IZEA Worldwide, Inc. - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File No.: 001-37703
IZEA WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 37-1530765 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
501 N. Orlando Avenue, Suite 313, PMB 247 Winter Park, FL | 32789 | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
Registrant’s telephone number, including area code: (407) 674-6911
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.0001 per share | IZEA | The Nasdaq Capital Market | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 10, 2021, there were 61,726,599 shares of our common stock outstanding.
Quarterly Report on Form 10-Q for the period ended March 31, 2021
Table of Contents
| Page | |||||
| PART I. FINANCIAL INFORMATION | |||||
| PART II. OTHER INFORMATION | |||||
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PART I
ITEM 1 – FINANCIAL STATEMENTS
IZEA Worldwide, Inc.
Unaudited Consolidated Balance Sheets
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 65,465,588 | $ | 33,045,225 | |||||||
| Accounts receivable, net | 4,071,940 | 5,207,205 | |||||||||
| Prepaid expenses | 380,407 | 199,294 | |||||||||
| Other current assets | 48,340 | 74,467 | |||||||||
| Total current assets | 69,966,275 | 38,526,191 | |||||||||
| Property and equipment, net | 219,563 | 230,918 | |||||||||
| Goodwill | 4,016,722 | 4,016,722 | |||||||||
| Intangible assets, net | 288,889 | 505,556 | |||||||||
| Software development costs, net | 1,356,308 | 1,472,684 | |||||||||
| Total assets | $ | 75,847,757 | $ | 44,752,071 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 1,675,520 | $ | 1,880,144 | |||||||
| Accrued expenses | 1,680,722 | 1,924,973 | |||||||||
| Contract liabilities | 7,222,120 | 7,180,264 | |||||||||
| Current portion of notes payable | 1,797,976 | 1,477,139 | |||||||||
| Total current liabilities | 12,376,338 | 12,462,520 | |||||||||
| Finance obligation, less current portion | 34,292 | 43,808 | |||||||||
| Notes payable, less current portion | 138,900 | 459,383 | |||||||||
| Total liabilities | 12,549,530 | 12,965,711 | |||||||||
| Commitments and Contingencies (Note 7) | — | — | |||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock; $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding | — | — | |||||||||
Common stock; $0.0001 par value; 200,000,000 shares authorized; 59,123,449 and 50,050,167, respectively, issued and outstanding | 5,912 | 5,005 | |||||||||
| Additional paid-in capital | 135,919,529 | 102,416,131 | |||||||||
| Accumulated deficit | (72,627,214) | (70,634,776) | |||||||||
| Total stockholders’ equity | 63,298,227 | 31,786,360 | |||||||||
| Total liabilities and stockholders’ equity | $ | 75,847,757 | $ | 44,752,071 | |||||||
See accompanying notes to the consolidated financial statements.
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IZEA Worldwide, Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Loss
| Three Months Ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Revenue | $ | 5,375,632 | $ | 4,763,668 | ||||||||||
| Costs and expenses: | ||||||||||||||
| Cost of revenue (exclusive of amortization) | 2,404,752 | 2,140,517 | ||||||||||||
| Sales and marketing | 2,078,323 | 1,523,143 | ||||||||||||
| General and administrative | 2,535,147 | 2,417,838 | ||||||||||||
| Impairment of goodwill | — | 4,300,000 | ||||||||||||
| Depreciation and amortization | 365,529 | 501,269 | ||||||||||||
| Total costs and expenses | 7,383,751 | 10,882,767 | ||||||||||||
| Loss from operations | (2,008,119) | (6,119,099) | ||||||||||||
| Other income (expense): | ||||||||||||||
| Interest expense | (13,793) | (6,618) | ||||||||||||
| Other income (expense), net | 29,474 | (37,744) | ||||||||||||
| Total other income (expense), net | 15,681 | (44,362) | ||||||||||||
| Net loss | $ | (1,992,438) | $ | (6,163,461) | ||||||||||
| Weighted average common shares outstanding – basic and diluted | 56,334,219 | 34,681,198 | ||||||||||||
| Basic and diluted loss per common share | $ | (0.04) | $ | (0.18) | ||||||||||
See accompanying notes to the unaudited consolidated financial statements.
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IZEA Worldwide, Inc.
Unaudited Consolidated Statements of Stockholders’ Equity
Three Months Ended March 31, 2020 and 2021
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 34,634,172 | $ | 3,464 | $ | 74,099,328 | $ | (60,384,769) | $ | 13,718,023 | |||||||||||||||||||||||
| Sale of securities | — | — | — | — | — | |||||||||||||||||||||||||||
| Stock purchase plan issuances | — | — | — | — | — | |||||||||||||||||||||||||||
| Stock issued for payment of services | 97,655 | 10 | 31,240 | — | 31,250 | |||||||||||||||||||||||||||
| Stock issuance costs | — | — | (2,326) | — | (2,326) | |||||||||||||||||||||||||||
| Stock-based compensation | 41,224 | 3 | 129,568 | — | 129,571 | |||||||||||||||||||||||||||
| Net loss | — | — | — | (6,163,461) | (6,163,461) | |||||||||||||||||||||||||||
| Balance, March 31, 2020 | 34,773,051 | $ | 3,477 | $ | 74,257,810 | $ | (66,548,230) | $ | 7,713,057 | |||||||||||||||||||||||
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 50,050,167 | $ | 5,005 | $ | 102,416,131 | $ | (70,634,776) | $ | 31,786,360 | |||||||||||||||||||||||
| Sale of securities | 8,701,691 | 870 | 34,357,142 | — | 34,358,012 | |||||||||||||||||||||||||||
| Stock purchase plan & option exercise issuances | 1,510 | — | 2,144 | — | 2,144 | |||||||||||||||||||||||||||
| Stock issued for payment of services | 7,176 | 1 | 34,695 | — | 34,696 | |||||||||||||||||||||||||||
| Stock issuance costs | — | — | (746,957) | — | (746,957) | |||||||||||||||||||||||||||
| Stock-based compensation | 526,903 | 52 | 197,934 | — | 197,986 | |||||||||||||||||||||||||||
| Shares withheld to cover statutory taxes | (163,998) | (16) | (341,560) | — | (341,576) | |||||||||||||||||||||||||||
| Net loss | — | — | — | (1,992,438) | (1,992,438) | |||||||||||||||||||||||||||
| Balance, March 31, 2021 | 59,123,449 | $ | 5,912 | $ | 135,919,529 | $ | (72,627,214) | $ | 63,298,227 | |||||||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
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IZEA Worldwide, Inc.
Unaudited Consolidated Statements of Cash Flows
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (1,992,438) | $ | (6,163,461) | |||||||
| Adjustments to reconcile net loss to net cash used for operating activities: | |||||||||||
| Depreciation and amortization | 32,486 | 35,629 | |||||||||
| Amortization of software development costs and other intangible assets | 333,043 | 465,640 | |||||||||
| Impairment of goodwill | — | 4,300,000 | |||||||||
| Gain on disposal of equipment | (7,914) | — | |||||||||
| Provision for losses on accounts receivable | — | 33,305 | |||||||||
| Stock-based compensation | 197,986 | 129,571 | |||||||||
| Fair value of stock issued for payment of services | 34,696 | 31,250 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 1,135,265 | 1,585,843 | |||||||||
| Prepaid expenses and other current assets | (154,986) | (15,135) | |||||||||
| Security deposits | — | 619 | |||||||||
| Accounts payable | (204,624) | (1,121,745) | |||||||||
| Accrued expenses | (245,077) | 215,375 | |||||||||
| Contract liabilities | 41,856 | (869,287) | |||||||||
| Right-of-use asset and lease liability, net | — | 24,024 | |||||||||
| Net cash used for operating activities | (829,707) | (1,348,372) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of equipment | (22,109) | — | |||||||||
| Proceeds from sale of equipment | 8,892 | — | |||||||||
| Software development costs | — | (51,004) | |||||||||
| Net cash used for investing activities | (13,217) | (51,004) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from sale of securities | 34,358,012 | — | |||||||||
| Stock issuance costs | (746,957) | (2,326) | |||||||||
| Proceeds from stock purchase plan and option exercise issuances | 2,144 | — | |||||||||
| Payments on shares withheld for statutory taxes | (341,576) | — | |||||||||
| Net proceeds from line of credit | — | 1,162,924 | |||||||||
| Payments on finance obligation | (8,336) | (11,410) | |||||||||
| Net cash provided by financing activities | 33,263,287 | 1,149,188 | |||||||||
| Net increase (decrease) in cash and cash equivalents | 32,420,363 | (250,188) | |||||||||
| Cash and cash equivalents, beginning of period | 33,045,225 | 5,884,629 | |||||||||
| Cash and cash equivalents, end of period | $ | 65,465,588 | $ | 5,634,441 | |||||||
| Supplemental cash flow information: | |||||||||||
| Interest paid | $ | 4,792 | $ | 1,368 | |||||||
| Non-cash financing and investing activities: | |||||||||||
| Equipment acquired with financing arrangement | $ | — | $ | 43,003 | |||||||
| Fair value of common stock issued for future services | $ | 147,329 | $ | 125,000 | |||||||
See accompanying notes to the unaudited consolidated financial statements.
