IZEA WORLDWIDE, INC.
Company Overview
IZEA creates and operates online marketplaces that connect marketers, including
brands, agencies, and publishers, with content creators such as bloggers and
tweeters ("creators"). Our technology brings the marketers and creators
together, enabling their transactions to be completed at scale through the
management of custom content workflow, creator search and targeting, bidding,
analytics and payment processing.
We help power the creator economy, allowing everyone from college students and
stay-at-home individuals to celebrities and accredited journalists the
opportunity to monetize their content, creativity and influence through our
marketers. These creators are compensated by IZEA for producing unique content
such as long and short form text, videos, photos, status updates, and
illustrations for marketers or distributing such content on behalf of marketers
through their personal websites, blogs, and social media channels.
Marketers engage us to gain access to our industry expertise, technology, data,
analytics, and network of creators. The majority of the marketers engage us to
perform these services on their behalf, but they also have the ability to use
our marketplaces on a self-service basis by licensing our technology. Our
technology is used for two primary purposes: the engagement of creators for
influencer marketing campaigns, or the engagement of creators to create
stand-alone custom content for the marketers' own use and distribution.
Marketers receive influential consumer content and engaging, shareable stories
that drive awareness.
Our primary technology platform, The IZEA Exchange ("IZEAx") enables
transactions to be completed at scale through the management of custom content
workflow, creator search and targeting, bidding, analytics, and payment
processing. IZEAx is designed to provide a unified ecosystem that enables the
creation and publication of multiple types of custom content through a creator's
personal websites, blogs, or social media channels including Twitter, Facebook,
Instagram, and YouTube, among others. Until December 2019 when it was merged
into IZEAx, we operated the Ebyline technology platform, which we acquired in
January 2015 . The Ebyline platform was originally 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 to
handle their content workflow. After the acquisition, we began to utilize the
creators in the Ebyline platform to produce professional custom content for
brands, in addition to the self-service functionality used by newspapers. In
July 2016 , we acquired the ZenContent technology platform to use as an in-house
workflow tool that enables us to produce highly scalable, multi-part production
of content for both e-commerce entities, as well as brand customers. The
TapInfluence technology platform, acquired in 2018, performed in a similar
manner to IZEAx and was being utilized by the majority of the TapInfluence
customers as a self-service platform via a licensing arrangement, allowing
access to the platform and its creators for self-managed marketing campaigns. 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.
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 five 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 TapInfluence
platforms ("Marketplace Spend Fees"); (3) revenue from fees charged to access
the IZEAx, Ebyline, and TapInfluence platforms ("License Fees"); (4) revenue
from transactions generated by the self-service use of our Ebyline platform for
professional custom content workflow ("Legacy Workflow Fees"); and (5) revenue
derived from other fees such as inactivity fees, early cash-out fees, and plan
fees charged to users of our platforms ("Other"). After the migration of the
last customers from the Ebyline platform to IZEAx in December 2019 , there will
no longer be any revenue generated from the Legacy Workflow Fees and all future
revenue will be reported as Marketplace Spend Fees.
As discussed in more detail within "Critical Accounting Policies and Use of
Estimates" under Part II, Item 7 and in "Note 1. Company and Summary of
Significant Accounting Policies," under Part II, Item 8 of this Annual Report,
revenue from Marketplace Spend Fees and Legacy Workflow Fees is reported on a
net basis and revenue from all other sources, including Managed Services,
License Fees and Other are reported on a gross basis. We further categorize
these sources into three primary
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groups: (1) Managed Services (2) SaaS Services, which includes revenue from Marketplace Spend Fees, License Fees and Legacy Workflow Fees, and (3) Other.
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 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 who are primarily responsible for providing support to our customers and ultimately fulfillment of our obligations under our contracts with customers. Where appropriate, we capitalize costs that were incurred with software that is 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.
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 sales and sales support personnel, as well as marketing expenses such as brand marketing, public relation events, trade shows and marketing materials, and travel expenses.
General and Administrative
Our general and administrative 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 and investor relations expenses, as well as accounting and legal professional services fees, leasehold facilities related costs, and other corporate related expenses. General and administrative 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 are 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. General and administrative expense also includes current period gains and losses on costs previously accrued related to our acquisitions.
Depreciation and Amortization
Depreciation and amortization 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 mainly related to the imputed interest on our acquisition costs payable and interest when we use our secured credit facility.
