ITEM 1A – RISK FACTORS
You should carefully consider the factors discussed under this item regarding the numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially and adversely affected. In such case, the trading price of our common stock could decline, and investors could lose all or part of their investment. These risk factors may not identify all risks that we face, and our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.
Risks Related to our Business and Industry
We have a history of annual net losses, expect future losses and cannot assure you that we will achieve profitability.
We have incurred significant net losses and negative cash flow from operations for most periods since our inception, which has resulted in a total accumulated deficit of $70,634,776 as of December 31, 2020. For the twelve months ended December 31, 2020, we had a net loss of $10,250,007, including a $10,233,703 loss from operations. We have not achieved profitability and cannot be certain that we will be able to realize sufficient revenue to achieve profitability. If we achieve profitability, we may not be able to sustain it. Therefore, we may need to raise capital through new financings, which could include equity financing, such as additional issuances of common stock under our at the market offering program, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to borrow from other sources. In addition, securities we issue may contain rights, preferences or privileges senior to those of the rights of our current stockholders. There can be no assurance that additional funds will be available on terms attractive to us, or at all. If adequate funds are not available, we may be required to curtail or reduce our operations or forced to sell or dispose of our rights or assets. An inability to raise adequate funds on commercially reasonable terms would have a material adverse effect on our business, results of operation, and financial condition, including the possibility that a lack of funds could cause our business to fail and liquidate with little or no return to investors.
Our business has been affected by the COVID-19 pandemic, and the continuing impacts of COVID-19 are highly unpredictable and could have a significant adverse effect on our business, results of operations, financial condition, and cash flows in the future.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (COVID-19) as a global pandemic and recommended containment and mitigation measures worldwide. As the disease spread throughout the United States, we directed all of our staff to work from home effective March 16, 2020 and subsequently did not renew leases for our headquarters and temporary office spaces to reduce fixed costs. We intend to have all employees work remotely for the foreseeable future to protect their health and safety. We believe our business operations and ability to support our customers are fully functional while our employees are working from remote locations; however, their productivity and efficiency may be negatively affected, and we may face increased risk of interruptions. Although countries have begun to distribute vaccinations, many countries face challenges in doing so and new variants of COVID-19 have been identified, and it is uncertain how quickly and effectively such vaccinations will help to control the spread of COVID-19. Therefore, there remains uncertainty around the duration and the total economic impact of the pandemic.
Our business relies heavily on people, and adverse events such as health-related concerns and changes in family working conditions experienced by our employees, the inability to travel and other matters affecting the general work environment have impacted our business near term. We have changed the way we interact with our customers and pivoted to provide alternative forms of advertising for our customer campaigns as large social gatherings were cancelled during the year. The economic conditions caused by COVID-19 have negatively impacted the business activity of our customers, and we have observed declining demand and changes in their advertising decisions, timing, and spending priorities, which have had a negative impact to our sales. We cannot fully quantify the impact to our business operations as a result of COVID-19 at this time. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business.
The outbreak and attempts to slow the spread of COVID-19 have resulted in extreme volatility and disruptions in the capital and credit markets, and future trends remain uncertain. A severe or prolonged economic downturn could result in a variety of additional risks to our business, including weakened demand from our customers and delays in client payments.
We have not extended our monthly arrangements for flexible office space in our remote offices, nor signed a new lease for our headquarters, which could negatively impact our business.
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In light of the uncertain and rapidly evolving situation relating to the spread of the COVID-19 - specifically stay-at-home orders imposed by certain states and localities - we did not enter into a new lease for our corporate headquarters in Winter Park, Florida and our Canadian headquarters in Toronto, Canada, for which both leases expired on April 30, 2020. Additionally, we have vacated the various co-working facilities our team members used around the country as their terms expired during 2020. As a result, our management team and all of our employees are working remotely. While our employees are accustomed to working with other remote employees and customers, our workforce had not been fully remote prior to March 16, 2020, when we proactively instituted a work-from-home policy in response to COVID-19 concerns. Although we continue to monitor the situation and may adjust our current plans as more information and guidance become available, not doing business in-person could negatively impact our marketing efforts, challenge our ability to enter into customer contracts in a timely manner, give rise to cybersecurity issues, slow down our recruiting efforts, or create operational or other challenges as we adjust to a fully-remote workforce, any of which could harm our business. Additionally, when we determine it prudent to end or modify our work-from-home policy, we will consider entering into a new lease for office space and/or arrangements for the use of co-working facilities. Although we believe suitable office space will be readily available when this time comes, we may encounter difficulties or delays in finalizing the terms of such lease arrangements or in obtaining rent prices at acceptable rates.
Impairment of our intangible assets has resulted in significant charges that adversely impact our operating results.
We assess the potential impairment of goodwill on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In March 2020, we identified a triggering event due to the reduction in projected revenue related to COVID-19 and the continuation of a market capitalization below our carrying value and uncertainty for recovery given the volatility of the capital markets surrounding COVID-19. We performed an interim assessment of goodwill and determined that the carrying value of the Company’s reporting unit as of March 31, 2020 exceeded the fair value. Therefore, we recorded a $4.3 million impairment of goodwill in the twelve months ended December 31, 2020. Future adverse changes in these or other unforeseeable factors could result in further impairment charges that would impact our results of operations and financial position in the reporting period identified.
We make numerous estimates or judgments relating to our critical accounting policies and these estimates create complexity in our accounting. If our accounting is erroneous or based on assumptions that change or prove to be incorrect, our operating results could change from investor expectations, which could cause our stock price to fall.
We are required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes in conformity with generally accepted accounting principles in the United States, or GAAP. Such estimates and assumptions include, but are not limited to, judgments related to revenue recognition, stock based compensation, credit risk, and values surrounding software development, intangible assets and goodwill, and their economic useful lives.
Various factors contribute to complexity in our accounting. For example, the recognition of our revenue is governed by certain criteria that determine whether we report revenue either on a gross basis, as a principal, or net basis, as an agent, depending upon the nature of the sales transaction. Changes in how we control and manage our platforms, our contractual terms, our business practices, or other changes in accounting standards or interpretations, may change the reporting of our revenue on a gross to net or net to gross basis. As a result, we may experience significant fluctuations in our revenue depending on the nature of our sales and our reporting of such revenue and related accounting treatment, without any change in our underlying business or net income. Our guidance or estimates about the combination of gross or net revenue are based upon the volumes and characteristics that we believe will be the mix of revenue during the period. Those estimates and assumptions may be inaccurate when made or may be rendered inaccurate by subsequent changes in circumstances, such as changing the characteristics of our offerings or particular transactions in response to client demands, market developments, regulatory pressures, acquisitions, and other factors. In addition, we may incorrectly extrapolate from revenue recognition treatment of prior transactions to future transactions that we believe are similar, but that ultimately are determined to have different characteristics that dictate different revenue reporting treatment. These factors may make our financial reporting more complex and difficult for investors to understand, may make comparison of our results of operations to prior periods or other companies more difficult, may make it more difficult for us to give accurate guidance, and could increase the potential for reporting errors.
Further, our acquisitions have imposed purchase accounting requirements, required us to integrate accounting personnel, systems, and processes, necessitated various consolidation and elimination adjustments, and imposed additional filing and audit requirements. Ongoing evolution of our business, changes in underlying GAAP and any future acquisitions, will compound these complexities. Our operating results may be adversely affected if we make accounting errors or our judgments prove to be wrong, assumptions change or actual circumstances differ from those in our assumptions, which could cause our operating results to fall below investor expectations or guidance we may have provided, resulting in a decline in our stock price and potential legal claims.
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Historically, we have not relied upon patents to protect our proprietary technology, and our competitors may be able to offer similar products andservices, which would harm our competitive position.
Our success depends upon our proprietary technology. We do not have registered patents on any of our current platforms because we have determined that the costs of patent prosecution outweigh the benefits given the alternative of reliance upon copyright law to protect our computer code and other proprietary technology and properties. In addition to copyright laws, we rely upon service mark and trade secret laws, confidentiality procedures and contractual provisions to establish and protect our proprietary rights. As part of our confidentiality procedures, we enter into non-disclosure agreements with our employees and consultants. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary or develop similar technology independently. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States, and effective copyright, trademark, trade secret and patent protection may not be available in those jurisdictions. Our means of protecting our proprietary rights may not be adequate to protect us from the infringement or misappropriation of such rights by others, and we cannot assure you that that our competitors will not independently develop similar technology, duplicate our products and services, or design around any intellectual property rights we hold.
We cannot provide any assurance that our proprietary rights with respect to our products or services will be viable or have value in the future since the validity, enforceability, and type of protection of proprietary rights in Internet-related industries are uncertain and still evolving.
If third parties claim that we infringe their intellectual property rights, it may result in costly litigation.
We cannot assure you that third parties will not claim our current or future products or services infringe their intellectual property rights. Any such claims, with or without merit, could cause costly litigation that could consume significant management time. As the number of product and services offerings in our market increases and functionalities increasingly overlap, companies such as ours may become increasingly subject to infringement claims. These claims, even if not meritorious, could be expensive to defend and could divert management's attention from operating our business. These claims also might require us to enter into royalty or license agreements. If required, we may not be able to obtain such royalty or license agreements, or obtain them on terms acceptable to us.
Further, in recent years, there has been significant litigation in the United States involving patents and other intellectual property rights, particularly in the software and Internet-related industries. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial award of damages and to develop non-infringing technology, obtain a license or cease selling the products that contain the infringing intellectual property. We may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, if at all.
Intense competition in our target markets could impair our ability to grow and to achieve profitability.
The market for influencer and content marketing is highly competitive. We expect this competition to continue to increase, in part because there are no significant barriers to entry to our industry for those that operate in a Managed Services or an agency-type model. Increased competition may result in reduced pricing for managed campaigns, reduced margins and reduced revenue as a result of lost market share. Our principal competitors include other companies that provide marketers with Internet advertising solutions and companies that offer pay per click search services.
Within the enterprise software unit of IZEA’s business (“SaaS Services”), while there is a higher technological barrier to entry, IZEA is vulnerable to new entrants with access to fresh capital and the ability to replicate upon previous research and development investments made by us. This is particularly challenging given the minimal opportunity to protect our internet-based software via patents.
We also compete with traditional advertising media, such as direct mail, television, radio, cable, and print for a share of marketers' total advertising budgets. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial, technical, sales, and marketing resources. As a result, we may be unable to compete successfully. If we fail to compete successfully, we could lose customers and our revenue and results of operations could decline.
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In addition, as we continue our efforts to expand the scope of our services, we may compete with a greater number of other media companies across an increasing range of different services, including in vertical markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over those offered by us, our business, prospects, results of operations, and financial condition could be negatively affected.
We are continuing to develop our IZEAx platform and have transitioned certain features and customers from our legacy Ebyline and TapInfluence platforms. Our updated IZEAx, Shake, and BrandGraph platforms may not achieve sufficient market acceptance to be commercially viable for open marketplace or SaaS services.
In April 2019, we released version 3.0 of IZEAx, which allows marketers to make offers that require a single creator to complete multiple tasks or deliverables. Throughout the remainder of 2019, we continued to add additional features to support our SaaS partners and integrate the Ebyline and TapInfluence platform offerings for custom content services within our IZEAx platform. By the end of 2019, nearly all of the Ebyline and TapInfluence customers and creators were migrated off of those platforms and onto the IZEAx platform. With the merging of the two platforms into IZEAx there is a risk of decreased revenue from marketers if they do not understand the changes or do not believe that the IZEAx platform can provide them with a similar or improved service from what they received in the Ebyline or TapInfluence platforms. If our marketers and creators do not perceive this platform to be of high value and quality, we may not be able to retain them or acquire new marketers and creators.