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IZEA Worldwide, Inc.
Notes to the Unaudited 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 Nevada corporation that was founded in February 2006 under the name PayPerPost, Inc. and became a public company in May 2011. In January 2015, IZEA purchased all of the outstanding shares of capital stock of Ebyline, Inc. (“Ebyline”). In March 2016, 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”). ZenContent, Ebyline, and TapInfluence were merged into IZEA and the legal entities were dissolved in December 2017, December 2019 and December 2020, respectively.
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.
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.
Basis of Presentation
The accompanying consolidated balance sheet as of March 31, 2021, the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2021 and 2020, the consolidated statements of stockholders' equity for the three months ended March 31, 2021 and 2020, and the consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 are unaudited but include all adjustments that are, in the opinion of management, necessary for a fair presentation of its financial position at such dates and its results of operations and cash flows for the periods then ended in conformity with generally accepted accounting principles in the United States ("GAAP"). The consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated financial statements at that date but, in accordance with the rules and regulations of the SEC, does not include all of the information and notes required by GAAP for complete financial statements. Operating results for the three months ended March 31, 2021 are not necessarily indicative of results that may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2020 included in the Company's Annual Report on Form 10-K filed with the SEC on March 30, 2021.
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
5
IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements
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 March 31, 2021 and through the date of the filing of this Quarterly Report on Form 10-Q. 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 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 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 and its business operations.
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 $62.7 million and $31.4 million as of March 31, 2021 and December 31, 2020, respectively.
Accounts Receivable and Concentration of Credit Risk
The Company’s accounts receivable balance consists of trade receivables, unbilled receivables, and a reserve for doubtful accounts. Trade receivables are customer obligations due under normal trade terms. Unbilled receivables represent amounts owed for work that has been performed, but not yet billed. The Company had trade receivables of $4,019,050 and unbilled receivables of $52,890 at March 31, 2021. The Company had trade receivables of $5,148,213 and unbilled receivables of $58,992 at December 31, 2020. Management considers an account to be delinquent when the customer has not paid an amount due by its associated due date. Uncollectibility of accounts receivable is not significant since most customers are bound by contract and are required to fund the Company for all the costs of an “opportunity,” defined as an order created by 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, the Company will either write-off the amount owed or provide a reserve based on its best estimate of the uncollectible portion of the account. Management determines the collectibility of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. The Company had a reserve for doubtful accounts of $155,000 as of March 31, 2021 and December 31, 2020. Management believes that this estimate is reasonable, but there can be no assurance that the estimate will not change as a result of a change in economic conditions or business conditions within the industry, the individual customers or the Company. Any adjustments to this account are reflected in the consolidated statements of operations and comprehensive loss as a general and administrative expense. Bad debt expense was less than 1% of revenue for each of the three months ended March 31, 2021 and 2020.
Concentrations of credit risk with respect to accounts receivable have been typically limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. However, with the Company’s addition of SaaS customers, it has increased credit exposure on certain customers who carry significant credit balances related to their marketplace spend. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. The Company performs credit evaluations of its customers, but generally does not require collateral to support accounts receivable. The Company had no customer that accounted for more than 10% of total accounts receivable at March 31, 2021 and December 31, 2020. The Company had no customer that accounted for more than 10% of its revenue during the three months ended March 31, 2021 and 2020.
6
IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements
Property and Equipment
Property and equipment are recorded at cost, or if acquired in a business combination, at the acquisition date fair value. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
| Computer Equipment | 3 years | ||||
| Office Equipment | 3 - 10 years | ||||
| Furniture and Fixtures | 5 - 10 years | ||||
Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for betterments and major improvements are capitalized and depreciated over the remaining useful lives of the assets. The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the year of disposal, with resulting gains or losses included in general and administrative expense in the consolidated statements of operations and comprehensive loss. There were no impairment charges associated with the Company’s long-lived tangible assets during the three months ended March 31, 2021 and 2020.
Goodwill
Goodwill represents the excess of the consideration transferred for an acquired business over the fair value of the underlying identifiable net assets. The Company has goodwill in connection with its 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, the Company will record a charge for the amount of impairment during the fiscal quarter in which the determination is made.
The Company performs its annual impairment tests of goodwill as of October 1 of each year, or more frequently, if certain indicators are present. Goodwill is required to be tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment level, which is referred to as a component. Management identifies its reporting units by assessing whether components (i) have discrete financial information available; (ii) engage in business activities; and (iii) whether a segment manager regularly reviews the component’s operating results. Net assets and goodwill of acquired businesses are allocated to the reporting unit associated with the acquired business based on the anticipated organizational structure of the combined entities. If two or more components are deemed economically similar, those components are aggregated into one reporting unit when performing the annual goodwill impairment review. The Company had one reporting unit as of March 31, 2021.
Intangible Assets
The Company acquired the majority of its intangible assets through its acquisitions of Ebyline, ZenContent, and TapInfluence. The Company is amortizing the identifiable intangible assets over periods of 12 to 60 months. See Note 3 for further details.
Management reviews long-lived assets, including property and equipment, software development costs and other intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared with the asset's carrying amount to determine if there has been an impairment, which is calculated as the difference between the fair value of the asset and the carrying value. Estimates of future undiscounted cash flows are based on expected growth rates for the business, anticipated future economic conditions and estimates of residual values. Fair values take into consideration management estimates of risk-adjusted discount rates, which are believed to be consistent with assumptions that marketplace participants would use in their estimates of fair value. There were no impairment charges associated with the Company’s acquired intangible assets during the three months ended March 31, 2021 and 2020.
Software Development Costs
In accordance with Accounting Standards Codification (“ASC”) 350-40, Internal Use Software, the Company capitalizes certain internal use software development costs associated with creating and enhancing internally developed software related to its 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
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IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements
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. The Company also capitalizes certain costs associated with cloud computing arrangements ("CCAs"). 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. The Company reviews 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, the Company recognizes an impairment loss for the excess of carrying value over the fair value in its consolidated statements of operations and comprehensive loss. See Note 4 for further details.
Leases
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which established a right-of-use model that requires a lessee to record a right-of-use asset and a right-of-use liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company does not record leases on the balance sheet that have a lease term of 12 months or less at the commencement date.
Revenue Recognition
The Company generates revenue from four primary sources: (1) revenue from its managed services when a marketer (typically a brand, agency or partner) pays the Company 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 the Company's IZEAx and Shake platforms (“Marketplace Spend Fees”); (3) revenue from license and subscription fees charged to access the IZEAx and BrandGraph platforms (“License Fees”); and (4) revenue derived from other fees such as inactivity fees, early cash-out fees, and other miscellaneous fees charged to users of the Company's platforms (“Other Fees”).
The Company recognizes 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. The Company applies 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, the Company assesses the goods or services promised within each contract and determines those that are distinct performance obligations. The Company also determines whether it acts as an agent or a principal for each identified performance obligation. The determination of whether the Company acts as the principal or the agent is highly subjective and requires the Company to evaluate a number of indicators individually and as a whole in order to make its determination. For transactions in which the Company acts 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 the Company records the amounts it pays to third-party creators as cost of revenue. For transactions in which the Company acts as an agent, revenue is reported on a net basis as the amount the Company charged to the self-service marketer using the Company’s platforms, less the amounts paid to the third-party creators providing the service.
The Company maintains 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 the Company 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. The Company assesses collectibility based on a number of factors, including the creditworthiness of the customer and payment and transaction history.
8
IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements
Managed Services Revenue
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. 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. The Company may provide one type or a combination of all types of these performance obligations on a statement of work for a lump sum fee. The Company allocates 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. 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 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 using an output method based on when each individual piece of content is delivered to the customer. Based on the Company’s evaluations, revenue from Managed Services is reported on a gross basis because the Company has the primary obligation to fulfill the performance obligations and it creates, reviews, and controls the services. The Company takes on the risk of payment to any third-party creators, and it establishes the contract price directly with its customers based on the services requested in the statement of work.
Marketplace Spend Fees Revenue
For Marketplace Spend Fees Revenue, the self-service customers instruct creators found through the Company’s IZEAx and Shake platforms to provide and/or distribute custom content for an agreed upon transaction price. The Company’s 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. The Company charges 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 the Company’s evaluations, this revenue is reported on a net basis since the Company is acting as an agent through its platform for the third-party creator to provide the services or content directly to the self-service customer or to post approved content through one or more social media platforms.
License Fees Revenue
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 may also separately subscribe to the IZEAx Discovery service within the IZEAx platform. 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 the Company’s 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.
The Company does not typically engage in contracts that are longer than year. Therefore, the Company does not capitalize costs to obtain its customer contracts as these amounts generally would be recognized over a period of less than one year and are not material.
9
IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements
Advertising Costs
Advertising costs are charged to expense as they are incurred, including payments to content creators to promote the Company. Advertising costs charged to operations for the three months ended March 31, 2021 and 2020 were approximately $442,000 and $168,000, respectively. Advertising costs are included in sales and marketing expense in the accompanying consolidated statements of operations and comprehensive loss.
Income Taxes
The Company has not recorded federal income tax expense due to its history of net operating losses. Deferred income taxes are accounted for using the balance sheet approach, which requires recognition of deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized. The Company incurs minimal state franchise tax in four states, which is included in general and administrative expense in the consolidated statements of operations and comprehensive loss.
The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company’s tax years subject to examination by the Internal Revenue Service are 2017 through 2020.
In March 2020, the CARES Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. It also appropriated funds for the PPP loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The Company is currently seeking forgiveness of the full amount of its PPP loan which, if approved, would result in non-taxable income on the forgiveness of debt.
Fair Value of Financial Instruments
The Company’s financial instruments are recorded at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. There are three levels of inputs that may be used to measure fair value:
•Level 1 – Valuation based on quoted market prices in active markets for identical assets and liabilities.
•Level 2 – Valuation based on quoted market prices for similar assets and liabilities in active markets.
•Level 3 – Valuation based on unobservable inputs that are supported by little or no market activity, therefore requiring management’s best estimate of what market participants would use as fair value.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The Company does not have any Level 1, 2 or 3 financial assets or liabilities. The respective carrying values of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable, contract liabilities, and accrued expenses. Unless otherwise disclosed, the fair values of the Company’s long-term debt obligations approximate their carrying value based upon current rates available to the Company.
Stock-Based Compensation
Stock-based compensation cost related to stock options granted under the 2011 Equity Incentive Plan, as amended and restated, the 2011 B Equity Incentive Plan (together, the “2011 Equity Incentive Plans”) (see Note 8) is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period on a straight-line basis. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The Company uses the simplified method to estimate the expected term of employee stock options, because it does not believe historical exercise data will provide a reasonable basis
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IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements
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. The Company uses the closing stock price of its common stock on the date of the grant as the associated fair value of its common stock. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its stock. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future.
The Company used the following assumptions for stock options granted under the 2011 Equity Incentive Plans during the three months ended March 31, 2021 and 2020:
| Three Months Ended | ||||||||||||||
| 2011 Equity Incentive Plans Assumptions | March 31, 2021 | March 31, 2020 | ||||||||||||
| Expected term | 6 years | 6 years | ||||||||||||
| Weighted average volatility | 117.97% | 101.92% | ||||||||||||
| Weighted average risk-free interest rate | 0.70% | 1.71% | ||||||||||||
| Expected dividends | — | — | ||||||||||||
| Weighted average expected forfeiture rate | 19.64% | 15.32% | ||||||||||||
The Company estimates forfeitures when recognizing compensation expense and this estimate of forfeitures is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and a revised amount of unamortized compensation expense to be recognized in future periods.
The Company may issue shares of restricted stock or restricted stock units which vest over future periods. The value of shares is recorded as the fair value of the stock or units upon the issuance date and is expensed on a straight-line basis over the vesting period. See Note 8 for additional information related to these shares.
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Income Taxes: In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 on January 1, 2021 with no material impact on its current reporting in the Company’s consolidated financial statements.
Investments - Equity Securities: In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, 323 and Topic 815 (“ASU 2020-01”) to clarify the scope and interaction between these standards for equity securities, equity method and certain derivatives. The Company adopted ASU No. 2020-01 on January 1, 2021 with no material impact on its current reporting in the Company’s consolidated financial statements.
Reference Rate Reform: In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and further issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), in January 2021 to provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 and ASU 2021-01 also provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. Additionally, they only apply to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. As of March 31,
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IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements
2021, the Company does not have any contracts that reference LIBOR rates and this guidance has not had a material impact on its financial statements.
Codification Improvements: In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs ("ASU 2020-08"), and ASU No. 2020-10, Codification Improvements ("ASU 2020-10"). ASU 2020-08 and ASU 2020-10 provide changes to clarify or improve existing guidance. The Company adopted ASU No. 2020-08 on January 1, 2021 with no material impact on its current reporting in the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Credit Losses: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. In May 2019, the FASB issued ASU 2019-05, which provides transition relief for entities adopting ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods therein. An entity may early adopt the ASU in any interim period after its issuance if the entity has adopted ASU 2016-13. For all other entities, the effective date will be the same as the effective date of ASU 2016-13. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the expected impact of adopting ASU 2016-13 on its consolidated financial statements and disclosures.
Convertible Instruments: In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was within the scope of those models before the adoption of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The provisions of ASU 2020-06 are applicable for the Company as a smaller reporting company for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact that ASU 2020-06 will have on its consolidated financial statements and disclosures.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Furniture and fixtures | $ | 221,733 | $ | 221,733 | |||||||
| Office equipment | 67,833 | 67,833 | |||||||||
| Computer equipment | 512,558 | 513,344 | |||||||||
| Total | 802,124 | 802,910 | |||||||||
| Less accumulated depreciation and amortization | (582,561) | (571,992) | |||||||||
| Property and equipment, net | $ | 219,563 | $ | 230,918 | |||||||
Depreciation and amortization expense on property and equipment recorded in depreciation and amortization expense in the consolidated statements of operations and comprehensive loss was $32,486 and $35,629 for the three months ended March 31, 2021 and 2020, respectively.
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IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
NOTE 3. INTANGIBLE ASSETS
The identifiable intangible assets, other than Goodwill, consists of the following assets:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| Intangible Asset Gross Value | Accumulated Amortization | Intangible Asset Gross Value | Accumulated Amortization | Useful Life (in years) | |||||||||||||||||||||||||
| Content provider networks | $ | 160,000 | $ | 160,000 | $ | 160,000 | $ | 160,000 | 2 | ||||||||||||||||||||
| Trade names | 87,000 | 87,000 | 87,000 | 87,000 | 1 | ||||||||||||||||||||||||
| Developed technology | 820,000 | 820,000 | 820,000 | 820,000 | 5 | ||||||||||||||||||||||||
| Self-service content customers | 2,810,000 | 2,521,111 | 2,810,000 | 2,304,444 | 3 | ||||||||||||||||||||||||
| Managed content customers | 2,140,000 | 2,140,000 | 2,140,000 | 2,140,000 | 3 | ||||||||||||||||||||||||
| Domains | 166,469 | 166,469 | 166,469 | 166,469 | 5 | ||||||||||||||||||||||||
| Embedded non-compete provision | 28,000 | 28,000 | 28,000 | 28,000 | 2 | ||||||||||||||||||||||||
| Total | $ | 6,211,469 | $ | 5,922,580 | $ | 6,211,469 | $ | 5,705,913 | |||||||||||||||||||||
Total identifiable intangible assets from the Company’s acquisitions and other acquired assets net of accumulated amortization thereon consists of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Ebyline Intangible Assets | $ | 2,370,000 | $ | 2,370,000 | |||||||
| ZenContent Intangible Assets | 722,000 | 722,000 | |||||||||
| Domains | 166,469 | 166,469 | |||||||||
| TapInfluence Intangible Assets | 2,953,000 | 2,953,000 | |||||||||
| Total | $ | 6,211,469 | $ | 6,211,469 | |||||||
| Less accumulated amortization | (5,922,580) | (5,705,913) | |||||||||
| Intangible assets, net | $ | 288,889 | $ | 505,556 | |||||||
The Company is amortizing the identifiable intangible assets over a remaining weighted-average period of 4 months. There were no impairment charges associated with the Company’s identifiable intangible assets in the three months ended March 31, 2021 and 2020.
Amortization expense recorded in depreciation and amortization in the accompanying consolidated statements of operations and comprehensive loss was $216,667 and $364,990 for the three months ended March 31, 2021 and 2020, respectively.
The portion of this amortization expense specifically related to the costs of acquired technology that is excluded from cost of revenue and recorded in depreciation and amortization was $0 and $136,500 for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021, future estimated amortization expense related to identifiable intangible assets is set forth in the following schedule:
| Intangible Asset Amortization Expense | ||||||||
| Remainder of 2021 | $ | 288,889 | ||||||
| Total | $ | 288,889 | ||||||
13
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
The Company’s goodwill balance changed as follows:
| Amount | ||||||||
| Balance on December 31, 2019 | $ | 8,316,722 | ||||||
| Acquisitions, impairments, or other changes during 2020 | (4,300,000) | |||||||
| Balance on December 31, 2020 | 4,016,722 | |||||||
| Acquisitions, impairments, or other changes during 2021 | — | |||||||
| Balance on December 31, 2021 | $ | 4,016,722 | ||||||
In March 2020, the Company identified triggering events due 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. The Company 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, the Company recorded a $4.3 million impairment of goodwill, which is reflected as an expense under impairment of goodwill in the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2020. The Company did not identify any triggering events during the three months ended March 31, 2021.
NOTE 4. SOFTWARE DEVELOPMENT COSTS
Software development costs consists of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Software development costs | $ | 3,036,810 | $ | 3,036,810 | |||||||
| Less accumulated amortization | (1,680,502) | (1,564,126) | |||||||||
| Software development costs, net | $ | 1,356,308 | $ | 1,472,684 | |||||||
The Company developed its web-based influencer marketing platform, IZEAx, to enable influencer marketing and content creation campaigns on a greater scale. The Company continues to add new features and additional functionality to IZEAx and developed additional platforms in 2020, BrandGraph and Shake, to facilitate the contracting, workflow, and delivery or posting of content as well as provide for invoicing, collaborating, and direct payments for the Company’s customers and creators. The Company capitalized software development costs of $0 and $51,004 during the three months ended March 31, 2021 and 2020, respectively. As a result, the Company has capitalized a total of $3,036,810 in direct materials, consulting, payroll and benefit costs to its internal use software development costs in the consolidated balance sheet as of March 31, 2021.
The Company amortizes its software development costs, commencing upon initial release of the software or additional features, on a straight-line basis over the estimated useful life of five years, which is consistent with the amount of time its legacy platforms were in service. Amortization expense on software development costs that is excluded from cost of revenue and recorded in depreciation and amortization expense in the accompanying consolidated statements of operations and comprehensive loss was $116,376 and $100,650 for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021, future estimated amortization expense related to software development costs is set forth in the following schedule:
| Software Development Amortization Expense | |||||
| Remainder of 2021 | $ | 332,849 | |||
| 2022 | $ | 400,474 | |||
| 2023 | $ | 359,685 | |||
| 2024 | $ | 177,764 | |||
| 2025 | $ | 78,920 | |||
| Thereafter | $ | 6,616 | |||
| Total | $ | 1,356,308 | |||
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IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Accrued payroll liabilities | $ | 1,320,452 | $ | 1,504,113 | |||||||
| Accrued taxes | 131,593 | 286,455 | |||||||||
| Current portion of finance obligation | 31,312 | 30,487 | |||||||||
| Accrued other | 197,365 | 103,918 | |||||||||
| Total accrued expenses | $ | 1,680,722 | $ | 1,924,973 | |||||||
NOTE 6. NOTES PAYABLE
Canada Emergency Business Account (“CEBA”) Loan
On April 22, 2020, the Company received a Canadian dollar loan in the principal amount of 40,000 CAD ($31,776 USD as of March 31, 2021), from TD Canada Trust Bank pursuant to a CEBA term loan agreement (the “CEBA Loan”). The CEBA Loan has an initial term from inception through December 31, 2022 (the “Initial Term”) and an extended term from January 1, 2023 through December 31, 2025 (the “Extended Term”). No interest is accrued and no payments are due on the loan during the Initial Term. If the Company repays 75% of the CEBA Loan (30,000 CAD) on or prior to December 31, 2022, the remaining 10,000 CAD balance will be forgiven. Otherwise, interest will begin to accrue on the unpaid balance on January 1, 2023 with monthly interest payments commencing on January 31, 2023 until the CEBA Loan is paid in full on or before the end of the Extended Term.
Paycheck Protection Program (“PPP”) Loan
On April 23, 2020, the Company 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”), evidenced by a promissory note issued by the Company (the “Note”) to the Lender.
The term of the Note is 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 the Company meets 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 the Company’s loan forgiveness amount to the Lender or (2) ten months after the end of the Company’s loan forgiveness covered period, if the Company does not apply for loan forgiveness. The Company submitted its forgiveness application for the entire amount of the loan in December 2020 and is awaiting approval from the SBA. The forgiveness of the PPP Loan is dependent on the Company qualifying for the forgiveness of the PPP Loan based on its adherence to the forgiveness criteria under the CARES Act, and no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.
The total balance owed was $1,905,100 as of March 31, 2021 and December 31, 2020, with $1,797,976 and $1,477,139 reflected in the current portion of notes payable in the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively, based on the original terms of the Note which state that the first payment would be due months after the receipt of the loan.
Finance Obligation
The Company has two long term payment plans with a vendor to pay for its computer equipment in four annual payments between October 2019 and February 2023. The Company used an imputed interest rate of 9.5%, based on its incremental borrowing rate, to determine the present value of its finance obligation. The total balance owed was $65,604 and $74,295 as of March 31, 2021 and December 31, 2020, respectively, with the short-term portion of $31,312 and $30,487 recorded under accrued expenses in the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively.
15
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
Secured Credit Facility
The Company had a secured credit facility agreement (also referred to herein as “line of credit”) with Western Alliance Bank, the parent company of Bridge Bank, N.A. of San Jose, California, which it obtained on March 1, 2013 and expanded on April 13, 2015. Pursuant to the secured credit facility agreement, as amended, the Company may submit requests for advances up to 80% of its eligible accounts receivable up to a maximum credit limit of $5 million. Interest accrued on the advances at the rate of prime plus 1.5% per annum and the default rate of interest was prime plus 7%. This agreement was secured by the Company’s accounts receivable and substantially all of the Company’s other assets. The agreement automatically renews in April of each year and required the Company to pay an annual facility fee of $20,000 (0.4% of the credit limit) and an annual due diligence fee of $1,000 upon renewal. The Company elected to terminate this agreement upon its renewal in April 2021.
The Company had no amounts outstanding under this secured credit facility as of March 31, 2021 and December 31, 2020. Assuming that all of the Company’s trade accounts receivables were eligible for funding, the Company would have had approximately $3.2 million in available credit under the agreement as of March 31, 2021.
The annual fees are capitalized in the Company’s consolidated balance sheet within other current assets and are amortized to interest expense over one year. During the three months ended March 31, 2021 and 2020, the Company amortized $5,250 and $5,250, respectively, of the secured credit facility costs through interest expense. The remaining value of the capitalized loan costs related to the secured credit facility as of March 31, 2021 is $1,750. This amount will be amortized to interest expense over the next month.
Summary
Interest expense on financing arrangements recorded in the Company’s consolidated statements of operations and comprehensive loss was $6,470 during the three months ended March 31, 2021. As of March 31, 2021, the future contractual maturities of our debt obligations by year is set forth in the following schedule:
| Remainder of 2021 | $ | 1,498,935 | |||
| 2022 | 493,125 | ||||
| 2023 | 10,420 | ||||
| Total | $ | 2,002,480 | |||
NOTE 7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
Due to the Company’s current work from home policy enacted on March 16, 2020 as a result of the COVID-19 pandemic, and its intent to remain virtual first, the Company does not have any office lease agreements as of March 31, 2021. Additionally, the Company does not have any other operating or finance lease greater than 12 months in duration as of March 31, 2021.
Total rent expense recorded in general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss was $147,983 for the three months ended March 31, 2020. Upon the January 1, 2019 adoption of ASU No. 2016-02, Leases, the Company had one material lease greater than 12 months in duration. This was the lease associated with its corporate headquarters in Winter Park, Florida. This lease expired in April 2020. Cash paid for this one operating lease was $85,137 during the three months ended March 31, 2020.
Litigation
From time to time, the Company may become involved in various other lawsuits and legal proceedings that arise in the ordinary course of its 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 the Company’s business. The Company is currently not aware of any legal proceedings or claims that it believes would or could have, individually or in the aggregate, a material adverse effect on the Company. 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.
16
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
NOTE 8. STOCKHOLDERS’ EQUITY
Authorized Shares
The Company has 200,000,000 authorized shares of common stock and 10,000,000 authorized shares of preferred stock, each with a par value of $0.0001 per share.
Sale of Securities
On June 4, 2020, the Company entered into an ATM Sales Agreement (the “2020 Sales Agreement”) with National Securities Corporation, as sales agent (“National Securities”), pursuant to which the Company could offer and sell, from time to time, through National Securities, shares of the Company's common stock, by any method deemed to be an “at the market offering” (the “ATM Offering”).
On June 12, 2020, the Company entered into an amendment to the 2020 Sales Agreement to increase the amount of common stock that could be offered and sold in the ATM Offering to $40,000,000 in the aggregate. On January 25, 2021, the Company entered into a new ATM Sales Agreement (the “2021 Sales Agreement”) with National Securities, pursuant to which the Company may offer and sell, from time to time, through National Securities, up to $35,000,000 shares of its common stock, by any method deemed to be an at-the-market offering.
During the three months ended March 31, 2021, the Company sold 8,701,691 shares at an average price of $3.95 per share for total gross proceeds of $34,358,012 pursuant to the 2020 and 2021 Sales Agreements with National Securities. As of March 31, 2021, the Company had sold 23,521,431 cumulative shares at an average price of $2.67 per share for total gross proceeds of $62,813,108 pursuant to the 2020 and 2021 Sales Agreements with National Securities.
Equity Incentive Plans
In May 2011, the Company’s Board of Directors (the “Board”) adopted the 2011 Equity Incentive Plan of IZEA Worldwide, Inc. (as amended, the “May 2011 Plan”). The stockholders approved an amendment and restatement of the Company’s May 2011 Plan at its 2020 Annual Meeting of Stockholders held on December 18, 2020, to allow the Company to award restricted stock, restricted stock units and stock options covering up to 7,500,000 shares of common stock as incentive compensation for its officers, employees, consultants, and advisors, including its non-employee directors. Shares of the Company’s common stock that are withheld (or not issued) to cover the purchase price of an option or any required tax withholding obligation will again be available for issuance under the May 2011 Plan. As of March 31, 2021, the Company had 3,809,381 remaining shares of common stock available for issuance pursuant to future grants under the May 2011 Plan.
In August 2011, the Company adopted the 2011 B Equity Incentive Plan (the “August 2011 Plan”) reserving 4,375 shares of common stock for issuance under the August 2011 Plan. As of March 31, 2021, the Company had 4,375 remaining shares of common stock available for future grants under the August 2011 Plan.
Restricted Stock
Under both the May 2011 Plan and the August 2011 Plan (together, the “2011 Equity Incentive Plans”), the Board determines the terms and conditions of each restricted stock issuance, including any future vesting restrictions.
On January 31, 2020, the Company issued its five independent directors a total of 390,625 shares of restricted common stock initially valued at $125,000 for their annual service as directors of the Company. The stock vests in equal monthly installments from January through December 2020.
As of March 31, 2021, the Company had issued its six independent directors a total of 30,324 shares of restricted common stock initially valued at $147,329 for their annual service as directors of the Company. The stock vests in equal monthly installments from January through December 2021.
17
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
The following table contains summarized information about restricted stock issued during the year ended December 31, 2020 and the three months ended March 31, 2021:
| Restricted Stock Activity | Common Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Years to Vest | ||||||||
| Nonvested at December 31, 2019 | 31,282 | $ | 2.15 | 1.9 | |||||||
| Granted | 390,625 | 0.32 | |||||||||
| Vested | (408,241) | 0.39 | |||||||||
| Forfeited | — | ||||||||||
| Nonvested at December 31, 2020 | 13,666 | $ | 2.28 | 1.4 | |||||||
| Granted | 30,324 | 4.86 | |||||||||
| Vested | (9,823) | 4.19 | |||||||||
| Forfeited | — | ||||||||||
| Nonvested at March 31, 2021 | 34,167 | $ | 4.02 | 0.9 | |||||||
Although restricted stock is issued upon the grant of an award, the Company excludes restricted stock from the computations within the financial statements of total shares outstanding and basic earnings per share until such time as the restricted stock vests.
Expense recognized on restricted stock issued to non-employees for services was $34,696 and $31,250 during three months ended March 31, 2021 and 2020, respectively. Expense recognized on restricted stock issued to employees was $6,507 and $13,535 during the three months ended March 31, 2021 and 2020, respectively.
On March 31, 2021, the fair value of the Company’s common stock was approximately $3.77 per share and the intrinsic value on the non-vested restricted stock was $128,810. Future compensation expense related to issued, but non-vested, restricted stock awards as of March 31, 2021 is $137,328. This value is estimated to be recognized over the weighted-average vesting period of approximately ten months.
Restricted Stock Units
The Board determines the terms and conditions of each restricted stock unit award issued under the May 2011 Plan.
The Company issued 84,994 restricted stock units on January 3, 2020 to Mr. Schram under the terms of his employment agreement. The restricted stock units were initially valued at $23,739 and vest in equal monthly installments over 48 months from issuance. The Company also issued 100,000 restricted stock units on January 3, 2020 to Mr. Schram as additional incentive compensation. The restricted stock units were initially valued at $27,930 and vest in a lump sum 12 months from issuance.
During the twelve months ended December 31, 2020, the Company issued a total of 580,099 restricted stock units initially valued at $215,936 to non-executive employees as additional incentive compensation. The restricted stock units vest 12 months from issuance.
During the twelve months ended December 31, 2020, the Company issued Mr. Murphy 123,228 restricted stock units valued at $61,790 for bonuses owed under the terms of his amended employment agreement. The restricted stock units vest in equal monthly installments over 36 months from issuance.
During the twelve months ended December 31, 2020, the Company issued Mr. Schram 41,824 restricted stock units initially valued at $14,052 for bonuses owed under the terms of his employment agreement. The restricted stock units vest in equal monthly installments over 48 months from issuance.
During three months ended March 31, 2021 the Company issued Mr. Murphy 100,000 restricted stock units valued at $394,000 as a one-time bonus. The restricted stock units vest in equal monthly installments over 10 months from issuance.
18
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
The following table contains summarized information about restricted stock units during the year ended December 31, 2020 and the three months ended March 31, 2021:
| Restricted Stock Units Activity | Common Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Years to Vest | ||||||||
| Nonvested at December 31, 2019 | 366,812 | $ | 0.42 | 3.2 | |||||||
| Granted | 930,145 | 0.37 | |||||||||
| Vested | (172,441) | 0.41 | |||||||||
| Forfeited | (154,167) | 0.30 | |||||||||
| Nonvested at December 31, 2020 | 970,349 | $ | 0.39 | 1.2 | |||||||
| Granted | 100,000 | 3.94 | |||||||||
| Vested | (524,256) | 0.47 | |||||||||
| Forfeited | — | — | |||||||||
| Nonvested at March 31, 2021 | 546,093 | $ | 0.96 | 1.8 | |||||||
During the three months ended March 31, 2021, the Company withheld 163,998 shares of common stock valued at $341,576 to cover statutory employee withholding taxes due upon the delivery of common stock for the vested restricted stock units. Expense recognized on restricted stock units issued to employees was $137,808 and $56,607 during the three months ended March 31, 2021 and 2020, respectively. On March 31, 2021, the fair value of the Company’s common stock was approximately $3.77 per share and the intrinsic value on the non-vested restricted units was $2,058,771. Future compensation related to the non-vested restricted stock units as of March 31, 2021 is $491,208 and it is estimated to be recognized over the weighted-average vesting period of approximately 1.8 years.
Stock Options
Under the 2011 Equity Incentive Plans, the Board determines the exercise price to be paid for the stock option shares, the period within which each stock option may be exercised, and the terms and conditions of each stock option. The exercise price of incentive and non-qualified stock options may not be less than 100% of the fair market value per share of the Company’s common stock on the grant date. If an individual owns stock representing more than 10% of the outstanding shares, the exercise price of each share of an incentive stock option must be equal to or exceed 110% of fair market value. Unless otherwise determined by the Board at the time of grant, the exercise price is set at the fair market value of the Company’s common stock on the grant date (or the last trading day prior to the grant date, if it is awarded on a non-trading day). Additionally, the term is set at years and the option typically vests on a straight-line basis over the requisite service period as follows: 25% year from the date of grant with the remaining vesting monthly in equal increments over the following years. The Company issues new shares for any stock awards or options exercised under its 2011 Equity Incentive Plans.
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IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
A summary of option activity under the 2011 Equity Incentive Plans during the year ended December 31, 2020 and the three months ended March 31, 2021, is presented below:
| Options Outstanding | Common Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | ||||||||||||||
| Outstanding at December 31, 2019 | 1,357,837 | $ | 3.24 | 7.2 | |||||||||||||
| Granted | 411,350 | 0.69 | |||||||||||||||
| Exercised | (369) | 1.00 | |||||||||||||||
| Expired | — | — | |||||||||||||||
| Forfeited | (56,012) | 5.08 | |||||||||||||||
| Outstanding at December 31, 2020 | 1,712,806 | $ | 2.56 | 6.9 | |||||||||||||
| Granted | 44,155 | 2.61 | |||||||||||||||
| Exercised | (1,510) | 1.42 | |||||||||||||||
| Expired | — | — | |||||||||||||||
| Forfeited | (6,934) | 5.57 | |||||||||||||||
| Outstanding at March 31, 2021 | 1,748,517 | $ | 2.55 | 6.8 | |||||||||||||
| Exercisable at March 31, 2021 | 1,070,149 | $ | 3.60 | 5.7 | |||||||||||||
During the three months ended March 31, 2021, 1510 options were exercised for gross proceeds of $2,144. The intrinsic value on exercised options was $4,651. There were no options exercised during the three months ended March 31, 2020. The fair value of the Company's common stock on March 31, 2021 was approximately $3.77 per share and the intrinsic value on outstanding options as of March 31, 2021 was $3,277,104. The intrinsic value on exercisable options as of March 31, 2021 was $1,321,186.
A summary of the nonvested stock option activity under the 2011 Equity Incentive Plans during the year ended December 31, 2020 and the three months ended March 31, 2021, is presented below:
| Nonvested Options | Common Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Years to Vest | ||||||||||||||
| Nonvested at December 31, 2019 | 600,779 | $ | 0.64 | 3.0 | |||||||||||||
| Granted | 411,350 | 0.56 | |||||||||||||||
| Vested | (283,766) | 0.72 | |||||||||||||||
| Forfeited | (12,877) | 0.88 | |||||||||||||||
| Nonvested at December 31, 2020 | 715,486 | $ | 0.56 | 2.5 | |||||||||||||
| Granted | 44,155 | 2.24 | |||||||||||||||
| Vested | (79,460) | 0.72 | |||||||||||||||
| Forfeited | (1,813) | 0.64 | |||||||||||||||
| Nonvested at March 31, 2021 | 678,368 | $ | 0.64 | 2.4 | |||||||||||||
There were outstanding options to purchase 1,748,517 shares with a weighted average exercise price of $2.55 per share, of which options to purchase 1,070,149 shares were exercisable with a weighted average exercise price of $3.60 per share as of March 31, 2021.
Expense recognized on stock options issued to employees during the three months ended March 31, 2021 and 2020 was $52,407 and $59,051, respectively. Future compensation related to non-vested awards as of March 31, 2021 is $388,112, and it is estimated to be recognized over the weighted-average vesting period of approximately 2.4 years.
