Corporate Information
IZEA Worldwide, Inc. (together with its wholly-owned subsidiaries, “we,” “us,” “our,” “IZEA,” or the “Company”) is a Nevada corporation that was founded in February 2006 under the name PayPerPost, Inc. and became a public company in May 2011. In January 2015, IZEA purchased all of the outstanding shares of capital stock of Ebyline, Inc. (“Ebyline”). In March 2016, we formed IZEA Canada, Inc., a wholly-owned subsidiary incorporated in Ontario, Canada, to provide sales and support for IZEA's Canadian customers. In July 2016, IZEA purchased all the outstanding shares of capital stock of ZenContent, Inc. (“ZenContent”) and, in July 2018, a subsidiary of the Company merged with TapInfluence, Inc. (“TapInfluence”). ZenContent, Ebyline, and TapInfluence were merged into IZEA in December 2017, December 2019, and December 2020, respectively.
Our Company is based in Orlando, Florida, but intends to operate as a virtual-first company, with all of our employees working remotely since March 16, 2020.
Our Business
We create and operate online marketplaces that connect marketers, including brands, agencies, and publishers, with content creators such as Instagram influencers, TikTok influencers, YouTube stars, designers, photographers, and writers (“creators”). Marketers also engage us to gain access to our industry expertise, data, and analytics. Our primary technology platform, the IZEA Exchange (“IZEAx”), is designed to provide a unified ecosystem that enables the creation and publication of multiple types of content to be completed at scale.
We provide value through managing custom content workflow, creator search and targeting, bidding, analytics, and payment processing. While the majority of marketers engage us to perform these services (the “Managed Services”) on their behalf, they may also use our marketplaces to engage creators for influencer marketing campaigns or to produce custom content on a self-service basis by licensing our technology.
Influencer Marketing. We work with marketers to enable influencer marketing campaigns at scale. A subset of influencer marketing known as “Sponsored Social” is when a company compensates creators to share sponsored content with the creators’ social network followings. This sponsored content is within the body of the 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. We have focused on scaling our product and service offerings ever since, including acquiring TapInfluence in July 2018 and launching Shake and BrandGraph in 2020.
Custom Content.We also work with marketers to augment or replace their content development efforts. Our network of creators produces editorial and marketing content that can be published both online and offline. Our network of creators includes professional journalists, subject matter experts, bloggers, and everyday content creators, allowing our customers 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 blogs. We first began offering custom content services in 2015 after acquiring Ebyline, a leading marketplace in the editorial content space, and continued to expand this offering with our acquisition of ZenContent in July 2016, a company that predominantly focused on e-commerce-related asset creation.
Our Platforms
IZEAx. The platform is designed to provide a unified ecosystem that enables the creation and publication of multiple types of custom content through our creators’ websites, blogs, and social media channels, including, among others, Twitter, Facebook, YouTube, Twitch, and Instagram. We extensively use this platform to manage influencer marketing campaigns on behalf of our marketers. This platform is also available directly to our marketers as a self-service tool and a licensed white label product. IZEAx was engineered from the ground up to replace all of our previous platforms with an integrated offering that is improved and more efficient.
BrandGraph. In March 2020, we launched BrandGraph, a social media intelligence platform. BrandGraph is heavily integrated with IZEAx, and both platforms rely heavily on data from each other, but it is also available as a stand-alone platform. BrandGraph offers marketers an analysis of share-of-voice, engagement benchmarking, category spending estimates, influencer identification, and sentiment analysis. The platform maps and classifies the complex hierarchy of corporation-to-brand relationships by category and associates social content with brands through a proprietary content analysis engine. It aggregates and analyzes content data to provide insights for marketers across their competitive landscapes that are particularly useful to influencer marketing professionals, including our managed services team.
Shake. In November 2020, we launched Shake, a new online marketplace where buyers can quickly and easily hire creators of all types for influencer marketing, photography, design, and other digital services. The Shake platform is aimed at digital creators seeking freelance “gig” work. Creator’s list available “Shakes” on their accounts on the platform. Marketers select and purchase creative packages from them through a streamlined chat experience, assisted by ShakeBot - a proprietary, artificial intelligence assistant.
Legacy Platforms
Ebyline. In January 2015, we acquired Ebyline and its technology platform to source and compensate creators for the creation and delivery of professional editorial content. Ebyline was initially designed as a self-service content marketplace to replace editorial newsrooms located in the news agencies with a “virtual newsroom” of creators to produce their content needs and handle their workflow. After the acquisition, we began to utilize the creators in the Ebyline platform to create professional custom content for brands, in addition to the self-service functionality used by newspapers. We have been incorporating certain functions of this platform into IZEAx to have one consolidated platform in the future. By December 2019, we migrated all remaining customers into our IZEAx platform and dissolved the Ebyline entity.
ZenContent. In July 2016, we acquired ZenContent, including its custom content creation workflow technology and database of creators. ZenContent’s platform enabled us to produce highly scalable, multi-part content for e-commerce entities and brand customers. The ZenContent platform allowed us to parse work out to a wide array of qualified creators who together could develop custom content assets with unmatched quality, speed, and price. Our campaign fulfillment team utilized this platform to service orders for custom content until December 2020.
TapInfluence. In July 2018, we acquired TapInfluence and its technology platform. TapInfluence marketed and sold software-as-a-service “SaaS” software complementary to IZEA’s existing influencer marketing products and services. We incorporated certain functions of this platform into IZEAx and improved influencer discovery and content workflow to have one consolidated platform. Throughout 2019, users of this platform were migrated over to IZEAx. We discontinued the use of this platform in March 2020.
IZEAx, BrandGraph, Shake, Ebyline,ZenContent, and TapInfluence were designed with the same purpose: to streamline transactions between our internal campaign fulfillment team, marketers, and creators. We utilize these proprietary technologies to create efficiencies and economies of scale for all parties. These platforms' knowledge base and technology provide marketers with access to an extensive network of creators and complete workflow management, content control, payment processing, and related performance tracking.
We believe that IZEAx improves our ability to efficiently match marketplace participants as the number of marketers and creators using the platform increases. To date, we have completed over 3.9 million influencer and content marketing transactions for customers ranging from small local businesses to Fortune 500 companies. We consider each piece of custom content, sponsored post, or other updates as an individual transaction so long as the creator of that content is being compensated for the transaction.
Industry Background and Trends
When IZEA first launched PayPerPost in 2006, the concept of a brand paying bloggers to create sponsored content on their blogs was highly controversial among marketers and content creators. The idea was introduced when there were no ads on Facebook, YouTube, or Twitter, and social media was largely void of corporate marketing messages. Over the past fifteen years, the landscape has dramatically changed. Today, strategic engagement of online influencers is table stakes for modern brands - largely in part to changes in consumer behavior and the large-scale adoption of social media platforms. Similarly, those same companies are now producing custom marketing content for their social channels and embracing influencer marketing as a means to reach their customers.
While industry research indicates that brand spending on influencer and content marketing has grown dramatically in the last several years, the business processes and practices have not evolved in a meaningful way for the majority of buyers and sellers. The markets that we operate in are highly fragmented, highly competitive, and primarily limited by the current inefficiencies inherent in our space. Most marketers have been forced to utilize a variety of execution partners and manual processes to navigate the complicated landscape, often resulting in low returns on their time investment or, worse-yet, questionable results. We believe this is mainly due to marketers and creators lacking an efficient way to identify and engage each other in a marketplace of scale.
At the same time, influencers and content creators seeking to monetize their communities and work product face significant challenges in making marketers aware of their services and finding quality brands motivated to sponsor them. In addition, those creators with smaller followings lack the individual influence and audience needed to warrant the processing of a micro-transaction. In many cases, it costs a marketer more money to issue a traditional check to a nano influencer than the value of the sponsorship payment itself. Further complicating the sponsorship process for both parties are federal regulations around social media endorsements, tax reporting generally applicable to anyone receiving income for services, and the
associated campaign tracking required to provide compliance. While many marketers would prefer to be “part of the conversation,” we believe the complexity and cost of individual sponsorship often deter them from doing so.
We believe that addressing the current efficiency and measurable success challenges via technology represents a significant opportunity. IZEA ultimately solves these challenges with targeted, scalable marketplaces that aggregate content creators and marketers. In doing so, we offer an efficient, innovative way for creators and marketers of all sizes to find each other and form a compensated relationship.
Our Business Model
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, takes calculated risks, 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 what we see as our most significant competitive advantage.
First-mover advantage. We believe that by pioneering the modern influencer marketing industry and investing heavily in innovation, acquisitions, and marketing, we have acquired a vast amount of industry knowledge, market insights, and technology. Over time, the software foundation we have built is expansive with the amount of actionable data we have accumulated from our network of creators and the execution of customer programs. Those new to the space face a significant technology investment requirement and steep learning curve to compete in a complex and rapidly evolving industry.
Best in class technology. We believe that the feature sets in our platforms are among the most comprehensive for those seeking to execute influencer marketing campaigns. While our industry has a broad and fragmented set of competitors offering various technology solutions, we have developed a complete, enterprise-grade solution for those seeking to execute large-scale influencer marketing campaigns from beginning to end.
Experienced management team, board of directors, and strategic advisors. Our management team includes a highly experienced team of entrepreneurs and executives from the digital media, technology, and entertainment industries and outstanding board members, who are experts in their respective fields. See Item 10 under Part III of this Annual Report for details.
Our Growth Strategy
After over fifteen years of working in and developing the influencer and content marketing categories, we believe our business model is market-tested, and our industry is well-established. Our development efforts have included assembling a diverse and experienced senior management team and 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:
Software + Service. IZEA’s flexible client engagement model appeals to agency and brand customers with various need states. We structure content and influencer marketing programs that align with our customers’ goals, resources, and profiles. IZEA clients can license our software to run their programs, hire our team for fully outsourced managed services, or engage us in a hybrid model that combines access to our software with collaborative execution.
Product development. Since 2009, we have invested over $34.1 million in engineering resources and product development, creating a meaningful competitive moat of features and functionality in our platform. We continue to recruit additional engineering and product innovation team members to enhance IZEAx, Shake, and BrandGraph, and to develop new technology ideas within these platforms that complement our mission as a company.
Large network of users. IZEA is a driving force in the broader “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 platform. As of December 31, 2021, we had more than 996,500 user accounts in IZEAx. These accounts have connections to over 1,080,000 social media accounts with an approximate aggregate reach of 10.7 billion non-unique fans and followers of IZEAx creators. Our total number of user accounts may be higher than our actual individual creators because some creators may have created multiple user accounts.
Creators can join our platforms for free, but they may also choose to pay to upgrade their accounts to enable additional services and benefits. We compensate these individuals for producing content for our market clients or distributing it on behalf of brands through their websites, blogs, and social media channels. We continually seek ways to increase our creators’ ability to generate revenue.
By continually developing our creator network, we make our marketplace more attractive to our customers 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.
Sales and Marketing
We primarily sell influencer marketing and custom content campaigns through our sales team and platforms. We target regional, national, and global brands and advertising agencies in the following ways:
Client Development Team.Our client development team is assigned a geographic region or specific markets, primarily within the United States and Canada. Team members are responsible for identifying and managing sales opportunities to brands and agencies seeking to outsource some or all of the planning and production of their content and advertising needs.
SaaS Sales Team. The SaaS Sales team initiates SaaS license opportunities with brands and agencies who seek to utilize additional functionality on our platforms on a self-service basis to facilitate custom content and influencer marketing campaigns.
Self-Service. IZEA offers a version of IZEAx, called IZEAx Discovery, tailored to customers focused only on identifying influencers. Customers who need influencer discovery software can license this technology by signing up directly with a credit card on the IZEA website without speaking to a sales representative. Our Shake platform is 100% self-service and has no sales team. Marketers who would like to hire creators do so by entering their credit card information on the Shake website to purchase a “Shake” from a creator.
Industry Acumen. Our team possesses 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, growing our creator network, and driving self-service sign-ups to our platforms. Our corporate marketing plan is designed to continually elevate awareness of our brand and generate demand for our software and services. We rely on a growing number of channels in this area, including third-party social media platforms (e.g., Facebook and YouTube), paid search engine marketing, content marketing, influencer marketing, and virtual events.
Customers and Revenue
We generate revenue from four primary sources: (1) revenue from our managed services when a marketer (typically a brand, agency, or partner) pays us to provide custom content, influencer marketing, amplification, or other campaign management services (“Managed Services”); (2) revenue from fees charged to software customers on their marketplace spend within our IZEAx and Shake platforms (“Marketplace Spend Fees”); (3) revenue from license and subscription fees charged to access the IZEAx and BrandGraph platforms (“License Fees”); and (4) revenue derived from other fees such as inactivity fees, early cash-out fees, and other miscellaneous fees charged to users of our platforms (“Other Fees”).
As discussed in more detail within “Critical Accounting Policies and Use of Estimates” under “Note 1. Company and Summary of Significant Accounting Policies,” under Part I, Item 7 herein, revenue from Marketplace Spend Fees is reported on a net basis. Revenue from all other sources, including Managed Services, License Fees, and Other Fees, are reported on a gross basis. We further categorize these sources into two primary groups: (1) Managed Services and (2) SaaS Services, which includes revenue from Marketplace Spend Fees, License Fees, and Other Fees.
We provide services to customers in multiple industry segments, including consumer products, retail/e-tail, lifestyle, technology, and travel. Our business serves advertising and public relations agencies, brands, and companies directly. In many cases, influencer marketing dollars flow through the advertising or public relations agency, even when we have a direct relationship with the brand.
We generate the majority of our revenue from our Managed Services customers. Managed Services accounted for approximately 94% and 87% of our revenue during the twelve months ended December 31, 2021, and 2020, respectively. SaaS Services accounted for approximately 6% and 13% of our revenue during the twelve months ended December 31, 2021, and 2020, respectively.
Changes in how we control and manage our platforms, contractual terms, business practices, or other changes in accounting standards or interpretations may change our revenue reporting. 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.
The majority of our customers are located in the United States and Canada. We had one customer that accounted for 14% of our revenue during the twelve months ended December 31, 2021, and one customer that accounted for 13% of our revenue during the twelve months ended December 31, 2020. Revenue from our Canadian customers accounted for approximately $0.6 million (2%) and $1.0 million (6%) of our revenues during the twelve months ended December 31, 2021, and 2020, respectively.
Technology
IZEAx and Shake span multiple social networks and digital creative services. We aggregate creators in our platforms, which allows us to create scale and choice for marketers. We provide the ability to find and collaborate with our creators based on a variety of software rules, filters, and data enrichment. Our self-service platforms service all business types and sizes, ranging from Fortune 500 customers to small agencies and brands. We provide trackable results for influencer marketing campaigns by automatically embedding tracking links and pixels and support for third-party tracking. IZEA technology includes content review and approval, dashboards for real-time reporting, and digital asset management.
Privacy and Security
We are committed to protecting the personal privacy of our marketers and creators. Any personal information that we collect is processed under our Privacy Notice, and we employ reasonable and appropriate administrative, physical, and technical safeguards to protect personal information.
Product Development
Our product development team is responsible for platform and infrastructure development, application development, user interface, application design, enterprise connectivity, Internet applications and design, quality assurance, documentation, and release management. Among our core strengths is our knowledge of and experience in launching and operating scalable content and influencer marketing marketplaces. Our product development expenses include salaries, bonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to our development team, along with hosting and software subscription costs. These costs were approximately $5.9 million and $3.8 million for the years ended December 31, 2021, and 2020, respectively, and are included in general and administrative expenses.
We launched IZEAx in March 2014 and unveiled our latest version 3.0 of the platform in April 2019. We continue to add new features and additional functionality to this platform each year. These new features enable our platform to facilitate the contracting, workflow, and delivery of direct content and provide for invoicing, collaborating, and direct payments for our SaaS customers. We incurred and capitalized software development costs of zero and $363,793 in our balance sheet during the years ended December 31, 2021, and 2020, respectively.
Our team believes that relentless innovation is the only way to achieve long-term growth. We consistently invest in new technology inside and outside of our current software platforms. The launch of Shake and BrandGraph during the pandemic in 2020 underscores that commitment. We intend to continue to invest in creating new technology additions that complement our core offerings.
Competition
We face competition from multiple companies in the influencer and content marketing categories. Direct and indirect competitors in the influencer marketing space include Facebook, TikTok, YouTube, Linqia, and Upfluence. We also face competition in the creator economy from companies such as Fiverr and Upwork. In addition, there are many traditional advertising agencies, public relations firms, and niche consultancies that provide content development and conduct manual influencer outreach programs.
Competition could result in significant price pressure, declining margins, and reductions in our revenue. In addition, as we continue our efforts to expand the scope of our services with IZEAx, Shake, and BrandGraph, 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 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 crucial to our success and competitive position. To evolve and secure our proprietary rights, we rely on intellectual property and trade secret laws, confidentiality procedures, and contractual provisions.
