ITEM 1 - FINANCIAL STATEMENTS
IZEA, Inc.
Consolidated Balance Sheets
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March 31,
2016
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December 31,
2015
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(Unaudited)
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Assets
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Current:
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|
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Cash and cash equivalents
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$
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10,064,454
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$
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11,608,452
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Accounts receivable, net of allowance for doubtful accounts of $190,000 and $139,000
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2,976,322
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|
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3,917,925
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Prepaid expenses
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530,485
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193,455
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Other current assets
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40,028
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|
16,853
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Total current assets
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13,611,289
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15,736,685
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Property and equipment, net of accumulated depreciation of $506,566 and $445,971
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582,173
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596,008
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Goodwill
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2,468,289
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2,468,289
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Intangible assets, net of accumulated amortization of $926,101 and $730,278
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1,610,368
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1,806,191
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Software development costs, net of accumulated amortization of $247,393 and $207,514
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856,974
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813,932
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Security deposits
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116,149
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117,946
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Total assets
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$
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19,245,242
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$
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21,539,051
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts payable
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$
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1,055,800
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$
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995,275
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Accrued expenses
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1,118,667
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908,519
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Unearned revenue
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3,378,237
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3,584,527
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Current portion of deferred rent
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28,451
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14,662
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Current portion of capital lease obligations
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—
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7,291
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Current portion of acquisition costs payable
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900,492
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844,931
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Total current liabilities
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6,481,647
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6,355,205
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Deferred rent, less current portion
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85,534
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102,665
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Acquisition costs payable, less current portion
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—
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889,080
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Warrant liability
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2,208
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5,060
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Total liabilities
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6,569,389
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7,352,010
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Stockholders’ equity:
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Common stock, $.0001 par value; 200,000,000 shares authorized; 5,341,404 and 5,222,951, respectively, issued and outstanding
|
534
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|
522
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Additional paid-in capital
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49,517,460
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48,436,040
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Accumulated deficit
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(36,842,141
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)
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(34,249,521
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)
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Total stockholders’ equity
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12,675,853
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14,187,041
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Total liabilities and stockholders’ equity
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$
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19,245,242
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$
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21,539,051
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See accompanying notes to the unaudited consolidated financial statements.
IZEA, Inc.
Unaudited Consolidated Statements of Operations
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Three Months Ended
March 31,
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2016
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2015
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Revenue
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$
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5,465,950
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$
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4,135,494
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Cost of sales
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3,101,369
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2,441,491
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Gross profit
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2,364,581
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1,694,003
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Operating expenses:
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General and administrative
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2,580,001
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1,860,514
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Sales and marketing
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2,359,663
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1,581,487
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Total operating expenses
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4,939,664
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3,442,001
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Loss from operations
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(2,575,083
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)
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(1,747,998
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)
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Other income (expense):
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Interest expense
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(21,339
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)
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(18,770
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)
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Change in fair value of derivatives, net
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2,852
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(2,505,951
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)
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Other income, net
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950
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1,807
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Total other income (expense)
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(17,537
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)
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(2,522,914
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)
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Net loss
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$
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(2,592,620
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)
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$
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(4,270,912
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)
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Weighted average common shares outstanding – basic and diluted
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5,300,520
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2,884,883
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Basic and diluted loss per common share
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$
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(0.49
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)
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$
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(1.48
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)
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See accompanying notes to the unaudited consolidated financial statements.
IZEA, Inc.
Unaudited Consolidated Statement of Stockholders’ Equity
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Common Stock
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Additional
Paid-In
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Accumulated
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Total
Stockholders’
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Shares
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Amount
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Capital
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Deficit
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Equity
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Balance, December 31, 2015
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5,222,951
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$
|
522
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$
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48,436,040
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$
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(34,249,521
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)
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$
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14,187,041
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Stock issued for payment of acquisition liability
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114,398
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11
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848,821
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—
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848,832
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Stock issued for payment of services
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4,055
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1
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31,249
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—
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31,250
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Stock issuance costs
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—
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—
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(3,622
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)
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—
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(3,622
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)
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Stock-based compensation
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—
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—
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204,972
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—
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204,972
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Net loss
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—
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—
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—
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(2,592,620
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)
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(2,592,620
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)
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Balance, March 31, 2016
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5,341,404
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$
|
534
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$
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49,517,460
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$
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(36,842,141
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)
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$
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12,675,853
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See accompanying notes to the unaudited consolidated financial statements.
IZEA, Inc.
Unaudited Consolidated Statements of Cash Flows
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Three Months Ended
March 31,
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2016
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|
2015
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Cash flows from operating activities:
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Net loss
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$
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(2,592,620
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)
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$
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(4,270,912
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)
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Adjustments to reconcile net loss to net cash used for operating activities:
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Depreciation
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60,595
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|
47,019
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Amortization of software development costs and other intangible assets
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235,702
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127,277
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Provision for losses on accounts receivable
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51,000
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—
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Stock-based compensation
|
204,972
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|
142,331
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Value of stock and warrants issued or to be issued for payment of services
|
31,250
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35,050
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Change in fair value of derivatives, net
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(2,852
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)
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2,505,951
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Changes in operating assets and liabilities, net of effects of business acquired:
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Accounts receivable
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890,603
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34,698
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Prepaid expenses and other current assets
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(360,205
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)
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(23,845
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)
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Accounts payable
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60,525
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|
4,949
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Accrued expenses
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225,461
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|
50,363
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Unearned revenue
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(206,290
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)
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(181,541
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)
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Deferred rent
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(3,342
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)
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|
548
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Net cash used for operating activities
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(1,405,201
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)
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(1,528,112
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)
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Cash flows from investing activities:
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Purchase of equipment
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(46,760
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)
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(28,985
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)
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Increase in software development costs
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(82,921
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)
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—
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Acquisition, net of cash acquired
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—
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(995,286
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)
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Security deposits
|
1,797
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—
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Net cash used for investing activities
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(127,884
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)
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(1,024,271
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)
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Cash flows from financing activities:
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Proceeds from exercise of options & warrants
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—
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5,264
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Stock issuance costs
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(3,622
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)
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—
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Payments on capital lease obligations
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(7,291
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)
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(14,592
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)
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Net cash used for financing activities
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(10,913
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)
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(9,328
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)
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Net decrease in cash and cash equivalents
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(1,543,998
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)
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(2,561,711
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)
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Cash and cash equivalents, beginning of period
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11,608,452
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|
6,521,930
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Cash and cash equivalents, end of period
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$
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10,064,454
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$
|
3,960,219
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Supplemental cash flow information:
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Cash paid during the year for interest
|
$
|
230
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$
|
2,362
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|
|
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|
Non-cash financing and investing activities:
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|
|
|
|
|
Fair value of warrants issued
|
$
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—
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|
|
$
|
7,700
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Acquisition costs payable for assets acquired
|
$
|
—
|
|
|
$
|
4,192,639
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|
Acquisition costs paid through issuance of common stock
|
$
|
848,832
|
|
|
$
|
—
|
|
See accompanying notes to the unaudited consolidated financial statements.
IZEA, Inc.
Notes to the Unaudited Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying consolidated balance sheet as of
March 31, 2016
, the consolidated statements of operations for the
three months
ended
March 31, 2016
and
2015
, the consolidated statement of stockholders' equity for the
three months
ended
March 31, 2016
and the consolidated statements of cash flows for the
three months
ended
March 31, 2016
and
2015
are unaudited but include all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position at such dates and our results of operations and cash flows for the periods then ended in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). The consolidated balance sheet as of
December 31, 2015
has been derived from the audited consolidated financial statements at that date but, in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"), does not include all of the information and notes required by U.S. GAAP for complete financial statements. Operating results for the
three months
ended
March 31, 2016
are not necessarily indicative of results that may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended
December 31, 2015
included in the Company's Annual Report on Form 10-K filed with the SEC on March 30, 2016.
