IZEA, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. IZEA operates online marketplaces and software that connect brands and publishers with content creators. The filing compares results with Q1 2015; that comparison is affected by Ebyline, acquired January 30, 2015, so Q1 2015 included only two months of Ebyline results.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $5.47 million | $4.14 million; up 32.2% |
| Gross profit and margin | $2.36 million; 43% | $1.69 million; 41% |
| Operating expenses | $4.94 million | $3.44 million; up 43.5% |
| Loss from operations | $(2.58) million | $(1.75) million |
| Net loss | $(2.59) million; $(0.49) per share | $(4.27) million; $(1.48) per share |
| Adjusted EBITDA (non-GAAP) | $(2.04) million | $(1.39) million |
| Cash used in operating activities | $(1.41) million | $(1.53) million |
Revenue growth came primarily from Content Revenue, which rose about $1.12 million, and Sponsored Revenue, up about $160,000. Service-fee revenue increased about $48,000. Gross margin improved as the company sold more managed services, including a greater managed share of Content Revenue; content margins remained below sponsored margins. Operating expenses rose faster than revenue, reflecting higher personnel, engineering, sales commissions, public-company and other costs. The smaller GAAP net loss versus prior year chiefly reflects the absence of the prior-year $2.51 million derivative fair-value loss; operating loss and Adjusted EBITDA both worsened.
Cash and liquidity: Cash and equivalents were $10.06 million at March 31, down $1.54 million from year-end 2015. Total current assets were $13.61 million and current liabilities $6.48 million. Total liabilities were $6.57 million; this included $900,492 of current acquisition costs payable. No advances were outstanding on the secured Bridge Bank facility, which permits requests up to 80% of eligible receivables, subject to a $5 million maximum. There was no material conventional long-term borrowing reported.
Total assets were $19.25 million, stockholders’ equity $12.68 million, and accumulated deficit $36.84 million. The company reported $7.4 million in net bookings, 71% above the prior-year quarter; management said revenue is generally recognized within 120 days of booking, although larger contracts can take up to 12 months.
Material changes and notable items
- The company’s 1-for-20 reverse stock split took effect January 11, 2016, and its shares began trading on Nasdaq on January 26, 2016.
- In January, IZEA issued 114,398 shares valued at $848,832 to settle an Ebyline acquisition installment. A further $900,492 acquisition amount was classified as current at quarter-end.
- Management expected Ebyline to miss the revenue thresholds for up to $5.5 million of contingent performance payments and did not expect to make those payments. It estimated total Ebyline consideration at $3.33 million.
- IZEA formed a Canadian subsidiary for a sales office expected to begin operating in Q2 2016. The company also reported filing a merger of a wholly owned, non-operating subsidiary into IZEA in April.
Outlook, risks and contingencies
Management said higher bookings from new customers, larger managed campaigns, repeat business and the Ebyline acquisition were expected to support higher 2016 revenue than in 2015. It expected personnel costs to continue increasing with planned staff growth. No specific revenue, earnings or margin guidance was provided. Management stated that existing cash, the credit facility and proceeds from a warrant transaction were expected to fund expenses for longer than the next 12 months; the filing also emphasizes continuing losses and the need to raise additional funding as a risk.
- The company has a history of losses and negative operating cash flow and has not achieved profitability.
- Two customers represented 24% of Q1 2016 revenue; two customers together represented 26% of accounts receivable at quarter-end.
- Outstanding options, warrants and equity-plan reservations may dilute shareholders. The filing also identifies customer retention, competition, execution and integration, hiring, and access to capital as risks.
- Derivative warrant liabilities are remeasured at fair value, creating earnings volatility. The remaining warrant liability was $2,208 at quarter-end.
- Management reported effective disclosure controls as of March 31, 2016, with no material change in internal control over financial reporting during the quarter. It reported no legal proceedings believed likely to have a material adverse effect.
- New revenue-recognition and lease accounting standards were under evaluation; management had not determined their financial-statement impact.
Investor verification priorities
- Confirm whether bookings convert to recognized revenue and whether growth persists after accounting for the Ebyline comparison effect.
- Track cash burn, operating losses, runway assumptions and actual availability or use of the receivables-backed credit facility.
- Assess whether Content Revenue margins improve as the managed-services mix grows, and whether expense growth moderates.
- Verify the status and payment terms of the remaining Ebyline acquisition obligation and the basis for management’s expectation that contingent payments will not be due.
- Monitor major-customer concentration, receivable collection and potential shareholder dilution from outstanding equity awards and warrants.