Ryan Schram - COO LeAnn Hitchcock - CFO Ted Murphy - Founder, Chairman & CEO

Matt Tiampo - Craig-Hallum Alex Silverman - Special Situation Funds Jon Hickman - Ladenburg Thalmann George Kafkarkou - Private Investor

Welcome to the IZEA Second Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Ryan Schram, Chief Operating Officer for IZEA. Thank you, Mr. Schram, you may now begin.

Good afternoon everyone and welcome to IZEA's Q2 2015 investor update. I'm Ryan Schram, Chief Operating Officer at IZEA and joining me on the call this afternoon is our Chief Financial Officer, and IZEA Founder, Chairman & CEO, Ted Murphy. On behalf of our entire team at IZEA we’re pleased to have you with us today as we share updates and perspective on our business. During the course of today's call our management team will discuss IZEA's business outlook and the process of doing so will make some forward statements regarding the company. These statements are predictions based on our team's expectations as of today. Actual results or events could differ due to the number of risks and uncertainties including those mentioned in our most recent filings with the SEC, the company assumes no obligations to update any forward-looking statements made during this call. Now with the appropriate disclosures out of the way, I will turn the call over to LeAnn who will walk us through IZEA's financial performance in the second quarter of 2015. LeAnn?

Thank you, Ryan. Good afternoon everyone. I'm pleased to share that IZEA had another record breaking quarter. IZEA had it's best quarterly revenue in the history of the company, Q2 2015 revenue 135% to 4.63 million compared to 1.7 million in Q2 2014 this increase is primarily attributable to the creation of our content only revenue stream through the acquisition of Ebyline and continued increases in our existing sponsored social revenue. Content revenue represented $2.2 million or 47% of total revenues for the quarter. Sponsored social revenue represented 2.4 million or 52% of total revenues for the quarter. A significant amount of business booked in Q2 was weighted towards the back half of the quarter as a result much of the bookings were not recognized as revenue within this quarter. At the end of the quarter the company had unearned revenue of 2.7 million with an additional 2.5 million of booked business not yet started for a total of 5.2 million that is expected to result in future revenue. On average content starts going live 30 days after booking a campaign and our average campaign runs over a 90 day period. Therefore we expect much of this $5.2 million to be recognized as revenue in the coming months. Gross profit for the quarter was 1.7 million up from 1.3 million during the same quarter last year and increase of 30%, the gross profit increase is attributable to the increase in sales during the quarter. Gross profit margin for the quarter was 37% from 67% during the same period in 2014. This is largely due to substantially lower profit margins from Ebyline related content operations. Gross profit margin for the quarter for sponsored social was 58% while gross profit for content was 11%, Ebyline's profit margin on content sales in Q2 2014 was 9%. Therefore we are encouraged by the gains made during the first few months of integration and believe that over time there is room for significant improvement although the gross profit margin for the first and second quarters were higher than the annual target previously indicated by management. We believe that 30% to 35% is still the proper gross profit range for the year given our anticipation of increases in lower margin content revenue and increased participation by IZEA ex-partners that will result in lower sponsored social margins. We expect margin on content revenue will improve over time due to growth in our managed services over the content business. Operating expenses for the first quarter were 3.9 million compared to 2.5 million in the same period in 2014. We are actively making investments and additional sales in engineering staff. We expect the growth in expenses will outpace the growth in our gross profit near term as we expand our personnel to support our managed content business and we increase our engineering expenses to improve and support our web based platforms and IZEA ex-partners. These investments are being made in order to provide the infrastructure to create continued revenue growth at higher margins in coming years, operating EBITDA for the quarter was a loss of 1.7 million compared to a loss of 932,000 during the same period last year. This is primarily due to the increased overhead with the acquisition of Ebyline and our investment in sales and engineering personnel. Net loss for the second quarter was 2 million compared to a net income of approximately of 2 million in 2014. Basic and alluded loss per common share for the quarter was $0.03 compared to basic and diluted income per common share of $0.04 and $0.03 respectively for 2014. This is primarily due to a $3 million difference in the change in terms of the company derivatives and the increase in operating expenses during 2015. At June 30th, 2015 our cash and cash equivalents balance was 2.5 million and we had a positive working capital balance. In addition to our cash on hand we have a $5 million credit facility with Bridge Bank which is currently untapped. We are currently offering a 25% discount on the warrant exercise prices to investors holding warrants from 2013 and a 26% discount on the warrant exercised prices to investors holding warrants from 2014. Through this Friday, August 14th the proceeds received from the conversion of these warrants is expected to eliminate the volatile effect of the change in fair value of derivatives on our financial statements each period. It will also provide us with sufficient working capital to pay for our operating expenses and any future install payments due on my Ebyline purchase obligation. I will now pass it over to Ryan to speak about the brands and agencies we’ve partnered with in the second quarter.