Change in Fair Value of Derivatives, net. On occasion, we enter into financing
transactions that give rise to derivative liabilities. Additionally, we issue
restricted stock that may vest over future periods. 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.
Other Income (Expense). Other income consists primarily of interest income for
interest earned or changes in value on our cash and cash equivalent balances and
foreign currency exchange gains and losses on foreign currency transactions,
primarily related to the Canadian Dollar.
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Results of Operations for the Twelve Months Ended
The following table sets forth a summary of our consolidated statements of operations and the change between the periods:
Twelve Months Ended December 31,
2019 2018 $ Change % Change
Revenue $ 18,955,672 $ 20,099,695 $ (1,144,023 ) (6 )%
Costs and expenses:
Cost of revenue (exclusive of amortization) 8,521,353 9,042,155 (520,802 ) (6 )%
Sales and marketing 6,240,263 6,484,320 (244,057 ) (4 )%
General and administrative 9,611,131 8,683,911 927,220 11 %
Depreciation and amortization 1,750,629 1,298,359 452,270 35 %
Total costs and expenses 26,123,376 25,508,745 614,631 2 %
Loss from operations (7,167,704 ) (5,409,050 ) (1,758,654 ) 33 %
Other income (expense):
Interest expense (233,654 ) (269,473 ) 35,819 (13 )%
Change in fair value of derivatives, net - (11,794 ) 11,794 (100 )%
Other income (expense), net 111,238 (28,090 ) 139,328 (496 )%
Total other expense, net (122,416 ) (309,357 ) 186,941 (60 )%
Net loss $ (7,290,120 ) $
(5,718,407 )
Revenue
The following table illustrates our revenue by type, the percentage of total revenue by type, and the change between the periods:
Twelve Months Ended
December 31,
2019 2018 $ Change % Change
Managed Services Revenue $ 15,432,868 81 % $ 17,594,124 88 % $ (2,161,256 ) (12 )%
Legacy Workflow Fees 156,119 1 % 216,173 1 % (60,054 ) (28 )%
Marketplace Spend Fees 1,270,560 7 % 1,080,609 5 % 189,951 18 %
License Fees 1,986,285 10 % 1,151,242 6 % 835,043 73 %
SaaS Services Revenue 3,412,964 18 % 2,448,024 12 % 964,940 39 %
Other Revenue 109,840 1 % 57,547 - % 52,293 91 %
Total Revenue $ 18,955,672 100 % $ 20,099,695 100 % $ (1,144,023 ) (6 )%
Historically, we have invested the majority of our time and resources in our
Managed Services business, which provides the majority of our revenue. Our
acquisitions of Ebyline and ZenContent allowed us to expand our product
offerings to provide custom content in addition to and in combination with our
influencer marketing campaigns to expand our Managed Services. Our July 2018
merger with TapInfluence provided a springboard for SaaS Services and an
immediate increase of market share in the Marketplace Spend Fees and License
Fees on SaaS Services.
Managed Services is generated 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 revenue during the
twelve months ended December 31, 2019 , decreased 12% from the same period in
2018, due to a 30% decrease in our front-line sales personnel which resulted in
lower bookings and revenue in the first three quarters of 2019. However, revenue
per sales person increased approximately 25% compared to 2018.
SaaS Services revenue is generated by the self-service use of our technology
platforms by marketers to manage their own content workflow and influencer
marketing campaigns. It consists of fees earned on the marketer's spend within
the IZEAx, TapInfluence and Ebyline platforms, along with the license and
support fees to access the platform services.
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• Legacy Workflow Fees revenue represents self-service transactions through
the Ebyline platform for professional custom content workflow. This
revenue has been declining year over year due to the ongoing consolidation
and cutbacks in the newspaper industry, natural customer attrition and
customer migration to our IZEAx platform. Revenue from Legacy Workflow
Fees decreased to $156,119 for the twelve months ended December 31, 2019 ,
compared to $216,173 for same period in 2018. With the addition of
TapInfluence and its SaaS revenue model and our modifications to IZEAx
which now allows marketers to purchase custom content, in addition tosponsored posts, we have migrated the last customers from the Ebyline
platform into IZEAx in
from this source.
