# IZEA Worldwide, Inc.: Form 10-Q for the period ended Jun 30, 2019

- Company: [IZEA Worldwide, Inc.](/companies/izea.md) (CIK 1495231)
- Form: 10-Q
- Filed: 2019-08-13
- Accepted by EDGAR: Aug 13, 2019, 16:32 ET
- Period: 2019-06-30
- Accession: 0001495231-19-000115
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1495231/000149523119000115/izea19063010-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1495231/000149523119000115/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $3.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $8.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-04-01 to 2019-06-30 | $1.8m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2019-01-01 to 2019-06-30 | $3.9m | us-gaap:CostOfRevenue |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | −$1.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-01-01 to 2019-06-30 | −$3.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $86.7k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-01-01 to 2019-06-30 | $215.2k | us-gaap:InterestExpense |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | −$2.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | −$3.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | −$0.09 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | −$0.22 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2019-01-01 to 2019-06-30 | −$161.1k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $15.5k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-06-30 | $9.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $14.2m | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $27.4m | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $13.4m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2019-06-30 | $13.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 66,980 characters.

### Cautionary Note Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. The statements, which are not historical facts contained in this report, including those contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the notes to our unaudited consolidated financial statements, particularly those that utilize terminology such as “may,” “will,” “would,” “could,” “should,” “expects,” “anticipates,” “estimates,” “believes,” “intends,” “likely,” “projects,” “plans,” “pursue,” “strategy” or “future,” or the negative of these words or other words or expressions of similar meaning, are forward-looking statements. Such statements are based on currently available operating, financial and competitive information, and are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict and many of which are outside of our control. Future events and our actual results and financial condition may differ materially from those reflected in these forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause these differences include, but are not limited to, the following:

- our ability to raise additional funding;
- our ability to issue shares to settle future acquisition costs payable;
- customer cancellations;
- our ability to maintain and grow our business;
- variability of operating results;
- our ability to establish effective disclosure controls and procedures and internal control over financial reporting;
- our ability to regain compliance with the minimum bid price 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;
- the successful integration of acquired companies, technologies and assets into our portfolio of software 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 section of this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2018.

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, or the engagement of creators to create stand-alone custom content for the marketers’ own use and distribution. Marketers receive influential consumer content and engaging, shareable stories that drive awareness.

Our primary technology 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 and to handle their content workflow. After the acquisition, we began to utilize the creators in the *Ebyline* platform to produce professional custom content for brands, in addition to the self-service functionality used by newspapers. 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

We 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 Revenue, Cost of Revenue, Sales and Marketing expenses, General and Administrative expenses, Depreciation and Amortization, and Other Income (Expense), net.

### Revenue

We generate revenue from five primary sources: (1) revenue from our managed services when a marketer (typically a brand, agency or partner) pays us to provide custom content, influencer marketing, amplification or other consulting services (“Managed Services”); (2) revenue from fees charged to self-service customers on their marketplace spend within our *IZEAx* and *TapInfluence* platforms (“Marketplace Spend Fees”); (3) revenue from fees charged to access the *IZEAx, Ebyline,* and *TapInfluence* platforms (“License Fees”); (4) revenue from transactions generated by the self-service use of our *Ebyline* platform for professional custom content (“Legacy Workflow Fees”); and (5) revenue derived from other fees such as inactivity fees, early cash-out fees, and plan fees charged to users of our platforms (“Other”).

As discussed in more detail within “Critical Accounting Policies and Use of Estimates” and in “Note 1. Company and Summary of Significant Accounting Policies,” of this Quarterly Report, revenue from Marketplace Spend Fees and Legacy Workflow Fees is reported on a net basis and revenue from all other sources, including Managed Services, License Fees and Other are reported on a gross basis. We further categorize these sources into two primary operating segments, Managed Services and SaaS Services (which includes revenue from Marketplace Spend Fees, License Fees and Legacy Workflow Fees.)

### Cost of Revenue

Our cost of revenue consists of direct costs paid to our third-party creators who provide the custom content, influencer marketing or amplification services for our Managed Service customers where we report revenue on a gross basis. It also includes internal costs related to our campaign fulfillment and SaaS support departments. These costs include salaries, bonuses, commissions, stock-based compensation, employee benefit costs, and miscellaneous departmental costs related to the personnel who are primarily responsible for providing support to our customers and ultimately fulfillment of our obligations under our contracts with customers. Where appropriate, we capitalize costs that were incurred with software that is developed or acquired for our revenue supporting platforms and amortize these costs over the estimated useful lives of those platforms. This amortization is separately stated in Depreciation and amortization on our consolidated statements of operations.

### Sales and Marketing

Our sales and marketing expense consists 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 related 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 current period gains and losses on costs previously accrued related to our acquisitions.

### 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 the associated assets.

### Other (Expense) Income

Interest expense is mainly related to the imputed interest on our acquisition costs payable and interest when we use our secured credit facility.

Other income consists primarily of interest income for interest earned on our cash and cash equivalent balances 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 June 30, 2019 and 2018

The following table sets forth a summary of our consolidated statements of operations and the change between the periods:

|  | Three Months Ended June 30, 2019 | 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $3,923,864 | $4,120,960 | $(197,096) | (5)% |
| Costs and expenses: |  |  |  |  |
| Cost of revenue (exclusive of amortization) | 1,817,659 | 1,930,298 | (112,639) | (6)% |
| Sales and marketing | 1,362,242 | 1,735,596 | (373,354) | (22)% |
| General and administrative | 2,232,305 | 1,970,610 | 261,695 | 13% |
| Depreciation and amortization | 448,105 | 210,691 | 237,414 | 113% |
| Total costs and expenses | 5,860,311 | 5,847,195 | 13,116 | —% |
| Loss from operations | (1,936,447) | (1,726,235) | (210,212) | 12% |
| Other (expense) income: |  |  |  |  |
| Interest expense, net | (86,737) | (35,403) | (51,334) | 145% |
| Change in fair value of derivatives, net | — | 113,801 | (113,801) | (100)% |
| Other income, net | 30,798 | 82 | 30,716 | 37,459% |
| Total other (expense) income, net | (55,939) | 78,480 | (134,419) | (171)% |
| Net loss | $(1,992,386) | $(1,647,755) | $(344,631) | 21% |