Thanks, LeAnn. From pipeline to bookings to revenue Q2 marked several new milestones for IZEA, a new opportunity pipeline or the total value proposals placed in front of clients was $32 million in Q2, a new all-time record that was a 159% increase in activity from the same period in 2014. In addition to strong overall sales IZEA continues to see impressive growth of our average deal size, the company's average deal size for the first half of 2015 climbed 67% from the first half of 2014, our team attributes the continued acceleration of pipeline creation and the opportunity size to three macro effects of our business. Number one, the realization of the investment that we've made in human capital focused on client development towards the end of fiscal 2014. Number two, the ability for our clients development team efforts to upsell cross-sell both influencer and content marketing to our clients. And number three the continued recognition by leading marketers that influencer and content centered solutions need to be a core investment focus in their overall mix. Equally, exciting our client development team achieved another all-time record on the net bookings front with $6.2 million during Q2 that’s 141% increase over the same quarter last year and just one last record, June was the first time in company history that we cracked a 2.5 million market of bookings in a single month. We also were fortunate enough to welcome back many repeat clients during Q2 including 3M, [indiscernible], Chase, [indiscernible] Dell, Dollar General, e-bay, Kellogg's, Kimberly Clark Georgia Pacific, Groupon, MetLife and Unilever amongst others. They were enjoyed by impressive roster of new clients including Bosch, Danone Group, Intercontinental Hotel Group, Nestle, New Balance, Pfizer and Wendy's also last quarter we begin to see their benefits of cross sell and sponsored social and virtual and newsroom content marketing services. Several longtime IZEA clients are now taking advantage of our content creation capabilities with professional journalists and subject matter experts. In some cases we're seeing content budgets at or above the budgets for sponsored social from the same climate as you can imagine our team is bullish and the opportunity to that [indiscernible] Ebyline acquisition has afforded us specifically as it relates to business to business clients and ongoing relationships with publishers, broadcasters and other firms that are part of the media content ecosystem. At the conclusion the second quarter the quarter carrying members of IZEA's client development staff totaled 39 people with the vast majority of those based on the Winter Park Headquarters in Florida. In addition to our field offices in New York City, Los Angeles, Chicago and Detroit and speaking of field offices IZEA official expanded into Canada Tiffany Heimpel leading our efforts in the ground there out of Toronto. We’re going to capitalize on our first mover advantage in that country by adding additional team members and open an actual office in the coming quarters. Beyond our client services organization team IZEA can do a total of over 115 full time employees by the end of Q2 up from 77 members one year ago at the same time. We will continue to hire and client development and look to add over a dozen net new court hearing team members by the end of this year with approximately half of the content and B2B focused clients. Now for some additional insight about IZEA and a look at what's ahead for the second half of 2015, I'll turn the call over IZEA's Chairman and Chief Executive Officer Ted Murphy.