Nature of Business
IZEA, Inc. (together with its wholly-owned subsidiaries, "we," "us," "our" or the "Company") was founded in February 2006 under the name PayPerPost, Inc. and became a public company incorporated in the state of Nevada in May 2011. On March 9, 2016, the Company formed IZEA Canada, Inc., a wholly-owned subsidiary incorporated in Ontario, Canada to operate as a sales office for its Canadian customers beginning in the second quarter of 2016. On April 5, 2016, the Company filed Articles of Merger with the Secretary of State of Nevada to effect the merger of its wholly-owned, non-operating subsidiary, IZEA Innovations, Inc., a Delaware corporation originally incorporated on September 19, 2006, into the parent operations of IZEA, Inc., a Nevada corporation. The Company is headquartered near Orlando, Florida with additional offices in Chicago, Los Angeles and Toronto, and a sales presence in New York, Detroit and Boston.
The Company operates online marketplaces that facilitate transactions between brands and influential content creators. These creators produce and distribute text, videos and photos on behalf of brands through websites, blogs and social media channels. The Company's technology enables transactions to be completed at scale through the management of content workflow, creator search and targeting, bidding, analytics and payment processing.
On January 30, 2015, the Company purchased all of the outstanding shares of capital stock of Ebyline, Inc. (“Ebyline”) (see Note 2). Based in Los Angeles, California, Ebyline operates an online marketplace that enables publishers to access a network of over
15,000
content creators ranging from writers to illustrators in
84
countries. Over
2,000
fully vetted individuals in the Ebyline network have professional journalism credentials with backgrounds at well-known media outlets. Ebyline’s proprietary workflow is utilized by leading media organizations to obtain the content they need from professional content creators. In addition to publishers, Ebyline is leveraged by brands to produce custom branded content for use on their owned and operated sites, as well as third party content marketing and native advertising efforts.
The Company currently operates the Ebyline online marketplace along with its own online marketplace that connects brands with creators at IZEA.com as well as other white label marketplaces. IZEA.com and all white label sites are powered by the IZEA Exchange (“
IZEAx
”), a platform that handles content workflow, creator search and targeting, bidding, analytics and payment processing.
IZEAx
is designed to provide a unified ecosystem that enables the creation of multiple types of content including blog posts, status updates, videos and photos through a wide variety of social channels including blogs, Twitter, Facebook, Instagram and Tumblr, among others.
Reverse Stock Split
On January 6, 2016, the Company filed a Certificate of Amendment with the Secretary of State of Nevada to effect a reverse stock split of the issued and outstanding shares of its common stock at a ratio of one share for every 20 shares outstanding prior to the effective date of the reverse stock split. All current and historical information contained herein related to the share and per share information for the Company's common stock or stock equivalents reflects the 1-for-20 reverse stock split of the Company's outstanding shares of common stock that became market effective on January 11, 2016. There was no change in the number of the Company's authorized shares of common stock.
Principles of Consolidation
The consolidated financial statements include the accounts of IZEA, Inc. and its wholly-owned subsidiary, Ebyline. All significant intercompany balances and transactions have been eliminated in consolidation.
IZEA, Inc.
Notes to the Unaudited Consolidated Financial Statements
The consolidated financial statements were prepared using the acquisition method of accounting with IZEA considered the accounting acquirer of Ebyline. Under the acquisition method of accounting, the purchase price is allocated to the underlying Ebyline tangible and intangible assets acquired and liabilities assumed based on their respective fair market values with any excess purchase price allocated to goodwill.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are customer obligations due under normal trade terms. Uncollectibility of accounts receivable is not significant since most customers are bound by contract and are required to fund the Company for all the costs of an “opportunity,” defined as an order created by an advertiser for a creator to write about the advertiser’s product. If a portion of the account balance is deemed uncollectible, the Company will either write-off the amount owed or provide a reserve based on the uncollectible portion of the account. Management determines the collectibility of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. The Company had a reserve of
$190,000
and
$139,000
for doubtful accounts as of
March 31, 2016
and
December 31, 2015
, respectively. Management believes 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 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%
of revenue for the
three months
ended
March 31, 2016
and
2015
.
Concentrations of credit risk with respect to accounts receivable are typically limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. The Company also controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs credit evaluations of its customers but generally does not require collateral to support accounts receivable. At
March 31, 2016
, the Company had
two
customers which accounted for
26%
of total accounts receivable in the aggregate. At
December 31, 2015
, the Company had
one
customer which accounted for
13%
of total accounts receivable in the aggregate. The Company had
two
customers that accounted for
24%
of its revenue during the
three months
ended
March 31, 2016
and
one
customer that accounted for
12%
of its revenue during the
three months
ended
March 31, 2015
.
Property and Equipment
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:
|
|
|
Computer Equipment
|
3 years
|
Software Costs
|
3 years
|
Office Equipment
|
3 - 10 years
|
Furniture and Fixtures
|
5 - 10 years
|
Leasehold improvements are depreciated over the shorter of the term of the lease or the estimated useful lives of the improvements. Property and equipment under capital leases are depreciated over their estimated useful lives. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for betterments and major improvements are capitalized and depreciated over the remaining useful lives of the assets. The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the year of disposal, with resulting gains or losses included in general and administrative expense. Depreciation expense on property and equipment recorded in general and administrative expense in the accompanying consolidated statements of operations was
$60,595
and
$47,019
for the
three months
ended
March 31, 2016
and
2015
, respectively.
Software Development Costs
In accordance with ASC 350-40,
Internal Use Software
and ASC 985-730,
Computer Software Research and Development
, research phase costs related to internal use software should be expensed as incurred and development phase costs including direct materials and services, payroll and benefits and interest costs may be capitalized. The Company amortizes software development costs equally over
5 years
upon initial launch of the software or additional features. Amortization expense on software development costs recorded in general and administrative expense in the accompanying consolidated statements of operations was
$39,879
and
$28,444
for the
three months
ended
March 31, 2016
and
2015
, respectively.
IZEA, Inc.
Notes to the Unaudited Consolidated Financial Statements
As of
December 31, 2015
, future estimated amortization expense related to software development costs over the next five years is set forth in the following schedule:
|
|
|
|
|
Year ending December 31:
|
Software Amortization Expense
|
2016
|
$
|
204,289
|
|
2017
|
204,289
|
|
2018
|
204,289
|
|
2019
|
118,958
|
|
2020
|
82,107
|
|
|
$
|
813,932
|
|
Intangible Assets
The Company acquired the majority of its intangible assets through its acquisition of Ebyline on January 30, 2015. The Company is amortizing the identifiable intangible assets over a period of
12
to
60
months. Management reviews long-lived assets, including property and equipment, software development costs and other intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If an 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 an asset and its 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. For the
three months
ended
March 31, 2016
and
2015
, there were no impairment charges associated with the Company's long-lived assets.
The Company is amortizing the identifiable intangible assets over a weighted average period of
3 years
. Amortization expense on the Ebyline related identifiable intangible assets costs recorded in general and administrative expense in the accompanying consolidated statements of operations was
$195,823
and
$98,833
for the
three months
ended
March 31, 2016
and
2015
, respectively.
As of
December 31, 2015
, future estimated amortization expense related to identifiable intangible assets over the next five years is set forth in the following schedule:
|
|
|
|
|
Year ending December 31:
|
Amortization Expense
|
2016
|
$
|
765,794
|
|
2017
|
759,961
|
|
2018
|
148,849
|
|
2019
|
93,294
|
|
2020
|
38,293
|
|
Total
|
$
|
1,806,191
|
|
Goodwill
Goodwill represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets. The Company has goodwill that has been recorded in connection with its acquisition of Ebyline. 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, the Company will record a charge for the amount of impairment during the fiscal quarter in which the determination is made.
The Company performs its annual impairment tests of goodwill during the fourth quarter 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
IZEA, Inc.
Notes to the Unaudited Consolidated Financial Statements
unit when performing the annual goodwill impairment review. The Company has determined that prior to and after the acquisition of Ebyline, it had and continues to have one reporting unit.
Revenue Recognition
The Company derives its revenue from three sources: revenue from an advertiser when it pays for a social media publisher or influencer such as a blogger or tweeter ("creators") to share sponsored content with their social network audience ("Sponsored Revenue"), revenue when a publisher or company purchases custom branded content for use on its owned and operated sites, as well as third party content marketing and native advertising efforts ("Content Revenue") and revenue derived from various service and license fees charged to users of our platforms ("Service Fee Revenue").
