10-Q 1 izea18093010q.htm 10-Q Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
FORM 10-Q
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

o
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.)
 
480 N. Orlando Avenue, Suite 200
Winter Park, FL
 
32789
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:   (407) 674-6911
 
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x    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  o
Accelerated filer  o
Smaller reporting company x
Non-accelerated filer  x
 
Emerging growth company  o
 
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 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

APPLICABLE ONLY TO CORPORATE REGISTRANTS
 
 As of November 12, 2018, there were 12,073,031 shares of our common stock outstanding.





Quarterly Report on Form 10-Q for the period ended September 30, 2018

Table of Contents
 


 
Page
 
 
 
 
 
 
 





i


PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

IZEA Worldwide, Inc.
Unaudited Consolidated Balance Sheets
 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current:
 
 
 
Cash and cash equivalents
$
3,864,676

 
$
3,906,797

Accounts receivable, net
6,811,029

 
3,647,025

Prepaid expenses
573,611

 
389,104

Other current assets
84,359

 
9,140

Total current assets
11,333,675

 
7,952,066

 
 
 
 
Property and equipment, net
309,374

 
286,043

Goodwill
8,316,722

 
3,604,720

Intangible assets, net
3,472,855

 
667,909

Software development costs, net
1,233,988

 
967,927

Security deposits
154,248

 
148,638

Total assets
$
24,820,862

 
$
13,627,303

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,831,696

 
$
1,756,841

Accrued expenses
2,146,862

 
1,592,356

Contract liabilities
5,631,096

 

Unearned revenue

 
3,070,502

Line of credit
1,733,420

 
500,550

Current portion of deferred rent
29,187

 
45,127

Current portion of acquisition costs payable
4,535,930

 
741,155

Total current liabilities
16,908,191

 
7,706,531

 
 
 
 
Deferred rent, less current portion

 
17,419

Acquisition costs payable, less current portion
43,055

 
609,768

Total liabilities
16,951,246

 
8,333,718

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock; $.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $.0001 par value; 200,000,000 shares authorized; 12,073,031 and 5,733,981, respectively, issued and outstanding
1,207

 
573

Additional paid-in capital
60,270,355

 
52,570,432

Accumulated deficit
(52,401,946
)
 
(47,277,420
)
Total stockholders’ equity
7,869,616

 
5,293,585

 
 
 
 
Total liabilities and stockholders’ equity
$
24,820,862

 
$
13,627,303



See accompanying notes to the unaudited consolidated financial statements.

1


IZEA Worldwide, Inc.
Unaudited Consolidated Statements of Operations
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Revenue
$
5,780,941

 
$
7,089,855

 
$
13,798,342

 
$
17,637,264

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 

 
 

Cost of revenue (exclusive of amortization)
2,397,466

 
3,302,626

 
6,490,906

 
8,354,385

Sales and marketing
1,574,335

 
1,733,178

 
5,065,457

 
6,008,526

General and administrative
2,699,978

 
2,312,301

 
6,285,810

 
6,925,589

Depreciation and amortization
370,674

 
374,965

 
846,820

 
1,095,831

Total costs and expenses
7,042,453

 
7,723,070

 
18,688,993

 
22,384,331

 
 
 
 
 
 
 
 
Loss from operations
(1,261,512
)
 
(633,215
)
 
(4,890,651
)
 
(4,747,067
)
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 

 
 

Interest expense
(90,452
)
 
(15,058
)
 
(147,166
)
 
(45,406
)
Change in fair value of derivatives, net

 
45,160

 
(11,794
)
 
36,122

Other income, net
19,135

 
44,308

 
23,907

 
31,728

Total other income (expense), net
(71,317
)
 
74,410

 
(135,053
)
 
22,444

 
 
 
 
 
 
 
 
Net loss
$
(1,332,829
)
 
$
(558,805
)
 
$
(5,025,704
)
 
$
(4,724,623
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic and diluted
10,365,750

 
5,702,297

 
7,351,827

 
5,659,423

Basic and diluted loss per common share
$
(0.13
)
 
$
(0.10
)
 
$
(0.68
)
 
$
(0.83
)
 






















See accompanying notes to the unaudited consolidated financial statements.

2


IZEA Worldwide, Inc.
Unaudited Consolidated Statement of Stockholders’ Equity



 
 
Common Stock
 
Additional
Paid-In
 
Accumulated
 
Total
Stockholders’
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Equity
Balance, December 31, 2017
 
5,733,981

 
$
573

 
$
52,570,432

 
$
(47,277,420
)
 
$
5,293,585

Cumulative effect of change in accounting policy to ASC 606
 

 

 

 
(98,822
)
 
(98,822
)
Sale of securities
 
4,963,333

 
496

 
5,666,504

 

 
5,667,000

Stock issued for payment of acquisition liability
 
1,248,765

 
125

 
1,896,658

 

 
1,896,783

Stock purchase plan issuances
 
11,189

 
1

 
9,034

 

 
9,035

Stock issued for payment of services
 
30,265

 
3

 
124,997

 

 
125,000

Stock issuance costs
 

 

 
(709,634
)
 

 
(709,634
)
Stock-based compensation
 
85,498

 
9

 
712,364

 

 
712,373

Net loss
 

 

 

 
(5,025,704
)
 
(5,025,704
)
Balance, September 30, 2018
 
12,073,031

 
$
1,207

 
$
60,270,355

 
$
(52,401,946
)
 
$
7,869,616





































See accompanying notes to the unaudited consolidated financial statements.

3


IZEA Worldwide, Inc.
Unaudited Consolidated Statements of Cash Flows
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(5,025,704
)
 
$
(4,724,623
)
Adjustments to reconcile net loss to net cash used for operating activities:
 

 
 

Depreciation and amortization
167,900

 
163,597

Amortization of software development costs and other intangible assets
678,920

 
932,234

(Gain) loss on disposal of equipment
5,242

 
(5,462
)
Provision for losses on accounts receivable

 
44,827

Stock-based compensation
468,042

 
509,642

Fair value of stock issued for payment of services
93,734

 
143,536

Increase (decrease) in fair value of contingent acquisition costs payable
(485,747
)
 
62,000

Gain on settlement of acquisition costs payable
(84,938
)
 
(10,491
)
Change in fair value of derivatives, net
11,794

 
(36,122
)
Changes in operating assets and liabilities, net of effects of business acquired:
 

 
 

Accounts receivable
73,744

 
(1,552,555
)
Prepaid expenses and other current assets
32,007

 
(84,798
)
Accounts payable
924,039

 
242,033

Accrued expenses
(1,638,319
)
 
946,002

Contract liabilities
654,859

 

Unearned revenue

 
435,054

Deferred rent
(33,359
)
 
(25,764
)
Net cash used for operating activities
(4,157,786
)
 
(2,960,890
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of equipment
(157,384
)
 
(7,762
)
Merger with TapInfluence, net of cash acquired
11,266

 

Increase in software development costs
(486,927
)
 
(85,460
)
Security deposits
(5,610
)
 
4,309

Net cash used for investing activities
(638,655
)
 
(88,913
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Payments on acquisition liabilities
(120,930
)
 
(266,898
)
Proceeds from sale of securities
5,667,000

 

Proceeds from line of credit, net of repayments
(91,151
)
 
810,376

Proceeds from stock purchase plan issuances
9,035

 
16,232

Stock issuance costs
(709,634
)
 
(10,913
)
Net cash provided by financing activities
4,754,320

 
548,797

 
 
 
 
Net decrease in cash and cash equivalents
(42,121
)
 
(2,501,006
)
Cash and cash equivalents, beginning of year
3,906,797

 
5,949,004

 
 
 
 
Cash and cash equivalents, end of period
$
3,864,676

 
$
3,447,998

 
 
 
 
Supplemental cash flow information:
 

 
 

Cash paid during the period for interest
$
104,028

 
$
29,700

 
 
 
 
Non-cash financing and investing activities:
 

 
 

Common stock issued for payment of acquisition liability
$
1,896,783

 
$
928,041

Fair value of common stock issued for future services
$
317,134

 
$
23,110


See accompanying notes to the unaudited consolidated financial statements.

4

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements


NOTE 1.    COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Unaudited Interim Financial Information
The accompanying consolidated balance sheet as of September 30, 2018, the consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017, the consolidated statement of stockholders' equity for the nine months ended September 30, 2018 and the consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017 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, 2017 has been derived from the audited consolidated financial statements at that date but, in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"), does not include all of the information and notes required by GAAP for complete financial statements. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of results that may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2017 included in the Company's Annual Report on Form 10-K filed with the SEC on April 17, 2018.

Nature of Business
IZEA Worldwide, Inc. (together with its wholly-owned subsidiaries, “we,” “us,” “our,” “IZEA” or the “Company”) was founded in February 2006 under the name PayPerPost, Inc. and became a public company incorporated in the state of Nevada in May 2011. In January 2015, IZEA purchased all of the outstanding shares of capital stock of Ebyline, Inc. (“Ebyline”). In July 2016, IZEA purchased all the outstanding shares of capital stock of ZenContent, Inc. (“ZenContent”). The legal entity of ZenContent was dissolved in December 2017 after all assets and transactions were transferred to IZEA. On March 9, 2016, the Company formed IZEA Canada, Inc., a wholly-owned subsidiary, incorporated in Ontario, Canada to operate as a sales and support office for IZEA's Canadian customers. On July 26, 2018, the Company merged with TapInfluence, Inc. ("TapInfluence") pursuant to the terms of an Agreement and Plan of Merger dated as of July 11, 2018, and amended July 20, 2018.

Effective August 20, 2018, the Company changed its name from IZEA, Inc. to IZEA Worldwide, Inc. The Company is headquartered near Orlando, Florida with additional offices in California, Colorado, Illinois, New York and Canada.

The Company creates and operates online marketplaces that connect marketers with content creators. The creators are compensated by IZEA for producing unique content such as long and short form text, videos, photos, status updates, and illustrations for marketers or distributing such content on behalf of marketers through their personal websites, blogs, and social media channels. Marketers receive influential consumer content and engaging, shareable stories that drive awareness.

The Company's primary technology platform, The IZEA Exchange (“IZEAx”), enables transactions to be completed at scale through the management of custom content workflow, creator search and targeting, bidding, analytics, and payment processing. IZEAx is designed to provide a unified ecosystem that enables the creation and publication of multiple types of custom content through a creator's personal websites, blogs, or social media channels including Twitter, Facebook, Instagram, and YouTube, among others. In addition to IZEAx, the Company operates the Ebyline technology platform, which it acquired in January 2015, and the TapInfluence technology platform, which it acquired in July 2018. The Ebyline platform was originally designed as a self-service content marketplace to replace editorial newsrooms in the news agencies with a “virtual newsroom” to handle their content workflow. The TapInfluence platform performs in a similar manner to IZEAx and is being utilized by the majority of its customers as a self-service platform via a licensing arrangement, allowing access to the platform and its creators for self-managed marketing campaigns.

Liquidity and Going Concern
The Company’s financial statements are prepared using GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred significant net losses and negative cash flow from operations for most periods since its inception, which has resulted in a total accumulated deficit of $52,401,946 as of September 30, 2018.  For the nine months ended September 30, 2018, the Company had a net loss of $5,025,704 and the Company expects to incur a net loss for the fiscal year 2018.  The Company's cash balance as of September 30, 2018 was $3,864,676 and the Company's operating activities used cash of $4,157,786 for the nine months ended September 30, 2018. The Company’s revenues decreased year-over-year for the nine months ended September 30, 2018. If the Company's annual revenue continues to decline from prior year levels at a rate similar to or greater than the decline in the first three quarters of 2018 and future commitments do not increase, the Company’s cash resources will likely be insufficient to meet its obligations as they become due during the next twelve months.
 

5

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

As further discussed in Note 6, the Company received net proceeds of $3,140,647 and $1,820,965 from two separate underwritten public offerings on July 2, 2018 and September 21, 2018, respectively. The Company used a portion of the July 2, 2018 proceeds to finance its merger with TapInfluence and has agreed to pay TapInfluence stockholders an additional $4,500,000 in the form of cash, common stock or a combination thereof, at IZEA’s option, in two installments - $1,000,000 six months after the closing date of the merger and $3,500,000 twelve months after the closing date of the merger. The Company does not have enough cash to cover these current obligations and will rely on its ability to issue shares of its common stock as payment, its ability to raise additional capital through the sale of equity or equity linked securities, or its ability to utilize or secure other debt financing to pay for its current obligations.