Thank you, Ryan. I'm very pleased with the progress we're making on the sales front, we are executing on our plan and delivering incredible growth in pipeline bookings and revenue. I'm proud of what we have accomplished and continue to be confident in our ability to grow IZEA bookings to $25 million for the 2015 fiscal year. The second quarter of 2015 was all about execution for IZEA. We drove sales to unprecedented levels. We work to integrate Ebyline and IZEA corporate cultures, processes and offerings. We revamped our corporate website and other marketing materials, we had a key team members in engineering under the leadership of our newly appointed Vice President of Engineering, Chris Staymates and we set the process in motion for an eventual uplifting, more on that later But for now let's turn our attention to the network. We believe that there are three keys to long term success of IZEAx, we must offer advertisers a broad network of creators providing them with access to high quality diversity and scale. We must provide creators with an opportunity to work with high quality brands and publishers that they truly enjoy, we must provide a best of breed technology platform that makes conducting business with each other simple and intuitive. We continue to make progress on all three aspects of IZEAx and remain dedicated to ongoing improvement and value creation. At quarter end we had 514,000 registered users in IZEAx up from 66,000 in Q2 2014 a year over year increase of 679%. IZEAx aggregate network reach increased 2.97 billion fans and followers at the end of the quarter up 9.6% compared to Q2 2015 and 460% year-over-year. We continue to scale our creator base offering our clients the most robust marketplace in terms of network size and quality. This number does not include the creator a base from our Ebyline acquisition which adds another 15,000 creators with professional journalism backgrounds. Ebyline creators will be migrated to the IZEAx platform over the coming year. We continue to strategically add IZEAx partners to the ecosystem. In Q2 two announced WeConnect and Whistle Sports, these partnerships are important in that they reflect a refined targeting of partnership opportunities with a focus on those that can have a more meaningful impact on licensing fees, content and sponsorship revenue in future quarters. The appointment of Staymates as Vice President of Engineering has already proved to be a positive move for the company. He's been instrumental in building out the data, user experience, and mobile teams and I'm happy to report that we only have one engineering hire left for the remainder of the year. The size and composition of the team is radically different than one year ago and we're delivering a higher quality product faster than ever before. That said many of the biggest changes and features are currently hidden from the vast majority of our users. As we prepare for a massive upgrade to the ecosystem in October of this year. In Q2 we also added Jill Golder, CFO of Ruby Tuesday to the Board. Jill has been an incredible asset to the board and the management team as we have navigated through the warrant conversion process. Speaking of the warrant conversion process, we now have signed commitments in excess of $12 million dollars with over 80% participation by work holders. The warrant conversion window will close on Friday of this week and I'm thrilled by the overwhelming level of support we perceive from our shareholders. I would like to thank our institutional investors including Special Situations Funds, Private Fund [ph], Goldman Partners, Diker Management and Potomac Capital Partners for their commitments to exercise 100% of their warrant holdings. I would also like to thank the IZEA Board of Directors for their commitment to convert 100% of their holdings for a total of $2.8 million. We would not be here today if it weren't for the incredible shareholder base we have established. I appreciate the vote of confidence in our team and I'm grateful of the opportunity we have been afforded to continue executing on our plan. In October of this year we will be unveiling multiple new IZEAx technology initiatives at IZEA Fest. These initiatives will focus on data, analytics, targeting and the creator experience including mobile devices. IZEA Fest will be held at Walt Disney World in Orlando and includes speakers from our clients at HP, Scott's, Discover Card, Kellogg's and Lenovo as well as some of the worlds' biggest creators. In addition to this content we will now have several partnerships including technology integration with a Top 20 global website that will provide a new revenue stream for the company moving forward. This event is a great opportunity to understand our roadmap for 2016 and beyond and I sincerely hope you can join us. In February of last year we made a commitment to investors that we would use our best efforts to be uplifted to a major exchange within two years. I'm pleased to share that I believe we are on track to make good on that commitment and that we are likely a bit ahead of plan. Two weeks ago IZEA officially filed for a NASDAQ capital market up listing but we have not yet received confirmation of eligibility from NASDAQ. We believe that upon close of the warrant conversion you will meet all the fundamental requirements for an uplifting outside of the minimum share price requirement, we intend to do a reverse stock split at some point in the not too distant future and have already received greater than 50% shareholder approval for a reverse split. As a company we remain focused on top line sales growth while being aware and respectful of the bottom line implications, we believe that the capital infusion on the other side of the warrant conversion provides enough capital for us to reach cash flow positive barring any unforeseen circumstances. We continue to build momentum as a company, our team is executing and delivering impressive results in a rapidly changing business climate. I'm excited by the new initiatives we've been working on and I look forward to sharing those with you in October. Thank you for spending your time with us this afternoon. I would like to open up the call for Q&A.