Shake and BrandGraph were both officially launched in 2020 during the COVID-19 pandemic. We continue to invest significant engineering resources into the development and improvement of these platforms and the creation of new technology additions that complement our core offerings. The Shake and BrandGraph platforms and models are new to IZEA and we are still in the very early days of building a customer base for these products. We may fail to achieve significant marketplace inventory in Shake to attract enough buyers and we may fail to create enough product differentiation among social data platforms to drive adoption of BrandGraph. We cannot provide any assurances of the short or long-term commercial success or growth of our platforms. There is no assurance that the amount of money being allocated for the platforms will be sufficient to complete them, or that such completion will result in a competitive edge, significant revenues or profit for us.
We depend on our ability to attract and retain customers that are prepared to offer products or services on compelling terms through IZEAx and Shake. Additionally, we rely on marketers who purchase direct custom content from our creators in our platforms. We must continue to attract and retain customers in order to increase revenue and achieve profitability. If existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over this platform, demand for our platforms may decrease. In addition, we may experience attrition in our customers in the ordinary course of business resulting from several factors, including losses to competitors, mergers, closures or bankruptcies. If we are unable to attract new customers in numbers sufficient to grow our business, or if too many customers are unwilling to offer products or services with compelling terms to our creators through our platforms, of if creators stop offering their services through our platform, our operating results will be adversely affected.
Our total number of user accounts may be higher than the number of our actual individual marketers or creators and may not be representative of the number of persons who are active users.
Our total number of user accounts in the IZEAx and Shake platform may be higher than the number of our actual individual marketers and creators because some may have created multiple accounts for different purposes, including different user connections. We define a user connection as a social account or blog that has been added to IZEAx and Shake under a user account. It is possible for one user to add as many user connections as they like, and it is common for talent mangers and large publishers to add several connections under a single account. Given the challenges inherent in identifying these creators, we do not have a reliable system to accurately identify the number of actual individual creators, and thus we rely on the number of total user connections and user accounts as our measure of the size of our user base. In addition, the number of user accounts includes the total number of individuals that have completed registration through a specific date, less individuals who have unsubscribed, and should not be considered as representative of the number of persons who continue to actively create to fulfill the sponsorships offered through our platforms. Many users may create an account but may not actively participate in marketplace activities.
Delays in releasing enhanced versions of our products and services could adversely affect our competitive position.
As part of our strategy, we expect to periodically release enhanced versions of IZEAx and related services. Even if our new versions contain the features and functionality our customers want, in the event we are unable to timely introduce these new product releases, our competitive position may be harmed. We cannot assure you that we will be able to successfully complete the development of currently planned or future products in a timely and efficient manner. Due to the complexity of
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these products, internal quality assurance testing and customer testing of pre-commercial releases may reveal product performance issues, undesirable feature enhancements or additional desirable feature enhancements that could lead us to postpone the release of these new versions. In addition, the reallocation of resources associated with any postponement would likely cause delays in the development and release of other future products or enhancements to our currently available products. Any delay in releasing other future products or enhancements of our products could cause our financial results to be adversely impacted.
We rely on third-party social media platforms to provide the mechanism necessary to deliver influencer marketing, and any change in the platform terms, costs, availability, or access to these technologies could adversely affect our business.
We rely on third-party social media platforms such as Facebook, Instagram, Twitter, and YouTube to serve as the mechanism for publishing influencer marketing content to targeted audiences, in order to deliver our influencer marketing services to our customers. These platforms include technologies that provide some of the core functionality required to operate the influencer marketing portion of our platform, as well as functionalities such as user traffic reporting, ad-serving, content delivery services, discovering services, and metrics. There can be no assurance that these providers will continue to make all or any of their technologies available to us on reasonable terms, or at all. Third-party social media platforms may start charging fees or otherwise change their business models in a manner that impedes our ability to use their technologies. In any event, we have no control over these companies or their decision-making with respect to granting us access to their social media platforms or providing us with analytical data, and any material change in the current terms, costs, availability or use of their social media platforms or analytical data could adversely affect our business.
Our business depends on continued and unimpeded access to the Internet by us and by our customers and their end users. Internet access providers or distributors may be able to block, degrade or charge for access to our content, which could lead to additional expenses to us and our customers and the loss of end users and advertisers.
Products and services such as ours depend on our ability and the ability of our customers' users to access the Internet. Currently, this access is provided by companies that have, or in the future may have, significant market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies and government-owned service providers. Some of these providers may take, or have stated that they may take, measures that could degrade, disrupt, or increase the cost of user access to products or services such as ours by restricting or prohibiting the use of their infrastructure to support or facilitate product or service offerings such as ours, or by charging increased fees to businesses such as ours to provide content or to have users access that content. In 2015, the Federal Communications Commission (“FCC”) released an order, commonly referred to as net neutrality, that, among other things, prohibited (i) the impairment or degradation of lawful Internet traffic on the basis of content, application or service and (ii) the practice of favoring some Internet traffic over other Internet traffic based on the payment of higher fees. In December 2017, the FCC voted to overturn the net neutrality regulations imposed by the 2015 order. Internet service providers in the U.S. may now be able to impair or degrade the use of, or increase the cost of using, our products or services. Such interference could result in a loss of existing viewers, subscribers and advertisers, and increased costs, and could impair our ability to attract new viewers, subscribers and advertisers, thereby harming our revenues and growth.
Fluctuations in foreign currency exchange rates could result in unanticipated losses that could adversely affect our results of operations and financial position.
We are exposed to foreign currency exchange rate fluctuations because a portion of our sales, expenses, assets and liabilities are denominated in foreign currencies. Changes in the value of foreign currencies, particularly the Canadian dollar, affect our results of operations and financial position. With respect to international sales initially priced using U.S. dollars as a cost basis, a decrease in the value of foreign currencies relative to the U.S. dollar would make our products less price competitive. Once the product is sold at a fixed foreign currency price, we could experience foreign currency gains or losses that could have a material effect on our operating results.
New tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our services and our financial results.
Due to the global nature of social media and our services, it is possible that various states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce. New or revised international, federal, state or local tax regulations may subject us or our creators to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over social media. New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of
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doing business online and decrease the attractiveness of advertising and selling goods and services over social media. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.
We may become subject to government regulation and legal uncertainties that could reduce demand for our products and services orincrease the cost of doing business, thereby adversely affecting our financial results.
As described in the section “Business - Government Regulation,” we are subject to laws and regulations applicable to businesses generally and certain laws or regulations directly applicable to service providers for advertising and marketing Internet commerce. Due to the increasing popularity and use of social media, it is possible that a number of laws and regulations may become applicable to us or may be adopted in the future with respect to social media covering issues such as:
•truth-in-advertising;
•user privacy;
•taxation;
•right to access personal information;
•copyrights;
•distribution; and
•characteristics and quality of services.
The applicability of existing laws governing issues such as property ownership, copyrights and other intellectual property, encryption, taxation, libel and export or import matters to social media platforms is uncertain. The vast majority of these laws were adopted prior to the broad commercial use of social media platforms and related technologies. As a result, they do not contemplate or address the unique issues of social media and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes, could create uncertainty in the social media marketplace. Such uncertainty could reduce demand for our services or increase the cost of doing business due to increased costs of litigation or increased service delivery costs.
Our influencer marketing business is subject to the risks associated with word of mouth advertising and endorsements, suchas violations of “truth-in-advertising” laws, the FTC Endorsement Guide and other similar global regulatory requirements and, more generally, loss of consumer confidence.
As the practice of targeted advertising is increasingly scrutinized by both regulators and the industry alike, a greater emphasis has been placed on educating consumers about their privacy choices on the Internet, and providing them with the right to opt in or opt out of targeted advertising. The common thread throughout both targeted advertising and the FTC requirements described in detail in the section “Business - Government Regulation” is the increased importance placed on transparency between the marketer and the consumer to ensure that consumers know the difference between “information” and “advertising” on the Internet, and are afforded the opportunity to decide how their personal information will be used in the manner to which they are marketed. There is a risk regarding negative consumer perception of the practice of “undisclosed compensation” of social media users to endorse specific products. As described in the section “Business - Government Regulation,” we undertake various measures through controls across our platforms and by monitoring and enforcing our code of ethics to ensure that marketers and creators comply with the FTC's Endorsement Guide (and analogous laws and guidance in other countries) when utilizing our websites, but if competitors and other companies do not, it could create a negative overall perception for the industry. Not only will readers stop relying on blogs for useful, timely and insightful information that enrich their lives by having access to up-to-the-minute information that often bears different perspectives and philosophies, but a lack of compliance will almost inevitably result in greater governmental oversight and involvement in an already-highly regulated marketplace. A pervasive overall negative perception caused by a failure of our own preventative measures or by others not complying with the FTC's Endorsement Guide (among the FTC's other acts, regulations and policies, and among analogous laws and guidance in other countries,) could result in reduced revenue and results of operations and higher compliance costs for us.
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Failure to comply with federal, state and international privacy laws and regulations, or the expansion of current or the enactment of new privacy laws or regulations, could adversely affect our business.
A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of personal information (“Privacy Laws”). Privacy Laws are evolving and subject to potentially differing interpretations. The European Union adopted the GDPR, which went into effect in May 2018, and requires companies to satisfy stricter requirements regarding the handling of personal and sensitive data, including its collection, use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. EU Member States also are enacting national GDPR-implementing laws that are in some cases stricter or different from GDPR. During 2018, Brazil enacted a law similar to GDPR and other countries are expanding or considering their Privacy Laws to follow suit. Complying with these new and expanded Privacy Laws will cause us to incur substantial operational costs or may require us to change our business practices. For example, noncompliance with the GDPR could result in proceedings against us by governmental entities or others and fines up to the greater of €20 million or 4% of annual global revenues as well as damage to our reputation and brand. We also may find it necessary to establish systems to effectuate cross-border personal data transfers of personal information originating from the European Economic Area, Australia, Japan and other non-U.S. jurisdictions, which may involve substantial expense and distraction from other aspects of our business.
We have made public certain statements about our privacy practices concerning the collection, use and disclosure of creators' personal information on our websites and platforms. Several Internet companies have incurred penalties for failing to abide by the representations made in their public-facing privacy notices. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Any failure, or perceived failure, by us to comply with our public-facing privacy notices, FTC requirements or orders or other federal, state or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental or other entities or the incurring by us of other liabilities, which could adversely affect our business. In addition, a failure or perceived failure to comply with industry standards or with our own privacy policies and practices could result in a loss of creators or marketers and adversely affect our business. Federal, state, and international governmental authorities continue to evaluate the privacy implications of targeted advertising, such as the use of cookies and other tracking technology. The regulation of these cookies and other current online advertising practices could adversely affect our business.
Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, or if we receive unfavorable media coverage, our ability to expand our base of creators and marketers will be impaired and our business and operating results will be harmed.
We believe that the brand identity that we have developed has significantly contributed to the success of our business. We also believe that maintaining and enhancing the “IZEA” brand is critical to expanding our base of creators and marketers. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to promote, maintain, and protect the “IZEA” brand, or if we incur excessive expenses in this effort, our business, prospects, operating results, and financial condition will be materially and adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Unfavorable publicity or consumer perception of our platforms, applications, practices or service offerings, or the offerings of our marketers, could adversely affect our reputation, resulting in difficulties in recruiting, decreased revenue and a negative impact on the number of marketers and the size of our creator base, the loyalty of our creators and the number and variety of sponsorships we offer each day. As a result, our business, prospects, results of operation, and financial condition could be materially and adversely affected.
