# IZEA Worldwide, Inc.: Form 10-Q for the period ended Sep 30, 2018

- Company: [IZEA Worldwide, Inc.](/companies/izea.md) (CIK 1495231)
- Form: 10-Q
- Filed: 2018-11-14
- Accepted by EDGAR: Nov 14, 2018, 16:11 ET
- Period: 2018-09-30
- Accession: 0001495231-18-000118
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1495231/000149523118000118/izea18093010q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1495231/000149523118000118/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $5.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $13.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $2.4m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $6.5m | us-gaap:CostOfRevenue |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | −$1.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | −$4.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-01 to 2018-09-30 | $90.5k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-01-01 to 2018-09-30 | $147.2k | us-gaap:InterestExpense |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | −$1.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | −$5.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | −$0.13 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | −$0.68 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | −$4.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $157.4k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-09-30 | $3.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $11.3m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $24.8m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $16.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $17.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-09-30 | $7.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 89,087 characters.

### 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.

### 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 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.

### 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.

*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 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.

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.

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.

### 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.

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, ZenContent, and TapInfluence have allowed us to expand our product offerings to provide custom content in addition to and in combination with our influencer marketing campaigns. In particular, our merger with TapInfluence provides an immediate increase of 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 initial 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. Net bookings related to Managed Services were $14.4 million in the nine months ended September 30, 2018 compared to $18.5 million in the nine months ended September 30, 2017. The decrease in net bookings is the result of a decreasing new opportunity pipeline in the first through third quarters of 2017, which impacts bookings and revenue on a trailing basis. Although our annual revenue has historically increased since inception, we have seen a year-over-year decrease in revenue in the first three quarters of 2018 and believe revenue related to our Managed Services will also be down year-over-year in the fourth quarter of 2018 based on these lower net bookings as they translate into future revenue.

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 standards resulted in a revenue decrease of $29,405 between the periods.

*Marketplace Spend Fees* revenue primarily results from marketers and partners using the *IZEAx*, and beginning in July 2018, the *TapInfluence* platforms on a SaaS basis to distribute content for marketing and sponsored social advertising campaigns. This also includes revenue from the Company's *Ebyline* platform ("Legacy Workflow"). Revenue from Marketplace Spend Fees increased by $342,784, or approximately 750%, for the nine months ended September 30, 2018 compared to the same period in 2017, primarily as a result of the Company's merger with TapInfluence, which accounted for approximately $363,764 of the consolidated Marketplace Spend Fees revenue for the period. Self-service use for transactions on the *Ebyline* platform is declining year over year due to the ongoing consolidation and cutbacks in the newspaper industry. Revenue from Marketplace Spend Fees represents our net margins received on this business, which averaged approximately 12% and 40% for the nine months ended September 30, 2018 and 2017, respectively. We expect to see continued increases in total Marketplace Spend Fees revenue, and improved margins, compared to prior year levels due to the addition of the *TapInfluence* platform, as well as expected 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 nine months ended September 30, 2018 to $538,262, primarily as a result of the merger with TapInfluence, compared to $64,491 in the same period of the prior year.

*Legacy Workflow* revenue represents 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 $164,994 for the nine months ended September 30, 2018, compared to $227,442 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 nine 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 $3,787,789 for the nine months ended September 30, 2018, an increase of $3,608,748 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 for the nine months ended 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 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 $12.8 million in the nine months ended September 30, 2018 compared to $18.5 million in the nine 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 nine months ended September 30, 2018 decreased by $1,863,479, or approximately 22%, compared to the same period in 2017. Cost of revenue as a percentage of revenue remained level at approximately 47% for both periods. 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 those primarily responsible for fulfillment of our obligations under our Managed Services. Our direct costs related to third-party creators are variable with the revenue they generate and these remained consistent at approximately 39% of revenue for Managed Services in 2018 and 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 13% of revenues for Managed Services during the nine months ended September 30, 2018 compared to 10% for the same period in 2017.

### Sales and Marketing

Sales and marketing expenses for the nine months ended September 30, 2018 decreased by $943,069, or approximately 16%, compared to the same period in 2017. In February 2017, we held our IZEAFest Conference for marketers and creators. This event was not repeated in 2018 and the non-recurrence of this event contributed to a reduction in our public relations expense of approximately $480,000. Our sales, marketing and support personnel declined by 8%, which along with the decrease in variable compensation linked with sales performance, contributed to a reduction of approximately $870,000 in sales and marketing payroll and personnel related expenses. Marketing costs increased by approximately $181,000 during the nine 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 nine months ended September 30, 2018 decreased by $639,779, or approximately 9%, compared to the same period in 2017. The decrease was primarily attributable to an overall reduction in operating costs and the change in our acquisition cost liability estimate related to the ZenContent acquisition in July 2016, offset by the accrual of estimated legal expenses of $500,000.