[Operator Instructions]. Our first question is from Matt Tiampo of Craig-Hallum. Please go ahead.

I have a couple quick questions on gross margin. It looks like you've had some pretty good progress impact in the Ebyline business fairly quickly, been a little quick than we would've expected. Maybe talk through some of the stuff that you’re taking to move that gross margin upwards and then on the other side of the business on the sponsor [indiscernible] side it looks like that gross margin is actually may be down a little year-over-year, is that a greater contribution perhaps from white label. Any color you can give us would be great. Thanks.

On the content side of the business you know we have definitely been seeing some positive momentum there, a lot of that is being driven by the brands that we’re selling to, they're using the platform that just have a higher margin so that the mix between brand business and their traditional publisher business is changing a little bit faster than we had originally anticipated. And that's what's having the positive impact there and that's something that that we believe is going to continue to happen based on the pipeline that we have right now. On the sponsored social side, last year we had just phenomenal margins on the sponsored social side really higher than what we had even anticipated last year. I think that you're starting to see that kind of settle in to a more natural margin profile and you're also starting to see some of the impact from partners as well, but I think that the profile that you're seeing here in this quarter is probably a little bit more representative of where it should be. And then as we see more partners come on it's going to have some downward pressure on that.

The next question is from Alex Silverman of Special Situation Funds. Please go ahead.

So Matt stole my question on the Ebyline gross margin. LeAnn, can you walk through the bookings that did not convert into revenue a little faster than I could tell you, could you repeat those?

Sure. We have on our balance sheet about $2.7 million in unearned revenue. This is related to campaign that have been booked in this quarter, prior quarters that has been started but we have not yet recognized the revenue on that. And then we have another $2.5 million in bookings that we've seen but they've not been billed or started yet so they are not reflected anywhere in our financial statement. So the additive together is about $5.2 million in revenue they will translate into future revenue in the coming quarters.

Can I assume that much of that $2.5 million of bookings that haven't started yet were booked in the June quarter?

That is correct.

And off the 2.7 million that was u earned revs roughly how much of that was booked in the June quarter and how much of it was booked?

Our typical translation is about 120 days from booking to final completion on average. And so it could be anywhere, this part of that was from the Q1, but the majority is probably it well is from Q2two.

[Operator Instructions]. And the next question is from Jon Hickman of Ladenburg Thalmann. Please go ahead.

My question is really is LeAnn also, I was trying to figure out exactly what kind of blended warrant conversion price would be and I got something around like in the low $0.30 range. Have you done that calculation with like 80% of your warrant holders already signed up to convert? Could you share any information on that topic for us?

Sure. Definitely the average is going to be right there around the $0.30 mark and that represents a 25% discount on their current holding for 2013 warrant holders and a 26% discount from the 2014 holders.

So if 80% of your warrant holders convert. How many shares will be outstanding and how many warrants will be left?

We're expecting that probably over 80% of the warrants are going to be exercised -- our current outstanding warrants, I'm sorry, will be about 80% - 85% so that -- it's going to be about maybe 10 million remaining. However one of the things that we did in this deal was it's removing the anti-dilution provision from the 2014 warrant which is what's creating the change fair value derivative each quarter. So without that provision in the warrant we no longer have the fair pay value them at the end of every quarter and all of that liability should move to equity in quarter three.

Okay. And then the share count of 10 million remaining, the outstanding share count will be 110 million - 115 million?

That would be about correct, yes.

Okay, and then Ted, you said you're going to try and effect a reverse split so you can get the minimum bid price for it now by 2016 [ph]?

Yes.

Should that process take longer than about three months to complete, you already filed?

We believe that you know barring any unforeseen delays it should be within three months if not sooner.

Okay and then LeAnn, one more question for you. So whether the $5.2 million of kind of unbooked revenue, you made the comment I think in your prepared remarks that you expect the majority of that to be recognized in this September quarter we're in right now is that true?

That is correct.

The next question is from Dennis Dolmen [ph], a Private Investor. Please go ahead.