### Revenue

The following table illustrates our revenue by type, the percentage of total revenue by type, and the change between the periods:

|  | Three Months Ended June 30, 2019 |  | 2018 |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Managed Services Revenue | $2,991,571 | 76% | $4,004,850 | 97% | $(1,013,279) | (25)% |
| Legacy Workflow Fees | 44,291 | 1% | 55,880 | 1% | (11,589) | (21)% |
| Marketplace Spend Fees | 314,638 | 8% | 6,881 | —% | 307,757 | 4,473% |
| License Fees | 548,494 | 14% | 39,347 | 1% | 509,147 | 1,294% |
| SaaS Services Revenue | 907,423 | 23% | 102,108 | 2% | 805,315 | 789% |
| Other Revenue | 24,870 | 1% | 14,002 | —% | 10,868 | 78% |
| Total Revenue | $3,923,864 | 100% | $4,120,960 | 100% | $(197,096) | (5)% |

Historically, we have invested the majority of our time and resources in our Managed Services business, which provides the majority of our revenue. Our acquisitions of Ebyline and ZenContent allowed us to expand our product offerings to provide custom content in addition to and in combination with our influencer marketing campaigns to expand our Managed Services. Our July 2018 merger with TapInfluence provided a springboard for the SaaS Services segment and an immediate increase of market share in the Marketplace Spend Fees and License Fees on SaaS Services.

*Managed Services* revenue decreased by 25% over the same period in 2018, due to a significant decrease in our front-line sales personnel.

*SaaS Services* revenue is generated by the self-service use of our technology platforms by marketers to manage their own content workflow and influencer marketing campaigns. It consists of fees earned on the marketer’s spend within the *IZEAx, TapInfluence* and *Ebyline* platforms, along with the license and support fees to access the platform services.

- *Legacy Workflow Fees* revenue represents self-service transactions through the *Ebyline* platform for professional custom content workflow. This revenue is declining quarter over quarter due to the ongoing consolidation and cutbacks in the newspaper industry. Revenue from Legacy Workflow Fees transactions decreased to $44,291 for the three months ended June 30, 2019, compared to $55,880 for same period in 2018. With the addition of TapInfluence and its SaaS revenue model and our modifications to *IZEAx* which now allows marketers to purchase custom content, in addition to sponsored posts, we have shifted our focus away from this platform and its content generated primarily for newspapers and traditional publishers, and expect Legacy Workflow Fees revenue to continue to decline going forward.
- *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 influencer marketing campaigns. Revenue from Marketplace Spend Fees increased by $307,757 for the three months ended June 30, 2019 when compared with the same period of 2018, primarily as a result of our merger with TapInfluence. Revenue from Marketplace Spend Fees represents our net margins received on this business.
- *License Fees* revenue are generated primarily 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. License Fees revenue increased during the three months ended June 30, 2019 to $548,494, primarily as a result of the merger with TapInfluence, compared to $39,347 in the same period of the prior year.

*Other* revenue consists of other fees, such as inactivity fees, early cash-out fees, and plan fees charged to users of our platforms. These fees did not have a significant effect on our revenue for the three months ended June 30, 2019 or 2018.

### Cost of Revenue

Cost of revenue for the three months ended June 30, 2019 decreased by $112,639, or approximately 6%, compared to the same period in 2018. Cost of revenue as a percentage of revenue improved from 46.8% in 2018 to 46.3% in 2019, due to an increase of approximately $805,000 in our higher margin revenue from SaaS Services, which is recognized on a net basis.

### Sales and Marketing

Sales and marketing expense for the three months ended June 30, 2019 decreased by $373,354, or approximately 22%, compared to the same period in 2018. Our average number of sales and marketing personnel, excluding support personnel, declined by 29% for the three months ended June 30, 2019 when compared with 2018 which, along with the decrease in variable compensation linked with sales performance, contributed to a reduction of approximately $249,000 in sales and marketing payroll and personnel related expenses.

### General and Administrative

General and administrative expense for the three months ended June 30, 2019 increased by $261,695, or approximately 13%, compared to the same period in 2018. General and administrative expense for the three months ended June 30, 2018 were reduced by a gain associated with the change in fair value of derivatives of $113,801, and by a net gain associated with adjusting acquisition costs payable to fair value of $231,502. Adjusting for these discrete items, general and administrative expenses for the three months ended June 30, 2019 decreased by $96,835, or approximately 4%. General and administrative expenses were impacted most notably by increases in payroll and personnel related costs for our development function of approximately $81,000, an increase in software licensing and hosting fees of approximately $90,000, primarily related to Amazon Web Services (“AWS”) hosting costs and costs to upgrade our financial reporting software, and a decrease in professional services and recruiting spend of approximately $218,000.

We capitalized software development costs of $104,830 during the three months ended June 30, 2019, which was $33,472 higher than in the prior year period. This increase in software development costs was directly attributable to the development of *IZEAx* 3.0, the upgraded platform released in April 2019.

### Depreciation and Amortization

Depreciation and amortization expense for the three months ended June 30, 2019 increased by $237,414, or approximately 113%, compared to the same period in 2018.

Depreciation and amortization expense on property and equipment was $35,946 and $56,828 for the three months ended June 30, 2019 and 2018, respectively. Depreciation expense has declined primarily due to certain assets becoming fully depreciated.

Amortization expense was $412,158 and $153,862 for the three months ended June 30, 2019 and 2018, respectively. Amortization expense related to intangible assets acquired in the Ebyline, ZenContent, and TapInfluence acquisitions was 322,907 and $80,241 for the three months ended June 30, 2019 and 2018, respectively. Amortization expense related to internal use software development costs was $89,251 and $73,622 for the three months ended June 30, 2019 and 2018, respectively.

### Other (Expense) Income

Interest expense increased by $51,334 to $86,737 during the three months ended June 30, 2019 compared to the same period in 2018 due primarily to higher interest rates and higher average amounts outstanding on our credit facility in 2019, and interest incurred related to our acquisition costs payable.