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 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 nine months ended September 30, 2018 and 2017 was $28,125 and $151,042, 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 $744,510 as of December 31, 2017. Therefore, we recorded a $646,637 decrease in the fair value of the contingent performance payments during the nine months ended September 30, 2018. Of this amount, $160,890 was allocated as a decrease in compensation expense and $485,747 was allocated as a decrease in the fair value of the contingent performance payments.

During the nine months ended September 30, 2017, we recorded a $184,444 increase in the fair value of the contingent performance payments when the estimated fair value increased from the estimate of $324,000 as of December 31, 2017 to $342,861 as of September 30, 2017. Of this amount, $122,444 was allocated as an increase in compensation expense and $62,000 was allocated as a 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 $618,512 and an increase of $335,486 for the nine months ended September 30, 2018 and 2017, respectively, thus contributing $953,998 to the decrease between periods in general and administrative expense.

The remaining decrease in general and administrative expense was due to (i) lower payroll, stock compensation, and personnel-related expenses of approximately $561,000 due to lower commissions and bonus amounts accrued and lower stock expense on vested options in 2018, (ii) capitalization of software development costs of $401,000, and (iii) decreased investor relations costs of approximately $17,000 due to the non-renewal of our investor relations firm agreement in May 2017. Legal and accounting fees increased approximately $604,000 during the nine months ended September 30, 2018 as compared to the prior year period due our acquisition activities, additional procedures related to revised statements and implementation of ASC 606 in our public filings, and an accrual of $500,000 for estimated legal expenses.

### Depreciation and Amortization

Depreciation and amortization expense for the nine months ended September 30, 2018 decreased by $249,011, or approximately 23%, compared to the same period in 2017.

Depreciation and amortization expense on property and equipment was $167,900 and $163,597 for the nine months ended September 30, 2018 and 2017, respectively. Depreciation expense increased in 2018 due to acquisition of cryptocurrency mining equipment, acquired assets from TapInfluence, and minimal increases in our property and equipment, offset by certain assets becoming fully depreciated.

Our amortization expense was $678,920 and $932,234 for the nine months ended September 30, 2018 and 2017, respectively. Amortization expense related to intangible assets acquired in the Ebyline, ZenContent, and TapInfluence acquisitions was $458,054 and $747,720 for the nine months ended September 30, 2018 and 2017, respectively. Amortization expense on our intangible acquisition assets is declined through July 2018 as several of the items completed the amortization period for their useful lives, with offsetting increase starting in late July for the newly acquired TapInfluence intangible assets. Amortization expense related to internal use software development costs was $220,866 and $184,514 for the nine months ended September 30, 2018 and 2017, respectively, and is increasing as we continue to amortize costs associated with the development 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 $101,760 to $147,166 during the nine 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 expense of $11,794 and income of $36,122 resulting from the change in the fair value of restricted stock during the nine months ended September 30, 2018 and 2017, respectively.

The $7,821 increase in other income (expense) between the periods is the result of the net value of cryptocurrency we received from our cryptocurrency mining operations during the nine months ended September 30, 2018 of approximately $24,000 offset by currency exchange losses related to our Canadian transactions during the nine months ended September 30, 2018 and 2017.

### Net Loss

Net loss for the nine months ended September 30, 2018 was $5,025,704, a $301,081 increase over the net loss of $4,724,623 for the same period in 2017. The increase in net loss was primarily the result of reduced revenues as discussed above.

### Non-GAAP Financial Measures

Below are financial measures of our gross billings, cash-based operating expenses (“Cash Opex”) and Adjusted EBITDA. These are “non-GAAP financial measures” as defined under the rules of the Securities and Exchange Commission (the “SEC”). We use these non-GAAP financial measures to assess the progress of our business and make decisions on where to allocate our resources. As our business evolves, we may make changes in future periods to the key financial metrics that we consider to measure our business.

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.

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.