Our business depends on our ability to maintain and scale the network infrastructure necessary to operate our platforms and applications, and any significant disruption in service on our platforms and applications could result in a loss of creators or marketers.
Creators and marketers access our services through our platforms and applications. Our reputation and ability to acquire, retain, and serve our creators and marketers are dependent upon the reliable performance of our platforms and applications and the underlying network infrastructure. If our creator base continues to grow, we will need an increasing amount of network capacity and computing power. We have spent and expect to continue to spend substantial amounts for data centers and equipment and related network infrastructure to handle the traffic on our platforms and applications. The operation of these systems is expensive and complex and could result in operational failures. In the event that our creator base or the amount of traffic on our platforms and applications grows more quickly than anticipated, we may be required to incur significant additional costs. Interruptions in these systems, whether due to system failures, computer viruses or physical or
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electronic break-ins, could affect the security or availability of our platforms and applications, and prevent our creators and marketers from accessing our services. A substantial portion of our network infrastructure is hosted by third-party providers. Any disruption in these services or any failure of these providers to handle existing or increased traffic could significantly harm our business. Any financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. If we do not maintain or expand our network infrastructure successfully or if we experience operational failures, we could lose current and potential creators and marketers or transactions between the two groups, which could harm our operating results and financial condition.
If our security measures are breached, or if our services are subject to attacks that degrade or deny the ability of users to access our platforms, our platforms and applications may be perceived as not being secure, marketers and creators may curtail or stop using our services, and we may incur significant legal and financial exposure.
Our platforms and applications and the network infrastructure that is hosted by third-party providers involve the storage and transmission of marketer and creator proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and potential liability. Our security measures may be breached due to the actions of outside parties, employee error, malfeasance, security flaws in the third-party hosting service that we rely upon or any number of other reasons and, as a result, an unauthorized party may obtain access to our data or our marketers' or creators' data. Additionally, outside parties may attempt to fraudulently induce employees, marketers or creators to disclose sensitive information in order to gain access to our data or our marketers' or creators' data. Although we do have security measures in place, we have had instances where some customers have used fraudulent credit cards in order to pay for our services. While these breaches of our security did not result in material harm to our business, any future breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation and a loss of confidence in the security of our platforms and applications that could potentially have an adverse effect on our business. Because the techniques used to obtain and use unauthorized credit cards, obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures on a timely basis. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose marketers, creators, and vendors and have difficulty obtaining merchant processors or insurance coverage essential for our operations.
If our technology platforms contain defects, we may need to suspend their availability and our business and reputation would beharmed.
Platforms as complex as ours often contain unknown and undetected defects or performance problems. Many serious defects are frequently found during the period immediately following introduction and initial release of new platforms or enhancements to existing platforms. Although we attempt to resolve all defects that we believe would be considered serious by our customers before making our platforms available to them, our products are not defect-free. We may not be able to detect and correct defects before releasing our product commercially. We cannot ensure that undetected defects or performance problems in our existing or future products will not be discovered in the future or that known defects, considered minor by us, will not result in serious issues for our customers. Any such defects or performance problems may be considered serious by our customers, resulting in a decrease in our revenues.
We may be subject to lawsuits for information by our marketers and our creators, which may affect our business.
Laws relating to the liability of providers of online services for activities of their marketers or of their social media creators and for the content of their marketers' listings are currently unsettled. It is unclear whether we could be subjected to claims for defamation, negligence, copyright or trademark infringement or claims based on other theories relating to the information we publish on our websites or the information that is published across our platforms. These types of claims have been brought, sometimes successfully, against online services and print publications in the past. We may not successfully avoid civil or criminal liability for unlawful activities carried out by our marketers or our creators. Our potential liability for unlawful activities of our marketers or our creators or for the content of our marketers' listings could require us to implement measures to reduce our exposure to such liability, which may require us, among other things, to spend substantial resources or to discontinue certain service offerings. Our insurance may not adequately protect us against these types of claims and the defense of such claims may divert the attention of our management from our operations. If we are subjected to such lawsuits, it may adversely affect our business.
If we fail to detect click-fraud or other invalid clicks, we could lose the confidence of our marketers and advertising partners as a result of lost revenue to marketers or misappropriation of proprietary and confidential information, thereby causing ourbusiness to suffer.
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“Click-fraud” is a form of online fraud when a person or computer program imitates a legitimate user by intentionally clicking on an advertisement for the purpose of generating a charge per click without having an actual interest in the target of the advertisement's link. We are exposed to the risk of fraudulent or illegitimate clicks on our sponsored listings. The security measures we have in place, which are designed to reduce the likelihood of click-fraud, detect click-fraud from time to time. Although the instances of click-fraud that we have detected to date have not had a material effect on our business, click-fraud could result in a marketer experiencing a reduced return on their investment in our advertising programs because the fraudulent clicks will not lead to revenue for the marketers. As a result, our marketers and advertising partners may become dissatisfied with our advertising programs, which could lead to loss of marketers, advertising partners, and revenue. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary and confidential information or could cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to address problems caused by such breaches. Concerns over the security of the Internet and other online transactions and the privacy of users may also deter people from using the Internet to conduct transactions that involve transmitting confidential information.
The influencer and content marketing industry is subject to rapid technological change and, to compete, we must continually enhance our products and services.
We must continue to enhance and improve the performance, functionality, and reliability of our products and services. The influencer and content marketing industry is characterized by rapid technological change, changes in user requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our products and services obsolete. In the past, we have discovered that some of our customers desire additional performance and functionality not currently offered by our products. Our success will depend, in part, on our ability to develop new products and services that address the increasingly sophisticated and varied needs of our customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of our technology and other proprietary technology involves significant technical and business risks. We may fail to use new technologies effectively or to adapt our proprietary technology and systems to customer requirements or emerging industry standards. If we are unable to adapt to changing market conditions, customer requirements or emerging industry standards, we may not be able to increase our revenue and expand our business.
If we lose key personnel or are unable to attract and retain additional qualified personnel we may not be able to successfully manageour business and achieve our objectives.
We believe our future success will depend upon our ability to retain our key management, including Edward H. Murphy, our Chief Executive Officer, and Ryan S. Schram, our President and Chief Operating Officer. Mr. Murphy, who is our founder, has unique knowledge regarding the influencer marketing space, business contacts, and system design and development expertise regarding our platforms that would be difficult to replace. Mr. Schram has sales, marketing, and business development expertise that our other officers do not possess. Even though we have employment agreements in place with each of them, if Messrs. Murphy and Schram were to become unavailable to us, our operations would be adversely affected. Although we maintain “key-man” life insurance for our benefit on the lives of Mr. Murphy and Mr. Schram, this insurance may be inadequate to compensate us for the loss of our executive officers.
Our future success and our ability to expand our operations will also depend in large part on our ability to attract and retain additional qualified engineers, sales and marketing and senior management personnel. Competition for these types of employees is intense due to the limited number of qualified professionals and the high demand for them, particularly in the Orlando, Florida area where our headquarters are located. We have in the past experienced difficulty in recruiting qualified personnel. Failure to attract, assimilate and retain personnel, including key management, technical, sales and marketing personnel, would have a material adverse effect on our business and potential growth.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs and to make certain activities more time consuming and costly. As a public company, we also expect that these rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult and costly for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers.
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Risks Relating to our Common Stock
Our common stock may be delisted if we fail to maintain compliance with the requirements for continued listing on the Nasdaq Capital Market, and the price of our common stock and our ability to access the capital markets could be negatively impacted.
Our common stock is listed for trading on the Nasdaq Capital Market (“Nasdaq”). To maintain this listing, we must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for continued inclusion on the Nasdaq Capital Market under Nasdaq Listing Rule 5450(a)(1) (the "Bid Price Rule").
On November 12, 2020, we received a notification letter from Nasdaq informing us that for the prior 30 consecutive business days, the bid price of our common stock had closed below $1.00 per share. This notice had no immediate effect on our Nasdaq listing, and we had 180 calendar days, or until May 11, 2021, to regain compliance.
On January 6, 2021, we received notification from Nasdaq that we had regained compliance with the Bid Price Rule after the closing bid price of our common stock was at $1.00 per share or greater for the prior 10 consecutive business days.
Although we are now in compliance with the Bid Price Rule, if we fail to meet this or any of the other continued listing requirements in the future, our common stock may be delisted from Nasdaq, which could reduce the liquidity of our common stock materially and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees, and business development opportunities. Such a delisting likely would impair your ability to sell or purchase our common stock when you wish to do so. Further, if we were to be delisted from Nasdaq, our common stock may no longer be recognized as a “covered security” and we would be subject to regulation in each state in which we offer our securities. Thus, delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly impact the ability of investors to trade our securities and would negatively impact the value and liquidity of our common stock.
We have raised, and may raise, additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests.
We have incurred losses since inception and expect to continue to incur losses until we are able to significantly grow our revenues. From 2019 to 2020, we incurred a year-over-year decrease in revenue. If our annual revenue does not increase, we may need additional financing to maintain and expand our business. This financing may be obtained through our at-the-market (ATM) equity offering program under the sales agreement, dated January 25, 2021, with National Securities Corporation acting as sales agent, pursuant to which we may sell common stock having an aggregate offering price of up to $35,000,000. Any additional capital raised through our at-the-market equity offering program or any other financing involving the sale of equity or equity linked securities may dilute current stockholders’ ownership percentages and could also result in a decrease in the market value of our equity securities.
The terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding. In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses, and other costs. We may be required to bear the costs even if we are unable to successfully complete any such capital financing. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible promissory notes and warrants, which may adversely impact our financial results.
Exercises of stock options, warrants, and other securities will dilute your percentage of ownership and could cause our stock price to fall.
As of March 26, 2021, we had 59,129,390 shares of our common stock issued and outstanding, which included 37,620 shares of unvested restricted stock, outstanding stock options to purchase 1,742,303 shares of our common stock at an average exercise price of $2.55 per share, and unvested restricted stock units of 569,934 shares with an intrinsic value of $2,308,233.
As of March 26, 2021, we also have reserved shares to issue stock options, restricted stock or other awards to purchase or receive up to 3,651,597 shares of common stock under our May 2011 Equity Incentive Plan, 4,375 shares of common stock under our August 2011 Equity Incentive Plan, and 395,613 shares of common stock under our 2014 Employee Stock Purchase
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Plan. In the future, we may grant these additional shares or issue new securities, in accordance with terms defined in employment agreements or as part of additional incentive programs. The exercise, conversion or exchange by holders of stock options, restricted stock units, or warrants for shares of common stock, or the issuance of new shares of common stock for additional compensation will dilute the percentage ownership of our stockholders. Issuance of a substantial number of shares of our common stock could cause the price of our common stock to fall and could impair our ability to raise capital by selling additional securities.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they adversely change their recommendations regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that securities or industry analysts may publish about us, our business, our market, or our competitors. No person is under any obligation to publish research or reports on us, and any person publishing research or reports on us may discontinue doing so at any time without notice. If adequate research coverage is not maintained on our company or if any of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business or provide relatively more favorable recommendations about our competitors, our stock price would likely decline. If any analysts who cover us were to cease coverage of our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Our earnings are subject to substantial quarterly and annual fluctuations and to market downturns.
