Property and Equipment
Property and equipment are recorded at cost, or if acquired in a business combination, at the acquisition date fair value. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
Computer Equipment
|
3 years
|
Software Costs
|
3 - 5 years
|
Office Equipment
|
3 - 10 years
|
Furniture and Fixtures
|
5 - 10 years
|
Leasehold improvements are depreciated over the shorter of the term of the lease or the estimated useful lives of the improvements. Property and equipment under capital leases are depreciated over their estimated useful lives. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for betterments and major improvements are capitalized and depreciated over the remaining useful lives of the assets. The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the year of disposal, with resulting gains or losses included in general and administrative expense.
Software Development Costs
In accordance with ASC 350-40,
Internal Use Software
and ASC 985-730,
Computer Software Research and Development
, research phase costs related to internal use software should be expensed as incurred and development phase costs including direct materials and services, payroll and benefits and interest costs may be capitalized. The Company amortizes software development costs equally over
5 years
upon initial launch of the software or additional features.
Intangible Assets
The Company acquired the majority of its intangible assets through its acquisition of Ebyline on January 30, 2015 and its acquisition of ZenContent on July 31, 2016. The Company is amortizing the identifiable intangible assets over a period of
12
to
60
months. Management reviews long-lived assets, including property and equipment, software development costs and other intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared with the asset's carrying amount to determine if there has been an impairment, which is calculated as the difference between the fair value of an asset and its carrying value. Estimates of future undiscounted cash flows are based on expected growth rates for the business, anticipated future economic conditions and estimates of residual values. Fair values take into consideration management estimates of risk-adjusted discount rates, which are believed to be consistent with assumptions that marketplace participants would use in their estimates of fair value. For the
twelve months
ended
December 31, 2016
and
2015
, there were no impairment charges associated with the Company's long-lived assets.
Goodwill
Goodwill represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets. The Company has goodwill that has been recorded in connection with its acquisition of Ebyline and ZenContent. Goodwill is not amortized, but instead it is tested for impairment at least annually. In the event that management determines that the value of goodwill has become impaired, the Company will record a charge for the amount of impairment during the fiscal quarter in which the determination is made.
The Company performs its annual impairment tests of goodwill during the fourth quarter of each year, or more frequently, if certain indicators are present. Goodwill is required to be tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment level, which is referred to as a component. Management identifies its reporting units by assessing whether components (i) have discrete financial information available; (ii) engage in business activities; and (iii) whether a segment manager regularly reviews the component's operating results. Net assets and goodwill of acquired businesses are allocated to the reporting unit associated with the acquired business based on the anticipated organizational structure of the
IZEA, Inc.
Notes to the Consolidated Financial Statements
combined entities. If two or more components are deemed economically similar, those components are aggregated into one reporting unit when performing the annual goodwill impairment review. The Company has determined that prior to and after the acquisition of Ebyline and ZenContent, it had and continues to have one reporting unit.
Revenue Recognition
The Company derives its revenue from three sources: revenue from a marketer when it pays for a social media publisher or influencer such as a blogger or tweeter ("creators") to share sponsored content with their social network audience ("Sponsored Revenue"), revenue when a publisher or company purchases custom branded content for its own use, as well as third party content marketing and native advertising efforts ("Content Revenue") and revenue derived from various service and license fees charged to users of the Company's platforms ("Service Fee Revenue").
For managed customers, the Company enters into an agreement to provide services that may require multiple deliverables in the form of (a) sponsored social items, such as blogs, tweets, photos or videos shared through social network offerings that provide awareness or advertising buzz regarding the marketer's brand; (b) media advertisements, such as click-through advertisements appearing in websites and social media channels; and (c) original content items, such as a research or news article, informational material or videos that a publisher or marketer can use. The Company may provide one type or a combination of all types of these deliverables including a management fee on a statement of work for a lump sum fee. These deliverables are to be provided over a stated period that may range from one day to one year. Each of these items are considered delivered once the content is live through a public or social network or custom content has been delivered to the customer for their own use. Revenue is accounted for separately on each of the deliverables in the time frames set forth below. The statement of work typically provides for a cancellation fee if the agreement is canceled by the customer prior to completion of services. Payment terms are typically 30 days from the invoice date. If the Company is unable to provide a portion of the services, it may agree with the customer to provide a different type of service or to provide a credit for the value of those services that may be applied to the existing order or used for future services.
Sponsored Revenue is recognized and considered earned after a marketer's sponsored content is posted through
IZEAx
and shared through a creator's social network for a requisite period of time. The requisite period ranges from
3 days
for a tweet to
30 days
for a blog, video or other form of content. Management fees related to Sponsored Revenue from advertising campaigns managed by the Company are recognized ratably over the term of the campaign which may range from a few days to several months. Content Revenue is recognized when the content is delivered to and accepted by the customer. Service Fee Revenue is generated when fees are charged to customers primarily related to subscription fees for different levels of service within a platform, licensing fees for white-label use of
IZEAx
, early cash-out fees if a creator wishes to take proceeds earned for services from their account when the account balance is below certain minimum balance thresholds and inactivity fees for dormant accounts. Service Fee Revenue is recognized immediately when the service is performed or at the time an account becomes dormant or is cashed out. Service Fee Revenue for subscription or licensing fees is recognized straight-line over the term of service. Self-service marketers must prepay for services by placing a deposit in their account with the Company. The deposits are typically paid by the marketer via credit card. Marketers who use the Company to manage their social advertising campaigns or custom content requests may prepay for services or request credit terms. Payments received or billings in advance of services are recorded as unearned revenue until earned as described above.
All of the Company's revenue is generated through the rendering of services and is recognized under the general guidelines of SAB Topic 13 A.1, which states that revenue will be recognized when it is realized or realizable and earned. The Company considers its revenue as generally realized or realizable and earned once (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) the price to the marketer or customer is fixed (required to be paid at a set amount that is not subject to refund or adjustment) and determinable, and (iv) collectibility is reasonably assured. The Company records revenue on the gross amount earned since it generally is the primary obligor in the arrangement, takes on credit risk, establishes the pricing and determines the service specifications.
Advertising Costs
Advertising costs are charged to expense as they are incurred, including payments to content creators to promote the Company. Advertising expense charged to operations for the
twelve months
ended
December 31, 2016
and
2015
were approximately
$455,000
and
$558,000
, respectively. Advertising costs are included in sales and marketing expense in the accompanying consolidated statements of operations.
Deferred Rent
The Company’s operating leases for its office facilities contain rent abatements and predetermined fixed increases of the base rental rate during the lease term. The Company accounts for rental expense on a straight-line basis over the lease term. The
IZEA, Inc.
Notes to the Consolidated Financial Statements
Company records the difference between the straight-line expense and the actual amounts paid under the lease as deferred rent in the accompanying consolidated balance sheets.
Income Taxes
The Company has not recorded federal income tax expense due to the generation of net operating losses. Deferred income taxes are accounted for using the balance sheet approach which requires recognition of deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized. The Company incurs minimal state franchise tax in two states which is included in general and administrative expenses in the consolidated statements of operations.
The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company’s tax years subject to examination by the Internal Revenue Service are 2013, 2014 and 2015.
Derivative Financial Instruments
Derivative financial instruments are defined as financial instruments or other contracts that contain a notional amount and one or more underlying factors (e.g., interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or assets. The Company accounts for derivative instruments in accordance with ASC 815,
Derivatives and Hedging
(“ASC 815”), which requires additional disclosures about the Company’s objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedging items affect the financial statements. The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of equity instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.