LeAnn, following up on the warrant conversion, assuming the 80% is converted on a fully diluted basis how many shares of stock would be outstanding?

That's really going to be around 110 million mark.

I'm sorry I thought he wasn't specific as to whether it was fully diluted or not. Second question, there was a little blurb a few weeks ago reporting that you had entered into a settlement on the lawsuit. Has there been any -- is that true, do you have any comment on that?

I assume that you're referring to the Blue Calypso patent.

Yes.

We’re continuing discussions with them but there has been no settlement.

Okay. And finally you indicated that you had received 50% approval or indication in stockholders for the reverse split. Was that informal formal request as stockholder I'm not too sure whether or not I received any information, I might have I just might have missed it.

We received a written consent by over 50%.

And was that on a broad request basis, I mean I would have approved it myself but I was just curious how that came about the process?

We went to the largest holders because the stock is so closely held and seek approval from those shareholders.

Any reason why you didn't go to everyone else? Just curious.

Yes we just needed to get a majority vote in order to be able to affect the reverse. Technically we didn't need to do that under Nevada law but we wanted to do that.

I appreciate that, I voted myself.

The next question is from George Kafkarkou, a Private Investor. Please go ahead.

I know two or three people have already asked this one but to be clear I should figure five 5.2 million dollars of revenue in Q3 from activities in Q2 such that whatever number you're doing Q3 5.2 million is incremental to Q3 activity revenue correct?

Yes the majority of the 5.2 million should come to recognize as revenue in Q3. It always is a timing issue specifically based on the individual specific campaigns we may book something in Q2 but they don't want us to run until Christmas but on average if we average all of our campaigns it will be over about 120 days before from book to the time that they're completed. Now as we get to larger campaigns it may change the skew or the weight of that as we book sometimes large dollar campaigns, but on average we are anticipating most of that Q2 hit in Q3.

And the reason for the question is that you know clearly the average deal size continues to grow. You know you guys had your best ever month in terms of the June month of $2.5 million in bookings or more than that and it's all feeding into clearly you know the commitment of heating or surpassing a revenue figure for the year of $23.1 million. So given that we've done $8.7 million in Q1 and Q2 it seems to me with that 5.2 million that you're moving forward that will be Q3, it look looks very encouraging that you will perhaps overachieve even that $23.1 million revenue commitment for this fiscal year. How do you guys think about that?

Yes the way we look at that is you know we are very much so focused on the bookings number and generating the sales, on the revenue side we’re definitely encouraged to be sitting here and you know be at 8.7 million in revenue with another 5.2 million that's essentially backlog for us. But we also recognize that the timing of that is largely out of our control. It's really dependent on our clients and when they want to run campaigns and when the end dates are. So I would say I still feel comfortable that we're going to be in that range. I feel more comfortable committing to the bookings number and you know I feel very comfortable that we're going to 25 or potentially more. But just recognize that we may wind up at the end of the year with an even larger unearned revenue number or booked but not build number depending on what campaigns come in and when.

So the single number that excites me the most is the new opportunity pipeline which I think is defined as proposals that have been submitted with real numbers. So given you know in the same quarter last year that number was 12.8 million and now it's 32.3 million how do you guys think about that 32.3 million number? Obviously you know that's hugely impressive but how should we think about that number other than make clearly growing, and there is great demand which is incredibly exciting. But how should we internalize that number? You know the question I'm asking you know, how much of that do you expect to fall in terms of bookings this fiscal year and so on and so forth.

