; and disputes with our advertisersmarketers and creators. These factors affecting our future earnings are difficult to forecast and could harm our quarterly and/or annual operating results. The change in our earnings or general economic conditions may cause the market price of our common stock to fluctuate.
Our stock price may be volatile.
While our shares of common stock recently becameare listed for trading on the Nasdaq Capital Market, the stock market in general, and the stock prices of technology-based companies in particular, have experienced volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock is likelyhas historically experienced and may continue to be highly volatile andexperience significant volatility. As a result, the market price could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
changes in our industry;
competitive pricing pressures;
our ability to obtain working capital financing;
additions or departures of key personnel;
limited "public float"“public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market prices of our common stock;
expiration of any Rule 144 holding periods or registration of unregistered securities issued by us;
sales of our common stock;
our ability to execute our business plan;
operating results that fall below expectations;
loss of any strategic relationship;
regulatory developments; and
economic and other external factors.
In addition,These and other market and industry factors may cause the securities markets have from time to time experienced significantmarket price and volume fluctuations that are unrelateddemand for our common stock to thefluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of particular companies. These market fluctuationscommon stock and may also materially and adverselyotherwise negatively affect the market priceliquidity of our common stock.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our Board of Directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
None.