The following table sets forth a reconciliation from the GAAP measurement of Revenue to our non-GAAP financial measure of gross billings and the percentage change between the periods:

|  | Three Months Ended September 30, 2018 | 2017 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $5,780,941 | $7,089,855 | $(1,308,914) | (18)% |
| Plus transaction costs for third-party creators (1) | 3,437,372 | 1,064,818 | 2,372,554 | 223% |
| Gross billings | $9,218,313 | $8,154,673 | $1,063,640 | 13% |

|  | Nine Months Ended September 30, 2018 | 2017 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $13,798,342 | $17,637,264 | $(3,838,922) | (22)% |
| Plus transaction costs for third-party creators (1) | 5,031,875 | 3,700,137 | 1,331,738 | 36% |
| Gross billings | $18,830,217 | $21,337,401 | $(2,507,184) | (27)% |

(1) Transaction costs related to third-party creators for services provided for the Marketplace Spend Fees portion of our revenue reported on a net basis for GAAP.

The following table sets forth our gross billings by revenue type, the percentage of total gross billings by revenue 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 | 53% | $6,997,390 | 86% | $(2,137,955) | (31)% |
| Marketplace Spend Fees | 3,191,484 | 35% | 58,863 | 1% | 3,132,621 | 5,322% |
| License Fees | 485,651 | 5% | 9,353 | —% | 476,298 | 5,092% |
| Legacy Workflow | 673,065 | 7% | 1,082,932 | 13% | (409,867) | (38)% |
| Other | 8,678 | —% | 6,135 | —% | 2,543 | 41% |
| Total gross billings | $9,218,313 | 100% | $8,154,673 | 100% | $1,063,640 | 13% |

|  | Nine Months Ended September 30, 2018 |  | September 30, 2017 |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Managed Services | $12,660,949 | 67% | $17,274,314 | 81% | $(4,613,365) | (27)% |
| Marketplace Spend Fees | 3,249,527 | 17% | 114,550 | 1% | 3,134,977 | 2,737% |
| License Fees | 538,262 | 3% | 64,491 | —% | 473,771 | 735% |
| Legacy Workflow | 2,335,834 | 13% | 3,858,736 | 18% | (1,522,902) | (39)% |
| Other | 45,645 | —% | 25,310 | —% | 20,335 | 80% |
| Total gross billings | $18,830,217 | 100% | $21,337,401 | 100% | $(2,507,184) | (12)% |

We define Cash Opex as the total of our operating expenses exclusive of unusual or non-cash expenses such as depreciation and amortization, non-cash stock related compensation, gain or loss on asset disposals or impairment and changes in acquisition cost estimates, and gains or losses on settlement of liabilities, if applicable.

We define Adjusted EBITDA as earnings or loss before interest, taxes, depreciation and amortization, non-cash stock-based compensation, gain or loss on asset disposals or impairment, changes in acquisition cost estimates, and all other non-cash income and expense items such as gains or losses on settlement of liabilities and exchanges, and changes in the fair value of derivatives, if applicable.

We use Cash Opex as a percentage of revenue and Adjusted EBITDA as measures of operating performance, for planning purposes, to allocate resources to enhance the financial performance of our business and in communications with our Board of Directors regarding our financial performance. We believe that Cash Opex as a percentage of revenue and Adjusted EBITDA also provide useful information to investors as they exclude transactions not related to our core cash operating business activities, including non-cash transactions, and they provide consistency and facilitate period-to-period comparisons. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash operations. All companies do not calculate Cash Opex and Adjusted EBITDA in the same manner, and Cash Opex and Adjusted EBITDA as presented by us may not be comparable to Cash Opex and Adjusted EBITDA presented by other companies, which limits their usefulness as comparative measures.

Moreover, Cash Opex and Adjusted EBITDA have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for an analysis of our results of operations as under GAAP. These limitations include that Cash Opex and Adjusted EBITDA:

- do not include stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;
- do not include stock issued for payment of services, which is a non-cash expense, but has been, and is expected to be for the foreseeable future, an important means for us to compensate our vendors and other parties who provide us with services;
- do not include changes in acquisition cost estimates as a result of the allocation of acquisition costs payable to compensation expense or changes in the estimate of contingent acquisition costs payable, which may or may not ever be paid, but may be a significant recurring expense for our business if we continue to make business acquisitions;
- do not include gains or losses on the settlement of acquisition costs payable or liabilities when the stock value, as agreed upon in the agreement, varies from the market price of our stock on the settlement date, which is a non-cash expense, but will continue to be a recurring expense for our business on certain business contracts where the amounts can vary; and
- do not include depreciation and intangible assets amortization expense, impairment charges and gains or losses on disposal of equipment, which is not always a current period cash expense, but the assets being depreciated and amortized may have to be replaced in the future.

Furthermore, Adjusted EBITDA excludes changes in fair value of derivatives, interest expense and other gains, losses, and expenses that we believe are not indicative of our ongoing core operating results, but these items may represent a reduction or increase in cash available to us.