So we look at this as this, this is the upper funnel activity, right? So your definition is correct. We look at our pipeline as the proposal the total aggregate number of the proposals value to be placed in front of clients during a period of time. So I think you have a couple of factors going on there. First as we've signaled in previous calls the investment that we've made in personnel related to client development unlock those opportunities right? We have arguably one of the largest sales staff in this space and we feel that’s a huge defensible position for us to be able to go and work with clients of all shapes and sizes. Historically prior to the acquisition of Ebyline we were selling largely to business consumer focused businesses which well they have perhaps the more sexy, you know blue list [ph] kind of names what also we found is that by focusing on content marketing we tend to address other kinds of businesses that sell B2B or business to channel, when I mean by that are life sciences companies, oil and mining companies, manufacturing companies that all require a sophisticated amount of content marketing. So I would interpret that uptake in the ability of our team to sell to those different audiences and also cross sell existing clients. The composition I would say in terms of how but that's on bookings reiterating the points that Ted and LeAnn made, it really depends on the market is objective and what we're aligning either sponsored social or virtual newsroom against in terms of a time frame for their campaign needs. We don't dictate when the Super Bowl is for example but what we do like about businesses like virtual newsroom or on the content front is that those are commitments that can be more recurring in nature; you know the need for white papers, blog posts, infographics, that’s an evergreen need where perhaps in the past you know a sponsored social singular campaign would have been for just the [indiscernible] for example. So there is a lot of changing dynamics but reason for us to be bullish. I hope that helps.

No, it does. It just appears there is a lot of headroom for even further growth in this what drives the business. One last question if I could, to do with the reverse splits. I didn’t if you shared or if you did I missed it what the actual reverse split number will be will be? Will it five for one, ten for one or whatever and what you know -- I cannot imagine what kind of activities are you doing to support that? Would that include things like doing more with the branding or rebranding because I picked something up online today along those lines.

Yes. So in terms of the reverse stock splits we have not picked an exact ratio. We're more looking at a price range and looking at through that lens. But that will be determined at the time that we choose to do the split, in terms of supporting the stock and you know building liquidity around the company in the stock we have a pretty massive effort underway here and you know if you pick something up online about rebranding we have some things that we are -- that we're sharing their through our dribble account. We are going to actually be rebranding the company, we're going to unveil that rebrand at a IZEA Fest. The name of the company will still remain IZEA but we're going to be updating the logo and lot of the marketing materials and assets and that will coincide with the other big announcements that we make it IZEA Fest. So kind of all these things are coming together at the same time with the uplifting with IZEA Fest, the rebrand, the new technology, the new partnerships and where we're really excited about that. Also going to be using our [indiscernible] to get on TV pretty extensively here moving forward. I'll be doing some appearances here towards the end of this week and our PR team works pretty hard on our behalf to make sure that we get pretty consistent mentions in the industry rags and also outside of our core space.

The next question is from Alex Silverman with Special Situation Funds. Please go ahead.

Ryan mentioned something that was sort of new which was this concept of an evergreen business. I've always sort of thought as thought of sponsor social as campaigns which frankly you have to go out and rewin right in and the contract revs which return but they're not necessarily contractually required to return. But can you go a little further into what you know what evergreen might be looking like?

So the concept is pretty straightforward. You know our goal as part of growing the managed service effort whether it's on the B2C or the B2B site but find a perspective is to have brand make investments for a minimum period of time of 90 days. And what we've seen from the historical feedback prior to the acquisition as well as the appetite from clients conceptually is that they want to build a content marketing plan. So the goal would be to -- either to recur those quarterly commitments or in certain cases be able to motivate individual to commit to even longer periods of time. We're very much in the early innings of that but that's our concept so far.

And from a revenue recognition standpoint, would you be able to recognize that as you go along or would you have to wait until everything is done to recognize it as you do now for sponsored social?

We basically recognize it as we provide the content to them. So it's coming monthly as it's recurring because it is coming throughout the month equally.

Okay and then last question for me, LeAnn has there been discussions with auditors about you know adjusting rev rec so that you can do a percentage of completion revenue recognition as opposed to waiting for the campaign to complete?

Well actually it's a perfect opportunity to let you know that we have upgraded our auditor to video and it was actually as a merger of our current auditors Cross, Fernandez and Riley and they are now part of the video, they have always been a video affiliate but now we actually have an office here in Orlando and we will be reviewed by the [indiscernible] partners and there at SEC division. We have not had any discussions with them nor any current intention to change our current revenue recognition policies in our system. We will be recognizing content as it's provided to clients.

Thank you. And with that I would like to turn the conference back over to management for any closing remarks.

I'd like to thank you all for joining us today. I'm incredibly encouraged by this past quarter and again I look forward to seeing those of you that can join us in October at IZEA Fest. Have a great day.

Thank you ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.