• Marketplace Spend Fees revenue primarily results from marketers and
partners using the IZEAx, and beginning in
platforms on a SaaS basis to distribute content for marketing and
influencer marketing campaigns. We increased our revenue from Marketplace
Spend Fees by
compared with the same period of 2018, primarily as a result of our merger
with TapInfluence as well as an increased investment in SaaS sales
efforts. Revenue from Marketplace Spend Fees represents our net margins
received on this business.
• License Fees revenue is generated primarily through the granting oflimited, non-exclusive, non-transferable licenses to customers for the use
of the IZEAx and TapInfluence technology platforms for an agreed-upon
subscription period. Customers license the platforms to manage their own
influencer marketing campaigns. Fees for subscription or licensing
services are recognized straight-line over the term of the service.
License Fees revenue increased during the twelve months ended
2019 to
as well as an increased investment in SaaS sales efforts, compared to
$1,151,242 in the same period of the prior year.
Other revenue consists of other fees, such as inactivity fees, early cash-out
fees, and plan fees charged to users of our platforms. These fees did not have a
significant effect on our revenue for the twelve months ended December 31, 2019
or 2018.
Cost of Revenue
Cost of revenue for the twelve months ended
Sales and Marketing Sales and marketing expense for the twelve months endedDecember 31, 2019 decreased by$244,057 , or approximately 4%, compared to the same period in 2018. Our average number of direct sales personnel, excluding support personnel, decreased by 22% for the twelve months endedDecember 31, 2019 when compared with 2018 which, along with the decrease in variable compensation linked with sales performance, contributed to a reduction in sales and marketing payroll and personnel related expenses. This decrease was offset by a$248,000 increase in our marketing expenses to generate awareness and future revenue. General and Administrative General and administrative expense for the twelve months endedDecember 31, 2019 increased by$927,220 , or approximately 11%, compared to the same period in 2018. General and administrative expense for the twelve months endedDecember 31, 2019 increased due to (i) an impairment on our software & technology intangible assets of approximately$418,000 due to the phase out of certain technology after migration into IZEAx, (ii) increased contractor costs of approximately$232,000 due to additional engineering and accounting contractors utilized during 2019 and approximately$165,000 less in capitalized developments costs, (iii) increased software and license fees of approximately$311,000 for additional web hosting costs for additional data usage from users in our system, (iv) higher payroll, stock compensation, and personnel-related expenses of approximately$57,000 due to higher salaries,and (v) increased insurance expense of approximately$33,000 due to increases in our insurance premiums. General and administrative expense decreased by approximately$640,000 as a result of decreased professional fees compared to the same period in 2018. Prior year professional fees were higher than normal due to our acquisition activities, additional procedures related to revised statements and implementation of ASC 606 in our public filings, along with an accrual of$500,000 for estimated legal expenses on litigation.
Depreciation and Amortization
Depreciation and amortization expense for the twelve months ended
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approximately 35%, compared to the same period in 2018.
Depreciation and amortization expense on property and equipment was$131,121 and$222,912 for the twelve months endedDecember 31, 2019 and 2018, respectively. Depreciation expense has declined primarily due to certain assets becoming fully depreciated. Amortization expense was$1,619,508 and$1,075,447 for the twelve months endedDecember 31, 2019 and 2018, respectively. Amortization expense related to intangible assets acquired in the Ebyline, ZenContent, and TapInfluence acquisitions was$1,228,433 and$780,960 for the twelve months endedDecember 31, 2019 and 2018, respectively, while amortization expense related to internal use software development costs was$391,075 and$294,487 for the twelve months endedDecember 31, 2019 and 2018, respectively. Amortization on our intangible acquisition assets increased in 2019 due to the full year of amortization of the TapInfluence intangible assets acquired inJuly 2018 . However, this expense will decrease in the future periods as these assets are fully amortized. Amortization on our internal use software is expected to increase in future periods due to the release of IZEAx 3.0 inApril 2019 .
Other Income (Expense)
Interest expense decreased by$35,819 to$233,654 during the twelve months endedDecember 31, 2019 compared to the same period in 2018 due primarily to the elimination of borrowings on our secured credit facility afterMay 2019 and the reduction in amounts owed on our acquisition costs payable in 2019. We recorded$11,794 resulting from the change in the fair value of restricted stock for the twelve months endedDecember 31, 2018 with no comparable amount for the same period in 2019.