As of December 31, 2021, we owned 51 trademarks (35 domestic trademark registrations in the United States and 16 foreign registrations on the International Register) and had 10 total pending applications in the United States, Canada, and Nigeria. During the year ended December 31, 2021, we abandoned 2 inactive U.S. trademarks. As of December 31, 2021, we also owned approximately 343 domain names related to the various aspects of IZEA’s products and services.
Government Regulation
We are subject to many 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 adversely affect our business model. 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 several claims. These regulations and laws may involve taxation, tariffs, privacy and data protection, consumer protection, content, copyrights, distribution, electronic contracts and other communications, and online payment services. In addition, governments may seek to censor content available on our platforms or attempt to block access to our platforms. Accordingly, adverse legal or regulatory developments could substantially harm our business.
We are subject to various federal, state, and international laws and regulations governing privacy, information security, and data protection laws (“Privacy Laws”). Legislators and/or regulators in countries in which we operate are increasingly adopting or revising Privacy Laws. All U.S. states have passed data breach notification laws, and others have adopted or expanded laws and regulations that address the security of personal information and the collection and use of personal information through websites. In particular, California passed a broad-reaching consumer privacy law in June 2018, which went into effect on January 1, 2020, called the California Consumer Privacy Act (“CCPA”). In response to the CCPA, IZEA posted an updated California Privacy Notice on its websites. Virginia’s Consumer Data Protection Act (“CDPA”) will come into effect on January 1, 2023, which is also when the California Privacy Rights and Enforcement Act of 2020 (“CPRA”) will take effect. The U.S. Congress also is considering the implementation of a national Privacy Law. Outside the U.S., the EU’s General Data Protection Regulation (“GDPR”), which became effective May 25, 2018, has an extra-territorial scope and substantial fines (up to 4% of global annual revenue or €20M, whichever is greater). In 2018, Brazil passed a law similar to GDPR and other countries are considering similar laws. Enforcement of Privacy Laws also has increased over the past few years. Accordingly, new and revised Privacy Laws, together with stepped-up enforcement of existing Privacy Laws, could significantly affect our current and planned privacy, data protection, information security-related practices, our collection, use, sharing, retention, and safeguarding of consumer and/or employee information, and some of our current or planned business activities.
The U.S. Digital Millennium Copyright Act has provisions that limit but do not eliminate our liability for linking to third-party websites. These websites may contain materials that infringe copyrights or other intellectual property rights of third parties. We must 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.
As an e-commerce service provider, we are subject to Section 5 of the Federal Trade Commission Act of 1914 (the “FTC Act”), which prohibits unfair or deceptive acts or practices, including advertising and marketing on the Internet. Many states have consumer protection laws similar to the FTC Act with the purpose of prohibiting unfair and deceptive business practices. In some instances, we are retained by marketers 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 marketers, creators, and agencies that use our platforms are subject to specific guidelines and regulations regarding online advertising, such as the Dot Com Disclosures - Information about Online Advertising, issued by the Federal Trade Commission (the “FTC”), the FTC’s Enforcement Policy Statement on Deceptively Formatted Advertisements, issued in 2015, and the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising (known as the Endorsement Guide) which were adopted in 2009, updated and reissued by the FTC in 2013, and further clarified in 2015 and are regularly enforced. The Endorsement Guide, for example, significantly extends the scope of potential liability associated with the use of testimonials and endorsements, including injecting endorsement requirements into advertising methods such as blogging, posting on Instagram, tweeting, and other online postings of sponsored advertisements by a creator. In particular, the Endorsement Guide provides that creators must always clearly and conspicuously disclose the material connection between the creator and the 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 as accolades and more prominent future blogging or posting opportunities). In addition, the creator must not make claims about the product or service they are discussing that go beyond what the marketer could say about the product or service. The Endorsement Guide further provides that the marketer should ensure that creators speaking on its behalf are provided guidance and training needed to ensure their claims, statements, and representations are truthful, transparent, and properly substantiated, and monitor the activities of creators speaking on its behalf. If a creator, blogger, agency, or marketer should fail to comply with the Dot Com Disclosures, the Endorsement Guide, 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 the FTC Act or state consumer protection laws, 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. Other countries, such as Canada and EU member states, also have laws, regulations, and rules that mirror the FTC Endorsement Guide and similar consumer protection laws and guidance.
More generally, if there is negative consumer perception and mistrust of the practice of compensating creators to endorse the marketers' specific products, then marketers may become less interested in using influencer marketing platforms like ours as a means for advertising which could, in turn, materially adversely affect our business and financial results.
We are committed to promoting ethical social sponsorship practices and have established terms of service for users of our platforms, which refer to the Endorsement Guide and include one or more of the following:
Mandatory Disclosure.Our terms of service require the disclosure of the sponsored relationship between the marketer and creator. By default, 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 several disclosure phrases such as “sponsored,” “advertisement” or “ad” before the publication of a tweet or a post. Other social sponsorship forms may be monitored through a Disclosure Audit tool that monitors posts on an ongoing basis to ensure they continue to include disclosure after the initial posts are approved. Failure to disclose the sponsored relationship violates 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 a 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 marketers 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 an open, safe environment for our marketers, creators, and users. We do not cloak the identities of marketers 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 Marketer Review.Marketers may choose to review their sponsored content before it is published and to request a change to the sponsored content before publication in the case of factual inaccuracies.
Reporting Violations.We have zero tolerance for violations of our terms of service and encourage the reporting of violations directly to IZEA. If violations are reported, we promptly investigate them and in appropriate cases, marketers, creators, and users are removed from our network and prohibited from using our sites.
We believe and have included requirements within our terms of service, based on positions taken by certain federal courts and the FTC, that communications and messages disseminated by our platform users are subject to and must comply at all times with CAN-SPAM Act of 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 and marketers and creators who use our platforms, nor can we predict the effects of attempts to circumvent our mechanisms designed to ensure compliance.
Employees
As of December 31, 2021, we had a total of 131 employees, of which 125 were full-time employees, including 44 in sales and marketing, 38 in campaign fulfillment, 33 in technology and development, and 16 in administration and finance. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relationship with our employees to be good. Our future success depends on our continuing ability to attract and retain highly qualified engineers, sales and marketing, account management, and senior management personnel.
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. In January 2015,Effective August 20, 2018, we purchased all of the outstanding shares of capital stock of Ebyline, Inc.
and in July 2016, we purchased all the outstanding shares of capital stock of ZenContent, Inc. These entities, which aid inchanged our management and production of custom branded content, now operate as wholly-owned subsidiaries undername from IZEA, Inc. On March 9, 2016, we formedto IZEA Canada,Worldwide, Inc., a wholly-owned subsidiary of IZEA, Inc. incorporated in Ontario, Canada to operate as a sales and support office for our Canadian customers and partners.
Our executive offices are located at 480 N.corporate address is 1317 Edgewater Dr. # 1880 Orlando, Avenue, Suite 200, Winter Park, FL 3278932804 and our telephone number is (407) 674-6911. We maintain a corporate website at https://izea.com. We provideOur Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, and amendments to those reports filed or furnished according to Sections 13 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 investorsinvestor’s section of our website, or through 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, our services, new product developments, and other matters. Any information that we consider to be material to an investor's evaluation of our Company will be included in filings onaccessible through the SEC EDGAR website andand/or may also be disseminated using our investor relations website (https://izea.com) and press releases. However, we encourage investors, the media, and others interested in our Company to also reviewfollow our social media channelschannels: @izea on Twitter, @izea on Instagram, and izeaincIZEA 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 toYou should carefully consider the information set forth atfactors discussed under this item regarding the beginning of Management's Discussion and Analysis entitled "Special Note Regarding Forward-Looking Information," 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 a 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 $41,809,721$73.6 million as of December 31, 2016.2021. For the twelve months ended December 31, 2016,2021, we had a net loss of $7,560,200,$3.1 million, including a $7,476,344$5.4 million loss from operations and we expect to incur a net loss for the fiscal year 2017. Although our revenue has increased since inception, weoperations. We have not achieved profitability and cannot be certain that we will be able to maintain these growth rates or realize sufficient revenue to achieve profitability. If we achieve profitability, we may not be able to sustain it. Therefore, we may need to raise capital through new financings, which could include equity financing, such as additional issuances of common stock under our “at the market offering” program, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to borrow from other sources. In addition, securities we issue may contain rights, preferences, or privileges senior to those of the rights of our current stockholders. There can be no assurance that additional funds will be available on terms attractive to us, or at all. If adequate funds are not available, we may be required to curtail or reduce our operations or forced to sell or dispose of our rights or assets. An inability to raise adequate funds on commercially reasonable terms would have a material adverse effect on our business, results of operation, and financial condition, including the possibility that a lack of funds could cause our business to fail and liquidate with little or no return to investors.
Our business has been affected by the COVID-19 pandemic, and the continuing impacts of COVID-19 are highly unpredictable and could have a significant adverse effect on our business, results of operations, financial condition, and cash flow in the future.
Our operations, sales, and finances have been impacted by the COVID-19 pandemic. To protect the health and safety of our employees, we took precautionary action and directed all staff to work from home effective March 16, 2020, and we allowed the leases for our company headquarters and temporary office spaces to expire at the end of their terms throughout 2020. We have not experienced any major declines in operating efficiency in our remote working environment and have decided to continue our work-from-home policy indefinitely as a virtual-first employer.
While we are able to maintain full operations remotely, the economic conditions caused by COVID-19 negatively impacted the business activity of our customers in 2020. We observed changes in advertising decisions, timing, and spending priorities from brand and agency customers, which resulted in a negative impact on our revenue in 2020.
Since the third quarter of 2020, we have seen continued increases in Managed Services bookings and net orders from customers, through the fourth quarter of 2021. That growth in bookings led to a 63% growth in overall revenue in the twelve months ended December 31, 2021 from the same period in 2020. While we have seen an increase in Managed Services bookings, there is still a risk that bookings will not be recognized as revenue if customers cancel prior to the performance of service.
We will continue to actively monitor the COVID-19 situation and may take further actions altering business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, employees, and prospects, or on our future financial results.
We have transitioned to a remote workforce, which will subject us to certain operational challenges and risks and potential harm to our business.
In light of the uncertainty caused by the COVID-19 pandemic in 2020, specifically stay-at-home orders imposed by certain states and localities, we did not enter into a new lease for our corporate headquarters in Winter Park, Florida or our Canadian headquarters in Toronto, Canada and additionally vacated the various co-working facilities previously used by our team members. As a result, our workforce has shifted from in-person to remote work, and we are subject to the challenges and risks of having a remote workforce. For example, certain security systems in homes or other remote workplaces may be less secure than those previously used in our offices, which may subject us to increased security risks, including cybersecurity-related events, and expose us to risks of data or financial loss and associated disruptions to our business operations. Members of our workforce who access company data and systems remotely may not have access to robust technology, which could cause the networks, information systems, applications, and other tools available to those workers to be more limited or less reliable.
We may also be exposed to risks associated with the locations of remote workers, including compliance with local laws and regulations or exposure to compromised internet infrastructure. Allowing members of our workforce to work remotely may create intellectual property risk if employees create intellectual property on our behalf while residing in a jurisdiction with unenforced or uncertain intellectual property laws. Further, if employees fail to inform us of changes in their work location, we may be exposed to additional risks without our knowledge. The transition to remote working may also subject us to other operational challenges and risks. For example, our shift to remote working may adversely affect our ability to recruit and retain personnel who prefer an in-person work environment. Operating our business remotely could have a negative impact on our corporate culture, decrease the ability of our workforce to collaborate and communicate effectively, decrease innovation and productivity, or negatively affect workforce morale. If we are unable to effectively transition to a fully remote workforce, manage the cybersecurity and other risks of remote work, and maintain our corporate culture and workforce morale, our business could be harmed or otherwise negatively impacted.
The Ukraine crisis could have a significant adverse effect on our business, results of operations, financial condition, and cash flow in the future.
The Ukraine crisis raises a host of potential threats and risk factors to consider even though we do not conduct business directly in the Ukraine or Russia. Sanctions brought against Russia will impact the import, export, sale, and supply of goods and services with companies located in the US and other regions. Many companies have ceased all operations in Russia with near and short term losses expected in the millions. This will have a negative impact on the global economy and effect economic and capital markets. A downturn in the economy could drive our customers to cancel or reduce existing bookings, which will result in a reduction in revenue.
In light of the dramatic sanctions imposed against Russia, we need to consider the threat of a cyber-attack. The US Cyber-security and Infrastructure Security Agency (“CISA”) recently issued a warning of the risk of Russian cyber-attacks on US networks and critical infrastructure. While we do not think we are a likely target of a cyber-attack, we will be diligent in our controls over IT and ensuring the protection of our companies, employees, vendors, and customers data. If we do fall victim to such attack, it could have an adverse effect on our business operations.
Impairment of our intangible assets has resulted in significant charges that adversely impact our operating results.
We assess the potential impairment of goodwill on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In March 2020, we identified a triggering event due to the reduction in projected revenue related to COVID-19 and the continuation of a market capitalization below our carrying value and uncertainty for recovery given the volatility of the capital markets surrounding COVID-19. We performed an interim assessment of goodwill and determined that the carrying value of the Company’s reporting unit as of March 31, 2020, exceeded the fair value. Therefore, we recorded a $4.3 million impairment of goodwill in the twelve months ended December 31, 2020. In October 2021, the time of our annual review of goodwill and our finite-lived intangible assets, we determined that there were no triggering events requiring further analysis. Future adverse changes in these or other unforeseeable factors could result in further impairment charges that would impact our results of operations and financial position in the reporting period identified.
We may experience losses or issues relating to transacting in and holding digital assets.
The use of digital assets to buy and sell goods and services is part of a new and rapidly evolving way of doing business. Growth in the adoption and use of digital assets is subject to a high degree of uncertainty. Market valuation of digital assets is highly volatile and could result in losses. Currently, digital assets are treated as an intangible asset and must be impaired if a triggering event occurs. The assets are impaired if the fair market value falls below the carrying value. Governmental regulations could also impose tighter restrictions on transacting in digital assets, such as anti-money laundering compliance.
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 required to make 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. Such estimates and assumptions include but are not limited to, judgments related to revenue recognition, stock based compensation, credit risk, and values surrounding software development, intangible assets and goodwill, 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. 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 other factors. 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 a comparison of our results of operations to 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. An ongoing evolution of our business, changes in underlying GAAP, and any 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.
If we fail to retainmaintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.
If we fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations or prevent fraud, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
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. We cannot assure you that any existing material weaknesses have been identified, or that we will not in the future identify material weaknesses. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business and results of operations and could adversely impact our business, operating results, and financial condition.
If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC. Furthermore, investor perceptions of our company may suffer if, in the future, material weaknesses are found, and this could cause the price of our common stock to decline.
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, 2021, 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 cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses.
Historically, we have not relied upon patents to protect our proprietary technology, and our competitors may be able to offer similar products andservices, 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 have determined that the costs of patent prosecution outweigh 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 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 or develop similar technology independently. 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, and we cannot assure you that our competitors will not independently develop similar technology, duplicate our products and services, or design around any intellectual property rights we hold.
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.
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 on 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, even if not meritorious, could be expensive to defend and could divert management's attention from operating our business. 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.
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. 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.
Intense competition in our target markets could impair our ability to grow and to achieve profitability.
The market for influencer and content marketing is highly competitive. We expect this competition to continue to increase, in part because there are no significant barriers to entry to our industry for those that operate in a Managed Services or an agency-type model. Increased competition may result in reduced pricing for managed campaigns, reduced margins, and reduced revenue as a result of lost market share. Our principal competitors include other companies that provide marketers with Internet advertising solutions and companies that offer pay-per-click search services.
Within the enterprise software unit of IZEA’s business (“SaaS Services”), while there is a higher technological barrier to entry, IZEA is vulnerable to new entrants with access to fresh capital and the ability to capitalize upon previous research and development investments made by us. This is particularly challenging given the minimal opportunity to protect our internet-based software via patents.
We also compete with traditional advertising media, such as direct mail, television, radio, cable, and print for a share of 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 be unable to compete successfully. If we fail to compete successfully, we could lose customers or add new customers,and our revenue and results of operations could decline.
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 are continuing to develop our IZEAx platform and have transitioned certain features and customers from our legacy Ebyline and TapInfluence platforms. Our updated IZEAx, Shake, and BrandGraph platforms may not achieve sufficient market acceptance to be commercially viable for open marketplace or SaaS services.
In April 2019, we released version 3.0 of IZEAx, which allows marketers to make offers that require a single creator to complete multiple tasks or deliverables. Throughout the remainder of 2019, we continued to add additional features to support our SaaS partners and integrate the Ebyline and TapInfluence platform offerings for custom content services within our IZEAx platform. By the end of 2019, nearly all of the Ebyline and TapInfluence customers and creators were migrated off of those platforms and onto the IZEAx platform. With the merging of the two platforms into IZEAx, there is a risk of decreased revenue from marketers if they do not understand the changes or do not believe that the IZEAx platform can provide them with a similar or improved service from what they received in the Ebyline or TapInfluence platforms. If our marketers 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 marketers and creators.