For managed customers, the Company enters into an agreement to provide services that may require multiple deliverables in the form of (a) sponsored social items, such as blogs, tweets, photos or videos shared through social network offerings that provide awareness or advertising buzz regarding the advertiser's brand; (b) media advertisements, such as click-through advertisements appearing in websites and social media channels and (c) original content items, such as a research or news article, informational material or videos that a publisher or brand can use. The Company may provide one type or a combination of all types of these deliverables including a management fee on a statement of work for a lump sum fee. These deliverables are to be provided over a stated period that may range 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 content has been delivered to the customer for their own use. Revenue is accounted for separately 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 completion of services. Payment terms are typically 30 days from the invoice date. If the Company is unable to provide a portion of the services, it may agree with the customer to provide a different type of service or to provide a credit for the value of those services that may be applied to the existing order or used for future services.
Sponsored Revenue is recognized and considered earned after an advertiser's sponsored content is posted through
IZEAx
and shared through a creator's social network for a requisite period of time. The requisite period ranges from
3 days
for a tweet to
30 days
for a blog, video or other form of content. Management fees related to Sponsored Revenue from advertising campaigns managed by the Company are recognized ratably over the term of the campaign which may range from a few days to several months. Content Revenue is recognized when the content is delivered to and accepted by the customer. Service Fee Revenue is generated when fees are charged to customers primarily related to subscription fees for different levels of service within a platform, licensing fees for white-label use of
IZEAx
, early cash-out fees if a creator wishes to take proceeds earned for services from their account when the account balance is below certain minimum balance thresholds and inactivity fees for dormant accounts. Service Fee Revenue is recognized immediately when the service is performed or at the time an account becomes dormant or is cashed out. Service Fee Revenue for subscription or licensing fees is recognized straight-line over the term of service. Self-service advertisers must prepay for services by placing a deposit in their account with the Company. The deposits are typically paid by the advertiser via credit card. Advertisers who use the Company to manage their social advertising campaigns or content requests may prepay for services or request credit terms. Payments received or billings in advance of services are recorded as unearned revenue until earned as described above.
All of the Company's 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 will be recognized when it is realized or realizable and earned. The Company considers its 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 advertiser or customer is fixed (required to be paid at a set amount that is not subject to refund or adjustment) and determinable, and (iv) collectibility is reasonably assured. The Company records revenue on the gross amount earned since it generally is the primary obligor in the arrangement, takes on credit risk, establishes the pricing and determines the service specifications.
Advertising Costs
Advertising costs are charged to expense as they are incurred, including payments to content creators to promote the Company. Advertising expense charged to operations for the
three months
ended
March 31, 2016
and
2015
were approximately
$111,000
and
$118,000
, respectively. Advertising costs are included in sales and marketing expense in the accompanying consolidated statements of operations.
Deferred Rent
The Company’s operating leases for its office facilities contain rent abatements and predetermined fixed increases of the base rental rate during the lease term. The Company accounts for rental expense on a straight-line basis over the lease term. The Company records the difference between the straight-line expense and the actual amounts paid under the lease as deferred rent in the accompanying consolidated balance sheets.
IZEA, Inc.
Notes to the Unaudited Consolidated Financial Statements
Income Taxes
The Company has not recorded federal income tax expense due to the generation of net operating losses. Deferred income taxes are accounted for using the balance sheet approach which requires recognition of deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized. The Company incurs minimal state franchise tax in two states which is included in general and administrative expenses in the consolidated statements of operations.
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 2012, 2013 and 2014.
Derivative Financial Instruments
Derivative financial instruments are defined as financial instruments or other contracts that contain a notional amount and one or more underlying factors (e.g., interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. The Company accounts for derivative instruments in accordance with ASC 815,
Derivatives and Hedging
(“ASC 815”), which requires additional disclosures about the Company’s 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. The Company does 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 fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.
Fair Value of Financial Instruments
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:
|
|
•
|
Level 1
–
Valuation based on quoted market prices in active markets for identical assets and liabilities.
|
|
|
•
|
Level 2
–
Valuation based on quoted market prices for similar assets and liabilities in active markets.
|
|
|
•
|
Level 3
–
Valuation based on unobservable inputs that are supported by little or no market activity, therefore requiring management’s best estimate of what market participants would use as fair value.
|
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The Company does not have any Level 1 or 2 financial assets or liabilities. The Company’s Level 3 financial liabilities measured at fair value consisted of its acquisition cost liability (see Note 2) and a warrant liability (see Note 3) as of
March 31, 2016
. Significant unobservable inputs used in the fair value measurement of the warrants include the estimated term and risk-adjusted interest rates. In developing our credit risk assumption used in the fair value of warrants, consideration was made of publicly available bond rates and US Treasury Yields. However, since the Company does not have a formal credit-standing, management estimated its standing among various reported levels and grades for use in the model. During all periods, management estimated that the Company's standing was in the speculative to high-risk grades (BB- to CCC in the Standard and Poor's Rating). Significant increases or decreases in the estimated remaining period to exercise or the risk-adjusted interest rate could result in a significantly lower or higher fair value measurement.
The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash and cash equivalents, accounts receivable, accounts
IZEA, Inc.
Notes to the Unaudited Consolidated Financial Statements
payable, unearned revenue and accrued expenses. Unless otherwise disclosed, the fair value of the Company’s capital lease obligations approximate their carrying value based upon current rates available to the Company.
Stock-Based Compensation
Stock-based compensation cost related to stock options granted under the May 2011 Equity Incentive Plan and August 2011 B Equity Incentive Plan (together, the "2011 Equity Incentive Plans") (see Note 5) is measured at the grant date, based on the fair value of the award, and is recognized as a straight-lined expense over the employee’s requisite service period. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The Company estimates the fair value of its common stock using the closing stock price of its common stock on the date of the option award. The Company estimates the volatility of its 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 itself. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses 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. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The Company used the following assumptions for options granted under the 2011 Equity Incentive Plans during the
three months
ended
March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
2011 Equity Incentive Plans Assumptions
|
|
|
March 31,
2016
|
|
March 31,
2015
|
Expected term
|
|
|
6 years
|
|
6 years
|
Weighted average volatility
|
|
|
52.68%
|
|
54.00%
|
Weighted average risk free interest rate
|
|
|
1.62%
|
|
1.50%
|
Expected dividends
|
|
|
—
|
|
—
|
The Company estimates 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. Average expected forfeiture rates were
10.41%
and
13.93%
during the
three months
ended
March 31, 2016
and
2015
, respectively.
Non-Employee Stock-Based Payments
The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505,
“Equity-Based Payments to Non-Employees.”
The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. The fair value of equity instruments issued to consultants that vest immediately is expensed when issued. The fair value of equity instruments issued to consultants that have future vesting and are subject to forfeiture if performance does not occur is recognized as expense over the vesting period. Fair values for the unvested portion of issued instruments are adjusted each reporting period. The change in fair value is recorded to additional paid-in capital. Stock-based payments related to non-employees is accounted for based on the fair value of the related stock or the fair value of the services, whichever is more readily determinable.
Segment Information
The Company does not identify separate operating segments for management reporting purposes. The results of consolidated operations are the basis on which management evaluates operations and makes business decisions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
There are new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") which are not yet effective.
IZEA, Inc.
Notes to the Unaudited Consolidated Financial Statements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard in the first quarter of 2018.
In March 2016, the FASB issued ASU 2016-08, "
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
." The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and transition of ASU 2014-09 stated above.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
(“ASU 2016-10”). ASU 2016-10 is intended to reduce the cost and complexity of applying the guidance in the FASB's new revenue standard on identifying performance obligations, and is also intended to improve the operability and understandability of the licensing implementation guidance. The effective date for ASU 2016-10 is the same as for ASU 2014-09, which will be the first quarter of 2018.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.
NOTE 2. PURCHASE ACQUISITION
Purchase Price and Acquisition Costs Payable
On January 30, 2015, the Company purchased all of the outstanding shares of capital stock of Ebyline, pursuant to the terms of a Stock Purchase Agreement, dated as of January 27, 2015, by and among IZEA, Ebyline and the stockholders of Ebyline for a maximum purchase price to be paid over the next
three years
of
$8,850,000
.