Fair Value of Financial Instruments
The Company’s financial instruments are recorded at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. There are three levels of inputs that may be used to measure fair value:
|
|
•
|
Level 1
–
Valuation based on quoted market prices in active markets for identical assets and liabilities.
|
|
|
•
|
Level 2
–
Valuation based on quoted market prices for similar assets and liabilities in active markets.
|
|
|
•
|
Level 3
–
Valuation based on unobservable inputs that are supported by little or no market activity, therefore requiring management’s best estimate of what market participants would use as fair value.
|
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The Company does not have any Level 1 or 2 financial assets or liabilities. The Company’s Level 3 financial liabilities measured at fair value consisted of its acquisition cost liability (see Note 2) and a warrant liability (see Note 6) as of
December 31, 2016
. Significant unobservable inputs used in the fair value measurement of the warrants include the estimated term and risk-adjusted interest rates. In developing its credit risk assumption used in the fair value of warrants, the Company considered publicly available bond rates and US Treasury Yields. However, since the Company does not have a formal credit-standing, management estimated its standing among various reported levels and grades for use in the model. During all periods, management estimated that the Company's standing was in the speculative to high-risk grades (BB- to CCC in the Standard and Poor's Rating). Significant increases or decreases in the estimated remaining period to exercise or the risk-adjusted interest rate could result in a significantly lower or higher fair value measurement.
IZEA, Inc.
Notes to the Consolidated Financial Statements
The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable, unearned revenue and accrued expenses. Unless otherwise disclosed, the fair value of the Company’s capital lease obligations approximate their carrying value based upon current rates available to the Company.
Stock-Based Compensation
Stock-based compensation cost related to stock options granted under the 2011 Equity Incentive Plan and 2011 B Equity Incentive Plan (together, the "2011 Equity Incentive Plans") (see Note 8) is measured at the grant date, based on the fair value of the award, and is recognized as a straight-lined expense over the employee’s requisite service period. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The Company estimates the fair value of its common stock using the closing stock price of its common stock on the date of the option award. The Company estimates the volatility of its common stock at the date of grant based on the volatility of comparable peer companies that are publicly traded and have had a longer trading history than itself. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The Company used the following assumptions for options granted under the 2011 Equity Incentive Plans during the
twelve months
ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
Twelve Months Ended
|
2011 Equity Incentive Plans Assumptions
|
|
December 31,
2016
|
|
December 31,
2015
|
Expected term
|
|
6 years
|
|
6 years
|
Weighted average volatility
|
|
47.95%
|
|
55.47%
|
Weighted average risk free interest rate
|
|
1.58%
|
|
1.65%
|
Expected dividends
|
|
—
|
|
—
|
The Company estimates forfeitures when recognizing compensation expense and this estimate of forfeitures is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and a revised amount of unamortized compensation expense to be recognized in future periods. Average expected forfeiture rates were
9.52%
and
8.32%
during the
twelve months
ended
December 31, 2016
and
2015
, respectively.
Non-Employee Stock-Based Payments
The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505,
“Equity-Based Payments to Non-Employees.”
The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. The fair value of equity instruments issued to consultants that vest immediately is expensed when issued. The fair value of equity instruments issued to consultants that have future vesting and are subject to forfeiture if performance does not occur is recognized as expense over the vesting period. Fair values for the unvested portion of issued instruments are adjusted each reporting period. The change in fair value is recorded in the accompanying consolidated statements of operations. Stock-based payments related to non-employees is accounted for based on the fair value of the related stock or the fair value of the services, whichever is more readily determinable.
Segment Information
The Company does not identify separate operating segments for management reporting purposes. The results of consolidated operations are the basis on which management evaluates operations and makes business decisions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board ("FASB") issued guidance that applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could
IZEA, Inc.
Notes to the Consolidated Financial Statements
be achieved after the requisite service period. It requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. This update was effective January 1, 2016 and the adoption of this guidance did not have a material impact on the Company's financial statements.
In August 2014, the FASB issued guidance about disclosing an entity's ability to continue as a going concern. The guidance is intended to define management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This update was effective December 15, 2016 and the adoption of this guidance did not have a material impact on the Company's financial statements.
In September 2015, the FASB issued guidance to simplify the accounting for measurement-period adjustments for an acquirer in a business combination. The update requires an acquirer to recognize any adjustments to provisional amounts of the initial accounting for a business combination with a corresponding adjustment to goodwill in the reporting period in which the adjustments are determined in the measurement period, as opposed to revising prior periods presented in financial statements. Thus, an acquirer shall adjust its financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date. This update was effective January 1, 2016 and the adoption of this guidance did not have a material impact on the Company's financial statements.
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers
, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. The amendments in this ASU are intended to improve the understanding of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and transition of ASU 2014-09 stated above.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
. ASU 2016-10 is intended to reduce the cost and complexity of applying the guidance in the FASB's new revenue standard on identifying performance obligations, and is also intended to improve the understanding of the licensing implementation guidance. The effective date for ASU 2016-10 is the same as for ASU 2014-09 stated above.
These new revenue recognition standards will be effective for the Company in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company currently anticipates adopting the new standard effective January 1, 2018. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company currently anticipates adopting the standard using the modified retrospective method. The Company is reviewing each of the five steps in the new revenue recognition model, which are as follows: 1) Identify the contract with the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue when (or as) performance obligations are satisfied. However, the Company has not yet finalized its review and analysis to determine the impact that this standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical
IZEA, Inc.
Notes to the Consolidated Financial Statements
expedients available. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements.
NOTE 2. BUSINESS ACQUISITIONS
EBYLINE, INC.
On January 30, 2015, the Company purchased all of the outstanding shares of capital stock of Ebyline pursuant to the terms of a Stock Purchase Agreement, dated as of January 27, 2015, by and among IZEA, Ebyline and the stockholders of Ebyline for a maximum purchase price to be paid over the next
three years
of
$8,850,000
. Based in Los Angeles, California, Ebyline operates an online marketplace that enables publishers to access a network of over
15,000
content creators ranging from writers to illustrators in
84
countries. Over
2,000
fully vetted individuals in the Ebyline network have professional journalism credentials with backgrounds at well-known media outlets. Ebyline’s proprietary workflow is utilized by leading media organizations to obtain the content they need from professional content creators. In addition to publishers, Ebyline is leveraged by marketers to produce custom branded content for use on their owned and operated sites, as well as third party content marketing and native advertising efforts.
Purchase Price and Acquisition Costs Payable
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|
|
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|
|
|
|
|
|
|
|
Estimated Gross Purchase Consideration
|
Initial Present and Fair Value
|
Remaining Present and Fair Value
|
Remaining Present and Fair Value
|
|
1/30/2015
|
1/30/2015
|
12/31/2015
|
12/31/2016
|
Cash paid at closing
|
$
|
1,200,000
|
|
$
|
1,200,000
|
|
$
|
—
|
|
$
|
—
|
|
Guaranteed purchase price (a)
|
2,127,064
|
|
1,982,639
|
|
1,823,711
|
|
934,728
|
|
Contingent performance payments (b)
|
2,210,000
|
|
1,834,300
|
|
—
|
|
—
|
|
Acquisition costs payable by Ebyline shareholders (c)
|
—
|
|
—
|
|
(89,700
|
)
|
—
|
|
Total estimated consideration
|
$
|
5,537,064
|
|
$
|
5,016,939
|
|
$
|
1,734,011
|
|
$
|
934,728
|
|
|
|
|
|
|
Current portion of acquisition costs payable
|
|
|
$
|
844,931
|
|
$
|
934,728
|
|
Long term portion of acquisition costs payable
|
|
|
889,080
|
|
—
|
|
Total acquisition costs payable
|
|
|
$
|
1,734,011
|
|
$
|
934,728
|
|
|
|
(a)
|
The January 2015 Ebyline Stock Purchase Agreement required a
$1,200,000
cash payment at closing, a
$250,000
stock payment on July 30, 2015 and a cash or stock payment of up to an additional
$1,900,000
(
subject to proportional reduction in the event Ebyline’s final 2014 revenue was below $8,000,000
). Ebyline's final gross revenue for 2014 was
$7,903,429
. As such, the additional amount owed became
$1,877,064
payable in two equal installments of
$938,532
on January 30, 2016 and January 30, 2017. This guaranteed purchase price consideration was discounted to present value using the Company's
borrowing rate of prime plus 2%
. Interest expense imputed on the acquisition costs payable in the accompanying consolidated statements of operations was
$49,549
and
$91,072
for the
twelve months
ended
December 31, 2016
and
2015
, respectively. Per the January 2015 Ebyline Stock Purchase Agreement, the Company issued
31,821
shares of its common stock valued at
$250,000
to satisfy a portion of the guaranteed purchase price payment obligation on July 30, 2015. On January 29, 2016, the Company issued
114,398
shares of its common stock valued at
$848,832
to satisfy the annual guaranteed payment of
$938,532
less
$89,700
in closing related expenses (see item (c) below).