Because of these limitations, Cash Opex should not be considered as a measure of our total operating expenses, and adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the operation and growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP financial measures as supplements. In evaluating these non-GAAP financial measures, you should be aware that in the future we may incur expenses similar to those for which adjustments are made in calculating Cash Opex and Adjusted EBITDA. Our presentation of these non-GAAP financial measures should also not be construed to infer that our future results will be unaffected by unusual or non-recurring items.

The following table sets forth a reconciliation from the GAAP measurement of Operating Expenses to our non-GAAP financial measure of Cash Opex and Cash Opex as a percentage of revenue for the three and nine months ended September 30, 2018 and 2017:

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Total costs and expenses | $7,042,453 | $7,723,070 | $18,688,993 | $22,384,331 |
| Less: |  |  |  |  |
| Non-cash stock-based compensation | 118,410 | 182,796 | 468,042 | 509,642 |
| Non-cash stock issued for payment of services | 31,244 | 60,074 | 93,734 | 143,536 |
| (Gain) loss on disposal of equipment | 6,642 | (1,775) | 5,242 | (5,462) |
| (Gain) loss on settlement of acquisition costs payable | (84,938) | — | (84,938) | (10,491) |
| Increase (decrease) in value of acquisition costs payable | 6,084 | 193,708 | (618,512) | 335,486 |
| Legal expense accrual | 500,000 | — | 500,000 | — |
| Depreciation and amortization | 370,674 | 374,965 | 846,820 | 1,095,831 |
| Total excluded expenses | 948,116 | 809,768 | 1,210,388 | 2,068,542 |
| Cash Opex | $6,094,337 | $6,913,302 | $17,478,605 | $20,315,789 |
| Revenue | $5,780,941 | $7,089,855 | $13,798,342 | $17,637,264 |
| Cash Opex / Revenue | 105% | 98% | 127% | 115% |

The following table sets forth a reconciliation from the GAAP measurement of net loss to our non-GAAP financial measure of Adjusted EBITDA for the three and nine months ended September 30, 2018 and 2017:

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net loss | $(1,332,829) | $(558,805) | $(5,025,704) | $(4,724,623) |
| Non-cash stock-based compensation | 118,410 | 182,796 | 468,042 | 509,642 |
| Non-cash stock issued for payment of services | 31,244 | 60,074 | 93,734 | 143,536 |
| (Gain) loss on disposal of equipment | 6,642 | (1,775) | 5,242 | (5,462) |
| (Gain) loss on settlement of acquisition costs payable | (84,938) | — | (84,938) | (10,491) |
| Increase (decrease) in value of acquisition costs payable | 6,084 | 193,708 | (618,512) | 335,486 |
| Legal expense accrual | 500,000 | — | 500,000 | — |
| Depreciation and amortization | 370,674 | 374,965 | 846,820 | 1,095,831 |
| Interest expense | 90,452 | 15,058 | 147,166 | 45,406 |
| Change in fair value of derivatives | — | (45,160) | 11,794 | (36,122) |
| Adjusted EBITDA | $(294,261) | $220,861 | $(3,656,356) | $(2,646,797) |
| Revenue | $5,780,941 | $7,089,855 | $13,798,342 | $17,637,264 |
| Adjusted EBITDA as a % of Revenue | (5)% | 3% | (26)% | (15)% |

### Liquidity and Capital Resources

We had cash and cash equivalents of $3,864,676 as of September 30, 2018 as compared to $3,906,797 as of December 31, 2017, a decrease of $42,121, primarily due to the funding of our operating losses. We have incurred significant net losses and negative cash flow from operations for most periods since our inception, which has resulted in a total accumulated deficit of $52,401,946 at September 30, 2018. To date, we have financed our operations through internally generated revenue from operations and the sale and exercise of our equity securities.

Cash used for operating activities was $4,157,786 during the nine months ended September 30, 2018 and is the result of expenses exceeding our revenues. Cash used for investing activities was $638,655 during the nine months ended September 30, 2018 due to internal costs related to the development of our proprietary software and purchases of computer and office equipment. Cash provided by financing activities during the nine months ended September 30, 2018 was $4,754,320, which consisted primarily of net proceeds received from our public securities offerings during the quarter ended September 30, 2018.

On July 26, 2018, we completed our merger with TapInfluence. Pursuant to the merger agreement, we will pay TapInfluence stockholders an additional $4,500,000 in the form of cash, common stock or a combination thereof, at our option, in two installments - $1,000,000 six months after the closing date and $3,500,000 twelve months after the closing date of the merger.