The
Net Loss
Net loss for the twelve months endedDecember 31, 2019 was$7,290,120 , a$1,571,713 increase in the net loss of$5,718,407 for the same period in 2018. The increase in net loss was impacted largely by increases in non-cash items such as asset impairment and amortization and changes in acquisition cost values discussed above.
Non-GAAP Financial Measures
Below are financial measures of our gross billings and Adjusted EBITDA. These are "non-GAAP financial measures" as defined under the rules of theSecurities and Exchange Commission (the "SEC"). We use these non-GAAP financial measures to assess the progress of our business and make decisions on where to allocate our resources. As our business evolves, we may make changes in future periods to the key financial metrics that we consider to measure our business. Gross Billings by Revenue Stream Company management evaluates its operations and makes strategic decisions based, in part, on gross billings from its two primary types of revenue, Managed Services and SaaS Services. We define gross billings as the total dollar value of the amounts earned from our customers for the services we performed, or the amounts billed to our customers for their self-service purchase of goods and services on our platforms. 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 inthe United States ("GAAP") reporting purposes. Gross billings for Managed Services is the same as revenue reported in our consolidated statements of operations on a GAAP basis, as there is no requirement to net the costs of revenue against the revenue. Gross billings for Marketplace Spend and Legacy Workflow Fees (which are included in SaaS Services) differ from revenue reported for these services in our consolidated statements of operations on a GAAP basis. These services are presented net of the amounts we pay to the third-party creators providing the content or sponsorship services. Gross billings for all other revenue types equals the revenue reported in our consolidated statements of operations.
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
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gross billings that we are able to retain after payments to our creators.
Additionally, tracking gross billings is critical as it pertains to our credit
risk and cash flow. 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 the time of payment to our creators, we could
experience large swings in our cash flows. Finally, gross billings allows us to
evaluate our transaction totals on an equal basis in order for us to see our
contribution margins by revenue stream so that we can better understand where we
should be allocating our resources.
The following table sets forth our gross billings by revenue type, the
percentage of total gross billings by type, and the change between the periods:
Twelve Months Ended December 31,
2019 2018 $ Change % Change
Managed Services GrossBillings$ 15,432,868 53%$ 17,594,124 59%$ (2,161,256 ) (12)% Legacy Workflow Fees 2,155,550 8% 3,048,503 10% (892,953 ) (29)% Marketplace Spend Fees 9,264,892 32% 8,127,774 27% 1,137,118 14% License Fees 1,986,285 7% 1,151,242 4% 835,043 73% SaaS Services Gross Billings 13,406,727 47% 12,327,519 41% 1,079,208 9% Other Revenue 109,840 -% 57,547 -% 52,293 91% Total Gross Billings$ 28,949,435 100%$ 29,979,190 100%$ (1,029,755 ) (3)% Gross billings for Managed Services revenue were$15,432,868 for the twelve months endedDecember 31, 2019 , a decrease of$2,161,256 compared to the same period in 2018. The decrease in Managed Services revenue for the twelve months endedDecember 31, 2019 is attributable to the decrease in the sales team compared to the same period in 2018. The increase of$1,079,208 in SaaS Services revenue for the twelve months endedDecember 31, 2019 compared to the same period in 2018, was primarily due to the addition of TapInfluence inJuly 2018 and our focus towards expanding our SaaS offerings and sales team. We expect our merger with TapInfluence to have a continuing positive impact on our future gross billings with respect to our SaaS Services revenue as we build on the significant marketer base obtained from the merger, offset by the phasing out of our Legacy Workflow activity. The following table sets forth a reconciliation from the GAAP measurement of revenue to our non-GAAP financial measure of gross billings stated above and the percentage change between the periods: Twelve Months Ended December 31, 2019 2018 $ Change % Change Revenue$ 18,955,672 $ 20,099,695 $ (1,144,023 ) (6)% Plus payments made to third-party creators (1) 9,993,763 9,879,495 114,268 1% Gross billings$ 28,949,435 $ 29,979,190 $ (1,029,755 ) (3)%
(1) Payments made to third-party creators for the Legacy Workflow and Marketplace
Spend components of our revenue reported on a net basis for GAAP.