Our revenues and earnings may fluctuate significantly in the future. General economic or other political conditions may cause a downturn in the market for our products or services. A future downturn in the market for our products or services could adversely affect our operating results and increase the risk of substantial quarterly and annual fluctuations in our earnings. Our future operating results may be affected by many factors, including, but not limited to: our ability to retain existing or secure anticipated marketers and creators; our ability to develop, introduce and market new products and services on a timely basis; changes in the mix of products developed, produced and sold; disputes with our marketers and creators; and general economic conditions causing a reduction in spending by our customers. These factors affecting our future earnings are difficult to forecast and could harm our quarterly and/or annual operating results. The change in our earnings or general economic conditions may cause the market price of our common stock to fluctuate.
The price of our common stock in the public markets has experienced, and may in the future experience, extreme volatility due to a variety of factors, many of which are beyond our control.
Since our common stock started trading on the Nasdaq Capital Market, it has been relatively thinly traded and at times been subject to price volatility. Recently our common stock has experienced extreme price and volume volatility. From January 1, 2020 to December 31, 2020, the closing price of our common stock ranged from a low of $0.13 on March 18, 2020 to a high of $2.82 on June 11, 2020, with an average daily trading volume of 6.7 million shares. On January 25, 2021, the price increased to an intraday high of $7.45 per share and 25,323,000 shares were traded. Otherwise, in January 2021 the closing price of our common stock averaged $3.65 with an average daily trading volume of 8.9 million shares and, in February 2021, the closing price of our common stock averaged $4.70 with an average daily trading volume of 4.0 million shares.
In addition to shares of our common stock, the stock market in general, and the stock prices of technology-based companies in particular, have experienced volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock has historically experienced and may continue to experience significant volatility. As a result, the market price could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
•changes in our industry;
•competitive pricing pressures;
•our ability to obtain working capital financing;
•additions or departures of key personnel;
•limited “public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market prices of our common stock;
•speculative trading practices of certain market participants;
•actual or purported “short squeeze” trading activity;
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•expiration of any Rule 144 holding periods or registration of unregistered securities issued by us;
•sales of our common stock;
•our ability to execute our business plan;
•operating results that fall below expectations;
•loss of any strategic relationship;
•regulatory developments; and
•economic and other external factors, including effects of the coronavirus pandemic.
These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock.
Further, on some occasions, our stock price may be, or may be purported to be, subject to “short squeeze” activity. A “short squeeze” is a technical market condition that occurs when the price of a stock increases substantially, forcing market participants who had taken a position that its price would fall (i.e. who had sold the stock “short”), to buy it, which in turn may create significant, short-term demand for the stock not for fundamental reasons, but rather due to the need for such market participants to acquire the stock in order to forestall the risk of even greater losses. A “short squeeze” condition in the market for a stock can lead to short-term conditions involving very high volatility and trading that may or may not track fundamental valuation models.
In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business.
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
ITEM 2 - PROPERTIES
Our corporate headquarters are based near Orlando using an address at 501 N. Orlando Avenue, Suite 313 PMB 247 in Winter Park, Florida. We do not have any current physical locations and all of our employees are working remotely. When we determine it prudent to end or modify our work-from-home policy, we will consider entering into a new lease for office space and/or arrangements for the use of co-working facilities.
ITEM 3 – LEGAL PROCEEDINGS
From time to time, we may become involved in various other lawsuits and legal proceedings that arise in the ordinary course of our business. Litigation is, however, subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. As of March 26, 2021, we are not aware of any legal proceedings or claims that we believe would or could have, individually or in the aggregate, a material adverse effect on us. Regardless of final outcomes, however, any such proceedings or claims may nonetheless impose a significant burden on management and employees and may come with costly defense costs or unfavorable preliminary interim rulings.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Information
Our shares of common stock trade on the Nasdaq Capital Market under the symbol IZEA. As of March 26, 2021, we had approximately 173 shareholders of record of our common stock. This number does not include beneficial owners whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
Dividend Policy
We have never paid dividends to holders of our common stock and we do not anticipate paying any cash dividends in the foreseeable future as we intend to retain any earnings for use in our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.
Securities Authorized for Issuance under Equity Compensation Plans
See the section “Equity Incentive Plans,” under Part III, Item 11 of this Annual Report.
Recent Sales of Unregistered Securities
Except as previously reported in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC, there were no unregistered sales of equity securities by us during the year ended December 31, 2020.
Share Repurchase Program
On July 1, 2019, the Board authorized and approved a share repurchase program under which the Company could repurchase up to $3,500,000 of its common stock from time to time through December 31, 2020, subject to market conditions. The Company did not repurchase any shares of common stock under the share repurchase program prior to its expiration on December 31, 2020.
ITEM 6 - SELECTED FINANCIAL DATA
Not applicable for smaller reporting companies.
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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Overview
IZEA Worldwide, Inc. (“IZEA”, “we”, “us” or “our”) creates and operates online marketplaces that connect marketers, including brands, agencies, and publishers, with content creators such as bloggers and tweeters (“creators”). Our technology brings the marketers and creators together, enabling their transactions to be completed at scale through the management of custom content workflow, creator search and targeting, bidding, analytics, and payment processing.
We help power the creator economy, allowing everyone from college students and stay-at-home individuals to celebrities and accredited journalists the opportunity to monetize their content, creativity and influence through our marketers. These creators are compensated by IZEA for producing unique content such as long and short form text, videos, photos, status updates, and illustrations for marketers or distributing such content on behalf of marketers through their personal websites, blogs, and social media channels.
Marketers engage us to gain access to our industry expertise, technology, data, analytics, and network of creators. The majority of the marketers engage us to perform these services on their behalf, but they also have the ability to use our marketplaces on a self-service basis by licensing our technology. Our technology is used for two primary purposes: the engagement of creators for influencer marketing campaigns, or the engagement of creators to create stand-alone custom content for the marketers’ own use and distribution. Marketers receive influential consumer content and engaging, shareable stories that drive awareness.
Our primary technology platform, The IZEA Exchange (“IZEAx”), enables transactions to be completed at scale through the management of custom content workflow, creator search and targeting, bidding, analytics, and payment processing. IZEAx is designed to provide a unified ecosystem that enables the creation and publication of multiple types of custom content through a creator’s personal websites, blogs, or social media channels including Twitter, Facebook, Instagram, and YouTube, among others. Until December 2019 when it was merged into IZEAx, we operated the Ebyline technology platform, which we acquired in January 2015. The Ebyline platform was originally designed as a self-service content marketplace to replace in-house editorial newsrooms in news agencies with a “virtual newsroom” to source and handle their content workflow with outside creators. After the acquisition, we began to utilize the creators in the Ebyline platform to produce professional custom content for brands, in addition to the self-service functionality used by newspapers. In July 2016, we acquired the ZenContent technology platform to use as an in-house workflow tool that enables us to produce highly scalable, multi-part production of content for both e-commerce entities and brand customers. The TapInfluence technology platform, acquired in 2018, performed in a similar manner to IZEAx and was being utilized by the majority of the TapInfluence customers as a self-service platform via a licensing arrangement, allowing access to the platform and its creators for self-managed marketing campaigns. After the migration of the last customers to IZEAx from the Ebyline platform in December 2019 and from the TapInfluence platform in February 2020, all marketplace revenue was solely generated from the IZEAx platform until the launch of Shake in November 2020.
In 2020, we launched two new platforms, BrandGraph and Shake. BrandGraph is a social media intelligence platform that is heavily integrated with IZEAx and both platforms rely heavily on data from each other, but it is also available as a stand-alone platform. The platform maps and classifies the complex hierarchy of corporation-to-brand relationships by category and associates social content with brands through a proprietary content analysis engine. Shake is a new online marketplace where buyers can quickly and easily hire creators of all types for influencer marketing, photography, design, and other digital services. The Shake platform is aimed at digital creatives seeking freelance “gig” work. Creators list available “Shakes” on their accounts in the platform and marketers select and purchase creative packages from them through a streamlined chat experience, assisted by ShakeBot - a proprietary, artificial intelligence assistant.
Impact of COVID-19 on our Business
Our operations, sales, and finances were impacted by the COVID-19 pandemic during the twelve months ended December 31, 2020. In an effort to protect the health and safety of our employees, we took precautionary action and directed all staff to work from home effective March 16, 2020. During this work-from-home period, which is ongoing, the term of our leases for our headquarters and temporary office spaces expired. When and if we determine it prudent to end or modify our work-from-home policy, we may need to enter into a new lease for office space and/or arrangements for the use of co-working facilities.
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While we are able to maintain full operations remotely, the economic conditions caused by COVID-19 have negatively impacted the business activity of our customers. We observed changes in advertising decisions, timing, and spending priorities from brand and agency customers, which have resulted in a negative impact to our revenue.
In light of the adverse economic conditions caused by the COVID-19 pandemic, we implemented certain cost-reduction measures for the three months ended June 30, 2020, including hiring restrictions and temporary salary and wage reductions. Salary reductions averaged 20%, including a 21% reduction in the base salary for our Chief Executive Officer and Chief Operating Officer and in the fees of our directors. We also nearly eliminated travel expense for the remainder of 2020. In March 2020, we incurred debt by drawing on our secured credit facility and receiving a loan under the U.S. Small Business Association’s Paycheck Protection Program. After we were able to secure additional capital through sales of our common stock through an at the market offering program in June 2020, the secured credit facility was paid down by June 30, 2020, and the employee salary reductions and hiring restrictions were removed effective July 1, 2020.
In an effort to contain COVID-19 or slow its spread, governments around the world have from time to time enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. These measures have impacted the method and timing of certain business meetings and our attendance at industry events. Rather than attending events in-person, as we have done historically, these events have been held virtually. We believe such events still are a valuable business opportunity, but their relative value without in-person networking is uncertain.
When COVID-19 is demonstrably contained, we anticipate a rebound in economic activity, depending on the rate, pace, and effectiveness of the containment efforts deployed by various national, state, and local governments; however, the timing and extent of any such rebound is uncertain. In the fourth quarter of 2020, we began to see a dramatic year over year increase in Managed Services bookings, our net orders from customers, resulting in 48% growth compared to the fourth quarter of 2019. That growth in bookings led to a 10% growth in overall revenue for the fourth quarter of 2020. While we have seen a continuation of that positive momentum for Managed Services bookings in the first quarter of 2021, there is still risk that bookings will not be recognized as revenue if customers cancel prior to the performance of service.
We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, employees, and prospects, or on our future financial results.
Key Components of Results of Operations
Overall consolidated results of operations are evaluated based on Revenue, Cost of Revenue, Sales and Marketing expenses, General and Administrative expenses, Depreciation and Amortization, and Other Income (Expense), net.
Revenue
We historically generated revenue from five primary sources: (1) revenue from our managed services when a marketer (typically a brand, agency or partner) pays us to provide custom content, influencer marketing, amplification or other campaign management services (“Managed Services”); (2) revenue from fees charged to software customers on their marketplace spend within our IZEAx, Shake, and TapInfluence platforms (“Marketplace Spend Fees”); (3) revenue from fees charged to access the IZEAx, BrandGraph, Ebyline, and TapInfluence platforms (“License Fees”); (4) revenue from transactions generated by the self-service use of our Ebyline platform for professional custom content workflow (“Legacy Workflow Fees”); and (5) revenue derived from other fees such as inactivity fees, early cash-out fees, and subscription plan fees charged to users of our platforms (“Other Fees”). After the migration of the last customers from the Ebyline platform to IZEAx in December 2019, there is no longer any revenue generated from Legacy Workflow Fees and all such revenue is reported as Marketplace Spend Fees under the IZEAx platform.