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Gross Purchase Consideration
|
Initial Present and Fair Value
|
Remaining Present and Fair Value
|
|
1/30/2015
|
1/30/2015
|
3/31/2016
|
Cash paid at closing
|
$
|
1,200,000
|
|
$
|
1,200,000
|
|
$
|
—
|
|
Guaranteed purchase price (a)
|
2,127,064
|
|
1,982,639
|
|
900,492
|
|
Contingent performance payments (b)
|
2,210,000
|
|
1,834,300
|
|
—
|
|
Acquisition costs to be paid by Ebyline shareholders (c)
|
—
|
|
—
|
|
—
|
|
Total estimated consideration
|
$
|
5,537,064
|
|
$
|
5,016,939
|
|
$
|
900,492
|
|
|
|
|
|
Current portion of acquisition costs payable
|
|
|
900,492
|
|
Long term portion of acquisition costs payable
|
|
|
—
|
|
Total acquisition costs payable
|
|
|
$
|
900,492
|
|
IZEA, Inc.
Notes to the Unaudited Consolidated Financial Statements
|
|
(a)
|
The Stock Purchase Agreement required a
$1,200,000
cash payment at closing, a
$250,000
stock payment on July 30, 2015 and a cash or stock payment of up to an additional
$1,900,000
(
subject to proportional reduction in the event Ebyline’s final 2014 revenue was below $8,000,000
). Ebyline's final gross revenue for 2014 was
$7,903,429
. As such, the additional amount owed became
$1,877,064
to be paid in two equal installments of
$938,532
on January 30, 2016 and January 30, 2017. This guaranteed purchase price consideration was discounted to present value using our current
borrowing rate of prime plus 2% (5.25%)
. Interest expense imputed on the acquisition costs payable in the accompanying consolidated statements of operations was
$15,313
and
$15,138
for the
three months
ended
March 31, 2016
and
2015
, respectively. Per the Stock Purchase Agreement, the Company issued
31,821
shares of its common stock valued at
$250,000
to satisfy a portion of the guaranteed purchase price payment obligation on July 30, 2015. On January 29, 2016, the Company issued
114,398
shares of common stock valued at
$848,832
to satisfy the annual installment payment of
$938,532
less
$89,700
in closing related expenses (see item (c) below).
|
|
|
(b)
|
Total contingent performance payments up to
$5,500,000
are to be paid based on Ebyline meeting certain revenue targets. 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. The fair value of the
$5,500,000
of contingent performance payments was calculated using a Monte-Carlo simulation to simulate revenue over the next three years. Since the contingent consideration has an option like structure, a risk-neutral framework is considered appropriate for the valuation. The Company started with a risk-adjusted measure of forecasted revenue (using a risk-adjusted discount rate of
8.5%
) and assumed it will follow geometric brownian motion to simulate the revenue at future dates. Once the initial revenue was estimated based off of projections made during the acquisition, payout was calculated for each year and present valued to incorporate the credit risk associated with these payments. The Company's initial value conclusion was based on the average payment from
100,000
simulation trials. The volatility used for the simulation was
35%
. The Monte Carlo simulation resulted in a calculated fair value of contingent performance payments of
$2,210,000
on
January 30, 2015
. Because the contingent performance payments are subject to a
17%
reduction related to the continued employment of certain key employees, ASC 805-10-55-25 indicates that a portion of these payments be treated as potential compensation to be accrued over the term rather than allocated to the purchase price. Therefore, the Company reduced its overall purchase price consideration by
$357,700
and recorded the initial present value of the contingent performance payments at
$1,834,300
. Based on actual results for 2015 and current projections for Content Revenue for 2016-2017, the Content Revenue for every year is expected to be below 90% of the required Content Revenues targets. Therefore, the Company reduced the fair value of contingent performance payments to zero by the end of 2015. The gain as a result of the decrease in the estimated fair value of contingent performance payments was recorded as a reduction of general and administrative expense in the Company's consolidated statement of operations during the year ended
December 31, 2015
.
|
|
|
(c)
|
According to the stock purchase agreement,
$89,700
in closing related expenses paid by Ebyline during the acquisition process are to be paid by the selling shareholders. These costs were deducted from the guaranteed payment on January 30, 2016.
|
Purchase Price Allocation
The final allocation of the purchase price as of January 30, 2015 is summarized as follows:
|
|
|
|
|
|
Final Purchase Price Allocation
|
Current assets
|
$
|
738,279
|
|
Property and equipment
|
27,194
|
|
Identifiable intangible assets
|
2,370,000
|
|
Goodwill
|
2,468,289
|
|
Security deposits
|
18,553
|
|
Current liabilities
|
(605,376
|
)
|
Total estimated consideration
|
$
|
5,016,939
|
|
There are many synergies between the business operations of Ebyline and IZEA including a database of creators that can provide content and advertising and synergies between our online marketplaces that appeal to customers on both sides. The Ebyline operations are included in the consolidated financial statements beginning on the date of acquisition of January 30, 2015. The Ebyline operations contributed revenue of
$2,493,507
and gross profit of
$485,793
in the consolidated statement of operations
IZEA, Inc.
Notes to the Unaudited Consolidated Financial Statements
for the
three months
ended
March 31, 2016
and revenue of
$1,368,607
and gross profit of
$135,406
in the consolidated statement of operations during the two months from January 31, 2015 through
March 31, 2015
.
The following unaudited pro forma summary presents consolidated information of IZEA, Inc. as if the business combination with Ebyline had occurred on January 1, 2014:
|
|
|
|
|
|
Proforma
|
|
Three Months Ended
|
|
3/31/2015
|
Pro-Forma Revenue
|
$
|
4,845,608
|
|
Pro-Forma Cost of Sales
|
3,091,637
|
|
Pro-Forma Gross Profit
|
1,753,971
|
|
Pro-Forma Net Loss
|
(4,371,577
|
)
|
IZEA did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The pro forma revenue and earnings calculations have been calculated after applying the Company's accounting policies on revenue recognition and adjusting the results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied from January 1, 2014. The Company incurred
$77,406
in acquisition-related costs which are included in general and administrative expense on the Company's consolidated statement of operations for the
three months
ended
March 31, 2015
. These costs are reflected in pro forma earnings for the
three months
ended
March 31, 2015
.
NOTE 3. DERIVATIVE FINANCIAL INSTRUMENTS
The Company evaluates its warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon registration of the shares, changes in price-based anti-dilution adjustments, conversion or exercise, as applicable, of a derivative instrument, the instrument is marked to fair value at the date of the occurrence of the event and then that fair value is reclassified to equity.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Instruments that are initially classified as equity that become subject to reclassification are reclassified to a liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months after the balance sheet date.
The following table summarizes the Company's activity and fair value calculations of its derivative warrants for the year ended
December 31, 2015
and
three months
ended
March 31, 2016
:
|
|
|
|
|
|
|
|
Linked Common
Shares to
Derivative Warrants
|
Warrant
Liability
|
Balance, December 31, 2014
|
1,795,564
|
|
$
|
3,203,465
|
|
Exercise of warrants for common stock
|
(1,392,832
|
)
|
(5,348,408
|
)
|
Loss on exchange of warrants
|
—
|
|
1,197,821
|
|
Reclassification of fair value of 2014 Private Placement warrants to equity
|
(396,536
|
)
|
(1,181,638
|
)
|
Change in fair value of derivatives
|
—
|
|
2,133,820
|
|
Balance, December 31, 2015
|
6,196
|
|
5,060
|
|
Change in fair value of derivatives
|
—
|
|
(2,852
|
)
|
Balance, March 31, 2016
|
6,196
|
|
$
|
2,208
|
|
The Company's warrants were valued on the applicable dates using a Binomial Lattice Option Valuation Technique (“Binomial”). Significant inputs into this technique as of
December 31, 2015
and
March 31, 2016
were as follows:
|
|
|
|
Binomial Assumptions
|
December 31,
2015
|
March 31,
2016
|
Fair market value of asset
(1)
|
$7.66
|
$7.14
|
Exercise price
|
$25.00
|
$25.00
|
Term
(2)
|
1.7 years
|
1.4 years
|
Implied expected life
(3)
|
1.7 years
|
1.4 years
|
Volatility range of inputs
(4)
|
83.00%
|
75.07%
|
Equivalent volatility
(3)
|
83.00%
|
75.07%
|
Risk-free interest rate range of inputs
(5)
|
1.06%
|
0.59%
|
Equivalent risk-free interest rate
(3)
|
1.06%
|
0.59%
|
(1) The fair market value of the asset was determined by using the Company's closing stock price as reflected in the OTCQB for the period ended December 31, 2015 and the Nasdaq Capital Market for the period ended March 31, 2016.