We recorded income of $113,801 resulting from the change in the fair value of restricted stock during the three months ended June 30, 2018.

The $30,716 increase in other income during the three months ended June 30, 2019 when compared to 2018 is primarily attributable to interest income on our invested cash balances.

### Net Loss

Net loss for the three months ended June 30, 2019 was $1,992,386, a $344,631 increase in the net loss of $1,647,755 for the same period in 2018. The increase in net loss was impacted primarily by the factors discussed previously.

### Results of Operations for the Six Months Ended June 30, 2019 and 2018

The following table sets forth a summary of our consolidated statements of operations and the change between the periods:

|  | Six Months Ended June 30, 2019 | 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $8,717,620 | $8,017,401 | $700,219 | 9% |
| Costs and expenses: |  |  |  |  |
| Cost of revenue (exclusive of amortization) | 3,916,950 | 4,093,440 | (176,490) | (4)% |
| Sales and marketing | 2,719,909 | 3,491,122 | (771,213) | (22)% |
| General and administrative | 4,844,359 | 3,585,832 | 1,258,527 | 35% |
| Depreciation and amortization | 884,329 | 476,146 | 408,183 | 86% |
| Total costs and expenses | 12,365,547 | 11,646,540 | 719,007 | 6% |
| Loss from operations | (3,647,927) | (3,629,139) | (18,788) | 1% |
| Other (expense) income: |  |  |  |  |
| Interest expense, net | (215,201) | (56,714) | (158,487) | 279% |
| Change in fair value of derivatives, net | — | (11,794) | 11,794 | (100)% |
| Other income, net | 40,162 | 4,772 | 35,390 | 742% |
| Total other (expense) income, net | (175,039) | (63,736) | (111,303) | 175% |
| Net loss | $(3,822,966) | $(3,692,875) | $(130,091) | 4% |

### Revenue

The following table illustrates our revenue by type, the percentage of total revenue by type, and the change between the periods:

|  | Six Months Ended June 30, 2019 |  | 2018 |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Managed Services Revenue | $6,858,803 | 79% | $7,801,515 | 97% | $(942,712) | (12)% |
| Legacy Workflow Fees | 91,621 | 1% | 116,585 | 1% | (24,964) | (21)% |
| Marketplace Spend Fees | 689,291 | 8% | 9,724 | —% | 679,567 | 6,989% |
| License Fees | 1,039,588 | 12% | 52,611 | 1% | 986,977 | 1,876% |
| SaaS Services Revenue | 1,820,500 | 21% | 178,920 | 2% | 1,641,580 | 917% |
| Other Revenue | 38,317 | —% | 36,966 | —% | 1,351 | 4% |
| Total Revenue | $8,717,620 | 100% | $8,017,401 | 100% | $700,219 | 9% |

Historically, we have invested the majority of our time and resources in our Managed Services business, which provides the majority of our revenue. Our acquisitions of Ebyline and ZenContent allowed us to expand our product offerings to provide custom content in addition to and in combination with our influencer marketing campaigns to expand our Managed Services. Our July 2018 merger with TapInfluence provided a springboard for the SaaS Services segment and an immediate increase of market share in the Marketplace Spend Fees and License Fees on SaaS Services.

Managed Services revenue decreased 12% from the same period in 2018, due to a significant decrease in our front-line sales personnel.

*SaaS Services* revenue is generated by the self-service use of our technology platforms by marketers to manage their own content workflow and influencer marketing campaigns. It consists of fees earned on the marketer’s spend within the *IZEAx, TapInfluence* and *Ebyline* platforms, along with the license and support fees to access the platform services.

- *Legacy Workflow Fees* revenue represents self-service transactions through the *Ebyline* platform for professional custom content workflow. This revenue is declining quarter over quarter due to the ongoing consolidation and cutbacks in the newspaper industry. Revenue from Legacy Workflow Fees transactions decreased to $91,621 for the six months ended June 30, 2019, compared to $116,585 for same period in 2018. With the addition of TapInfluence

and its SaaS revenue model and our modifications to *IZEAx* which now allows marketers to purchase custom content, in addition to sponsored posts, we have shifted our focus away from this platform and its content generated primarily for newspapers and traditional publishers, and expect Legacy Workflow Fees revenue to continue to decline going forward.

- *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 influencer marketing campaigns. We increased our revenue from Marketplace Spend Fees by $679,567 for the six months ended June 30, 2019 when compared with the same period of 2018, primarily as a result of our merger with TapInfluence. Revenue from Marketplace Spend Fees represents our net margins received on this business.
- *License Fees* revenue are generated primarily 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. License Fees revenue increased during the six months ended June 30, 2019 to $1,039,588, primarily as a result of the merger with TapInfluence, compared to $52,611 in the same period of the prior year.

*Other* revenue consists of other fees, such as inactivity fees, early cash-out fees, and plan fees charged to users of our platforms. These fees did not have a significant effect on our revenue for the six months ended June 30, 2019 or 2018.

### Cost of Revenue

Cost of revenue for the six months ended June 30, 2019 decreased by $176,490, or approximately 4%, compared to the same period in 2018. Cost of revenue as a percentage of revenue improved from 51% in 2018 to 45% in 2019, due to an increase of approximately $1,642,000 in our higher margin revenue from SaaS Services, which is recognized on a net basis.

### Sales and Marketing

Sales and marketing expense for the six months ended June 30, 2019 decreased by $771,213, or approximately 22%, compared to the same period in 2018. Our average number of sales and marketing personnel, excluding support personnel, declined by 28% for the six months ended June 30, 2019 when compared with 2018 which, along with the decrease in variable compensation linked with sales performance, contributed to a reduction of approximately $528,000 in sales and marketing payroll and personnel related expenses.