Shake and BrandGraph were both officially launched in 2020 during the COVID-19 pandemic. We continue to invest significant engineering resources into the development and improvement of these platforms and the creation of new technology additions that complement our core offerings. The Shake and BrandGraph platforms and models are new to IZEA and we are still in the very early days of building a customer base for these products. We may fail to achieve significant marketplace inventory in Shake to attract enough buyers and we may fail to create enough product differentiation among social data platforms to drive adoption of BrandGraph. We cannot provide any assurances of the short or long-term commercial success or growth of our platforms. There is no assurance that the amount of money being allocated for the platforms will be harmed.sufficient to complete them, or that such completion will result in a competitive edge, significant revenues, or profit for us.
We depend on our ability to attract and retain customers that are prepared to offer products or services on compelling terms through IZEAx and Shake. Additionally, we rely on customersmarketers who purchase direct custom content from our creators inon our platforms. We must continue to attract and retain customers in order to increase revenue and achieve profitability. We had one customerIf existing or future competitors develop or offer products or services that accountedprovide significant performance, price, creative or other advantages over this platform, demand for nearly 10% and another customer that accounted for 8% of our revenue during the twelve months ended December 31, 2016. The loss of either of these customers or a significant reduction in revenue from either of these customers could have a material adverse effect on our results of operation. Moreover, if customers do not find our marketing and promotional services effective, they are not satisfied with content they receive, or 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.decrease. 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,creators stop offering their services through our platform, our operating results will be adversely affected.
We are developing a new platform to process allOur total number of user accounts may be higher than the number of our existing business transactionsactual individual marketers or creators and grow our operations, but cannot provide any assurance regarding its commercial success.may not be representative of the number of persons who are active users.
We are continuing to develop our primary Our total number of user accounts in the IZEAx and Shake platform IZEAx, and we intend to focus allmay be higher than the number of our engineering resources on the IZEAx platform for the foreseeable future. Throughout 2017, we will continue to add additional features to support SaaS white-label partners and integrate the Ebyline 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. There is a risk that the merging of our Ebyline customers into IZEAx will result in a decrease in revenue related to the self-service content business if the customers do not understand the changes or do not believe that the IZEAx platform can provide them with a similar or improved service from what they received in the Ebyline platform. If ouractual individual marketers and creators do not perceive this platformbecause 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 be of high valueIZEAx and quality, we may not be ableShake under a user account. One user can add as many user connections as they like, and it is common for talent managers and large publishers to retain them or acquire new marketers 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 overadd several connections under a short period andsingle account. Given the challenges inherent in identifying these creators, we do not know whether this willhave 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, fewer individuals who have unsubscribed, and should not be considered as representative of the number of persons who continue to develop or whether it can be maintained. If we are unableactively create to successfully respond to changes infulfill the market, our business could be harmed.
Our business has grown rapidly as publishers, marketers and creators have increasingly usedsponsorships offered through our platforms. It is difficult to predict whether our platforms will continue to grow and whether the historical levels of growth can be maintained.
We expect that the platforms will evolveMany users may create an account but may not actively participate in ways that may be difficult to predict. It is possible that marketers 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 operation and financial condition could be materially harmed.
We may fail to meet publicly announced financial guidance or other expectations about our business, which could cause our stock to decline in value.
From time to time, we provide preliminary financial results or forward-looking financial guidance, to our investors, including the guidance provided above under "Management's Discussion and Analysis." Such statements are based on our current views, expectations and assumptions and involve known and unknown risks and uncertainties that may cause actual results, performance, achievements or share prices to be materially different from any future results, performance, achievements or share prices expressed or implied by such statements. Such risks and uncertainties include, among others: changes to the assumptions used to forecast or calculate such guidance, the risk that our business does not perform as expected, changes in the markets for our products and services and risks related to competitive factors. Such risks are summarized in the other risks factors included this Risk Factors section.
marketplace activities.
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 platformsIZEAx 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, undesirable feature enhancements, or additional 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.
We may expand our business 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 ZenContent, Inc. in July 2016. We may decide to pursue other acquisitions of companies, technologies and assets in the future. Such transactions could divert our management'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 the purchase price of companies we may acquire may be allocated to acquired goodwill and 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 required to take charges to our earnings based on this impairment assessment process, which could harm our operating results.
Future acquisitions could result in potentially dilutive issuances of our equity securities, including our common stock, or the incurrence of debt, contingent liabilities, amortization expenses or acquired in-process research and development expenses, any of which could harm our business, financial condition and results of operations. Future acquisitions may also require us to obtain additional financing, which may not be available on favorable terms, or 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 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;
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 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 when a person or computer program imitates a legitimate user by clicking on an advertisement for the purpose generating a charge per click without having an actual interest in the target of the advertisement's 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.
We rely on third partythird-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 partythird-party social media platforms such as Facebook, Instagram, Twitter, and YouTube to serve as the mechanism for publishing influencer marketing content to targeted audiences, in order to deliver our sponsored socialinfluencer marketing services to our customers. These platforms include technologies that provide some of the core functionality required to operate the sponsored socialinfluencer marketing portion of our platform, as well as functionalities such as user traffic reporting, ad-serving, content delivery services, discovering services, and reporting.metrics. 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. ProvidersThird-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 have no control over these companies or their decision-making with respect tofor 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.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 usersend-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 internetInternet 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 based on 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.
If we fail to retain existing creators, our revenue and business will be harmed.
We must continue to retain and acquire creators that publish sponsorships through IZEAxFluctuations 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 able 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.
Intense competition in our target market 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 marketers 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,foreign currency exchange rates could result in significant price competition, declining margins and reductions in advertising revenue. In addition, as we continueunanticipated losses that could adversely affect 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 conditionposition.
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.
New tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our services and our financial results.
Due to the global nature of social media and our services, 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 Internet 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 the results of operations.
We may become subject to government regulation and legal uncertainties that could reduce demand for our products and services orincrease the cost of doing business, thereby adversely affecting our financial results.
As described in the section “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 social media, it is possible that some laws and regulations may become applicable to us or may be negatively affected. We also compete with traditional advertisingadopted in the future concerning social media covering issues such as:
•truth-in-advertising;
•user privacy;
•taxation;
•right to access personal information;
•copyrights;
•distribution; and
•characteristics and quality of services.
The applicability of existing laws governing issues such as direct mail, television, radio, cableproperty ownership, copyrights, and print for a shareother intellectual property, encryption, taxation, libel, and export or import matters to social media platforms is uncertain. The vast majority of marketers' total advertising budgets. Many currentthese laws were adopted before the broad commercial use of social media platforms 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.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 influencer marketing business is subject to the risks associated with word-of-mouth advertising and endorsements, suchas violations of “truth-in-advertising” laws, the FTC Endorsement Guide, and other similar global regulatory requirements and, more generally, loss of consumer confidence.
As the practice of targeted advertising is 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 targeted advertising. The common thread throughout both targeted advertising and the FTC requirements described in detail in the section “Business - Government Regulation” is the increased importance placed on transparency between the marketer and the consumer to ensure that consumers know the difference between “information” and “advertising” on the Internet and are allowed to decide how their personal information 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. As described in the section “Business - Government Regulation,” we may be unableundertake various measures through controls across our platforms and by monitoring and enforcing our code of ethics to compete successfully. If we failensure that marketers and creators comply with the FTC's Endorsement Guide (and analogous laws and guidance in other countries) when utilizing our websites, 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 compete successfully, weup-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. A pervasive overall negative perception caused by a failure of our preventative measures or by others not complying with the FTC's Endorsement Guide (among the FTC's other acts, regulations, and policies, and among analogous laws and guidance in other countries,) could lose customers or advertising inventory and ourresult in reduced revenue and results of operations and higher compliance costs for us.
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 decline.adversely affect our business.
A variety of federal, state, and international laws and regulations govern the collection, use, retention, sharing, and security of personal information (“Privacy Laws”). Privacy Laws are evolving and subject to potentially differing interpretations. The European Union (“EU”) adopted the GDPR, which went into effect in May 2018 and requires companies to satisfy stricter 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. EU Member States also are enacting national GDPR-implementing laws that are in some cases stricter or different from GDPR. In 2018, Brazil enacted a law similar to GDPR and other countries are expanding or considering their Privacy Laws to follow suit. Complying with these new and expanded Privacy Laws will cause us to incur substantial operational costs or may require us to change our business practices. For example, noncompliance with the GDPR could result in proceedings against us by governmental entities or others and fines up to the greater of €20 million or 4% of annual global revenues as well as damage to our reputation and brand. We also may find it necessary to establish systems to effectuate cross-border personal data transfers of personal information originating from the European Economic Area, Australia, Japan, and other non-U.S. jurisdictions, which may involve substantial expense and distraction from other aspects of our business.
We have made public certain statements about our privacy practices concerning the collection, use, and disclosure of creators' personal information on our websites and platforms. Several Internet companies have incurred penalties for failing to abide by the representations made in their public-facing privacy notices. 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 public-facing privacy notices, 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 or other entities or the incurring by us of other liabilities, which could adversely affect our business. In addition, a failure or perceived failure to comply with industry standards or with our privacy policies and practices could result in a loss of creators or marketers and adversely affect our business. Federal, state, and international governmental
authorities continue to evaluate the privacy implications of targeted advertising, such as the use of cookies and other tracking technology. The regulation of these cookies and other current online advertising practices could adversely affect our business.
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 marketers 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 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 marketers, could adversely affect our reputation, resulting in difficulties in recruiting, decreased revenue, and a negative impact on the number of marketers 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 marketers or creators and may not be representative of the number of persons who are active users.
Our total number of user accounts in IZEAx and Ebyline may be higher than the number of our actual individual marketers 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 many 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 do not actively participate in marketplace activities.
We may become subject to government regulation and legal uncertainties that could reduce demand for our products and services orincrease the cost of doing business, thereby adversely affecting our financial results.
As described in the section "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 Internet 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, suchas 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 better optimize them for improved business results. As the practice of targeted advertising has become 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 - Government Regulation" is the increased importance placed on transparency between the marketer 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 - Government Regulation," we undertake various measures through controls across our platforms and by monitoring and enforcing our code of ethics to ensure that marketers 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 internet 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 internet 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 hearings and increased attention to the capture and use of location-based information relating to users of smartphones and other mobile devices. We have posted privacy policies and practices concerning the collection, use and disclosure of creator data on our websites and platforms. Several internet 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 marketers 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" 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 marketers.
Creators and marketers access our services through our platforms and applications. Our reputation and ability to acquire, retain, and serve our creators and marketers 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 thatIf 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 marketers 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 marketers or transactions between the two groups, 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, marketers 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 marketer 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 marketers' or creators' data. Additionally, outside parties may attempt to fraudulently induce employees, marketers, or creators to disclose sensitive information in order to gain access to our data or our 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 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 beharmed.
Platforms as complex as ours often contain unknown and undetected errorsdefects or performance problems. Many serious defects are frequently found during the period immediately following the introduction and initial release of new platforms or enhancements to existing platforms. Although we attempt to resolve all errorsdefects 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.defect-free. We may not be able to detect and correct errorsdefects before releasing our product commercially. We cannot assure youensure that undetected errorsdefects or performance problems in our existing or future products will not be discovered in the future or that known errors,defects, considered minor by us, will not result in serious issues for our customers. Any such defects 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 published on our websites or by our marketers and ouror creators, which may adversely affect our business.
Laws relating to the liability of providers of online services for the activities of their marketers or of their social media creators and for the content of their marketers' listings are currently unsettled. It is unclear whether we could be subjectedsubject 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 marketers or our creators. Our potential liability for unlawful activities of our marketers or our creators or for the content of our 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 subjectedsubject 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 marketers and advertising partners as a result of lost revenue to marketers or misappropriation of proprietary and confidential information, thereby causing ourbusiness 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 generatingto generate 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 ana marketer experiencing a reduced return on their investment in our advertising programs because the fraudulent clicks will not lead to revenue for the marketers. As a result, our marketers and advertising partners may become dissatisfied with our advertising programs, which could lead to the loss of marketers, advertising partners, and revenue. In addition, anyone who is able tocan 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 productThe influencer 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 andservices 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.
Our marketcontent marketing 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 sponsorshipinfluencer and content marketing 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 increased our full-time employees from 92 to 137 and our revenues from $8,322,274 to $27,310,602 as of and for the year ended December 31, 2014 compared to December 31, 2016, respectively. This growth has placed, and our continued growth 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 manageour 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 President and Chief Operating Officer. Mr. Murphy, who is our founder, has unique knowledge regarding the social sponsorshipinfluencer marketing space, and business contacts, system design, and development expertise regarding our platforms that would be difficult to replace. Mr. Schram has sales, marketing, and business development expertise regarding our platforms that our other officers do not possess. Even though we have employment agreements in place with each of them, if Messrs. Murphy and Schram were to become unavailable to us, our operations would be adversely affected. Although we maintain "key-man"“key-man” life insurance for our benefit on the lives of Mr. Murphy and Mr. Schram, this insurance may be inadequate to compensate us for the loss of our executive 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 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 consumingtime-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
Our common stock may be delisted if we fail to maintain compliance with the requirements for continued listing on the Nasdaq Capital Market, and the price of our common stock and our ability to access the capital markets could be negatively impacted.
ExerciseOur common stock is listed for trading on the Nasdaq Capital Market (“Nasdaq”). To maintain this listing, we must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for continued inclusion on the Nasdaq Capital Market under Nasdaq Listing Rule 5450(a)(1) (the "Bid Price Rule").
Although we are currently in compliance with the Bid Price Rule, we have fallen out of compliance with such a rule in the past. If we fail to meet this or any of the other continued listing requirements in the future, our common stock may be delisted from Nasdaq, which could reduce the liquidity of our common stock materially and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees, and business development opportunities. Such a delisting likely would impair your ability to sell or purchase our common stock when you wish to do so. Further, if we were to be delisted from Nasdaq, our common stock may no longer be recognized as a “covered security” and we would be subject to regulation in each state in which we offer our securities. Thus, delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly impact the ability of investors to trade our securities, and would negatively impact the value and liquidity of our common stock.
We have raised and may raise, additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests.
We have incurred losses since inception and expect to continue to incur losses until we can significantly grow our revenues. Therefore, we may need additional financing to maintain and expand our business. This financing may be obtained through our at-the-market (ATM) equity offering program under the sales agreement, dated June 21, 2021, with National Securities Corporation acting as a sales agent, under which we may sell common stock having an aggregate offering price of up to $100,000,000. Any additional capital raised through our at-the-market equity offering program or any other financing involving the sale of equity or equity-linked securities may dilute current stockholders’ ownership percentages and could also result in a decrease in the market value of our equity securities.
The terms of any securities issued by us in future capital transactions may be more favorable to new investors and may include preferences, superior voting rights, and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding. In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing
and distribution expenses, and other costs. We may be required to bear the costs even if we are unable to complete any such capital financing. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible promissory notes and warrants, which may adversely impact our financial results.
Exercises of stock options, warrants, and other securities will dilute your percentage of ownership and could cause our stock price to fall.
As of March 24, 2017,22, 2022, we had 5,670,90462,176,505 shares of our common stock issued and outstanding, which included 90,599 shares of unvested restricted stock, outstanding stock options to purchase 962,4331,778,932 shares of our common stock at an average exercise price of $8.03$2.78 per share, and outstanding warrants to purchase 557,421unvested restricted stock units of 490,382 shares with an intrinsic value of our common stock at an average exercise price$552,780.
As of $8.59 per share.
WeMarch 22, 2022, we also have reserved shares to issue stock options, restricted stock, or other awards to purchase or receive up to 18,3773,308,294 shares of common stock under our May 2011 Equity Incentive Plan, — shares of common stock under our August 2011 Equity Incentive Plan, and 49,762387,500 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, as well as issuethese additional shares or issue new securities, per terms defined in employment agreements or as part of common stock pursuant to the earn-out provisions of the stock purchase agreements in connection with our Ebyline and ZenContent acquisitions.additional incentive programs. The exercise, conversion, or exchange by holders of stock options, restricted stock units, warrants or convertible securitieswarrants for shares of common stock, andor the issuance of new shares pursuant to acquisition earn-out provisions,of common stock for additional compensation will dilute the percentage ownership of our other stockholders. SalesIssuance 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 our effective shelf registration.
We have an effective shelf registration statement on Form S-3 (File No. 333-212247) for the sale of up to $75,000,000 of our common stock. Currently, under Form S-3 rules, we can only sell our securities in a public primary offering with a value not exceeding one-third of our public float in any 12-month period, because our public float is below $75,000,000. Sales of a substantial number of shares of our common stock or securities convertible or exercisable into shares of our common stock under the shelf registration statement could cause the market price of our common stock to drop and could dilute your percentage of ownership.
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.
We have effective registration statements (File No. 333-191743 and File No. 333-197482) covering the resale of 587,202shares of our common stock that may be offered by certain stockholders who participated 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 487,226 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 an effective registration statement (File No. 333-195081) covering the resale of 1,469,147 shares of our common stock that may be offered by certain stockholders who participated in our 2014 private placement. The number of shares the selling stockholders may sell consists of 1,147,663 shares of common stock that are currently issued and outstanding and 321,484 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. Sales of a substantial number of shares of our common stock by the selling stockholders over a short period of time could cause the market price of our common stock to drop and could impair our ability to raise capital in the future by selling additional securities.