As discussed in more detail within “Critical Accounting Policies and Use of Estimates” under “Note 1. Company and Summary of Significant Accounting Policies,” under Part I, Item 1 herein, revenue from Marketplace Spend Fees and Legacy Workflow Fees is reported on a net basis and revenue from all other sources, including Managed Services, License Fees, and Other Fees are reported on a gross basis. We further categorize these sources into two primary groups: (1) Managed Services and (2) SaaS Services, which includes revenue from Marketplace Spend Fees, License Fees, Legacy Workflow Fees, and Other Fees.
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Cost of Revenue
Our cost of revenue consists of direct costs paid to our third-party creators who provide the custom content, influencer marketing or amplification services for our Managed Service customers where we report revenue on a gross basis. It also includes internal costs related to our campaign fulfillment and SaaS support departments. These costs include salaries, bonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to the personnel who are primarily responsible for providing support to our customers and ultimately fulfillment of our obligations under our contracts with customers. Where appropriate, we capitalize costs that were incurred with software that is developed or acquired for our revenue supporting platforms and amortize these costs over the estimated useful lives of those platforms. This amortization is separately stated under depreciation and amortization in our consolidated statements of operations.
Sales and Marketing
Our sales and marketing expenses consist primarily of salaries, bonuses, commissions, stock-based compensation, employee benefit costs, travel and miscellaneous departmental costs for our marketing, sales and sales support personnel, as well as marketing expenses such as brand marketing, public relation events, trade shows and marketing materials, and travel expenses.
General and Administrative
Our general and administrative expense consists primarily of salaries, bonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to our executive, finance, legal, human resources, and other administrative personnel. It also includes travel, public company and investor relations expenses, as well as accounting and legal professional services fees, leasehold facilities, and other corporate-related expenses. General and administrative expense also includes our technology and development costs consisting primarily of our payroll costs for our internal engineers and contractors responsible for developing, maintaining, and improving our technology, as well as hosting and software subscription costs. These costs are expensed as incurred, except to the extent that they are associated with internal use software that qualifies for capitalization, which are then recorded as software development costs in the consolidated balance sheet. We also capitalize costs that are related to our acquired intangible assets. Depreciation and amortization related to these costs are separately stated under depreciation and amortization in our consolidated statements of operations. General and administrative expense also includes current period gains and losses on our acquisition costs payable, as well as gains and losses from the sale of fixed assets. Impairments on fixed assets, intangible assets and goodwill, are included as part of general and administrative expense when they are not material and broken out separately in our consolidated statements of operations when they are material.
Depreciation and Amortization
Depreciation and amortization expense consists primarily of amortization of our internal use software and acquired intangible assets from our business acquisitions. To a lesser extent, we also have depreciation and amortization on equipment and leasehold improvements used by our personnel. Costs are amortized or depreciated over the estimated useful lives of the associated assets.
Other Income (Expense)
Interest Expense. Interest expense is mainly related to the imputed interest on our acquisition costs payable and interest when we use our secured credit facility.
Other Income (Expense). Other income (expense) consists primarily of interest income for interest earned or changes in the value of our foreign assets and liabilities and foreign currency exchange gains and losses on foreign currency transactions, primarily related to the Canadian Dollar.
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Results of Operations for the Twelve Months Ended December 31, 2020 and 2019
The following table sets forth a summary of our consolidated statements of operations and the change between the periods:
Twelve Months Ended December 31,
Costs and expenses:
Other income (expense):
Revenue
The following table illustrates our revenue by type, the percentage of total revenue by type, and the change between the periods:
Twelve Months Ended December 31,
Managed Services revenue during the twelve months ended December 31, 2020, increased 4% from the same period in 2019, primarily due to several customers completing larger fourth quarter projects based on their marketing objectives as compared to the prior year period.
SaaS Services revenue is generated by the self-service use of our technology platforms by marketers to manage their own content workflow and influencer marketing campaigns. It consists of fees earned on the marketer’s spend within the IZEAx,BrandGraph, TapInfluence, and Ebyline platforms, along with the license and support fees to access the platform services.
•Legacy Workflow Fees are no longer generated after the migration of the last customers from the Ebyline platform to IZEAx in December 2019. Any activity from former legacy workflow customers is now generated under the IZEAx platform and reported as Marketplace Spend Fees.
•Marketplace Spend Fees decreased by $648,629 for the twelve months ended December 31, 2020 when compared with the same period in 2019, primarily as a result of lower spend levels from our marketers and lower fees assessed on those spends as a result of competitive pricing efforts and the incorporation of lower margin legacy
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workflow customers into IZEAx. Revenue from Marketplace Spend Fees represents our net margins received on this business. After the migration of the last customers from the TapInfluence platform to IZEAx in February 2020, all revenue was solely generated from the IZEAx platform until the launch of Shake in November 2020.
•License Fees revenue decreased during the twelve months ended December 31, 2020 to $1,507,336 compared to $1,986,285 in the same period of 2019. The decrease was partly due to former TapInfluence customers who churned during the second half of 2019. Additionally, we implemented a competitive standardized pricing system for all IZEAx license fee customers that was at a lower price point than the former TapInfluence licensing contracts.
•Other Fees revenue increased 94% for the twelve months ended December 31, 2020 compared to the same period in 2019 due to increases in the number of subscriptions for certain new self-service offerings such as IZEAx Discovery and BrandGraph.
Cost of Revenue
Cost of revenue for the twelve months ended December 31, 2020 decreased by $521,315, or approximately 6%, compared to the same period in 2019 primarily as a result of the decrease in Managed Services revenue. Cost of revenue as a percentage of revenue remained consistent at 45% in 2019 and 44% in 2020.
Sales and Marketing
Sales and marketing expense for the twelve months ended December 31, 2020 decreased by $240,592, or approximately 4%, compared to the same period in 2019. Our payroll and personnel related expenses and stock compensation for sales and marketing personnel decreased $52,000 as a result of the cost reductions and operating changes implemented after the outbreak of COVID-19. Travel related expenses decreased by $176,000 due to the impact of COVID-19 restricting travel beginning in March 2020 and subscription based software expenses decreased by $10,000 due to the non-renewal of non-essential software as part of our operating changes.
General and Administrative
General and administrative expense for the twelve months ended December 31, 2020 decreased by $581,609, or approximately 6%, compared to the same period in 2019. General and administrative expense for the twelve months ended December 31, 2020 decreased due to a $802,000 reduction in payroll and personnel related expenses as a result of a 13% decrease in the number of employees compared to the prior year period and the 20% average decrease in salaries that was implemented for the second quarter of 2020 as a result of the COVID-19 cost reduction efforts. Rent expense also decreased by $370,000 due to the non-renewal of expiring office facility leases and travel costs decreased by $142,000 as our employees continue to work from home. These decreases were offset by an increase of $133,000 in contractor expenses as we began to increase the number of engineers working on our technology offerings. We also recorded a gain of $602,410 related to the settlement of our acquisition cost liabilities in 2019 that did not recur in 2020. The gain resulted due to the actual closing market price of our common stock on the date of settlement being lower than the 30-day volume weighted average price used to calculate the number of shares used to pay for the liability pursuant to the terms of the purchase agreements.
Impairment of Goodwill and Intangible Assets
In March 2020, we identified triggering events due to the reduction in our projected revenue due to adverse economic conditions caused by the COVID-19 pandemic, the continuation of a market capitalization below our carrying value, and uncertainty for recovery given the volatility of the capital markets surrounding COVID-19. We performed an interim assessment of goodwill, using the discounted cash flow method under the income approach and the guideline transaction method under the market approach, and determined that the carrying value of our Company’s reporting unit as of March 31, 2020 exceeded the fair value. As a result of the valuation, we recorded a $4.3 million impairment of goodwill resulting in an expense for the twelve months ended December 31, 2020.
For the twelve months ended December 31, 2019, we recorded impairment charges of $418,099 associated with our reduction in use of certain developed technology upon implementation of IZEAx 3.0 and the migration of TapInfluence customers and creators into the IZEAx platform.
Depreciation and Amortization
Depreciation and amortization expense for the twelve months ended December 31, 2020 decreased by $98,503, or approximately 6%, compared to the same period in 2019.
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Depreciation and amortization expense on property and equipment was $135,077 and $131,121 for the twelve months ended December 31, 2020 and 2019, respectively. Depreciation expense has increased slightly due to the purchase of new equipment in the fourth quarter of 2019 and first quarter of 2020.
Amortization expense was $1,517,049 and $1,619,508 for the twelve months ended December 31, 2020 and 2019, respectively. Amortization expense related to intangible assets acquired in the Ebyline, ZenContent, and TapInfluence acquisitions was $1,105,960 and $1,228,433 for the twelve months ended December 31, 2020 and 2019, respectively, while amortization expense related to internal use software development costs was $411,089 and $391,075 for the twelve months ended December 31, 2020 and 2019, respectively. Amortization on our intangible acquisition assets decreased in 2020 as several of these assets were fully amortized during 2020. Amortization on our internal use software increased due to the release of IZEAx 3.0 in April 2019.
Other Income (Expense)
Interest expense decreased by $170,642 to $63,012 during the twelve months ended December 31, 2020 compared to the same period in 2019 due primarily to the elimination of amounts owed on our acquisition costs payable and amortization thereon after July 2019 and partly to the reduction in our average borrowings on our secured credit facility during the twelve months ended December 31, 2020 compared to the same period in 2019.
The $64,530 decrease in other income during the twelve months ended December 31, 2020 when compared to the same period in 2019 resulted primarily from reduced interest income received on cash balances as short term interest rates declined to near zero in 2020 after the outbreak of COVID-19 and currency exchange losses on our Canadian transactions in 2020.
Net Loss
Net loss for the twelve months ended December 31, 2020 was $10,250,007, a $2,959,887 increase in the net loss of $7,290,120 for the same period in 2019. The increase in net loss was primarily the result of the impairment on intangible assets discussed above offset by reductions in operating expenses.
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Key Metric
We review information provided by our key financial metric, gross billings, to assess the progress of our business and make decisions on where to allocate our resources. As our business evolves, we may make changes to the key financial metrics that we consider to measure our business in future periods.
Gross Billings by Revenue Type
Company management evaluates our operations and makes strategic decisions based, in part, on our key metric of gross billings from our two primary types of revenue, Managed Services and SaaS Services. We define gross billings as the total dollar value of the amounts charged to our customers for the services we perform and the amounts billed to our SaaS customers for their self-service purchase of goods and services on our platforms. The amounts billed to our SaaS customers are on a cost plus basis. Gross billings are the amounts of our reported revenue plus the cost of payments we made to third-party creators providing the content or sponsorship services, which are netted against revenue for generally accepted accounting principles in the United States (“GAAP”) reporting purposes.
Gross billings for Managed Services are the same as revenue reported for those services in our consolidated statements of operations on a GAAP basis, as there is no requirement to net the costs of revenue against the revenue. Gross billings for SaaS Services differ from revenue reported for these services in our consolidated statements of operations on a GAAP basis, as revenue for these services are presented net of the amounts we collect and pay to the third-party creators providing the content or sponsorship services to the self-service SaaS customer.