### General and Administrative

General and administrative expense for the six months ended June 30, 2019 increased by $1,258,527, or approximately 35%, compared to the same period in 2018. General and administrative expense for the six months ended June 30, 2019 included a loss on the settlement of acquisition costs payable of $191,439 associated with our January 2019 payment related to the acquisition of TapInfluence. General and administrative expense for the six months ended June 30, 2018 was reduced by a gain of $624,596 on the adjustment of acquisition costs to fair value. Adjusting for these discrete items, general and administrative expense for the six months ended June 30, 2019 increased by $442,492, or approximately 12% compared to the same period in 2018. General and administrative expenses were impacted most notably by increased payroll and personnel related costs for our administrative and development functions of approximately $214,000, decreased professional services and recruiting spend of approximately $86,000, and an increase in software licensing and hosting fees of approximately $184,000, primarily related to AWS hosting costs and costs to upgrade our financial reporting software.

We capitalized software development costs of $451,619 during the six months ended June 30, 2019, which was $193,965 higher than in the prior year period. This increase in software development costs was directly attributable to the development of *IZEAx* 3.0, the upgraded platform released in April 2019.

### Depreciation and Amortization

Depreciation and amortization expense for the six months ended June 30, 2019 increased by $408,183, or approximately 86%, compared to the same period in 2018.

Depreciation and amortization expense on property and equipment was $74,423 and $112,866 for the six months ended June 30, 2019 and 2018, respectively. Depreciation expense has declined primarily due to certain assets becoming fully depreciated.

Amortization expense was $809,907 and $363,280 for the six months ended June 30, 2019 and 2018, respectively. Amortization expense related to intangible assets acquired in the Ebyline, ZenContent, and TapInfluence acquisitions was $645,814 and $216,036 for the six months ended June 30, 2019 and 2018, respectively. Amortization expense related to internal use software development costs was $164,093 and $147,244 for the six months ended June 30, 2019 and 2018, respectively.

### Other (Expense) Income

Interest expense increased by $158,487 to $215,201 during the six months ended June 30, 2019 compared to the same period in 2018 due primarily to higher interest rates and higher average amounts outstanding on our credit facility in 2019, and interest incurred related to our acquisition costs payable.

We recorded $11,794 resulting from the change in the fair value of restricted stock for the six months ended June 30, 2018 with no comparable amount for the same period in 2019.

The $35,390 increase in other income during the six months ended June 30, 2019 when compared to the same period in 2018 results from a combination of net currency exchange gains related to our Canadian transactions, and interest earned on our invested cash subsequent to our May 2019 secondary offering.

### Net Loss

Net loss for the six months ended June 30, 2019 was $3,822,966, a $130,091 increase in the net loss of $3,692,875 for the same period in 2018. The increase in net loss was impacted primarily by the factors discussed previously.

### Non-GAAP Financial Measures

Below are financial measures of our gross billings 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.

#### Gross Billings by Segment

Company management evaluates its operations and makes strategic decisions based, in part, on gross billings from its two primary 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 billed to our customers for their self-service purchase of goods and services on our platforms. Gross billings are the amounts of our reported revenue plus the cost of payments we made to third-party creators providing the content or sponsorship services, which are netted against revenue for generally accepted accounting principals in the United States (“GAAP”) reporting purposes.

Gross billings for Managed Services is the same as revenue reported in our consolidated statements of operations on a GAAP basis, as there is no requirement to net the costs of revenue against the revenue. Gross billings for Marketplace Spend Fees (which are included in SaaS Services) differ from revenue reported in our consolidated statements of operations on a GAAP basis, 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 types equals the revenue reported in our consolidated statements of operations.

We consider gross billings to be an important indicator of our potential performance as it measures the total dollar volume of transactions generated through our marketplaces. Tracking gross billings allows us to monitor the percentage of gross billings that we are able to retain after payments to our creators. Additionally, tracking gross billings is critical as it pertains to our credit risk and cash flow. We invoice our customers based on our services performed or based on their self-service transactions plus our fee. Then we remit the agreed-upon transaction price to the creators. If we do not collect the money from our customers prior to the time of payment to our creators, we could experience large swings in our cash flows. Finally, gross billings allows us to evaluate our transaction totals on an equal basis in order for us to see our contribution margins by revenue stream so that we can better understand where we should be allocating our resources.

The following table sets forth our gross billings by revenue type, the percentage of total gross billings by type, and the change between the periods:

|  | Three Months Ended June 30, 2019 |  | 2018 |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Managed Services Revenue | $2,991,571 | 45% | $4,004,850 | 82% | $(1,013,279) | (25)% |
| Legacy Workflow Fees | 606,756 | 9% | 790,957 | 16% | (184,201) | (23)% |
| Marketplace Spend Fees | 2,453,625 | 37% | 52,388 | 1% | 2,401,237 | 4,584% |
| License Fees | 548,494 | 8% | 39,347 | 1% | 509,147 | 1,294% |
| SaaS Services Gross Billings | 3,608,875 | 54% | 882,692 | 18% | 2,726,183 | 309% |
| Other Revenue | 24,870 | —% | 14,002 | —% | 10,868 | 78% |
| Total Gross Billings | $6,625,316 | 100% | $4,901,544 | 100% | $1,723,772 | 35% |

|  | Six Months Ended June 30, 2019 |  | 2018 |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Managed Services Revenue | $6,858,803 | 49% | $7,801,515 | 81% | $(942,712) | (12)% |
| Legacy Workflow Fees | 1,261,681 | 9% | 1,662,769 | 17% | (401,088) | (24)% |
| Marketplace Spend Fees | 5,256,146 | 36% | 58,043 | 1% | 5,198,103 | 8,956% |
| License Fees | 1,039,588 | 7% | 52,611 | 1% | 986,977 | 1,876% |
| SaaS Services Gross Billings | 7,557,415 | 51% | 1,773,423 | 17% | 5,783,992 | 326% |
| Other Revenue | 38,317 | —% | 36,966 | —% | 1,351 | 4% |
| Total Gross Billings | $14,454,535 | 100% | $9,611,904 | 100% | $4,842,631 | 50% |

Gross billings for our SaaS Services segment were $3,608,875 for the three months ended June 30, 2019, an increase of $2,726,183 compared to the same period in 2018. For the six months ended June 30, 2019, our gross billings for the SaaS Services segment were $7,557,415, an increase of $5,783,992 compared to the same period in 2018. These increases were primarily due to the addition of TapInfluence in July 2018. We expect our merger with TapInfluence to have a continuing significant positive impact on our future gross billings in our SaaS Services segment as we build on the significant marketer base obtained from the merger, offset by the phasing out of our Legacy Workflow activity.