Issuance of stock to pay future obligations will dilute your percentage of ownership and could cause our stock 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 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 funds 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 companyCompany or fail to regularly publish reports on us, we could lose visibility in the 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. A 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:to our ability to retain existing or secure anticipated marketers 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 marketers and creators.creators; and general economic conditions causing a reduction in spending by our customers. 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 stockThe price may be volatile.
Whileof our shares of common stock in the public markets has experienced, and may in the future experience, extreme volatility due to a variety of factors, many of which are listed forbeyond our control.
Since our common stock started trading on the Nasdaq Capital Market, it has been relatively thinly traded and at times been subject to price volatility. Recently our common stock has experienced extreme price and volume volatility. From January 1, 2021, to December 31, 2021, the closing price of our common stock ranged from a low of $1.23 on December 29, 2021, to a high of $7.45 on January 25, 2021. During the twelve months ended December 31, 2021, the closing price of our common stock averaged $2.84 with an average daily trading volume of 2.4 million shares.
In addition to shares of our common stock, 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 has historically experienced and may continue to experience 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;
•speculative trading practices of certain market participants;
•actual or purported “short squeeze” trading activity;
•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.factors, including effects of the coronavirus pandemic.
These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock.
Further, on some occasions, our stock price may be or may be purported to be, subject to “short squeeze” activity. A “short squeeze” is a technical market condition that occurs when the price of a stock increases substantially, forcing market participants who had taken a position that its price would fall (i.e. who had sold the stock “short”), to buy it, which in turn may create significant, short-term demand for the stock not for fundamental reasons, but rather due to the need for such market participants to acquire the stock to forestall the risk of even greater losses. A “short squeeze” condition in the market for a stock can lead to short-term conditions involving very high volatility and trading that may or may not track fundamental valuation models.
We have not paid dividendsIn addition, in the past, and do not expect to pay dividendsclass action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the future. Any return on investment may be limited tothe valuemerit or ultimate results of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing sosuch litigation, could result in the foreseeable future. The payment of dividends onsubstantial costs, which would hurt our common stock will depend on earnings, financial condition and other businessoperating results and economic factors affecting us at such time asdivert management’s attention and resources from 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.business.
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
ITEM 2 - PROPERTIES
We do not have any current physical locations and all of our employees are working remotely. We have not experienced any major declines in operating efficiency in our remote working environment and have made the decision to continue our work from home policy indefinitely as a virtual first employer.Our corporate headquarters are located at 480 N.mailing address is 1317 Edgewater Dr #1880, Orlando, Avenue, Suite 200 in Winter Park, Florida. We occupy our offices pursuant to a five-year, five-month sublease agreement that expires in April 2019 and is renewable for one additional year until April 2020. We lease approximately 15,500 square feet based on an annually increasing rate of $17.50 to $22.50 per square foot annual rate over the lease term. We also lease flexible office space under one-year renewable contracts in Los Angeles, Chicago and Toronto.
Total rent expense recorded in general and administrative expense in the accompanying consolidated statements of operations was approximately $618,940 and $491,543 for the twelve months ended December 31, 2016 and 2015, respectively.
ITEM 3 – LEGAL PROCEEDINGS
From time to time, we may become involved in various other lawsuits and legal proceedings that arise in the ordinary course of our business. Litigation is, however, subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. WeAs of March 22, 2022, we are currently not aware of any legal proceedings or claims that we believe would or could have, individually or in the aggregate, a material adverse effect on us. Regardless of final outcomes, however, any such proceedings or claims may nonetheless impose a significant burden on management and employees and may come with costly defense costs or unfavorable preliminary interim rulings.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicableapplicable.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Information
On January 26, 2016, ourOur shares of common stock commenced tradingtrade on the Nasdaq Capital Market under the symbol IZEA. Prior thereto, our common stock was quoted on the OTCQB marketplace under the same symbol. On January 6, 2016, we filed a Certificate of Change with the Secretary of State of Nevada to effect a reverse stock split of our outstanding shares of common stock at a ratio of one share for every 20 shares outstanding prior to the effective date of the reverse stock split. All historical prices in the following table reflect the 1-for-20 reverse stock split of our outstanding shares of common stock that became market effective on January 11, 2016.
The following table sets forth the range of the high and low closing prices reported for our common stock during the periods presented below. The quotations represent inter-dealer prices without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. The quotations may be rounded for presentation.
|
| | | | | | | | |
| Fiscal year ended December 31, 2015 | | High | | Low |
| First quarter | | $ | 8.00 |
| | $ | 4.60 |
|
| Second quarter | | $ | 10.00 |
| | $ | 7.20 |
|
| Third quarter | | $ | 8.80 |
| | $ | 6.80 |
|
| Fourth quarter | | $ | 9.70 |
| | $ | 6.81 |
|
|
| | | | | | | | |
| Fiscal year ended December 31, 2016 | | High | | Low |
| First quarter | | $ | 8.40 |
| | $ | 6.38 |
|
| Second quarter | | $ | 7.85 |
| | $ | 5.75 |
|
| Third quarter | | $ | 7.79 |
| | $ | 5.60 |
|
| Fourth quarter | | $ | 5.75 |
| | $ | 4.38 |
|
Holders
As of March 24, 2017,22, 2022, we had approximately 29862,176,505 shareholders of record of our common stock. This number does not include beneficial owners whose shares are held in the names of various securities brokers, dealers, and registered clearing agencies.
Dividend Policy
We have never declared or paid cash dividends onto holders of our common stock, and we do not intend to payanticipate paying any cash dividends on our common stock in the foreseeable future. Rather,future as we expectintend to retain any earnings for use in our business. Any future earnings (if any)determination to fundpay dividends will be at the operation and expansiondiscretion of our businessboard of directors and for general corporate purposes.
will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law, and other factors our board of directors deems relevant.
Securities Authorized for Issuance under Equity Compensation Plans
See the section "Equity Compensation Plan Information,"“Equity Incentive Plans,” under Part III, Item 11 in Part III of this Form 10-K.
Annual Report.
Recent Sales of Unregistered Securities
Except as previously reported in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission during the year ended December 31, 2016,SEC, there were no unregistered sales of equity securities by us during the year ended December 31, 2016.2021.
On January 30, 2017, we issued 200,542 shares of common stock valued at $938,532 to the former Ebyline stockholders as settlement of our annual installment payment owed under the January 2015 Stock Purchase Agreement.
On February 12, 2017, we issued 7,109 shares valued at $30,000 as compensation for services a contractor provided to us.
The foregoing issuances of shares were made in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.
Equity Repurchases
None.
ITEM 6 - SELECTED FINANCIAL DATA
Not applicable for smaller reporting companies.
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Information
The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our consolidated financial statements and related notes included elsewhere in this report. Historical results and percentage relationships among any amounts in these financial statements are not necessarily indicative of trends in operating results for any future period. This report contains “forward-looking statements.” The statements, which are not historical facts contained in this report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, and notes to our consolidated financial statements, particularly those that utilize terminology such as “may,” “will,” “would,” “could,” “should,” “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 various risks and uncertainties. Future events and our actual results may differ materially from the results reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to raise additional funding, customer cancellations, our ability to maintain and grow our business, variability of operating results, our ability to maintain and enhance our brand, our development and introduction of new products and services, 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 other risks described herein and in our other filings with the SEC.
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 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.
Company Overview
IZEA Worldwide, Inc. (“IZEA”, “we”, “us” or “our”) creates and operates online marketplaces that connectsconnect marketers, including brands, agencies, and publishers, with influential content creators. Our creators range from leading social media influencers to accredited journalists. These creators are compensated by IZEA for producing and distributing unique content such as long-form text, videos, photosbloggers and status updates on behalf oftweeters (“creators”). Our technology brings the marketers through websites, blogs and social media channels. Marketers receive influential consumercreators together, enabling their transactions to be completed at scale by managing custom content workflow, creator search and engaging, shareable stories that drive awareness.
targeting, bidding, analytics, and payment processing.
We help power the creator economy, allowing everyone from college students and stay at home momsstay-at-home individuals to celebrities and accredited journalists the opportunity to monetize their content, creativity, and influence. Marketers benefit from buzz, traffic, awarenessinfluence through our marketers. IZEA compensates these creators for producing unique content such as long and sales,short-form text, videos, photos, status updates, and creators earn cash compensation in exchangeillustrations for marketers or distributing such content on behalf of marketers through their workwebsites, blogs, and promotion.social media channels.
Our online marketplaces are powered by the IZEA Exchange (“IZEAx”). Our technology enables transactions to be completed at scaleWe provide value through the management ofmanaging custom content workflow, creator search and targeting, bidding, analytics, and payment processing. While the majority of the marketers engage us to perform these services (the “Managed Services”) on their behalf, they may also use our marketplaces to engage creators for influencer marketing campaigns or to produce custom content on a self-service basis by licensing our technology.
Our primary technology platform, The IZEA Exchange (“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 creators’ websites, blogs, and photos through a wide variety of social media channels, including, blogs,among others, Twitter, Facebook, InstagramYouTube, Twitch, and Tumblr, among others.Instagram. We extensively use this platform to manage influencer marketing campaigns on behalf of our marketers. This platform is also available directly to our marketers as a self-service tool and a licensed white label product. IZEAx was engineered from the ground up to replace all of our previous platforms with an integrated offering that is improved and more efficient.
We derive revenue from three sources: revenue from a marketer when it pays forIn 2020, we launched two new platforms, BrandGraph and Shake. BrandGraph is a social media publisher orintelligence platform offering marketers an analysis of share-of-voice, engagement benchmarking, category spending estimates, influencer suchidentification, and sentiment analysis.The BrandGraph platform maps and classifies the complex hierarchy of corporation-to-brand relationships by category and associates social content with brands through a proprietary content analysis engine. Shake is an online marketplace where buyers can quickly and easily hire creators of all types for influencer marketing, photography,
design, and other digital services. The Shake platform is aimed at digital creatives seeking freelance “gig” work. Creator’s list available “Shakes” in their accounts on the platform. Marketers select and purchase creative packages from them through a streamlined chat experience, assisted by ShakeBot - a proprietary, artificial intelligence assistant.
Impact of COVID-19 on our Business
The COVID-19 pandemic impacted our operations, sales, and finances beginning in 2020. To protect the health and safety of our employees, we took precautionary action and directed all staff to work from home effective March 16, 2020. We allowed the leases for our company headquarters and temporary office spaces to expire at the end of their terms throughout 2020. We have not experienced any major declines in operating efficiency in our remote working environment and have decided to continue our work-from-home policy indefinitely as a bloggervirtual-first employer.
We will continue to actively monitor the COVID-19 situation and may take further actions altering the business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or tweeter to share sponsored content with their social network audience ("Sponsored Revenue")as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, employees, and prospects, or on our future financial results.
Key Components of Results of Operations
Overall consolidated results of operations are evaluated based on Revenue, Cost of Revenue, Sales and Marketing expenses, General and Administrative expenses, Depreciation and Amortization, and Other Income (Expense), net.
Revenue
We generate revenue from four primary sources: (1) revenue from our managed services when a publishermarketer (typically a brand, agency, or company purchasespartner) pays us to provide custom branded content, for its own use, as well as third party contentinfluencer marketing, amplification, or other campaign management services (“Managed Services”); (2) revenue from fees charged to software customers on their marketplace spend within our IZEAxand native advertising efforts ("Content Revenue"Shake platforms (“Marketplace Spend Fees”); (3) revenue from license and subscription fees charged to access the IZEAx and BrandGraph platforms (“License Fees”); and (4) revenue derived from various serviceother fees such as inactivity fees, early cash-out fees, and licenseother miscellaneous fees charged to users of our platforms ("(“Other Fees”).
As discussed in more detail within “Critical Accounting Policies and Use of Estimates” under “Note 1. Company and Summary of Significant Accounting Policies,” under Part I, Item 1 herein, revenue from Marketplace Spend Fees are reported on a net basis, and revenue from all other sources, including Managed Services, License Fees, and Other Fees are reported on a gross basis. We further categorize these sources into two primary groups: (1) Managed Services and (2) SaaS Services, which includes revenue from Marketplace Spend Fees, License Fees, and Other Fees.
Cost of Revenue
Our cost of revenue consists of direct costs paid to our third-party creators who provide the custom content, influencer marketing, or amplification services for our Managed Service Fee Revenue").customers, where we report revenue on a gross basis. It also includes internal costs related to our campaign fulfillment and SaaS support departments. These costs include salaries, bonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to the personnel responsible for providing support to our customers and ultimately fulfilling our obligations under our contracts with customers. Where appropriate, we capitalize costs incurred with software developed or acquired for our revenue-supporting platforms and amortize these costs over the estimated useful lives of those platforms. This amortization is separately stated under depreciation and amortization in our consolidated statements of operations and comprehensive loss.
Sales and Marketing
Our sales and marketing expenses consist primarily of salaries, bonuses, commissions, stock-based compensation, employee benefit costs, travel and miscellaneous departmental costs for our marketing, sales, and sales support personnel, as well as marketing expenses such as brand marketing, public relations events, trade shows, and marketing materials, and travel expenses.
General and Administrative
Our general and administrative (“G&A”) expense consists primarily of salaries, bonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to our executive, finance, legal, human resources, and other administrative personnel. It also includes travel, public company, investor relations expenses, accounting, legal professional services fees, leasehold facilities, and other corporate-related expenses. G&A expense also includes our technology and development costs consisting primarily of our payroll costs for our internal engineers and contractors responsible for developing, maintaining, and improving our technology, as well as hosting and software subscription costs. These costs are expensed as incurred, except to the extent that they are associated with internal-use software that qualifies for capitalization, which is then recorded as software development costs in the consolidated balance sheet. We also capitalize costs
that are related to our acquired intangible assets. Depreciation and amortization related to these costs are separately stated under depreciation and amortization in our consolidated statements of operations and comprehensive loss. G&A expense also includes current period gains and losses on our acquisition costs payable and gains and losses from the sale of fixed assets. Impairments on fixed assets, intangible assets, and goodwill are included as part of general and administrative expense when they are not material and broken out separately in our consolidated statements of operations and comprehensive loss when they are material.
Depreciation and Amortization
Depreciation and amortization expense consists primarily of amortization of our internal-use software and acquired intangible assets from our business acquisitions. To a lesser extent, we also have depreciation and amortization on equipment and leasehold improvements used by our personnel. Costs are amortized or depreciated over the estimated useful lives of the associated assets.
Other Income (Expense)
Interest Expense. Interest expense is primarily related to the imputed interest on our secured credit facility, accrued interest for the PPP loan, and interest on the financing of computers.
Other Income. Other income consists primarily of interest income for interest earned on investments, or changes in the value of our foreign assets and liabilities and foreign currency exchange gains and losses on foreign currency transactions, primarily related to the Canadian Dollar. For 2021, it also includes a gain on the forgiveness of debt related to our PPP loan (see “Liquidity and Capital Resources ‒ PPP Loan” below) and a gain on the sale of digital assets.
