IZEA Worldwide, Inc. (IZEA) — FY 2017 Form 10-K
Business and period: IZEA operates online marketplaces and managed services connecting marketers with creators for influencer marketing and custom content. This filing covers the fiscal year ended December 31, 2017; the audited financial statements were filed April 17, 2018.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $24.44 million | $21.23 million |
| Operating loss | $5.48 million | $7.48 million |
| Net loss | $5.47 million | $7.56 million |
| Loss per share, basic and diluted | $0.96 | $1.41 |
| Cash used in operating activities | $2.37 million | $4.72 million |
| Cash and cash equivalents at year-end | $3.91 million | $5.95 million |
- Revenue grew 15% year over year, primarily from Managed Services, which represented 98% of FY 2017 revenue and increased 17%.
- Cost of revenue was $11.59 million, or 47% of revenue; total costs and expenses were $29.91 million, or 122% of revenue. Operating loss equaled 22% of revenue.
- Cash declined $2.04 million during 2017, primarily because operating losses consumed cash. Cash used in investing activities was $0.19 million; financing activities provided $0.51 million.
- Current assets were $7.95 million and current liabilities $7.71 million. Stockholders’ equity was $5.29 million; accumulated deficit was $47.28 million.
- IZEA had $0.50 million drawn on its secured, $5 million accounts-receivable-based credit facility at year-end. It reported up to $2.46 million of additional availability, assuming all receivables qualified. Acquisition costs payable totaled $1.35 million.
Material changes and restatement
- Revenue increased from $21.23 million in 2016 to $24.44 million in 2017, while net loss narrowed 28%, from $7.56 million to $5.47 million. Operating cash use also improved from $4.72 million to $2.37 million.
- The company restated FY 2015 and FY 2016 annual results and all 2015–2016 quarterly results, plus the first three quarters of 2017. Content Workflow revenue was reclassified from gross to net because IZEA concluded it acted as an agent; internal Managed Services fulfillment personnel costs were moved from sales and marketing to cost of revenue. Depreciation and amortization was presented separately, and the statement of operations changed to a one-step format.
- The restatement reduced reported revenue and reclassified expenses, but the company stated it did not affect previously reported operating loss, net loss, loss per share, balance sheets, cash flows, or stockholders’ equity. For example, FY 2016 revenue was restated from $27.31 million to $21.23 million.
Outlook, risks, and unusual items
- Management expected a net loss for 2018. It anticipated Content Workflow revenue could decline by as much as 35% from 2017 levels, reflecting the shrinking legacy Ebyline customer base.
- IZEA planned to release IZEAx 3.0 in 2018 and continue integrating legacy platform functions. Management said it believed available cash and credit would cover expenses for longer than 12 months, but noted it might seek additional capital; equity financing could dilute shareholders.
- A material weakness in internal control over financial reporting related to revenue recognition and cost classification led to the restatement. Management concluded controls were ineffective at December 31, 2017 and described additional controls, including engagement of independent technical-accounting experts, as remediation efforts. The auditor did not attest to internal-control effectiveness.
- A securities class action filed April 4, 2018 against IZEA and certain executives seeks damages; IZEA said it would defend the case and could not estimate a loss range. The filing of this 10-K brought IZEA current on periodic reports after a Nasdaq notice concerning its late filing; other Nasdaq listing requirements remained a risk.
- Management cited customer retention, continued losses and cash burn, competition, platform execution, reliance on third-party social networks, regulatory and privacy requirements, and the need for additional funding as key risks. The company also disclosed that it would not release its cryptocurrency-mining software amid financial, legal, and regulatory uncertainty.
Investor verification priorities
- Review the restated statements and quarterly reconciliations, especially the gross-to-net Content Workflow treatment and Managed Services cost classifications.
- Track operating cash use, cash balances, receivable eligibility under the credit facility, and any need for additional capital.
- Assess progress in remediating the material weakness and the quality of subsequent revenue-recognition and financial-reporting controls.
- Monitor Managed Services growth, expected Content Workflow declines, and execution and customer migration to IZEAx 3.0.
- Follow developments in the securities litigation, Nasdaq listing compliance, and potential dilution from financing or acquisition-related share payments.