We consider gross billings to be an important indicator of our potential performance as it measures the total dollar volume of transactions generated through our marketplaces. Tracking gross billings allows us to monitor the percentage of gross billings that we are able to retain after payments to our creators. Additionally, tracking gross billings is critical as it pertains to our credit risk and cash flow. We invoice our customers based on our services performed or based on their self-service transactions plus our fee. Then we remit the agreed-upon transaction price to the creators. If we do not collect the money from our customers prior to the time of payment to our creators, we could experience large swings in our cash flows. Finally, gross billings allow us to evaluate our transaction totals on an equal basis in order for us to see our contribution margins by revenue stream so that we can better understand where we should be allocating our resources.
The following tables set forth our gross billings by revenue type, the percentage of total gross billings by type, and the change between the periods:
Twelve Months Ended December 31,
Non-GAAP Financial Measure
Adjusted EBITDA
Adjusted EBITDA is a “non-GAAP financial measure” as defined under the rules of the Securities and Exchange Commission (the “SEC”). We define Adjusted EBITDA as earnings or loss before interest, taxes, depreciation and amortization, non-cash stock-based compensation, gain or loss on asset disposals or impairment, changes in acquisition cost estimates, and certain other unusual or non-cash income and expense items such as gains or losses on settlement of liabilities and exchanges, and changes in the fair value of derivatives, if applicable.
We use Adjusted EBITDA as a measure of operating performance, for planning purposes, to allocate resources to
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enhance the financial performance of our business, and in communications with our Board of Directors regarding our financial performance. We believe that Adjusted EBITDA also provides useful information to investors as it excludes transactions not related to our core cash-generating operating business activities, and it provides consistency to facilitate period-to-period comparisons. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash-generating operations.
All companies do not calculate Adjusted EBITDA in the same manner, and Adjusted EBITDA as presented by us may not be comparable to Adjusted EBITDA presented by other companies, which limits its usefulness as a comparative measure. Moreover, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for an analysis of our results of operations as under GAAP. These limitations are that Adjusted EBITDA:
•does not include stock-based compensation expense, which is a non-cash expense, but has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;
•does not include stock issued for payment of services, which is a non-cash expense, but has been, and is expected to be for the foreseeable future, an important means for us to compensate our directors, vendors and other parties who provide us with services;
•does not include changes in acquisition cost estimates as a result of the allocation of acquisition costs payable to compensation expense which may be a significant recurring expense for our business if we continue to make business acquisitions;
•does not include gains or losses on the settlement of acquisition costs payable or liabilities when the stock value, as agreed upon in the agreement, varies from the market price of our stock on the settlement date. This is a non-cash expense, but was a recurring expense for our business on certain business contracts where the amounts could vary;
•does not include depreciation and intangible assets amortization expense, impairment charges and gains or losses on disposal of equipment, which is not always a current period cash expense, but the assets being depreciated and amortized may have to be replaced in the future; and
•does not include interest expense and other gains, losses, and expenses that we believe are not indicative of our ongoing core operating results, but these items may represent a reduction or increase in cash available to us.
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the operation and growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP financial measures as supplements. In evaluating these non-GAAP financial measures, you should be aware that in the future, we may incur expenses similar to those for which adjustments are made in calculating Adjusted EBITDA. Our presentation of these non-GAAP financial measures should also not be construed to infer that our future results will be unaffected by unusual or non-recurring items.
The following table sets forth a reconciliation from the GAAP measurement of net loss to our non-GAAP financial measure of Adjusted EBITDA for the twelve months ended December 31, 2020 and 2019:
Twelve Months Ended December 31,
Non-cash stock issued for payment of services 125,000 141,665
Gain on settlement of acquisition costs payable — (602,410)
Increase in value of acquisition costs payable — 6,222
Adjusted EBITDA as a % of Revenue (20) % (25) %
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Liquidity and Capital Resources
We had cash and cash equivalents of $33,045,225 as of December 31, 2020 as compared to $5,884,629 as of December 31, 2019, an increase of $27,160,596, primarily due to net proceeds received from the sale of our common stock in our at the market offering program, offset by operating losses. We have incurred significant net losses and negative cash flow from operations for most periods since our inception, which has resulted in a total accumulated deficit of $70,634,776 as of December 31, 2020. To date, we have financed our operations through revenue from operations, borrowings under our secured credit facility, the PPP Loan (described below) and the sale of our equity securities.
Twelve Months Ended December 31,
Net cash (used for)/provided by:
Cash used for operating activities was $2,095,651 during the twelve months ended December 31, 2020 and is primarily the result of continued use of cash to cover operating losses. Net cash used for investing activities was $354,407 during the twelve months ended December 31, 2020 primarily due to the payment of $363,793 in the development of our proprietary software. Net cash provided by financing activities during the twelve months ended December 31, 2020 was $29,610,654, which consisted primarily of net proceeds of approximately $27.7 million from the sale of our common stock in our at the market offering program and approximately $1.9 million from the PPP Loan (described below).
Secured Credit Facility
We have a secured credit facility agreement with Western Alliance Bank, the parent company of Bridge Bank, National Association. Pursuant to this agreement, we may submit requests for funding up to 80% of our eligible accounts receivable up to a maximum credit limit of $5 million. As of December 31, 2020, we had no amounts outstanding under this agreement. Assuming that our unfunded remaining trade accounts receivable balance was eligible for funding, we had approximately $4.1 million in available credit under the agreement as of December 31, 2020.
PPP Loan
On April 23, 2020, we received a loan from Western Alliance Bank (the “Lender”) in the principal amount of $1,905,100 (the “PPP Loan”) under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The term of the promissory note (the “Note”) issued in respect of the loan is two years, though it may be payable sooner in connection with an event of default under the Note. The PPP Loan carries a fixed interest rate of one percent per year. Certain amounts received under the PPP Loan may be forgiven if the loan proceeds are used for eligible purposes, including payroll costs and certain rent or utility costs, and we meet other requirements regarding, among other things, the maintenance of employment and compensation levels. Loan payments on the PPP Loan may be deferred to either (1) the date that the SBA remits our loan forgiveness amount to the Lender or (2) ten months after the end of our loan forgiveness covered period, if we do not apply for loan forgiveness. We submitted our forgiveness application for the entire amount of the loan in December 2020 and, as of the date of this Annual Report, are awaiting approval from the SBA. The forgiveness of the PPP Loan is based on our adherence to the forgiveness criteria under the CARES Act, and no assurance is provided that we will obtain forgiveness of the PPP Loan in whole or in part.
At the Market (ATM) Offering
On June 4, 2020 and January 25, 2021, we entered into ATM Sales Agreements (as amended, the “Sales Agreements”) with National Securities Corporation, as sales agent (“National Securities”), pursuant to which we may offer and sell, from time to time, through National Securities, shares of our common stock, by any method deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended (the “ATM Offering”), for aggregate purchase prices of up to $40,000,000 and $35,000,000, respectively. As of December 31, 2020, we had sold 14,819,740 shares at an average price of $1.92 per share for total gross proceeds of $28,455,096. From January 1, 2021 to March 26, 2021, we sold 8,691,391 shares at an average price of $3.95 per share for gross proceeds of $34,311,634. Thus, total proceeds raised in the ATM Offering under our shelf registration statement on Form S-3 (File No. 333-238619) as of March 26, 2021 were $62,766,730.
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Financial Condition
We have seen impacts on our operations due to changes in advertising decisions, timing and spending priorities from our customers as a result of COVID-19, which has had and may continue to have a negative impact to our expected future sales and valuation estimates. With our cash on hand as of December 31, 2020, we expect to have sufficient cash reserves and financing sources available to cover expenses at least one year from the issuance of this Annual Report based on our current estimates of revenue and expenses for the next twelve months. While the disruption caused by COVID-19 is currently expected to be temporary, it is generally outside of our control and there is uncertainty around the duration and the total economic impact. Therefore, this matter could have a further material adverse impact on our business, results of operations, and financial position in future periods.
Off-Balance Sheet Arrangements
The Company did not engage in any “off-balance sheet arrangements” (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of December 31, 2020.
Critical Accounting Policies and Use of Estimates
We prepare our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain of our accounting policies require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments will be subject to an inherent degree of uncertainty. Our judgments are based upon the historical experience of the Company, terms of existing contracts, observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. For a summary of our significant accounting policies, please refer to Note 1 — Company and Summary of Significant Accounting Policies included in Item 8 of this Annual Report. We consider accounting estimates to be critical accounting policies when:
•The estimates involve matters that are highly uncertain at the time the accounting estimate is made; and
•different estimates or changes to estimates could have a material impact on the reported financial position, changes in financial position, or results of operations.
When more than one accounting principle, or method of its application, is generally accepted, we select the principle or method that we consider to be the most appropriate when given the specific circumstances. Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties. Due to the inherent uncertainty involving estimates, actual results reported in the future may differ from our estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are customer obligations due under normal trade terms. We consider an account to be delinquent when the customer has not paid its balance due by the associated due date. Uncollectibility of accounts receivable is not significant since most customers are bound by contract and are required to fund us for all the costs of an “opportunity,” defined as an order created by a marketer for a creator to develop or share content on behalf of a marketer. If a portion of the account balance is deemed uncollectible, we will either write-off the amount owed or provide a reserve based on our best estimate of the uncollectible portion of the account. Management estimates the collectibility of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. We have a reserve of $155,000 for doubtful accounts as of December 31, 2020. We believe that this estimate is reasonable, but there can be no assurance that the estimate will not change as a result of a change in economic conditions or business conditions within the industry, the individual customers or our Company. Any adjustments to this account are reflected in the consolidated statements of operations as a general and administrative expense. Bad debt expense was less than 1% of revenue for each of the twelve months ended December 31, 2020 and 2019.
Concentrations of credit risk with respect to accounts receivable were typically limited, because a large number of geographically diverse customers make up our customer base, thus spreading the trade credit risk. However, with our acquisition of TapInfluence, we have increased credit exposure on certain customers who carry significant credit balances related to their Marketplace Spend. We control credit risk through credit approvals, credit limits, and monitoring procedures.
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We perform credit evaluations of our customers, but generally do not require collateral to support accounts receivable. We had no customer that accounted for more than 10% of total accounts receivable at December 31, 2020 and 2019. We had one customer that accounted for 12% of our revenue during the twelve months ended December 31, 2020 and no customer that accounted for more than 10% of our revenue during the twelve months ended December 31, 2019.
Software Development Costs and Acquired Intangible Software
In accordance with Accounting Standards Codification (“ASC”) 350-40, Internal Use Software, we capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our platforms. Software development activities generally consist of three stages (i) the research and planning stage, (ii) the application and development stage, and (iii) the post-implementation stage. Costs incurred in the research and planning stage and in the post-implementation stage of software development, or other maintenance and development expenses that do not meet the qualification for capitalization, are expensed as incurred. Costs incurred in the application and infrastructure development stage, including significant enhancements and upgrades, are capitalized. These costs include personnel and related employee benefits expenses for employees or consultants who are directly associated with and who devote time to software projects, and external direct costs of materials obtained in developing the software. We also capitalize certain costs associated with cloud computing arrangements ("CCAs"). We have capitalized software development costs of $3,036,810 in the consolidated balance sheet as of December 31, 2020. We also have additional proprietary software platforms valued at $820,000 from our acquisitions of Ebyline, ZenContent, and TapInfluence. These costs are reflected as intangible assets in the consolidated balance sheet as of December 31, 2020. We do not transfer ownership of our software to third parties. These software development, acquired technology and CCA costs are amortized on a straight-line basis over the estimated useful life of five years upon initial release of the software or additional features. We review the software development costs for impairment when circumstances indicate that their carrying amounts may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the fair value in our consolidated statements of operations.