On July 30, 2018, we paid $333,333 for the second annual installment due under ZenContent Stock Purchase Agreement. Of this amount $111,111 was paid in cash and $222,222 was paid 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. On July 30, 2019, we will be required to make the third and final annual installment payment of $333,334 in the form of either cash or additional shares of our common stock (determined at our option) as long as at least a minimum of 33% is paid in the form of cash. We are also required to pay contingent performance payments of $90,000 pursuant to the ZenContent Stock Purchase Agreement, as amended, $45,000 of which was due and paid in cash on November 1, 2018, and $45,000 in cash or stock, at our option, due on November 1, 2019.

We have a secured credit facility agreement with Western Alliance Bank, the parent company of Bridge Bank, National Association. Pursuant to this agreement, we may submit requests for funding up to 80% of our eligible accounts receivable up to a maximum credit limit of $5 million. 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. As of September 30, 2018, we had $1,733,420 outstanding under this agreement. Assuming that all of our accounts receivable balance was eligible for funding, we had remaining available credit of $3,266,580 under the agreement as of September 30, 2018.

Additionally, on July 2, 2018 and September 21, 2018, we completed two separate underwritten public offerings for the sale of 3,556,000 and 1,407,333 shares of our common stock at a public offering price of $1.00 and $1.50 per share, respectively. The net proceeds for all shares sold by us in the public offerings were approximately $4.9 million after deducting underwriting discounts and commissions and estimated offering expenses.

With the cash on hand after our 2018 financings and the expected additional revenue potential and operational efficiencies after our merger with TapInfluence in July 2018, along with our available credit line with Western Alliance Bank, we expect to have sufficient cash reserves and financing sources available to cover expenses at least through the third quarter of 2019, although this is dependent, in part, upon a continued upward trend towards profitability from operations. However, we do not currently have enough cash to pay our future obligations relating to our acquisitions of ZenContent and TapInfluence obligations as they become due in January 2019 and July 2019. We intend to rely on our ability to issue shares of our common stock as payment, but if we are limited in our ability to issue shares, cannot raise additional cash through our operations, borrowing on our credit facilities, or through a sale of our equity or equity linked securities to pay for these future obligations, we will need to significantly slow or pause our business activities and reduce expenses until such time as we are able to raise additional capital or perhaps even cease the operation of our business.

We are currently exploring potential financing options that may be available to us. However, we have no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all. If we are unable to obtain additional financing in a timely fashion and on terms acceptable to us, or do not attain profitability through operations, our financial condition and results of operations may be materially adversely affected and we may not be able to continue operations. These and other factors raise substantial doubt about our ability to continue as a going concern for one year from the issuance of the accompanying financial statements. The financial statements accompanying this report do not include any adjustments that might be necessary should we be unable to continue as a going concern.

### Off-Balance Sheet Arrangements

As of September 30, 2018, we do not engage in any activities involving variable interest entities or off-balance sheet arrangements.

### Critical Accounting Policies and Use of Estimates

The preparation of the accompanying consolidated financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the accompanying consolidated financial statements and the accompanying notes. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, tax positions and stock-based compensation. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements.

### Accounts Receivable and Concentration of Credit Risk

Accounts receivable are customer obligations due under normal trade terms. Uncollectibility of accounts receivable is not significant since most customers are bound by contract and are required to fund us for all the costs of an “opportunity” 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, we 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. We perform credit evaluations of our customers but generally do not require collateral to support accounts receivable. We determine the collectibility of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. We have a reserve of $317,190 for doubtful accounts as of September 30, 2018. We believe that this estimate is reasonable, but there can be no assurance that the estimate will not change as a result of a change in economic conditions or business conditions within the industry, the individual customers or our Company. Any adjustments to this account are reflected in the consolidated statements of operations as a general and administrative expense. Bad debt expense was less than 1% of revenue for the three and nine months ended September 30, 2018 and 2017.

### Software Development Costs and Acquired Intangible Software

In accordance with Accounting Standards Codification (“ASC”) 350-40, *Internal Use Software,* we capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our platforms. Software development activities generally consist of three stages (i) the research and planning stage, (ii) the application and development stage, and (iii) the post-implementation stage. Costs incurred in the 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. As a result, we have capitalized $2,048,278 to software development costs in the consolidated balance sheet as of September 30, 2018. We also acquired additional proprietary software platforms valued at $530,000 during our acquisitions of Ebyline and ZenContent. These costs are reflected as intangible assets in the consolidated balance sheet as of September 30, 2018. We do not transfer ownership of our software to third parties. 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 under depreciation and amortization expense in the consolidated statements of operations.