Adjusted EBITDA
We define Adjusted EBITDA as earnings or loss before interest, taxes,
depreciation and amortization, non-cash stock-based compensation, gain or loss
on asset disposals or impairment, changes in acquisition cost estimates, and all
other unusual or non-cash income and expense items such as gains or losses on
settlement of liabilities and exchanges, and changes in the fair value of
derivatives, if applicable.
We use Adjusted EBITDA as a measure of operating performance, for planning
purposes, to allocate resources to enhance the financial performance of our
business, and in communications with our Board of Directors regarding our
financial performance. We believe that Adjusted EBITDA also provides useful
information to investors as it excludes transactions not related to our core
cash-generating operating business activities, and it provides consistency and
facilitates period-to-period comparisons. We believe that excluding these
transactions allows investors to meaningfully trend and analyze the performance
of our core cash-generating operations.
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All companies do not calculate Adjusted EBITDA in the same manner, and Adjusted EBITDA as presented by us may not be comparable to Adjusted EBITDA presented by other companies, which limits its usefulness as a comparative measure. Moreover, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for an analysis of our results of operations as under GAAP. These limitations are that Adjusted EBITDA:
• 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
important part of our compensation strategy;
• 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;
• does not include changes in acquisition cost estimates as a result of
the allocation of acquisition costs payable to compensation expense
which may be a significant recurring expense for our business if we
continue to make business acquisitions;
• does not include gains or losses on the settlement of acquisition costs
payable or liabilities when the stock value, as agreed upon in the
agreement, varies from the market price of our stock on the settlement
date. This is a non-cash expense, but was a recurring expense for our
business on certain business contracts where the amounts could vary;
• does not include unusual or expected non-recurring items such as large
litigation reserves;
• 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; and
• does not include changes in fair value of derivatives, interest expense
and other gains, losses, and expenses that we 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, 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 these non-GAAP financial measures, you should be
aware that in the future, we may incur expenses similar to those for which
adjustments are made in calculating Adjusted EBITDA. Our presentation of these
non-GAAP financial measures 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 net
loss to our non-GAAP financial measure of Adjusted EBITDA for the twelve months
ended December 31, 2019 and 2018:
Twelve Months Ended
December 31,
2019 2018
Net loss $ (7,290,120 ) $ (5,718,407 )
Non-cash stock-based compensation 634,651 580,693
Non-cash stock issued for payment of services 141,665
125,000
Change in fair value of derivatives -
11,794
Gain on settlement of acquisition costs payable (602,410 ) (84,938 ) Increase (decrease) in value of acquisition costs payable 6,222 (615,845 ) Legal expense accrual - 500,000 Interest expense 233,654 269,473 Depreciation and amortization 1,750,629 1,298,359 Impairment on intangible assets 418,099 - Other non-cash items 18,786 156 Adjusted EBITDA$ (4,688,824 ) $ (3,633,715 ) Revenue$ 18,955,672 $ 20,099,695 Adjusted EBITDA as a % of Revenue (25 )% (18 )% 30
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Liquidity and Capital Resources
We had cash and cash equivalents of$5,884,629 as ofDecember 31, 2019 as compared to$1,968,403 as ofDecember 31, 2018 , an increase of$3,916,226 primarily due to net proceeds received from our public securities offering inMay 2019 . 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$60,384,769 as ofDecember 31, 2019 . To date, we have financed our operations through internally generated revenue from operations, the sale of our equity securities and borrowings under our secured credit facility. Twelve Months Ended December 31, 2019 2018 Net cash (used for)/provided by: Operating activities$ (2,905,485 ) $ (5,582,480 ) Investing activities (687,979 ) (908,609 ) Financing activities 7,509,690 4,552,695
Net increase/(decrease) in cash and cash equivalents
Cash used for operating activities was$2,905,485 during the twelve months endedDecember 31, 2019 and is the result of our net loss not being fully offset by the net conversion of working capital into cash. Net cash used for investing activities was$687,979 during the twelve months endedDecember 31, 2019 primarily due to the payment of$590,549 related to the development of our proprietary software and purchases of$88,801 for updated computer equipment. Net cash provided by financing activities during the twelve months endedDecember 31, 2019 was$7,509,690 which consisted primarily of net proceeds of approximately$9.2 million received from our public securities offering inMay 2019 , offset by net repayments on our secured credit facility of approximately$1.5 million . Secured Credit Facility We have a secured credit facility agreement withWestern Alliance Bank , the parent company ofBridge Bank , National Association. Pursuant to this agreement, we may submit requests for funding up to 80% of our eligible accounts receivable up to a maximum credit limit of$5 million . EffectiveAugust 30, 2018 , as a result of IZEA's merger with TapInfluence, we entered into a Business Financing Modification Agreement and Consent withWestern