Results of Operations for the Twelve Months Ended December 31, 2016 Compared to the Twelve Months EndedDecember 31, 2015
2021 and 2020
The following table sets forth a summary of our consolidated statements of operations and the change between the periods:
| | | | | | | | | | | | | | | | | | | | |
| | | | |
| Twelve Months Ended December 31, | | |
| 2021 | | 2020 | | $ Change | % Change |
| Revenue | $ | 30,022,377 | | | $ | 17,967,207 | | | $ | 12,055,170 | | 67 | % |
| | | | | | |
| Costs and expenses: | | | | | | |
| Cost of revenue | 14,461,702 | | | 7,896,078 | | | 6,565,624 | | 83 | % |
| Sales and marketing | 8,795,038 | | | 5,999,671 | | | 2,795,367 | | 47 | % |
| General and administrative | 11,034,246 | | | 8,611,423 | | | 2,422,823 | | 28 | % |
| Impairment of goodwill | — | | | 4,300,000 | | | (4,300,000) | | (100) | % |
| Depreciation and amortization | 1,089,118 | | | 1,652,126 | | | (563,008) | | (34) | % |
| Total costs and expenses | 35,380,104 | | | 28,459,298 | | | 6,920,806 | | 24 | % |
| Loss from operations | (5,357,727) | | | (10,492,091) | | | 5,134,364 | | (49) | % |
| Other income (expense): | | | | | | |
| Interest expense | (25,320) | | | (63,012) | | | 37,692 | | (60) | % |
| Other income, net | 2,242,426 | | | 46,708 | | | 2,195,718 | | 4,701 | % |
| Total other income (expense), net | 2,217,106 | | | (16,304) | | | 2,233,410 | | (13,699) | % |
| Net income (loss) | $ | (3,140,621) | | | $ | (10,508,395) | | | $ | 7,367,774 | | (70) | % |
|
| | | | | | | | | | | | | | |
| | Twelve Months Ended | | |
| | December 31,
2016 | | December 31,
2015 | | $ Change | | % Change |
| Revenue | $ | 27,310,602 |
| | $ | 20,467,926 |
| | $ | 6,842,676 |
| | 33.4 | % |
| Cost of sales | 14,242,244 |
| | 12,236,916 |
| | 2,005,328 |
| | 16.4 | % |
| Gross profit | 13,068,358 |
| | 8,231,010 |
| | 4,837,348 |
| | 58.8 | % |
| Operating expenses: | | | | | | | |
| General and administrative | 10,282,792 |
| | 7,517,115 |
| | 2,765,677 |
| | 36.8 | % |
| Sales and marketing | 10,261,910 |
| | 7,936,215 |
| | 2,325,695 |
| | 29.3 | % |
| Total operating expenses | 20,544,702 |
| | 15,453,330 |
| | 5,091,372 |
| | 32.9 | % |
| Loss from operations | (7,476,344 | ) | | (7,222,320 | ) | | (254,024 | ) | | (3.5 | )% |
| Other income (expense): | | | | | | | |
| Interest expense | (82,944 | ) | | (115,861 | ) | | 32,917 |
| | (28.4 | )% |
| Loss on exchange of warrants | — |
| | (1,845,810 | ) | | 1,845,810 |
| | (100.0 | )% |
| Change in fair value of derivatives, net | 9,163 |
| | (2,133,820 | ) | | 2,142,983 |
| | (100.4 | )% |
| Other income (expense), net | (10,075 | ) | | 9,640 |
| | (19,715 | ) | | (204.5 | )% |
| Total other income (expense), net | (83,856 | ) | | (4,085,851 | ) | | 4,001,995 |
| | 97.9 | % |
| Net loss | $ | (7,560,200 | ) | | $ | (11,308,171 | ) | | $ | 3,747,971 |
| | 33.1 | % |
Revenues
Revenue
The following table breaks downillustrates our approximate revenue costby type, the percentage of salestotal revenue by type, and gross profit by revenue stream for the twelve months ended December 31, 2016 and 2015:change between the periods:
|
| | | | | | | | | | | |
| | Twelve Months Ended |
| | December 31,
2016 | December 31,
2016 | | December 31,
2015 | December 31,
2015 |
| Revenue & % of Total | | | | | |
| Sponsored Revenue | $ | 16,704,000 |
| 61 | % | | $ | 12,230,000 |
| 60 | % |
| Content Revenue | 10,231,000 |
| 37 | % | | 7,978,000 |
| 39 | % |
| Service Fees & Other Revenue | 375,000 |
| 2 | % | | 260,000 |
| 1 | % |
| Total Revenue | $ | 27,310,000 |
| 100 | % | | $ | 20,468,000 |
| 100 | % |
| | | | | | |
| Cost of Sales & % of Total | | | | | |
| Sponsored COS | $ | 6,538,000 |
| 46 | % | | $ | 5,177,000 |
| 42 | % |
| Content COS | 7,704,000 |
| 54 | % | | 7,060,000 |
| 58 | % |
| Service Fees & Other COS | — |
| — | % | | — |
| — | % |
| Total Cost of Sales | $ | 14,242,000 |
| 100 | % | | $ | 12,237,000 |
| 100 | % |
| | | | | | |
| Gross Profit & Profit % | | | | | |
| Sponsored Revenue | $ | 10,166,000 |
| 61 | % | | $ | 7,053,000 |
| 58 | % |
| Content Revenue | 2,527,000 |
| 25 | % | | 918,000 |
| 12 | % |
| Service Fees & Other Revenue | 375,000 |
| 100 | % | | 260,000 |
| 100 | % |
| Total Profit | $ | 13,068,000 |
| 48 | % | | $ | 8,231,000 |
| 40 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| Twelve Months Ended December 31, | | | |
| 2021 | | 2020 | | $ Change | % Change |
| Managed Services Revenue | $ | 28,203,556 | | 94 | % | | $ | 15,625,273 | | 87 | % | | $ | 12,578,283 | | 80 | % |
| | | | | | | | |
| Marketplace Spend Fees | 319,419 | | 2 | % | | 621,536 | | 3 | % | | (302,117) | | (49) | % |
| License Fees | 1,454,874 | | 5 | % | | 1,667,662 | | 9 | % | | (212,788) | | (13) | % |
| Other Fees | 44,528 | | — | % | | 52,736 | | — | % | | (8,208) | | (16) | % |
| SaaS Services Revenue | 1,818,821 | | 6 | % | | 2,341,934 | | 13 | % | | (523,113) | | (22) | % |
| | | | | | | | |
| Total Revenue | $ | 30,022,377 | | 100 | % | | $ | 17,967,207 | | 100 | % | | $ | 12,055,170 | | 67 | % |
Revenues for the twelve months ended December 31, 2016increased by $6,842,676, or 33%, compared to the same period in 2015. Sponsored Revenue increased $4,474,000, Content Revenue increased $2,253,000 and Service Fee Revenue
increased $115,000Managed Services revenue during the twelve months ended December 31, 2016 compared to2021, increased 80% from the same period in 2015. Sponsored Revenue increased2020, primarily due to our larger sales force, concentrated salesincreased orders from new and existing customers returning to and expanding their marketing efforts toward larger IZEA managed campaigns rather than smaller marketer self-service campaigns and generating repeat business from existing customers. Content Revenue increased duethrough sponsored social marketing as compared to the same reasons as Sponsored Revenue, as well as a full twelve full monthsprior-year period.
SaaS Services revenue, which includes license and support fees to access the platform services, and fees earned on the marketers’ self-service use of Content Revenue reported in 2016 comparedour technology platforms to only eleven months in 2015 as the Ebyline acquisition occurred on January 30, 2015. Service Fee Revenue increased in the twelve months ended December 31, 2016 due to more licensing fees generatedmanage their content workflow and influencer marketing campaigns, declined 22% from the white-label partnerssame period in IZEAx.2020, due to:
We estimate that revenue for the year ending December 31, 2017 will increase•Marketplace Spend Fees decreased by approximately 25% to approximately $34 million.
Our net bookings of $30.0$0.3 million for the twelve months ended December 31, 20162021, when compared with the same period in 2020, primarily as a result of lower spend levels from our marketers and lower fees assessed on those spends as a result of competitive pricing efforts in IZEAx. Revenue from Marketplace Spend Fees represents our net margins received on this business.
•License Fees revenue decreased during the twelve months ended December 31, 2021 to $1.5 million compared to $1.7 million in the same period of 2020. The decrease in IZEAx license fees was partially offset by an increase in subscribers for BrandGraph and IZEAx Discovery services, albeit at lower rates. Additionally, we implemented a competitive standardized pricing system for all IZEAx license fee customers. Prior to 2021, the subscription fees for BrandGraph and IZEAx Discovery were 23% higher than the net bookings of $24.5 millionclassified under Other Fees, but these amounts from 2020 have been reclassified under License Fees to conform with their 2021 classification.
•Other Fees revenue decreased (16)% for the twelve months ended December 31, 2015. Net bookings is a measure of sales orders received minus any cancellations or changes2021, compared to the same period in a given period. Management uses net bookings as a leading indicator of future revenue recognition as revenue is typically recognized within 90-120 days of booking, though larger contracts may be recognized over twelve months from the original booking date. Net bookings can be affected by, among other things, cancellations or changes to orders that occur in future periods. Reductions in net bookings or changes in the expected timing of delivery for services2020 due to delays and customer preferences or other considerations may resulta reduction in fluctuations in expected future revenue. We experienced higher bookings as a result of the joint benefit of revenue gained by recent acquisitions and the increase in average deal size from existing and new customers alike. These bookings are expected to continue to translate into higher revenue in 2017 as compared to 2016.
inactivity service fees.
Cost of Sales and Gross ProfitRevenue
Our cost of sales is comprised primarily of amounts paid to our content creators to provide custom content or advertising services through the promotion of sponsored content in a blog post, tweet, click or action.
Cost of salesrevenue for the twelve months ended December 31, 20162021, increased by $2,005,328,$6.6 million, or 16%approximately 83%, compared to the same period in 2015. Cost of sales increased2020 primarily due to the increase in our sales, but the increase was tempered by the improved margins on our managed services for Content Revenue.
Gross profit for the twelve months ended December 31, 2016increased by $4,837,348, or 59%, compared to the same period in 2015. Our gross profitManaged Services revenue. Cost of revenue as a percentage of revenue increased from 40% for the twelve months ended December 31, 201544% in 2020 to 48% for the same period in 2016. Sponsored Revenue gross margin was 61% and Content Revenue gross margin was 25% for the twelve months ended December 31, 2016. We estimate that our average gross margins for the year ending December 31, 2017 will average approximately 47%2021, due primarily to 48%.
The gross profit increase was primarily attributable to increased use of our managed services by marketers and agencies. Prior to being acquired by IZEA, Ebyline generated Content Revenue primarily from newspaper and traditional publishers through their workflow platform on a self-service basis at a 7% to 9% profit. After the acquisition, these customers still produce a significant amount of revenue, but we are increasing the sales of Content Revenue to customers on a managed basis and expect to see continued improvementseveral large contracts in the Content Revenue margins. The mix of sales between our higher margin Sponsored Revenuecurrent period that carry a lower average margin.
Sales and our lower margin Content Revenue (particularly the self-service workflow portion of this revenue) has a significant effect on our overall gross profit percentage.Marketing
For the twelve months ended December 31, 2016, managed services were 36% of Content Revenue compared to 14% for the twelve months ended December 31, 2015. Additionally, the margins on the managed portion of Content Revenue increased by 18 percentage points for the twelve months ended December 31, 2016 as we incorporated higher standard pricing guidelines into revenue during 2016 and we lowered our production costs after the acquisition of ZenContent in July 2016.
Operating Expenses
Operating expenses consist of general and administrative expenses and salesSales and marketing expenses. Total operating expenses for the twelve months ended December 31, 20162021, increased by $5,091,372,$2.8 million, or 33%approximately 47%, compared to the same period in 2015. The increase was primarily attributable2020. Advertising and marketing expenses increased $1.2 million to further promote brand awareness and improve customer acquisition, satisfaction, and retention. Payroll, personnel-related expenses, and stock compensation for sales and marketing personnel increased personnel costs$1.3 million due to higher commissions and additional overhead resulting frombonuses driven by increased personnel.bookings.
General and administrative expenses consist primarily of administrative and engineering personnel costs, general operating costs, public company costs, including non-cash stock compensation, acquisition costs, facilities costs, insurance,Administrative
depreciation, professional fees, and investor relations costs. General and administrative expense for the twelve months ended December 31, 20162021, increased by $2,765,677,$2.4 million, or 37%approximately 28%, compared to the same period in 2015.2020. The increase in general and administrative expense was primarily attributabledue to a $1$1.4 million increase in higher compensation costs associated with additional personnel costs and a $142,000 increase in variable costs relatedhigher commission and bonus expense linked to personnel such as software and subscription costs, communication, travel and supply costs. Theseperformance. Contractor costs increased $1.1 million for additional engineers to supplement our team working to expand our technology offerings.
Impairment of Goodwill
In March 2020, we identified triggering events due to the reduction in our projected revenue due to adverse economic conditions caused by the COVID-19 pandemic, the continuation of a market capitalization below our carrying value, and uncertainty for recovery given the volatility of the capital markets surrounding COVID-19. We performed an interim
assessment of goodwill, using the discounted cash flow method under the income approach and the guideline transaction method under the market approach, and determined that the carrying value of our Company’s reporting unit as of March 31, 2020 exceeded the fair value. As a result of an increase in the average number of our administrative and engineering personnel by 34% since the prior year period along with increased costs for those personnel. Increased personnel costs are expected to continue in 2017 due to planned growth in the total number of administrative and engineering personnel needed to handle our growing organization.
On January 30, 2015, we purchased all of the outstanding shares of capital stock of Ebyline, Inc. for aggregate consideration up to $8,850,000, including guaranteed payments of $3,350,000 and contingent performance payments up to $5,500,000 based on Ebyline meeting certain revenue targets for each of the three years ending December 31, 2015, 2016 and 2017. We initially determined the fair value of the contingent payments to be $2,210,000 using a Monte-Carlo simulation to simulate revenue over the next three years. Of this amount, $357,700 was determined to be future compensation expense and the $1,834,300 remainder was determined to be purchase consideration and recorded as acquisition costs payable. During the twelve months ended December 31, 2015, we reassessed the expected revenues to be produced from Ebyline over the next three years and did not believe that it would meet any of the targets required to achieve the performance payments. Therefore,valuation, we recorded a gain$4.3 million impairment of $1,834,300goodwill resulting in an expense for the twelve months ended December 31, 2015,2020.
Based upon our analysis of goodwill in late 2021, there has been no further impairment as of December 31, 2021.
Depreciation and Amortization
Depreciation and amortization expense for the twelve months ended December 31, 2021 decreased by $0.6 million, or approximately 34%, compared to the same period in 2020.
Depreciation expense on property and equipment was $0.13 million and $0.14 million for the twelve months ended December 31, 2021, and 2020, respectively. Depreciation expense decreased slightly due to the reductiondisposal of aging equipment in our estimated fair value of contingent acquisition costs payable.2021.
On July 31, 2016, we purchased all ofAmortization expense was $1.0 million and $1.5 million for the outstanding shares of capital stock of ZenContent, Inc. for aggregate consideration up to $4,500,000, including guaranteed payments of $2,000,000 and contingent performance payments up to $2,500,000 based on ZenContent meeting certain revenue targets for each of the three years ending July 31, 2017, 2018 and 2019. We initially determined the fair value of the contingent payments to be $230,000 using a Monte-Carlo simulation to simulate revenue over the next three years. As oftwelve months ended December 31, 2016, we reassessed2021, and 2020, respectively. Amortization expense related to intangible assets acquired in the expected revenuesEbyline, ZenContent, and TapInfluence acquisitions was $0.5 million and $1.1 million for the twelve months ended December 31, 2021, and 2020, respectively, while amortization expense related to be produced from ZenContent overinternal-use software development costs was $0.5 million and $0.4 million for the next threetwelve months ended December 31, 2021, and 2020, respectively. Amortization on our intangible acquisition assets is decreasing due to the completion of amortization on certain intangible assets acquired in prior years while amortization on our internal software costs is increasing due to continued development and determined that current fair value was $324,000. Therefore, we recorded a $94,000the release of BrandGraph and Shake in 2020.
Other Income (Expense)
Interest expense decreased by $0.04 million to $0.03 million during the twelve months ended December 31, 20162021 compared to a $1,834,300 gainthe same period in 2020 due primarily to the elimination of amounts owed on our acquisition costs payable and the reduction in our average borrowings on our secured credit facility during the twelve months ended December 31, 2015, resulting in a net increase of $1,928,300 in general and administrative expense in our consolidated statement of operations, due2021, compared to the changesame period in our estimated fair value of contingent acquisition costs payable.2020.
A portion of the guaranteed ZenContent payments are subject to downward adjustment of up to 30% if Brianna DeMike, ZenContent’s co-founder, is terminatedOther income, net increased by IZEA for cause or she terminates her employment without good reason. As a result, we initially reduced our acquisition cost liability by $300,000 to be accrued as compensation expense over the three-year term rather than allocated to the purchase price in accordance with ASC 805-10-55-25. We increased acquisition costs payable and general and administrative expense in our consolidated statement of operations for$2.2 million during the twelve months ended December 31, 2016 by $102,431 related to the portion that was earned during the period.
The increase in general and administrative expenses is also attributable to a $241,000 increase in depreciation and amortization expense during the three months ended December 31, 2016 as a result of the amortization of software development costs for IZEAx and the Ebyline and ZenContent intangible assets acquired; a $12,000 increase in contractor expense for outsourced engineering and finance projects; and a $131,000 increase in rent for our facilities and an additional office in Canada and California. Legal fees decreased by $784,000 from the prior year period due to the settlement of our patent litigation in August 2015.
Sales and marketing expenses consist primarily of personnel costs related to employees and consultants who support sales and marketing efforts, promotional and advertising costs and trade show expenses. Sales and marketing expenses for the twelve months ended December 31, 2016 increased by $2,325,695, or 29%,2021, when compared to the same period in 2015. The increase was2020, primarily attributable to a $2,552,000 increase in personnel costsfrom the gain on the forgiveness of debt. including principal of $1.9 million and interest of $0.02 million, totaling $1.92 million on the PPP Loan and a $280,000 increase in variable costs related to personnel such as software and subscription costs, communication, travel and supply costs. These increases in the personnel costs are the resultgain of a 23% increase in the number of our sales and marketing personnel since the prior year along with a $328,000 increase in commission expense as a result of the increase in customer bookings. Travel costs included in the variable costs increased by 13% as a result of increased training and corporate events during the first half of 2016. Sales and marketing expenses also increased $74,000 in contractor expenses and $42,000 as a result of increased non-cash stock compensation costs related to the new employees. These increases were offset by a $621,000 decrease in public relations and marketing events during 2016 as compared to 2015. We anticipate these expenses will increase again in 2017 due to IZEAFest 2017, which was held in February 2017, and other planned marketing efforts.