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses and its acquisition liabilities until it achieves and maintains profitability. Management’s plans to continue as a going concern include raising additional capital through sales of securities, issuing shares of stock to pay for its obligations, and increasing its borrowing levels. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. If the Company is not able to substantially increase sales, obtain and sustain profitability and obtain the necessary additional financing on a timely basis or on acceptable terms, the Company will be required to delay, reduce the scope of, or eliminate current expansion and development plans, initiate reductions in its workforce, or perhaps even cease the operation of its business.  Therefore, there is substantial doubt about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying financial statements. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Principles of Consolidation
The consolidated financial statements include the accounts of IZEA Worldwide, Inc. and its wholly-owned subsidiaries, subsequent to the subsidiaries' individual acquisition, merger or formation dates, as applicable. All significant intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial statements were prepared using the acquisition method of accounting with IZEA considered the accounting acquirer of Ebyline, ZenContent, and TapInfluence. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values with any excess purchase price allocated to goodwill.

Restatement
As described in its Annual Report on Form 10-K for the year ended December 31, 2017, the Company restated its previously issued financial statements included in its Annual Reports on Form 10-K for the years ended December 31, 2015 and 2016 and Quarterly Reports on Form 10-Q for each quarterly period for the years ended December 31, 2015 and 2016, and for the first three quarters for the year ended December 31, 2017 (collectively, the “Restated Periods”).

The restatement reclassified direct costs associated with the Company's Content Workflow transactions previously reported as cost of revenue to net them directly against revenue in the Company's consolidated statements of operations. Additionally, the Company reclassified the cost of its campaign fulfillment personnel out of sales and marketing expenses and into cost of revenue. As part of the restatement process, the Company also elected to present depreciation and amortization expense as a separate line item. The restatement of the consolidated statement of operations reflected no change in the Company's previously reported loss from operations, net loss, loss per share, or on any of the Company's consolidated balance sheets, statements of cash flows, and statements of stockholders' equity. All amounts related to the Restated Periods of the consolidated statement of operations included herein reflect the restated amounts as reflected in Notes 2 and 14 of the Audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 filed on April 17, 2018.

Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less from the date of purchase to be cash equivalents.
 
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are customer obligations due under normal trade terms. Uncollectibility of accounts receivable is not significant since most customers are bound by contract and are required to fund the Company for all the costs of an “opportunity” or "assignment," defined as an order created by a marketer for a creator to develop or share content on behalf of a marketer. If a portion of the account balance is deemed uncollectible, the Company will either write-off the amount owed or provide a reserve based on the uncollectible portion of the account. 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. Management determines the collectibility of accounts by regularly evaluating individual customer

6

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

receivables and considering a customer’s financial condition, credit history and current economic conditions. The Company had a reserve of $317,190 and $189,000 for doubtful accounts as of September 30, 2018 and December 31, 2017, respectively. Management believes that this estimate is reasonable, but there can be no assurance that the estimate will not change as a result of a change in economic conditions or business conditions within the industry, the individual customers or the Company. Any adjustments to this account are reflected in the consolidated statements of operations as a general and administrative expense. Bad debt expense was less than 1% of revenue for the three and nine months ended September 30, 2018 and 2017.
 
Concentrations of credit risk with respect to accounts receivable are typically limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. However, the Company had two customers that together accounted for 39% of total accounts receivable at September 30, 2018. The Company had no customer that accounted for more than 10% of total accounts receivable at December 31, 2017. The Company had no customer that accounted for more than 10% of its revenue during the three months ended September 30, 2018 and one customer that accounted for 13% of its revenue during the three months ended September 30, 2017. The Company had no customer that accounted for more than10% of its revenue during the nine months ended September 30, 2018 and 2017.

Property and Equipment
Property and equipment are recorded at cost, or if acquired in a business combination, at the acquisition date fair value. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows:
Computer Equipment
3 years
Software Costs
3 - 5 years
Office Equipment
3 - 10 years
Furniture and Fixtures
5 - 10 years

Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. Property and equipment under capital leases are depreciated over their estimated useful lives. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for betterments and major improvements are capitalized and depreciated over the remaining useful lives of the assets. The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the year of disposal, with resulting gains or losses included in general and administrative expense.

Depreciation expense on property and equipment recorded in depreciation and amortization expense in the accompanying consolidated statements of operations was $55,034 and $50,168 for the three months ended September 30, 2018 and 2017, respectively. Depreciation expense on property and equipment recorded in depreciation and amortization expense in the accompanying consolidated statements of operations was $167,900 and $163,597 for the nine months ended September 30, 2018 and 2017, respectively. Property and equipment is recorded net of accumulated depreciation and amortization amounts of $944,568 and $790,029 as of September 30, 2018 and December 31, 2017, respectively.

Goodwill and Business Combinations
Goodwill represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets. The Company has goodwill in connection with its acquisitions of Ebyline, ZenContent, and TapInfluence. Goodwill is not amortized, but instead it is tested for impairment at least annually. In the event that management determines that the value of goodwill has become impaired, the Company will record a charge for the amount of impairment during the fiscal quarter in which the determination is made.

The Company performs its annual impairment tests of goodwill during the fourth quarter of each year, or more frequently, if certain indicators are present. Goodwill is required to be tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment level, which is referred to as a component. Management identifies its reporting units by assessing whether components (i) have discrete financial information available; (ii) engage in business activities; and (iii) whether a segment manager regularly reviews the component's operating results. Net assets and goodwill of acquired businesses are allocated to the reporting unit associated with the acquired business based on the anticipated organizational structure of the combined entities. If two or more components are deemed economically similar, those components are aggregated into one reporting unit when performing the annual goodwill impairment review. The Company has determined that prior to and after the acquisitions of Ebyline and ZenContent, it had one reporting unit. Subsequent to the merger with TapInfluence, the Company has determined that it has two reporting units. See further discussion regarding segment reporting in Note 9. For the three and nine months ended September 30, 2018 and 2017, there were no impairment charges associated with the Company's goodwill.


7

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

Intangible Assets
The Company acquired the majority of its intangible assets through its acquisitions of Ebyline, ZenContent, and TapInfluence. The Company is amortizing the identifiable intangible assets over periods of 12 to 60 months. See Note 3 for further details.

Management reviews long-lived assets, including property and equipment, software development costs and other intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared with the asset's carrying amount to determine if there has been an impairment, which is calculated as the difference between the fair value of an asset and its carrying value. Estimates of future undiscounted cash flows are based on expected growth rates for the business, anticipated future economic conditions and estimates of residual values. Fair values take into consideration management estimates of risk-adjusted discount rates, which are believed to be consistent with assumptions that marketplace participants would use in their estimates of fair value. For the three and nine months ended September 30, 2018 and 2017, there were no impairment charges associated with the Company's long-lived assets.

Software Development Costs
In accordance with 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 planning and post-implementation stages of software development, or other maintenance and development expenses that do not meet the qualification for capitalization, are expensed as incurred. Costs incurred in the application and infrastructure development stage, including significant enhancements and upgrades, are capitalized. These costs include personnel and related employee benefits expenses for employees or consultants who are directly associated with and who devote time to software projects, and external direct costs of materials obtained in developing the software. These software development and acquired technology costs are amortized on a straight-line basis over the estimated useful life of five years upon initial release of the software or additional features. See Note 4 for further details.

Revenue Recognition
The Company derives its revenue from providing content services or managing advertising campaigns for its customers, as well as from making its platforms available to allow customers the ability to purchase content directly from its creators, and to self-manage their own campaigns. Managed Services is when a marketer (typically a brand, agency or partner) contracts IZEA to provide custom content, influencer marketing, amplification or other consulting services. Marketplace Spend Fees are fees charged to self-service customers on their marketplace spend within the Company's platforms. License Fees consist of fees charged to access the IZEAx, Ebyline, and TapInfluence technology platforms. Other Fees are generated from various service fees charged to users of the Company's platforms.

On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method, under which comparative periods will not be restated and the cumulative effect of applying the standard will be recognized at the date of initial adoption on January 1, 2018. Under the modified retrospective method, the Company only applied the new standard to contracts that were not completed as of January 1, 2018. Under ASC 606, revenue is recognized based on a five-step model and, in doing so, more judgment and estimates may be required within the revenue recognition process than were required under the former rules. The Company has reviewed its sources of revenue in accordance with each of the five steps in the model, which are as follows: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) performance obligations are satisfied. The core principle of ASC 606 is that revenue will be recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are distinct performance obligations. The Company also determines whether it acts as an agent or a principal for each identified performance obligation. The determination of whether the Company acts as the principal or the agent is highly subjective and requires the Company to evaluate a number of indicators individually and as a whole in order to make its determination. For transactions in which the Company acts as a principal, revenue is reported on a gross basis as the amount paid by the marketer for the purchase of content or sponsorship, promotion and other related services and the Company records the amounts it pays to third-party creators as cost of revenue. For transactions in which the Company acts as an agent, revenue is reported on a net basis as the amount the Company charged to the self-service marketer using the Company's platform, less the amounts paid to the third-party creators providing the service.


8

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

The Company maintains separate arrangements with each marketer and content creator either in the form of a master agreement or terms of service, which specifies the terms of the relationship and access to its platforms, or by statement of work, which specifies the price and the services to be performed, along with other terms. The transaction price is determined based on the fixed fee stated in the statement of work and does not contain variable consideration. Marketers who contract with the Company to manage their advertising campaigns or custom content requests may prepay for services or request credit terms. Payment terms are typically 30 days from the invoice date. The agreement typically provides for a cancellation fee if the agreement is canceled by the customer prior to completion of services. Billings in advance of completed services are recorded as a contract liability until earned. The Company assesses collectibility based on a number of factors, including the creditworthiness of the customer and payment and transaction history. The allocation of the transaction price to the performance obligations in the contract is based on a cost plus methodology.

For Managed Services, the Company enters into an agreement to provide services that may include multiple distinct performance obligations in the form of: (i) an integrated marketing campaign to provide influencer marketing services, which may include the provision of blogs, tweets, photos or videos shared through social network offerings and content promotion, such as click-through advertisements appearing in websites and social media channels; and (ii) custom content items, such as a research or news article, informational material or videos. Marketers typically purchase influencer marketing services for the purpose of providing public awareness or advertising buzz regarding the marketer's brand and they purchase custom content for internal and external use. The Company may provide one type or a combination of all types of these performance obligations on a statement of work for a lump sum fee. The Company allocates revenue to each performance obligation in the contract at inception based on its relative standalone selling price. These performance obligations are to be provided over a stated period that may range from one day to one year. Revenue is accounted for when the performance obligation has been satisfied depending on the type of service provided. The Company views its obligation to deliver influencer marketing services, including management services, as a single performance obligation that is satisfied over time as the customer receives the benefits from the services. Revenue is recognized using an input method of costs incurred compared to total expected costs to measure the progress towards satisfying the overall performance obligation of the marketing campaign. The delivery of custom content represents a distinct performance obligation that is satisfied over time as the Company has no alternative for the custom content and the Company has an enforceable right to payment for performance completed to date under the contracts. The Company considers custom content to be a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer, and revenue is recognized over time using an output method based on when each individual piece of content is delivered to the customer. Based on the Company's evaluations, revenue from Managed Services is reported on a gross basis, because the Company has the primary obligation to fulfill the performance obligations and it creates, reviews and controls the services. The Company takes on the risk of payment to any third-party creators and it establishes the contract price directly with its customers based on the services requested in the statement of work.

For Marketplace Spend services (including Legacy Workflow), the self-service customer instructs creators found through the Company's platforms to provide and/or distribute custom content for an agreed upon transaction fee. The Company's platforms control the contracting, description of services, acceptance of and payment for the requested content. This service is used primarily by news agencies or marketers to control the outsourcing of their content and advertising needs. The Company charges the self-service customer the transaction price plus a fee based on the contract. Revenue is recognized when the transaction is completed by the creator and accepted by the marketer. Based on the Company's evaluations, Marketplace Spend Fee revenue is reported on a net basis since the Company is acting as an agent solely arranging for the third-party creator or influencer to provide the services directly to the self-service customer through the platform, and are typically recognized upon publishing or purchase of the marketplace spend by the creator and verification of the publishing by the marketer.

License Fee revenue is generated through the granting of limited, non-exclusive, non-transferable licenses to customers for the use of the IZEAx and TapIfluence technology platforms for an agreed-upon subscription period. Customers license the platforms to manage their own influencer marketing campaigns. Fees for subscription or licensing services are recognized straight-line over the term of the service.

Other Fee revenue is generated when fees are charged to customers primarily related to monthly plan fees, inactivity fees, and early cash-out fees. Plan fees are recognized within the month they relate to, and inactivity and early cash-out fees are recognized at a point in time when the account is deemed inactive or a cash-out below certain minimum thresholds is requested.