### Revenue Recognition

We derive our revenue from providing content services or managing advertising campaigns for its customers, as well as from making our platforms available to allow customers the ability to purchase content directly from our 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.

We maintain 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 us to manage their advertising campaigns or custom content requests may prepay for services or request credit terms. Payment terms are typically 30 days from the invoice date. The agreement typically provides for a cancellation fee if the agreement is canceled by the customer prior to completion of services. Billings in advance of completed services are recorded as a contract liability until earned. We assess collectibility based on a number of factors, including the creditworthiness of the customer and payment and transaction history. The allocation of the transaction price to the performance obligations in the contract is based on a cost plus methodology.

For Managed Services, we enter into an agreement to provide services that may include multiple distinct performance obligations in the form of: (i) an integrated marketing campaign to provide influencer marketing services, which may include the provision of blogs, tweets, photos or videos shared through social network offerings and content promotion, such as click-through advertisements appearing in websites and social media channels; and (ii) custom content items, such as a research or news article, informational material or videos. Marketers typically purchase influencer marketing services for the purpose of providing public awareness or advertising buzz regarding the marketer's brand and they purchase custom content for internal and external use. 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. We view our obligation to deliver influencer marketing services, including management services, as a single performance obligation that is satisfied over time as the customer receives the benefits from the services. Revenue is recognized using an input method of costs incurred compared to total expected costs to measure the progress towards satisfying the overall performance obligation of the marketing campaign. The delivery of custom content represents a distinct performance obligation that is satisfied over time as we have no alternative for the custom content and we have an enforceable right to payment for performance completed to date under the contracts. 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 our evaluations, revenue from Managed Services is reported on a gross basis, because we have the primary obligation to fulfill the performance obligations and it creates, reviews and controls the services. We take on the risk of payment to any third-party creators and establish the contract price directly with our customers based on the services requested in the statement of work.

For Marketplace Spend services, 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. We charge the self-service customer the transaction price plus a fee based on the contract. Revenue is recognized when the transaction is completed by the creator and accepted by the marketer. 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 *TapInfluence* technology platforms for an agreed-upon subscription period. Customers license the platforms to manage their own influencer marketing campaigns. Fees for subscription or licensing services are recognized straight-line over the term of the service.

Other 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.

We do 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.

Changes in how we control and manage our platforms, our contractual terms, our business practices, or other changes in accounting standards or interpretations, may change the reporting of our revenue. Effective January 1, 2018, we became subject to new guidelines for disclosing and accounting for our revenue from contracts with customers. See Note 8 under Part I, Item 1 of this Quarterly Report for further details on the Company's adoption and disclosures related to ASC 606.

### Stock-Based Compensation

Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes pricing model. Options typically vest ratably over four years with one-fourth of options vesting one year from the date of grant and the remaining options vesting monthly, in equal increments over the remaining three-year period and generally have five or ten-year contract lives. We estimate the fair value of our common stock using the closing stock price of our common stock on the date of the grant. We estimate the volatility of our common stock at the date of grant based on the volatility of comparable peer companies that are publicly traded and have had a longer trading history than us. We determine the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. We use the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We estimate forfeitures when recognizing compensation expense and this estimate of forfeitures is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and a revised amount of unamortized compensation expense to be recognized in future periods.

The following table shows the number of options granted under our 2011 Equity Incentive Plans and the assumptions used to determine the fair value of those options during the year ended December 31, 2017 and the nine months ended September 30, 2018:

| Period Ended | Total Options Granted | Weighted Average Exercise Price | Weighted Average Expected Term | Weighted Average Volatility | Weighted Average Risk Free Interest Rate | Weighted Average Grant Date Fair Value |
| --- | ---: | ---: | --- | ---: | ---: | ---: |
| December 31, 2017 | 141,246 | $3.49 | 6.0 years | 50.16% | 2.06% | $1.76 |
| September 30, 2018 | 98,359 | $1.71 | 6.0 years | 63.40% | 2.77% | $0.96 |

There were outstanding options to purchase 1,066,049 shares with a weighted average exercise price of $5.59 per share, of which options to purchase 788,036 shares were exercisable with a weighted average exercise price of $6.24 per share as of September 30, 2018. 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.

### Recent Accounting Pronouncements

See “Note 1. Company and Summary of Significant Accounting Policies,” under Item 1 of this Quarterly Report for information on additional recent pronouncements.

## Controls and procedures

As filed, 5,145 characters.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, controls and procedures could be circumvented by the individual acts of some persons, by collusion or two or more people or by management override of the control. Misstatements due to error or fraud may occur and not be detected on a timely basis.

### Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, an evaluation was performed under the supervision and with the participation of our management including our principal executive officer and principal financial officer to determine the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2018. Based on that evaluation our principal executive and principal financial officers concluded that our disclosure controls and procedures were not effective as of September 30, 2018 due to a previously disclosed material weakness in internal control over financial reporting as discussed below. This material weakness was identified and discussed in “Part II - Item 9A - Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2017.

We identified the following material weakness in the operation of our internal control over financial reporting: we did not maintain effective controls concerning our presentation of revenue related to certain aspects of our statement of operations. Specifically, we determined that for certain historical periods, revenue from Content Workflow services (also referred to as Marketplace Spend and Legacy Workflow services) should have been reported on a net transaction basis where the cost of the Content Workflow revenues should be netted against the revenue generated from the transactions. In addition, we determined that cost of revenue related to our Managed Services only included the direct cost of the content that was being purchased by our customers, and did not appropriately include the cost of our internal personnel responsible for fulfilling these services. We historically considered and reported the cost of our campaign fulfillment personnel as part of our sales and marketing expenses.

These errors were subsequently identified and corrected, and resulted in a restatement of the (i) consolidated statements of operations for the years ended December 31, 2015 and 2016 and (ii) consolidated statements of operations for each quarter within the years ended December 31, 2015 and 2016, and the first three quarters for the year ended December 31, 2017. The restated periods were included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The errors had no impact on our 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.

To remediate the material weakness described above, we have implemented additional controls including the engagement of independent third-party technical accounting experts to assist management with the adoption of new accounting pronouncements, the review and evaluation of significant contracts, and the related financial reporting. We are continuing to evaluate our processes and controls after giving effect to the additional controls. Further processes and controls may be added. We believe that these measures will remediate the material weakness identified and strengthen the Company's internal control over financial reporting.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 12,461 characters.

*In addition to the information set forth under Item 1A of Part I to our Annual Report on Form 10-K for the year ended December 31, 2017, the information set forth at the beginning of Management's Discussion and Analysis entitled "Special Note Regarding Forward-Looking Information," and updates noted below, you should consider that there are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially and adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment. These risk factors may not identify all risks that we face and our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.*

***We have a history of net losses, expect future losses and cannot assure you that we will achieve profitability.***

We have incurred significant net losses and negative cash flow from operations for most periods since our inception, which has resulted in a total accumulated deficit of $52,401,946 as of September 30, 2018. For the nine months ended September 30, 2018, we had a net loss of $5,025,704, including a $4,890,651 loss from operations and we expect to incur a net loss for the fiscal year 2018.

We have seen a year-over-year decrease in revenue in the three quarters of 2018 and believe revenue related to our Managed Services in the fourth quarter of 2018 will also reflect a decrease year-over-year. We have not achieved profitability and cannot be certain that we will be able to realize sufficient revenue to achieve profitability. Therefore, we may need to develop a plan to raise additional capital or make further reductions in our operating expenses in order to achieve profitability.

***We have raised and will need to raise additional capital to meet our business requirements and purchase obligations in the future and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests.***

We have incurred losses since inception and expect to continue to incur losses until we are able to significantly grow our revenues. Our cash balance as of September 30, 2018 was $3,864,676. On July 2, 2018 and September 21, 2018, we completed two separate underwritten public offerings for the sale of 3,556,000 and 1,407,333 shares of our common stock at a public offering price of $1.00 and $1.50 per share, respectively. The net proceeds for all shares sold by us in the public offerings were approximately $5.0 million after deducting underwriting discounts and commissions and estimated offering expenses. However, we expect additional financing transactions will be necessary to meet our business requirements and purchase obligations.

We have seen a year-over-year decrease in revenue in the first three quarters of 2018 and believe revenue from Managed Services will also decrease year-over-year in the fourth quarter of 2018 due to the lower bookings received in the fourth quarter of 2017 through the third quarter of 2018. Our revenue results from numerous individual one-time orders, which we cannot predict with reasonable certainty. If our 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, we will need additional financing to maintain and expand our business. Such financing may not be available on favorable terms, if at all. Any additional capital raised through the sale of equity or equity linked securities may dilute current stockholders’ ownership percentages and could also result in a decrease in the market value of our equity securities. The terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding.

If we are unable to obtain such additional financing on a timely basis or generate sufficient revenues from operations, we may have to curtail our activities and growth plans, reduce expenses, and/or sell assets, perhaps on unfavorable terms, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately we could be forced to discontinue our operations and liquidate, in which event it is unlikely that stockholders would receive any distribution on their shares.