Although we estimate that operating expenses will increase for the year ending December 31, 2017 as a result of our continued expansion and investment in future growth, we expect that operating expenses as a percentage of revenue will decline slightly for the year. We estimate that Adjusted EBITDA for the year ending December 31, 2017 will be approximately
negative $6$0.19 million as a result of our continued investment in sales and engineering staff necessary to increase our revenue and support our customers.
Other Income (Expense)
Other income (expense) consists primarily of interest expense, loss on exchange of warrants and the change in the fair value of derivatives.
Interest expense during the twelve months ended December 31, 2016decreased by $32,917 to $82,944 compared to the same period in 2015 primarily due to the lower imputed interest on the remaining balancesale of acquisition costs payable.digital assets.
From July 20, 2015 through August 14, 2015, we offered a 25% discount on the warrant exercise prices to investors holding the series A and series B warrants to purchase common stock issued in its August - September 2013 private placement (the “2013 Warrants”) and a 26% discount on the warrant exercise prices to investors holding series A and series B warrants to purchase common stock issued in its February 2014 private placement (the “2014 Warrants” and together with the 2013 Warrants, the "Warrants"). At the close of the offer period on August 14, 2015, Warrants for a total of 2,191,547 shares of common stock were exercised and converted into common stock at an average exercise price of $5.87 per share for total proceeds of $12,861,057 less $3,972 in transaction costs. The amendment of Warrants to reduce the exercise price required us to treat the adjustment as an exchange whereby it computed the fair value of the Warrants immediately prior to the price reduction and the fair value of the Warrants after the price reduction. The $1,845,810 change in the fair value of the Warrants as a result of the price reduction was treated as a loss on exchange and recorded in the consolidated statements of operations during the twelve months ended December 31, 2015.
In prior years, we entered into financing transactions that gave rise to derivative liabilities. These financial instruments are carried at fair value in our financial statements. Changes in the fair value of derivative financial instruments are required to be recorded in other income (expense) in the period of change. We recorded expense of $9,163 and income of $2,133,820 resulting from the increase or decrease in the fair value of certain warrants and stock during the twelve months ended December 31, 2016 and 2015, respectively. Due to the large exercise of Warrants in August 2015 resulting in fewer remaining warrants requiring re-measurement of fair values, we believe that these fluctuations will be little to none in future periods unless we enter into new financing transactions that create derivative liabilities.
The $19,715 change in other income (expense) is primarily the result of currency exchange losses related to our Canadian transactions during the twelve months ended December 31, 2016.
Net Loss
Net loss for the twelve months ended December 31, 20162021, was $7,560,200, which decreased from$3.1 million, a $7.4 million decrease in the net loss of $11,308,171$10.5 million for the same period in 2015.2020. The reductiondecrease in net loss was primarily the result of the increased net revenue and profitthe gain on the forgiveness of debt related to the $1.9 million PPP Loan.
Key Metric
We review the information provided by our key financial metrics, Managed Services Bookings, and gross billings, to assess the progress of our business and make decisions on where to allocate our resources. As our business evolves, we may change the key financial metrics in future periods.
Managed Services Bookings
Managed Services Bookings is a measure of all sales orders received during a time period less any cancellations received, or refunds given during the same time period. Sales order contracts vary in complexity with each customer and range from custom content delivery to integrated marketing services; our contracts generally run from several months for smaller contracts up to twelve months for larger contracts. We recognize revenue from our Managed Services contracts on a percentage of completion basis as we deliver the content or services over time, which can vary greatly. Historically, bookings have converted to revenues over a 6-month period on average. However, since late 2020, we have been receiving increasingly larger and more complex sales orders which, in turn, has lengthened the average revenue period to approximately 9-months, with the largest contracts taking longer to complete. For this reason, Managed Services Bookings, while an overall indicator of the health of our business, may not be used to predict quarterly revenues, and could be subject to future adjustment. Managed Services Bookings is useful information as it reflects the amount of orders received in one period, even though revenue from those orders may be reflected over varying amounts of time. Management uses the Managed Services Bookings metric to plan its operating staff, to identify key customer group trends to enlighten go-to-market activities, and to inform its product development efforts. Managed Services Bookings for the twelve months ended December 31, 2021 and 2020 was $39.5 million and $17.3 million, respectively.
Gross Billings by Revenue Type
Company management evaluates our operations and makes strategic decisions based, in part, on our key metric of gross billings from our two primary types of revenue, Managed Services, and SaaS Services. We define gross billings as the total dollar value of the amounts charged to our customers for the services we perform, and the amounts billed to our SaaS customers for their self-service purchase of goods and services on our platforms. The amounts billed to our SaaS customers are on a cost-plus basis. Gross billings are the amounts of our reported revenue plus the cost of payments we made to third-party creators providing the content or sponsorship services, which are netted against revenue for generally accepted accounting principles in the United States (“GAAP”) reporting purposes.
Managed Services gross billings include the total dollar value of the amounts billed to our customers for the services we perform. Gross billings for Managed Services are the same as Managed Services Revenue reported for those services in our consolidated statements of operations and comprehensive loss in accordance with GAAP.
SaaS Service gross billings include license and other fees together with the total amounts billed to our SaaS customers for their self-service purchase of goods and services on our platforms, termed ‘Marketplace Spend Fees.’ Our SaaS customers’ marketplace spend is billed on a cost-plus basis. SaaS Services Revenue includes the total of License and Other Fees gross billings, plus the Marketplace Spend Fees gross billings (which includes our third-party creator costs on those billings that are netted against revenue for GAAP reporting purposes).
We consider gross billings to be an important indicator of our potential performance as it measures the total dollar volume of transactions generated through our marketplaces. Tracking gross billings allows us to monitor the percentage of gross billings that we retain after payments to our creators. Additionally, tracking gross billings is critical as it pertains to our credit risk and cash flows. We invoice our customers based on our services performed or based on their self-service transactions plus our fee. Then we remit the agreed-upon transaction price to the creators. If we do not collect the money from our customers prior to paying our creators, we could experience large swings in our cash flows. Additionally, we incur the credit risk to collect amounts owed from our customers for all services performed by us or by the creators. Finally, gross billings allow us to evaluate our transaction totals on an equal basis to see our contribution margins along with a reduced expense fromby revenue stream so that we can better understand where we should be allocating our resources.
The following tables set forth our gross billings by revenue type, the percentage of total gross billings by type, and the change inbetween the fair valueperiods:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | | |
| 2021 | | 2020 | | $ Change | % Change |
| Managed Services Gross Billings | $ | 28,203,556 | | 84% | | $ | 15,625,273 | | 65% | | $ | 12,578,283 | | 80% |
| | | | | | | | |
| Marketplace Spend Fees | 3,970,308 | | 12% | | 6,607,425 | | 28% | | (2,637,117) | | (40)% |
| License Fees | 1,454,874 | | 4% | | 1,667,662 | | 7% | | (212,788) | | (13)% |
| Other Fees | 44,528 | | —% | | 52,736 | | 1% | | (8,208) | | (16)% |
| SaaS Services Gross Billings | 5,469,710 | | 16% | | 8,327,823 | | 35% | | (2,858,113) | | (34)% |
| | | | | | | | |
| Total Gross Billings | $ | 33,673,266 | | 100% | | $ | 23,953,096 | | 100% | | $ | 9,720,170 | | 41% |
Non-GAAP Financial MeasuresMeasure
Adjusted EBITDA
Below are financial measures of cash operating expenses (“Cash Opex”) and Adjusted EBITDA. These areEBITDA is a “non-GAAP financial measure” as defined under the rules of the Securities and Exchange Commission (the “SEC”).
We define Cash Opex as total operating expenses exclusive of unusual or non-cash expenses such as depreciation and amortization, non-cash stock related compensation, gain or loss on asset disposals or impairment and changes in contingent acquisition costs, and all other non-cash income and expense items such as loss on exchanges and changes in fair value of derivatives, if applicable.
We define Adjusted EBITDA as earnings or loss before interest, taxes, depreciation and amortization, non-cash stock relatedstock-based compensation, gain or loss on asset disposals or impairment, changes in contingent acquisition costs, and allcertain other unusual or non-cash income and expense items such as lossgains or losses on settlement of liabilities and exchanges, and changes in the fair value of derivatives, if applicable.
We use Cash Opex as a percentage of revenue and Adjusted EBITDA as measuresa measure of operating performance, for planning purposes, to allocate resources to enhance the financial performance of our business and in communications with our boardBoard of directorsDirectors regarding our financial performance. We believe that Cash Opex as a percentage of revenue and Adjusted
EBITDA also provide usefulprovides valuable information to investors as they exclude transactions not related to our core cash operating business activities, includingit excludes non-cash transactions, and they provideit provides consistency andto facilitate period-to-period comparisons. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash operations. All companies do not calculate Cash Opex and Adjusted EBITDA in the same manner, and Cash Opex and Adjusted EBITDA as presented by us may not be comparable to Cash Opex and Adjusted EBITDA presented by other companies, which limits their usefulness as comparative measures.
Moreover, Cash Opex and Adjusted EBITDA have limitations as analytical tools, and youYou should not consider themAdjusted EBITDA in isolation or as a substitute for an analysis of our results of operations as reported under generally accepted accounting principlesGAAP. All companies do not calculate Adjusted EBITDA in the United States (“GAAP”). Thesesame manner, limiting its usefulness as a comparative measure. Moreover, Adjusted EBITDA has limitations includeas an analytical tool, including that Cash Opex and Adjusted EBITDA:
do•does not include stock-based compensation expense, which is a non-cash expense, but has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an importantessential part of our compensation strategy;
do•does not include stock issued for payment of services, which is a non-cash expense, but has been, and is expected to be for the foreseeable future, an important means for us to compensate our directors, vendors, and other parties who provide us with services; and
do•does not include depreciation and intangible assets amortization expense, impairment charges and gains or losses on disposal of equipment, which is not always a current period cash expense, but the assets being depreciated and amortized may have to be replaced in the future.future; and
Furthermore, Adjusted EBITDA
excludes changes in fair value of derivatives,•does not include interest expense and other gains, losses, and expenses that we do not believe are not indicative of our ongoing core operating results, but these items may represent a reduction or increase in cash available to us.
Because of these limitations, Cash Opex should not be considered as a measure of our total operating expenses, and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the operation and growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP financial measures as supplements. In evaluating thesethis non-GAAP financial measures,measure, you should be aware that in the future, we may incur expenses similar to those for which adjustments are made in calculating Adjusted EBITDA and Cash Opex.EBITDA. Our presentation of thesethis non-GAAP financial measuresmeasure should also not be construed to infer that our future results will be unaffected by unusual or non-recurring items.
The following table sets forth a reconciliation from the GAAP measurement of Operating Expenses to our non-GAAP financial measure of Cash Opex and Cash Opex as a percentage of revenue for the twelve months ended December 31, 2016 and 2015:
|
| | | | | | | |
| | Twelve Months Ended
December 31, |
| | 2016 | | 2015 |
| Total operating expenses | $ | 20,544,702 |
| | $ | 15,453,330 |
|
| Less: | | | |
| Non-cash stock-based compensation | 748,092 |
| | 705,466 |
|
| Non-cash stock issued for payment of services | 133,897 |
| | 177,842 |
|
| Loss on disposal of equipment | 9,435 |
| | 595 |
|
| Increase/(decrease) in value of contingent acquisition costs payable | 94,000 |
| | (1,834,300 | ) |
| Depreciation and amortization | 1,299,851 |
| | 1,059,131 |
|
| Total excluded expenses | 2,285,275 |
| | 108,734 |
|
| Cash Opex | $ | 18,259,427 |
| | $ | 15,344,596 |
|
| | | | |
| Revenue | $ | 27,310,602 |
| | $ | 20,467,926 |
|
| Cash Opex / Revenue | 67 | % | | 75 | % |
The following table sets forth a reconciliation from the GAAP measurement of Netnet loss to our non-GAAP financial measure of Adjusted EBITDA for the twelve months ended December 31, 20162021, and 2015:2020:
| | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended December 31, |
| | | | | 2021 | | 2020 |
| Net loss | | | | | $ | (3,140,621) | | | $ | (10,508,395) | |
| Gain on the forgiveness of debt | | | | | (1,927,220) | | | — | |
| Gain on the sale of digital assets | | | | | (185,895) | | | — | |
| Non-cash stock-based compensation | | | | | 878,739 | | | 477,993 | |
| Non-cash stock issued for payment of services | | | | | 147,329 | | | 125,000 | |
| Interest expense | | | | | 25,320 | | | 63,012 | |
| Depreciation and amortization | | | | | 1,089,118 | | | 1,652,126 | |
| Impairment of goodwill and intangible assets | | | | | — | | | 4,300,000 | |
| Other non-cash items | | | | | (22,022) | | | (22,598) | |
| Adjusted EBITDA | | | | | $ | (3,135,252) | | | $ | (3,912,862) | |
| | | | | | | |
| Revenue | | | | | $ | 30,022,377 | | | $ | 17,967,207 | |
| Adjusted EBITDA as a % of Revenue | | | | | (10) | % | | (22) | % |
|
| | | | | | | |
| | Twelve Months Ended |
| | December 31,
2016 | | December 31,
2015 |
| Net loss | $ | (7,560,200 | ) | | $ | (11,308,171 | ) |
| Non-cash stock-based compensation | 748,092 |
| | 705,466 |
|
| Non-cash stock issued for payment of services | 133,897 |
| | 177,842 |
|
| Change in fair value of derivatives | (9,163 | ) | | 2,133,820 |
|
| Loss on exchange of warrants | — |
| | 1,845,810 |
|
| Loss on disposal of equipment | 9,435 |
| | 595 |
|
| Increase/(decrease) in value of contingent acquisition costs payable | 94,000 |
| | (1,834,300 | ) |
| Interest expense | 82,944 |
| | 115,861 |
|
| Depreciation and amortization | 1,299,851 |
| | 1,059,131 |
|
| Adjusted EBITDA | $ | (5,201,144 | ) | | $ | (7,103,946 | ) |
Liquidity and Capital Resources
We had cash and cash equivalents of $5,949,004 as of December 31, 2016 as compared to $11,608,452$75.4 million as of December 31, 2015, a decrease2021, as compared to $33.0 million as of $5,659,448December 31, 2020, an increase of $42.4 million, primarily due to net proceeds received from the fundingsale of our common stock in our “at the market offering” program, offset by operating losses. 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 $41,809,721$73.6 million as of December 31, 2016.2021. To date, we have primarily financed our operations through internally generated revenue from operations, and the sale and exercise of our equity securities.
| | | | | | | | | | | |
| Twelve Months Ended December 31, |
| 2021 | | 2020 |
| Net cash (used for)/provided by: | | | |
| Operating activities | $ | (2,566,999) | | | $ | (2,095,651) | |
| Investing activities | (26,169) | | | (354,407) | |
| Financing activities | 44,981,238 | | | 29,610,654 | |
| Net increase in cash and cash equivalents | $ | 42,388,070 | | | $ | 27,160,596 | |
Cash used for operating activities was $4,719,454$2.6 million during the twelve months ended December 31, 20162021 and wasis primarily athe result of our loss from operations during the periodcontinued use of $7,476,344. Cashcash to cover operating losses. Net cash used for investing activities was $967,007$0.03 million during the twelve months ended December 31, 20162021, primarily due primarily to a $400,000 cash payment for the purchase of ZenContent, and nearly $600,000 in purchases of computer and office equipment for our expanding staff and development of our proprietary software. Cashdigital assets. Net cash provided by financing activities was $27,013during the twelve months ended December 31, 2016 and2021, was the result$45.0 million, which consisted primarily of proceeds of approximately $46.5 million from the exercisesale of our common stock optionsin our at the market offering program offset by expenses on the$1.1 million in stock issuance of sharescosts and principal$0.5 million of payments on our capital lease obligations.shares withheld for taxes.
At the Market (ATM) Offering
On June 4, 2020 and January 30, 2015,25, 2021, we purchased all of the outstanding shares of capital stock of Ebyline for aggregate consideration upentered into ATM Sales Agreements with National Securities Corporation, as sales agent (“National Securities”), pursuant to $8,850,000, including a cash payment at closing of $1,200,000, a stock issuance valued at $250,000 paid on July 30, 2015, $1,877,064 in two equal installments of $938,532 on the firstwhich we could offer and second anniversaries of the closing, and up to $5,500,000 in contingent performance payments, subject to Ebyline meeting certain revenue targets for each of the three years ending December 31, 2015, 2016 and 2017. The $1,877,064 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. On January 29, 2016, we issued 114,398 shares of common stock valued at $848,832 to satisfy our first annual installment payment of $938,532 less $89,700 in closing related expenses owed as part of the January 2015 Ebyline Stock Purchase Agreement. On January 30, 2017,we issued 200,542 shares of common stock valued at $938,532 to satisfy the final annual guaranteed payment owed as part of the January 2015 Ebyline Stock Purchase Agreement. Based on actual results and future projections, we do not believe that we will owe any of the $5,500,000 in contingent performance payments related to the Ebyline acquisition.
