IZEA Worldwide, Inc. - Quarter Report: 2022 September (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 | ||||
For the quarterly period ended September 30, 2022
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _________________ to _________________
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.) | |||||||
1317 Edgewater Dr., # 1880, Orlando, FL | 32804 | |||||||
| (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 x No o
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 such files). Yes ☒ No o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 4, 2022, there were 62,325,085 shares of our common stock outstanding.
Quarterly Report on Form 10-Q for the period ended September 30, 2022
Table of Contents
| PART I. FINANCIAL INFORMATION | |||||
| PART II. OTHER INFORMATION | |||||
i
PART I
ITEM 1 – FINANCIAL STATEMENTS
IZEA Worldwide, Inc.
Unaudited Consolidated Balance Sheets
| September 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 20,026,477 | $ | 75,433,295 | |||||||
| Accounts receivable, net | 8,643,509 | 7,599,103 | |||||||||
| Prepaid expenses | 2,852,583 | 2,257,382 | |||||||||
| Short term investments | 21,879,305 | — | |||||||||
| Other current assets | 57,327 | 100,522 | |||||||||
| Total current assets | 53,459,201 | 85,390,302 | |||||||||
| Property and equipment, net | 76,182 | 155,185 | |||||||||
| Goodwill | 4,016,722 | 4,016,722 | |||||||||
| Intangible assets, net | 71,455 | 213,263 | |||||||||
| Software development costs, net | 1,264,543 | 1,019,600 | |||||||||
| Long term investments | $ | 25,106,327 | $ | — | |||||||
| Total assets | $ | 83,994,430 | $ | 90,795,072 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 1,792,445 | $ | 2,086,892 | |||||||
| Accrued expenses | 2,045,355 | 2,502,882 | |||||||||
| Contract liabilities | 9,236,220 | 11,338,095 | |||||||||
| Current portion of notes payable | 29,220 | — | |||||||||
| Total current liabilities | 13,103,240 | 15,927,869 | |||||||||
| Finance obligation, less current portion | — | 10,420 | |||||||||
| Notes payable, less current portion | — | 31,648 | |||||||||
| Total liabilities | 13,103,240 | 15,969,937 | |||||||||
| 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; 62,273,425 and 62,044,883, respectively, issued, and outstanding | 6,227 | 6,205 | |||||||||
| Additional paid-in capital | 148,935,491 | 148,452,498 | |||||||||
| Accumulated deficit | (77,185,933) | (73,633,568) | |||||||||
| Accumulated other comprehensive income (loss) | (864,595) | — | |||||||||
| Total stockholders’ equity | 70,891,190 | 74,825,135 | |||||||||
| Total liabilities and stockholders’ equity | $ | 83,994,430 | $ | 90,795,072 | |||||||
See accompanying notes to the consolidated financial statements.
1
IZEA Worldwide, Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Loss
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | 10,826,335 | $ | 7,734,374 | $ | 32,293,682 | $ | 19,678,991 | |||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of revenue | 6,597,430 | 4,022,395 | 18,989,076 | 9,688,870 | |||||||||||||||||||
| Sales and marketing | 2,502,128 | 2,240,936 | 7,312,240 | 6,622,128 | |||||||||||||||||||
| General and administrative | 2,928,679 | 2,670,785 | 9,810,102 | 7,865,510 | |||||||||||||||||||
| Depreciation and amortization | 127,535 | 220,453 | 404,856 | 949,906 | |||||||||||||||||||
| Total costs and expenses | 12,155,772 | 9,154,569 | 36,516,274 | 25,126,414 | |||||||||||||||||||
| Loss from operations | (1,329,437) | (1,420,195) | (4,222,592) | (5,447,423) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (814) | (1,558) | (2,594) | (24,090) | |||||||||||||||||||
| Other income (expense), net | 424,019 | 20,961 | 672,821 | 2,019,379 | |||||||||||||||||||
| Total other income (expense), net | 423,205 | 19,403 | 670,227 | 1,995,289 | |||||||||||||||||||
| Net Loss | $ | (906,232) | $ | (1,400,792) | $ | (3,552,365) | $ | (3,452,134) | |||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||
| Unrealized (gain) loss on securities held | 597,113 | — | 864,595 | — | |||||||||||||||||||
| Total other comprehensive income | 597,113 | — | 864,595 | — | |||||||||||||||||||
| Total comprehensive income (loss) | $ | (1,503,345) | $ | (1,400,792) | $ | (4,416,960) | $ | (3,452,134) | |||||||||||||||
| Weighted average common shares outstanding – basic and diluted | 62,273,425 | 61,883,017 | 62,162,508 | 59,875,142 | |||||||||||||||||||
| Basic and diluted net loss per common share | $ | (0.01) | $ | (0.02) | $ | (0.06) | $ | (0.06) | |||||||||||||||
See accompanying notes to the consolidated financial statements.
2
IZEA Worldwide, Inc.
Unaudited Consolidated Statements of Stockholders’ Equity
Three Months Ended September 30, 2022 and 2021
| Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 62,206,467 | $ | 6,221 | $ | 148,769,056 | $ | (76,279,701) | (267,482) | $ | 72,228,094 | ||||||||||||||||||||||||||||
| Stock purchase plan & option exercise issuances | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Stock issued for payment of services | 26,490 | 3 | 31,257 | — | — | 31,260 | ||||||||||||||||||||||||||||||||
| Stock-based compensation | 63,133 | 5 | 154,110 | — | — | 154,115 | ||||||||||||||||||||||||||||||||
| Shares withheld to cover statutory taxes | (22,665) | (2) | (18,932) | — | — | (18,934) | ||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (597,113) | (597,113) | ||||||||||||||||||||||||||||||||
| Net comprehensive income (loss) | — | — | — | (906,232) | — | (906,232) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | 62,273,425 | $ | 6,227 | $ | 148,935,491 | $ | (77,185,933) | $ | (864,595) | $ | 70,891,190 | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 61,809,573 | $ | 6,181 | $ | 148,006,352 | $ | (72,544,289) | $ | — | $ | 75,468,244 | |||||||||||||||||||||||||||
| Sale of securities | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Stock purchase plan & option exercise issuances | 27,995 | 2 | 11,239 | — | 11,241 | |||||||||||||||||||||||||||||||||
| Stock issued for payment of services | 7,716 | 1 | 37,543 | — | 37,544 | |||||||||||||||||||||||||||||||||
| Stock issuance costs | — | — | (14,094) | — | (14,094) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | 76,745 | 8 | 229,031 | — | 229,039 | |||||||||||||||||||||||||||||||||
| Shares withheld to cover statutory taxes | (18,398) | (2) | (40,680) | — | (40,682) | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (1,400,792) | (1,400,792) | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 61,903,631 | $ | 6,190 | $ | 148,229,391 | $ | (73,945,081) | $ | — | $ | 74,290,500 | |||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
3
IZEA Worldwide, Inc.
Unaudited Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2022 and 2021
| Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 62,044,883 | $ | 6,205 | $ | 148,452,498 | $ | (73,633,568) | $ | — | $ | 74,825,135 | |||||||||||||||||||||||||||
| Stock purchase plan & option exercise issuances | 38,076 | 4 | 18,723 | — | — | 18,727 | ||||||||||||||||||||||||||||||||
| Stock issued for payment of services | 79,440 | 8 | 93,734 | — | — | 93,742 | ||||||||||||||||||||||||||||||||
| Stock-based compensation | 168,722 | 16 | 427,997 | — | — | 428,013 | ||||||||||||||||||||||||||||||||
| Shares withheld to cover statutory taxes | (57,696) | (6) | (57,461) | — | — | (57,467) | ||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (864,595) | (864,595) | ||||||||||||||||||||||||||||||||
| Net comprehensive income (loss) | — | — | — | (3,552,365) | — | (3,552,365) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | 62,273,425 | $ | 6,227 | $ | 148,935,491 | $ | (77,185,933) | $ | (864,595) | $ | 70,891,190 | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 50,050,167 | $ | 5,005 | $ | 102,416,131 | $ | (70,492,947) | $ | — | $ | 31,928,189 | |||||||||||||||||||||||||||
| Sale of securities | 11,186,084 | 1,119 | 46,543,569 | — | — | 46,544,688 | ||||||||||||||||||||||||||||||||
| Stock purchase plan & option exercise issuances | 164,646 | 16 | 59,311 | — | — | 59,327 | ||||||||||||||||||||||||||||||||
| Stock issued for payment of services | 22,608 | 2 | 109,782 | — | — | 109,784 | ||||||||||||||||||||||||||||||||
| Stock issuance costs | — | — | (1,094,929) | — | — | (1,094,929) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | 681,068 | 68 | 633,151 | — | — | 633,219 | ||||||||||||||||||||||||||||||||
| Shares withheld to cover statutory taxes | (200,942) | (20) | (437,624) | — | — | (437,644) | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (3,452,134) | — | (3,452,134) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 61,903,631 | $ | 6,190 | $ | 148,229,391 | $ | (73,945,081) | $ | — | $ | 74,290,500 | |||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
4
IZEA Worldwide, Inc.
Unaudited Consolidated Statements of Cash Flows
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (3,552,365) | $ | (3,452,134) | |||||||
| Adjustments to reconcile net loss to net cash used for operating activities: | |||||||||||
| (Gain) on the forgiveness of debt | — | (1,927,220) | |||||||||
| Impairment of digital assets | 141,808 | — | |||||||||
| Depreciation and amortization | 91,200 | 98,759 | |||||||||
| Amortization of software development costs and other intangible assets | 313,656 | 851,147 | |||||||||
| Stock-based compensation | 428,013 | 633,219 | |||||||||
| Fair value of stock issued for payment of services | 93,742 | 109,784 | |||||||||
| (Gain) loss on disposal of equipment | 18,555 | (21,522) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (1,044,406) | (1,885,823) | |||||||||
| Prepaid expenses and other current assets | (552,006) | (1,429,405) | |||||||||
| Accounts payable | (294,445) | (613,330) | |||||||||
| Accrued expenses | (458,431) | 516,238 | |||||||||
| Contract liabilities | (2,101,876) | 3,468,207 | |||||||||
| Net cash used for operating activities | (6,916,555) | (3,652,080) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of short term investments | (89,220,431) | — | |||||||||
| Proceeds from the sale of short term investments | 67,171,356 | — | |||||||||
| Purchase of long term investments | (26,278,590) | — | |||||||||
| Proceeds from the sale of long term investments | 477,438 | — | |||||||||
| Purchase of equipment | (41,097) | (33,912) | |||||||||
| Proceeds from the sale of equipment | 10,344 | 29,824 | |||||||||
| Software development costs | (558,599) | — | |||||||||
| Net cash used for investing activities | (48,439,579) | (4,088) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from sale of securities | — | 46,544,688 | |||||||||
| Proceeds from stock purchase plan and option exercise issuances | 18,727 | 59,327 | |||||||||
| Payments on finance obligation | (11,944) | (8,336) | |||||||||
| Stock issuance costs | — | (1,094,929) | |||||||||
| Payments on shares withheld for statutory taxes | (57,467) | (341,576) | |||||||||
| Net cash provided by (used for) financing activities | (50,684) | 45,159,174 | |||||||||
| Net increase (decrease) in cash and cash equivalents | (55,406,818) | 41,503,006 | |||||||||
| Cash and cash equivalents, beginning of period | 75,433,295 | 33,045,225 | |||||||||
| Cash and cash equivalents, end of period | $ | 20,026,477 | $ | 74,548,231 | |||||||
| Supplemental cash flow information: | |||||||||||
| Interest paid | $ | 1,894 | $ | 5,610 | |||||||
See accompanying notes to the consolidated financial statements.
5
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
NOTE 1. COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
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 by managing 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. IZEA compensates these creators 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 websites, blogs, and social media channels.
We provide value through managing custom content workflow, creator search and targeting, bidding, analytics, and payment processing. While the majority of the marketers engage us to perform these services (the “Managed Services”) on their behalf, they may also use our marketplaces to engage creators for influencer marketing campaigns or to produce custom content on a self-service basis by licensing our technology.
Our primary technology platform, The IZEA Exchange (“IZEAx”), is designed to provide a unified ecosystem that enables the creation and publication of multiple types of custom content through our creators’ websites, blogs, and social media channels, including, among others, Twitter, Facebook, YouTube, Twitch, and Instagram. We extensively use this platform to manage influencer marketing campaigns on behalf of our marketers. This platform is also available directly to our marketers as a self-service tool and a licensed white label product.
In 2020, we launched two new platforms, BrandGraph and Shake. BrandGraph is a social media intelligence platform offering marketers an analysis of share-of-voice, engagement benchmarking, category spending estimates, influencer identification, and sentiment analysis. The BrandGraph platform maps and classifies the complex hierarchy of corporation-to-brand relationships by category and associates social content with brands through a proprietary content analysis engine. Shake is an online marketplace where buyers can quickly and easily hire creators of all types for influencer marketing, photography, design, and other digital services. The Shake platform is aimed at digital creatives seeking freelance “gig” work. Creator’s list available “Shakes” in their accounts on the platform. Marketers select and purchase creative packages from them through a streamlined chat experience, assisted by ShakeBot - a proprietary artificial intelligence assistant.
This year, we announced the launch of The Creator Marketplace® which expands upon the foundation of the Shake platform and ultimately replaces it and IZEAx as the primary platform for marketers and creators to find each other and conduct business. Later this year we expect to launch IZEA FLEX as a workflow tool to complement The Creator Marketplace.
Impact of COVID-19
The COVID-19 pandemic impacted our operations, sales, and finances beginning in 2020. To protect the health and safety of our employees, we took precautionary action and directed all staff to work from home effective March 16, 2020. We allowed the leases for our company headquarters and temporary office spaces to expire at the end of their terms throughout 2020. We have not experienced any major declines in operating efficiency in our remote working environment and have decided to continue our work-from-home policy indefinitely as a virtual-first employer.
We will continue to monitor the COVID-19 situation actively and may take further actions altering the business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or 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.
Basis of Presentation
The accompanying consolidated balance sheet as of September 30, 2022, the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2022 and 2021, the consolidated statements of stockholders' equity for the three and nine months ended September 30, 2022 and 2021, and the consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 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, 2021 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 and nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the entire fiscal year. These unaudited consolidated financial
6
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2021, included in the Company's Annual Report on Form 10-K filed with the SEC on March 31, 2022.
Principles of Consolidation
The consolidated financial statements include the accounts of IZEA Worldwide, Inc. and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to the magnitude and duration of COVID-19, the extent to which it impacts worldwide macroeconomic conditions, the speed of the anticipated recovery, access to capital markets, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of September 30, 2022, 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 on the Company’s consolidated financial statements in future reporting periods.
Despite the Company’s efforts, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is unable to estimate the full extent to which COVID-19 will negatively impact its financial results or liquidity.
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. The FDIC insures deposits made to the Company bank accounts up to $250,000. The CDIC insures deposits made to the Company bank account in Canada up to CAD 100,000. Deposit balances exceeding these limits were approximately $19.8 million and $74.9 million as of September 30, 2022 and December 31, 2021, respectively.
Investment in Debt Securities
Our investments in debt securities are carried at either amortized cost or fair value. The cost basis is determined by the specific identification method. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity. Investments in debt securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale. Realized and unrealized gains and losses on trading debt securities as well as realized gains and losses on available-for-sale debt securities are included in net income. Unrealized gains and losses, net of tax, on available-for-sale debt securities are included in our consolidated balance sheet as a component of accumulated other comprehensive income (loss).
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 standard trade terms. Unbilled receivables represent amounts owed for work that has been performed but not yet billed. The Company had net trade receivables of $8,556,962 and unbilled receivables of $86,547 at September 30, 2022. The Company had net trade receivables of $7,577,177 and unbilled receivables of $21,926 at December 31, 2021.
Management determines the collectability of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. An account is delinquent when the customer has not paid an amount due by its associated due date. 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. The Company had a reserve for doubtful accounts of $155,000 and $155,000 as of September 30, 2022 and December 31, 2021, respectively. Management believes that this estimate is reasonable, but there can be no assurance that the estimate will not change due to a change in economic conditions or business conditions within the industry, the individual
7
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
customers, or the Company. Any adjustments to this account are reflected in the consolidated statements of operations as a general and administrative expense. Bad debt expense was less than 0.01% of revenue for each of the three and nine months ended September 30, 2022 and 2021.
Concentrations of credit risk for accounts receivable have typically been limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. However, the Company’s addition of SaaS customers 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 currently has one customer that accounts for 33% of total accounts receivable at September 30, 2022, and no customers that accounted for more than 10% of total accounts receivable at December 31, 2021. The Company had two customers that accounted for 15% and 23%, respectively, of its gross billings during the three months ended September 30, 2022 and two customers that accounted for more than 12% and 12%, respectively, of its gross billings during the three months ended September 30, 2021. The Company had two customers that accounted 11% and 25%, respectively, of its gross billings during the nine months ended September 30, 2022, and one customer that accounted for 13% of its gross billings during the nine months ended September 30, 2021.
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 | ||||
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.
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 in an amount equal to the excess of the reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit 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, 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 September 30, 2022.
Intangible Assets
The Company acquired the majority of its intangible assets through its acquisitions of Ebyline, ZenContent, and TapInfluence. The Company amortizes the identifiable intangible assets over 12 to 60 months. See Note 3 of Notes to the Consolidated Financial Statements for further details.
The Company accounts for its digital assets held as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. The Company maintains ownership of and control over its digital assets and may use third-party custodial services to secure them. The digital assets are initially recorded at cost and are subsequently evaluated for any impairment losses incurred since acquisition.
The Company reviews long-lived assets, including 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 asset’s fair
8
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
value 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. The Company did not recognize any impairment charges associated with the Company’s acquired identifiable intangible assets in the three and nine months ended September 30, 2022, and 2021. The Company recognized an impairment of $1,081 on digital assets held as indefinite-lived intangible assets in the three months ended September 30, 2022. The Company recognized an impairment of $141,808 on digital assets held as indefinite-lived intangible assets in the nine months ended September 30, 2022. The Company did not recognize any impairment charges on digital assets held as indefinite-lived intangible assets in the three and nine months ended September 30, 2021.
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 development stage, including significant enhancements and upgrades, are capitalized. These costs include personnel and related employee benefit expenses for employees or consultants directly associated with and devoted 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"). These software developments, acquired technology, and CCA costs are amortized on a straight-line basis over the estimated useful life of five years upon the 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. See Note 4 of Notes to the Consolidated Financial Statements for further details.
Leases
Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), 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 with 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 principal or 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
9
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
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 a 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 the completion of services. Billings in advance of completed services are recorded as a contract liability until earned. The Company assesses collectability based on several factors, including the creditworthiness of the customer and payment and transaction history. Certain content creators have payment terms that require sponsored social postings to remain active 45 days following the posting date before payment is due; the Company records pro-rata revenue and a pro-rata liability for this content at each balance sheet date. The Company intends to remove this posting period requirement from its new market contracts before the end of 2022.
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 to provide public awareness or advertising buzz regarding the marketer’s brand and purchase custom content for internal and external use.
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 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. When multiple types of performance obligations exist in a contract, the Company allocates revenue to each distinct performance obligation at contract inception based on its relative standalone selling price. These performance obligations are to be provided over a period that generally ranges from one day to one year. The delivery of custom content represents a distinct performance obligation that is satisfied at a point in time when each 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 distribute custom content for an agreed-upon transaction price. The Company’s platforms control the contracting, description of services, acceptance, and payment for the requested content. This service is used primarily by news agencies or marketers to 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 post approved content through one or more social media platforms.
License Fees Revenue
License Fees Revenue is generated by granting customers limited, non-exclusive, non-transferable licenses to access the IZEAx and BrandGraph technology platforms for an agreed-upon subscription period. Customers access the platforms to manage their 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.
10
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
The Company does not typically engage in contracts 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.
Advertising Costs
Advertising costs include spending relating to our advertising and promotional activities in support of our products and services, are charged as incurred and are included in sales and marketing expense in the accompanying Consolidated Statement of Operations. Advertising costs for the three months ended September 30, 2022 and 2021 were approximately $585,000 and $530,000, respectively. Advertising costs for the nine months ended September 30, 2022 and 2021 were approximately $1,576,500 and $1,484,000, respectively.
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 has recorded a full valuation allowance on its deferred tax assets. 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 2019 through 2021.
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. As of September 30, 2022, the Company holds Level 1 and Level 2 financial assets; this is further discussed in Note 11 of Notes to the Consolidated Financial Statements.
Stock-Based Compensation
Stock-based compensation cost related to stock options granted under the 2011 Equity Incentive Plan, as amended, and the 2011 B Equity Incentive Plan (together, the “2011 Equity Incentive Plans”) (see Note 8 of Notes to the Consolidated Financial Statements) 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 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. For issuances after June 30, 2019, the Company estimates the volatility of its common stock at the date of grant based on the volatility of its stock during the period. For issuances on or prior to June 30, 2019, the Company estimated the volatility of its common stock at the date of grant based on the volatility of comparable peer companies that were publicly traded and had a longer trading history than the Company. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term
11
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
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 and nine months ended September 30, 2022 and 2021:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| 2011 Equity Incentive Plans Assumptions | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||
| Expected term | — | 6 years | 6 years | 6 years | |||||||||||||||||||
| Weighted average volatility | —% | 120.67% | 120.48% | 120.14% | |||||||||||||||||||
| Weighted average risk-free interest rate | —% | 0.93% | 1.70% | 0.94% | |||||||||||||||||||
| Expected dividends | — | — | — | — | |||||||||||||||||||
| Weighted average expected forfeiture rate | —% | 11.03% | 37.00% | 12.25% | |||||||||||||||||||
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 did not issue any stock options during the three months ended September 30, 2022.
The Company may issue shares of restricted stock or restricted stock units that 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 of Notes to the Consolidated Financial Statements for additional information related to these shares.
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
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 impacted 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 September 30, 2022, the Company does not have any contracts that reference LIBOR rates and this guidance has not had a material impact on its 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 the 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 ASU No. 2019-05 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
12
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
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 no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and related disclosures.
Accounting for Contract Assets and Contract Liabilities from Contracts with Customers: In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). Under ASU 2021-08, an acquirer in a business combination must apply ASC 606 principles when recognizing and measuring acquired contract assets and contract liabilities. The provisions of ASU 2021-08 are applicable for the Company for fiscal years and interim periods beginning after December 15, 2022. The Company is currently evaluating the impact of ASU 2021-08 on its consolidated financial statements and related disclosures.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Furniture and fixtures | $ | 8,674 | $ | 208,583 | |||||||
| Office equipment | 3,843 | 66,417 | |||||||||
| Computer equipment | 415,790 | 541,330 | |||||||||
| Total | 428,307 | 816,330 | |||||||||
| Less accumulated depreciation | (352,125) | (661,145) | |||||||||
| Property and equipment, net | $ | 76,182 | $ | 155,185 | |||||||
Depreciation expense on property and equipment recorded in depreciation and amortization expense in the consolidated statements of operations and comprehensive loss was $25,672 and $33,072 for the three months ended September 30, 2022 and 2021, respectively, and was $91,200 and $98,759 for the nine months ended September 30, 2022 and 2021, respectively.
NOTE 3. INTANGIBLE ASSETS
The identifiable intangible assets, other than Goodwill, consists of the following assets:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
| Balance | Accumulated Amortization | Balance | 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 | 2,810,000 | 2,810,000 | 2,810,000 | 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 definite-lived intangible assets | 6,211,469 | 6,211,469 | 6,211,469 | 6,211,469 | |||||||||||||||||||||||||
| Digital Assets | 71,455 | — | 213,263 | — | Indefinite | ||||||||||||||||||||||||
| Total intangible assets | $ | 6,282,924 | $ | 6,211,469 | $ | 6,424,732 | $ | 6,211,469 | |||||||||||||||||||||
Total identifiable intangible assets from the Company’s acquisitions and other acquired assets net of accumulated amortization thereon consists of the following:
13
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
| September 30, 2022 | December 31, 2021 | ||||||||||
| 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 | |||||||||
| Digital Assets | 71,455 | 213,263 | |||||||||
| Total | $ | 6,282,924 | $ | 6,424,732 | |||||||
| Less accumulated amortization | (6,211,469) | (6,211,469) | |||||||||
| Intangible assets, net | $ | 71,455 | $ | 213,263 | |||||||
There were no impairment charges associated with the Company’s definitive-lived intangible assets in the three and nine months ended September 30, 2022 and 2021.
Amortization expense recorded in depreciation and amortization in the accompanying consolidated statements of operations and comprehensive loss was $216,667 and $505,556 for the three and nine months ended September 30, 2021, respectively. No amortization expense was recorded for the three and nine months ended September 30, 2022 as all applicable assets have been fully amortized.
The Company determines the fair value of its digital assets, specifically Bitcoin and Ethereum, on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that has been determined to be the principal market for such assets (Level 1 inputs). The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that the digital assets are impaired. In determining if an impairment has occurred, the Company considers the lowest market price of one unit of the digital asset quoted on the active exchange since acquiring the digital asset. If the then-current carrying value of a digital asset exceeds the fair value so determined, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying value and the price determined.
Impairment losses on digital assets are recognized within general and administrative expenses in the consolidated statements of operations and comprehensive loss in the period in which the impairment is identified. The impaired digital assets are written down to the lowest market price at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets held. In determining the gain to be recognized upon sale, the Company calculates the difference between the sales price and carrying value of the digital assets sold immediately prior to sale.
During the three and nine months ended September 30, 2022, the Company did not conduct any transactions in digital assets. The Company impaired the value of its digital assets by $1,081 and $141,808 during the three and nine months ended September 30, 2022, respectively, as the fair market value decreased from the purchase value. No impairment of digital assets was recognized during the three and nine months ended September 30, 2021. The impairment of digital assets is presented as a non-cash operating expense within general and administrative on the consolidated statements of operations and comprehensive loss. The fair market value of such digital assets held as of September 30, 2022 was $71,455.
The Company performs its annual impairment tests of goodwill as of October 1 of each year, or more frequently, if certain indicators are present. As of September 30, 2022 the Company determined that no impairment to goodwill existed.
NOTE 4. SOFTWARE DEVELOPMENT COSTS
Software development costs consists of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Software development costs | $ | 3,595,410 | $ | 3,036,810 | |||||||
| Less accumulated amortization | (2,330,867) | (2,017,210) | |||||||||
| Software development costs, net | $ | 1,264,543 | $ | 1,019,600 | |||||||
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, 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 $281,230 and $558,599 during the three and nine months ended September 30, 2022, respectively. The
14
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
Company did not capitalize any software development costs during the three and nine months ended September 30, 2021. As a result, the Company has capitalized a total of $3,595,410 in direct materials, consulting, payroll, and benefit costs to its internal-use software development costs in the September 30, 2022 consolidated balance sheet.
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.
As of September 30, 2022, future estimated amortization expense related to software development costs is set forth in the following schedule:
| Software Development Amortization Expense | |||||
| Remainder of 2022 | $ | 117,851 | |||
| 2023 | 471,405 | ||||
| 2024 | 289,484 | ||||
| 2025 | 190,639 | ||||
| 2026 | 114,477 | ||||
| 2027 | 80,687 | ||||
| Total | $ | 1,264,543 | |||
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Accrued payroll liabilities | $ | 1,787,297 | $ | 2,251,284 | |||||||
| Accrued taxes | 41,871 | 76,079 | |||||||||
| Current portion of finance obligation | 34,292 | 33,388 | |||||||||
| Accrued other | 181,895 | 142,131 | |||||||||
| Total accrued expenses | $ | 2,045,355 | $ | 2,502,882 | |||||||
NOTE 6. NOTES PAYABLE
Summary
Interest expense on financing arrangements recorded in the Company’s consolidated statements of operations and comprehensive loss was $814 and $1,558 during the three months ended September 30, 2022 and 2021, respectively, and $2,594 and $24,090 for the nine months ended September 30, 2022 and 2021, respectively.
As of September 30, 2022, the future contractual maturities of the Company’s debt obligations by year is set forth in the following schedule:
| Remainder of 2022 | $ | 63,512 | |||
| Total | $ | 63,512 | |||
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 financial obligation. The total balance owed was $34,292 and $43,808 as of September 30, 2022 and December 31, 2021, respectively, with the short-term portion of $34,292 and $33,388 recorded under accrued expenses in the consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
15
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
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 ($29,220 USD as of September 30, 2022), 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. On October 21, 2022, the Company received notification from the Government of Canada that a determination had been made that the business did not meet the eligibility criteria for loan forgiveness. The loan will be paid in the full amount of 40,000 CAD ($29,220 USD as of September 30, 2022) in the fourth quarter of 2022.
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 was terminated in April 2021. The line of credit agreement required the Company to pay an annual facility fee of $20,000 and an annual due diligence fee of $1,000 upon renewal. During the three months ended September 30, 2021, the Company did not amortize any costs through interest expense. During the nine months ended September 30, 2021, the Company amortized $7,000 of cost through interest expense. During the three and nine months ended September 30, 2022 the Company did not amortize any interest expense related to the secured credit facility.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company does not have any operating or finance leases greater than 12 months in duration as of September 30, 2022. The Company did not have any leasehold rent or operating lease expenses during the three and nine months ended September 30, 2022 and 2021.
Retirement Plans
The Company offers a 401(k) plan to all of its eligible employees. The Company matches participant contributions in an amount equal to 50% of each participant’s contribution up to 8% of the participant’s salary. The participants become vested in 20% annual increments after years of service. Total expense for employer matching contributions during the three and nine months ended September 30, 2022 and 2021 was recorded in the Company’s consolidated statements of operations as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||||||||
| Cost of revenue | $ | 24,910 | $ | 15,975 | $ | 69,877 | $ | 37,444 | |||||||||||||||
| Sales and marketing | 31,186 | 23,009 | 104,667 | 73,610 | |||||||||||||||||||
| General and administrative | 21,874 | 6,800 | 95,491 | 56,258 | |||||||||||||||||||
| Total contribution expense | $ | 77,970 | $ | 45,784 | $ | 270,035 | $ | 167,312 | |||||||||||||||
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 the outcome, 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.
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
The Company entered into an ATM Sales Agreement in June 2020, which was amended in July 2020 (the “2020 Sales Agreement”), with National Securities Corporation, as sales agent (“National Securities”), pursuant to which the Company
16
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
could offer and sell, from time to time, through National Securities, up to $40 million in the aggregate shares of its common stock, by any method deemed to be an “at the market offering” under Rule 415 of the Securities Act (the “ATM Offering”). The 2020 Sales Agreement was fulfilled in April 2021 and terminated thereafter.
On January 25, 2021, the Company entered into a new ATM Sales Agreement (the “January 2021 Sales Agreement”) with National Securities, pursuant to which the Company could offer and sell, from time to time, through National Securities up to $35 million shares of its common stock, by any method determined to be an “at the market offering” under Rule 415 of the Securities Act. The January 2021 Sales Agreement was fulfilled in April 2021 and terminated thereafter.
During the three months ended June 30, 2021, the Company sold a total of 2,484,393 shares at an average price of $4.91 per share for total gross proceeds of $12,186,676 pursuant to the 2020 Sales Agreement and the January 2021 Sales Agreement with National Securities. During the six months ended June 30, 2021, the Company sold a total of 11,186,084 shares at an average price of $4.16 per share for total gross proceeds of $46,544,688 pursuant to the 2020 Sales Agreement and the January 2021 Sales Agreement.
On June 21, 2021, the Company entered into a third ATM Sales Agreement (the “June 2021 Sales Agreement”) with National Securities, as sales agent, pursuant to which the Company can offer and sell, from time to time, through National Securities, up to $100 million shares of the Company’s common stock by any method deemed to be an “at the market offering” under Rule 415 of the Securities Act.
On September 6, 2022, the Company terminated the June 2021 Sales Agreement. The Company did not sell any common stock under this ATM.
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 “2011 Equity Incentive Plan”). The Company’s stockholders approved an amendment and restatement of the 2011 Equity Incentive Plan at the Company’s 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 employees and consultants. As of September 30, 2022, the Company had 2,916,441 remaining shares of common stock available for issuance pursuant to future grants under the 2011 Equity Incentive 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. The August 2011 Plan expired in 2021 and no new grants may be made thereunder.
Restricted Stock
Under the 2011 Plan, the Board determines the terms and conditions of each restricted stock issuance, including any future vesting restrictions.
In 2021, the Company 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 vested in equal monthly installments from January through December 2021. A new board member started on February 9, 2021 and the annual stock compensation was pro-rated.
In 2022, the Company issued each of its five independent directors a total of 105,930 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 2022.
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, 2021 and the nine months ended September 30, 2022:
| Restricted Stock | Common Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Years to Vest | ||||||||
| Nonvested at December 31, 2020 | 13,666 | $ | 2.28 | 1.4 | |||||||
| Granted | 30,324 | 4.86 | |||||||||
| Vested | (40,437) | 4.25 | |||||||||
| Forfeited | — | — | |||||||||
| Nonvested at December 31, 2021 | 3,553 | $ | 1.83 | 0.7 | |||||||
| Granted | 105,930 | 1.18 | |||||||||
| Vested | (82,421) | 1.21 | |||||||||
| Forfeited | — | — | |||||||||
| Nonvested at September 30, 2022 | 27,062 | $ | 1.18 | 0.3 | |||||||
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 directors for services was $32,068 and $37,544 for the three months ended September 30, 2022 and 2021, respectively, and $94,550 and $72,240 for the nine months ended September 30, 2022 and 2021, respectively. Expense recognized on restricted stock issued to employees was $5,735 and $19,371 during the nine months ended September 30, 2022 and 2021, respectively.
On September 30, 2022, the fair value of the Company’s common stock was approximately $0.71 per share and the intrinsic value on the non-vested restricted stock was $19,214. Future compensation expense related to issued, but non-vested, restricted stock awards as of September 30, 2022, is $32,025. This value is estimated to be recognized over the weighted-average vesting period of approximately nine months.
Restricted Stock Units
The Board determines the terms and conditions of each restricted stock unit award issued under the May 2011 Plan.
During the nine months ended September 30, 2022, the Company issued a total of 613,351 restricted stock units initially valued at $651,727 to non-executive employees as additional incentive compensation. The restricted stock units vest over 36 months from issuance. During the nine months ended September 30, 2022, the Company issued a total of 318,860 restricted stock units initially valued at $355,404 to executive employees as additional incentive compensation. The restricted stock units have varying vesting schedules ranging from to years, depending on the executive’s employment contract. A small subset of the restricted stock units have 100% cliff vesting year from issuance.
The following table contains summarized information about restricted stock units during the year ended December 31, 2021 and the nine months ended September 30, 2022:
| Restricted Stock Units | Common Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Years to Vest | ||||||||
| Nonvested at December 31, 2020 | 970,349 | $ | 0.39 | 1.2 | |||||||
| Granted | 229,638 | 2.93 | |||||||||
| Vested | (817,417) | 0.83 | |||||||||
| Forfeited | (7,126) | 1.77 | |||||||||
| Nonvested at December 31, 2021 | 375,444 | $ | 0.96 | 1.8 | |||||||
| Granted | 932,211 | 1.08 | |||||||||
| Vested | (165,741) | 0.78 | |||||||||
| Forfeited | (132,897) | 1.29 | |||||||||
| Nonvested at September 30, 2022 | 1,009,017 | $ | 1.06 | 2.6 | |||||||
18
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
Expense recognized on restricted stock units issued to employees was $227,937 and $427,287 during the nine months ended September 30, 2022, and 2021, respectively. Expense recognized on restricted stock units issued to employees was $103,863 and $147,044 during the three months ended September 30, 2022, and 2021, respectively. On September 30, 2022, the fair value of the Company’s common stock was approximately $0.71 per share and the intrinsic value on the non-vested restricted units was $591,402. Future compensation related to the non-vested restricted stock units as of September 30, 2022, is $934,089 and it is estimated to be recognized over the weighted-average vesting period of approximately 2.6 years.
Stock Options
Under the 2011 Equity Incentive Plan, 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.
On January 28, 2022, in connection with a shift in the Company’s employee compensation strategy toward restricted stock units, the Compensation Committee of the Board of Directors amended the employment agreement for each of Edward Murphy, Ryan Schram, and Peter Biere to provide for grants of restricted stock units instead of stock options. The Company intends to issue restricted stock units rather than stock options for equity compensation purposes going forward.
A summary of option activity under the 2011 Equity Incentive Plans during the periods ended December 31, 2021, and September 30, 2022, is presented below:
| Options Outstanding | Common Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | ||||||||||||||
| Outstanding at December 31, 2020 | 1,712,806 | $ | 2.56 | 6.9 | |||||||||||||
| Granted | 296,569 | 2.60 | |||||||||||||||
| Exercised | (182,722) | 3.26 | |||||||||||||||
| Forfeited | (30,990) | 0.32 | |||||||||||||||
| Outstanding at December 31, 2021 | 1,795,663 | $ | 2.79 | 6.4 | |||||||||||||
| Granted | 125 | 1.15 | |||||||||||||||
| Exercised | (27,336) | 0.39 | |||||||||||||||
| Forfeited | (49,322) | 4.70 | |||||||||||||||
| Outstanding at September 30, 2022 | 1,719,130 | $ | 2.77 | 6.0 | |||||||||||||
| Exercisable at September 30, 2022 | 1,345,643 | $ | 3.10 | 5.1 | |||||||||||||
During the nine months ended September 30, 2022, 27,336 options were exercised for gross proceeds of $10,528. The intrinsic value of the exercised options was $28,335. During the nine months ended September 30, 2021, 161,270 options were exercised for gross proceeds of $54,105. The intrinsic value of the exercised options was $454,123. The fair value of the Company's common stock on September 30, 2022, was approximately $0.71 per share, and the intrinsic value on outstanding options as of September 30, 2022, was $132,748. The intrinsic value of the exercisable options as of September 30, 2022, was $94,418.
There were outstanding options to purchase 1,719,130 shares with a weighted average exercise price of $2.77 per share, of which options to purchase 1,345,643 shares were exercisable with a weighted average exercise price of $3.10 per share as of September 30, 2022.
Expense recognized on stock options issued to employees during the nine months ended September 30, 2022, and 2021 was $200,721 and $182,137, respectively. Future compensation related to non-vested awards as of September 30, 2022, is $589,655, and it is estimated to be recognized over the weighted-average vesting period of approximately 1.92 years.
19
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 nine months ended September 30, 2022, and 2021:
| Period Ended | Total Options Granted | Weighted Average Exercise Price | Weighted Average Expected Term | Weighted Average Volatility | Weighted Average Risk-Free Interest Rate | Expected Dividends | Weighted Average Grant Date Fair Value | Weighted average expected forfeiture rate | ||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | 44,155 | $ | 2.61 | 6.0 years | 120.14% | 0.94% | — | $ | 2.24 | 12.25% | ||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | 125 | $ | 1.15 | 6.0 years | 120.48% | 1.70% | — | $ | 1.00 | 37.00% | ||||||||||||||||||||||||||||||||||||||||
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 -month 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.
Stock compensation expense on ESPP issuances was $6,866 and $4,424 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the Company had 376,760 remaining shares of common stock available for future issuances under the ESPP.
Summary Stock-Based Compensation
The 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 as 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 and nine months ended September 30, 2022 and 2021 was recorded in the Company’s consolidated statements of operations as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||||||||
| Cost of revenue | $ | 9,650 | $ | 1,898 | $ | 27,299 | $ | 5,315 | |||||||||||||||
| Sales and marketing | 15,011 | 5,342 | 39,723 | 16,090 | |||||||||||||||||||
| General and administrative | 129,454 | 221,799 | 360,991 | 611,814 | |||||||||||||||||||
| Total stock-based compensation | $ | 154,115 | $ | 229,039 | $ | 428,013 | $ | 633,219 | |||||||||||||||
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 the weighted-average number of shares of common stock outstanding until the stock vests. Diluted loss per common share is computed by dividing the net 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.
20
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||||||||
| Net loss | $ | (906,232) | $ | (1,400,792) | $ | (3,552,365) | $ | (3,452,134) | |||||||||||||||
| Weighted average shares outstanding - basic and diluted | 62,273,425 | 61,883,017 | 62,162,508 | 59,875,142 | |||||||||||||||||||
| Basic and diluted net loss per common share | $ | (0.01) | $ | (0.02) | $ | (0.06) | $ | (0.06) | |||||||||||||||
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 | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||
| Stock options | 1,720,003 | 1,726,580 | 1,745,442 | 1,732,763 | ||||||||||||||||||||||
| Restricted stock units | 899,844 | 467,214 | 661,096 | 549,385 | ||||||||||||||||||||||
| Restricted stock | 44,912 | 20,351 | 60,504 | 26,798 | ||||||||||||||||||||||
| Total excluded shares | 2,664,759 | 2,214,145 | 2,467,042 | 2,308,946 | ||||||||||||||||||||||
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 | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||
| Managed Services Revenue | $ | 10,476,278 | $ | 7,281,984 | $ | 31,025,350 | $ | 18,309,295 | ||||||||||||||||||
| Marketplace Spend Fees | 16,019 | 87,556 | 122,243 | 256,308 | ||||||||||||||||||||||
| License Fees | 320,349 | 354,850 | 1,030,718 | 1,082,734 | ||||||||||||||||||||||
| Other Fees | 13,689 | 9,984 | 115,371 | 30,654 | ||||||||||||||||||||||
| SaaS Services Revenue | 350,057 | 452,390 | 1,268,332 | 1,369,696 | ||||||||||||||||||||||
| Total Revenue | $ | 10,826,335 | $ | 7,734,374 | $ | 32,293,682 | $ | 19,678,991 | ||||||||||||||||||
The following table provides the Company’s revenues as determined by the country of domicile:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||
| United States | $ | 10,660,311 | $ | 7,521,059 | $ | 31,914,735 | $ | 19,098,638 | ||||||||||||||||||
| Canada | 166,024 | 213,315 | 378,947 | 580,353 | ||||||||||||||||||||||
| Total | $ | 10,826,335 | $ | 7,734,374 | $ | 32,293,682 | $ | 19,678,991 | ||||||||||||||||||
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:
21
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
| September 30, 2022 | December 31, 2021 | ||||||||||
| Accounts receivable, net | $ | 8,643,509 | $ | 7,599,103 | |||||||
| Contract liabilities (unearned revenue) | $ | 9,236,220 | $ | 11,338,095 | |||||||
Contract liabilities represent amounts billed on customer contracts that have yet to be fully delivered. Typically, contract periods are up to twelve months in length. The Company expects that the balance of unearned revenues in contract liabilities will be recognized within the following twelve-month period.
Contract receivables are recognized when the receipt of consideration is unconditional. Contract liabilities relate to the 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 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 September 30, 2022 and December 31, 2021, are equal to the contract liabilities disclosed above. The Company expects to recognize the full balance of the unearned revenue on September 30, 2022 within the next year.
NOTE 11. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents, and Marketable Securities (Available for Sale)
Per a revised investment strategy policy, the Company engaged a third party registered investment advisor and appointed a leading national bank for custody services with respect to investment securities, making an initial deposit of $60 million on April 18, 2022. Investments comply with the Company’s revised investment strategy policy, designed to preserve capital, minimize investment risks, and maximize returns.
The following table shows the Company’s cash, cash equivalents, and marketable securities by significant investment category as of September 30, 2022:
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Current Marketable Securities | Non-Current Marketable Securities | |||||||||||||||||
| Cash | $ | 6,130,267 | $ | — | $ | — | $ | 6,130,267 | $ | 6,130,267 | $ | — | $ | — | |||||||||
Level 1 (1) | |||||||||||||||||||||||
| Commercial paper | 6,721,079 | 428 | (109) | 6,720,760 | 6,720,760 | — | — | ||||||||||||||||
| Money market funds | 7,175,450 | — | — | 7,175,450 | 7,175,450 | — | — | ||||||||||||||||
| US Treasury securities | 11,604,675 | — | (194,712) | 11,799,387 | — | 4,921,412 | 6,877,975 | ||||||||||||||||
| Subtotal | 25,501,204 | 428 | (194,821) | 25,695,597 | 13,896,210 | 4,921,412 | 6,877,975 | ||||||||||||||||
Level 2 (2) | |||||||||||||||||||||||
| Asset backed securities | 13,532,192 | 1,165 | (160,020) | 13,691,047 | — | 11,326,790 | 2,364,257 | ||||||||||||||||
| Corporate debt securities | 20,983,851 | — | (511,347) | 21,495,198 | — | 5,631,103 | 15,864,095 | ||||||||||||||||
| Subtotal | 34,516,043 | 1,165 | (671,367) | 35,186,245 | — | 16,957,893 | 18,228,352 | ||||||||||||||||
| Total | $ | 66,147,514 | $ | 1,593 | $ | (866,188) | $ | 67,012,109 | $ | 20,026,477 | $ | 21,879,305 | $ | 25,106,327 | |||||||||
(1) Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
(2) Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
The Company records the fair value of cash equivalents and marketable securities on our balance sheet. The adjusted cost, which includes unrealized gains and losses, reflects settlement amounts if all investments are held to maturity. The
22
IZEA Worldwide, Inc.
Notes to the Consolidated Financial Statements
Company recognized realized gains (net of losses) of $3,735 and $2,501 for the three and nine months ended September 30, 2022. Realized gains and losses are a component of other income (expense), net. Unrealized gains and losses are a component of other comprehensive income (loss) (“OCI”).
The following table summarizes the estimated fair value of investments in marketable debt securities by stated contractual maturity dates:
| As of September 30, 2022 | |||||
| Due in 1 year or less | $ | 21,879,305 | |||
| Due in 1 year through 5 years | 25,106,327 | ||||
| Total | $ | 46,985,632 | |||
The following table presents fair values and net unrealized gains (losses) recorded to OCI, aggregated by investment category:
| As of September 30, 2022 | ||||||||
| Fair Value | Net Unrealized Gain (Loss) | |||||||
| Cash and cash equivalents | $ | 20,026,477 | $ | 319 | ||||
| Government bonds | 11,799,387 | (194,712) | ||||||
| Corporate debt securities | 21,495,198 | (511,347) | ||||||
| Asset backed securities | 13,691,047 | (158,855) | ||||||
| Total | $ | 67,012,109 | $ | (864,595) | ||||
During the three and nine months ended September 30, 2022, the Company did not recognize significant credit losses and had no ending allowances balance for credit losses.
NOTE 12. SUBSEQUENT EVENTS
The Company has completed an evaluation of all subsequent events through November 14, 2022 to ensure that the consolidated financial statements include appropriate disclosure of events both recognized in the consolidated financial statements and events which occurred but were not recognized in the consolidated financial statements. The Company has concluded there no subsequent event has occurred that requires disclosure.
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,” “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:
•risks related to the restatement of the Company’s previously issued interim financial statements for the quarterly periods ended March 31, 2020, June 30, 2020, and September 30, 2020 (the “Restatement”) included in our Annual Report for the year ended December 31, 2021, including, without limitation, potential inquiries from the SEC and/or the Nasdaq Capital Market, the potential adverse effect on the price of our common stock, and possible claims by our stockholders or otherwise;
23
•the impact of the COVID-19 pandemic on our operations, financial condition, and the worldwide economy;
•the impact of the Ukraine crisis and ramifications of sanctions against Russia;
•customer cancellations;
•any erroneous or inaccurate estimates or judgments relating to our critical accounting policies;
•our ability to raise the 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 remediate the material weakness in our internal control over financial reporting and establish effective controls and procedures;
•our ability to protect our intellectual property and other proprietary rights;
•our ability to maintain and grow our business;
•results of any future litigation and costs incurred in connection with any such 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;
•any security breaches or other disruptions compromising our proprietary information and exposing us to liability;
•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 concerning actions taken by our existing and past employees;
•any losses or issues we may encounter as a consequence of accepting or holding digital assets;
•risks associated with doing business internationally; and
•the other risks and uncertainties described in the Risk Factors section of our Annual Report for the year ended December 31, 2021, filed with the SEC on March 31, 2022.
All forward-looking statements in this document are based on current expectations, intentions, and beliefs using information available to us as of the date of this Quarterly Report; we assume no obligation to update any forward-looking statements, except as required by law. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements.
Company Overview
IZEA Worldwide, Inc. (“IZEA”, “we”, “us” or “our”) creates and operates online marketplaces that connect marketers, including brands, agencies, and publishers, with content creators such as Instagram influencers, TikTok influencers, YouTube stars, designers, photographers, and writers (“creators”). Marketers also engage us to gain access to our industry expertise, data, and analytics. Our primary technology platform, the IZEA Exchange (“IZEAx”), is designed to provide a unified ecosystem that enables the creation and publication of multiple types of content to be completed at scale.
24
We provide value through managing custom content workflow, creator search and targeting, bidding, analytics, and payment processing. While the majority of the marketers engage us to perform these services (the “Managed Services”) on their behalf, they may also use our marketplaces to engage creators for influencer marketing campaigns or to produce custom content on a self-service basis by licensing our technology.
Influencer Marketing. We work with marketers to enable influencer marketing campaigns at scale. A subset of influencer marketing known as “Sponsored Social” is when a company compensates creators to share sponsored content with the creators’ social network followings. This sponsored content is within the body of the content stream. We believe that we pioneered the concept of a marketplace for sponsorships on the social web in 2006 with the launch of our first platform, PayPerPost. We have focused on scaling our product and service offerings ever since, including by acquiring TapInfluence in July 2018 and launching Shake and BrandGraph in 2020.
Custom Content. We also work with marketers to augment or replace their content development efforts. Our network of creators produces editorial and marketing content that can be published both online and offline. Our network of creators includes professional journalists, subject matter experts, bloggers, and everyday content creators, allowing our customers to produce content ranging from complex white papers to simple product descriptions. Many of our content customers use this service to create a steady stream of posts for their corporate blogs. We first began offering custom content services in 2015 after acquiring Ebyline, a leading marketplace in the editorial content space, and continued to expand this offering with our acquisition of ZenContent in July 2016, a company that predominantly focused on e-commerce-related asset creation.
Our Platforms
IZEAx. The platform is designed to provide a unified ecosystem that enables the creation and publication of multiple types of custom content through our creators’ websites, blogs, and social media channels, including, among others, Twitter, Facebook, YouTube, Twitch, and Instagram. We extensively use this platform to manage influencer marketing campaigns on behalf of our marketers. This platform is also available directly to our marketers as a self-service tool and a licensed white label product. IZEAx was engineered from the ground up to replace all of our previous platforms with an integrated offering that is improved and more efficient.
BrandGraph. In March 2020, we launched BrandGraph, a social media intelligence platform. BrandGraph is heavily integrated with IZEAx, and both platforms rely heavily on data from each other, but it is also available as a stand-alone platform. BrandGraph offers marketers an analysis of share-of-voice, engagement benchmarking, category spending estimates, influencer identification, and sentiment analysis. The platform maps and classifies the complex hierarchy of corporation-to-brand relationships by category and associates social content with brands through a proprietary content analysis engine. It aggregates and analyzes content data to provide insights for marketers across their competitive landscapes that are particularly useful to influencer marketing professionals, including our managed services team.
Shake. In November 2020, we launched Shake, a new online marketplace where buyers can quickly and easily hire creators of all types for influencer marketing, photography, design, and other digital services. The Shake platform is aimed at digital creators seeking freelance “gig” work. Creator’s list available “Shakes” on their accounts on the platform. Marketers select and purchase creative packages from them through a streamlined chat experience, assisted by ShakeBot - a proprietary, artificial intelligence assistant.
This year, we announced the launch of The Creator Marketplace® which expands upon the foundation of the Shake platform and ultimately replaces it and IZEAx as the primary platform for marketers and creators to find each other and conduct business. Later this year we expect to launch IZEA Flex a workflow tool to complement The Creator Marketplace.
Impact of COVID-19 on our Business
The COVID-19 pandemic impacted our operations, sales, and finances beginning in 2020. To protect the health and safety of our employees, we took precautionary action and directed all staff to work from home effective March 16, 2020. We allowed the leases for our company headquarters and temporary office spaces to expire at the end of their terms throughout 2020. We have not experienced any major declines in operating efficiency in our remote working environment and have decided to continue our work-from-home policy indefinitely as a virtual-first employer.
We will continue to actively monitor the COVID-19 situation and may take further actions altering the business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, employees, and prospects, or on our future financial results.
Key Components of Results of Operations
Overall consolidated results of operations are evaluated based on Revenue, Cost of Revenue, Sales and Marketing expenses, General and Administrative expenses, Depreciation and Amortization, and Other Income (Expense), net.
25
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 are reported on a net basis, and revenue from all other sources, including Managed Services, License Fees, and Other Fees are reported on a gross basis. We further categorize these sources into two primary groups: (1) Managed Services and (2) SaaS Services, which includes revenue from Marketplace Spend Fees, License Fees, and Other Fees.
Cost of Revenue
Our cost of revenue consists of direct costs paid to our third-party creators who provide the custom content, influencer marketing, or amplification services for our Managed Service customers, where we report revenue on a gross basis. It also includes internal costs related to our campaign fulfillment and SaaS support departments. These costs include salaries, bonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to the personnel responsible for providing support to our customers and ultimately fulfilling our obligations under our contracts with customers. Where appropriate, we capitalize costs incurred with software developed or acquired for our revenue-supporting platforms and amortize these costs over the estimated useful lives of those platforms. This amortization is separately stated under depreciation and amortization in our consolidated statements of operations and comprehensive loss.
Sales and Marketing
Our sales and marketing expenses consist primarily of salaries, bonuses, commissions, stock-based compensation, employee benefit costs, travel and miscellaneous departmental costs for our marketing, sales, and sales support personnel, as well as marketing expenses such as brand marketing, public relations events, trade shows, and marketing materials, and travel expenses.
General and Administrative
Our general and administrative (“G&A”) expense consists primarily of salaries, bonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to our executive, finance, legal, human resources, and other administrative personnel. It also includes travel, public company, investor relations expenses, accounting, legal professional services fees, and other corporate-related expenses. G&A expense also includes our technology and development costs consisting primarily of our payroll costs for our internal engineers and contractors responsible for developing, maintaining, and improving our technology, as well as hosting and software subscription costs. These costs are expensed as incurred, except to the extent that they are associated with internal-use software that qualifies for capitalization, which is then recorded as software development costs in the consolidated balance sheet. We also capitalize costs that are related to our acquired intangible assets. Depreciation and amortization related to these costs are separately stated under depreciation and amortization in our consolidated statements of operations and comprehensive loss. G&A expense also includes current period gains and losses on our acquisition costs payable and gains and losses from the sale of fixed assets. Impairments on fixed assets, intangible assets, and goodwill are included as part of general and administrative expense when they are not material and broken out separately in our consolidated statements of operations and comprehensive loss when they are material.
Depreciation and Amortization
Depreciation and amortization expense consists primarily of amortization of our internal-use software and acquired intangible assets from our business acquisitions. To a lesser extent, we also have depreciation and amortization on equipment and leasehold improvements used by our personnel. Costs are amortized or depreciated over the estimated useful lives of the associated assets.
Other Income (Expense)
Interest Expense. Interest expense is prior years has primarily been related to the imputed interest on our secured credit facility, accrued interest for the PPP loan, and interest on the financing of computers. The Company is only recognizing interest expense on the financing of computers in the current year.
26
Other Income. Other income consists primarily of interest income for interest earned on investments, or changes in the value of our foreign assets and liabilities and foreign currency exchange gains and losses on foreign currency transactions, primarily related to the Canadian Dollar.
Other Comprehensive Income
Unrealized (gain) loss on securities held. Unrealized gains and losses on investment securities represent the difference between fair value at the balance sheet date and adjusted cost, which would be the cash settlement value of investment securities if held to maturity.
Results of Operations for the Three Months Ended September 30, 2022 and 2021
The following table sets forth a summary of our consolidated statements of operations and the change between the periods:
| (Unaudited) | ||||||||||||||||||||
| Three Months Ended September 30, | ||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||
| Revenue | $ | 10,826,335 | $ | 7,734,374 | $ | 3,091,961 | 40.0 | % | ||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Cost of revenue | 6,597,430 | 4,022,395 | 2,575,035 | 64.0 | % | |||||||||||||||
| Sales and marketing | 2,502,128 | 2,240,936 | 261,192 | 11.7 | % | |||||||||||||||
| General and administrative | 2,928,679 | 2,670,785 | 257,894 | 9.7 | % | |||||||||||||||
| Depreciation and amortization | 127,535 | 220,453 | (92,918) | (42.1) | % | |||||||||||||||
| Total costs and expenses | 12,155,772 | 9,154,569 | 3,001,203 | 32.8 | % | |||||||||||||||
| Loss from operations | (1,329,437) | (1,420,195) | 90,758 | (6.4) | % | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense | (814) | (1,558) | 744 | (47.8) | % | |||||||||||||||
| Other income, net | 424,019 | 20,961 | 403,058 | 1,922.9 | % | |||||||||||||||
| Total other income (expense), net | 423,205 | 19,403 | 403,802 | 2,081.1 | % | |||||||||||||||
| Net Loss | $ | (906,232) | $ | (1,400,792) | $ | 494,560 | (35.3) | % | ||||||||||||
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 September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Managed Services Revenue | $ | 10,476,278 | 96.8 | % | $ | 7,281,984 | 94.2 | % | $ | 3,194,294 | 43.9 | % | ||||||||||||||
| Marketplace Spend Fees | 16,019 | 0.1 | % | 87,556 | 1.1 | % | (71,537) | (81.7) | % | |||||||||||||||||
| License Fees | 320,349 | 3.0 | % | 354,850 | 4.6 | % | (34,501) | (9.7) | % | |||||||||||||||||
| Other Fees | 13,689 | 0.1 | % | 9,984 | 0.1 | % | 3,705 | 37.1 | % | |||||||||||||||||
| SaaS Services Revenue | 350,057 | 3.2 | % | 452,390 | 5.8 | % | (102,333) | (22.6) | % | |||||||||||||||||
| Total Revenue | $ | 10,826,335 | 100.0 | % | $ | 7,734,374 | 100.0 | % | $ | 3,091,961 | 40.0 | % | ||||||||||||||
Historically, we have invested the majority of our time and resources in our Managed Services business, which provides the majority of our revenue. Our acquisitions of Ebyline in 2015 and ZenContent in 2016 allowed us to expand our product offerings to provide custom content in addition to and in combination with our influencer marketing campaigns to expand our Managed Services. Our July 2018 merger with TapInfluence expanded our SaaS Services to derive revenue from Marketplace Spend Fees and License Fees.
27
Managed Services revenue is generated when a marketer (typically a brand, agency, or partner) pays us to provide custom content, influencer marketing, amplification, or other campaign management services. Managed Services revenue during the three months ended September 30, 2022 increased by $3.2 million, or 44%, to $10.5 million compared to $7.3 million for the same period in 2021. Revenue from one large customer accounted for $3.1 million of the increase to Managed Services revenue in the period.
SaaS Services revenue is generated by the self-service use of our technology platforms by marketers to manage their own content workflow and influencer marketing campaigns. It consists of fees earned on the marketer’s spend within the IZEAx, TapInfluence and Ebyline platforms, along with the license and support fees to access the platform services.
•Marketplace Spend Fees decreased by $71,537 for the three months ended September 30, 2022 when compared with the same period in 2021, primarily as a result of lower spend levels from fewer 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 September 30, 2022 to $320,349 compared to $354,850 in the same period of 2021. The fee decrease was primarily due to a reduction in BrandGraph and IZEAx Discovery service subscriptions.
•Other Fees revenue increased by $3,705 during the three months ended September 30, 2022 compared to the same period in 2021 due to fees earned on an increased number of early creator cash outs.
Cost of Revenue
Cost of revenue for the three months ended September 30, 2022 totaled $6.6 million, or 61% of revenue, compared to $4.0 million, or 52% of revenue for the same period in 2021. The increase in the cost of revenue is primarily due to higher cost deliveries on one large customer contract, which made up approximately 30% of current quarter revenues. Aside from the one large customer contract, the cost of revenue was in range with recent historical averages.
Sales and Marketing
Sales and marketing expense for the three months ended September 30, 2022 increased by $261,192, or approximately 12%, compared to the same period in 2021. Higher Payroll costs due to additional headcount were offset by reduced selling commissions related to lower bookings compared to the prior year quarter and lower contractor and other spending during the current quarter.
General and Administrative
General and administrative expense for the three months ended September 30, 2022 increased by $257,894, or approximately 10%, compared to the same period in 2021. Contractor related expense decreased $120,000 primarily as a result of the capitalization of engineering wages for software development. Software & licenses costs increased $177,000 due to increased software hosting and subscription costs. Professional services increased $200,000 over the prior year primarily due to audit fees related changing our independent public accountant.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended September 30, 2022 was $127,535, a decrease of $92,918, or approximately 42%, compared to the same period in 2021.
Depreciation and amortization expense on property and equipment was $25,672 and $33,072 for the three months ended September 30, 2022 and 2021, respectively. Depreciation expense has decreased slightly due to the disposal of aging equipment in the second quarter of 2022.
Amortization expense was $101,863 and $187,381 for the three months ended September 30, 2022 and 2021, respectively. Amortization expense related to intangible assets acquired in the Ebyline, ZenContent, and TapInfluence acquisitions was $72,222 for the three months ended June 30, 2021. There was no amortization expense related to intangible acquired assets for the three months ended September 30, 2022, as they were fully amortized during fiscal year 2021. Amortization expense related to internal use software development costs was $101,863 and $115,159 for the three months ended September 30, 2022 and 2021, respectively. Amortization on our intangible acquisition assets decreased in the three months ended September 30, 2022 due to completion of amortization on certain intangible assets acquired in prior years.
Other Income (Expense)
Interest expense decreased by $744 to $814 during the three months ended September 30, 2022 compared to the same period in 2021 due to the elimination of amounts owed on loan acquisition costs for the Bridge Bank Line of Credit and the PPP loan.
28
Other income, net increased by $403,058 during the three months ended September 30, 2022, when compared to the same period in 2021. The increase is primarily driven by interest income earned on marketable securities, which investment commenced in April 2022 as described in Note 11 of Notes to the Consolidated Financial Statements.
Net Loss
Net loss for the three months ended September 30, 2022 was $906,232, a $494,560 decrease compared to the net loss of $1,400,792 for the same period in 2021. The change in net loss was a result of the items discussed above.
Results of Operations for the Nine Months Ended September 30, 2022 and 2021
The following table sets forth a summary of our consolidated statements of operations and the change between the periods:
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||
| Revenue | $ | 32,293,682 | $ | 19,678,991 | $ | 12,614,691 | 64.1 | % | ||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Cost of revenue | 18,989,076 | 9,688,870 | 9,300,206 | 96.0 | % | |||||||||||||||
| Sales and marketing | 7,312,240 | 6,622,128 | 690,112 | 10.4 | % | |||||||||||||||
| General and administrative | 9,810,102 | 7,865,510 | 1,944,592 | 24.7 | % | |||||||||||||||
| Depreciation and amortization | 404,856 | 949,906 | (545,050) | (57.4) | % | |||||||||||||||
| Total costs and expenses | 36,516,274 | 25,126,414 | 11,389,860 | 45.3 | % | |||||||||||||||
| Loss from operations | (4,222,592) | (5,447,423) | 1,224,831 | (22.5) | % | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense | (2,594) | (24,090) | 21,496 | (89.2) | % | |||||||||||||||
| Other income (expense), net | 672,821 | 2,019,379 | (1,346,558) | (66.7) | % | |||||||||||||||
| Total other income (expense), net | 670,227 | 1,995,289 | (1,325,062) | (66.4) | % | |||||||||||||||
| Net Loss | $ | (3,552,365) | $ | (3,452,134) | $ | (100,231) | 2.9 | % | ||||||||||||
Revenue
The following table illustrates our revenue by type, the percentage of total revenue by type, and the change between the periods:
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Managed Services Revenue | $ | 31,025,350 | 96.1 | % | $ | 18,309,295 | 93.0 | % | $ | 12,716,055 | 69.5 | % | ||||||||||||||
| Marketplace Spend Fees | 122,243 | 0.4 | % | 256,308 | 1.3 | % | (134,065) | (52.3) | % | |||||||||||||||||
| License Fees | 1,030,718 | 3.2 | % | 1,082,734 | 5.5 | % | (52,016) | (4.8) | % | |||||||||||||||||
| Other Fees | 115,371 | 0.4 | % | 30,654 | 0.2 | % | 84,717 | 276.4 | % | |||||||||||||||||
| SaaS Services Revenue | 1,268,332 | 3.9 | % | 1,369,696 | 7.0 | % | (101,364) | (7.4) | % | |||||||||||||||||
| Total Revenue | $ | 32,293,682 | 100.0 | % | $ | 19,678,991 | 100.0 | % | $ | 12,614,691 | 64.1 | % | ||||||||||||||
Managed Services revenue is generated when a marketer (typically a brand, agency, or partner) pays us to provide custom content, influencer marketing, amplification, or other campaign management services. Managed Services revenue during the nine months ended September 30, 2022, increased 69% from the same period in 2021. Revenues from one large customer contract, dating to April 2021, comprised over one-third of the increase in managed services revenue. The balance of the increase in managed services revenue year to date is due to growth in orders from new and existing customers expanding their marketing efforts through sponsored social marketing as compared to the prior-year.
29
SaaS Services revenue, which includes license and support fees to access the platform services, and fees earned on the marketers’ self-service use of our technology platforms to manage their content workflow and influencer marketing campaigns, declined (7.4)% from the same period in 2021, due to:
•Marketplace Spend Fees decreased by $134,065 for the nine months ended September 30, 2022, when compared with the same period in 2021, primarily as a result of lower spend levels from our marketers and lower fees assessed on those spends as a result of competitive pricing efforts in IZEAx. Revenue from Marketplace Spend Fees represents our net margins received on this business.
•License Fees revenue decreased 5% during the nine months ended September 30, 2022 to $1,030,718 compared to $1,082,734 in the same period of 2021. The decrease was primarily driven by a reduction in subscriptions for BrandGraph, this reduction was partially offset by an increase in subscribers for IZEAx Discovery services, albeit at lower rates. Additionally, we implemented a competitive standardized pricing system for all IZEAx license fee customers.
•Other Fees revenue increased $84,717 for the nine months ended September 30, 2022, compared to the same period in 2021 due primarily to a customer deposit forfeiture. Nonrefundable deposits are collected from certain customers due to defined minimum spend per the contract or prepayment required for any identified credit issues. Customers do not typically forfeit deposits held on account.
Cost of Revenue
Cost of revenue for the nine months ended September 30, 2022, increased by $9.3 million, or approximately 96%, compared to the same period in 2021. The increase in the cost of revenue is primarily due to higher-cost deliveries on one large customer contract, which made up approximately 33% of the year-to-date revenues. Aside from the one large customer contract, the cost of revenue was in range with recent historical averages.
Sales and Marketing
Sales and marketing expenses for the nine months ended September 30, 2022, increased by $690,112, or approximately 10%, compared to the same period in 2021. The increase over the prior year is primarily related to additional headcount and associated payroll costs.
General and Administrative
General and administrative expense for the nine months ended September 30, 2022, increased by $1.9 million, or approximately 25%, compared to the same period in 2021. The increase over the prior year was primarily due to $460,000 in higher payroll and personnel related expenses as a result of an increase in headcount. Contractor costs increased $152,000 for additional engineers to supplement our team working to expand our technology offerings. Professional services increased $370,000 due to new ERP system implementation and additional accounting and legal fees related to the Restatement and transition costs related to changing our independent public accountant. Travel increased $204,000 due to relaxing COVID-19 restrictions. Public company expenses increased $140,000 primarily due to usage of consultants to assist with stock management software implementation, penetration testing, proxy solicitation, and investment strategy. Software and licenses increased approximately $575,000 due to increased usage of AWS hosting, new software subscriptions, and additional licenses on existing software subscriptions.
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended September 30, 2022 was $404,856, a decrease of $545,050, or approximately 57%, compared to the same period in 2021.
Depreciation expense on property and equipment was $91,200 and $98,759 for the nine months ended September 30, 2022, and 2021, respectively. Depreciation expense decreased slightly due to the disposal of aging equipment in 2021.
Amortization expense was $313,656 and $851,147 for the nine months ended September 30, 2022, and 2021, respectively. Amortization expense related to intangible assets acquired in the Ebyline, ZenContent, and TapInfluence acquisitions was zero and $505,556 for the nine months ended September 30, 2022, and 2021, respectively, while amortization expense related to internal-use software development costs was $313,656 and $345,591 for the nine months ended September 30, 2022, and 2021, respectively. Amortization on our intangible acquisition assets is decreasing due to the completion of amortization on certain intangible assets acquired in prior years while amortization on our internal software costs is increasing due to continued development.
Other Income (Expense)
Interest expense decreased by $21,496 to $2,594 during the nine months ended September 30, 2022 compared to the same period in 2021 due primarily to the elimination of amounts owed on loan acquisition costs payable and the reduction in
30
our average borrowings on our secured credit facility during the nine months ended September 30, 2022, compared to the same period in 2021.
Other income, net decreased by $1.3 million during the nine months ended September 30, 2022, when compared to the same period in 2021. The prior year period included income related to the forgiveness of debt, including principal and interest. The current year period includes $230,000 of interest income earned on marketable securities, which investment commenced in April 2022.
Net Loss
Net loss for the nine months ended September 30, 2022, was $3.6 million, a $0.10 million decrease in the net loss of $3.5 million for the same period in 2021. The decrease in net loss was a result of the changes discussed above.
Key Metrics
We review the information provided by our key financial metrics, Managed Services Bookings, and gross billings, to assess the progress of our business and make decisions on where to allocate our resources. As our business evolves, we may change the key financial metrics in future periods.
Managed Services Bookings
Managed Services Bookings is a measure of all sales orders received during a time period less any cancellations received, or refunds given during the same time period. Sales order contracts vary in complexity with each customer and range from custom content delivery to integrated marketing services; our contracts generally run from several months for smaller contracts up to twelve months for larger contracts. We recognize revenue from our Managed Services contracts on a percentage of completion basis as we deliver the content or services over time, which can vary greatly. Historically, bookings have converted to revenues over a 6-month period on average. However, since late 2020, we have been receiving increasingly larger and more complex sales orders which, in turn, has lengthened the average revenue period to approximately 9-months, with the largest contracts taking longer to complete. For this reason, Managed Services Bookings, while an overall indicator of the health of our business, may not be used to predict quarterly revenues, and could be subject to future adjustment. Managed Services Bookings is useful information as it reflects the value of orders received in one period, even though revenue from those orders may be reflected over varying amounts of time. Management uses the Managed Services Bookings metric to plan its operating staff, to identify key customer group trends to enlighten go-to-market activities, and to inform its product development efforts.
The following tables set forth our Managed Services Bookings and the change between the periods:
| Three Months Ended September 30, | ||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||
| Managed Services Bookings | $ | 8,217,765 | $ | 11,290,569 | $ | (3,072,804) | (27.2) | % | ||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||
| Managed Services Bookings | $ | 29,683,261 | $ | 28,838,629 | $ | 844,632 | 2.9 | % | ||||||||||||
Gross Billings by Revenue Type
Company management evaluates our operations and makes strategic decisions based, in part, on our key metric of gross billings from our two primary types of revenue, Managed Services, and SaaS Services. We define gross billings as the total dollar value of the amounts charged to our customers for the services we perform, and the amounts billed to our SaaS customers for their self-service purchase of goods and services on our platforms. The amounts billed to our SaaS customers are on a cost-plus basis. Gross billings are the amounts of our reported revenue plus the cost of payments we made to third-party creators providing the content or sponsorship services, which are netted against revenue for generally accepted accounting principles in the United States (“GAAP”) reporting purposes.
Managed Services gross billings include the total dollar value of the amounts billed to our customers for the services we perform. Gross billings for Managed Services are the same as Managed Services Revenue reported for those services in our consolidated statements of operations and comprehensive loss in accordance with GAAP.
SaaS Service gross billings include license and other fees together with the total amounts billed to our SaaS customers for their self-service purchase of goods and services on our platforms, termed ‘Marketplace Spend Fees.’ Our SaaS customers’
31
marketplace spend is billed on a cost-plus basis. SaaS Services Revenue includes the total of License and Other Fees gross billings, plus the Marketplace Spend Fees gross billings (which includes our third-party creator costs on those billings that are netted against revenue for GAAP reporting purposes).
We consider gross billings to be an important indicator of our potential performance as it measures the total dollar volume of transactions generated through our marketplaces. Tracking gross billings allows us to monitor the percentage of gross billings that we retain after payments to our creators. Additionally, tracking gross billings is critical as it pertains to our credit risk and cash flows. We invoice our customers based on our services performed or based on their self-service transactions plus our fee. Then we remit the agreed-upon transaction price to the creators. If we do not collect the money from our customers prior to paying our creators, we could experience large swings in our cash flows. Additionally, we incur the credit risk to collect amounts owed from our customers for all services performed by us or by the creators. Finally, gross billings allow us to evaluate our transaction totals on an equal basis to see our contribution margins by revenue stream so that we can better understand where we should be allocating our resources.
The following tables set forth our gross billings by revenue type, the percentage of total gross billings by type, and the change between the periods:
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Managed Services Gross Billings | $ | 10,476,278 | 90.4% | $ | 7,281,984 | 83.5% | $ | 3,194,294 | 43.9% | |||||||||||||||||
| Marketplace Spend Fees | 775,055 | 6.7% | 1,077,268 | 12.3% | (302,213) | (28.1)% | ||||||||||||||||||||
| License Fees | 320,349 | 2.8% | 354,850 | 4.1% | (34,501) | (9.7)% | ||||||||||||||||||||
| Other Fees | 13,689 | 0.1% | 9,984 | 0.1% | 3,705 | 37.1% | ||||||||||||||||||||
| SaaS Services Gross Billings | 1,109,093 | 9.6% | 1,442,102 | 16.5% | (333,009) | (23.1)% | ||||||||||||||||||||
| Total Gross Billings | $ | 11,585,371 | 100.0% | $ | 8,724,086 | 100.0% | $ | 2,861,285 | 32.8% | |||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Managed Services Gross Billings | $ | 31,025,350 | 89.9% | $ | 18,309,295 | 81.2% | $ | 12,716,055 | 69.5% | |||||||||||||||||
| Marketplace Spend Fees | 2,355,534 | 6.8% | 3,137,124 | 13.9% | (781,590) | (24.9)% | ||||||||||||||||||||
| License Fees | 1,030,718 | 3.0% | 1,082,734 | 4.8% | (52,016) | (4.8)% | ||||||||||||||||||||
| Other Fees | 115,371 | 0.3% | 30,654 | 0.1% | 84,717 | 276.4% | ||||||||||||||||||||
| SaaS Services Gross Billings | 3,501,623 | 10.1% | 4,250,512 | 18.8% | (748,889) | (17.6)% | ||||||||||||||||||||
| Total Gross Billings | $ | 34,526,973 | 100.0% | $ | 22,559,807 | 100.0% | $ | 11,967,166 | 53.0% | |||||||||||||||||
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 valuable information to investors as it excludes non-cash transactions, and it provides consistency to facilitate period-to-period comparisons.
32
You should not consider Adjusted EBITDA in isolation or as a substitute for an analysis of our results of operations as under GAAP. All companies do not calculate Adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Moreover, Adjusted EBITDA has limitations as an analytical tool, including that Adjusted EBITDA:
•does not include stock-based compensation expense, which is a non-cash expense, but has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an essential part of our compensation strategy;
•does not include stock issued for payment of services, which is a non-cash expense, but has been, and is expected to be for the foreseeable future, an important means for us to compensate our directors, vendors, and other parties who provide us with services;
•does not include depreciation and intangible assets amortization expense, impairment charges and gains or losses on disposal of equipment, which is not always a current period cash expense, but the assets being depreciated and amortized may have to be replaced in the future; and
•does not include interest expense and other gains, losses, and expenses that we believe are not indicative of our ongoing core operating results, but these items may represent a reduction or increase in cash available to us.
Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the operation and growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP financial measures as supplements. In evaluating this non-GAAP financial measure, you should be aware that in the future, we may incur expenses similar to those for which adjustments are made in calculating Adjusted EBITDA. Our presentation of this non-GAAP financial measure should also not be construed to infer that our future results will be unaffected by unusual or non-recurring items.
The following table sets forth a reconciliation from the GAAP measurement of net loss to our non-GAAP financial measure of Adjusted EBITDA for the three and nine months ended September 30, 2022, and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss | $ | (906,232) | $ | (1,400,792) | $ | (3,552,365) | $ | (3,452,134) | |||||||||||||||
| Gain on the forgiveness of debt | — | — | — | (1,927,220) | |||||||||||||||||||
| Write down of digital assets | 1,081 | — | 141,808 | — | |||||||||||||||||||
| Non-cash stock-based compensation | 154,115 | 229,039 | 428,013 | 633,219 | |||||||||||||||||||
| Non-cash stock issued for payment of services | 31,260 | 37,544 | 93,742 | 109,784 | |||||||||||||||||||
| Interest expense | 814 | 1,558 | 2,594 | 24,090 | |||||||||||||||||||
| Depreciation and amortization | 127,535 | 220,453 | 404,856 | 949,906 | |||||||||||||||||||
| Other non-cash items | — | (13,732) | 18,555 | (21,522) | |||||||||||||||||||
| Adjusted EBITDA | $ | (591,427) | $ | (925,930) | $ | (2,462,797) | $ | (3,683,877) | |||||||||||||||
| Revenue | $ | 10,826,335 | $ | 7,734,374 | $ | 32,293,682 | $ | 19,678,991 | |||||||||||||||
| Adjusted EBITDA as a % of Revenue | (5.5)% | (12.0)% | (7.6)% | (18.7)% | |||||||||||||||||||
Liquidity and Capital Resources
Near-Term Liquidity and Capital Resources
The Company’s primary cash needs have historically been funding the development and integration of IZEAx and other technology platforms used in its business, marketing expenses, and general and administrative (“G&A”) expenses including salaries, bonuses, commissions, and stock-based compensation. The Company has incurred losses and negative cash flow from operations for most periods since inception, primarily the result of costs associated with third-party creators, salaries, bonuses and stock-based compensation, and other G&A expenses, including technology and development costs, which has resulted in a total accumulated deficit of $77.2 million as of September 30, 2022. While we have not achieved profitability, we have sufficient resources to fund operations and planned investments for at least the next twelve months.
We had cash and cash equivalents of $20.0 million as of September 30, 2022, as compared to $75.4 million as of December 31, 2021. This decrease of $55.4 million is primarily the result of investment of cash pursuant to our investment
33
policy, $25.1 million of which is classified as long-term investments and $21.9 million of which is classified as short-term investments, with the balance for the change primarily due to operating losses.
| September 30, 2022 | December 31, 2021 | ||||||||||
| Net cash (used for) provided by: | |||||||||||
| Operating activities | $ | (6,916,555) | $ | (3,652,080) | |||||||
| Investing activities | (48,439,579) | (4,088) | |||||||||
| Financing activities | (50,684) | 45,062,800 | |||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (55,406,818) | $ | 41,406,632 | |||||||
Cash used for operating activities was $6.9 million during the nine months ended September 30, 2022 and is primarily the result of $3.6 million in operating losses and $3.5 million in net working capital changes. Net cash used for investing activities was $48,439,579 during the nine months ended September 30, 2022, primarily due to the purchase and sale of marketable securities. Net cash used for financing activities during the nine months ended September 30, 2022, was $50,684, which consisted primarily of payments on shares withheld for taxes.
In June 2020 and January 2021, we entered into ATM Sales Agreements with National Securities Corporation, as sales agent (“National Securities”), pursuant to which we could offer and sell up to $40 million and $35 million, respectively, of common stock (the “ATM Offerings”). From June 4, 2020 through April 15, 2021, we sold a total of 26,005,824 shares at an average price of $2.88 per share for total gross proceeds of $75.0 million in the ATM Offerings. On June 21, 2021, we entered into a third ATM Sales Agreement with National Securities, as sales agent (the “2021 ATM Sales Agreement”), pursuant to which we can offer and sell shares of our common stock, from time to time for aggregate purchase prices up to $100 million by any method deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act under our shelf registration statement on Form S-3 (File No. 333-256078). We terminated the 2021 ATM Sales Agreement with National Securities effective September 6, 2022. No sales were made under this agreement.
Long-Term Liquidity
We anticipate that our operating expenses will increase in the foreseeable future as we continue to pursue the expansion of our business. We currently expect that we have adequate cash and invested resources to fund our business growth for the next twelve months, however, should additional capital become necessary, we expect these funds would be financed predominately through proceeds from future equity, equity-based, or debt offerings, unless and until our operations are profitable and sustain our ongoing capital needs. As a result, our business success could depend, to a significant extent, upon our ability to obtain the funding necessary to support our operations.
Financial Condition
Our business operations and results have been impacted by COVID-19, which in the first half of 2020 had a material effect on our customers, their advertising commitments, bookings cancellations, revenues, and cash flows. Since late 2020, through mid-summer of 2022, the Company saw a material increase in the overall social media marketing spend by large and small customers, which benefited our bookings and revenue growth rates, and cash flows. Since June of 2022, on top of continuing economic impacts of supply-chain issues, labor disruption, business closures, and recent inflationary pressures, the broadening unenthusiastic economic outlook may be affecting marketing budgets as evidenced by the softness in bookings the Company has experienced through the third quarter of 2022. While our recent bookings have not met expectations, we see evidence of continued demand for influencer marketing services in our pipeline, and despite opportunities taking longer to close, we believe that our base business remains strong. These matters, taken together, could have a further material adverse impact on our business, results of operations, and financial position in future periods.
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, 2021. 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,” of this Quarterly Report for information on additional recent pronouncements.
34
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
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 the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the 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 the Company files under the Exchange Act is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
In designing and evaluating the disclosure controls and procedures, 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 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 of 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
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.
In connection with the preparation of this Quarterly Report on Form 10-Q for the period ended September 30, 2022, an evaluation was performed under the supervision and with the participation of the Company’s management team including its principal executive officer and principal financial and accounting officer to determine the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2022. Our disclosure controls and procedures are 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 periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Due to the material weakness outlined below, our principal executive and principal financial officers concluded that our disclosure controls and procedures were not effective as of September 30, 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
During the preparation of the Company’s Annual Report for the year ended December 31, 2021, management conducted a review of the Company’s recognition of liabilities and associated costs relating to the Company’s Managed Services within its IZEAx platform ("Managed Services"), in connection with which the Company enters into contracts with marketers for creators to produce sponsored social services content (“Sponsored Content”) and publish the Sponsored Content on one or more approved social media platforms. The Company determined that a portion of the liability, associated cost, and related revenue from Sponsored Content should have been accrued upon its initial posting (publication) based on the number of
35
posting days during the Term of the agreement in which such Sponsored Content was to remain live. Since the Company recognizes its Managed Services revenue using an input method of costs incurred compared to the total of expected costs, the timing of the accrual of Sponsored Content costs affected the related Managed Services revenue recognized during each period. In light of this determination, the Company restated its interim financial statements for the quarterly periods ended March 31, 2020, June 30, 2020, and September 30, 2020, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. As a result of the Restatement, we determined that we have a material weakness in our internal control over financial reporting relating to the inadequate design and operation of management’s controls over identifying the appropriate timing of cost recognition related to creator content deliveries used in the input method of costs incurred compared to total expected costs.
Remediation of Material Weakness
To remediate the material weakness described above, we have identified additional controls and engaged an independent third-party technical accounting expert to assist management with the continued review and evaluation of our processes and pertinent controls. We completed the Restatement in order to apply adjustments to certain liabilities and cost accruals related to the material weakness and have reflected such adjusted methods in the subsequent interim periods. We will continue to design and implement measures to strengthen the Company's internal control over financial reporting.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2022, the Company utilized the new Enterprise Resource Planning (“ERP”) system to accurately maintain our financial records, enhance the flow of financial information, improve data management, and provide timely information to senior leadership. Except for the utilization of the new ERP system, there have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended September 30, 2022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
36
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 November 14, 2022, 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 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, 2021 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. Except as described below, there have been no material changes to the risk factors described under “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Our common stock may be delisted if we fail to comply with the requirements for continued listing on the Nasdaq Capital Market, and the price of our common stock and our ability to access the capital markets could be negatively impacted.
Our common stock is listed for trading on the Nasdaq Capital Market (“Nasdaq”). To maintain this listing, we must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for continued inclusion on the Nasdaq Capital Market under Nasdaq Listing Rule 5450(a)(1) (the "Bid Price Rule").
On July 6, 2022, the Company received a notification letter from the Listing Qualifications Department of Nasdaq stating that the Company was not in compliance with the Bid Price Rule. The notification letter stated that the Company would be afforded 180 calendar days (until January 2, 2023) to regain compliance. In order to regain compliance, the Company's closing bid price must remain at $1.00 or more for a minimum of ten consecutive business days. The notification letter also states that in the event the Company does not regain compliance within the 180 day period, the Company may be eligible for an additional 180 days to regain compliance. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary.
If we are unable to regain compliance with the Bid Price Rule, or fail to meet any of the other continued listing requirements in the future, our common stock may be delisted from Nasdaq, which could reduce the liquidity of our common stock materially and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees, and business development opportunities. Such a delisting likely would impair your ability to sell or purchase our common stock when you wish to do so. Further, if we were to be delisted from Nasdaq, our common stock may no longer be recognized as a “covered security” and we would be subject to regulation in each state in which we offer our securities. Thus, delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly impact the ability of investors to trade our securities, and would negatively impact the value and liquidity of our common stock.
A few of our customers account for a significant portion of our gross billings and accounts receivable, and the loss of, or reduced purchases from, this or other customers could have a material adverse effect on our operating results.
A significant portion of our gross billings and accounts receivable are attributable to a small number of customers. At September 30, 2022, one customer accounted for 33% of total accounts receivable and, during the three months ended September 30, 2022, two customers accounted for an aggregate of almost 40% of gross billings. The concentration of our sales with a relatively small number of customers makes us particularly dependent on factors, both positive and negative, affecting those customers. If demand for our services from these customers increases, our results are favorably impacted, while if their demand for our services decreases, they may reduce their purchases of, or stop purchasing, our services and our operating results would suffer. The Company does not typically engage in contracts are longer than one year, and so most of our customers can cease reduce or cease business with us on a relatively short basis. The loss of a large customer and failure to add
37
new customers to replace lost revenue would have a material adverse effect on our business, financial condition, and results of operations.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
Not applicable.
38
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 three month September 30, 2022 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Stockholders' Equity, (iv) the Consolidated Statements of Cash Flow, and (iv) the Notes to the 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 Annual Report on Form 10-K 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.
39
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 | ||||||||
| November 14, 2022 | By: | /s/ Edward H. Murphy | ||||||
| Edward H. Murphy Chairman and Chief Executive Officer (Principal Executive Officer) | ||||||||
| November 14, 2022 | By: | /s/ Peter J. Biere | ||||||
Peter J. Biere Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
40