Goodwill and Business Combinations
Goodwill represents the excess of the consideration transferred for an acquired business over the fair value of the underlying identifiable net assets. We have goodwill in connection with our acquisitions of Ebyline, ZenContent, and TapInfluence. Goodwill is not amortized, but instead it is tested for impairment at least annually. In the event that management determines that the value of goodwill has become impaired, we will record a charge for the amount of impairment during the fiscal quarter in which the determination is made.
We perform our annual impairment tests of goodwill as of October 1 of each year, or more frequently, if certain indicators are present. For instance, in March 2020, we identified triggering events, including the reduction in our projected revenue due to adverse economic conditions caused by the COVID-19 pandemic, the continuation of a market capitalization below our carrying value, and uncertainty for recovery given the volatility of the capital markets surrounding COVID-19. Therefore, we performed an interim assessment of goodwill, using the discounted cash flow method under the income approach and the guideline transaction method under the market approach, and determined that the carrying value of our Company’s reporting unit as of March 31, 2020 exceeded the fair value. As a result of the March 2020 valuation, we recorded a $4.3 million impairment of goodwill which is reflected as an expense in the consolidated statements of operations for the twelve months ended December 31, 2020.
Goodwill is required to be tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment level, which is referred to as a component. Management identifies its reporting units by assessing whether components (i) have discrete financial information available; (ii) engage in business activities; and (iii) whether a segment manager regularly reviews the component's operating results. Net assets and goodwill of acquired businesses are allocated to the reporting unit associated with the acquired business based on the anticipated organizational structure of the combined entities. If two or more components are deemed economically similar, those components are aggregated into one reporting unit when performing the annual goodwill impairment review. We have determined that we have one reporting unit.
Revenue Recognition
We historically generated revenue from five primary sources: (1) revenue from our managed services when a marketer (typically a brand, agency or partner) pays us to provide custom content, influencer marketing, amplification or other campaign management services (“Managed Services”); (2) revenue from fees charged to software customers on their marketplace spend
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within our IZEAx, Shake, and TapInfluence platforms (“Marketplace Spend Fees”); (3) revenue from fees charged to access the IZEAx, BrandGraph, Ebyline, and TapInfluence platforms (“License Fees”); (4) revenue from transactions generated by the self-service use of our Ebyline platform for professional custom content workflow (“Legacy Workflow Fees”); and (5) revenue derived from other fees such as inactivity fees, early cash-out fees, and subscription plan fees charged to users of our platforms (“Other”). After the migration of the last customers from the Ebyline platform to IZEAx in December 2019, there is no longer any revenue generated from Legacy Workflow Fees and all such revenue is reported as Marketplace Spend Fees under the IZEAx platform.
We recognize revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, revenue is recognized based on a five-step model as follows: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) performance obligations are satisfied. The core principle of ASC 606 is that revenue is recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We apply the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are distinct performance obligations. We also determine whether we act as an agent or a principal for each identified performance obligation. The determination of whether we act as the principal or the agent is highly subjective and requires us to evaluate a number of indicators individually and as a whole in order to make our determination. For transactions in which we act as a principal, revenue is reported on a gross basis as the amount paid by the marketer for the purchase of content or sponsorship, promotion and other related services and we record the amounts we pay to third-party creators as cost of revenue. For transactions in which we act as an agent, revenue is reported on a net basis as the amount we charged to the self-service marketer using our platforms, less the amounts paid to the third-party creators providing the service.
We maintain separate arrangements with each marketer and content creator either in the form of a master agreement or terms of service, which specify the terms of the relationship and access to its platforms, or by statement of work, which specifies the price and the services to be performed, along with other terms. The transaction price is determined based on the fixed fee stated in the statement of work and does not contain variable consideration. Marketers who contract with us to manage their advertising campaigns or custom content requests may prepay for services or request credit terms. Payment terms are typically 30 days from the invoice date. The agreement typically provides for either a non-refundable deposit, or a cancellation fee if the agreement is canceled by the customer prior to completion of services. Billings in advance of completed services are recorded as a contract liability until earned. We assess collectibility based on a number of factors, including the creditworthiness of the customer and payment and transaction history.
Managed Services Revenue
For Managed Services Revenue, we enter into an agreement to provide services that may include multiple distinct performance obligations in the form of: (i) an integrated marketing campaign to provide influencer marketing services, which may include the provision of blogs, tweets, photos or videos shared through social network offerings and content promotion, such as click-through advertisements appearing in websites and social media channels; and (ii) custom content items, such as a research or news article, informational material or videos. Marketers typically purchase influencer marketing services for the purpose of providing public awareness or advertising buzz regarding the marketer’s brand and they purchase custom content for internal and external use. We may provide one type or a combination of all types of these performance obligations on a statement of work for a lump sum fee. We allocate revenue to each performance obligation in the contract at inception based on its relative standalone selling price. These performance obligations are to be provided over a stated period that generally ranges from one day to one year. Revenue is accounted for when the performance obligation has been satisfied depending on the type of service provided. We view our obligation to deliver influencer marketing services, including management services, as a single performance obligation that is satisfied over time as the customer receives the benefits from the services. Revenue is recognized using an input method of costs incurred compared to total expected costs to measure the progress towards satisfying the overall performance obligation of the marketing campaign. The delivery of custom content represents a distinct performance obligation that is satisfied over time as we have no alternative for the custom content, and we have an enforceable right to payment for performance completed to date under the contracts. We consider custom content to be a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer, and revenue is recognized over time using an output method based on when each individual piece of content is delivered to the customer. Based on our evaluations, revenue from Managed Services is reported on a gross basis because we have the primary obligation to fulfill the performance obligations and we create, review, and control the services. We take on the risk of payment to any third-party creators, and we establish the contract price directly with our customers based on the services requested in the statement of work.
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Marketplace Spend Fees and Legacy Workflow Fees Revenue
For Marketplace Spend Fees and Legacy Workflow Fees Revenue, the self-service customer instructs creators found through the Company’s platforms to provide and/or distribute custom content for an agreed upon transaction price. Our platforms control the contracting, description of services, acceptance of and payment for the requested content. This service is used primarily by news agencies or marketers to control the outsourcing of their content and advertising needs. We charge the self-service customer the transaction price plus a fee based on the contract. Revenue is recognized when the transaction is completed by the creator and accepted by the marketer or verified as posted by the system. Based on our evaluations, this revenue is reported on a net basis since we are acting as an agent solely arranging for the third-party creator or influencer to provide the services directly to the self-service customer through the platform or by posting the requested content.
License Fees Revenue
License Fees Revenue is generated through the granting of limited, non-exclusive, non-transferable licenses to customers for the use of the IZEAx, BrandGraph, and until February 2020, the TapInfluence technology platforms for an agreed-upon subscription period. Customers license the platforms to manage their own influencer marketing campaigns. Fees for subscription or licensing services are recognized straight-line over the term of the service.
Other Fees Revenue
Other Fees Revenue is generated when fees are charged to our platform users primarily related to monthly plan fees, inactivity fees, and early cash-out fees. Plan fees are recognized within the month they relate to, inactivity fees are recognized at a point in time when the account is deemed inactive, and early cash-out fees are recognized when a cash-out is either below certain minimum thresholds or when accelerated payout timing is requested.
We do not typically engage in contracts that are longer than one year. Therefore, we do not capitalize costs to obtain our customer contracts as these amounts generally would be recognized over a period of less than one year and are not material.
Changes in how we control and manage our platforms, our contractual terms, our business practices, or other changes in accounting standards or interpretations, may change the reporting of our revenue.
Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes pricing model. Options typically vest ratably over four years with one-fourth of options vesting one year from the date of grant and the remaining options vesting monthly, in equal increments over the remaining three-year period and generally have five or ten-year contract lives. We use the simplified method to estimate the expected term of employee stock options, because we do not believe historical exercise data will provide a reasonable basis for estimating the expected term for the current share options granted. The simplified method assumes that employees will exercise share options evenly between the period when the share options are vested and ending on the date when the options would expire.We use the closing stock price of our common stock on the date of the grant as the associated fair value of our common stock. For issuances after June 30, 2019, we estimate the volatility of our common stock at the date of grant based on the volatility of our stock during the period. For issuances on or prior to June 30, 2019, we estimated the volatility of our common stock at the date of grant based on the volatility of comparable peer companies that were publicly traded and 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 stock options granted under our 2011 Equity Incentive Plans and the assumptions used to determine the fair value of those options during the twelve months ended December 31, 2020 and 2019:
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Total stock-based compensation expense recorded in the Company’s consolidated statements of operations for restricted stock, restricted stock units, stock options, and employee stock purchase plan issuance during the twelve months ended December 31, 2020 and 2019 was $477,993 and $634,651, respectively.
There were outstanding options to purchase 1,712,806 shares with a weighted average exercise price of $2.56 per share, of which options to purchase 997,320 shares were exercisable with a weighted average exercise price of $3.84 per share, as of December 31, 2020. The intrinsic value on outstanding options as of December 31, 2020 was $1,127,194. The intrinsic value on exercisable options as of December 31, 2020 was $364,866.
As of December 31, 2020, we had unvested restricted stock units representing 970,349 shares of common stock with an intrinsic value of $1,766,035 and 13,666 unvested shares of issued restricted stock with an intrinsic value of $24,872.
Recent Accounting Pronouncements
See “Note 1. Company and Summary of Significant Accounting Policies,” under Part II, Item 8 of this Annual Report for information on additional recent pronouncements.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
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ITEM 8 – FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
IZEA Worldwide, Inc.
Winter Park, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of IZEA Worldwide, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition - Estimated Costs to Complete for Managed Services Revenue
As described in Notes 1 and 10 to the consolidated financial statements, for Managed Services Revenue, the Company enters into an agreement to provide services that may include multiple distinct performance obligations in the form of: (i) an integrated marketing campaign to provide influencer marketing services, which may include the provision of blogs, tweets, photos or videos shared through social network offerings and content promotion, such as click-through advertisements appearing in websites and social media channels; and (ii) custom content items, such as a research or news article, informational material or videos. The Company views its obligation to deliver influencer marketing services, including management services, as a single performance obligation that is satisfied over time as the customer receives the benefits from the services. Revenue is
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recognized using an input method of costs incurred compared to total expected costs to measure the progress towards satisfying the overall performance obligation of the marketing campaign. The delivery of custom content represents a distinct performance obligation that is satisfied over time as the Company has no alternative for the custom content and the Company has an enforceable right to payment for performance completed to date under the contracts. The Company considers custom content to be a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer, and revenue is recognized over time based on an output model method based on when each individual piece of content is delivered to the customer.
We identified the estimation of costs to complete on the Company’s obligation to deliver influencer marketing services, including management services, on Managed Services contracts to be a critical audit matter. The determination of the total estimated cost and progress toward completion on contracts not completed requires management to make significant estimates and assumptions primarily related to estimated direct labor and applicable subcontract costs needed to complete contracts. Changes in these estimated direct labor and applicable subcontract costs can have a significant impact on the revenue recognized in each period. Auditing such estimates involved especially challenging and subjective auditor judgment to determine the reasonableness of management’s assumptions and estimates that ultimately determine the amount of revenue to recognize.
The primary procedures we performed to address this critical audit matter included:
•Evaluating management’s ability to accurately estimate total costs to complete by (i) performing a retrospective review to compare prior year estimates of costs to complete for open Managed Services contracts to actual costs incurred upon completion of the contract or updated estimated costs at completion if the contract is still not complete and (ii) evaluating whether contracts which were previously completed earned any additional revenues after the contract was assumed to be completed.