In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may be required to bear the costs even if we are unable to successfully complete any such capital financing. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible promissory notes and warrants, which may adversely impact our financial results.

***We will need to raise additional capital to finance obligations relating to recent acquisitions if we are not able to obtain stockholder approval to satisfy such obligations by payment in shares of common stock.***

We have future purchase obligations related to our acquisitions of ZenContent in July 2016 and TapInfluence in July 2018. We are obligated to make certain deferred payments of the respective purchase prices of those acquisitions, which may be made in common stock at our election. We do not have enough cash to cover these current obligations and intend to rely on our ability to issue shares of our common stock as payment, our ability to raise additional capital through the sale of equity or equity linked securities, or our ability to utilize or secure other debt financing to pay for our current obligations. The issuance of a substantial number of shares of our common stock to the former stockholders of TapInfluence or ZenContent or the perception that such issuances may occur could cause our stock price to decline, make it more difficult for us to raise funds through future offerings of our common stock or acquire other businesses using our common stock as consideration. In addition, such issuance would dilute your percentage of ownership of our common stock.

Additionally, in order to finance these purchase obligations with issuances of our common stock, we are seeking stockholder approval under Nasdaq Marketplace Rules. However, we may not be successful in obtaining such stockholder approval, in which case we may need to seek alternative sources of financing.

***We have been named as a defendant in securities class action and shareholder derivative lawsuits. This litigation, and any other similar or related claims or investigations, could result in substantial damages and cost and may divert management’s time and attention from our business.***

Soon after the announcement of a restatement of our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, we and certain of our officers and directors were named as parties in lawsuits relating to the restatement, which are ongoing.

A securities class action lawsuit, *Julian Perez, individually, and on behalf of all others similarly situated v. IZEA, Inc., et al*., case number 2:18-cv-02784-SVW-GJS was instituted April 4, 2018 in the U.S. District Court for the Central District of California against us and certain of our executive officers on behalf of certain purchasers of our common stock. The plaintiffs seek to recover damages for investors under federal securities laws.

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. We believe that the plaintiff’s allegations are without merit and intend to vigorously defend against the claims.

Additionally, 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.

These lawsuits, and any other similar or related claims or investigations, could result in the diversion of management’s time and attention away from business operations, which could harm our business and also harm our relationships with existing customers, vendors and business partners. The lawsuit may also materially damage our reputation and the value of our brand. Our legal expenses incurred in defending the lawsuit, and any other similar or related matters, could be significant, and a ruling against us, or any settlement, could have a material adverse effect on us.

There can be no assurance that any litigation to which we are, or in the future may become, a party will be resolved in our favor. These lawsuits and any other lawsuits that we may become party to are subject to inherent uncertainties, and the costs to us of defending litigation matters will depend upon many unknown factors. Any claim that is successfully decided against us may require us to pay substantial damages, including punitive damages, and other related fees. We may also determine that a settlement of one or more of the actions is in the best interest of the company and its shareholders.

Regardless of whether lawsuits are resolved in our favor or if we are the plaintiff or the defendant in the litigation, any lawsuits to which we are or may become a party will likely be expensive and time consuming to defend or resolve.

***Exercise of stock options, warrants and other securities will dilute your percentage of ownership and could cause our stock price to fall.***

As of November 12, 2018, we had 12,073,031 shares of common stock issued, outstanding stock options to purchase 1,017,336 shares of our common stock at an average exercise price of $5.51 per share, and outstanding warrants to purchase 414,036 shares of our common stock at an average exercise price of $8.57 per share.

We also have reserved shares to issue stock options, restricted stock or other awards to purchase or receive up to 298,927 shares of common stock under our May 2011 Equity Incentive Plan and 22,405 shares of common stock under our 2014 Employee Stock Purchase Plan. In the future, we may grant additional stock options, restricted stock units, warrants and convertible securities, as well as issue additional shares of common stock pursuant to our obligations under the stock purchase agreements in connection with our ZenContent and TapInfluence acquisitions. The exercise, conversion or exchange by holders of stock options, restricted stock units, warrants or convertible securities for shares of common stock, and the issuance of new shares of common stock for past acquisition obligations, shares of common stock issued as consideration in future acquisitions, and shares of common stock issued in future equity offerings will dilute the percentage ownership of our stockholders. Sales of a substantial number of shares of our common stock could cause the price of our common stock to fall and could impair our ability to raise capital by selling additional securities.

Filed Nov 14, 2018.
Source: SEC EDGAR, the filing index for accession 0001495231-18-000118. Last ingested by Listed: Nov 2, 2026, 16:20 ET. No prices; not investment advice.