20
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
The following table shows the number of stock options granted under the Company’s 2011 Equity Incentive Plans and the assumptions used to determine the fair value of those options using a Black-Scholes option-pricing model during the three months ended March 31, 2021 and 2020:
| Period Ended | Total Stock Options Granted | Weighted-Average Exercise Price | Weighted-Average Expected Term | Weighted-Average Volatility | Weighted-Average Risk-Free Interest Rate | Expected Dividends | Weighted-Average Grant Date Fair Value | |||||||||||||||||||||||||||||||||||||
| March 31, 2020 | 8,917 | $0.25 | 6 years | 101.92% | 1.71% | — | $0.16 | |||||||||||||||||||||||||||||||||||||
| March 31, 2021 | 44,155 | $2.61 | 6 years | 117.97% | 0.70% | — | $2.24 | |||||||||||||||||||||||||||||||||||||
Employee Stock Purchase Plan
The amended and restated IZEA Worldwide, Inc. 2014 Employee Stock Purchase Plan (the “ESPP”), provides for the issuance of up to 500,000 shares of the Company’s common stock to employees regularly employed by the Company for 90 days or more on a full-time or part-time basis (20 hours or more per week on a regular schedule). The ESPP operates in successive months offering periods commencing at the beginning of each fiscal year half. Each eligible employee who elects to participate may purchase up to 10% of their annual compensation in common stock not to exceed $21,250 annually or 2,000 shares per offering period. The purchase price will be the lower of (i) 85% of the fair market value of a share of common stock on the first day of the offering period or (ii) 85% of the fair market value of a share of common stock on the last day of the offering period. The ESPP will continue until January 1, 2024, unless otherwise terminated by the Board.
Expense recognized on the options to purchase shares under the ESPP was $1,264 and $378 during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the Company had 395,613 remaining shares of common stock available for future issuances under the ESPP.
Summary Stock-Based Compensation
Stock-based compensation cost related to all awards granted to employees 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 utilizing the weighted-average forfeiture rates disclosed in Note 1. Total stock-based compensation expense recognized on restricted stock, restricted stock units, stock options, and employee stock purchase plan issuances during the three months ended March 31, 2021 and 2020 was recorded in the Company’s consolidated statements of operations and comprehensive loss as follows:
| Three Months Ended | ||||||||||||||
| March 31, 2021 | March 31, 2020 | |||||||||||||
| Cost of revenue | $ | 1,454 | $ | 7,004 | ||||||||||
| Sales and marketing | 5,430 | 22,056 | ||||||||||||
| General and administrative | 191,102 | 100,511 | ||||||||||||
| Total stock-based compensation | $ | 197,986 | $ | 129,571 | ||||||||||
NOTE 9. LOSS PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing the net income or loss by the basic weighted-average number of shares of common stock outstanding during each period presented. Although restricted stock is issued upon the grant of an award, the Company excludes restricted stock from the computations of weighted-average number of shares of common stock outstanding until such time as the stock vests. Diluted loss per share is computed by dividing the net income or loss by the sum of the total of the basic weighted-average number of shares of common stock outstanding plus the additional dilutive securities that could be exercised or converted into common shares during each period presented less the amount of shares that could be repurchased using the proceeds from the exercises.
21
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
| Three Months Ended | ||||||||||||||
| March 31, 2021 | March 31, 2020 | |||||||||||||
| Net loss | $ | (1,992,438) | $ | (6,163,461) | ||||||||||
| Weighted average shares outstanding - basic and diluted | 56,334,219 | 34,681,198 | ||||||||||||
| Basic and diluted loss per common share | $ | (0.04) | $ | (0.18) | ||||||||||
The Company excluded the following weighted average items from the above computation of diluted loss per common share, as their effect would be anti-dilutive:
| Three Months Ended | |||||||||||||||||
| March 31, 2021 | March 31, 2020 | ||||||||||||||||
| Stock options | 1,738,854 | 1,358,501 | |||||||||||||||
| Restricted stock units | 654,209 | 812,687 | |||||||||||||||
| Restricted stock | 29,331 | 386,209 | |||||||||||||||
| Warrants | — | 13,709 | |||||||||||||||
| Total excluded shares | 2,422,394 | 2,571,106 | |||||||||||||||
NOTE 10. REVENUE
The Company has consistently applied its accounting policies with respect to revenue to all periods presented in the consolidated financial statements contained herein. The following table illustrates the Company’s revenue by product service type:
| Three Months Ended | ||||||||||||||
| March 31, 2021 | March 31, 2020 | |||||||||||||
| Managed Services Revenue | $ | 4,872,034 | $ | 4,125,061 | ||||||||||
| Marketplace Spend Fees | 108,797 | 166,293 | ||||||||||||
| License Fees | 383,041 | 451,548 | ||||||||||||
| Other Fees | 11,760 | 20,766 | ||||||||||||
| SaaS Services Revenue | 503,598 | 638,607 | ||||||||||||
| Total Revenue | $ | 5,375,632 | $ | 4,763,668 | ||||||||||
The following table provides the Company’s revenues as determined by the country of domicile:
| Three Months Ended | |||||||||||||||||
| March 31, 2021 | March 31, 2020 | ||||||||||||||||
| United States | $ | 5,128,245 | $ | 4,578,008 | |||||||||||||
| Canada | 247,387 | 185,660 | |||||||||||||||
| Total | $ | 5,375,632 | $ | 4,763,668 | |||||||||||||
22
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers reported in the Company’s consolidated balance sheet:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Accounts receivable, net | $ | 4,071,940 | $ | 5,207,205 | |||||||
| Contract liabilities (unearned revenue) | $ | 7,222,120 | $ | 7,180,264 | |||||||
The increase in contract liabilities is primarily the result of the increase in first quarter contracts where the customers have paid in advance for services in future periods. The Company does not typically engage in contracts that are longer than year. Therefore, the Company recognized substantially all of the contract liabilities recorded at the end of the year in the following year and it did not recognize any contract assets as of March 31, 2021 or December 31, 2020. The Company does not capitalize costs to obtain its customer contracts given their general duration of less than year, and the amounts are not material.
Contract receivables are recognized when the receipt of consideration is unconditional. Contract liabilities relate to consideration received from customers in advance of the Company satisfying performance obligations under the terms of the contracts, which will be earned in future periods. Contract liabilities increase as a result of receiving new advance payments from customers and decrease as revenue is recognized upon the Company meeting the performance obligations. As a practical expedient, the Company expenses the costs of sales commissions that are paid to its sales force associated with obtaining contracts less than one year in length in the period incurred.
Remaining Performance Obligations
The Company typically enters into contracts that are one year or less in length. As such, the remaining performance obligations at March 31, 2021 and December 31, 2020 are equal to the contract liabilities disclosed above. The Company expects to recognize the full balance of the unearned revenue at March 31, 2021 within the next year.
NOTE 11. SUBSEQUENT EVENTS
In April 2021, the Company sold 2,484,393 shares of its common stock at an average price of $4.91 per share for gross proceeds of $12,186,677 under the 2021 Sales Agreement with National Securities. On April 15, 2021, the Company announced that it had sold the entire $35.0 million of common stock available for sale under the 2021 Sales Agreement. All shares eligible to be sold under the ATM Offering were sold by the Company in the last two fiscal quarters of 2020 and the first two fiscal quarters of 2021. Over the selling period, the Company sold a total of 26,005,824 shares at an average price of $2.88 per share for total gross proceeds of approximately $75.0 million pursuant to the 2020 and 2021 Sales Agreements with National Securities. The 2020 and 2021 Sales Agreements were terminated following the sale of all shares of common stock available to be sold thereunder.
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. The statements, which are not historical facts contained in this report, including those contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the notes to our consolidated financial statements, particularly those that utilize terminology such as “may,” “will,” “would,” “could,” “should,” “expects,” “anticipates,” “anticipates,” “estimates,” “believes,” “thinks,” “intends,” “likely,” “projects,” “plans,” “pursue,” “strategy” or “future,” or the negative of these words or other words or expressions of similar meaning, are forward-looking statements. Such statements are based on currently available operating, financial and competitive information, and are subject to inherent risks, uncertainties, and changes in circumstances that are difficult to predict and many of which are outside of our control. Future events and our actual results and financial condition may differ materially from those reflected in these forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause these differences include, but are not limited to, the following:
•the impact of the COVID-19 pandemic on our operations, financial condition, and the worldwide economy;
•customer cancellations;
•our ability to raise additional funding needed to fund our business operation in the future;
•our ability to satisfy the requirements for continued listing of our common stock on the Nasdaq Capital Market;
•our ability to maintain effective disclosure controls and procedures and internal control over financial reporting;
•our ability to protect our intellectual property;
•our ability to maintain and grow our business;
•results of any future litigation;
•competition in the industry;
•variability of operating results;
•our ability to maintain and enhance our brand;
•accuracy of tracking the number of user accounts;
•our development and introduction of new products and services;
•the successful integration of acquired companies, technologies and assets into our portfolio of software and services;
•marketing and other business development initiatives;
•general government regulation;
•economic conditions, including as a result of health and safety concerns;
•dependence on key personnel;
•the ability to attract, hire, and retain personnel who possess the technical skills and experience necessary to meet the service requirements of our customers;
•the potential liability with respect to actions taken by our existing and past employees;
•risks associated with international sales; and
•the other risks and uncertainties described in the Risk Factors sections of this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2020.
All forward-looking statements in this document are based on our current expectations, intentions, and beliefs using information currently available to us as of the date of this Quarterly Report, and we assume no obligation to update any forward-looking statements, except as required by law. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
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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.
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 three months ended March 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 and we allowed the leases for our company headquarters and temporary office spaces to expire at the end of their terms throughout 2020. We have not experienced any major declines in operating efficiency in our remote working environment and have made the decision to continue our work from home policy indefinitely as a virtual first employer.
While we are able to maintain full operations remotely, the economic conditions caused by COVID-19 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 resulted in a negative impact to our revenue in 2020.
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 and the first quarter of 2021, we saw a year over year increase in Managed Services bookings, our net orders from customers. That growth in bookings led to a 13% growth in overall revenue in the three months ended March 31, 2021. While we have seen an increase in Managed Services bookings, 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.
25
Key Components of Results of Operations
Overall consolidated results of operations are evaluated based on Revenue, Cost of Revenue, Sales and Marketing expenses, General and Administrative expenses, Depreciation and Amortization, and Other Income (Expense), net.
Revenue
We generate revenue from four primary sources: (1) revenue from our managed services when a marketer (typically a brand, agency or partner) pays us to provide custom content, influencer marketing, amplification or other campaign management services (“Managed Services”); (2) revenue from fees charged to software customers on their marketplace spend within our IZEAx and Shake platforms (“Marketplace Spend Fees”); (3) revenue from license and subscription fees charged to access the IZEAx and BrandGraph platforms (“License Fees”); and (4) revenue derived from other fees such as inactivity fees, early cash-out fees, and other miscellaneous fees charged to users of our platforms (“Other Fees”).
As discussed in more detail within “Critical Accounting Policies and Use of Estimates” under “Note 1. Company and Summary of Significant Accounting Policies,” under Part I, Item 1 herein, revenue from Marketplace Spend 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, and Other Fees.
Cost of Revenue
Our cost of revenue consists of direct costs paid to our third-party creators who provide the custom content, influencer marketing or amplification services for our Managed Service 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 and comprehensive loss.
Sales and Marketing
Our sales and marketing expenses consist primarily of salaries, bonuses, commissions, stock-based compensation, employee benefit costs, travel and miscellaneous departmental costs for our marketing, sales and sales support personnel, as well as marketing expenses such as brand marketing, public 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 and comprehensive loss. 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 and comprehensive loss when they are material.
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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 Three Months Ended March 31, 2021 and 2020
The following table sets forth a summary of our consolidated statements of operations and comprehensive loss and the change between the periods:
| Three Months Ended March 31, | ||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||
| Revenue | $ | 5,375,632 | $ | 4,763,668 | $ | 611,964 | 13 | % | ||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Cost of revenue (exclusive of amortization) | 2,404,752 | 2,140,517 | 264,235 | 12 | % | |||||||||||||||
| Sales and marketing | 2,078,323 | 1,523,143 | 555,180 | 36 | % | |||||||||||||||
| General and administrative | 2,535,147 | 2,417,838 | 117,309 | 5 | % | |||||||||||||||
| Impairment of goodwill | — | 4,300,000 | (4,300,000) | (100) | % | |||||||||||||||
| Depreciation and amortization | 365,529 | 501,269 | (135,740) | (27) | % | |||||||||||||||
| Total costs and expenses | 7,383,751 | 10,882,767 | (3,499,016) | (32) | % | |||||||||||||||
| Loss from operations | (2,008,119) | (6,119,099) | 4,110,980 | (67) | % | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense | (13,793) | (6,618) | (7,175) | 108 | % | |||||||||||||||
| Other income (expense), net | 29,474 | (37,744) | 67,218 | (178) | % | |||||||||||||||
| Total other income (expense), net | 15,681 | (44,362) | 60,043 | (135) | % | |||||||||||||||
| Net loss | $ | (1,992,438) | $ | (6,163,461) | $ | 4,171,023 | (68) | % | ||||||||||||
Revenue
The following table illustrates our revenue by type, the percentage of total revenue by type, and the change between the periods:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Managed Services Revenue | $ | 4,872,034 | 91 | % | $ | 4,125,061 | 87 | % | $ | 746,973 | 18 | % | ||||||||||||||
| Marketplace Spend Fees | 108,797 | 2 | % | 166,293 | 3 | % | (57,496) | (35) | % | |||||||||||||||||
| License Fees | 383,041 | 7 | % | 451,548 | 10 | % | (68,507) | (15) | % | |||||||||||||||||
| Other Fees | 11,760 | — | % | 20,766 | — | % | (9,006) | (43) | % | |||||||||||||||||
| SaaS Services Revenue | 503,598 | 9 | % | 638,607 | 13 | % | (135,009) | (21) | % | |||||||||||||||||
| Total Revenue | $ | 5,375,632 | 100 | % | $ | 4,763,668 | 100 | % | $ | 611,964 | 13 | % | ||||||||||||||
Managed Services revenue during the three months ended March 31, 2021, increased 18% from the same period in 2020, primarily due to increased orders from new and existing customers returning to and expanding their marketing efforts through sponsored social marketing as compared to the prior year period when customers began to curtail marketing efforts in light of the COVID-19 uncertainties.
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, and Shake platforms, along with the license and support fees to access the platform services.
•Marketplace Spend Fees decreased by $57,496 for the three months ended March 31, 2021 when compared with the same period in 2020, primarily as a result of lower spend levels from our marketers and lower average fees assessed on those spends as a result of competitive pricing efforts in IZEAx. Revenue from Marketplace Spend Fees represents our net margins received on this business.
•License Fees revenue decreased during the three months ended March 31, 2021 to $383,041 compared to $451,548 in the same period of 2020. The decrease was a result of the implementation of a competitive standardized pricing system for all new and renewing IZEAx license fee customers in 2020 that was at a lower
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price point than the former licensing contracts put in place prior to 2020. The decrease in IZEAx license fees was offset by an increase in subscriptions for BrandGraph and IZEAx Discovery services. Prior to 2021, the subscription fees for BrandGraph and IZEAx Discovery were classified under Other Fees, but these amounts from 2020 have been reclassified under License Fees to conform with their 2021 classification.
•Other Fees revenue decreased (43)% for the three months ended March 31, 2021 compared to the same period in 2020 due to a decrease in the amount of inactivity fees assessed on user accounts.
Cost of Revenue
Cost of revenue for the three months ended March 31, 2021 increased by $264,235, or approximately 12%, compared to the same period in 2020 primarily as a result of the increase in Managed Services revenue. Cost of revenue as a percentage of revenue remained consistent at 45% in 2020 and 45% in 2021.
Sales and Marketing
Sales and marketing expense for the three months ended March 31, 2021 increased by $555,180, or approximately 36%, compared to the same period in 2020. Advertising and marketing expenses increased $328,000 as a result of increased spends to increase brand awareness and improve customer acquisition, satisfaction and retention. Our payroll and personnel related expenses and stock compensation for sales and marketing personnel increased $208,000 as a result of increased commission and bonus expense due to the increase in customer bookings in the first quarter of 2021.
General and Administrative
General and administrative expense for the three months ended March 31, 2021 increased by $117,309, or approximately 5%, compared to the same period in 2020. General and administrative expense for the three months ended March 31, 2021 increased due to a $166,000 increase in payroll and personnel related expenses primarily as a result of an increase in annual salaries, and higher bonus and stock compensation expense due to the improved company performance in the first quarter of 2021. Contractor expenses increased $209,000 as we are increasing the number of internal and external engineers working on our technology offerings. These increases were partially offset by decreases in (i) rent expense of $142,000 due to the non-renewal of expiring office facility leases, (ii) software and AWS hosting costs of $77,000 due to continued efforts to reduce software subscriptions in 2020 and improve efficiencies in our data storage, (iii) non-renewal of investor relations contracts, and (iv) the elimination of travel costs of $19,000 due to limited travel after the outbreak of COVID-19.
Impairment of Goodwill
In March 2020, we identified triggering events due to the reduction in our projected revenue due to adverse economic conditions caused by the COVID-19 pandemic, the continuation of a market capitalization below our carrying value, and uncertainty for recovery given the volatility of the capital markets surrounding COVID-19. We performed an interim assessment of goodwill, using the discounted cash flow method under the income approach and the guideline transaction method under the market approach, and determined that the carrying value of our Company’s reporting unit as of March 31, 2020 exceeded the fair value. As a result of the valuation, we recorded a $4.3 million impairment of goodwill resulting in an expense for the three months ended March 31, 2020.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 2021 decreased by $135,740, or approximately 27%, compared to the same period in 2020.
Depreciation and amortization expense on property and equipment was $32,486 and $35,629 for the three months ended March 31, 2021 and 2020, respectively. Depreciation expense has increased slightly due to the purchase of new equipment in recent periods.
Amortization expense was $333,043 and $465,640 for the three months ended March 31, 2021 and 2020, respectively. Amortization expense related to intangible assets acquired in the Ebyline, ZenContent, and TapInfluence acquisitions was $216,667 and $364,990 for the three months ended March 31, 2021 and 2020, respectively, while amortization expense related to internal use software development costs was $116,376 and $100,650 for the three months ended March 31, 2021 and 2020, respectively. Amortization on our intangible acquisition assets decreased in 2021 as several of these assets were fully amortized during 2020. Amortization on our internal use software increased due to the release of BrandGraph and Shake in 2020.