Alliance Bank to add TapInfluence as an additional borrower on the credit facility. As ofDecember 31, 2019 , we had no amounts outstanding under this agreement. Assuming that all of our accounts receivable balance was eligible for funding, we had remaining available credit of$4.5 million under the agreement as ofDecember 31, 2019 . Public Offering OnMay 10, 2019 , we closed on our underwritten registered public offering of 14,285,714 shares of common stock at a public offering price of$0.70 per share, for total gross proceeds of approximately$10.0 million . The net proceeds to the Company were approximately$9.2 million after deducting underwriting discounts and commissions and estimated offering expenses. InJuly 2018 , andSeptember 2018 , we completed two separate underwritten public offerings for the sale of 3,556,000 and 1,407,333 shares of our common stock at a public offering price of$1.00 and$1.50 per share, respectively. The net proceeds for all shares sold by us in the public offerings were approximately$4.9 million after deducting underwriting discounts and commissions and estimated offering expenses. Acquisition ObligationsZenContent, Inc. OnJuly 31, 2016 , we entered into a Stock Purchase Agreement (the "ZenContent Stock Purchase Agreement") withZenContent, Inc. ("ZenContent"), pursuant to which we purchased all of the outstanding shares of capital stock of ZenContent. OnJuly 31, 2019 , we made the third and final annual installment payment under the ZenContent Stock Purchase Agreement, of 447,489 shares of our common stock valued at$222,223 or$0.4966 per share, using a thirty (30) trading day volume-weighted average closing price (the "30-day VWAP") as recorded by the Nasdaq Capital Market prior to the issuance date. We recognized a gain of$41,258 on the settlement of this acquisition cost payable as a result of the difference between the actual closing market price of the common stock of$0.4044 on the settlement date and the 30-day VWAP. 31
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InJuly 2018 , pursuant to an amendment to the ZenContent Stock Purchase Agreement, the parties agreed to fix the amount payable for any further contingent performance payments at$90,000 , of which$45,000 was paid in cash onNovember 1, 2018 , and$45,000 was paid in cash onNovember 1, 2019 . TapInfluence OnJuly 26, 2018 , we completed our merger with TapInfluence. Pursuant to the Agreement and Plan of Merger (the Merger Agreement"), we were required to pay the former TapInfluence stockholders an additional$4,500,000 , less any final working capital adjustments, in the form of cash, common stock or a combination thereof, at our option, in two installments. OnJanuary 26, 2019 , we paid the first installment of$884,583 ($1,000,000 less the final working capital adjustment of$115,416 ) using 660,136 shares of our common stock valued at$1.34 per share, using the 30-day VWAP as reported by the Nasdaq Capital Market prior to the issuance date. We recorded a$191,437 loss on the settlement of this acquisition cost payable as a result of the difference between the actual closing market price of the common stock of$1.63 on the settlement date and the 30-day VWAP of$1.34 required by the Merger Agreement. OnJuly 26, 2019 , we paid the second and final installment through the issuance to the former shareholders of TapInfluence of 6,908,251 shares of our common stock valued at$3,500,000 , or$0.50664 per share, using the 30-day VWAP as required by the Merger Agreement. The Company recognized a gain of$752,589 on the settlement of this acquisition cost payable as a result of the difference between the actual closing market price of the common stock of$0.3977 on the settlement date and the 30-day VWAP.
Financial Condition
With the cash on hand after ourMay 2019 public offering and the settlement of all the remaining obligations on our acquisitions, along with our available credit line withWestern Alliance Bank , we expect to have sufficient cash reserves and financing sources available to cover expenses at least one year from the issuance of this Annual Report. However, we have begun to see some impact on our operations due to changes in advertising decisions, timing and spending priorities from our customers as a result of the novel coronavirus (COVID-19), which will result in a negative impact to our expected future sales. While the disruption is currently expected to be temporary, there is uncertainty around the duration and the total economic impact. Therefore, while we expect this matter to negatively impact our business, results of operations, and financial position, the full financial impact cannot be reasonably estimated at this time.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Use of Estimates
We prepare our financial statements in conformity with accounting principles generally accepted inthe United States ("GAAP"). Certain of our accounting policies require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments will be subject to an inherent degree of uncertainty. Our judgments are based upon the historical experience of the Company, terms of existing contracts, observance of trends in the industry, 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 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 position, changes in financial 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 to be the
most appropriate when given the specific circumstances. Application of these
accounting principles requires us to make estimates about the future resolution
of existing uncertainties. Due to the inherent uncertainty involving estimates,
actual results reported in the future may differ from our estimates. The
following critical accounting policies are significantly affected by judgments,
assumptions and estimates used in the preparation of the financial statements.