(2) The term is the contractual remaining term, allocated among twelve equal intervals for purposes of calculating other inputs, such as volatility and risk-free rate.
(3) The implied expected life, and equivalent volatility and risk-free interest rate amounts are derived from the binomial.
(4) The Company does not have a market trading history upon which to base its forward-looking volatility. Accordingly, the Company selected peer companies that provided a reasonable basis upon which to calculate volatility for each of the intervals described in (2), above.
(5) The risk-free rates used for inputs represent the yields on zero coupon U.S. Government Securities with periods to maturity consistent with the intervals described in (2), above.
NOTE 4. COMMITMENTS & CONTINGENCIES
Litigation
From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is, however, subject to inherent uncertainties, and an adverse result in these or other matters may harm the Company's business. The Company is currently not aware of any legal proceedings or claims that it believes would or could have, individually or in the aggregate, a material adverse effect on its operations or financial position.
NOTE 5. STOCKHOLDERS' EQUITY
Authorized Shares
The Company has
200,000,000
authorized shares of common stock and
10,000,000
authorized shares of preferred stock, each with a par value of
$0.0001
per share.
Reverse Stock Split
On January 6, 2016, the Company filed a Certificate of Amendment with the Secretary of State of Nevada to effect a reverse stock split of the issued and outstanding shares of its common stock at a
ratio of one share for every 20 shares outstanding
prior to the effective date of the reverse stock split. All current and historical information contained herein related to the share and per share information for the Company's common stock or stock equivalents reflects the 1-for-20 reverse stock split of the Company's outstanding shares of common stock that became market effective on January 11, 2016. There was no change in the number of the Company's authorized shares of common stock.
Nasdaq Uplisting
On January 25, 2016, the Company filed a registration statement on Form 8-A to register its securities pursuant to Section 12(b) of the Exchange Act. Thereafter, on January 26, 2016, the Company's shares of common stock commenced trading on the Nasdaq Capital Market under the symbol IZEA. Prior thereto, the Company's common stock was quoted on the OTCQB marketplace under the same symbol.
Stock Issued for Purchases
On January 29, 2016, we issued
114,398
shares of common stock valued at
$848,832
to the former Ebyline stockholders as settlement of our annual installment payment of
$938,532
less
$89,700
in closing related expenses owed as part of our January 2015 Stock Purchase Agreement.
Stock Issued for Services
The Company issued
4,055
shares of common stock valued at
$31,250
to five directors for their service as directors of the Company during the
three months
ended
March 31, 2016
.
Total expense recognized for stock-based payments for services during the
three months
ended
March 31, 2016
and
2015
was
$31,250
and
$27,450
, respectively, all of which is included in general and administrative expense in the consolidated statements of operations. The fair value of the services is based on the value of the Company's common stock over the term of service.
Warrant Transactions
Warrant Issuances:
On January 22, 2015, the Company issued a warrant to purchase
5,000
shares of its common stock to an investor relations consultant. The warrant was fully vested on the date of issuance, has an exercise price of
$10.20
per share and expires on January 22, 2020. The fair value of the warrant upon issuance was
$7,700
and the Company received
$100
as compensation for the warrant. The fair value of the warrant issuance was recorded as an increase in additional paid-in capital in the Company's consolidated balance sheet and the net
$7,600
compensation expense was recorded in general and administrative expense during the
three months
ended
March 31, 2015
.
Stock Options
In May 2011, the Board of Directors adopted the 2011 Equity Incentive Plan of IZEA, Inc. (the “May 2011 Plan”). The May 2011 Plan allows the Company to grant options to purchase up to
1,000,000
shares as an incentive for its employees and consultants. As of
March 31, 2016
, the Company had
144,445
shares of common stock available for future grants under the May 2011 Plan.
On August 22, 2011, the Company adopted the 2011 B Equity Incentive Plan (the “August 2011 Plan”) reserving for issuance an aggregate of
4,375
shares of common stock under the August 2011 Plan. As of
March 31, 2016
, the Company had
no
shares of common stock available for future grants under the August 2011 Plan.
Under both the May 2011 Plan and the August 2011 Plan (together, the "2011 Equity Incentive Plans"), the Board of Directors determines the exercise price to be paid for the shares, the period within which each option may be exercised, and the terms and conditions of each option. The exercise price of the incentive and non-qualified stock options may not be less than
100%
of the fair market value per share of the Company’s common stock on the grant date. If an individual owns stock representing more than
10%
of the outstanding shares, the price of each share of an incentive stock option must be equal to or exceed
110%
of fair market value. Unless otherwise determined by the Board of Directors at the time of grant, the right to purchase shares covered by any options under the 2011 Equity Incentive Plans typically vest on a straight-line basis over the requisite service period as follows:
25%
of options shall vest one year from the date of grant and the remaining options shall vest monthly, in equal increments over the following
three years
. The term of the options is up to
ten years
. The Company issues new shares to the optionee for any stock awards or options exercised pursuant to its equity incentive plans.
A summary of option activity under the 2011 Equity Incentive Plans for the year ended
December 31, 2015
and
three months
ended
March 31, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
Common Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Life
(Years)
|
Outstanding at December 31, 2014
|
595,786
|
|
|
$
|
9.20
|
|
|
6.5
|
Granted
|
277,059
|
|
|
7.43
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
Forfeited
|
(42,246
|
)
|
|
7.70
|
|
|
|
Outstanding at December 31, 2015
|
830,599
|
|
|
$
|
8.65
|
|
|
6.8
|
Granted
|
38,535
|
|
|
7.33
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
Forfeited
|
(9,329
|
)
|
|
7.90
|
|
|
|
Outstanding at March 31, 2016
|
859,805
|
|
|
$
|
8.60
|
|
|
6.7
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
420,491
|
|
|
$
|
10.08
|
|
|
6.0
|
During the
three months
ended
March 31, 2016
and
2015
, no options were exercised. The fair value of our common stock on
March 31, 2016
was
$7.14
per share. The intrinsic value on outstanding options as of
March 31, 2016
was
$835,350
. The intrinsic value on exercisable options as of
March 31, 2016
was
$579,371
.
A summary of the nonvested stock option activity under the 2011 Equity Incentive Plans for the year ended
December 31, 2015
and
three months
ended
March 31, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
|
Nonvested Options
|
Common Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Weighted Average
Remaining Years
to Vest
|
Nonvested at December 31, 2014
|
372,092
|
|
|
$
|
4.00
|
|
|
3.0
|
Granted
|
277,059
|
|
|
3.84
|
|
|
|
Vested
|
(147,759
|
)
|
|
4.32
|
|
|
|
Forfeited
|
(39,466
|
)
|
|
3.44
|
|
|
|
Nonvested at December 31, 2015
|
461,926
|
|
|
$
|
3.84
|
|
|
2.8
|
Granted
|
38,535
|
|
|
3.68
|
|
|
|
Vested
|
(52,121
|
)
|
|
4.24
|
|
|
|
Forfeited
|
(9,026
|
)
|
|
4.00
|
|
|
|
Nonvested at March 31, 2016
|
439,314
|
|
|
$
|
3.76
|
|
|
2.8
|
Stock-based compensation cost related to stock options granted under the 2011 Equity Incentive Plans 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. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes option-pricing model that uses the assumptions stated in Note 1. Total stock-based compensation expense recognized on awards outstanding during the
three months
ended
March 31, 2016
and
2015
was
$204,972
and
$142,331
, respectively. Stock-based compensation expense was recorded as
$20,268
to sales and marketing and
$184,704
to general and administrative expense in the Company's consolidated statement of operations during the
three months
ended
March 31, 2016
. Stock-based compensation expense was recorded as
$0
to sales and marketing and
$142,331
to general and administrative expense in the Company's consolidated statement of operations during the
three months
ended
March 31, 2015
. Future compensation related to nonvested awards expected to vest of
$1,558,403
is estimated to be recognized over the weighted-average vesting period of approximately
three years
.