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

|  | Three Months Ended June 30, 2019 | 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $3,923,864 | $4,120,960 | $(197,096) | (5)% |
| Plus payments made to third-party creators (1) | 2,701,452 | 780,584 | 1,920,868 | 246% |
| Gross billings | $6,625,316 | $4,901,544 | $1,723,772 | 35% |

(1) Payments made to third-party creators for the Legacy Workflow and Marketplace Spend components of our revenue reported on a net basis for GAAP.

|  | Six Months Ended June 30, 2019 | 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $8,717,620 | $8,017,401 | $700,219 | 9% |
| Plus payments made to third-party creators (1) | 5,736,915 | 1,594,503 | 4,142,412 | 260% |
| Gross billings | $14,454,535 | $9,611,904 | $4,842,631 | 50% |

(1) Payments made to third-party creators for the Legacy Workflow and Marketplace Spend components of our revenue reported on a net basis for GAAP.

#### Adjusted EBITDA

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 unusual or non-cash income and expense items such as gains or losses on settlement of liabilities and exchanges, and changes in the fair value of derivatives, if applicable.

We use Adjusted EBITDA as a measure of operating performance, for planning purposes, to allocate resources to enhance the financial performance of our business, and in communications with our Board of Directors regarding our financial performance. We believe that Adjusted EBITDA also provides useful information to investors as it excludes transactions not related to our core cash-generating operating business activities, and it provides consistency and facilitates period-to-period comparisons. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash-generating operations.

All companies do not calculate Adjusted EBITDA in the same manner, and Adjusted EBITDA as presented by us may not be comparable to Adjusted EBITDA presented by other companies, which limits its usefulness as a comparative measure. Moreover, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for an analysis of our results of operations as under GAAP. These limitations are that Adjusted EBITDA:

- does not include stock-based compensation expense, which is a non-cash expense, but has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;
- does not include stock issued for payment of services, which is a non-cash expense, but has been, and is expected to be for the foreseeable future, an important means for us to compensate our directors, vendors and other parties who provide us with services;
- does not include changes in acquisition cost estimates as a result of the allocation of acquisition costs payable to compensation expense which may be a significant recurring expense for our business if we continue to make business acquisitions;
- does not include gains or losses on the settlement of acquisition costs payable or liabilities when the stock value, as agreed upon in the agreement, varies from the market price of our stock on the settlement date. This is a non-cash expense, but will continue to be a recurring expense for our business on certain business contracts where the amounts can vary;
- does not include unusual or expected non-recurring items such as large litigation reserves;
- does not include depreciation and intangible assets amortization expense, impairment charges and gains or losses on disposal of equipment, which is not always a current period cash expense, but the assets being depreciated and amortized may have to be replaced in the future; and
- does not include 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, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the operation and growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP financial measures as supplements. In evaluating these non-GAAP financial measures, you should be aware that in the future, we may incur expenses similar to those for which adjustments are made in calculating Adjusted EBITDA. Our presentation of these non-GAAP financial measures should also not be construed to infer that our future results will be unaffected by unusual or non-recurring items.

The following table sets forth a reconciliation from the GAAP measurement of net loss to our non-GAAP financial measure of Adjusted EBITDA for the three and six months ended June 30, 2019 and 2018:

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net loss | $(1,992,386) | $(1,647,755) | $(3,822,966) | $(3,692,875) |
| Non-cash stock-based compensation | 157,328 | 203,351 | 318,205 | 349,632 |
| Non-cash stock issued for payment of services | 37,497 | 33,819 | 74,995 | 62,490 |
| Change in fair value of derivatives | — | (113,801) | — | 11,794 |
| Loss on settlement of acquisition costs payable | — | — | 191,439 | — |
| Increase (decrease) in value of acquisition costs payable | 2,669 | (231,502) | 5,333 | (624,596) |
| Interest expense | 86,737 | 35,403 | 215,201 | 56,714 |
| Depreciation and amortization | 448,105 | 210,691 | 884,329 | 476,146 |
| Other non-cash items | (7,580) | (2,253) | (8,095) | (1,400) |
| Adjusted EBITDA | $(1,267,630) | $(1,512,047) | $(2,141,559) | $(3,362,095) |
| Revenue | $3,923,864 | $4,120,960 | $8,717,620 | $8,017,401 |
| Adjusted EBITDA as a % of Revenue | (32)% | (37)% | (25)% | (42)% |

36

### Liquidity and Capital Resources

We had cash and cash equivalents of $9,325,192 as of June 30, 2019 as compared to $1,968,403 as of December 31, 2018, an increase of $7,356,789 primarily due to net proceeds received from our public securities offering in May 2019. 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 $56,917,615 as of June 30, 2019. To date, we have financed our operations through internally generated revenue from operations, the sale of our equity securities and borrowings under our secured credit facility.

Cash used for operating activities was $161,146 during the six months ended June 30, 2019 and is the net result of our net loss not being fully offset by the net conversion of working capital into cash. Net cash used for investing activities was $464,261 during the six months ended June 30, 2019 primarily due to the payment of $451,619 related to the development of our proprietary software and purchases of $15,535 for updated computer equipment. Cash provided by financing activities during the six months ended June 30, 2019 was $7,982,196 which consisted primarily of net proceeds received from our public securities offering in May 2019, offset by net repayments on our secured credit facility of $1,246,343.

#### Secured Credit Facility

We have a secured credit facility agreement with Western Alliance Bank, the parent company of Bridge Bank, National Association. Pursuant to this agreement, we may submit requests for funding up to 80% of our eligible accounts receivable up to a maximum credit limit of $5 million. Effective August 30, 2018, as a result of IZEA’s merger with TapInfluence, we entered into a Business Financing Modification Agreement and Consent with Western Alliance Bank to add TapInfluence as an additional borrower on the credit facility. As of June 30, 2019,we had $279,945 outstanding under this agreement. Assuming that all of our accounts receivable balance was eligible for funding, we had remaining available credit of $3,068,388 under the agreement as of June 30, 2019.