•Assessing the reasonableness of the estimated costs to complete on open contracts as of December 31, 2020 through evaluation of the consistency of expected margins on open contracts to historical margins on completed contracts.
Goodwill Impairment
As described in Notes 1 and 3 to the consolidated financial statements, the Company has goodwill of $4.0 million as of December 31, 2020, all of which relates to the Company’s single reporting unit. The Company’s goodwill is the result of the acquisitions of Ebyline, ZenContent, and TapInfluence in previous years. Goodwill is not amortized, but instead is tested for impairment at least annually, or more frequently, if certain indicators are present. In the event that management determines that the value of goodwill has become impaired, they will record a charge for the amount of impairment during the fiscal quarter in which the determination is made. During the first quarter of 2020, the Company identified triggering events related to the reduction in its projected revenue due to adverse economic conditions caused by the COVID-19 pandemic, the continuation of a market capitalization below the Company’s carrying value and uncertainty for recovery given the volatility of the capital markets surrounding COVID-19 and performed an interim valuation to estimate the fair value of the reporting unit. As a result of the impairment assessment performed by the Company a $4.3 million impairment of goodwill was recorded during the year ending December 31, 2020. The Company used the discounted cash flow method under the income approach and the guideline transaction method under the market approach to estimate the fair value of the reporting unit.
We identified the estimate of the fair value of the Company’s single reporting unit as a critical audit matter. Estimation of the fair value of the Company’s single reporting unit requires management to make significant estimates and assumptions related to future cash flows, growth rates for the business, future economic conditions, and discount rates. Auditing management’s assumptions used in the determination of the fair value of the single reporting unit was especially challenging due to the nature of audit effort required to address the subjective estimates, including the extent of specialized skill and knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Assessing the reasonableness of estimated future cash flows based on the growth rates for the business and future economic conditions, including the impact of COVID-19, by comparing the estimated future cash flows to (i) historical operating results of the Company, and (ii) information included in industry reports and publicly available information related to the industry in which the Company operates.
•Utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) evaluating the reasonableness of the valuation methodologies utilized by the Company, (ii) testing the reasonableness of the Company-specific discount rate used against other comparable publicly traded companies, and (iii) evaluating the appropriateness of the revenue multiple used, including testing the source information utilized.
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/s/ BDO USA, LLP
We have served as the Company's auditor since 2015.
Orlando, Florida
March 30, 2021
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IZEA Worldwide, Inc.
Consolidated Balance Sheets
Assets
Current assets:
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of notes payable 1,477,139 —
Finance obligation, less current portion 43,808 45,673
Notes payable, less current portion 459,383 —
Commitments and Contingencies (Note 7) — —
Stockholders’ equity:
See accompanying notes to the consolidated financial statements.
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IZEA Worldwide, Inc.
Consolidated Statements of Operations and Comprehensive Loss
Twelve Months Ended December 31,
Costs and expenses:
Other income (expense):
Basic and diluted loss per common share $ (0.25) $ (0.29)
See accompanying notes to the consolidated financial statements.
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IZEA Worldwide, Inc.
Consolidated Statements of Stockholders’ Equity
Common Stock AdditionalPaid-In Accumulated TotalStockholders’
Shares Amount Capital Deficit Equity
See accompanying notes to the consolidated financial statements.
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IZEA Worldwide, Inc.
Consolidated Statements of Cash Flows
Twelve Months Ended December 31,
Cash flows from operating activities:
(Gain) loss on disposal of equipment (22,598) 18,786
Provision for losses on accounts receivable 154,576 5,510
Fair value of stock issued for payment of services 125,000 141,665
Gain on settlement of acquisition costs payable — (602,410)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 171,620 (87,323)
Right-of-use asset and lease liability, net 24,024 (24,024)
Cash flows from investing activities:
Cash flows from financing activities:
Proceeds from stock purchase plan and option exercise issuances 7,634 6,979
Proceeds from notes payable 1,936,522 —
Net repayments on line of credit — (1,526,288)
Payments on acquisition liabilities — (156,111)
Supplemental cash flow information:
Non-cash financing and investing activities:
Equipment acquired with financing arrangement $ 43,003 $ 98,648
Common stock issued for payment of acquisition liability $ — $ 4,004,397
Operating right-of-use asset $ — $ 410,852
Fair value of common stock issued for future services $ 125,000 $ 192,550
See accompanying notes to the consolidated financial statements.
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IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
NOTE 1. COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
IZEA Worldwide, Inc. (together with its wholly-owned subsidiaries, “we,” “us,” “our,” “IZEA” or the “Company”) is a public company incorporated in the state of Nevada. In January 2015, IZEA purchased all of the outstanding shares of capital stock of Ebyline, Inc. (“Ebyline”). In March 2016, the Company formed IZEA Canada, Inc., a wholly-owned subsidiary, incorporated in Ontario, Canada, to operate as a sales and support office for IZEA’s Canadian customers. In July 2016, IZEA purchased all the outstanding shares of capital stock of ZenContent, Inc. (“ZenContent”) and in July 2018, a subsidiary of the Company merged with TapInfluence, Inc. (“TapInfluence”). The legal entity of ZenContent was dissolved in December 2017, Ebyline was dissolved in December 2019 and TapInfluence was dissolved in December 2020.
The Company creates and operates online marketplaces that connect marketers with content creators. The creators are compensated by the Company for producing unique content such as long and short form text, videos, photos, status updates, and illustrations for marketers or distributing such content on behalf of marketers through their personal websites, blogs, and social media channels. Marketers receive influential consumer content and engaging, shareable stories that drive awareness.
The Company’s primary technology platform, the IZEA Exchange (“IZEAx”), enables transactions to be completed at scale through the management of custom content workflow, creator search and targeting, bidding, analytics, and payment processing. IZEAx is designed to provide a unified ecosystem that enables the creation and publication of multiple types of custom content through a creator’s personal websites, blogs, or social media channels including Twitter, Facebook, Instagram, and YouTube, among others. Until December 2019 when it was merged into IZEAx, the Company operated the Ebyline technology platform, which was originally designed as a self-service content marketplace to replace in-house editorial newsrooms in news agencies with a “virtual newsroom” to source and handle their content workflow with outside creators. In July 2016, the Company acquired the ZenContent technology platform to use as an in-house workflow tool that enables the Company to produce highly scalable, multi-part production of content for both e-commerce entities and brand customers. The TapInfluence technology platform, acquired in 2018, performed in a similar manner to IZEAx and was being utilized by the majority of the TapInfluence customers as a self-service platform via a licensing arrangement, allowing access to the platform and its creators for self-managed marketing campaigns. After the migration of the last customers to IZEAx from the Ebyline platform in December 2019 and from the TapInfluence platform in February 2020, all marketplace revenue was solely generated from the IZEAx platform until the launch of Shake in November 2020.
In 2020, the Company launched two new platforms, BrandGraph and Shake. BrandGraph is a social media intelligence platform that is heavily integrated with IZEAx and both platforms rely heavily on data from each other, but it is also available as a stand-alone platform. The platform maps and classifies the complex hierarchy of corporation-to-brand relationships by category and associates social content with brands through a proprietary content analysis engine. Shake is a new online marketplace where buyers can quickly and easily hire creators of all types for influencer marketing, photography, design, and other digital services. The Shake platform is aimed at digital creatives seeking freelance “gig” work. Creators list available “Shakes” on their accounts in the platform and marketers select and purchase creative packages from them through a streamlined chat experience, assisted by ShakeBot - a proprietary, artificial intelligence assistant.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a global pandemic and recommended containment and mitigation measures worldwide. As the spread continued throughout the United States, the Company directed all of its staff to work from home effective March 16, 2020. All of the Company’s business operations and ability to support its customers is fully functional while its employees are working from remote locations. However, the Company has seen impacts on its operations due to changes in advertising decisions, timing and spending priorities from customers, which resulted in a negative impact to Company bookings, its net orders from customers, and timing of future revenue. While the disruption caused by COVID-19 is currently expected to be temporary, it is generally outside of the Company’s control and there is uncertainty around the duration and the total economic impact. Therefore, this matter could have a material adverse impact on the Company’s business, results of operations, and financial position in future periods. As a result, the Company leveraged its balance sheet by drawing on its secured credit facility and obtaining a loan under the Paycheck Protection Program (“PPP”) established under the CARES Act as administered by the U.S. Small Business Administration (“SBA”) to increase the Company’s cash position and help preserve its financial flexibility. The secured credit facility was paid down by June 30, 2020 after the Company was able to secure additional capital as described in Note 8.
In light of the adverse economic conditions caused by the COVID-19 pandemic, the Company implemented temporary salary and wage reductions averaging 20%, including a 21% reduction in base salary for the Company’s Chief Executive
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IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
Officer and Chief Operating Officer. These salary reductions were effective as of April 6, 2020 until the earlier of December 31, 2020 or the Company’s restoring normal payroll rates to the majority of its employees. Members of the Company’s Board of Directors also agreed to a similar temporary reduction to their fees. In addition to the salary reductions, the Company also temporarily reduced certain employee benefits and implemented a new employee hiring freeze, during the three months ended June 30, 2020. The employee salary reductions and hiring restrictions were removed effective July 1, 2020 after the Company was able to secure additional capital as described in Note 8.
The Company did not renew leases for its headquarters and temporary office spaces as additional means to reduce fixed costs and the Company intends to have all employees work from home for the foreseeable future to protect the health and safety of its workers. There can be no assurance that the Company will return to a typical office environment in the future, nor can the Company say what that office environment may look like. The Company also reduced and shifted marketing expenses and eliminated travel for the near-term future. These measures may not be sustainable and could prove detrimental long term. Therefore, management reviews these initial actions and other options in conjunction with the changing internal and external economic conditions on an ongoing basis.
Principles of Consolidation
The consolidated financial statements include the accounts of IZEA Worldwide, Inc. and its wholly-owned subsidiaries, subsequent to the subsidiaries’ individual acquisition, merger or formation dates, as applicable. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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.
The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it impacts worldwide macroeconomic conditions, the speed of the anticipated recovery, access to capital markets, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of December 31, 2020 and through the date of the filing of this Annual Report on Form 10-K. The accounting matters assessed included, but were not limited to estimates related to revenue, the accounting for potential liabilities and accrued expenses, the assumptions utilized in valuing stock-based compensation issued for services, the realization of deferred tax assets, and assessments of impairment related to long-lived assets, intangible assets, and goodwill. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods.
Despite the Company’s efforts, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is unable to estimate the full extent to which COVID-19 will negatively impact its financial results or liquidity. However, in consideration of the effect of COVID-19 on the assumptions and estimates used in the preparation of the December 31, 2020 financial statements, the Company identified the goodwill impairment disclosed in Note 3 as a material adverse effect on its results of operations and financial position in the first quarter of fiscal 2020 that was caused by COVID-19’s effect on economic conditions.
Reclassifications
Certain items have been reclassified in the 2019 financial statements to conform to the 2020 presentation. The Company has reclassified its 2019 impairment on intangible assets and software development costs (see Notes 3 and 4) out of general and administrative expense and into a separately stated line item labeled impairment of goodwill and intangible assets within the accompanying consolidated statements of operations.
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IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less from the date of purchase to be cash equivalents. Deposits in our banks are insured by the FDIC up to a maximum amount of $250,000. Deposit balances exceeding this limit were approximately $31.4 million and $4.1 million as of December 31, 2020 and 2019, respectively.
Accounts Receivable and Concentration of Credit Risk