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Accounts Receivable and Concentration of Credit Risk
Accounts receivable are customer obligations due under normal trade terms. We consider an account to be 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 develop or share content on behalf of a marketer. If a portion of the account balance is deemed uncollectible, we will either write-off the amount owed or provide a reserve based on our best estimate of the uncollectible portion of the account. Management estimates the collectibility of accounts by regularly evaluating individual customer receivables and considering a customer's financial condition, credit history and current economic conditions. We have a reserve of$145,000 for doubtful accounts as ofDecember 31, 2019 . We believe that this estimate is reasonable, but there can be no assurance that the estimate will not change as a result of a change 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 endedDecember 31, 2019 and 2018. Concentrations of credit risk with respect to accounts receivable were typically limited, because a large number of geographically diverse customers make up our customer base, thus spreading the trade credit risk. However, with our acquisition of TapInfluence, we have 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 no customer that accounted for more than 10% of total accounts receivable atDecember 31, 2019 and two customers that accounted for an aggregate of 36% of total accounts receivable atDecember 31, 2018 .
Software Development Costs and
In accordance with Accounting Standards Codification ("ASC") 350-40, Internal
Use Software , we capitalize certain internal use software development costs
associated with creating and enhancing internally developed software related to
our platforms. Software development activities generally consist of three stages
(i) the research and planning stage, (ii) the application and development stage,
and (iii) the post-implementation stage. Costs incurred in the research and
planning stage and in 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 infrastructure development stage, including significant enhancements and
upgrades, are capitalized. These costs include personnel and related employee
benefits expenses for employees or consultants who are directly associated with
and who devote time to software projects, and external direct costs of materials
obtained in developing the software. We have capitalized software development
costs of $2,673,017 in the consolidated balance sheet as of December 31, 2019 .
We also have additional proprietary software platforms valued at $820,000 from
our acquisitions of Ebyline, ZenContent and TapInfluence. These costs are
reflected as intangible assets in the consolidated balance sheet as of
December 31, 2019 . We do not transfer ownership of our software to third
parties. These software development and acquired technology 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.
Goodwill represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible 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. In the event that 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 ofOctober 1 of each year, or more frequently, if certain indicators are present.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. 33
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Revenue Recognition
We generate revenue from five 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 TapInfluence
platforms ("Marketplace Spend Fees"); (3) revenue from fees charged to access
the IZEAx, Ebyline, and TapInfluence platforms ("License Fees"); (4) revenue
from transactions generated by the self-service use of our Ebyline platform for
professional custom content workflow ("Legacy Workflow Fees"); and (5) revenue
derived from other fees such as inactivity fees, early cash-out fees, and plan
fees charged to users of our platforms ("Other").
On January 1, 2018 , we adopted Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers (ASC 606) using the modified retrospective
method, under which comparative periods were not restated and the cumulative
effect of applying the standard was recognized at the date of initial adoption
on January 1, 2018 . Under the modified retrospective method, we only applied the
new standard to contracts that were not completed as of January 1, 2018 . Under
ASC 606, revenue is recognized based on a five-step model and, in doing so, more
judgment and estimates may be required within the revenue recognition process
than were required under the former rules. We have reviewed our sources of
revenue in accordance with each of the five steps in the model, which are 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 determines those
that are distinct performance obligations. We also determine whether we act as
an agent or a principal for each identified performance obligation. The
determination of whether we act as the principal or the agent is highly
subjective and requires us to evaluate a number of indicators individually and
as a whole in order to make its determination. 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 we 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 we 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 its platforms, or by statement of work, which
specifies 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. Payment terms are
typically 30 days from the invoice date. The agreement typically provides for a
cancellation fee if the agreement is canceled by the customer prior to
completion of services. Billings in advance of completed services are recorded
as a contract liability until earned. We assess collectibility based on a number
of factors, including the creditworthiness of the customer and payment and
transaction history. The allocation of the transaction price to the performance
obligations in the contract is based on a cost-plus methodology.