Employee Stock Purchase Plan
On April 16, 2014, stockholders holding a majority of the Company's outstanding shares of common stock, upon previous recommendation and approval of the Board of Directors, adopted the IZEA, Inc. 2014 Employee Stock Purchase Plan (the “ESPP”) and reserved
75,000
shares of the Company's common stock for issuance thereunder. Any employee regularly employed by the Company for
90 days
or more on a full-time or part-time basis (
20
hours or more per week on a regular schedule) is eligible to participate in the ESPP. The ESPP operates in successive six month offering periods commencing at the beginning of each fiscal
year half. Each eligible employee who elects to participate may purchase up to
10%
of their annual compensation in common stock not to exceed
$21,250
annually or
1,000
shares per offering period. The purchase price will be the lower of (i)
85%
of the fair market value of a share of common stock on the first trading day of the offering period or (ii)
85%
of the fair market value of a share of common stock on the last trading day of the offering period. The ESPP will continue until January 1, 2024, unless otherwise terminated by the Board. As of
March 31, 2016
, the Company had
61,215
remaining shares of common stock available for future grants under the ESPP.
NOTE 6. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing the net income or loss by the basic weighted-average number of shares of common stock outstanding during each period presented. Diluted earnings per share is computed by dividing the net income or loss by the total of the basic weighted-average number of shares of common stock outstanding plus the additional dilutive securities that could be exercised or converted into common shares during each period presented less the amount of shares that could be repurchased using the proceeds from the exercises.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
2016
|
|
March 31,
2015
|
Net loss
|
|
$
|
(2,592,620
|
)
|
|
$
|
(4,270,912
|
)
|
Weighted average shares outstanding - basic and diluted
|
|
5,300,520
|
|
|
2,884,883
|
|
Basic and diluted loss per common share
|
|
$
|
(0.49
|
)
|
|
$
|
(1.48
|
)
|
The Company excluded the following weighted average items from the above computation of diluted loss per common share as their effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2016
|
|
March 31,
2015
|
Stock options
|
|
|
841,911
|
|
|
636,992
|
|
Warrants
|
|
|
534,653
|
|
|
2,700,971
|
|
Restricted stock units
|
|
|
—
|
|
|
85,417
|
|
Total excluded shares
|
|
|
1,376,564
|
|
|
3,423,380
|
|
ITEM 2 – 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,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements. Such statements are based on currently available operating, financial and competitive information, and are subject to various risks and uncertainties. Future events and our actual results may differ materially from the results reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to raise additional funding, our ability to maintain and grow our business, variability of operating results, our ability to maintain and enhance our brand, our 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 clients, our ability to protect our intellectual property, the potential liability with respect to actions taken by our existing and past employees, risks associated with international sales, and other risks described herein and in our other filings with the SEC.
All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements, 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 History
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. We are headquartered near Orlando, Florida with additional offices in Chicago, Los Angeles and Toronto and a sales presence in New York, Detroit and Boston.
Company Overview
IZEA operates online marketplaces that facilitate transactions between brands and influential content creators. These creators produce and distribute text, videos and photos on behalf of brands through websites, blogs and social media channels. Our technology enables transactions to be completed at scale through the management of 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 moms to celebrities the opportunity to monetize their content, creativity and influence. Advertisers benefit from buzz, traffic, awareness and sales, and creators earn cash compensation in exchange for their work and promotion.
On January 30, 2015, we purchased all of the outstanding shares of capital stock of Ebyline. Based in Los Angeles, California, Ebyline operates an online marketplace that enables publishers to access a network of over 15,000 content creators ranging from writers to illustrators in 84 countries. Over 2,000 fully vetted individuals in the Ebyline network have professional journalism credentials with backgrounds at well-known media outlets. Ebyline’s proprietary workflow is utilized by leading media organizations to obtain the content they need from professional content creators. In addition to publishers, Ebyline is leveraged by brands to produce custom branded content for use on their owned and operated sites, as well as third party content marketing and native advertising efforts.
We derive revenue from three sources: revenue from an advertiser when it pays for a social media publisher or influencer such as a blogger or tweeter ("creators") to share sponsored content with their social network audience ("Sponsored Revenue"), revenue when a publisher or company purchases custom branded content for use on its owned and operated sites, as well as third party content marketing and native advertising efforts ("Content Revenue") and revenue derived from various service and license fees charged to users of our platforms ("Service Fee Revenue").
We operate the Ebyline online marketplace and our own online marketplace that connects brands with creators at IZEA.com as well as other white label marketplaces. IZEA.com and all white label sites are powered by the IZEA Exchange (“
IZEAx
”), a platform that handles content workflow, creator search and targeting, bidding, analytics and payment processing.
IZEAx
is designed to provide a unified ecosystem that enables the creation of multiple types of content including blog posts, status updates, videos and photos through a wide variety of social channels including blogs, Twitter, Facebook, Instagram and Tumblr, among others.
Results of Operations for the
Three Months Ended
March 31, 2016
Compared to the
Three Months Ended
March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2016
|
|
March 31,
2015
|
|
$ Change
|
|
% Change
|
Revenue
|
$
|
5,465,950
|
|
|
$
|
4,135,494
|
|
|
$
|
1,330,456
|
|
|
32.2
|
%
|
Cost of sales
|
3,101,369
|
|
|
2,441,491
|
|
|
659,878
|
|
|
27.0
|
%
|
Gross profit
|
2,364,581
|
|
|
1,694,003
|
|
|
670,578
|
|
|
39.6
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
General and administrative
|
2,580,001
|
|
|
1,860,514
|
|
|
719,487
|
|
|
38.7
|
%
|
Sales and marketing
|
2,359,663
|
|
|
1,581,487
|
|
|
778,176
|
|
|
49.2
|
%
|
Total operating expenses
|
4,939,664
|
|
|
3,442,001
|
|
|
1,497,663
|
|
|
43.5
|
%
|
Loss from operations
|
(2,575,083
|
)
|
|
(1,747,998
|
)
|
|
(827,085
|
)
|
|
(47.3
|
)%
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest expense
|
(21,339
|
)
|
|
(18,770
|
)
|
|
(2,569
|
)
|
|
13.7
|
%
|
Change in fair value of derivatives, net
|
2,852
|
|
|
(2,505,951
|
)
|
|
2,508,803
|
|
|
(100.1
|
)%
|
Other income, net
|
950
|
|
|
1,807
|
|
|
(857
|
)
|
|
(47.4
|
)%
|
Total other income (expense), net
|
(17,537
|
)
|
|
(2,522,914
|
)
|
|
2,505,377
|
|
|
99.3
|
%
|
Net loss
|
$
|
(2,592,620
|
)
|
|
$
|
(4,270,912
|
)
|
|
$
|
1,678,292
|
|
|
39.3
|
%
|
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we consider certain financial measures that are not prepared in accordance with GAAP, including Adjusted EBITDA. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
We believe that Adjusted EBITDA provides useful information to investors as it excludes transactions not related to the core cash operating business activities including non-cash transactions. 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 EBITDA in the same manner, and Adjusted EBITDA as presented by IZEA may not be comparable to EBITDA presented by other companies. IZEA defines Adjusted EBITDA as earnings or loss before interest, taxes, depreciation and amortization, non-cash stock related compensation, gain or loss on asset disposals or impairment, changes in contingent acquisition costs, and all other income and expense items such as loss on exchanges and changes in fair value of derivatives, if applicable.
|
|
|
|
|
|
|
|
|
Reconciliation of Net Loss to Adjusted EBITDA:
|
Three Months Ended
|
|
March 31,
2016
|
|
March 31,
2015
|
Net loss
|
$
|
(2,592,620
|
)
|
|
$
|
(4,270,912
|
)
|
Non-cash stock-based compensation
|
204,972
|
|
|
142,331
|
|
Non-cash stock issued for payment of services
|
31,250
|
|
|
35,050
|
|
Change in the fair value of derivatives
|
(2,852
|
)
|
|
2,505,951
|
|
Interest expense
|
21,339
|
|
|
18,770
|
|
Depreciation and amortization
|
296,297
|
|
|
174,296
|
|
Adjusted EBITDA
|
$
|
(2,041,614
|
)
|
|
$
|
(1,394,514
|
)
|
Revenues
The following table breaks down our approximate revenue, cost of sales and gross profit by revenue stream for the
three months
ended
March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2016
|
March 31,
2016
|
|
March 31,
2015
|
March 31,
2015
|
Revenue & % of Total
|
|
|
|
|
|
Sponsored Revenue
|
$
|
2,895,000
|
|
53
|
%
|
|
$
|
2,735,000
|
|
66
|
%
|
Content Revenue
|
2,488,000
|
|
45
|
%
|
|
1,365,000
|
|
33
|
%
|
Service Fees & Other Revenue
|
83,000
|
|
2
|
%
|
|
35,000
|
|
1
|
%
|
Total Revenue
|
$
|
5,466,000
|
|
100
|
%
|
|
$
|
4,135,000
|
|
100
|
%
|
|
|
|
|
|
|
Cost of Sales & % of Total
|
|
|
|
|
|
Sponsored COS
|
$
|
1,094,000
|
|
35
|
%
|
|
$
|
1,208,000
|
|
49
|
%
|
Content COS
|
2,007,000
|
|
65
|
%
|
|
1,233,000
|
|
51
|
%
|
Service Fees & Other COS
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
Total Cost of Sales
|
$
|
3,101,000
|
|
100
|
%
|
|
$
|
2,441,000
|
|
100
|
%
|
|
|
|
|
|
|
Gross Profit & Profit %
|
|
|
|
|
|
Sponsored Revenue
|
$
|
1,801,000
|
|
62
|
%
|
|
$
|
1,527,000
|
|
56
|
%
|
Content Revenue
|
481,000
|
|
19
|
%
|
|
132,000
|
|
10
|
%
|
Service Fees & Other Revenue
|
83,000
|
|
100
|
%
|
|
35,000
|
|
100
|
%
|
Total Profit
|
$
|
2,365,000
|
|
43
|
%
|
|
$
|
1,694,000
|
|
41
|
%
|
Revenues for the
three months
ended
March 31, 2016
increased
by
$1,330,456
, or
32%
, compared to the same period in
2015
. Sponsored Revenue
increased
$160,000
, Content Revenue
increased
$1,123,000
and Service Fee Revenue
increased
$48,000
during the
three months
ended
March 31, 2016
compared to the same period in
2015
. Sponsored Revenue
increased
primarily due to to our larger sales force, concentrated sales efforts toward larger IZEA managed campaigns rather than smaller advertiser self-service campaigns and generating repeat business from existing customers. Content Revenue
increased
due to the same reasons as Sponsored Revenue and also because there were three full months of revenue reported in 2016 compared to only two months in 2015 as a result of the Ebyline acquisition on January 30, 2015. Service Fee Revenue
increased
in the
three months
ended
March 31, 2016
due to more licensing fees generated from the white-label partners in
IZEAx
.
Our net bookings of $7.4 million for the
three months
ended
March 31, 2016
were 71% higher than the net bookings of $4.3 million for the
three months
ended
March 31, 2015
. Net bookings is a measure of sales orders minus any cancellations or refunds in a given period. Management uses net bookings as a leading indicator of future revenue recognition as revenue is recognized on average within 120 days of booking, though larger contracts may be recognized over twelve months from the original booking date. We experienced higher bookings as a result of the Ebyline acquisition, new customers, larger IZEA managed campaigns and an increase in repeat clients. These bookings are expected to continue to translate into higher revenue in 2016 as compared to 2015.
Cost of Sales and Gross Profit
Our cost of sales is comprised primarily of amounts paid to our content creators to provide content or advertising services through the pushing of sponsored content through a blog post, tweet, click or action.
Cost of sales for the
three months
ended
March 31, 2016
increased
by
$659,878
, or
27.0%
, compared to the same period in
2015
. The increase in cost of sales proportionally increased primarily due to the increase in our sales.
Gross profit for the
three months
ended
March 31, 2016
increased
by
$670,578
, or
39.6%
, compared to the same period in
2015
. Our gross profit as a percentage of revenue increased from
41%
for the
three months
ended
March 31, 2015
to
43%
for the same period in
2016
. Sponsored Revenue gross margin was
62%
and Content Revenue was
19%
for the
three months
ended
March 31, 2016
.
The gross profit increase was primarily attributable to increased use of our managed services versus self-service content and sponsored social offerings. 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 improvement in the Content Revenue margins. The mix of sales between our higher margin Sponsored Revenue and our lower margin Content Revenue (particularly the self-service workflow portion of this revenue) has a significant affect on our overall gross profit percentage.
For the
three months
ended
March 31, 2016
, managed services were
31.5%
of Content Revenue compared to
9.0%
for the
three months
ended
March 31, 2015
. Additionally, the margins on the managed portion of Content Revenue increased by twelve percentage points for the
three months
ended
March 31, 2016
as we incorporated our standard pricing guidelines into new bookings that were closed in fourth quarter of fiscal 2015.
Operating Expenses
Operating expenses consist of general and administrative expenses and sales and marketing expenses. Total operating expenses for the
three months
ended
March 31, 2016
increased
by
$1,497,663
, or
43.5%
, compared to the same period in
2015
. The increase was primarily attributable to increased personnel costs and additional overhead resulting from increased personnel.
General and administrative expenses consist primarily of administrative and engineering personnel costs, general operating costs, public company costs, including non-cash stock compensation, facilities costs, insurance, depreciation, professional fees, and investor relations costs. General and administrative expense for the
three months
ended
March 31, 2016
increased
by
$719,487
, or
38.7%
, compared to the same period in
2015
. The increase was primarily attributable to a $354,000 increase in personnel costs, a $50,000 increase in variable costs related to personnel such as software and subscription costs, communication, travel and supply costs. These costs increased as a result of an increase in the average number of our administrative and engineering personnel by 33% since the prior year period along with increased costs for those personnel. Increased personnel costs are expected to continue in 2016 due to planned growth in the total number of administrative and engineering personnel needed to handle our growing organization. The increase in general and administrative expenses is also attributable to a $122,000 increase in depreciation and amortization expense as a result of the amortization of software development costs for
IZEA Exchange
(
IZEAx
) and the Ebyline intangible assets acquired; a $74,000 increase in contractor expense for outsourced engineering and finance projects; a $42,000 increase in stock compensation; a $37,000 increase in public company related expenditures as a result of initial listing fees and expenses related to our up-listing to the Nasdaq Capital Market in February 2016; and a $31,000 increase in rent for our facilities and an additional office in Canada.
Sales and marketing expenses consist primarily personnel costs related to those who support sales and marketing efforts, promotional and advertising costs and trade show expenses. Sales and marketing expenses for the
three months
ended
March 31, 2016
increased
by
$778,176
or
49.2%
, compared to the same period in
2015
. The increase was primarily attributable to a $652,000 increase in personnel costs and a $128,000 increase in variable costs related to personnel such as software and subscription costs, communication, travel and supply costs. These increases are the result of a 20% increase in the number of our sales and marketing personnel since the prior year along with a $140,000 increase in commission expense as a result of the increase in customer bookings. Travel costs included in the variable costs increased by 50% as a result of increased training and corporate events during the first quarter of 2016.
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
three months
ended
March 31, 2016
increased
by
$2,569
to
$21,339
compared to the same period in
2015
primarily due to the imputed interest on the acquisition costs payable.
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 a gain of
$2,852
and a loss of
$2,505,951
resulting from the increase (decrease) in the fair value of certain warrants during the
three months
ended
March 31, 2016
and
2015
, respectively. We have no control over the amount of change in the fair value of our derivative instruments as this is a factor based on fluctuating interest rates and stock prices and other market conditions outside of our control. Due to the large exercise of Warrants in August 2015 resulting in less remaining warrants requiring valuation in the future, we believe
that these fluctuations will significantly decrease in future periods and will be substantially different from the amounts recorded during 2015. As of
March 31, 2016
, we have warrants to purchase
6,196
shares that are required to be fair valued each period. When the price of our stock decreases, it causes the fair value of our warrant liability in our consolidated balance sheets to decrease creating a gain from the change in fair value in our consolidated statement of operations. Alternatively, when the price of our stock increases, it causes the fair value of our warrant liability to increase causing a loss from the change in fair value.
Net Loss
Net loss for the
three months
ended
March 31, 2016
was
$2,592,620
, which decreased from a net loss of
$4,270,912
for the same period in
2015
. The reduction in net income was primarily the result of the increase in operating expenses and the change in the fair value of derivative financial instruments as discussed above.