On July 31, 2016, we purchased all of the outstanding shares of capital stock of ZenContent. Upon closing we (a) paid a cash payment of $400,000 and (b) issued 86,207sell shares of our common stock valued at $600,000 (usingthrough National Securities, by any method deemed to be an “at the 30 trading-day volume-weighted average closing pricemarket offering” as defined in Rule 415 under the Securities Act of our common stock of $6.96 per share1933, 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 paymentsamended (the “Securities Act”), for aggregate purchase prices of up to $40 million and $35 million, respectively (the “ATM Offerings”). During the twelve months ended December 31, 2021, we sold 11,186,084 shares at an aggregateaverage price of $2,500,000 over$4.16 per share for total gross proceeds of $46.5 million. From June 4, 2020 through April 15, 2021, we sold a total of 26,005,824 shares at an average price of $2.88 per share for total gross proceeds of $75.0 million in the three 12-month periodsATM Offerings under our shelf registration statement on Form S-3 (File No. 333-238619). The June 2020 and January 2021 Sales Agreements were each terminated following the closing, based upon ZenContent achieving certain minimum revenue thresholds. Of these payments, 33%sale of each such annual installment or contingent performance payment willall shares of common stock available to be in the formsold thereunder.
On June 21, 2021, we entered into a third ATM Sales Agreement with National Securities, as sales agent, pursuant to which we could offer and the remainder of such payment will be in the form of either cash or additionalsell shares of our common stock, (determined at our option). If we decidefrom time to issue stock rather than
make cash payments, 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.
On April 13, 2015, we expanded our secured credit facility agreement with Western Alliance Bank, the parent company of Bridge Bank, N.A. of San Jose, California ("Western Alliance"). Pursuant to this agreement, we may submit requeststime, through National Securities, for fundingaggregate purchase prices up to 80% of$100 million by any method deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act under our eligible accounts receivable up to a maximum credit limit of $5 million. This agreement is secured by our accounts receivable and substantially all of our other assets. The agreement renews annually and requires us to pay an annual facility fee of $20,000 (0.4% of the credit limit) and an annual due diligence fee of $1,000. Interest accruesshelf registration statement on the advances at the rate of prime plus 2% per annum. The default rate of interest is prime plus 7%Form S-3 (File No. 333-256078). As of December 31, 2016, weNo sales had no advances outstandingbeen made under this agreement. Assuming that all of our accounts receivable balance was eligible for funding, we have available credit of $2,996,556 under the agreement as of December 31, 2016.2021.
PPP Loan
We believeOn April 23, 2020, we received a loan under the Paycheck Protection Program (the “PPP Loan”) in the principal amount of $1.9 million. On June 18, 2021, we were notified by the lender that withthe PPP Loan had been forgiven by the Small Business Administration in full, including accrued interest. The principal amount of $1.9 million and accrued interest of $0.02 million was recorded as a gain on forgiveness of debt in other income (expense) in our currentconsolidated statements of operations and comprehensive loss in June 2021.
Financial Condition
Our business operations and results have been impacted by COVID-19, which in the first half of 2020 had a material effect on our customers, their advertising commitments, bookings cancellations, revenues, and cash flows. Since late 2020, while the economy continues to feel the impacts of supply-chain, labor disruption, and business closures, the Company has seen a material increase in the overall social media marketing spend by large and small customers, which has benefited our available credit line with Western Alliance, we will have sufficient cash reserves available to cover expenses for longer than the next twelve months. Given the volatility in U.S. equity marketsbookings and our normal working capital fluctuations, we may seek to raise additional capital at any time to supplement our operatingrevenue growth rates, cash flows and future prospects. We are still feeling some effects of the pandemic in our daily operations, despite the growth we are experiencing. While the disruption caused by COVID-19 is currently expected to the extent we can do so on competitive market terms. In such event, an equity financing may dilute the ownership interestsbe temporary, it is generally outside of our common stockholders.control, and there is uncertainty around the duration and the total economic impact. Therefore, this matter could have a further material adverse impact on our business, results of operations, and financial position in future periods.
Off-Balance Sheet Arrangements
We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.
Critical Accounting Policies and Use of Estimates
The preparationWe prepare our financial statements according to accounting principles generally accepted in the United States (“GAAP”). Certain accounting policies require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. These judgments will be subject to an inherent degree of uncertainty by their nature. Our judgments are based upon the historical experience of the accompanyingCompany, terms of existing contracts, observance of trends in the industry, the information provided by our customers, and information available from other outside sources, as appropriate. For a summary of our significant accounting policies, please refer to Note 1 — Company and Summary of Significant Accounting Policies and Note 2 – Restatement and Revision included in Item 8 of this Annual Report. We consider accounting estimates to be critical accounting policies when:
•The estimates involve matters that are highly uncertain at the time the accounting estimate is made; and
•Different estimates or changes to estimates could have a material impact on the reported financial statements and related disclosuresposition, changes in conformity with GAAPfinancial position, or results of operations.
When more than one accounting principle, or method of its application, is generally accepted, we select the principle or method that we consider the most appropriate when given the specific circumstances. The application of these accounting principles requires us to make judgments, assumptions andestimate the future resolution of existing uncertainties. Due to the inherent uncertainty involving estimates, that affect the amountsactual results reported in the accompanying financial statements and the accompanying notes. The preparation of these financial statements requires managements to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results couldfuture may differ from theseour estimates. The following critical accounting policies are significantly affected by judgments, assumptions, and estimates used in the preparation ofto prepare the financial statements.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are customer obligations due under normal trade terms. We consider an account delinquent when the customer has not paid its balance due by the associated due date. Uncollectibility of accounts receivable is not significant since most customers are bound by contract and are required to fund us for all the costs of an “opportunity,” defined as an order created by a marketer for a creator to write about the marketer’s product.develop or share content on behalf of a marketer. If a portion of the account balance is deemed uncollectible, we will either write-offwrite off the amount owed or provide a reserve based on our best estimate of the uncollectible portion of the account. Management determinesestimates the collectibilitycollectability of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. We havehad a reserve of $237,000$0.2 million for doubtful accounts as of December 31, 2016.2021. We believe that this estimate is reasonable, but there can be no assurance that the estimate will not change asdue to a result of a changeshift in economic conditions or business conditions within the industry, the individual customers, or our Company. Any adjustments to this account are reflected in the consolidated statements of operations as a general and administrative expense. Bad debt expense was less than 1% of revenue for each of the twelve months ended December 31, 20162021 and 2015.2020.
Throughout 2013Concentrations of credit risk in accounts receivable were typically limited because many geographically diverse customers make up our customer base, thus spreading the trade credit risk. However, with our acquisition of TapInfluence, we increased credit exposure on certain customers who carry significant credit balances related to their Marketplace Spend. We control credit risk through credit approvals, credit limits, and monitoring procedures. We perform credit evaluations of our customers but generally do not require collateral to support accounts receivable. We had three customers that accounted for 38% of total accounts receivable on December 31, 2021 and 2020. We had one customer that accounted for 14% of our revenue during the first quartertwelve months ended December 31, 2021. One customer accounted for 13% of 2014, we developed our new web-based advertising exchange platform, IZEAx. This platform is being utilized both internallyrevenue during the twelve months ended December 31, 2020.
Software Development Costs and externally to facilitate native advertising campaigns on a greater scale. We continue to add new features and additional functionality to this platform each year. These new features will enable our platform to facilitate the contracting, workflow and delivery of direct custom content as well as provide for invoicing, collaborating and direct payments for our SaaS customers. Acquired Intangible Software
In accordance with ASCAccounting Standards Codification (“ASC”) 350-40, Internal Use Software, we capitalize certain internal-use software development costs associated with creating and ASC 985-730, Computerenhancing internally developed software related to our platforms. Software Researchdevelopment activities generally consist of three stages (i) the research and Development,planning stage, (ii) the application and development stage, and (iii) the post-implementation stage. Costs incurred in the research phase costs should beand planning stage and the post-implementation stage of software development or other maintenance and development expenses that do not meet the qualification for capitalization are expensed as incurred. Costs incurred in the application and development phasestage, including significant enhancements and upgrades, are capitalized. These costs includinginclude personnel and related employee benefits expenses for employees or consultants directly associated with and who devote time to software projects and external direct costs of materials and services, payroll and benefits and interestobtained in developing the software. We also capitalize certain costs may be capitalized. As a result, werelated to cloud computing arrangements ("CCAs"). We have capitalized $1,492,665 in direct materials, consulting, payroll and benefit costs to software development costs of $3.0 million in the consolidated balance sheet as of December 31, 2016.2021. These costs are reflected as intangible assets in the consolidated balance sheet as of December 31, 2021. We estimatedo not transfer ownership of our software to third parties. These software developments and CCA costs are amortized on a straight-line basis over the estimated useful life of five years upon initial release of the software or additional features. We review the software development costs for impairment when circumstances indicate that their carrying amounts may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the fair value in our consolidated statements of operations and comprehensive loss.
Goodwill
Goodwill represents the excess of the consideration transferred for an acquired business over the fair value of the underlying identifiable net assets. We have goodwill in connection with our acquisitions of Ebyline, ZenContent, and TapInfluence. Goodwill is not amortized, but instead, it is tested for impairment at least annually. If management determines that the value of goodwill has become impaired, we will record a charge for the amount of impairment during the fiscal quarter in which the determination is made.
We perform our annual impairment tests of goodwill as of October 1 of each year, or more frequently, if certain indicators are present. For instance, in March 2020, we identified triggering events, including the reduction in our projected revenue due to adverse economic conditions caused by the COVID-19 pandemic, the continuation of a market capitalization below our carrying value, and uncertainty for recovery given the volatility of the capital markets surrounding COVID-19. Therefore, we performed an interim assessment of goodwill, using the discounted cash flow method under the income approach and the guideline transaction method under the market approach, and determined that the carrying value of our Company’s reporting unit as of March 31, 2020 exceeded the fair value. As a result of the March 2020 valuation, we recorded a $4.3 million impairment of goodwill which is reflected as an expense in the consolidated statements of operations for the twelve months ended December 31, 2020.
Goodwill is required to be tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment level, which is referred to as a component. Management identifies its reporting units by assessing whether components (i) have discrete financial information available; (ii) engage in business activities; and (iii) whether a segment manager regularly reviews the component's operating results. Net assets and goodwill of acquired businesses are allocated to the reporting unit associated with the acquired business based on the anticipated organizational structure of the combined entities. If two or more components are deemed economically similar, those components are aggregated into one reporting unit when performing the annual goodwill impairment review. We have determined that we have one reporting unit.
Management performs a qualitative assessment in the fourth quarter, or more frequently if events or changes in circumstances indicate it may be impaired, by comparing the carrying value to the fair value. For the year ending December 31, 2021 Management determined that no indicators were present that would trigger an impairment test and that there had been no further impairment.
Purchase, Disposal, and Impairment of Digital Assets
Historically, we have mined digital assets (mining operations ceased in 2019) and purchased digital assets on exchanges. We recently announced that we will accept payments in digital assets for our services from customers. We will also pay our creators in digital assets, if requested.
We will record our digital assets in accordance with ASC 350, Intangibles - Goodwill and other, which requires acquired intangible assets to be recorded at cost. Under FASB ASC 350, an entity should determine whether an intangible asset has a finite or indefinite life. FASB ASC 350-30-35-4 states that if no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset should be considered indefinite. We will record our softwaredigital assets as an indefinite-lived intangible asset.
Our transactions have historically transacted on Coinbase. Therefore, to-date Coinbase is determined to be 5 years, consistentthe principal market and will be used to determine fair values at initial recognition and subsequent measurement. If other exchanges or markets are used, we will reevaluate our principal market. We consider Coinbase to be an active market with quoted prices. Based on the amountfair value level hierarchy, we have determined the market to be observable and Level 1.
Purchased digital assets will be initially recorded at cost, including transaction fees.
Digital assets may be disposed of timethrough Coinbase. The conversion of digital assets to USD, or other fiat currency, will not be considered ordinary business activities and will follow the guidance within ASC 610-20. Proceeds will not be reported as revenue, but the excess over carrying value will be reported as a gain. Digital assets will be subject to impairment testing prior to derecognition, therefore significant losses are not expected upon derecognition. We will use FIFO for tracking our legacy platforms were in-service,digital assets.
Indefinite-lived intangible assets are initially carried at the value determined in accordance with FASB ASC 350-30-30-1 and is not subject to amortization. Rather, it should be tested for impairment annually or more frequently if events of changes in circumstance indicate it is more likely than not that the asset is impaired. When an identical digital asset is bought and sold at a price lower than the entity’s current carrying value, this will serve as an indicator that impairment is more likely than not. In determining if an impairment has occurred, we are amortizingwill consider the software development costs over this period.lowest market price of one unit of digital asset quoted on the active exchange since acquiring the digital asset. Each individual acquisition of digital asset represents a unit of account for impairment testing. If the then current carrying value of our digital assets is more than the fair value, an impairment loss has occurred. We will adjust the carrying value and the loss will be reflected as an operating expense.
Revenue Recognition
We derivegenerate revenue from threefour primary sources: (1) revenue from its managed services when a marketer when it(typically a brand, agency, or partner) pays for a social media publisherus to provide custom content, influencer marketing, amplification, or influencer such as a blogger or tweeter ("creators"other campaign management services (“Managed Services”); (2) revenue from fees charged to share sponsored content withsoftware customers on their social network audience ("Sponsored Revenue"marketplace spend within our IZEAx and Shake platforms (“Marketplace Spend Fees”),
; (3) revenue when a publisher or company purchases custom branded content for its own use, as well as third party content marketingfrom license and native advertising efforts ("Content Revenue"subscription fees charged to access the IZEAx and BrandGraph platforms (“License Fees”); and (4) revenue derived from various serviceother fees such as inactivity fees, early cash-out fees, and licenseother miscellaneous fees charged to users of the our platforms ("Service Fee Revenue"(“Other Fees”).
We recognize revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, revenue is recognized based on a five-step model as follows: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) performance obligations are satisfied. The core principle of ASC 606 is that revenue is recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We apply the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are distinct performance obligations. We also determine whether it acts as an agent or a principal for each identified performance obligation. For transactions in which we act as a principal, revenue is reported on a gross basis as the amount paid by the marketer for the purchase of content or sponsorship, promotion, and other related services and record the amounts we pay to third-party creators as cost of revenue. For transactions in which we act as an agent, revenue is reported on a net basis as the amount charged to the self-service marketer using our platforms, less the amounts paid to the third-party creators providing the service.
We maintain separate arrangements with each marketer and content creator either in the form of a master agreement or terms of service, which specify the terms of the relationship and access to our platforms or by a statement of work, which sets the price and the services to be performed, along with other terms. The transaction price is determined based on the fixed fee stated in the statement of work and does not contain variable consideration. Marketers who contract with us to manage their advertising campaigns or custom content requests may prepay for services or request credit terms, and payment terms are
typically 30 days from the invoice date. The agreement typically provides for either a non-refundable deposit or a cancellation fee if the customer cancels the agreement prior to completing the services. Billings in advance of completed services are recorded as a contract liability until earned. We assess collectibility based on several factors, including the creditworthiness of the customer and payment and transaction history.
Managed Services Revenue
For our managed customers,Managed Services Revenue, we enter into an agreementagree to provide services that may requireinclude multiple deliverablesdistinct performance obligations in the form of (a) sponsored social items, such as(i) an integrated marketing campaign to provide influencer marketing services, which may include the provision of blogs, tweets, photos, or videos shared through social network offerings that provide awareness or advertising buzz regarding the marketer's brand; (b) media advertisements,and content promotion, such as click-through advertisements appearing in websites and social media channels, and (c) original(ii) custom content items, such as a research or news article, informational material or videos that a publishervideos. Marketers typically purchase influencer marketing services to provide public awareness or other marketer canadvertising buzz regarding the marketer’s brand and purchase custom content for internal and external use. We may provide one type or a combination of all types of these deliverables including a management feeperformance obligations on a statement of work for a lump sum fee. We allocate revenue to each performance obligation in the contract at inception based on its relative standalone selling price. These deliverablesperformance obligations are to be provided over a stated period that may rangegenerally ranges from one day to one year. Each of these items are considered delivered once the content is live through a public or social network or custom content has been delivered to the customer for their own use. Revenue is accounted for separatelywhen the performance obligation has been satisfied, depending on each of the deliverables in the time frames set forth below. The statement of work typically provides for a cancellation fee if the agreement is canceled by the customer prior to our completion of services. Payment terms are typically 30 days from the invoice date. If we are unable to provide a portion of the services, we may agree with the customer to provide a different type of service orprovided. We view our obligation to providedeliver influencer marketing services, including management services, as a credit forsingle performance obligation that is satisfied over time as the value of those services that may be applied tocustomer receives the existing order or used for futurebenefits from the services.