The Company does not typically engage in contracts that are longer than one year. Therefore, the Company does not capitalize costs to obtain its customer contracts as these amounts would be generally recognized over less than one year and are not material.

See Note 8 for further details on the Company's adoption and disclosures related to ASC 606.


9

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

Advertising Costs
Advertising costs are charged to expense as they are incurred, including payments to content creators to promote the Company. Advertising costs charged to operations for the three months ended September 30, 2018 and 2017 were approximately $94,000 and $79,000, respectively. Advertising costs charged to operations for the nine months ended September 30, 2018 and 2017 were approximately $412,000 and $248,000, respectively. Advertising costs are included in sales and marketing expense in the accompanying consolidated statements of operations.

Deferred Rent
The Company’s operating leases for its office facilities contain rent abatements and predetermined fixed increases of the base rental rate during the lease terms. The Company accounts for rental expense on a straight-line basis over the lease terms. The Company records the difference between the straight-line expense and the actual amounts paid under the lease as deferred rent in the accompanying consolidated balance sheets.

Income Taxes
The Company has not recorded federal income tax expense due to the generation of net operating losses. Deferred income taxes are accounted for using the balance sheet approach, which requires recognition of deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized. The Company incurs minimal state franchise tax in four states, which is included in general and administrative expense in the consolidated statements of operations.
 
The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company’s tax years subject to examination by the Internal Revenue Service are 2014, 2015 and 2016.

Derivative Financial Instruments
Derivative financial instruments are defined as financial instruments or other contracts that contain a notional amount and one or more underlying factors (e.g., interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or assets. The Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging (“ASC 815”), which requires additional disclosures about the Company’s objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedging items affect the financial statements. The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of equity instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability. The Company had 5,502 warrant shares issued in its September 2012 public offering that required classification as a liability due to certain registration rights and listing requirements in the agreements. These warrants expired in September 2017 with no value. The Company has also issued shares of restricted stock which vest over future periods. The value of these shares is required to be adjusted over the vesting period. See Note 6 for additional information related to these shares.

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.

10

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

Level 3 Valuation based on unobservable inputs that are supported by little or no market activity, therefore requiring management’s best estimate of what market participants would use as fair value.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The Company does not have any Level 1 or 2 financial assets or liabilities. The Company’s Level 3 financial liabilities measured at fair value consisted of its acquisition cost liability (see Note 2) as of September 30, 2018 and 2017. Significant unobservable inputs used in the fair value measurement of the warrants include the estimated term and risk-adjusted interest rates. In developing its credit risk assumption used in the fair value of warrants, the Company considered publicly available bond rates and US Treasury Yields. However, since the Company does not have a formal credit-standing, management estimated its standing among various reported levels and grades for use in the model. During all periods, management estimated that the Company's standing was in the speculative to high-risk grades (BB- to CCC in the Standard and Poor's Rating). Significant increases or decreases in the estimated remaining period to exercise or the risk-adjusted interest rate could result in a significantly lower or higher fair value measurement.

The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable, unearned revenue, and accrued expenses. Unless otherwise disclosed, the fair value of the Company’s long-term debt obligations approximate their carrying value based upon current rates available to the Company.

Stock-Based Compensation
Stock-based compensation cost related to stock options granted under the 2011 Equity Incentive Plan and 2011 B Equity Incentive Plan (together, the “2011 Equity Incentive Plans”) (see Note 6) is measured at the grant date, based on the fair value of the award, and is recognized as a straight-lined expense over the employee’s requisite service period. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The Company estimates the fair value of its common stock using the closing stock price of its common stock on the date of the grant. The Company estimates the volatility of its common stock at the date of grant based on the volatility of comparable peer companies that are publicly traded and have had a longer trading history than itself. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future.

The Company used the following assumptions for options granted under the 2011 Equity Incentive Plans during the three and nine months ended September 30, 2018 and 2017:
 
 
Three Months Ended
 
Nine Months Ended
2011 Equity Incentive Plans Assumptions
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Expected term
 
6 years
 
6 years
 
6 years
 
6 years
Weighted average volatility
 
65.65%
 
43.08%
 
63.40%
 
43.49%
Weighted average risk free interest rate
 
2.82%
 
1.91%
 
2.77%
 
1.98%
Expected dividends
 
 
 
 

The Company estimates forfeitures when recognizing compensation expense and this estimate of forfeitures is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and a revised amount of unamortized compensation expense to be recognized in future periods. Weighted average expected forfeiture rates were 8.23% and 6.79% during the three months ended September 30, 2018 and 2017, respectively. Weighted average expected forfeiture rates were 10.01% and 9.01% during the nine months ended September 30, 2018 and 2017, respectively.

Non-Employee Stock-Based Payments
The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505, “Equity-Based Payments to Non-Employees.” The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. The fair value of equity instruments issued to consultants that vest immediately is expensed when issued. The fair value of equity instruments issued to consultants that have future vesting and are subject to forfeiture if performance does not occur is recognized as expense over the vesting period.

11

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

Fair values for the unvested portion of issued instruments are adjusted each reporting period. The change in fair value is recorded in the accompanying consolidated statements of operations. Stock-based payments related to non-employees is accounted for based on the fair value of the related stock or the fair value of the services, whichever is more readily determinable.

Segment Information
Prior to its merger with TapInfluence, the Company managed its operations as one segment for reporting purposes and evaluated operations and made business decisions based on consolidated results. Effective in the quarter ended September 30, 2018, and primarily as a result of the merger with TapInfluence, the Company has significantly expanded its operations related to license fees and marketplace spend fees. As a result, Company management is now actively evaluating operations under two reportable business segments (see Note 9).

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.
 
Reclassifications
Certain items have been reclassified in the 2017 financial statements to conform to the 2018 presentation. In the Statements of Cash Flows, the Company has reclassified payments on acquisition liabilities as financing activities rather than as a change in accrued expenses in operating activities.

Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Since the issuance of the original standard, the FASB has issued a subsequent update, ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842, which provides a practical expedient for land easements. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). To address concerns over the cost and complexity of the two-step goodwill impairment test, the new standard removes the requirement for the second step of the goodwill impairment test for certain entities. An entity may apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for testing dates after January 1, 2017. The Company is currently evaluating the impact that ASU 2017-04 will have on its consolidated financial statements.

NOTE 2.     BUSINESS COMBINATIONS

TapInfluence
On July 26, 2018, IZEA completed its merger with TapInfluence, Inc., pursuant to the terms of the Agreement and Plan of Merger, dated as of July 11, 2018, by and among IZEA, IZEA Merger Sub, Inc., TapInfluence, certain stockholders of TapInfluence and the stockholders’ representative, as amended by Amendment No. 1 thereto, dated as of July 20, 2018 (the "Merger Agreement"). The merger was consummated, in part, to further consolidate the influencer marketing industry for IZEA, and for IZEA to obtain benefits from the acquisition of the TapInfluence technology platform and existing customer base, particularly from TapInfluence's self-service customers.

At closing, IZEA paid to TapInfluence stockholders the sum of $1,500,000 in cash, less an estimated closing working capital adjustment of $181,633, along with other adjustments as defined in the Merger Agreement, and issued 1,150,000 shares of IZEA's common stock valued at $1,759,500 based on the $1.53 closing market price of IZEA's common stock on July 26, 2018. IZEA has agreed to pay TapInfluence stockholders an additional $4,500,000 in the form of cash, common stock or a combination thereof, at IZEA’s option, in two installments - $1,000,000 six months after the closing date of the merger and $3,500,000 twelve months

12

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

after the closing date of the merger. Stock issuances, if any, will be determined based on the 30 trading day volume-weighted average price per share of IZEA's common stock prior to the payment date. Future cash payments and stock issuances may be withheld from the six month or twelve month payment for post-closing working capital adjustments and to satisfy indemnifiable claims made by IZEA with respect to any misrepresentations or breaches of warranty under the Merger Agreement by TapInfluence or the stockholders of TapInfluence within 12 months after the closing date of the merger. Following the closing of the merger, IZEA calculated the final working capital as of the closing date to be $297,049. Therefore, the purchase price was reduced by an additional $115,416 that will be deducted from the six-month installment payment.

Purchase Price and Acquisition Costs Payable
 
Estimated Gross Purchase Consideration
Estimated Initial Present and Fair Value
Estimated Remaining Present and Fair Value
 
7/26/2018
7/26/2018
9/30/2018
Cash paid at closing (a)
$
1,500,000

$
1,500,000

$

Stock paid at closing (a)
1,759,500

1,759,500


Purchase price adjustment (b)
(439,610
)
(555,026
)


First deferred purchase price installment (c)
1,000,000

970,576

980,384

Second deferred purchase price installment (c)
3,500,000

3,271,028

3,309,190

Total estimated consideration
$
7,319,890

$
6,946,078

$
4,289,574

 
 
 
 
Current portion of acquisition costs payable
 
 
$
4,174,158

Long-term portion of acquisition costs payable
 
 

Total acquisition costs payable
 
 
$
4,174,158


(a)
The aggregate consideration paid at closing for the acquisition of TapInfluence consisted of a cash payment of $1,500,000 and the issuance of 1,150,000 shares of IZEA common stock valued at $1,759,500, or $1.53 per share.

(b)
Per the terms of the Merger Agreement, the initial cash payment due at closing of $1,500,000 was to be adjusted as follows: reduced for seller transaction expenses and closing date indebtedness, increased by closing date cash and cash equivalents of TapInfluence, and reduced or increased by an estimated working capital amount. These adjustments resulted in a net reduction in the purchase price of $439,610, which included a negative estimated working capital adjustment of $181,633.

(c)
Aggregate future consideration consists of additional payments totaling $4,500,000, less any remaining adjustment related to the final working capital adjustment calculation. The payments will be made in the form of cash, common stock or a combination thereof, at IZEA’s option, in two installments - $1,000,000 six months after the closing date of the merger and $3,500,000 twelve months after the closing date of the merger. Stock issuances, if any, will be determined based on the 30 trading day volume-weighted average price per share of IZEA's common stock prior to the payment date. Future cash payments and stock issuances may be withheld from the six month or twelve month payment for post closing working capital adjustments and to satisfy indemnifiable claims made by IZEA with respect to any misrepresentations or breaches of warranty under the Merger Agreement by TapInfluence or the stockholders of TapInfluence within 12 months after the closing date of the merger. Post closing, IZEA calculated the final working capital as of the closing date as a negative $297,049, which was $115,416 lower than the original estimate of negative $181,633. Therefore, the purchase price was reduced by an additional $115,416 that will be deducted from the six-month installment payment.







13

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

The following table summarizes the preliminary amounts of net assets acquired at the merger date:
 
Estimated Approximate Fair Value
 
7/26/2018
Current assets
$
4,337,334

Property and equipment
39,089

Identifiable intangible assets
3,263,000

Goodwill
4,711,999

Current liabilities
(4,071,727
)
Long-term debt
(1,333,617
)
Total net assets acquired
6,946,078

Less: cash acquired
(1,071,656
)
Net purchase consideration
$
5,874,422


For the three and nine months ended September 30, 2018, $797,244 of the Company's consolidated revenue was associated with TapInfluence operations. The Company is unable to determine net loss specifically related to TapInfluence operations as the majority of operational resources were shared with IZEA.

The following unaudited pro forma summary presents consolidated information of IZEA Worldwide, Inc. as if the business combination with TapInfluence, Inc. had occurred on January 1, 2017:
 
 
Pro Forma Nine Months Ended
Pro Forma Nine Months Ended
 
 
9/30/2018
9/30/2017
Pro forma revenue
 
$
16,344,003

$
21,960,003

Pro forma cost of revenue
 
$
6,867,048

$
8,784,895

Pro forma gross profit
 
$
9,476,955

$
13,175,108

 
 
 
 
Pro forma net loss prior to adjustments
 
$
(6,377,521
)
$
(7,418,941
)
Pro forma adjustment to net loss:
 
 
 
Amortization of acquired identifiable intangible assets
 
(583,722
)
(776,750
)
Acquisition-related expenses
 
105,146

(149,625
)
Pro forma net loss combined
 
$
(6,856,097
)
$
(8,345,316
)

The business combination was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, IZEA is in the process of estimating the fair value of TapInfluence’s assets acquired and liabilities assumed and conformed the accounting policies of TapInfluence to its own accounting policies. IZEA anticipates that all the information needed to identify and measure values assigned to the assets acquired and liabilities assumed will be obtained and finalized during the one-year measurement period following the merger date. Differences between these preliminary estimates and the final purchase price accounting may occur, and these differences could have a material impact on the Company's consolidated financial statements.

ZenContent
On July 31, 2016, the Company purchased all of the outstanding shares of capital stock of ZenContent pursuant to the terms of a Stock Purchase Agreement, by and among IZEA, ZenContent and the stockholders of ZenContent (the “ZenContent Stock Purchase Agreement”) for a maximum purchase price to be paid over the next three years of $4,500,000. Upon closing the Company paid a cash payment of $400,000 and issued 86,207 shares of the Company's common stock valued at $600,000. The ZenContent Stock Purchase Agreement also requires (i) three equal annual installment payments totaling $1,000,000, subject to a working capital adjustment, commencing 12 months following the closing and (ii) contingent performance payments of up to an aggregate of $2,500,000 over the three 12-month periods following the closing, based upon ZenContent achieving certain minimum revenue thresholds. Of these payments, 33% of each such annual installment or contingent performance payment will be in the form of

14

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

cash and the remainder of such payment will be in the form of either cash or additional shares of the Company's common stock (determined at the Company's option). Additionally, these payments were subject to a downward adjustment of up to 30% if Brianna DeMike, ZenContent's co-founder, was terminated by IZEA for cause or she terminated her employment without good reason.

The Company amended the ZenContent Stock Purchase Agreement on October 21, 2016, to clarify definitions surrounding contingent performance payments and to provide for a contingent cash commission of 1% on certain IZEA legacy clients for which the Company used ZenContent technology to produce content for its Managed Services in the future. The Company entered into a second amendment to the ZenContent Stock Purchase Agreement on July 17, 2018 to further amend the terms of the contingent performance payments. The parties agreed to pay approximately $9,818 related to the historical 1% commission on IZEA legacy client calculations and to fix the amount payable for any further contingent performance payments at $90,000 due as $45,000 in cash on November 1, 2018 and as $45,000 in cash or stock, at the Company's option on November 1, 2019. In return for the fixed valuation of the contingent performance payments, the Company waived its rights to reduce the future guaranteed annual and contingent performance payments in the event that ZenContent's co-founder terminated her employment, after which she terminated her employment with the Company on July 20, 2018.

Purchase Price and Acquisition Costs Payable
 
Estimated Gross Purchase Consideration
Initial Present and Fair Value
Remaining Present and Fair Value
Remaining Present and Fair Value
 
7/31/2016
7/31/2016
12/31/2017
9/30/2018
Cash paid at closing (a)
$
400,000

$
400,000

$

$

Stock paid at closing (a)
600,000

600,000



Guaranteed purchase price (b)
933,565

566,547

606,413

316,772

Contingent performance payments (c)
2,500,000

230,000

744,510

88,055

Total estimated consideration
$
4,433,565

$
1,796,547

$
1,350,923

$
404,827

 
 
 
 
 
Current portion of acquisition costs payable
 
 
$
741,155

$
361,772

Long-term portion of acquisition costs payable
 
 
609,768

43,055

Total acquisition costs payable
 
 
$
1,350,923

$
404,827


(a)
The aggregate consideration paid at closing for the acquisition of ZenContent consisted of a cash payment of $400,000 and the issuance of 86,207 shares of IZEA common stock valued at $600,000.


15

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

(b)
Aggregate deferred consideration consists of (i) three equal annual installment payments totaling $1,000,000, commencing 12 months following the closing, less a reduction of $66,435 due to a customary closing date working capital adjustment (“guaranteed purchase price”), and (ii) contingent performance payments up to an aggregate of $2,500,000 over the three 12-month periods following the closing. These payments were subject to a downward adjustment up to 30% if ZenContent’s co-founder was terminated by IZEA for cause or if she terminated her employment without good reason. As a result, the Company initially reduced its acquisition cost liability by $300,000 to be accrued as compensation expense over the three-year term rather than allocated to the initial purchase price in accordance with ASC 805-10-55-25. Compensation expense added to the guaranteed acquisition costs payable and recorded as general and administrative expense in the Company's consolidated statement of operations was $28,125 and $151,042 for the nine months ended September 30, 2018 and 2017, respectively. Compensation expense added to the guaranteed acquisition costs payable and recorded as general and administrative expense in the Company's consolidated statement of operations was $5,209 and $28,125 for the three months ended September 30, 2018 and 2017, respectively. The initial guaranteed purchase price consideration was discounted to present value using the Company's borrowing rate of prime plus 2% (5.5% on July 31, 2016). Interest expense imputed on the guaranteed acquisition costs payable in the accompanying consolidated statement of operations was $15,567 and $22,616 for the nine months ended September 30, 2018 and 2017, respectively. Interest expense imputed on the guaranteed acquisition costs payable in the accompanying consolidated statement of operations was $3,872 and $6,572 for the three months ended September 30, 2018 and 2017. On July 31, 2017, the Company paid $266,898 in cash for the first annual installment of $333,333 less $66,435 in working capital adjustments. On July 31, 2018, the Company paid an additional $111,111 in cash and $222,222 using 98,765 shares of our common stock valued at $2.25 per share using a thirty (30) trading day volume-weighted average closing price as reported by the NASDAQ Capital Market prior to the issuance date, for the second annual installment.

(c)
The contingent performance payments were subject to ZenContent achieving certain minimum revenue thresholds over 36 months. ZenContent was required to meet minimum revenues of $2.5 million, $3.5 million and $4.5 million in the first, second and third respective 12-month periods following the closing in order to receive any portion of the contingent performance payments. Of these payments, 33% of each such annual installment or contingent performance payment was to be in the form of cash and the remainder of such payment was to be in the form of either cash or additional shares of IZEA common stock, at the Company's option. The value of the Company's common stock would be valued using a thirty (30) trading day volume-weighted average closing price as reported by the NASDAQ Capital Market. These contingent performance payments were subject to downward adjustment of up to 30% if ZenContent's co-founder was terminated by IZEA for cause or she terminated her employment without good reason. On July 31, 2016, the Company initially determined the fair value of the $2,500,000 contingent payments to be $230,000. The fair value of the contingent performance payments is required to be revalued each quarter and is calculated using a Monte-Carlo simulation to simulate revenue over the future periods. Since the contingent consideration has an option like structure, a risk-neutral framework is considered appropriate for the valuation. The Company started with a risk-adjusted measure of forecasted revenue (using a risk-adjusted discount rate of 17%) and assumed it will follow geometric Brownian motion to simulate the revenue at future dates. Once the initial revenue was estimated based off of projections, payout was calculated for each year and present valued to incorporate the credit risk associated with these payments. The Company's fair value conclusion was based on the average payment from 250,000 simulation trials. The volatility used for the simulation was 45%. The interest rate used for the simulation was the Company's current borrowing rate of prime plus 2% at the time of valuation. Due to the adjustment in payments pursuant to the second amendment to the ZenContent Stock Purchase Agreement, the Company revalued its estimate of the contingent performance payment as of September 30, 2018 to be $99,818 and determined that current fair value of the contingent performance payments was $88,055 compared to $744,510 as of December 31, 2017. The change in the estimated fair value of contingent performance payable resulted in a $646,637 decrease in general and administrative expense in the Company's consolidated statement of operations during the nine months ended September 30, 2018. Of this amount, $160,890 was allocated to compensation expense and $485,747 was allocated as a change in the fair value of the contingent performance payments. The Company revalued its estimate of the contingent performance payment as of September 30, 2017 based on actual results and projections at the time and determined that current fair value of the contingent performance payments was $342,861 compared to $324,000 as of December 31, 2016. The change in the estimated fair value of contingent performance payable resulted in a $184,444 increase in general and administrative expense in the Company's consolidated statement of operations during the nine months ended September 30, 2017. Of this amount, $122,444 was allocated to compensation expense and a gain of $62,000 was allocated as a change in the fair value of the contingent performance payments.




16

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

NOTE 3.     INTANGIBLE ASSETS

The identifiable intangible assets consists of the following assets:    
 
Balance
Accumulated Amortization
 
Balance
Accumulated Amortization

 
Useful Life (in years)
 
September 30, 2018
 
December 31, 2017
 
Content provider networks
$
160,000

$
160,000

 
$
160,000

$
122,083

 
1
Trade names
87,000

57,834

 
52,000

52,000

 
1
Developed technology
1,130,000

339,667

 
530,000

240,167

 
3
Self-service content customers
2,810,000

354,444

 
210,000

204,167

 
5
Managed content customers
2,140,000

2,042,778

 
2,140,000

1,905,555

 
3
Domains
166,469

91,558

 
166,469

66,588

 
5
Embedded non-compete provision
28,000

2,333

 


 
1
Total identifiable intangible assets
$
6,521,469

$
3,048,614

 
$
3,258,469

$
2,590,560

 
 

Total identifiable intangible assets from the purchase price allocations from the Company's acquisitions and other acquired assets net of accumulated amortization thereon consists of the following:
 
September 30,
2018
 
December 31,
2017
Ebyline Intangible Assets
$
2,370,000

 
$
2,370,000

ZenContent Intangible Assets
722,000

 
722,000

TapInfluence Intangible Assets (preliminary)
3,263,000

 

Domains
166,469

 
166,469

Total Intangible Assets
6,521,469

 
3,258,469

Accumulated amortization
(3,048,614
)
 
(2,590,560
)
Intangible Assets, net
$
3,472,855

 
$
667,909


The Company is amortizing the identifiable intangible assets over a weighted average period of three years. Amortization expense recorded in depreciation and amortization expense in the accompanying consolidated statements of operations was $242,018 and $247,907 for the three months ended September 30, 2018 and 2017, respectively. Amortization expense recorded in depreciation and amortization expense in the accompanying consolidated statements of operations was $458,054 and $747,720 for the nine months ended September 30, 2018 and 2017, respectively. The portion of this amortization expense specifically related to the costs of acquired technology for its platforms that is presented separately from cost of services was $99,500 for the nine months ended September 30, 2018 and 2017. The portion of this amortization expense specifically related to the costs of acquired technology for its platforms that is presented separately from cost of services was $46,500 for the three months ended September 30, 2018 and 2017.

As of September 30, 2018, future estimated amortization expense related to identifiable intangible assets over the next five years is set forth in the following schedule:
Year ending December 31:
Amortization Expense
2018 (three months remaining)
$
322,907

2019
1,228,432

2020
1,079,126

2021
652,390

2022
120,000

2023
70,000

Total
$
3,472,855



17

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

NOTE 4.     SOFTWARE DEVELOPMENT COSTS

Software development costs consists of the following:
 
September 30,
2018
 
December 31,
2017
Software development costs
$
2,048,278

 
$
1,561,351

Less accumulated depreciation and amortization
(814,290
)
 
(593,424
)
Software development costs, net
$
1,233,988

 
$
967,927


The Company developed its web-based advertising and content exchange platform, IZEAx, to enable native advertising campaigns on a greater scale. The Company continues to add new features and additional functionality to IZEAx to facilitate the contracting, workflow, and delivery of direct content as well as provide for invoicing, collaborating, and direct payments for the Company's self-service customers. Research and planning phase costs are expensed as incurred. Costs incurred in the application and infrastructure development stage, including significant enhancements and upgrades, are capitalized. These costs include personnel and related employee benefits expenses for employees or consultants who are directly associated with and who devote time to software projects, and external direct costs of materials obtained in developing the software. We incurred and capitalized software development costs of $486,927 and $85,460 during the nine months ended September 30, 2018 and 2017, respectively. As a result, the Company has capitalized a total of $2,048,278 in direct materials, consulting, payroll and benefit costs to its internal use software development costs in the consolidated balance sheet as of September 30, 2018. The Company amortizes its software development costs, upon initial release of the software or additional features, on a straight-line basis over the estimated the useful life of five years, which is consistent with the amount of time its legacy platforms were in service.

Amortization expense on software development costs that is presented separately from cost of services and recorded in depreciation and amortization expense in the accompanying consolidated statements of operations was $73,622 and $76,890 for the three months ended September 30, 2018 and 2017, respectively. Amortization expense on software development costs that is presented separately from cost of services and recorded in depreciation and amortization expense in the accompanying consolidated statements of operations was $220,866 and $184,514 for the nine months ended September 30, 2018 and 2017, respectively.

As of September 30, 2018, future estimated amortization expense related to software development costs over the next five years is set forth in the following schedule:
Year ending December 31:
Software Amortization Expense
2018 (three months remaining)
$
73,622

2019
324,324

2020
290,996

2021
249,601

2022
180,276

Thereafter
115,169

 
$
1,233,988



18

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

NOTE 5.    COMMITMENTS & CONTINGENCIES

Credit Agreement
The Company has a secured credit facility agreement with Western Alliance Bank, the parent company of Bridge Bank, N.A. of San Jose, California, which it obtained on March 1, 2013 and expanded on April 13, 2015. Effective August 30, 2018, as a result of IZEA's merger with TapInfluence, Inc., the Company entered into a Business Financing Modification Agreement and Consent with Western Alliance Bank to add TapInfluence, Inc. as an additional borrower on the credit facility. Pursuant to this agreement, the Company may submit requests for funding up to 80% of its eligible accounts receivable up to a maximum credit limit of $5 million. This agreement is secured by the Company's accounts receivable and substantially all of the Company's other assets. The agreement renews annually and requires the Company to pay an annual facility fee of $20,000 (0.4% of the credit limit) and an annual due diligence fee of $1,000. Interest accrued on the advances at the rate of prime plus 2% per annum through August 29, 2018, at which time the rate was amended to 1.5% per annum in conjunction with the August 30, 2018 modification agreement. The default rate of interest is prime plus 7%. The Company had $1,733,420 and $500,550 outstanding under this line of credit agreement as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, the Company had a net accounts receivable balance of $6,811,029. Assuming that all of the Company's accounts receivable balance was eligible for funding, it had $3,266,580 in remaining available credit under the agreement as of September 30, 2018.

The annual fees are capitalized in the Company's consolidated balance sheet within other current assets and are amortized to interest expense over one year. The Company amortized $15,750 of the annual costs through interest expense during the nine months ended September 30, 2018 and 2017, respectively. The Company amortized $5,250 of the annual costs through interest expense during the three months ended September 30, 2018 and 2017, respectively. The remaining value of the capitalized loan costs related to this agreement as of September 30, 2018 is $12,250. This amount will be amortized to interest expense over the next ten months.

Litigation
On April 4, 2018, a securities lawsuit, Julian Perez v. IZEA, Inc., et al., case number 2:18-cv-02784-SVW-GJS was instituted in the U.S. District Court for the Central District of California against the Company and certain of its executive officers on behalf of certain purchasers of the Company’s common stock. The plaintiffs seek to recover damages for investors under federal securities laws. The Company believes that the plaintiffs’ allegations are without merit and intends to vigorously defend against the claims.
On July 3, 2018, a shareholder derivative lawsuit, Korene Stuart v. Edward H. Murphy et al., case number A-18-777135-C was instituted in the Eighth Judicial District Court of the State of Nevada, Clark County against certain executive officers and members of the Board of Directors for IZEA. IZEA has been named as a nominal defendant. The plaintiff seeks to recover damages on behalf of the company for purported breaches of the individual defendants’ fiduciary duties as directors and/or officers of IZEA, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets in violation of state common law. The individual defendants and the Company believe that the plaintiff’s allegations are without merit and intend to vigorously defend against the claims.

The Company had determined that it is probable that amounts payable by the Company in respect of the litigation proceedings described above and other litigation proceedings involving the Company will be in excess of the maximum retention amount under its insurance policy of $500,000. As a result, the Company has recorded a liability reflecting the payment of such amount, less related legal fees incurred to date of approximately $62,000 that the Company expects to count against the retention amount.

From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of the Company's 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 other legal proceedings or claims that it believes would or could have, individually or in the aggregate, a material adverse effect on its operations or financial position.

NOTE 6.    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.
Stock Issued for Acquisitions
On January 30, 2017, the Company issued 200,542 shares of its common stock to satisfy the final annual guaranteed purchase price payment of $938,532 per the terms of a Stock Purchase Agreement dated as of January 27, 2015, by and among IZEA,

19

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

Ebyline and the stockholders of Ebyline (the “Ebyline Stock Purchase Agreement”). The Company recorded a $10,491 gain on the settlement of the acquisition costs payable for the nine months ended September 30, 2017 in the accompanying consolidated statements of operations as a result of the difference between the market price of the stock on the settlement date and the 30-day average price of the stock required by the Ebyline Stock Purchase Agreement. The guaranteed purchase price consideration was originally recorded on the Company's balance sheet discounted to present value using the Company's borrowing rate of prime plus 2%. Interest expense imputed on the remaining acquisition costs payable was $3,804 in the accompanying consolidated statements of operations for the nine months ended September 30, 2017 prior to the final guaranteed payment made on January 30, 2017.

On July 26, 2018, pursuant to its merger agreement with TapInfluence (see Note 2) the Company issued 1,150,000 shares of IZEA's common stock valued at $1,759,500 based on the $1.53 closing market price of IZEA's common stock on July 26, 2018.

Underwritten Public Offerings of Common Stock

July 2, 2018 Public Offering

On July 2, 2018, the Company completed an underwritten public offering of 3,556,000 shares of the Company's common stock at a public offering price of $1.00 per share. The net proceeds for all shares sold by us in the public offering were approximately $3.1 million after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company totaling approximately $418,000. Mr. Edward Murphy, the Company's Chief Executive Officer and a Company director, Mr. Brian Brady, a Company director, and Mr. Lindsay Gardner, a Company director participated in the public offering and purchased 100,000, 500,000 and 20,000 shares of stock, respectively. The Company intends to use the net proceeds from the offering to finance the costs of acquiring competitive and complementary companies, technologies and assets as part of its growth strategy, including the merger with TapInfluence on July 25, 2018, and for working capital and general corporate purposes.

September 21, 2018 Public Offering

On September 21, 2018, the Company completed an underwritten public offering of 1,407,333 shares of the Company's common stock at a public offering price of $1.50 per share. The net proceeds for all shares sold by us in the public offering were approximately $1.8 million after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company totaling approximately $290,000. Mr. Edward Murphy, the Company's Chief Executive Officer and a Company director, participated in the public offering and purchased 3,000 shares of stock. The Company intends to use the net proceeds from the offering to finance the costs of acquiring competitive and complementary companies, technologies and assets as part of its growth strategy, and for working capital and general corporate purposes.

The above offerings were made pursuant to a shelf registration statement on Form S-3 (File No. 333-212247) filed with the U.S. Securities and Exchange Commission (the “SEC”) on June 24, 2016, which became effective on June 30, 2016.

Stock Issued for Services
During the twelve months ended December 31, 2017, the Company issued its five independent directors a total of 41,770 shares of restricted common stock initially valued at $125,000 for their annual service as directors of the Company. The stock vested in equal monthly installments for the period issued between January and December 2017. On February 12, 2017, the Company issued 7,109 shares valued at $30,000 as compensation for services a contractor provided.

The Company issued 2,812 shares and 7,543 shares of restricted stock on August 14, 2017 and November 9, 2017, respectively, to Mr. Edward Murphy, its Chief Executive Officer, for amounts owed on his second and third quarter performance bonus. The stock was initially valued at $36,411 and vests in equal monthly installments over 48 months from issuance. The Company issued 662 shares and 1,257 shares of restricted stock on August 14, 2017 and November 9, 2017, respectively, to Mr. Ryan Schram, its Chief Operating Officer, for amounts owed on his second and third quarter performance bonus. The stock was initially valued at $6,446 and vests in equal monthly installments over 48 months from issuance.

During the nine months ended September 30, 2018, the Company issued its five independent directors a total of 30,265 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 2018.

On January 11, 2018, the Company issued seventeen employees a total of 55,000 shares of restricted common stock initially valued at $303,600 as incentive compensation for their continued future service. Of these 55,000 shares, 10,000 shares were issued to Ms. LeAnn Hitchcock, the Company's then-current Chief Financial Officer, and 5,000 shares were issued to Mr. Schram. The stock vests over two years in equal quarterly installments from January 2018 through December 2019.

20

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements


The Company issued 21,628 shares and 3,870 shares of restricted stock on May 3, 2018 to Mr. Murphy and Mr. Schram, respectively, related to amounts owed for their first quarter performance bonus. The stock was valued at $46,715 and $8,360, respectively, and vests in equal monthly installments over 48 months from issuance. On May 25, 2018, the Company issued 5,000 shares of restricted common stock valued at $7,650 to an employee as incentive compensation for future services vesting in two equal annual installments in May 2019 and 2020.
 
The following table contains summarized information about nonvested restricted stock outstanding during the year ended December 31, 2017 and the nine months ended September 30, 2018:
Restricted Stock
Common Shares
Weighted Average
Grant Date
Fair Value
Weighted Average
Remaining Years
to Vest
Nonvested at December 31, 2016

$

 
Granted
61,153

$
3.24

 
Vested
(49,354
)
$
3.72

 
Forfeited

$

 
Nonvested at December 31, 2017
11,799

$
4.52

3.75
Granted
115,763

$
4.24

 
Vested
(47,023
)
$
4.56

 
Forfeited

$

 
Nonvested at September 30, 2018
80,539

$
3.95

1.8

Total expense recognized on restricted stock issued for services to non-employees during the three months ended September 30, 2018 and 2017 was $31,244 and $60,074, respectively. Total expense recognized on restricted stock issued for services to non-employees during the nine months ended September 30, 2018 and 2017 was $93,734 and $143,536, respectively. Total stock-based compensation expense recognized on restricted stock issued to employees during the three and nine months ended September 30, 2018 was $38,128 and $121,994, respectively. There was no stock-based compensation expense recognized on restricted stock issued to employees during the three and nine months ended September 30, 2017. The fair value of the services to non-employees is based on the value of the Company's common stock as it vests over the term of service, which may be different that the value of the stock upon issuance. The change between the Company's stock price upon issuance and the Company's stock price upon the date of vesting, results in a change in the fair value of derivatives during the period. The Company recognized a loss of $11,794 and $36,122 as a change in the fair value of derivatives during the nine months ended September 30, 2018 and 2017, respectively. Future compensation related to issued, but nonvested restricted stock awards as of September 30, 2018 is $317,134, and it is included in prepaid expenses in the accompanying consolidated balance sheets. This value is estimated to be recognized over the weighted-average vesting period of approximately 1.8 years.

Employee Stock Purchase Plan
On April 16, 2014, stockholders holding a majority of the Company's outstanding shares of common stock, upon previous recommendation and approval of the Board, adopted the IZEA Worldwide, Inc. 2014 Employee Stock Purchase Plan (the “ESPP”) and reserved 75,000 shares of the Company's common stock for issuance thereunder. Any employee regularly employed by the Company for 90 days or more on a full-time or part-time basis (20 hours or more per week on a regular schedule) is eligible to participate in the ESPP. The ESPP operates in successive six months offering periods commencing at the beginning of each fiscal year half. Each eligible employee who elects to participate may purchase up to 10% of their annual compensation in common stock not to exceed $21,250 annually or 1,000 shares per offering period. The purchase price will be the lower of (i) 85% of the fair market value of a share of common stock on the first trading day of the offering period or (ii) 85% of the fair market value of a share of common stock on the last trading day of the offering period. The ESPP will continue until January 1, 2024, unless otherwise terminated by the Board. As of September 30, 2018, the Company had 22,405 remaining shares of common stock available for future grants under the ESPP. Employees paid $9,035 to purchase 11,189 shares of common stock during the nine months ended September 30, 2018.

Stock Options 
In May 2011, the Company's Board of Directors (the “Board”) adopted the 2011 Equity Incentive Plan of IZEA Worldwide, Inc. (the “May 2011 Plan”). At the Company's 2017 Annual Meeting of Stockholders held on June 21, 2017, the stockholders approved

21

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

the amendment and restatement of the May 2011 Plan which increased the number of shares of common stock available for issuance under the May 2011 Plan by 500,000 shares. The amended May 2011 Plan allows the Company to grant options to purchase up to 1,500,000 shares as an incentive for its employees and consultants.  As of September 30, 2018, the Company had 250,214 shares of common stock available for future grants under the May 2011 Plan.

On August 22, 2011, the Company adopted the 2011 B Equity Incentive Plan (the “August 2011 Plan”) reserving 4,375 shares of common stock for issuance under the August 2011 Plan. As of September 30, 2018, the Company had 1,875 shares of common stock available for future grants under the August 2011 Plan.

Under both the May 2011 Plan and the August 2011 Plan (together, the “2011 Equity Incentive Plans”), the Board determines the exercise price to be paid for the shares, the period within which each option may be exercised, and the terms and conditions of each option. The exercise price of the incentive and non-qualified stock options may not be less than 100% of the fair market value per share of the Company’s common stock on the grant date. If an individual owns stock representing more than 10% of the outstanding shares, the price of each share of an incentive stock option must be equal to or exceed 110% of fair market value. Unless otherwise determined by the Board at the time of grant, the purchase price is set at the fair market value of the Company’s common stock on the grant date, the term is set at ten years and the options typically vest on a straight-line basis over the requisite service period as follows: 25% of options shall vest one year from the date of grant and the remaining options shall vest monthly, in equal increments over the following three years. The Company issues new shares to the optionee for any stock awards or options exercised pursuant to its 2011 Equity Incentive Plans.

A summary of option activity under the 2011 Equity Incentive Plans for the year ended December 31, 2017 and the nine months ended September 30, 2018 is presented below:
Options Outstanding
Common Shares
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining Life
(Years)
Outstanding at December 31, 2016
959,864

 
$
8.11

 
6.4
Granted
141,246

 
$
3.49

 
 
Exercised

 
$

 
 
Forfeited
(51,607
)
 
$
38.86

 
 
Outstanding at December 31, 2017
1,049,503

 
$
5.97

 
6.0
Granted
98,359

 
$
1.71

 
 
Exercised

 
$

 
 
Forfeited
(81,813
)
 
$
5.91

 
 
Outstanding at September 30, 2018
1,066,049

 
$
5.59

 
5.7
 
 
 
 
 
 
Exercisable at September 30, 2018
788,036

 
$
6.24

 
4.5

During the three and nine months ended September 30, 2018 and 2017 no options were exercised. The fair value of the Company's common stock on September 30, 2018 was $1.59 per share. The intrinsic value on outstanding options as of September 30, 2018 was $31,009. The intrinsic value on exercisable options as of September 30, 2018 was $466.

A summary of the nonvested stock option activity under the 2011 Equity Incentive Plans for the year ended December 31, 2017 and the nine months ended September 30, 2018 is presented below:

22

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

Nonvested Options
Common Shares
 
Weighted Average
Grant Date
Fair Value
 
Weighted Average
Remaining Years
to Vest
Nonvested at December 31, 2016
414,306

 
$
3.60

 
2.6
Granted
141,246

 
$
1.76

 
 
Vested
(205,469
)
 
$
3.36

 
 
Forfeited
(27,006
)
 
$
3.12

 
 
Nonvested at December 31, 2017
323,077

 
$
2.64

 
2.7
Granted
98,359

 
$
0.96

 
 
Vested
(106,021
)
 
$
2.88

 
 
Forfeited
(37,402
)
 
$
2.96

 
 
Nonvested at September 30, 2018
278,013

 
$
1.92

 
2.8

Stock-based compensation cost related to stock options granted under the 2011 Equity Incentive Plans is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes option-pricing model that uses the assumptions stated in Note 1.

Total stock-based compensation expense recognized on stock option issuances, including the restricted stock issuance expense disclosed above, during the three months ended September 30, 2018 and 2017 was $118,410 and $182,796, respectively. Stock-based compensation (income) expense was recorded as $3,786 to cost of revenue, $15,097 to sales and marketing, and $99,527 to general and administrative expense in the Company's consolidated statement of operations during the three months ended September 30, 2018. Stock-based compensation expense was recorded as $14,837 to sales and marketing, and $167,959 to general and administrative expense in the Company's consolidated statement of operations during the three months ended September 30, 2017. Future compensation related to nonvested awards as of September 30, 2018 expected to vest of $461,976 is estimated to be recognized over the weighted-average vesting period of approximately 2.8 years.

Total stock-based compensation expense recognized on stock option issuances, including the restricted stock issuance expense disclosed above, during the nine months ended September 30, 2018 and 2017 was $468,042 and $509,642, respectively. Stock-based compensation expense was recorded as $14,510 to cost of revenue, $60,396 to sales and marketing, and $393,136 to general and administrative expense in the Company's consolidated statement of operations during the nine months ended September 30, 2018. Stock-based compensation expense was recorded as $45,331 to sales and marketing, and $464,311 to general and administrative expense in the Company's consolidated statement of operations during the nine months ended September 30, 2017.

NOTE 7.    LOSS PER COMMON SHARE
 
Basic loss per common share is computed by dividing the net income or loss by the basic weighted-average number of shares of common stock outstanding during each period presented. Diluted loss per common share is computed by dividing the net income or loss by the total of the basic weighted-average number of shares of common stock outstanding plus the additional dilutive securities that could be exercised or converted into common shares during each period presented less the amount of shares that could be repurchased using the proceeds from the exercises.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Net loss
$
(1,332,829
)
 
$
(558,805
)
 
$
(5,025,704
)
 
$
(4,724,623
)
Weighted average shares outstanding - basic and diluted
10,365,750

 
5,702,297

 
7,351,827

 
5,659,423

Basic and diluted loss per common share
$
(0.13
)
 
$
(0.10
)
 
$
(0.68
)
 
$
(0.83
)

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:

23


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Stock options
 
1,048,135

 
993,546

 
1,040,940

 
979,775

Warrants
 
480,658

 
520,147

 
503,413

 
537,039

Total excluded shares
 
1,528,793

 
1,513,693

 
1,544,353

 
1,516,814


NOTE 8.    REVENUE

Except for the changes below, the Company has consistently applied its accounting policies to all periods presented in the consolidated financial statements. On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method, under which comparative periods will not be restated and the cumulative effect of applying the standard will be recognized at the date of initial adoption on January 1, 2018. As a result, the opening balance of retained earnings as of January 1, 2018 decreased by $98,822 and the comparative information in prior year periods continues to be reported under ASC 605.


24

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

Initial Adoption Change
The effects to the condensed consolidated balance sheet as of December 31, 2017, as adjusted for the adoption of ASC 606 on January 1, 2018, are as follows:
 
As Reported 12/31/17
Adjustments
As Adjusted 1/1/2018
Assets
 
 
 
Current:
 
 
 
Cash and cash equivalents
$
3,906,797

 
$
3,906,797

Accounts receivable, net
3,647,025

92,405

3,739,430

Prepaid expenses
389,104

 
389,104

Other current assets
9,140

 
9,140

Total current assets
7,952,066

92,405

8,044,471

 
 
 
 
Property and equipment, net
286,043

 
286,043

Goodwill
3,604,720

 
3,604,720

Intangible assets, net
667,909

 
667,909

Software development costs, net
967,927

 
967,927

Security deposits
148,638

 
148,638

Total assets
$
13,627,303

$
92,405

$
13,719,708

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,756,841



$
1,756,841

Accrued expenses
1,592,356



1,592,356

Unearned revenue
3,070,502

191,227

3,261,729

Line of credit
500,550

 
500,550

Current portion of deferred rent
45,127

 
45,127

Current portion of acquisition costs payable
741,155

 
741,155

Total current liabilities
7,706,531

191,227

7,897,758

 
 
 
 
Deferred rent, less current portion
17,419

 
17,419

Acquisition costs payable, less current portion
609,768

 
609,768

Total liabilities
8,333,718

191,227

8,524,945

 
 
 
 
Stockholders’ equity:
 

 
 
Common stock, $.0001 par value; 200,000,000 shares authorized; 5,733,981 issued and outstanding
573

 
573

Additional paid-in capital
52,570,432

 
52,570,432

Accumulated deficit
(47,277,420
)
(98,822
)
(47,376,242
)
Total stockholders’ equity
5,293,585

(98,822
)
5,194,763

 
 
 
 
Total liabilities and stockholders’ equity
$
13,627,303

$
92,405

$
13,719,708




25

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

Dual Reporting
The effects to the condensed consolidated financial statements as of September 30, 2018, as a result of applying ASC 606, rather than previous GAAP for revenue ("ASC 605") are as follows:
 
As Reported (ASC 606)
Adjustments
Previous GAAP (ASC 605)
Balance Sheet:
 
 
 
Accounts receivable, net
$
6,811,029

$
156,315

$
6,967,344

Contract liabilities
5,631,096

(5,631,096
)

Unearned revenue

5,659,184

5,659,184

Accumulated deficit
(52,401,946
)
128,227

(52,273,719
)
 
 
 
 
Statements of Operations:
 
 
 
Revenue:
 
 
 
Three months ended September 30, 2018
$
5,780,941

16,459

5,797,400

Nine months ended September 30, 2018
$
13,798,342

29,405

13,827,747


The changes reflected above were primarily due to the Company's delivery of its managed services related to influencer marketing services. Under ASC 605, these were recognized as separate elements at a point in time as services were delivered to the customer and under ASC 606, these are recognized as a single performance obligation over time based on an input model utilizing cost-to-cost methodology.

Disaggregation of Revenue
The following table illustrates our revenue by product service type:
 
Three Months Ended
Nine Months Ended
 
September 30, 2018
September 30, 2018
Managed Services
$
4,859,435

$
12,660,949

Marketplace Spend Fees, net
378,768

388,492

License Fees
485,651

538,262

Legacy Workflow, net
48,409

164,994

Other
8,678

45,645

Total Revenue from Customers
$
5,780,941

$
13,798,342


Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.
 
September 30,
2018
 
January 1,
2018
Accounts receivable, net
6,811,029

 
3,739,430

Contract liabilities (unearned revenue)
5,631,096

 
3,261,729


Contract receivables are recognized when the receipt of consideration is unconditional. The increase in contract receivables was primarily due to timing of billings, increased revenue during the period, and the addition of TapInfluence accounts. The Company did not recognize any contract assets as of September 30, 2018 or January 1, 2018. Contract liabilities relate to advance consideration received from customers under the terms of our contracts, which will be earned in future periods. The increase in contract liabilities is due to additional orders received during the quarter that are billed in advance and fulfilled throughout the year.

During the three and nine months ended September 30, 2018, the Company recognized revenue of $93,719 and $2,106,571, respectively relating to amounts that were included as a contract liability at January 1, 2018.

As a practical expedient, the Company expenses the costs of sales commissions that are paid to its sales force associated with obtaining contracts less than one year in length in the period incurred.


26

IZEA Worldwide, Inc.
Notes to the Unaudited Consolidated Financial Statements

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, 2018 are equal to the contract liabilities disclosed above. The Company expects to recognize the full balance of the unearned revenue at September 30, 2018 within the next year.

NOTE 9.    BUSINESS SEGMENTS

Prior to its merger with TapInfluence, the Company managed its operations as one segment for reporting purposes and evaluated operations and made business decisions based on consolidated results. Effective in the quarter ended September 30, 2018, and primarily as a result of the merger with TapInfluence, the Company has significantly expanded its operations related to license fees and marketplace spend fees. As a result, Company management is now actively evaluating operations under the following two reportable business segments:

Managed Services, which includes services to marketers to provide custom content, influencer marketing, amplification or other consulting services using the Company's internal resources, its network of creators and/or its technology platforms.

SaaS Services, which includes services generated by the self-service use of the Company's technology platforms by marketers to manage their own influencer marketing campaigns, as well as license subscriptions to access the IZEAx and TapInfluence platforms. SaaS Services are associated with the following revenue types:
Marketplace Spend Fees
License Fees

The Company's reportable segments are strategic business units that may offer similar services, but under different revenue recognition guidance. They are managed separately because each segment requires marketing and oversight strategies, however, the Company's chief operating decision maker for each segment is currently evaluating operations on the basis of revenue only as the Company does not currently allocate specific cost of revenue, other operating costs, or assets to each segment.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that Company management evaluates performance based primarily on gross revenue and gross margin for all revenue streams, including revenue externally reported on a net basis for the Company's SaaS Services segment.

The following table illustrates the Company's measure of revenue for each reportable segment, and other. The chief operating decision maker for each segment is not provided, and does not review, other measures related to profit or assets. All other measures of Company profit and assets are reviewed on a consolidated basis.

 
 
(Unaudited)
 
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2018
September 30,
2017
 
September 30,
2018
September 30,
2017
Revenue
 
 
 
 
 
Managed Services
 
$
4,859,435

$
6,997,390

 
$
12,660,949

$
17,274,313

SaaS Services
 
864,419

31,033

 
926,754

110,199

Other
 
57,087

61,432

 
210,639

252,752

Consolidated Total
 
$
5,780,941

$
7,089,855

 
$
13,798,342

$
17,637,264


NOTE 10.    SUBSEQUENT EVENTS

No material events have occurred after September 30, 2018 that require recognition or disclosure in the financial statements, except as follows:

On October 19, 2018, a shareholder derivative lawsuit, Dennis E. Emond v. Edward H. Murphy et al., case number 2:18-cv-9040, was instituted in the U.S. District Court for the Central District of California against certain executive officers and members of the Board of Directors for IZEA. IZEA has been named as a nominal defendant. An amended complaint was filed on October 31, 2018. The plaintiff seeks to recover damages on behalf of the Company for purported breaches of the individual defendants' fiduciary duties as directors and/or officers of IZEA, and gross mismanagement, and under federal securities laws. We believe that the plaintiff's allegations are without merit and intend to vigorously defend against the claims.

27


ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Information

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our consolidated financial statements and related notes included elsewhere in this report. This Quarterly Report on Form 10-Q (this "Quarterly Report") contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. The statements, which are not historical facts contained in this report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, and notes to our consolidated financial statements, particularly those that utilize terminology such as “may,” “will,” “would,” “could,” “should,” “expects,” “anticipates,” “estimates,” “believes,” “intends,” or “plans” or comparable terminology, are forward-looking statements. Such statements are based on currently available operating, financial and competitive information, and are subject to 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 might cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, but are not limited to, the following:

our ability to raise additional funding;
customer cancellations;
our ability to maintain and grow our business;
the successful integration of acquired companies, technologies and assets into our portfolio of software and services and into our current operations;
our ability to pay for our acquisition liabilities in cash or to issue common stock as payment;
variability of operating results;
the timing and outcome of pending or potential claims and litigation, including without limitation, the pending shareholder derivative lawsuits;
our ability to establish effective disclosure controls and procedures and internal control over financial reporting;
our ability to satisfy the requirements for continued listing of our common stock on the Nasdaq Capital Market;
our ability to maintain and enhance our brand;
our development and introduction of new products and services;
marketing and other business development initiatives;
competition in the industry;
general government regulation;
economic conditions;
dependence on key personnel;
the ability to attract, hire and retain personnel who possess the technical skills and experience necessary to meet the service requirements of our customers;
our ability to protect our intellectual property;
the potential liability with respect to actions taken by our existing and past employees;
risks associated with international sales;
and the other risks and uncertainties described in the Risk Factors and in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2017.

All forward-looking statements in this document are based on our current expectations, intentions and beliefs using information currently available to us as of the date of this Quarterly Report, and we assume no obligation to update any forward-looking statements, except as required by law.  Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.



28


Company Overview

IZEA creates and operates online marketplaces that connect marketers with content creators. Our technology brings the marketers and creators together, enabling their transactions to be completed at scale through the management of custom content workflow, creator search and targeting, bidding, analytics and payment processing.

We help power the creator economy, allowing everyone from college students and stay-at-home individuals to celebrities and accredited journalists the opportunity to monetize their content, creativity and influence through our marketers. These creators are compensated by IZEA for producing unique content such as long and short form text, videos, photos, status updates, and illustrations for marketers or distributing such content on behalf of marketers through their personal websites, blogs, and social media channels.

Marketers, including brands, agencies, and publishers, engage us to gain access to our industry expertise, technology, analytics, and network of creators. The majority of the marketers engage us to perform these services on their behalf, but they also have the ability to use our marketplaces on a self-service basis. Our technology is used for two primary purposes: the engagement of creators for influencer marketing campaigns (also known as “Influencer Marketing” or “Sponsored Social”), or the engagement of creators to create stand-alone custom content for the marketers' own use and distribution (“Custom Content”). Marketers receive influential consumer content and engaging, shareable stories that drive awareness.

    Our primary technology platforms, The IZEA Exchange (“IZEAx”) and TapInfluence, enable transactions to be completed at scale through the management of custom content workflow, creator search and targeting, bidding, analytics, and payment processing. IZEAx and TapInfluence are designed to provide a unified ecosystem that enables the creation and publication of multiple types of custom content through a creator's personal websites, blogs, or social media channels including Twitter, Facebook, Instagram, and YouTube, among others. In addition to IZEAx and TapInfluence, we operate the Ebyline technology platform, which we acquired in January 2015 and the ZenContent platform, which we acquired in July 2016. The Ebyline platform was originally designed as a self-service content marketplace to replace editorial newsrooms located in the news agencies with a “virtual newsroom” of creators to produce their content needs. The ZenContent platform is an in-house workflow tool that enables us to produce highly scalable, multi-part production of content for both e-commerce entities, as well as brand customers.

Key Components of Results of Operations

With the addition of TapInfluence in July 2018 and its Marketplace Spend Fees revenue, we now measure revenue associated with our business under two reportable business segments; Managed Services and SaaS Services. Overall consolidated results of operations are evaluated based on Cost of Revenue, Sales and Marketing expenses, General and Administrative expenses, Depreciation and Amortization, and Other Income (Expense), net.

Revenue

We derive our revenue from providing content services or managing advertising campaigns for our customers, as well as from making our platforms available to allow customers the ability to purchase content directly from our creators. We categorize our revenue by four primary revenue streams: 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 consulting services (“Managed Services”), revenue from fees charged to self-service customers on their marketplace spend within the Company's platforms (“Marketplace Spend Fees”), revenue derived from fees charged to access the IZEAx, Ebyline, and TapInfluence technology platforms (“License Fees”), and revenue from other fees such as inactivity, affiliate, and plan fees charged to users of the Company's platforms ("Other"). As discussed in more detail within “Critical Accounting Policies and Use of Estimates” in this section and in “Note 1. Company and Summary of Significant Accounting Policies,” under Item 1 of this Quarterly Report, revenue from our Managed Services and License Fees revenue are reported on a gross basis and revenue from Marketplace Spend is reported on a net basis.

Cost of Revenue

    Our cost of revenue consists primarily 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. Personnel costs included in cost of services include salaries, bonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to the personnel who are primarily responsible for providing support to our customers and ultimately fulfillment of our obligations under our contracts with customers. We capitalize costs that were incurred with software that is developed or acquired for our revenue supporting platforms and

29


amortize these costs over the estimated useful lives of those platforms. This amortization is separately stated under depreciation and amortization.

Sales and Marketing
    
Our sales and marketing expenses consist primarily of salaries, bonuses, commissions, stock-based compensation, employee benefit costs, travel and miscellaneous departmental costs for our sales and sales support personnel, as well as marketing expenses such as brand marketing, public relation events, trade shows and marketing materials, and travel expenses.

General and Administrative
    
Our general and administrative expense consists primarily of salaries, bonuses, commissions, stock­-based compensation, employee benefit costs, and miscellaneous departmental costs related to our executive, finance, legal, human resources, and other administrative personnel. It also includes travel, public company and investor relations expenses, as well as accounting and legal professional services fees, leasehold facilities­ costs, and other corporate-related expenses. General and administrative expense also includes our technology and development costs consisting primarily of our payroll costs for our internal engineers and contractors responsible for developing, maintaining and improving our technology, along with hosting and software subscription costs. These costs are expensed as incurred, except to the extent that they are associated with internal use software that qualifies for capitalization, which are then recorded as software development costs in the consolidated balance sheet. We also capitalize costs that are related to our acquired intangible assets. Depreciation and amortization related to these costs are separately stated under depreciation and amortization. General and administrative expense also includes costs related to our acquisitions and fluctuations in our estimates on contingent earnout payments and compensation allocations related to these acquisitions. To the extent that our contingent earnout estimates change, there will be fluctuations in the amount expensed each period.

Depreciation and Amortization

Depreciation and amortization consists primarily of amortization on 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 those assets.

Other Income (Expense)

Interest Expense. Interest expense is mainly related to the imputed interest on our acquisition costs payable and interest when we use our line of credit facility.
    
Change in Fair Value of Restricted Stock and Derivatives, net. On occasion, we enter into financing transactions that give rise to derivative liabilities. Additionally, we issue restricted stock to non-employees that vests over future periods. These financial instruments are carried at fair value in our financial statements. Changes in the fair value of such financial instruments are required to be recorded in other income (expense) in the period of change.

Other Income (Expense). Other income consists of interest income for interest earned on our cash and cash equivalent balances, the value of cryptocurrency received from our IZEA cryptocurrency mining operations which commenced in January 2018, and foreign currency exchange gains and losses on foreign currency transactions, primarily related to the Canadian Dollar.


30


Results of Operations for the Three Months Ended September 30, 2018 and 2017

The following table sets forth a summary of our consolidated statements of operations and the percentage of change between the periods:
 
(Unaudited)
 
 
 
 
 
Three Months Ended
September 30,
 
 
 
2018
 
2017
 
$ Change
 
% Change
Revenue
$
5,780,941

 
$
7,089,855

 
$
(1,308,914
)
 
(18
)%
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of amortization)
2,397,466

 
3,302,626

 
(905,160
)
 
(27
)%
Sales and marketing
1,574,335

 
1,733,178

 
(158,843
)
 
(9
)%
General and administrative
2,699,978

 
2,312,301

 
387,677

 
17
 %
Depreciation and amortization
370,674

 
374,965

 
(4,291
)
 
(1
)%
Total costs and expenses
7,042,453

 
7,723,070

 
(680,617
)
 
(9
)%
Loss from operations
(1,261,512
)
 
(633,215
)
 
(628,297
)
 
99
 %
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(90,452
)
 
(15,058
)
 
(75,394
)
 
501
 %
Change in fair value of derivatives, net

 
45,160

 
(45,160
)
 
(100
)%
Other income, net
19,135

 
44,308

 
(25,173
)
 
(57
)%
Total other income (expense), net
(71,317
)
 
74,410

 
(145,727
)
 
(196
)%
Net loss
$
(1,332,829
)
 
$
(558,805
)
 
$
(774,024
)
 
139
 %

Revenue

The following table illustrates our revenue by type, the percentage of total revenue by type, and the percentage of change between the periods:
 
Three Months Ended
 
 
 
 
September 30, 2018
 
September 30, 2017
 
$ Change
% Change
Managed Services
$
4,859,435

84
%
 
$
6,997,390

99
%
 
$
(2,137,955
)
(31
)%
Marketplace Spend Fees, net
378,768

7
%
 
21,680

%
 
357,088

1,647
 %
License Fees
485,651

8
%
 
9,353

%
 
476,298

5,092
 %
Legacy Workflow, net
48,409

1
%
 
55,297

1
%
 
(6,888
)
(12
)%
Other
8,678

%
 
6,135

%
 
2,543

41
 %
Total Revenue by type
$
5,780,941

100
%
 
$
7,089,855

100
%
 
$
(1,308,914
)
(18
)%

Total revenue for the three months ended September 30, 2018 decreased by $1,308,914, or approximately 18%, compared to the same period in 2017

We have invested the majority of our time and resources in our Managed Services, which generates the majority of our revenue. Our acquisitions of Ebyline and ZenContent allowed us to expand our product offerings to provide custom content in addition to and in combination with our influencer marketing campaigns. Our merger with TapInfluence allows us to immediately increase our market share of the marketplace spend and licensed SaaS revenue business, and enables us to scale more quickly in this space.

Managed Services revenue declined due to lower annual commitments from some of our larger customers for their 2018 advertising spends, along with a decrease in the number of smaller customers running short-term campaigns. Additionally, the revenue reported in 2017 is being reported pursuant to the previous GAAP reporting standards under ASC 605 while the revenue reported in 2018 is being reported pursuant to ASC 606. We adopted the new standards under the modified retrospective approach whereby we were not required to recalculate the revenue at each prior year reporting period. Changes between the standards results in timing differences on how revenue is recognized. As discussed in Note 8 under Item 1 of this Quarterly Report, the change in GAAP reporting standards resulted in an increase in revenue of $16,459 between the periods.

31



Marketplace Spend Fees revenue results primarily from marketers and partners using the IZEAx, and beginning in July 2018, the TapInfluence platforms on a self-service basis to create and distribute content for marketing and sponsored social advertising campaigns. This also includes revenue from creation and distribution of content related to newspaper and traditional publishers who utilize the Company's Ebyline platform ("Legacy Workflow"), to produce and process their content needs. Revenue from Marketplace Spend Fees increased by $357,088, or approximately 1,647%, in the three months ended September 30, 2018 compared to the same period in 2017, primarily as a result of the Company's merger with TapInfluence in July 2018, which acquired business accounted for approximately $363,764 of the consolidated Marketplace Spend Fees revenue for period. Revenue from Marketplace Spend Fees represents our net margins received on this business, which averaged approximately 12% and 37% for the three months ended September 30, 2018 and 2017, respectively. We expect to see continued increases in total Marketplace Spend Fees revenue and improved margins due to the addition of the TapInfluence platform as well as continued organic growth related to the IZEAx platform.

License Fees revenue is generated primarily through the granting of limited, non-exclusive, non-transferable licenses to customers for the use of the IZEAx and TapIfluence technology platforms for an agreed-upon subscription period. Customers license the platforms to manage their own sponsored social advertising campaigns. Fees for subscription or licensing services are recognized straight-line over the term of the service. License Fees revenue increased significantly during the three months ended September 30, 2018 to $485,651, primarily as a result of the business acquired in the merger with TapInfluence, compared to $9,353 in the same period of the prior year.

Legacy Workflow revenue represent transactions through the Ebyline platform, which is declining year over year due to the ongoing consolidation and cutbacks in the newspaper industry. Revenue from Legacy Workflow transactions decreased to $48,409 for the three months ended September 30, 2018, compared to $55,297 for same period in 2017. With the addition of TapInfluence and its SaaS revenue model, the Company has shifted its focus away from content related to newspapers and traditional publishers, and expects Legacy Workflow revenue to continue to decline going forward.

Other revenue consists of other fees generated from partners using the platforms, such as inactivity fees and affiliate fees, which did not have a significant effect on our operations for the three months ended September 30, 2018 and 2017.

Gross Billings by Segment
    
Company management evaluates its operations and makes strategic decisions based, in part, on gross billings from its two operating segments, Managed Services and SaaS Services. We define gross billings as the total dollar value of the amounts earned from our customers for the services we performed, or the amounts charged to our customers for their self-service purchase of goods and services on our platforms. This is the amount 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 GAAP reporting purposes. Managed Services gross billings is the same as revenue being reported on a GAAP basis as there is no requirement to net the revenue against costs of revenue. SaaS Services consists of gross billings generated by the self-service use of the Company's technology platforms by marketers to manage their own content workflow and sponsored social campaigns, as well as license subscriptions to access the IZEAx and TapInfluence platforms, which includes license fees and marketplace spend fees.
    
Gross billings for Marketplace Spend Fees differs from revenue reported in our consolidated statements of operations, which is presented net of the amounts we pay to our third-party creators providing the content or sponsorship services. Gross billings for all other revenue equals the revenue reported in our consolidated statements of operations. We consider this metric to be an important indicator of our performance as it measures the total dollar volume of transactions generated through our marketplaces. Tracking gross billings allows us to monitor the percentage of gross billings that we are able to retain after payments to our creators. Additionally, tracking gross billings is critical as it pertains to our credit risk and cash flow. We invoice our customers based on our services performed or based on their self-service transactions plus our fee. Then we remit the agreed-upon transaction price to the creators. If we do not collect the money from our customers prior to the time of payment to our creators, we could experience large swings in our cash flows. Finally, gross billings allows us to evaluate our transaction totals on an equal basis in order for us to see our contribution margins by revenue type so that we can better understand where we should be allocating our resources.

Gross billings for our SaaS Services segment were $3,677,135 for the three months ended September 30, 2018, an increase of $3,608,919 compared to the same period in 2017. The increase was primarily due to the addition of TapInfluence in July 2018, accounting for approximately $3.5 million of billings during the third quarter of 2018. Our merger with TapInfluence is expected to have a continuing significant positive impact on our future gross billings in this segment as we build on the significant marketer base obtained as a result of the merger, offset by the phasing out of our Legacy Workflow

32


activity. Refer to the below section titled "Non-GAAP Financial Measures" for a reconciliation of gross billings to a GAAP measure.

Net Bookings
 
Net bookings is a measure of sales orders received minus any cancellations or adjustments in a given period. Management uses net bookings as a leading indicator of future revenue recognition as revenue is typically recognized within 90-120 days of booking, though larger contracts may be recognized over twelve months from the original booking date. Net bookings can be affected by, among other things, cancellations or changes to orders that occur in future periods. Reductions in net bookings or changes in the expected timing of delivery for services due to delays and customer preferences or other considerations may result in fluctuations in expected future revenue. Net bookings related to our Managed Services were approximately $4.7 million in the three months ended September 30, 2018 compared to $6.7 million in the three months ended September 30, 2017.

The decrease in net bookings is the result of a decreasing new opportunity pipeline (defined as the measure of the total dollar amount of sales opportunities represented by proposals with potential customers) in the first through third quarters of 2017, which impacts bookings and revenue on a trailing basis. In addition to reduced overall pipeline activity, there was also a higher concentration of larger opportunities in the pipeline during this period, thereby increasing our reliance on a smaller number of clients and campaigns. In the fourth quarter of 2017 through the second quarter of 2018, we saw a number of larger clients reduce, shift, or eliminate their spending compared to prior years, which has significantly reduced our 2018 results. Year-over-year new opportunity pipeline growth began to return in the fourth quarter of 2017 and has continued in the first through third quarters of 2018. The Company has seen a positive effect from this pipeline growth, and increased bookings in the third quarter of 2018 compared to the second quarter, with revenue recognition trailing bookings. We anticipate lower year-over-year revenues from Managed Services when compared to prior years for the remainder of 2018, but increased revenues from Marketplace Spend Fees and License Fees and Other revenue due to additional SaaS customers licensing and the utilization of our platforms for marketplace spending.

Cost of Revenue

Cost of revenue for the three months ended September 30, 2018 decreased by $905,160, or approximately 27%, compared to the same period in 2017. Cost of revenue as a percentage of revenue decreased from 47% in 2017 to 41% in 2018. Our cost of revenue consists primarily of direct costs paid to our third-party creators who provide custom content and advertising and our internal personnel costs for the personnel who are primarily responsible for fulfillment of our obligations under our contracts for Managed Services. Overall increase in cost of revenue was primarily driven by the addition of Marketplace Spend Fee activity acquired through the Company's merger with TapInfluence in July 2018. Our direct costs related to third-party creators are variable with the revenue they generate. The direct costs decreased to 39% of revenues for Managed Services during the three months ended September 30, 2018 compared to 99% for the same period in 2017. Our internal fulfillment costs are mostly fixed and do not track directly to the revenue that is produced during the period. As a result, as Managed Services revenue fell, our internal fulfillment costs increased to 12% of revenues for Managed Services during the three months ended September 30, 2018 compared to 9% for the same period in 2017.

Sales and Marketing

Sales and marketing expenses for the three months ended September 30, 2018 decreased by $158,843, or approximately 9%, compared to the same period in 2017. The number of our sales, marketing and support personnel and contractors declined by 8% compared to the prior year period, which along with the decrease in variable compensation linked with sales performance, contributed to a reduction of approximately $248,000 in sales and marketing payroll and personnel-related expenses. Marketing costs increased by approximately $29,000 during the three months ended September 30, 2018 compared to the same period in 2017, due to our State of the Creator Economy survey which was produced and distributed during 2018 as an update to our latest report produced at the end of 2016. This survey provides key insight and sales resources for our internal team and customers.
    
General and Administrative

General and administrative expense for the three months ended September 30, 2018 increased by $387,677, or approximately 17% compared to the same period in 2017. The increase was primarily attributable to an accrual for estimated legal expenses of $500,000 offset by overall reduction in operating costs and change in our acquisition cost liability estimate related to the ZenContent acquisition in July 2016.


33


On July 31, 2016, we purchased all of the outstanding shares of capital stock of ZenContent, Inc. for aggregate consideration up to $4,500,000, consisting of guaranteed payments of $2,000,000 and contingent performance payments up to $2,500,000 based on ZenContent meeting certain revenue targets for each of the three years ending July 31, 2017, 2018 and 2019. These payments were subject to a downward adjustment of up to 30% if ZenContent’s co-founder was terminated by IZEA for cause or if she terminated her employment without good reason. As a result, the Company initially reduced its remaining guaranteed acquisition cost liability and its estimated contingent performance payments by 30% to be accrued as compensation expense over the three-year term rather than allocated to the purchase price. The compensation expense recorded as general and administrative expense and accrued to the guaranteed portion of acquisition cost liability during the three months ended September 30, 2018 and 2017 was $5,209 and $28,125, respectively.

Based on the July 2018 amendment to the ZenContent Stock Purchase Agreement, as further described in Note 2 to our financial statements, which resulted in a future fixed amount for the contingent performance payments, we determined that the current fair value of the $2,500,000 contingent performance payments for ZenContent was $88,055 as of September 30, 2018 compared to $96,998 as of June 30, 2018. Therefore, we recorded a $875 decrease in the fair value of the contingent performance payments during the three months ended September 30, 2018, which was allocated as a decrease in compensation expense.

During the three months ended September 30, 2017, we recorded a $165,583 increase in the fair value of the contingent performance payments when the estimated fair value increased from the estimate of $342,861 as of June 30, 2017 to $508,444 as of September 30, 2017. Of this amount, $47,583 was allocated as an increase in compensation expense and $118,000 was allocated as an increase in the fair value of the contingent performance payments.

The total change in our acquisition cost liability related to both the guaranteed and contingent performance payments noted above was a decrease of $6,084 and an increase of $193,708 for the three months ended September 30, 2018 and 2017, respectively, thus contributing $199,792 to the increase between periods in general and administrative expense.

Professional fees increased approximately $488,000 during the three months ended September 30, 2018 as compared to the prior year period primarily due to our acquisition activities and an accrual of $500,000 for estimated legal expenses. Contractor expense increase approximately $175,000, primarily related to increased needs for external engineering contractors. These increased costs were offset by reductions in general and administrative expense due to lower payroll, stock compensation, and personnel related expenses of approximately $39,000 and capitalization of software development costs of $229,000.
    
Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2018 decreased by $4,291, or approximately 1%, compared to the same period in 2017.

Depreciation and amortization expense on property and equipment was $55,034 and $50,168 for the three months ended September 30, 2018 and 2017, respectively.

Our amortization expense was $315,640 and $324,797 for the three months ended September 30, 2018 and 2017, respectively. Amortization expense related to intangible assets acquired in the Ebyline, ZenContent, and TapInfluence acquisitions was $242,018 and $247,907 for the three months ended September 30, 2018 and 2017, respectively. Amortization expense on our intangible acquisition assets will increase significantly as a result of the TapInfluence merger completed in July 2018, offset by assets that have become fully amortized related to prior acquisitions. Amortization expense related to internal use software development costs was $73,622 and $76,890 for the three months ended September 30, 2018 and 2017, respectively, related to our previous development of our current IZEAx platform.

Other Income (Expense)
 
Other income (expense) consists primarily of interest expense and the change in the fair value of derivatives.
 
Interest expense increased by $75,394 to $90,452 during the three months ended September 30, 2018 compared to the same period in 2017 primarily due to higher interest rates and higher amounts outstanding on our credit facility in 2018.

We recorded income of $0 and $45,160 resulting from the change in the fair value of derivatives during the three months ended September 30, 2018 and 2017, respectively.


34


The $25,173 increase in other income (expense) between the periods is the result of the net value of cryptocurrency we received from our cryptocurrency mining operations of approximately $7,000 as well as currency exchange changes related to our Canadian transactions during the three months ended September 30, 2018 and 2017.

Net Loss
 
Net loss for the three months ended September 30, 2018 was $1,332,829, which increased from a net loss of $558,805 for the same period in 2017.  The increase in net loss was primarily the result of reduced revenue as discussed above.


35


Results of Operations for the Nine Months Ended September 30, 2018 and 2017

The following table sets forth a summary of our consolidated statements of operations and the percentage of change between the periods:
 
(Unaudited)
 
 
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
2017
 
$ Change
% Change
Revenue
$
13,798,342

 
$
17,637,264

 
$
(3,838,922
)
(22
)%
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
Cost of revenue (exclusive of amortization)
6,490,906

 
8,354,385

 
(1,863,479
)
(22
)%
Sales and marketing
5,065,457

 
6,008,526

 
(943,069
)
(16
)%
General and administrative
6,285,810

 
6,925,589

 
(639,779
)
(9
)%
Depreciation and amortization
846,820

 
1,095,831

 
(249,011
)
(23
)%
Total costs and expenses
18,688,993

 
22,384,331

 
(3,695,338
)
(17
)%
Loss from operations
(4,890,651
)
 
(4,747,067
)
 
(143,584
)
3
 %
Other income (expense):
 
 
 
 
 
 
Interest expense
(147,166
)
 
(45,406
)
 
(101,760
)
224
 %
Change in fair value of derivatives, net
(11,794
)
 
36,122

 
(47,916
)
(133
)%
Other income, net
23,907

 
31,728

 
(7,821
)
(25
)%
Total other income (expense), net
(135,053
)
 
22,444

 
(157,497
)
(702
)%
Net loss
$
(5,025,704
)
 
$
(4,724,623
)
 
$
(301,081
)
6
 %

Revenue

The following table illustrates our revenue by type, the percentage of total revenue by type, and the percentage of change between the periods:
 
Nine Months Ended
 
 
 
 
September 30, 2018
 
September 30, 2017
 
$ Change
% Change
Managed Services
$
12,660,949

92
%
 
$
17,274,314

98
%
 
$
(4,613,365
)
(27
)%
Marketplace Spend Fees, net
388,492

3
%
 
45,708

%
 
342,784

750
 %
License Fees
538,262

4
%
 
64,491

%
 
473,771

735
 %
Legacy Workflow, net
164,994

1
%
 
227,441

2
%
 
(62,447
)
(27
)%
Other
45,645

%
 
$
25,310

%
 
20,335

80
 %
Total Revenue by type
$
13,798,342

100
%
 
$
17,637,264

100
%
 
$
(3,838,922
)
(22
)%

Revenues for the nine months ended September 30, 2018 decreased by $3,838,922, or approximately 22%, compared to the same period in 2017