Liquidity and Capital Resources
We had cash and cash equivalents of
$10,064,454
as of
March 31, 2016
as compared to
$11,608,452
as of
December 31, 2015
, a decrease of
$1,543,998
primarily as a result of funding of our operating losses. We have incurred significant net losses and negative cash flow from operations since our inception which has resulted in a total accumulated deficit of
$36,842,141
as of
March 31, 2016
. To date, we have financed our operations through internally generated revenue from operations and the sale and exercise of our equity securities.
Cash used for operating activities was
$1,405,201
during the
three months
ended
March 31, 2016
and was primarily a result of our loss from operations during the period of
$2,575,083
. Cash used for investing activities was
$127,884
during the
three months
ended
March 31, 2016
due primarily to purchases of computer and office equipment for our expanding staff and development of our proprietary software. Cash used in financing activities was
$10,913
during the
three months
ended
March 31, 2016
and was the result of expenses on the issuance of shares and principal payments on our capital lease obligations.
On January 30, 2015, we purchased all of the outstanding shares of capital stock of Ebyline. The aggregate consideration payable by us was to be an amount up to $8,850,000, including a cash payment at closing of $1,200,000, a stock issuance valued at $250,000 paid on July 30, 2015, $1,877,064 in two equal installments of $938,532 on the first 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. If Ebyline achieves at least 90%, but less than 100% of the Content Revenue targets, the performance payments owed of $1,800,000, $1,800,000 and $1,900,000 for each of the three years ending December 31, 2015, 2016 and 2017, respectively, will be subject to adjustment. Anything below 90% of the Content Revenue targets will not be eligible for any performance payment.
Content Revenue was $7,978,000 from February-December 2015 after our acquisition and it was $708,000 in January 2015 prior to our acquisition. Additionally, there were approximately $26,000 in subscription fees for Ebyline platform services during 2015 resulting in total Content Revenue of $8,712,000 or 51% of the 2015 Content Revenue Target. Based on the actual results for 2015 and our current projections for 2016-2017, we do not believe that these targets will be met within each of the respective years. As a result, we do not believe that we will be required to make any of the $5,500,000 in contingent performance payments and we currently expect that the total consideration to be paid for the Ebyline acquisition will be $3,327,064.
On January 29, 2016, we issued 114,398 shares of common stock valued at $848,832 to the former Ebyline stockholders as settlement of our annual installment payment of $938,532 less $89,700 in closing related expenses owed as part of the Stock Purchase Agreement.
On April 13, 2015, we expanded our secured credit facility agreement with Bridge Bank, N.A. of San Jose, California. 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
. 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 accrues on the advances at the rate of
prime plus 2%
per annum. The default rate of interest is
prime plus 7%
. As of
March 31, 2016
, we had no advances outstanding under this agreement.
We believe that with our current cash, the expanded credit line and the proceeds received from the closing of the warrant transaction, we will have sufficient cash reserves available to cover expenses for longer than the future twelve months.
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 preparation of the accompanying financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts 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 could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements.
Accounts receivable are customer obligations due under normal trade terms. 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 an advertiser for a creator to write about the advertiser’s product. If a portion of the account balance is deemed uncollectible, we will either write-off the amount owed or provide a reserve based on the uncollectible portion of the account. Management determines the collectibility of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. We have a reserve of
$190,000
for doubtful accounts as of
March 31, 2016
. 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 the
three months
ended
March 31, 2016
and
2015
.
Throughout 2013 and the first quarter of 2014, we developed our new web-based advertising exchange platform,
IZEAx
. This platform is being utilized both internally and externally to facilitate native advertising campaigns on a greater scale. We began adding features and additional functionality to this platform again in 2015 and will continue throughout 2016. These new features will enable our platform to facilitate the contracting, workflow and delivery of direct content. In accordance with ASC 350-40,
Internal Use Software
and ASC 985-730,
Computer Software Research and Development
, research phase costs should be expensed as incurred and development phase costs including direct materials and services, payroll and benefits and interest costs may be capitalized. As a result, we have capitalized
$1,104,367
in direct materials, consulting, payroll and benefit costs to software development costs in the consolidated balance sheet as of
March 31, 2016
. We estimate the useful life of our software to be 5 years, consistent with the amount of time our legacy platforms were in-service, and we are amortizing the software development costs over this period.
We derive revenue from three sources: revenue from an advertiser when it pays for a social media publisher or influencer such as a blogger or tweeter ("creators") to share sponsored content with their social network audience ("Sponsored Revenue"), revenue when a publisher or company purchases custom branded content for use on its owned and operated sites, as well as third party content marketing and native advertising efforts ("Content Revenue") and revenue derived from various service and license fees charged to users of our platforms ("Service Fee Revenue").
For our managed customers, we enter into an agreement to provide services that may require multiple deliverables in the form of (a) sponsored social items, such as blogs, tweets, photos or videos shared through social network offerings that provide awareness or advertising buzz regarding the advertiser's brand; (b) media advertisements, such as click-through advertisements appearing in websites and social media channels and (c) original content items, such as a research or news article, informational material or videos that a publisher or brand can use. We may provide one type or a combination of all types of these deliverables including a management fee on a statement of work for a lump sum fee. These deliverables are to be provided over a stated period that may range 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 content has been delivered to the customer for their own use. Revenue is accounted for separately 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 or to provide a credit for the value of those services that may be applied to the existing order or used for future services.
Sponsored Revenue is recognized and considered earned after an advertiser's sponsored content is posted through
IZEAx
and shared through a creator's social network for a requisite period of time. The requisite period ranges from
3 days
for a tweet to
30 days
for a blog, video or other form of content. Management fees related to Sponsored Revenue from advertising campaigns managed by us are recognized ratably over the term of the campaign which may range from a few days to several months. Content Revenue is recognized when the content is delivered to and accepted by the customer. Service Fee Revenue is generated when fees are charged to customers primarily related to subscription fees for different levels of service within a platform, licensing fees for white-label use of
IZEAx
, early cash-out fees if a creator wishes to take proceeds earned for services from their account when the account balance is below certain minimum balance thresholds and inactivity fees for dormant accounts. Service Fee Revenue is recognized immediately when the service is performed or at the time an account becomes dormant or is cashed out. Service Fee Revenue for subscription or licensing fees is recognized straight-line over the term of service. Self-service advertisers must prepay for services by placing a deposit in their account with the Company. The deposits are typically paid by the advertiser via credit card. Advertisers who use us to manage their social advertising campaigns or content requests may prepay for services or request credit terms. Payments received or billings in advance of services are recorded as unearned revenue until earned as described above.
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 will be recognized when it is realized or realizable 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 advertiser or customer is fixed (required to be paid at a set amount that is 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.
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 estimate the fair value of our common stock using the closing stock price of our common stock on the date of the option award. 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 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 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 options granted under our 2011 Equity Incentive Plans and the assumptions used to determine the fair value of those options during the year ended
December 31, 2015
and
three months
ended
March 31, 2016
:
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
|
March 31, 2016
|
|
38,535
|
|
|
$7.33
|
|
6.0 years
|
|
52.68%
|
|
1.62%
|
|
$3.68
|
There were outstanding options to purchase
859,805
shares with a weighted average exercise price of
$8.60
per share, of which options to purchase
420,491
shares were exercisable with a weighted average exercise price of
$10.08
per share as of
March 31, 2016
. The intrinsic value on outstanding options as of
March 31, 2016
was
$835,350
. The intrinsic value on exercisable options as of
March 31, 2016
was
$579,371
.
We account for derivative instruments in accordance 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 fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.
Recent Accounting Pronouncements
There are new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") which are not yet effective.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition
process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in the first quarter of 2018.
In March 2016, the FASB issued ASU 2016-08, "
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
." The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and transition of ASU 2014-09 stated above.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
(“ASU 2016-10”). ASU 2016-10 is intended to reduce the cost and complexity of applying the guidance in the FASB's new revenue standard on identifying performance obligations, and is also intended to improve the operability and understandability of the licensing implementation guidance. The effective date for ASU 2016-10 is the same as for ASU 2014-09, which will be the first quarter of 2018.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.