#### Acquisition Obligations

#### ZenContent, Inc.

On July 31, 2016, we entered into a Stock Purchase Agreement (the “ZenContent Stock Purchase Agreement”) with ZenContent, Inc. (“ZenContent”), pursuant to which we purchased all of the outstanding shares of capital stock of ZenContent.

On July 31, 2019, we made the third and final annual installment payment under the ZenContent Stock Purchase Agreement of 447,489 shares of our common stock valued at $222,223 or $0.4966 per share, using a thirty (30) trading day volume-weighted average closing price (the “30-day VWAP”) as recorded by the Nasdaq Capital Market prior to the issuance date. We recognized a gain of $41,258 on the settlement of this acquisition cost payable as a result of the difference between the actual closing market price of the common stock of $0.4044 on the settlement date and the 30-day VWAP.

We are also required to pay $45,000 in cash or stock, at the Company’s election, on or before November 1, 2019 in settlement of the final contingent performance payment.

#### TapInfluence

On July 26, 2018, we completed our merger with TapInfluence. Pursuant to the Agreement and Plan of Merger (the Merger Agreement”), we were required to pay the former TapInfluence stockholders an additional $4,500,000, less any final working capital adjustments, in the form of cash, common stock or a combination thereof, at our option, in two installments.

On January 26, 2019, we paid the first installment of $884,583 ($1,000,000 less the final working capital adjustment of $115,416) using 660,136 shares of our common stock valued at $1.34 per share, using the 30-day VWAP as reported by the Nasdaq Capital Market prior to the issuance date. We recorded a $191,439 loss on the settlement of this acquisition cost payable as a result of the difference between the actual closing market price of the common stock of $1.63 on the settlement date and the 30-day VWAP of $1.34 required by the Merger Agreement.

On July 26, 2019, we paid the second and final installment through the issuance to the former shareholders of TapInfluence of 6,908,251 shares of its common stock valued at $3,500,000, or $0.50664 per share, using the 30-day VWAP as required by the Merger Agreement. The Company recognized a gain of $752,589 on the settlement of this acquisition cost payable as a result of the difference between the actual closing market price of the common stock of $0.3977 on the settlement date and the 30-day VWAP.

### Off-Balance Sheet Arrangements

As of June 30, 2019, we did not engage in any activities involving variable interest entities or off-balance sheet arrangements.

### Critical Accounting Policies and Use of Estimates

We prepare our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain of our accounting policies require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments will be subject to an inherent degree of uncertainty. Our judgments are based upon the historical experience of the Company, terms of existing contracts, observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. For a summary of our significant accounting policies, please refer to Note 1. Company and Summary of Significant Accounting Policies included in this Quarterly Report. We consider accounting estimates to be critical accounting policies when:

- The estimates involve matters that are highly uncertain at the time the accounting estimate is made; and
- different estimates or changes to estimates could have a material impact on the reported financial position, changes in financial position, or results of operations.

When more than one accounting principle, or method of its application, is generally accepted, we select the principle or method that we consider to be the most appropriate when given the specific circumstances. Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties. Due to the inherent uncertainty involving estimates, actual results reported in the future may differ from our estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements.

### Accounts Receivable and Concentration of Credit Risk

Accounts receivable are customer obligations due under normal trade terms. We consider an account to be delinquent when the customer has not paid its balance due by the associated due date. Uncollectibility of accounts receivable is not significant since most customers are bound by contract and are required to fund us for all the costs of an “opportunity,” defined as an order created by a marketer for a creator to develop or share content on behalf of a marketer. If a portion of the account balance is deemed uncollectible, we will either write-off the amount owed or provide a reserve based on our best estimate of the uncollectible portion of the account. Management estimates the collectibility of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. We have a reserve of $120,060 for doubtful accounts as of June 30, 2019. We believe that this estimate is reasonable, but there can be no assurance that the estimate will not change as a result of a change in economic conditions or business conditions within the industry, the individual customers or our Company. Any adjustments to this account are reflected in the consolidated statements of operations as a general and administrative expense. Bad debt expense was less than 1% of revenue for each of the three and six months ended June 30, 2019 and 2018.

Concentrations of credit risk with respect to accounts receivable were typically limited, because a large number of geographically diverse customers make up our customer base, thus spreading the trade credit risk. However, with our acquisition of TapInfluence, we have increased credit exposure on certain customers who carry significant credit balances related to their Marketplace Spend. We control credit risk through credit approvals, credit limits and monitoring procedures. We perform credit evaluations of our customers, but generally do not require collateral to support accounts receivable. We had one customer that accounted for 26% of total accounts receivable at June 30, 2019 and two customers that together accounted for 36% of total accounts receivable at December 31, 2018.

### Software Development Costs and Acquired Intangible Software

In accordance with Accounting Standards Codification (“ASC”) 350-40, *Internal Use Software,* we capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our platforms. Software development activities generally consist of three stages (i) the research and planning stage, (ii) the application and development stage, and (iii) the post-implementation stage. Costs incurred in the research and planning stage and in the post-implementation stage of software development, or other maintenance and development expenses that do not meet the qualification for capitalization, are expensed as incurred. Costs incurred in the application and infrastructure development stage, including significant enhancements and upgrades, are capitalized. These costs include personnel and related employee benefits expenses for employees or consultants who are directly associated with and who devote time to software projects, and external direct costs of materials obtained in developing the software. We have capitalized $2,768,134 to software development costs in the consolidated balance sheet as of June 30, 2019. We also acquired additional proprietary software platforms valued at $1,130,000 during our acquisitions of *Ebyline, ZenContent* and *TapInfluence*. These costs are reflected as intangible assets in the consolidated balance sheet as of June 30, 2019. 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.

### Goodwill and Business Combinations

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

We perform our annual impairment tests of goodwill as of October 1 of each year, or more frequently, if certain indicators are present. Goodwill is required to be tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment level, which is referred to as a component. Management identifies its reporting units by assessing whether components (i) have discrete financial information available; (ii) engage in business activities; and (iii) whether a segment manager regularly reviews the component's operating results. Net assets and goodwill of acquired businesses are allocated to the reporting unit associated with the acquired business based on the anticipated organizational structure of the combined entities. If two or more components are deemed economically similar, those components are aggregated into one reporting unit when performing the annual goodwill impairment review. We have determined that prior to and after the acquisition of Ebyline and ZenContent, we had one reporting unit. Subsequent to the merger with TapInfluence, we have determined that we have two reporting units.

### Revenue Recognition

We generate revenue from five primary sources: (1) revenue from our managed services when a marketer (typically a brand, agency or partner) pays us to provide custom content, influencer marketing, amplification or other consulting services (“Managed Services”); (2) revenue from fees charged to self-service customers on their marketplace spend within our *IZEAx* and *TapInfluence* platforms (“Marketplace Spend Fees”); (3) revenue from fees charged to access the *IZEAx, Ebyline,* and *TapInfluence* platforms (“License Fees”); (4) revenue from transactions generated by the self-service use of our *Ebyline* platform for professional custom (“Legacy Workflow Fees”); and (5) revenue derived from other fees such as inactivity fees, early cash-out fees, and plan fees charged to users of our platforms (“Other”).

We recognize revenue in accordance with Accounting Standards Codification Topic 606, *Revenue from Contracts with Customers (“*ASC 606”). Under ASC 606, revenue is recognized based on a five-step model 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 is recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We apply the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determines those that are distinct performance obligations. We also determine whether we act as an agent or a principal for each identified performance obligation. The determination of whether we act as the principal or the agent is highly subjective and requires us to evaluate a number of indicators individually and as a whole in order to make its determination. For transactions in which we act as a principal, revenue is reported on a gross basis as the amount paid by the marketer for the purchase of content or sponsorship, promotion and other related services and we record the amounts we pay to third-party creators as cost of revenue. For transactions in which we act as an agent, revenue is reported on a net basis as the amount we charged to the self-service marketer using our platforms, less the amounts paid to the third-party creators providing the service.

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

#### Managed Services Revenue

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

#### Marketplace Spend Fees and Legacy Workflow Fees Revenue

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

#### License Fees Revenue

License Fees revenue is generated through the granting of limited, non-exclusive, non-transferable licenses to customers for the use of the *IZEAx* 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 Revenue

Other 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, inactivity fees are recognized at a point in time when the account is deemed inactive, and early cash-out fees are recognized when a cash-out either below certain minimum thresholds or with accelerated timing is requested.

We do not typically engage in contracts that are longer than one year. Therefore, we do not capitalize costs to obtain our customer contracts as these amounts generally would be recognized over a period of less than one year and are not material.

Changes in how we control and manage our platforms, our contractual terms, our business practices, or other changes in accounting standards or interpretations, may change the reporting of our revenue.

### Stock-Based Compensation

#### Stock Options

Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes pricing model. Options typically vest ratably over four years with one-fourth of options vesting one year from the date of grant and the remaining options vesting monthly, in equal increments over the remaining three-year period and generally have five or ten-year contract lives. We use the closing stock price of our common stock on the date of the grant as the associated fair value of our common stock. 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 stock options granted under our 2011 Equity Incentive Plans and the assumptions used to determine the fair value of those options during the six months ended June 30, 2019 and 2018:

| Period Ended | Total Stock 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 |
| --- | ---: | ---: | --- | ---: | ---: | ---: |
| June 30, 2019 | 284,102 | $1.03 | 6.0 years | 62.01% | 2.39% | $0.61 |
| June 30, 2018 | 33,589 | $2.75 | 6.0 years | 59.07% | 2.67% | $1.52 |

There were outstanding options to purchase 1,212,574 shares with a weighted average exercise price of $4.15 per share, of which options to purchase 703,770 shares were exercisable with a weighted average exercise price of $5.80 per share as of June 30, 2019. The intrinsic value on outstanding options as of June 30, 2019 was $0. The intrinsic value on exercisable options as of June 30, 2019 was $0.

As of June 30, 2019, we had outstanding unvested restricted stock units of 262,326 shares with an intrinsic value of $133,786.

### Recent Accounting Pronouncements

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

## Controls and procedures

As filed, 5,704 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 June 30, 2019, 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 June 30, 2019. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Given that the remediation of material weakness outlined below has not been validated and tested, our principal executive and principal financial officers concluded that our disclosure controls and procedures were not effective as of June 30, 2019.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In connection with the 2017 year-end financial statement close and preparation of the corresponding 2017 Annual Report during early 2018, management determined that there were errors in our financial statements issued prior to 2017 related to our presentation of revenue related to the self-service Content Workflow portion of our revenue and our classification of cost of revenue related to our Managed Services. This conclusion resulted in the restatement of certain 2015 and 2016 Consolidated Financial Statements in our 2017 Annual Report on Form 10-K. At that time, we determined that we have a material weakness in the evaluation of the application of generally accepted accounting principles for our contractual arrangements with customers, more specifically the method of revenue recognition and the identification and classification of the costs of our services.

Because the remediation plans associated with this material weakness are still in process of being verified and tested, management concluded that we did not maintain effective internal control over financial reporting as of June 30, 2019.

### Remediation of Material Weakness

To remediate the material weakness described above, we have identified appropriate additional controls including the engagement of independent third-party technical accounting experts to assist management with the adoption of new accounting and reporting requirements, 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 our internal control over financial reporting.

### Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2019, the Company engaged third-party technical expertise to assist with tax-related accounting and reporting requirements on an ongoing basis. In addition, the Company engaged a third-party software provider to provide an automated solution for the back-office administration and accounting for the Company’s stock-based compensation programs. Both of these changes are expected to significantly improve the effectiveness of the Company’s internal control over financial reporting. Aside from these two items, there were no other 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 June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 12,149 characters.

In addition to the information set forth in this report, you should carefully consider the factors discussed under Item 1A of Part I to our Annual Report on Form 10-K for the year ended December 31, 2018 regarding the numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially and adversely affected. In such case, the trading price of our common stock could decline, and investors could lose all or part of their investment. These risk factors may not identify all risks that we face, and our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.

***If we fail to regain compliance with the minimum closing bid requirements of the Nasdaq Capital Market or to satisfy other requirements for continued listing, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.***

Our common stock is listed for trading on the Nasdaq Capital Market (“Nasdaq”). To maintain this listing, we must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share.

On June 13, 2019, we received a notification letter from Nasdaq informing us that for the prior 30 consecutive business days, the bid price of our common stock had closed below $1.00 per share. This notice had no immediate effect on our Nasdaq listing and we have 180 calendar days, or until December 10, 2019, to regain compliance. The closing bid price of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days to regain compliance. If by that time we have not regained compliance with the bid price requirement, a second 180-day compliance period may be available, provided (i) we meet the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on Nasdaq (except for the bid price requirement), and (ii) we provide written notice to Nasdaq of our intention to cure this deficiency during the second compliance period by effecting a reverse stock split, if necessary.

If we are unable to regain compliance with the minimum closing bid price requirement by December 10, 2019, or such further extended period as may be provided by Nasdaq, or if we fail to meet any of the other continued listing requirements, our common stock may be delisted from Nasdaq, which could reduce the liquidity of our common stock materially and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and business development opportunities. Such a delisting likely would impair your ability to sell or purchase our common stock when you wish to do so. Further, if we were to be delisted from Nasdaq, our common stock may no longer be recognized as a “covered security” and we would be subject to regulation in each state in which we offer our securities. Thus, delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly impact the ability of investors to trade our securities and would negatively impact the value and liquidity of our common stock.

***We have been named as a defendant in a securities class action lawsuit and other shareholder derivative lawsuits relating to an error in the presentation of revenues and classification of expenses in certain financial statements issued in prior years. 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.***

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. We have estimated and accrued a potential loss of $500,000 representing our deductible on associated insurance coverage.

On April 15, 2019, a stipulation of settlement was filed in the U.S. District Court for the Central District of California that contained settlement terms as agreed upon by the parties to the *Perez* class action lawsuit described above. The motion for preliminary approval of the settlement was granted on May 7, 2019. According to the terms of the settlement as agreed upon by the parties IZEA’s insurer deposited $800,000 into the settlement fund and we paid the remainder of our previously accrued insurance deductible of $400,000 into escrow to be used as settlement funds, inclusive of lead plaintiff awards and lead counsel fees. The settlement is subject to final approval by the U.S. District Court, and the Court has scheduled a hearing for September 23, 2019. Upon final approval by the Court, the settlement will require that the *Perez* lawsuit be dismissed with prejudice. In the event that the Court does not approve the settlement, we intend to vigorously defend against the claims based upon our belief that the claims are without merit.

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 us 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.

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 us for purported breaches of the individual defendants’ fiduciary duties as directors and/or officers of IZEA, gross mismanagement and alleged violations of federal securities laws.

On March 6, 2019, a stipulation of settlement was filed in the United States District Court for the Central District of California that contained settlement terms as agreed upon by the parties to the *Stuart* and *Emond* shareholder derivative lawsuits described above. The settlement terms as agreed upon by the parties include that IZEA will direct its insurers to make a payment of $300,000 as a fee and service award to the plaintiffs and their counsel in the *Emond* and *Stuart* lawsuits and further that IZEA will enact certain corporate governance reforms. The settlement is subject to approval by the United States District Court for the Central District of California, and the plaintiff presented his motion for preliminary approval of the settlement on May 13, 2019. The motion is currently pending before the Court. Upon final approval by the Court, the settlement will require that both the *Emond* and *Stuart* lawsuits be dismissed with prejudice. In the event that the Court does not approve the settlement, we 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 lawsuits may also materially damage our reputation and the value of our brand. Our legal expenses incurred in defending the lawsuits, 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 us and our 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.

***We are continuing to develop our IZEAx platform and are in the process of transitioning certain features and customers from our legacy Ebyline, ZenContent and TapInfluence platforms. Our updated IZEAx platform may not achieve sufficient market acceptance to be commercially viable for open marketplace or SaaS services.***

We are continuing to develop our primary platform, *IZEAx,* and we intend to focus the majority of our engineering resources on the *IZEAx* platform for the foreseeable future. In April 2019, we released version 3.0 of *IZEAx,* which allows marketers to make offers that require a single creator to complete multiple tasks or deliverables. The new version also allows users to source multiple creators to produce a combined deliverable for the end-marketer. Throughout the remainder of 2019, we plan to continue to add additional features to support SaaS white-label partners and integrate the *Ebyline, ZenContent* and *TapInfluence* platform offerings for custom content services within our *IZEAx* platform. We are spending a significant amount of time and resources on the development of this platform, and we cannot provide any assurances of its short or long-term commercial success or growth. There is no assurance that the amount of money being allocated for the platform will be sufficient to complete it, or that such completion will result in significant revenues or profit for us.

The *Ebyline* platform is naturally declining as we are dedicating resources to the continuation and development of our *IZEAx* platform. We are working towards merging the two platforms and there is a risk that the merging of our Ebyline customers into *IZEAx* will result in a further decrease in revenue related to the self-service Content Workflow business if the customers do not understand the changes or do not believe that the *IZEAx* platform can provide them with a similar or improved service from what they received in the *Ebyline* platform.

Additionally, there is a risk that existing creators registered under our *Ebyline, ZenContent* and *TapInfluence* platforms will either not migrate or will not participate and accept offers after their migration into *IZEAx*. If our marketers and creators do not perceive this platform to be of high value and quality, we may not be able to retain them or acquire new marketers and creators. Additionally, if existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over this platform, demand for *IZEAx* may decrease and our business, prospects, results of operations and financial condition could be negatively affected.

Filed Aug 13, 2019.
Source: SEC EDGAR, the filing index for accession 0001495231-19-000115. Last ingested by Listed: Nov 2, 2026, 16:20 ET. No prices; not investment advice.