Sponsored Revenue is recognized using an input method of costs incurred compared to total expected costs to measure the progress towards satisfying the overall performance obligation of the marketing campaign. The delivery of custom content represents a distinct performance obligation that is satisfied over time as we have no alternative for the custom content, and considered earned afterwe have an enforceable right to payment for performance completed to date under the contracts. We consider custom content to be a marketer's sponsoredseries of distinct services that are substantially the same and have the same pattern of transfer to the customer. Revenue is recognized over time using an output method based on when each piece of content is posteddelivered to the customer. Based on our evaluations, revenue from Managed Services is reported on a gross basis because we have the primary obligation to fulfill the performance obligations, and we create, review, and control the services. We take on the risk of payment to any third-party creators and establish the contract price directly with our customers based on the services requested in the statement of work.
Marketplace Spend Fees Revenue
For Marketplace Spend Fees Revenue, the self-service customers instruct creators found through our IZEAx and shared throughShake platforms to provide and/or distribute custom content for an agreed-upon transaction price. Our platforms control the contracting, description of services, acceptance, and payment for the requested content. This service is used primarily by news agencies or marketers to manage the outsourcing of their content and advertising needs. We charge the self-service customer the transaction price plus 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, videofee based on the contract. Revenue is recognized when the transaction is completed by the creator and accepted by the marketer or, other form of content. Management feesif related to Sponsoredinfluencer marketing services, over the content posting period as verified by the platform. This revenue is reported on a net basis since we are acting as an agent through our platform for the third-party creator to provide the services or content directly to the self-service customer or to post approved content through one or more social media platforms.
License Fees Revenue from advertising campaigns managed
License Fees Revenue is generated by usgranting limited, non-exclusive, non-transferable licenses to customers to use the IZEAx, BrandGraph, and until February 2020, the TapInfluence technology platforms for an agreed-upon subscription period. Customers may also separately subscribe to the IZEAx Discovery service within the IZEAx platform. Customers license the platforms to manage their influencer marketing campaigns. Fees for subscription or licensing services are recognized ratablystraight-line over the term of the campaign which may range from a few days to several months. Contentservice.
Other Fees Revenue is recognized when the content is delivered to and accepted by the customer. Service Fee
Other Fees Revenue is generated when fees are charged to customersour platform users primarily related to subscriptionmonthly plan fees, for different levels of serviceinactivity fees, and early cash-out fees. Plan fees are recognized within the month they relate to, inactivity fees are recognized at a platform, licensing fees for white-label use of IZEAx,point in time when the account is deemed inactive, and early cash-out fees ifare recognized when a creator wishes to take proceeds earned for services from their account when the account balancecash-out is either below certain minimum balance thresholds and inactivity fees for dormant accounts. Service Fee Revenueor when accelerated payout timing 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 is recognized straight-line over the term of service. Self-service marketers must prepay for services by placing a depositrequested.
We do not typically engage in their account with us. The deposits are typically paid by the marketer via credit card. Marketers who use uscontracts longer than one year. Therefore, we do not capitalize costs 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 recordedobtain its customer contracts as unearned revenue until earned as described above.
All of our revenue is generated through the rendering of services and is recognized under the general guidelines of SAB Topic 13 A.1, which states that revenue willthese amounts generally would be recognized when it is realized or realizableover a period of less than one year and earned. We consider our revenue as generally realized or realizable and earned once (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) the price to the marketer or customer is fixed (required to be paid at a set amount that isare not subject to refund or adjustment) and determinable, and (iv) collectibility is reasonably assured. We record revenue on the gross amount earned since we generally are the primary obligor in the arrangement, take on credit risk, establish the pricing and determine the service specifications.material.
Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the award’s fair value, of the award, and is recognized as an expense over the employee’s requisite service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes pricing model. Options typically vest ratably over four years, with one-fourth of options vesting one
year from the date of grant and the remaining options vesting monthly, in equal increments over the remaining three-year period and generally havehaving five or ten-year contract lives. We use the simplified method to estimate the fair valueexpected term of our commonemployee stock usingoptions. We do not believe historical exercise data will provide a reasonable basis for estimating the expected term for the current share options granted. The simplified method assumes that employees will exercise share options evenly between the period when the share options are vested and ending on the date when the options expire. We use the closing stock price of our common stock on the date of the option award. Wegrant as the associated fair value of our common stock. For issuances after June 30, 2019, we estimate the volatility of our common stock at the date of grant based on the volatility of our stock during the period. For issuances on or before June 30, 2019, we estimated the volatility of our common stock at the date of grant based on the volatility of comparable peer companies that arewere publicly traded and have had a longer trading history than us. We determine the expected life based on historical experience with similar awards, giving consideration toconsidering the contractual terms, vesting schedules, and post-vesting forfeitures. We use the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We estimate forfeitures when recognizing compensation expense and thisexpense. This estimate of forfeitures is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and a revised amount of unamortized compensation expense to be recognized in future periods.
The following table shows the number of stock options granted under our 2011 Equity Incentive Plans and the assumptions used to determine the fair value of those options during the twelve months ended December 31, 20162021, and 2015:2020:
2011 Equity Incentive Plans - Options Granted |
| | | | | | | | | | | | | |
| Period Ended | | Total Options Granted | | Weighted Average Exercise Price | | Weighted Average Expected Term | | Weighted Average Volatility | | Weighted Average Risk Free Interest Rate | | Weighted Average
Grant Date
Fair Value |
| December 31, 2015 | | 277,059 |
| | $7.43 | | 6.0 years | | 55.47% | | 1.65% | | $3.84 |
| December 31, 2016 | | 179,998 |
| | $6.16 | | 6.0 years | | 47.95% | | 1.58% | | $2.88 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended | | Total Options Granted | | Weighted Average Exercise Price | | Weighted Average Expected Term | | Weighted Average Volatility | | Weighted Average Risk-Free Interest Rate | | Expected Dividends | | Weighted Average
Grant Date
Fair Value | | Weighted average expected forfeiture rate |
| December 31, 2020 | | 411,350 | | | $ | 0.69 | | | 6.0 years | | 108.58% | | 0.46% | | — | | | $ | 0.56 | | | 7.72% |
| December 31, 2021 | | 296,569 | | | $ | 2.60 | | | 6.0 years | | 120.18% | | 0.98% | | — | | | $ | 2.25 | | | 11.74% |
Total stock-based compensation expense recorded in our consolidated statements of operations for restricted stock, restricted stock units, stock options, and employee stock purchase plan issuance during the twelve months ended December 31, 2021, and 2020 were $0.9 million and $0.5 million, respectively.
There were outstanding options to purchase 959,8641,795,663 shares with a weighted average exercise price of $8.11$2.79 per share, of which options to purchase 545,5581,139,859 shares were exercisable with a weighted average exercise price of $9.20$3.54 per share, as of December 31, 2016.2021. The intrinsic value on outstanding options as of December 31, 20162021, was $8,080.$0.4 million. The intrinsic value on exercisable options as of December 31, 20162021, was $7,098.$0.2 million.
We account for derivative instruments in accordanceAs of December 31, 2021, we had unvested restricted stock units representing 375,444 shares of common stock with ASC 815, Derivatives and Hedging , which requires additional disclosures about the our objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedging items affect the financial statements. We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of equity instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fairan intrinsic value of derivative liabilities, if any, is required to be revalued at each reporting date,$0.5 million and 3,553 unvested shares of issued restricted stock with corresponding changes in fair value recorded in current period operating results. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fairintrinsic value of warrants issued is required to be classified as equity or as a derivative liability.$4.8 thousand.
Recent Accounting Pronouncements
See "Note“Note 1. Company and Summary of Significant Accounting Policies,"” under Part II, Item 8 in Part II of this Form 10-K.Annual Report for information on additional recent pronouncements.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 8 -– FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors and Stockholders
IZEA Worldwide, Inc.
Winter Park,Orlando, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of IZEA Worldwide, Inc. and subsidiaries (the “Company”) as of December 31, 20162021 and 2015, and2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years then ended. ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements referredthat was communicated or required to above present fairly,be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in allany way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Estimated Costs to Complete for Managed Services Revenue
As described in Notes 1 and 10 to the consolidated financial statements, for Managed Services Revenue, the Company enters into an agreement to provide services that may include multiple distinct performance obligations in the form of: (i) an integrated marketing campaign to provide influencer marketing services, which may include the provision of blogs, tweets, photos or videos shared through social network offerings and content promotion, such as click-through advertisements appearing in websites and social media channels; and (ii) custom content items, such as a research or news article, informational material respects,or videos. The Company views its obligation to deliver influencer marketing services, including management services, as a single performance obligation that is satisfied over time as the financial positioncustomer receives the benefits from the services. Revenue is recognized using an input method of IZEA, Inc. atcosts incurred compared to total expected costs to measure the progress towards satisfying the overall performance obligation of the marketing campaign. The delivery of custom content represents a distinct performance obligation that is satisfied over time as the Company has no alternative for the custom content and the Company has an enforceable right to payment for performance completed to date under the contracts. The Company considers custom content to be a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer, and revenue is
recognized over time based on an output model method based on when each individual piece of content is delivered to the customer.
We identified the estimation of costs to complete on the Company’s obligation to deliver influencer marketing services, including management services, on Managed Services contracts which have not been completed as of December 31, 20162021 to be a critical audit matter. The determination of the total estimated cost and 2015,progress toward completion on contracts not completed requires management to make significant estimates and assumptions primarily related to estimated direct labor and applicable subcontract costs needed to complete contracts. Changes in these estimated direct labor and applicable subcontract costs can have a significant impact on the resultsrevenue recognized in each period. Auditing such estimates involved especially challenging and subjective auditor judgment to determine the reasonableness of its operationsmanagement’s assumptions and its cash flowsestimates that ultimately determine the amount of revenue to recognize.
The primary procedures we performed to address this critical audit matter included:
•Evaluating management’s ability to accurately estimate total costs to complete by (i) performing a retrospective review to compare prior year estimates of costs to complete for open Managed Services contracts to actual costs incurred upon completion of the years then ended, in conformity with accounting principles generally accepted incontract or updated estimated costs at completion if the United Statescontract is still not complete as of America.December 31, 2021 and (ii) evaluating whether contracts which were previously completed earned any additional revenues after the contract was assumed to be completed.
•Assessing the reasonableness of the estimated costs to complete on open contracts as of December 31, 2021 through evaluation of the consistency of expected margins on open contracts to historical margins on completed contracts.
•Evaluating the reasonableness of the progress of the contract as of December 31, 2021 by inquiring of contract managers about the status of completion.
/s/ BDO USA, LLP
Certified Public Accountants
Tampa,We have served as the Company's auditor since 2015.
Orlando, Florida
March 28, 201731, 2022
IZEA Worldwide, Inc.
Consolidated Balance Sheets
| | | | December 31,
2016 | | December 31,
2015 | | | | | | | | | | |
| | | | | | December 31,
2021 | | December 31,
2020 |
| Assets | | | | Assets | |
| Current: | | | | |
| Current assets: | | Current assets: | | | |
| Cash and cash equivalents | $ | 5,949,004 |
| | $ | 11,608,452 |
| Cash and cash equivalents | $ | 75,433,295 | | | $ | 33,045,225 | |
| Accounts receivable, net | 3,745,695 |
| | 3,917,925 |
| Accounts receivable, net | 7,599,103 | | | 5,207,205 | |
| Prepaid expenses | 322,377 |
| | 193,455 |
| Prepaid expenses | 2,257,382 | | | 226,559 | |
| Other current assets | 11,940 |
| | 16,853 |
| Other current assets | 100,522 | | | 74,467 | |
| Total current assets | 10,029,016 |
| | 15,736,685 |
| Total current assets | 85,390,302 | | | 38,553,456 | |
| | | | | | |
| Property and equipment, net | 460,650 |
| | 596,008 |
| Property and equipment, net | 155,185 | | | 230,918 | |
| Goodwill | 3,604,720 |
| | 2,468,289 |
| Goodwill | 4,016,722 | | | 4,016,722 | |
| Intangible assets, net | 1,662,536 |
| | 1,806,191 |
| Intangible assets, net | 213,263 | | | 505,556 | |
| Software development costs, net | 1,103,959 |
| | 813,932 |
| Software development costs, net | 1,019,600 | | | 1,472,684 | |
| Security deposits | 161,736 |
| | 117,946 |
| |
| Total assets | $ | 17,022,617 |
| | $ | 21,539,051 |
| Total assets | $ | 90,795,072 | | | $ | 44,779,336 | |
| | Liabilities and Stockholders’ Equity | | Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | Current liabilities: | | | |
| Accounts payable | | Accounts payable | $ | 2,086,892 | | | $ | 2,310,974 | |
| Accrued expenses | | Accrued expenses | 2,502,882 | | | 1,924,973 | |
| Contract liabilities | | Contract liabilities | 11,338,095 | | | 6,634,870 | |
| Current portion of notes payable | | Current portion of notes payable | — | | | 1,477,139 | |
| Total current liabilities | | Total current liabilities | 15,927,869 | | | 12,347,956 | |
| | Finance obligation, less current portion | | Finance obligation, less current portion | 10,420 | | | 43,808 | |
| Notes payable, less current portion | | Notes payable, less current portion | 31,648 | | | 459,383 | |
| Total liabilities | | Total liabilities | 15,969,937 | | | 12,851,147 | |
| | Commitments and Contingencies (Note 8) | | Commitments and Contingencies (Note 8) | — | | | — | |
| | Stockholders’ equity: | | Stockholders’ equity: | | | |
| Preferred stock; $.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding | | Preferred stock; $.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding | — | | | — | |
| Common stock; $.0001 par value; 200,000,000 shares authorized; 62,044,883 and 50,050,167, respectively, issued, and outstanding | | Common stock; $.0001 par value; 200,000,000 shares authorized; 62,044,883 and 50,050,167, respectively, issued, and outstanding | 6,205 | | | 5,005 | |
| Additional paid-in capital | | Additional paid-in capital | 148,452,498 | | | 102,416,131 | |
| Accumulated deficit | | Accumulated deficit | (73,633,568) | | | (70,492,947) | |
| Total stockholders’ equity | | Total stockholders’ equity | 74,825,135 | | | 31,928,189 | |
| Total liabilities and stockholders’ equity | | Total liabilities and stockholders’ equity | $ | 90,795,072 | | | $ | 44,779,336 | |
|
| | | | | | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 1,438,389 |
| | $ | 995,275 |
|
| Accrued expenses | 1,242,889 |
| | 908,519 |
|
| Unearned revenue | 3,315,563 |
| | 3,584,527 |
|
| Current portion of deferred rent | 34,290 |
| | 14,662 |
|
| Current portion of capital lease obligations | — |
| | 7,291 |
|
| Current portion of acquisition costs payable | 1,252,885 |
| | 844,931 |
|
| Total current liabilities | 7,284,016 |
| | 6,355,205 |
|
| | | | |
| | | | |
| Deferred rent, less current portion | 62,547 |
| | 102,665 |
|
| Acquisition costs payable, less current portion | 688,191 |
| | 889,080 |
|
| Warrant liability | — |
| | 5,060 |
|
| Total liabilities | 8,034,754 |
| | 7,352,010 |
|
| | | | |
| Commitments and Contingencies | — |
| | — |
|
| | | | |
| Stockholders’ equity: | |
| | |
|
| Preferred stock; $.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding | — |
| | — |
|
| Common stock, $.0001 par value; 200,000,000 shares authorized; 5,456,118 and 5,222,951, respectively, issued and outstanding | 545 |
| | 522 |
|
| Additional paid-in capital | 50,797,039 |
| | 48,436,040 |
|
| Accumulated deficit | (41,809,721 | ) | | (34,249,521 | ) |
| Total stockholders’ equity | 8,987,863 |
| | 14,187,041 |
|
| | | | |
| Total liabilities and stockholders’ equity | $ | 17,022,617 |
| | $ | 21,539,051 |
|
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
NOTE 1. COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
industry, the individual customers, or the Company. Any adjustments to this account are reflected in the consolidated statements of operations as a general and administrative expense. Bad debt expense was less than 1%0.1% of revenue for each of the twelve months ended December 31, 20162021 and 2015.
Property and equipment are recorded at cost, or if acquired in a business combination, at the acquisition date fair value. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows:
evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared with the asset's carrying amount to determine if there has been an impairment, which is calculated as the difference between the fair value of anthe asset and itsthe carrying value. Estimates of future undiscounted cash flows are based on expected growth rates for the business, anticipated future economic conditions, and estimates of residual values. Fair values take into consideration management estimates of risk-adjusted discount rates, which are believed to be consistent with assumptions that marketplace participants would use in their estimates of fair value. ForThe Company did not recognize any impairment charges associated with the Company’s acquired intangible assets in the twelve months ended December 31, 20162021 and 2015, there were no impairment charges2020.
The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company’s tax years subject to examination by the Internal Revenue Service are 2013, 20142016 through 2019.
The Company’s financial instruments are recorded at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. There are three levels of inputs that may be used to measure fair value: