IZEA Worldwide, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. IZEA operates social sponsorship and content marketplaces, including IZEAx and Ebyline. The January 2015 Ebyline acquisition materially changed the business and revenue mix; the comparative 2014 periods do not include Ebyline.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $5.44 million | $1.93 million | $14.21 million | $5.86 million |
| Gross profit / margin | $2.15 million / 40% | $1.24 million / 64% | $5.56 million / 39% | $3.86 million / 66% |
| Operating loss | $0.89 million | $1.56 million | $4.84 million | $3.47 million |
| Net income (loss) | ($2.65 million) | $0.69 million | ($8.90 million) | $2.15 million |
| Operating EBITDA, non-GAAP | ($2.17 million) | ($1.31 million) | ($5.28 million) | ($2.75 million) |
Q3 revenue increased 182% year over year; nine-month revenue increased 143%. Sponsored revenue and Ebyline-led content revenue drove growth. In Q3, sponsored revenue was approximately $3.23 million and content revenue $2.17 million; each represented about 59% and 40% of revenue, respectively. Content revenue had an approximately 11% gross margin, versus 58% for sponsored revenue, and the shift toward content drove the overall margin decline.
Operating expenses were $3.04 million in Q3, up 8% year over year, and $10.39 million for the nine months, up 42%. Management cited higher staffing, sales commissions and Ebyline-related costs. Results also include non-core warrant and acquisition-accounting items described below.
Cash, liquidity and obligations
- Cash and cash equivalents were $13.27 million at September 30, 2015, compared with $6.52 million at December 31, 2014. Current assets were $17.08 million and current liabilities $5.31 million.
- Nine-month operating cash use was $5.04 million; investing cash use was $1.05 million, including the Ebyline acquisition; financing provided $12.84 million, largely from warrant exercises.
- Total liabilities were $6.41 million. No advances were outstanding on the secured Bridge Bank facility, which provides up to $5 million subject to eligible receivables and other terms. Capital lease obligations were $15,602 current, with none long term.
- Acquisition costs payable totaled $1.81 million, including $833,227 current and $977,669 long term. The company reported an accumulated deficit of $31.84 million and a history of operating losses and negative operating cash flow.
Material changes, outlook and unusual items
- Ebyline: The acquisition added content-marketplace revenue and goodwill of $2.47 million. Ebyline contributed $2.17 million of Q3 revenue and $0.24 million of Q3 gross profit. Management said net bookings were $6.7 million in Q3, up more than 230%, and $17.2 million for the nine months, up 174%; it views bookings as a leading indicator, with revenue generally recognized within 90 days.
- Management outlook: Management expected revenue to continue increasing, while forecasting overall gross margins in a 35%–40% range because of lower-margin content sales and white-label partner economics. It expected improvement in content margins as managed sales grew. Management stated cash, the credit line and warrant proceeds should provide sufficient reserves for the coming year. These are forward-looking statements, not guarantees.
- Acquisition earnout: Up to $5.5 million of Ebyline performance payments depended on revenue targets for 2015–2017. Management’s revised projections were below the 90% threshold for those targets, and it did not expect to pay the earnout. Revaluation reduced the estimated contingent consideration to $100,000 and produced a $1.73 million gain in Q3. Maximum stated acquisition consideration was $8.85 million.
- Warrant financing and dilution: IZEA discounted warrant exercise prices in July–August; holders exercised warrants for 43.83 million shares, generating approximately $12.86 million net of transaction costs. The exchange generated a $1.85 million accounting loss. Shares outstanding rose from 57.7 million at year-end 2014 to 104.0 million at September 30. Remaining options, warrants, equity awards and potential acquisition-share payments present further dilution risk.
- Fair-value volatility: The company recorded a $0.12 million Q3 gain on derivative fair value, versus a $2.25 million gain in Q3 2014; the nine-month comparison was a $2.14 million loss in 2015 versus a $5.63 million gain in 2014. These non-cash changes and the warrant exchange affected reported net income.
- Legal settlement: IZEA settled Blue Calypso patent litigation for $390,506, recorded the full amount in expense, paid $200,000 at signing and agreed to quarterly installments for the balance. Blue Calypso dismissed the claims and granted a covenant not to sue covering IZEAx and Ebyline, subject to the agreement’s terms.
- Other notable costs included a one-time $200,000 discretionary CEO bonus in Q3. Management identified ongoing risks including sustained losses, ability to finance and grow the business, acquisition integration, competition, reliance on key personnel, and potential share dilution or selling pressure.
Important facts for investors to verify
- Whether revenue growth and bookings convert to recognized revenue, and whether the company can reduce operating cash burn and reach profitability.
- Whether content and white-label margins improve as management expected, given content’s low reported gross margin and its growing share of sales.
- Whether Ebyline achieves its performance targets and how the acquisition’s final purchase accounting and remaining payments develop.
- Potential dilution from outstanding equity awards, warrants, registered resale shares and any acquisition consideration paid in stock.
- Liquidity runway and access to the secured credit facility, including its borrowing-base requirements and renewal terms.
- Ongoing legal, customer-concentration and other risk disclosures; the filing reported one customer represented 14% of Q3 and nine-month revenue.