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Other Income (Expense)
Interest expense increased by $7,175 to $13,793 during the three months ended March 31, 2021 compared to the same period in 2020 due primarily to increase in our financing arrangements, such as the PPP Loan, and the interest imputed thereon during the three months ended March 31, 2021 compared to the same period in 2020.
The $67,218 increase in other income during the three months ended March 31, 2021 when compared to the same period in 2020 resulted primarily from increased interest income received on the substantial increase in cash balances, as well as, currency exchange gains on our Canadian transactions in 2021 compared with losses in 2020.
Net Loss
Net loss for the three months ended March 31, 2021 was $1,992,438, a $4,171,023 decrease in the net loss of $6,163,461 for the same period in 2020. The decrease in net loss was primarily the result of the impairment of goodwill discussed above partially offset by the increase in sales and marketing and general and administrative expenses in 2021.
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 earned from our customers for the services we perform or the amounts billed to our SaaS customers for their self-service purchase of goods and services on our platforms. The amounts billed to our SaaS customers are on a cost plus basis. Gross billings are the amounts of our reported revenue plus the cost of payments we made to third-party creators providing the content or sponsorship services, which are netted against revenue for generally accepted accounting principles in the United States (“GAAP”) reporting purposes.
Managed Services Gross Billings include the total dollar value of the amounts billed to our customers for the services we perform. Gross billings for Managed Services are the same as Managed Services Revenue reported for those services in our consolidated statements of operations and comprehensive loss in accordance with GAAP.
SaaS Service Gross Billings include the license and other fees together with the total amounts billed to our SaaS customers for their self-service purchase of goods and services on our platforms, termed ‘Marketplace Spend Fees’. Our SaaS customers’ marketplace spend is billed on a cost-plus basis. SaaS Services Revenue includes the total of License and Other Fees gross billings, plus the Marketplace Spend Fees gross billings netted by our third-party creator costs on those billings in accordance with GAAP.
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 flows. We invoice our customers based on total 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. Additionally, we incur the credit risk to collect amounts owed from our customers for all services performed by us or by the creators. Finally, gross billings allow us to evaluate our transaction totals on an equal basis 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.
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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:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Managed Services Gross Billings | $ | 4,872,034 | 74% | $ | 4,125,061 | 68% | $ | 746,973 | 18% | |||||||||||||||||
| Marketplace Spend Fees | 1,351,592 | 20% | 1,499,774 | 25% | (148,182) | (10)% | ||||||||||||||||||||
| License Fees | 383,041 | 6% | 451,548 | 7% | (68,507) | (15)% | ||||||||||||||||||||
| Other Fees | 11,760 | —% | 20,766 | —% | (9,006) | (43)% | ||||||||||||||||||||
| SaaS Services Gross Billings | 1,746,393 | 26% | 1,972,088 | 32% | (225,695) | (11)% | ||||||||||||||||||||
| Total Gross Billings | $ | 6,618,427 | 100% | $ | 6,097,149 | 100% | $ | 521,278 | 9% | |||||||||||||||||
Non-GAAP Financial Measure
Adjusted EBITDA
Adjusted EBITDA is a “non-GAAP financial measure” 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, 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 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 primarily excludes non-cash transactions, and it provides consistency to facilitate period-to-period comparisons.
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 described further in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
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 three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Net loss | $ | (1,992,438) | $ | (6,163,461) | ||||||||||
| Non-cash stock-based compensation | 197,986 | 129,571 | ||||||||||||
| Non-cash stock issued for payment of services | 34,696 | 31,250 | ||||||||||||
| Interest expense | 13,793 | 6,618 | ||||||||||||
| Depreciation and amortization | 365,529 | 501,269 | ||||||||||||
| Impairment of goodwill | — | 4,300,000 | ||||||||||||
| Other non-cash items | (7,914) | — | ||||||||||||
| Adjusted EBITDA | $ | (1,388,348) | $ | (1,194,753) | ||||||||||
| Revenue | $ | 5,375,632 | $ | 4,763,668 | ||||||||||
| Adjusted EBITDA as a % of Revenue | (26) | % | (25) | % | ||||||||||
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Liquidity and Capital Resources
We had cash and cash equivalents of $65,465,588 as of March 31, 2021 as compared to $33,045,225 as of December 31, 2020, an increase of $32,420,363, primarily due to net proceeds received from the sale of our common stock, partly offset by operating losses. We have incurred significant net losses and negative cash flow from operations for most periods since our inception in 2006, which has resulted in a total accumulated deficit of $72,627,214 as of March 31, 2021. To date, we have financed our operations through revenue from operations, the sale of our equity securities, proceeds from the PPP Loan, and borrowings under our secured credit facility.
Cash used for operating activities was $829,707 during the three months ended March 31, 2021 and is primarily the result of operating losses during the period. Net cash used for investing activities was $13,217 during the three months ended March 31, 2021 due to purchases and sales of our fixed assets. Net cash provided by financing activities during the three months ended March 31, 2021 was $33,263,287, which consisted primarily of net proceeds of approximately $33.6 million from the sale of our common stock.
At the Market (ATM) Offering
On June 4, 2020 and January 25, 2021, we entered into ATM Sales Agreements with National Securities Corporation, as sales agent (“National Securities”), pursuant to which we could offer and sell shares of our common stock through National Securities, by any method deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended, for aggregate purchase prices of up to $40,000,000 and $35,000,000, respectively (the “ATM Offerings”). During the three months ended March 31, 2021, we sold 8,701,691 shares at an average price of $3.95 per share for total gross proceeds of $34,358,012. From June 4, 2020 through April 15, 2021, we sold a total of 26,005,824 shares at an average price of $2.88 per share for gross proceeds of $74,999,785 in the ATM Offerings under our shelf registration statement on Form S-3 (File No. 333-238619).
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 Quarterly 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.
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 March 31, 2021, we expect to have sufficient cash reserves and financing sources available to cover expenses at least one year from the issuance of this Quarterly 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
We did not engage in any activities involving variable interest entities or “off-balance sheet arrangements” (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of March 31, 2021.
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Critical Accounting Policies and Use of Estimates
There have been no material changes to our critical accounting policies as set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2020. For a summary of our significant accounting policies, please refer to Note 1 — Company and Summary of Significant Accounting Policies included in Item 1 of this Quarterly Report.
Recent Accounting Pronouncements
See “Note 1. Company and Summary of Significant Accounting Policies,” under Part I, Item 1 of this Quarterly Report for information on additional recent pronouncements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
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ITEM 4 – CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, controls and procedures could be circumvented by the individual acts of some persons, by collusion or two or more people or by management override of the control. Misstatements due to error or fraud may occur and not be detected on a timely basis.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q for the period ended March 31, 2021, an evaluation was performed under the supervision and with the participation of our management including our principal executive officer and principal financial and accounting officer to determine the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2021. Based on this evaluation, our management concluded that our disclosure controls and procedures were effective as designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions;
(ii) provide reasonable assurance that transactions are recorded as necessary for the preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect financial statement misstatements. Also, projections of any evaluation of internal control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1 – 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 May 10, 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 1A – RISK FACTORS
You should carefully consider the factors discussed under Item 1A of Part I to our Annual Report on Form 10-K for the year ended December 31, 2020 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 Relating to our Common Stock
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 (a 52-week high) and 25.3 million shares were traded. In January 2021, the closing price of our common stock averaged $3.65 with an average daily trading volume of 8.9 million shares; in February 2021, the closing price of our common stock averaged $4.70 with an average daily trading volume of 4.0 million shares; and in March 2021, the closing price of our common stock averaged $4.07 with an average daily trading volume of 2.6 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. 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 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Other than as previously reported in any Current Reports on Form 8-K, the Company did not sell any unregistered securities during the period covered by this report.
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ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None.
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ITEM 6 – EXHIBITS
| Exhibit No. | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 3.6 | ||||||||
| 3.7 | ||||||||
| 3.8 | ||||||||
| 3.9 | ||||||||
| 3.10 | ||||||||
| 3.11 | ||||||||
| 31.1 | * | |||||||
| 31.2 | * | |||||||
| 32.1 | * (a) | |||||||
| 32.2 | * (a) | |||||||
| 101 | * (b) | The following materials from IZEA Worldwide, Inc.'s Quarterly Report for the quarter ended March 31, 2021 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Operations and Comprehensive Loss, (iii) the Unaudited Consolidated Statement of Stockholders' Equity, (iv) the Unaudited Consolidated Statements of Cash Flow, and (iv) the Notes to the Unaudited Consolidated Financial Statements. | ||||||
* Filed or furnished herewith.
(a) In accordance with Item 601of Regulation S-K, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
(b) In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| IZEA Worldwide, Inc. a Nevada corporation | ||||||||
| May 13, 2021 | By: | /s/ Edward H. Murphy | ||||||
| Edward H. Murphy Chairman and Chief Executive Officer (Principal Executive Officer) | ||||||||
| May 13, 2021 | By: | /s/ Peter J. Biere | ||||||
| Peter J. Biere Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
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