|
|
|
(b)
|
Total contingent performance payments up to
$5,500,000
are to be paid based on Ebyline meeting certain revenue targets. The performance payments are to be made only if Ebyline achieves at least
90%
of Content Revenue targets of
$17,000,000
in 2015,
$27,000,000
in 2016 and
$32,000,000
in 2017. The fair value of the
$5,500,000
of contingent performance payments was calculated using a Monte-Carlo simulation to simulate revenue over the next three years. Since the contingent consideration has an option like structure, a risk-neutral framework is considered appropriate for the valuation. The Company started with a risk-adjusted measure of forecasted revenue (using a risk-adjusted discount rate of
8.5%
) and assumed it will follow geometric brownian motion to simulate the revenue at future dates. Once the initial revenue was estimated based off of projections made during the acquisition, payout was calculated for each year and present valued to incorporate the credit risk associated with these payments. The Company's initial value conclusion was based on the average payment from
100,000
simulation trials. The volatility used for the
|
IZEA, Inc.
Notes to the Consolidated Financial Statements
simulation was
35%
. The Monte Carlo simulation resulted in a calculated fair value of contingent performance payments of
$2,210,000
on
January 30, 2015
. Because the contingent performance payments are subject to a
17%
reduction related to the continued employment of certain key employees, ASC 805-10-55-25 indicates that a portion of these payments be treated as potential compensation to be accrued over the term rather than allocated to the purchase price. Therefore, the Company reduced its overall purchase price consideration by
$357,700
and recorded the initial present value of the contingent performance payments at
$1,834,300
. Based on actual results for and projections for Content Revenue for 2015-2017, the Content Revenue for every year is expected to be below 90% of the required Content Revenues targets. Therefore, the Company reduced the fair value of contingent performance payments to zero by the end of 2015. The decrease in the estimated fair value of contingent performance payments was recorded as a reduction of general and administrative expense in the Company's consolidated statement of operations during the year ended
December 31, 2015
.
|
|
(c)
|
According to the January 2015 Ebyline Stock Purchase Agreement,
$89,700
in closing related expenses paid by Ebyline during the acquisition process were payable by the selling shareholders. These costs were deducted from the guaranteed payment on January 30, 2016.
|
Purchase Price Allocation
The final allocation of the purchase price as of January 30, 2015 is summarized as follows:
|
|
|
|
|
|
Final Purchase Price Allocation
|
Current assets
|
$
|
738,279
|
|
Property and equipment
|
27,194
|
|
Identifiable intangible assets
|
2,370,000
|
|
Goodwill
|
2,468,289
|
|
Security deposits
|
18,553
|
|
Current liabilities
|
(605,376
|
)
|
Total estimated consideration
|
$
|
5,016,939
|
|
There are many synergies between the business operations of Ebyline and IZEA including a database of creators that can provide custom content and advertising and synergies between our online marketplaces that appeal to customers on both sides. The Ebyline operations are included in the consolidated financial statements beginning on the date of acquisition of January 30, 2015. The Ebyline operations contributed revenue of
$9,313,409
and gross profit of
$2,109,228
in the consolidated statement of operations for the
twelve months
ended
December 31, 2016
and revenue of
$8,001,882
and gross profit of
$942,089
in the consolidated statement of operations during the eleven months from January 31, 2015 through
December 31, 2015
.
The following unaudited pro forma summary presents consolidated information of IZEA, Inc. as if the business combination with Ebyline had occurred on January 1, 2014:
|
|
|
|
|
|
Pro-Forma
|
|
Twelve Months Ended
|
|
12/31/2015
|
Pro-Forma Revenue
|
$
|
21,178,040
|
|
Pro-Forma Cost of Sales
|
12,887,062
|
|
Pro-Forma Gross Profit
|
8,290,978
|
|
Pro-Forma Net Loss
|
(11,398,336
|
)
|
IZEA did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The pro forma revenue and earnings calculations have been calculated after applying the Company's accounting policies on revenue recognition and adjusting the results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied from January 1, 2014. The Company incurred
$87,906
in acquisition-related costs which are included in general and administrative expense on the Company's consolidated statement of operations for the
twelve months
ended
December 31, 2015
. These costs are reflected in pro forma earnings for the
twelve months
ended
December 31, 2015
.
IZEA, Inc.
Notes to the Consolidated Financial Statements
ZENCONTENT, INC.
On July 31, 2016, the Company purchased all of the outstanding shares of capital stock of ZenContent pursuant to the terms of a Stock Purchase Agreement, by and among IZEA, ZenContent and the stockholders of ZenContent for a maximum purchase price to be paid over the next
three years
of
$4,500,000
. Based in Mountain View, California, ZenContent offers a custom content marketing technology platform that creates high volume original content for businesses. ZenContent services a strong base of Fortune 500 e-commerce customers, amongst others. ZenContent customers have access to its network of more than
5,000
content creators for large-scale asset production. ZenContent’s proprietary tools ingest full product databases, source creators and provide quality assurance for custom content projects, making product listings friendlier for consumers and more indexable for search. Outside of e-commerce, ZenContent also works with leading online publishers for the production of articles and text updates, including a real-time application program interface that enables production of assets for rapid publishing of news stories and augmentation of consumer content.
Purchase Price and Acquisition Costs Payable
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Gross Purchase Consideration
|
Initial Present and Fair Value
|
Remaining Present and Fair Value
|
|
7/31/2016
|
7/31/2016
|
12/31/2016
|
Cash paid at closing (a)
|
$
|
400,000
|
|
$
|
400,000
|
|
$
|
—
|
|
Stock paid at closing (a)
|
600,000
|
|
600,000
|
|
—
|
|
Guaranteed purchase price (b)
|
933,565
|
|
566,547
|
|
682,348
|
|
Contingent performance payments (c)
|
2,500,000
|
|
230,000
|
|
324,000
|
|
Total estimated consideration
|
$
|
4,433,565
|
|
$
|
1,796,547
|
|
$
|
1,006,348
|
|
|
|
|
|
Current portion of acquisition costs payable
|
|
|
$
|
318,157
|
|
Long term portion of acquisition costs payable
|
|
|
688,191
|
|
Total acquisition costs payable
|
|
|
$
|
1,006,348
|
|
|
|
(a)
|
The aggregate consideration paid at closing for the acquisition of ZenContent consisted of (a) a cash payment of
$400,000
and (b) the issuance of
86,207
shares of IZEA common stock valued at
$600,000
(using the 30 trading-day volume-weighted average closing price of IZEA's common stock of
$6.96
per share as of July 29, 2016).
|
|
|
(b)
|
Aggregate future consideration consists of (i)
three equal annual installment payments totaling $1,000,000
, commencing 12 months following the closing, less a reduction of
$66,435
due to a customary closing date working capital adjustment ("guaranteed purchase price"), and (ii) contingent performance payments of up to an aggregate of
$2,500,000
over the three 12-month periods following the closing. These payments are also subject to downward adjustment of up to
30%
if Brianna DeMike, ZenContent’s co-founder, is terminated by IZEA for cause or she terminates her employment without good reason. As a result, the Company initially reduced its acquisition cost liability by
$300,000
to be accrued as compensation expense over the three-year term rather than allocated to the purchase price in accordance with ASC 805-10-55-25. Compensation expense added to the acquisition costs payable and recorded as general and administrative expense in the Company's consolidated statement of operations was
$102,431
for the
twelve months
ended
December 31, 2016
. The initial guaranteed purchase price consideration was discounted to present value using the Company's borrowing rate of prime plus
2%
(
5.5%
). Interest expense imputed on the acquisition costs payable in the accompanying consolidated statement of operations was
$13,370
for the
twelve months
ended
December 31, 2016
.
|
|
|
(c)
|
The contingent performance payments are subject to ZenContent achieving certain minimum revenue thresholds over 36 months. ZenContent is required to meet minimum revenues of
$2.5 million
,
$3.5 million
and
$4.5 million
in the first, second and third, respective 12-month periods following the closing in order to receive any portion of the contingent performance payments. Of these payments,
33%
of each such annual installment or contingent performance payment will be in the form of cash and the remainder of such payment will be in the form of either cash or additional shares of IZEA common stock at then average stock prices (determined at IZEA’s option). The
|
IZEA, Inc.
Notes to the Consolidated Financial Statements
$230,000
fair value of the contingent performance payments was calculated using a Monte-Carlo simulation to simulate revenue over the next three years. Since the contingent consideration has an option like structure, a risk-neutral framework is considered appropriate for the valuation. The Company started with a risk-adjusted measure of forecasted revenue (using a risk-adjusted discount rate of
16.0%
) and assumed it will follow geometric brownian motion to simulate the revenue at future dates. Once the initial revenue was estimated based off of projections made during the acquisition, payout was calculated for each year and present valued to incorporate the credit risk associated with these payments. The Company's initial value conclusion was based on the average payment from
250,000
simulation trials. The volatility used for the simulation was
60%
. The interest rate used for the simulation was the Company's current borrowing rate of prime plus
2%
(
5.75%
). The Company revalued its estimate of the contingent performance payment as of
December 31, 2016
based on actual results for and projections for Content Revenue from ZenContent and determined that current fair value was
$324,000
. Therefore, the increase in the estimated fair value of contingent performance payable resulted in an increase to general and administrative expense in the Company's consolidated statement of operations during the
twelve months
ended
December 31, 2016
.
Purchase Price Allocation
The consolidated financial statements reflect the allocation of the purchase price to the underlying ZenContent tangible and intangible assets acquired and liabilities assumed based on their respective fair market values with any excess purchase price allocated to goodwill.
The allocation of the purchase price as of July 31, 2016 is summarized as follows:
|
|
|
|
|
|
Final Purchase Price Allocation
|
Current assets
|
$
|
415,798
|
|
Property and equipment
|
4,551
|
|
Identifiable intangible assets
|
722,000
|
|
Goodwill
|
1,136,431
|
|
Current liabilities
|
(482,233
|
)
|
Total estimated consideration
|
$
|
1,796,547
|
|
There are many synergies between the business operations of ZenContent and IZEA including a database of creators that can provide custom content and advertising and synergies between our online marketplaces that appeal to customers on both sides. The ZenContent operations are included in the consolidated financial statements beginning on the date of acquisition of July 31, 2016. The ZenContent operations contributed revenue of
$936,194
and gross profit of
$436,395
in the consolidated statement of operations for the
twelve months
ended
December 31, 2016
. The Company incurred
$52,665
in acquisition-related costs which are included in general and administrative expense on the Company's consolidated statement of operations for the
twelve months
ended
December 31, 2016
.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Furniture and fixtures
|
$
|
254,206
|
|
|
$
|
252,516
|
|
Office equipment
|
65,463
|
|
|
53,265
|
|
Computer equipment
|
432,321
|
|
|
421,798
|
|
Leasehold improvements
|
324,716
|
|
|
314,400
|
|
Total
|
1,076,706
|
|
|
1,041,979
|
|
Less accumulated depreciation and amortization
|
(616,056
|
)
|
|
(445,971
|
)
|
Property and equipment, net
|
$
|
460,650
|
|
|
$
|
596,008
|
|
Computer equipment includes items under capital leases totaling
$59,458
as of
December 31, 2015
. Accumulated amortization relating to equipment under capital leases totaled
$37,341
as of
December 31, 2015
. Depreciation expense on property and equipment recorded in general and administrative expense in the accompanying consolidated statements of operations was
$253,004
and
$206,670
for the
twelve months
ended
December 31, 2016
and
2015
, respectively.
IZEA, Inc.
Notes to the Consolidated Financial Statements
NOTE 4. INTANGIBLE ASSETS AND GOODWILL
The identifiable intangible assets consists of the following assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
Accumulated Amortization
|
|
Balance
|
Accumulated Amortization
|
Useful Life (in years)
|
|
December 31, 2016
|
|
December 31, 2015
|
Content provider networks
|
$
|
160,000
|
|
$
|
57,083
|
|
|
$
|
30,000
|
|
$
|
27,500
|
|
1
|
Trade names
|
52,000
|
|
45,000
|
|
|
40,000
|
|
36,667
|
|
1
|
Developed technology
|
530,000
|
|
134,167
|
|
|
300,000
|
|
55,000
|
|
3
|
Self-service content customers
|
210,000
|
|
134,167
|
|
|
210,000
|
|
64,167
|
|
5
|
Managed content customers
|
2,140,000
|
|
1,192,222
|
|
|
1,790,000
|
|
546,944
|
|
3
|
Domains
|
166,469
|
|
33,294
|
|
|
166,469
|
|
—
|
|
5
|
Total identifiable intangible assets
|
$
|
3,258,469
|
|
$
|
1,595,933
|
|
|
$
|
2,536,469
|
|
$
|
730,278
|
|
|
Total identifiable intangible assets from the Ebyline and ZenContent purchase price allocation and other acquired assets along with accumulated amortization thereon consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Ebyline Intangible Assets
|
$
|
2,370,000
|
|
|
$
|
2,370,000
|
|
ZenContent Intangible Assets
|
722,000
|
|
|
—
|
|
Domains
|
166,469
|
|
|
166,469
|
|
Total Intangible Assets
|
3,258,469
|
|
|
2,536,469
|
|
Accumulated amortization
|
(1,595,933
|
)
|
|
(730,278
|
)
|
Intangible Assets, net
|
$
|
1,662,536
|
|
|
$
|
1,806,191
|
|
The Company is amortizing the identifiable intangible assets over a weighted average period of
3 years
. Amortization expense recorded in general and administrative expense in the accompanying consolidated statements of operations was
$865,655
and
$730,278
for the
twelve months
ended
December 31, 2016
and
2015
, respectively.
As of
December 31, 2016
, future estimated amortization expense related to identifiable intangible assets over the next five years is set forth in the following schedule:
|
|
|
|
|
Year ending December 31:
|
Amortization Expense
|
2017
|
$
|
994,628
|
|
2018
|
349,432
|
|
2019
|
207,349
|
|
2020
|
84,293
|
|
2021
|
26,834
|
|
Total
|
$
|
1,662,536
|
|
The Company performs its annual impairment tests of goodwill on October 1st of each year. Goodwill is required to be tested for impairment at the reporting unit level. The Company has determined that prior to and after the acquisition of Ebyline and ZenContent, it had and continues to have
one
reporting unit. As of October 1, 2016, the estimated fair value of the Company, based on the current market price of its common stock on October 1, 2016, exceeded its carrying value in excess of
$21 million
. Therefore, management concluded that goodwill was not impaired; however, significant changes in the assumptions used in the Company's impairment analysis, could result in additional non-cash impairment charges in future periods. Goodwill or any impairment thereon is not deductible for tax purposes.
NOTE 5. SOFTWARE DEVELOPMENT COSTS
Software development costs consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Software development costs
|
$
|
1,492,665
|
|
|
$
|
1,021,446
|
|
Less accumulated depreciation and amortization
|
(388,706
|
)
|
|
(207,514
|
)
|
Software development costs, net
|
$
|
1,103,959
|
|
|
$
|
813,932
|
|
The Company determined that on April 15, 2013, its project to create
IZEAx
became technologically feasible and the development phase began. Throughout 2013 and the first quarter of 2014, the Company developed its new web-based advertising exchange platform,
IZEAx
. On March 17, 2014, the Company launched a public beta of IZEA.com powered by
IZEAx
. This platform is being utilized both internally and externally to facilitate native advertising campaigns on a greater scale. The Company continues to add new features and additional functionality to this platform each year. These new features will enable
IZEAx
to facilitate the contracting, workflow and delivery of direct content as well as provide for invoicing, collaborating and direct payments for the Company's SaaS customers. In accordance with ASC 350-40,
Internal Use Software
and ASC 985-730,
Computer Software Research and Development
, research phase costs should be expensed as incurred and development phase costs including direct materials and services, payroll and benefits and interest costs may be capitalized. As a result, the Company has capitalized
$1,492,665
in direct materials, consulting, payroll and benefit costs to software development costs in the consolidated balance sheet as of
December 31, 2016
. The Company estimated the useful life of its developed software to be
5 years
, consistent with the amount of time its legacy platforms were in-service.
Amortization expense on software development costs recorded in general and administrative expense in the accompanying consolidated statements of operations was
$181,192
and
$122,183
for the
twelve months
ended
December 31, 2016
and
2015
, respectively.
As of
December 31, 2016
, future estimated amortization expense related to software development costs over the next five years is set forth in the following schedule:
|
|
|
|
|
Year ending December 31:
|
Software Amortization Expense
|
2017
|
$
|
298,533
|
|
2018
|
298,533
|
|
2019
|
213,201
|
|
2020
|
176,351
|
|
2021
|
117,341
|
|
|
$
|
1,103,959
|
|
NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company evaluates its warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon registration of the shares underlying the warrants, changes in price-based anti-dilution adjustments, conversion or exercise, as applicable, of a derivative instrument, the instrument is marked to fair value at the date of the occurrence of the event and then that fair value is reclassified to equity.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Instruments that are initially classified as equity that become subject to
reclassification are reclassified to a liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months after the balance sheet date.
As further described in Note 8, the Company has engaged in a series of private placements between 2011 and 2014 which resulted in the issuance of warrants. The Company determined that some of these warrants required classification as a liability due to certain provisions in their terms.
From July 20, 2015 through August 14, 2015, the Company offered a
26%
discount on the warrant exercise prices to investors holding warrants from its February 2014 Private Placement (the "2014 Warrants"). If and to the extent a holder did not exercise its 2014 Warrants at the reduced exercise prices during this time period, the exercise prices of any unexercised 2014 Warrants remained at their original exercise prices of
$7.00
and
$10.00
per share for the series A and series B 2014 Warrants, respectively. In exchange for the reduction in the warrant exercise price, the investors holding a majority of the 2014 Warrants agreed to amend the 2014 Warrants to remove the price-based anti-dilution adjustment provisions contained in the 2014 Warrants. The removal of these provisions from the 2014 Warrants eliminated the provision that required liability classification of the 2014 Warrants and quarterly non-cash adjustments reflecting changes in the fair value of the derivative liability on the Company’s financial statements. Except for the temporarily reduced exercise prices and elimination of the anti-dilution adjustment provisions in the 2014 Warrants, the terms of the 2014 Warrants remain unchanged. As a result of the amendment in the 2014 Warrants terms, the 2014 Warrants no longer require liability classification after August 14, 2015.
At the close of the offer period on August 14, 2015, investors exchanged and converted
1,392,832
shares underlying the 2014 Warrants at the
26%
discount for total proceeds of
$8,760,805
. The amendment of the 2014 Warrants to reduce the exercise price required the Company to treat the adjustment as an exchange whereby it computed the fair value of the 2014 Warrants immediately prior to the price reduction and the fair value of the 2014 Warrants after the price reduction. The
$1,197,821
change in the fair value of the 2014 Warrants as a result of the price reduction was treated as a loss on exchange and recorded in the Company's consolidated statements of operations during the
twelve months
ended
December 31, 2015
.
As a result of the above transactions, the fair value of
$5,348,408
on the
1,392,832
exercised 2014 Warrants and the fair value of
$1,181,638
on the
396,536
remaining unexercised 2014 Warrants as of August 14, 2015 was moved to equity as of August 14, 2015.
The following table summarizes the Company's activity and fair value calculations of its derivative warrants for the
twelve months
ended
December 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
Linked Common
Shares to
Derivative Warrants
|
Warrant
Liability
|
Balance, December 31, 2014
|
1,795,564
|
|
$
|
3,203,465
|
|
Exercise of warrants for common stock
|
(1,392,832
|
)
|
(5,348,408
|
)
|
Loss on exchange of warrants
|
—
|
|
1,197,821
|
|
Reclassification of fair value of 2014 Private Placement warrants to equity
|
(396,536
|
)
|
(1,181,638
|
)
|
Change in fair value of derivatives
|
—
|
|
2,133,820
|
|
Balance, December 31, 2015
|
6,196
|
|
5,060
|
|
Expiration of warrants
|
(694
|
)
|
—
|
|
Change in fair value of derivatives
|
—
|
|
(5,060
|
)
|
Balance, December 31, 2016
|
5,502
|
|
$
|
—
|
|
As of
December 31, 2016
, the Company had
5,502
warrant shares issued in its September 2012 public offering that still require classification as a liability due to certain registration rights and listing requirements in the agreements. The fair value and outstanding derivative warrant liability related to these warrant shares as of
December 31, 2016
was
$0
. During the
twelve months
ended
December 31, 2016
and
2015
, the Company recorded a gain of
$5,060
and a loss of
$2,133,820
, respectively, due to the change in the fair value of its warrant liability.
The Company's warrants were valued on the applicable dates using a Binomial Lattice Option Valuation Technique (“Binomial”). Significant inputs into this technique as of
December 31, 2016
and
2015
were as follows:
|
|
|
|
Binomial Assumptions
|
December 31,
2016
|
December 31,
2015
|
Fair market value of asset
(1)
|
$4.51
|
$7.66
|
Exercise price
|
$25.00
|
$25.00
|
Term
(2)
|
0.7 years
|
1.7 years
|
Implied expected life
(3)
|
0.7 years
|
1.7 years
|
Volatility range of inputs
(4)
|
55.91%
|
83.00%
|
Equivalent volatility
(3)
|
55.91%
|
83.00%
|
Risk-free interest rate range of inputs
(5)
|
0.85%
|
1.06%
|
Equivalent risk-free interest rate
(3)
|
0.85%
|
1.06%
|
(1) The fair market value of the asset was determined by using the Company's closing stock price as reflected in the OTCQB for the period ended December 31, 2015 and the Nasdaq Capital Market for the period ended
December 31, 2016
.
(2) The term is the contractual remaining term, allocated among twelve equal intervals for purposes of calculating other inputs, such as volatility and risk-free rate.
(3) The implied expected life, and equivalent volatility and risk-free interest rate amounts are derived from the Binomial.
(4) The Company does not have a market trading history upon which to base its forward-looking volatility. Accordingly, the Company selected peer companies that provided a reasonable basis upon which to calculate volatility for each of the intervals described in (2), above.
(5) The risk-free rates used for inputs represent the yields on zero coupon U.S. Government Securities with periods to maturity consistent with the intervals described in (2), above.
NOTE 7. COMMITMENTS & CONTINGENCIES
Credit Agreement
The Company has a secured credit facility agreement with Western Alliance Bank, the parent company of Bridge Bank, N.A. of San Jose, California, which it obtained on March 1, 2013 and expanded on April 13, 2015. Pursuant to this agreement, the Company may submit requests for funding up to
80%
of its eligible accounts receivable up to a maximum credit limit of
$5 million
. This agreement is secured by the Company's accounts receivable and substantially all of the Company's other assets. The agreement renews annually and requires the Company to pay an annual facility fee of
$20,000
(
0.4%
of the credit limit) and an annual due diligence fee of
$1,000
. Interest accrues on the advances at the rate of
prime plus 2% per annum
. The default rate of interest is
prime plus 7%
. As of
December 31, 2016
and
2015
, the Company had
no
advances outstanding under this agreement. As of
December 31, 2016
, the Company had a net accounts receivable balance of
$3,745,695
. Assuming that all of the the Company's accounts receivable balance was eligible for funding, it has available credit of
$2,996,556
under the agreement as of
December 31, 2016
.
The Company incurred
$21,000
and
$23,184
in costs related to this credit facility and expansion during the
twelve months
ended
December 31, 2016
and
2015
, respectively. These costs are capitalized in the Company's consolidated balance sheet within other current assets and are amortized to interest expense over
one year
. The Company amortized
$19,796
and
$18,388
of these costs through interest expense during the
twelve months
ended
December 31, 2016
and
2015
, respectively. The remaining value of the capitalized loan costs related to the Bridge Bank Credit Agreement as of
December 31, 2016
is
$7,000
. This amount will be amortized to interest expense during fiscal 2017.
Lease Commitments
Operating Leases
The corporate headquarters are located at 480 N. Orlando Avenue, Suite 200 in Winter Park, Florida. The Company occupies this office pursuant to a
five years, five months
sublease agreement that expires in April 2019 and is renewable for
one
additional year until April 30, 2020. The Company leases approximately
15,500
square feet based on an annually increasing rate of
$17.50
to
$22.50
per square foot over the lease term. The Company also leases flexible office space under
one year
renewable contracts in Los Angeles, Chicago and Toronto.
Capital Leases
During 2013 and 2014, the Company entered into capital leases for equipment which expire on various dates between December 2015 and January 2016. There are
no
remaining obligations outstanding under capital leases at
December 31, 2016
.
A summary of future minimum lease payments under the Company's non-cancelable leases as of
December 31, 2016
is as follows:
|
|
|
|
|
|
Year ending December 31:
|
|
Operating Leases
|
2017
|
|
$
|
449,295
|
|
2018
|
|
333,417
|
|
2019
|
|
113,516
|
|
Total minimum lease payments
|
|
$
|
896,228
|
|
Total rent expense recorded in general and administrative expense in the accompanying consolidated statements of operations was approximately
$618,940
and
$491,543
for the
twelve months
ended
December 31, 2016
and
2015
, respectively.
Retirement Plans
In December 2007, the Company introduced a 401(k) plan that covered all eligible employees. The Company matches participant contributions in an amount equal to
50%
of each participant's contribution up to
8%
of the participant's salary. The participants become vested in
20%
annual increments after
two years
of service. During the
twelve months
ended
December 31, 2016
and
2015
, the Company incurred
$166,271
and
$125,262
, respectively, in expense for matching employer contributions.
Litigation
From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is, however, subject to inherent uncertainties, and an adverse result in these or other matters may harm the Company's business. The Company is currently not aware of any legal proceedings or claims that it believes would or could have, individually or in the aggregate, a material adverse effect on its operations or financial position.
NOTE 8. STOCKHOLDERS' EQUITY
Authorized Shares
The Company has
200,000,000
authorized shares of common stock and
10,000,000
authorized shares of preferred stock, each with a par value of
$0.0001
per share.
Reverse Stock Split
On January 6, 2016, the Company filed a Certificate of Amendment with the Secretary of State of Nevada to effect a reverse stock split of the issued and outstanding shares of its common stock at a
ratio of one share for every 20 shares outstanding prior to the effective date of the reverse stock split. All current and historical information contained herein related to the share and per share information for the Company's common stock or stock equivalents reflects the 1-for-20 reverse stock split of the Company's outstanding shares of common stock that became market effective on January 11, 2016. There was no change in the number of the Company's authorized shares of common stock.
Nasdaq Uplisting
On January 26, 2016, the Company's shares of common stock commenced trading on the Nasdaq Capital Market under the symbol IZEA. Prior thereto, the Company's common stock was quoted on the OTCQB marketplace under the same symbol.
Stock Issued for Purchases
As further discussed in Note 2, on July 30, 2015, the Company issued
31,821
shares of common stock valued at
$250,000
to satisfy a portion of the guaranteed purchase price payment per the Ebyline Stock Purchase Agreement. On January 29, 2016, the Company issued
114,398
shares of common stock valued at
$848,832
to satisfy the annual guaranteed payment of
$938,532
less
$89,700
in closing related expenses owed as part of the Ebyline Stock Purchase Agreement.
On July 31, 2016, the Company purchased of all of the outstanding shares of capital stock of ZenContent, pursuant to the terms of a Stock Purchase Agreement, dated as of July 31, 2016, by and among IZEA, ZenContent and the stockholders of ZenContent. Upon closing, the Company (a) paid a cash payment of
$400,000
and (b) issued
86,207
shares of common stock valued at
$600,000
(using the 30 trading-day volume-weighted average closing price of the Company's common stock of
$6.96
per share as of July 29, 2016).
Stock Issued for Services
On April 30, 2015 and on December 29, 2015, the Company issued
1,250
and
1,364
shares, respectively, of common stock valued at
$18,700
for employee stock awards during the
twelve months
ended
December 31, 2015
.
On August 15, 2015, the Company issued
84,375
shares of common stock to Brian W. Brady for shares granted to him in 2013 as consideration for loans made to the Company.
The Company issued
13,767
shares of common stock valued at
$107,292
to five directors for their service as directors of the Company during the
twelve months
ended
December 31, 2015
.
The Company issued each of its five independent directors
811
shares of restricted common stock valued at
$6,250
for their service as directors of the Company during the first quarter of 2016. On May 16, 2016, the Company issued each of its five independent directors
3,261
shares of restricted common stock valued at
$18,750
for their service as directors of the Company for the period of April 2016 through December 2016. The stock vested in equal increments of approximately
362
shares per month. Total shares issued during the
twelve months
ended
December 31, 2016
were
20,360
at a total initial value of
$125,000
.
On April 11, 2016, the Company issued
749
shares of restricted common stock valued at
$4,794
to four employees as a contest award.
The following table contains summarized information about nonvested restricted stock outstanding during the
twelve months
ended
December 31, 2016
:
|
|
|
|
|
|
|
|
Restricted Stock
|
Common Shares
|
Weighted Average
Grant Date
Fair Value
|
Weighted Average
Remaining Years
to Vest
|
Nonvested at December 31, 2015
|
—
|
|
$
|
—
|
|
|
Granted
|
21,109
|
|
6.15
|
|
|
Vested
|
(21,109
|
)
|
6.34
|
|
|
Forfeited
|
—
|
|
—
|
|
|
Nonvested at December 31, 2016
|
—
|
|
$
|
—
|
|
|
Total expense recognized for stock-based payments for services during the
twelve months
ended
December 31, 2016
and
2015
was
$133,897
and
$125,992
, respectively. The fair value of the services is based on the value of the Company's common stock over the term of service. The Company recognized a gain of
$4,103
as a change in the fair value of derivatives during the
twelve months
ended
December 31, 2016
, based on the change between the Company's stock price upon issuance and the Company's stock price upon the date of vesting. There is
no
remaining future compensation related to nonvested restricted awards as of
December 31, 2016
.
Warrant Transactions
Warrant Issuances:
On January 22, 2015, the Company issued a warrant to purchase
5,000
shares of common stock to an investor relations consultant. The warrant was fully vested on the date of issuance, has an exercise price of
$10.20
per share and expires on January 22, 2020. The fair value of the warrant upon issuance was
$7,700
and the Company received
$100
as compensation for the warrant. The fair value of the warrant issuance was recorded as an increase in additional paid-in capital in the Company's consolidated balance sheet and the net
$7,600
compensation expense was recorded in general and administrative expense during the
twelve months
ended
December 31, 2015
.
On June 30, 2015, the Company issued a warrant to purchase
12,500
shares of common stock to an investor relations consultant. The warrant was fully vested on the date of issuance, has an exercise price of
$10.20
per share and expires on June 30, 2020. The fair value of the warrant upon issuance was
$44,250
. The fair value of the warrant issuance was recorded as an increase in additional paid-in capital in the Company's consolidated balance sheet and compensation expense in general and administrative expense during the
twelve months
ended
December 31, 2015
.
Warrant Exercises:
From July 20, 2015 through August 14, 2015, the Company offered a
25%
discount on the warrant exercise prices to investors holding the series A and series B warrants to purchase common stock issued in its August - September 2013 private placement (the “2013 Warrants”) and a
26%
discount on the warrant exercise prices to investors holding series A and series B warrants to purchase common stock issued in its February 2014 private placement (the “2014 Warrants” and together with the 2013 Warrants, the "Warrants"). If and to the extent a holder did not exercise its Warrants at the reduced exercise prices during this time period,
the exercise prices of any unexercised Warrants remain at their original exercise prices of
$5.00
and
$10.00
per share for the series A and series B 2013 Warrants, respectively, and
$7.00
and
$10.00
per share for the series A and series B 2014 Warrants, respectively.
The warrant exercise offer was made pursuant to the terms of Warrant Amendment and Exercise Agreements, dated July 20, 2015, entered into with holders owning more than
70%
of the Company's outstanding 2013 and 2014 Warrants. In exchange for the reduction in the warrant exercise price, the investors holding a majority of the 2014 Warrants agreed to amend the 2014 Warrants to remove the price-based anti-dilution adjustment provisions contained in the 2014 Warrants. The removal of these provisions from the 2014 Warrants eliminated the provision that required liability classification of the 2014 Warrants and quarterly non-cash adjustments reflecting changes in the fair value of the derivative liability on the Company’s financial statements. Except for the temporarily reduced exercise prices and elimination of the anti-dilution adjustment provisions in the 2014 Warrants, the terms of the 2013 Warrants and 2014 Warrants remain unchanged. As a result of the amendment in the 2014 Warrants terms, the 2014 Warrants no longer require liability classification after August 14, 2015 (See Note 6).
At the close of the offer period on August 14, 2015, investors exchanged and converted
1,392,832
shares underlying the 2014 Warrants at the
26%
discount for total proceeds of
$8,760,805
and
798,715
shares of the 2013 Warrants at the
25%
discount for total proceeds of
$4,100,252
. This resulted in the issuance of a total of
2,191,547
shares of common stock at an average exercise price of
$5.87
per share for total proceeds of
$12,861,057
. The exercise prices of any Warrants not exercised during the Warrant conversion offer period have reverted back to their original exercise prices.
The amendment of the Warrants to reduce the exercise price required the Company to treat the adjustment as an exchange whereby it computed the fair value of the Warrants immediately prior to the price reduction and the fair value of the Warrants after the price reduction. The
$1,197,821
and the
$647,989
change in the fair value of the 2014 and 2013 Warrants, respectively, as a result of the price reduction, was treated as a
$1,845,810
loss on exchange and recorded in the Company's consolidated statement of operations during the
twelve months
ended
December 31, 2015
.
As a result of the above transactions, the fair value of
$5,348,408
on the
1,392,832
exercised 2014 Warrants and the fair value of
$1,181,638
on the
396,536
remaining unexercised 2014 Warrants as of August 14, 2015 was moved to equity as of August 14, 2015. This reclassification plus the
$647,989
loss on exchange of the 2013 Warrants already classified as equity reflects a
$7,178,035
total change recorded in the Company's consolidated statement of stockholders' equity during the
twelve months
ended
December 31, 2015
.
The resale of the common stock underlying the 2013 and 2014 Warrants is covered by IZEA’s Registration Statements on Form S-1 (Registration Nos. 333-191743, 333-195081 and 333-197482), which are on file with the Securities and Exchange Commission.
Stock Options
In May 2011, the Board of Directors adopted the 2011 Equity Incentive Plan of IZEA, Inc. (the “May 2011 Plan”). The May 2011 Plan allows the Company to grant options to purchase up to
1,000,000
shares as an incentive for its employees and consultants. As of
December 31, 2016
, the Company had
28,081
shares of common stock available for future grants under the May 2011 Plan.
On August 22, 2011, the Company adopted the 2011 B Equity Incentive Plan (the “August 2011 Plan”) reserving
4,375
shares of common stock for issuance under the August 2011 Plan. As of
December 31, 2016
, the Company had
no
shares of common stock available for future grants under the August 2011 Plan.
Under both the May 2011 Plan and the August 2011 Plan (together, the "2011 Equity Incentive Plans"), the Board of Directors determines the exercise price to be paid for the shares, the period within which each option may be exercised, and the terms and conditions of each option. The exercise price of the incentive and non-qualified stock options may not be less than
100%
of the fair market value per share of the Company’s common stock on the grant date. If an individual owns stock representing more than
10%
of the outstanding shares, the price of each share of an incentive stock option must be equal to or exceed
110%
of fair market value. Unless otherwise determined by the Board of Directors at the time of grant, the purchase price is set at the fair market value of the Company’s common stock on the grant date, the term is set at ten years and the options typically vest on a straight-line basis over the requisite service period as follows:
25%
of options shall vest one year from the date of grant and the remaining options shall vest monthly, in equal increments over the following
three years
. The Company issues new shares to the optionee for any stock awards or options exercised pursuant to its 2011 Equity Incentive Plans.
A summary of option activity under the 2011 Equity Incentive Plans for the
twelve months
ended
December 31, 2016
and
2015
, is presented below:
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
Common Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Life
(Years)
|
Outstanding at December 31, 2014
|
595,786
|
|
|
$
|
9.20
|
|
|
6.5
|
Granted
|
277,059
|
|
|
7.43
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
Forfeited
|
(42,246
|
)
|
|
7.70
|
|
|
|
Outstanding at December 31, 2015
|
830,599
|
|
|
$
|
8.65
|
|
|
6.8
|
Granted
|
179,998
|
|
|
6.16
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
Forfeited
|
(50,733
|
)
|
|
10.15
|
|
|
|
Outstanding at December 31, 2016
|
959,864
|
|
|
$
|
8.11
|
|
|
6.4
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
545,558
|
|
|
$
|
9.20
|
|
|
5.4
|
During the
twelve months
ended
December 31, 2016
and
2015
, no options were exercised. The fair value of the Company's common stock on
December 31, 2016
was
$4.51
per share. The intrinsic value on outstanding options as of
December 31, 2016
was
$8,080
. The intrinsic value on exercisable options as of
December 31, 2016
was
$7,098
.
A summary of the nonvested stock option activity under the 2011 Equity Incentive Plans for the
twelve months
ended
December 31, 2016
and
2015
, is presented below:
|
|
|
|
|
|
|
|
|
|
Nonvested Options
|
Common Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Weighted Average
Remaining Years
to Vest
|
Nonvested at December 31, 2014
|
372,092
|
|
|
$
|
4.00
|
|
|
3.0
|
Granted
|
277,059
|
|
|
3.84
|
|
|
|
Vested
|
(147,759
|
)
|
|
4.32
|
|
|
|
Forfeited
|
(39,466
|
)
|
|
3.44
|
|
|
|
Nonvested at December 31, 2015
|
461,926
|
|
|
$
|
3.84
|
|
|
2.8
|
Granted
|
179,998
|
|
|
2.88
|
|
|
|
Vested
|
(187,181
|
)
|
|
4.00
|
|
|
|
Forfeited
|
(40,437
|
)
|
|
3.76
|
|
|
|
Nonvested at December 31, 2016
|
414,306
|
|
|
$
|
3.60
|
|
|
2.6
|
Stock-based compensation cost related to stock options granted under the 2011 Equity Incentive Plans is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes option-pricing model that uses the assumptions stated in Note 1. Total stock-based compensation expense recognized on option awards outstanding during the
twelve months
ended
December 31, 2016
and
2015
was
$748,092
and
$705,466
, respectively. Stock-based compensation expense was recorded as
$89,583
to sales and marketing and
$658,509
to general and administrative expense in the Company's consolidated statement of operations during the
twelve months
ended
December 31, 2016
. Stock-based compensation expense was recorded as
$58,595
to sales and marketing and
$646,871
to general and administrative expense in the Company's consolidated statement of operations during the
twelve months
ended
December 31, 2015
. Future compensation related to nonvested awards expected to vest of
$1,215,910
is estimated to be recognized over the weighted-average vesting period of approximately
three years
.
Employee Stock Purchase Plan
On April 16, 2014, stockholders holding a majority of the Company's outstanding shares of common stock, upon previous recommendation and approval of the Board of Directors, adopted the IZEA, Inc. 2014 Employee Stock Purchase Plan (the “ESPP”) and reserved
75,000
shares of the Company's common stock for issuance thereunder. Any employee regularly employed by the Company for
90 days
or more on a full-time or part-time basis (
20
hours or more per week on a regular schedule) is eligible to participate in the ESPP. The ESPP operates in successive six month offering periods commencing at the beginning of each fiscal year half. Each eligible employee who elects to participate may purchase up to
10%
of their annual compensation in common
stock not to exceed
$21,250
annually or
1,000
shares per offering period. The purchase price will be the lower of (i)
85%
of the fair market value of a share of common stock on the first trading day of the offering period or (ii)
85%
of the fair market value of a share of common stock on the last trading day of the offering period. The ESPP will continue until January 1, 2024, unless otherwise terminated by the Board. Employees paid
$76,170
to purchase
13,403
shares of common stock during the
twelve months
ended
December 31, 2015
. Employees paid
$58,021
to purchase
11,453
shares of common stock during the
twelve months
ended
December 31, 2016
. As of
December 31, 2016
, the Company had
49,762
remaining shares of common stock available for future grants under the ESPP.
NOTE 9. INCOME TAXES
The components of the Company’s net deferred income taxes are as follows (rounded):
|
|
|
|
|
|
|
|
|
December 31,
2016
|
December 31,
2015
|
Deferred tax assets:
|
|
|
Net operating loss carry forwards
|
$
|
17,875,000
|
|
$
|
15,649,000
|
|
Accrued expenses
|
256,000
|
|
187,000
|
|
Stock option and warrant expenses
|
804,000
|
|
618,000
|
|
Accounts receivable
|
90,000
|
|
52,000
|
|
Deferred rent
|
36,000
|
|
44,000
|
|
Other
|
3,000
|
|
3,000
|
|
Total deferred tax assets
|
19,064,000
|
|
16,553,000
|
|
Valuation allowance
|
(18,475,000
|
)
|
(15,871,000
|
)
|
Net deferred tax assets
|
589,000
|
|
682,000
|
|
|
|
|
Deferred tax liabilities:
|
|
|
Fixed and tangible assets
|
(589,000
|
)
|
(682,000
|
)
|
Total deferred tax liabilities
|
(589,000
|
)
|
(682,000
|
)
|
|
|
|
Total deferred tax assets (liabilities)
|
$
|
—
|
|
$
|
—
|
|
The following summary reconciles differences from taxes at the federal statutory rate with the effective rate:
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
2015
|
Federal income tax at statutory rates
|
(34.0
|
)%
|
(34.0
|
)%
|
Change in deferred tax asset valuation allowance
|
39.0
|
%
|
28.8
|
%
|
Deferred state taxes
|
(3.2
|
)%
|
(2.5
|
)%
|
Non-deductible expenses:
|
|
|
Meals & entertainment
|
0.4
|
%
|
0.3
|
%
|
Change in fair value of warrants
|
—
|
%
|
6.4
|
%
|
ISO stock compensation
|
1.3
|
%
|
0.7
|
%
|
Change in state deferred rate
|
(4.2
|
)%
|
—
|
%
|
Other
|
0.7
|
%
|
0.3
|
%
|
Income taxes (benefit) at effective rates
|
—
|
%
|
—
|
%
|
The Company has incurred net losses for tax purposes every year since inception. At
December 31, 2016
, the Company had approximately
$47,080,000
in net operating loss carryforwards for U.S. federal and state income tax purposes that expire in various amounts between the years of 2026 and 2036. The Company's ability to deduct its historical net operating losses may be limited in the future due to IRC Section 382 as a result of the substantial issuances of common stock in 2012 through 2015. Certain of the Company's net operating losses acquired in connection with the Ebyline acquisition also may be limited by IRC Section 382. The change in valuation allowance for the
twelve months
ended
December 31, 2016
and
2015
was an increase of
$2,604,000
and
$4,648,000
, respectively, resulting primarily from net operating losses generated during the periods.
NOTE 10. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing the net income or loss by the basic weighted-average number of shares of common stock outstanding during each period presented. Diluted earnings per share is computed by dividing the net income or loss by the total of the basic weighted-average number of shares of common stock outstanding plus the additional dilutive securities that could be exercised or converted into common shares during each period presented less the amount of shares that could be repurchased using the proceeds from the exercises.
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Net loss
|
|
$
|
(7,560,200
|
)
|
|
$
|
(11,308,171
|
)
|
Weighted average shares outstanding - basic and diluted
|
|
5,380,465
|
|
|
3,737,897
|
|
Basic and diluted loss per common share
|
|
$
|
(1.41
|
)
|
|
$
|
(3.03
|
)
|
The Company excluded the following weighted average items from the above computation of diluted loss per common share as their effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Stock options
|
|
889,450
|
|
|
723,834
|
|
Warrants
|
|
551,867
|
|
|
1,873,547
|
|
Restricted stock units
|
|
—
|
|
|
58,475
|
|
Total excluded shares
|
|
1,441,317
|
|
|
2,655,856
|
|
NOTE 11. RELATED PARTY TRANSACTIONS
In the warrant exchange transaction completed on August 14, 2015 as discussed in Note 8, the Special Situations funds, the Company's largest institutional shareholder, and Brian W. Brady, a director of the Company, participated in the transaction by exercising warrants that they received in the Company's previous private placements. The Special Situations funds made a payment in the amount of
$3,414,572
in consideration for
542,858
shares of the Company's common stock, and Mr. Brady made a payment in the amount of
$2,460,208
in consideration for
502,940
shares of the Company's common stock. The Special Situations funds and Mr. Brady exercised their warrants at the same price and on the same terms and conditions as all other warrant holders in the transaction, the negotiation of which terms was led by the Special Situations funds and other institutional shareholders. Mr. Murphy and Mr. Gardner also participated in the warrant exchange transaction and made payments of
$2,741
and
$179,715
, respectively, in consideration for
436
and
28,572
, respective shares of the Company's common stock.
NOTE 12. SUBSEQUENT EVENTS
No material events have occurred after
December 31, 2016
that require recognition or disclosure in the financial statements except as follows:
On January 30, 2017, the Company issued
200,542
shares of common stock valued at
$938,532
(using the 30 trading-day volume-weighted average closing price of IZEA's common stock of
$4.68
per share as of January 30, 2017) to satisfy the annual guaranteed payment owed as part of the January 2015 Ebyline Stock Purchase Agreement. Such shares were issued in accordance with the exemption contained in Section 4(a)(2) of the Securities Exchange Act of 1933, as amended.