For Managed Services Revenue, we enter 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 or
videos. Marketers typically purchase influencer marketing services for the
purpose of providing public awareness or advertising buzz regarding the
marketer's brand and they purchase custom content for internal and external use.
We may provide one type or a combination of all types of these performance
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 performance obligations are to be provided over
a stated period that may range from one day to one year. Revenue is accounted
for when the performance obligation has been satisfied depending on the type of
service provided. We view our obligation to deliver influencer marketing
services, including management services, as a single performance obligation that
is satisfied over time as the customer receives the benefits from the services.
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 we have an enforceable
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right to payment for performance completed to date under the contracts. We consider 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 using an output method based on when each individual piece of content is delivered 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 we establish the contract price directly with our customers based on the services requested in the statement of work. For Marketplace Spend and Legacy Workflow Fee Revenue, the self-service customer instructs creators found through our platforms to provide and/or distribute custom content for an agreed upon transaction price. Our platforms control the contracting, description of services, acceptance of and payment for the requested content. This service is used primarily by news agencies or marketers to control the outsourcing of their content and advertising needs. We charge the self-service customer the transaction price plus a fee based on the contract. Revenue is recognized when the transaction is completed by the creator and accepted by the marketer. Based on our evaluations, Marketplace Spend and Legacy Workflow Fee revenue is reported on a net basis since we are acting as an agent solely arranging for the third-party creator or influencer to provide the services directly to the self-service customer through the platform, and is typically recognized upon publishing or purchase of the marketplace spend by the creator and verification of the publishing by the marketer. License Fee revenue is generated through the granting of limited, non-exclusive, non-transferable licenses to customers for the use of the IZEAx andTapInfluence technology platforms for an agreed-upon subscription period. Customers license the platforms to manage their own influencer marketing campaigns. Fees for subscription or licensing services are recognized straight-line over the term of the service. Other Fee revenue is generated when fees are charged to customers primarily related to monthly plan fees, inactivity fees, and early cash-out fees. Plan fees are recognized within the month they relate to, and inactivity and early cash-out fees are recognized at a point in time when the account is deemed inactive or a cash-out below certain minimum thresholds is requested. 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. EffectiveJanuary 1, 2018 , we became subject to new guidelines for disclosing and accounting for our revenue from contracts with customers. See "Note 1. Summary of Significant Accounting Policies," under Part II, Item 8 of this Annual Report for information on ASC 606 as it relates to our revenue recognition policies.
Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes 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 have five or ten-year contract lives. We use the closing stock price of our common stock on the date of the grant as the associated fair value of our common stock. We estimate the volatility of our common stock at the date of grant based on the volatility of comparable peer companies that are 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 to the contractual terms, vesting schedules and post-vesting forfeitures. We use the risk-free interest rate on the implied yield currently available onU.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 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 endedDecember 31, 2019 and 2018: 35
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Weighted
Weighted Weighted Average Weighted
Total Average Average Weighted Risk-Free Average
Twelve Options Exercise Expected Average Interest Grant Date
Months Ended Granted Price Term Volatility Rate Fair Value
December 31,
2018 156,084 $1.60 6.0 years 64.49% 2.81% $0.96
December 31,
2019 586,552 $0.67 6.0 years 64.38% 1.92% $0.40
There were outstanding options to purchase 1,357,837 shares with a weighted
average exercise price of $3.24 per share, of which options to purchase 757,058
shares were exercisable with a weighted average exercise price of $4.88 per
share as of December 31, 2019 . The intrinsic value on outstanding options as of
December 31, 2019 was $0 . The intrinsic value on exercisable options as of
December 31, 2019 was $0 .
As of December 31, 2019 , we had unvested restricted stock units representing
366,812 shares of common stock with an intrinsic value of $86,788 and unvested
shares of issued restricted stock with an intrinsic value of $7,401 .
Recent Accounting Pronouncements
See "Note 1. Company and Summary of Significant Accounting Policies," under Part II, Item 8 of this Annual Report for information on additional recent pronouncements.
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