IZEA, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as IZEA, Inc. The company operates social media sponsorship marketplaces, including SocialSpark, SponsoredTweets and WeReward, and earns revenue primarily by connecting advertisers with social media publishers. Figures below are unaudited.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1.059 million | $1.053 million | $3.908 million | $2.821 million |
| Gross profit | $625,000 | $569,000 | $2.314 million | $1.515 million |
| Gross margin | 59% | 54% | 59% | 54% |
| Operating expenses | $1.555 million | $2.199 million | $5.825 million | $4.407 million |
| Operating loss | $(931,000) | $(1.630) million | $(3.510) million | $(2.892) million |
| Net loss | $(952,000) | $(1.591) million | $(3.708) million | $(2.839) million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(2.485) million | $(3.163) million |
At September 30, cash was $1.304 million, versus $225,000 at December 31, 2011. Current assets were $2.165 million and current liabilities $3.181 million, a reported working capital deficit of approximately $1.016 million. Total liabilities were $3.239 million; stockholders’ deficit was $856,000. The balance sheet included $597,000 in current notes payable and $85,000 in compound embedded derivative liabilities. The company had an accumulated deficit of $21.839 million.
Nine-month financing cash flow was $3.570 million, mainly from stock issuances and notes. Investing cash use was $5,000. The company raised $1.696 million net from a September public offering and $1.222 million net in a May private placement. Cash paid for interest during the nine-month period was $6,222.
Changes versus comparable periods
- Q3 revenue was nearly unchanged year over year (+0.6%); nine-month revenue increased 38.5%. Management attributed nine-month growth mainly to Sponsored Revenue from SocialSpark and SponsoredTweets, supported by expanded sales coverage, and new display-ad revenue from IZEAMedia.
- Q3 gross margin improved to 59% from 54%, which management attributed largely to campaign-management fees requiring lower publisher costs. Nine-month gross profit rose 52.8%.
- Q3 operating expenses fell 29.3%, primarily because a large investor-relations campaign from 2011 did not recur. Nine-month operating expenses increased 32.2%, reflecting higher payroll, professional and public-company costs, and promotional marketing, partly offset by lower investor-relations fees.
- Q3 net loss narrowed 40.2% from the prior-year quarter. Nine-month net loss widened 30.6%, as increased operating expenses and financing-related charges outweighed revenue and gross-profit growth.
- Nine-month other expense included an $802,000 loss on exchanging warrants for shares, partly offset by a $739,000 gain from warrant fair-value changes; derivative and warrant revaluations are market-sensitive and non-cash in nature.
Outlook, risks and unusual items
- Management expected 2012 total revenue growth of more than 15%, citing higher average revenue per customer, added platform features and new offerings. It expected revenue from legacy platforms PayPerPost and InPostLinks to continue declining. This is management’s expectation, not a guarantee.
- The filing raises substantial doubt about the company’s ability to continue as a going concern. Management said continued operations depend on additional financing and described discussions about a credit line or other funding. It warned that insufficient capital could force reduced marketing and development or cessation of operations.
- The February 2012 $550,000 senior secured note was secured by substantially all company assets, had conversion terms linked to the share price and was due February 2, 2013 unless earlier converted or otherwise settled. The $75,000 shareholder note was extended to December 4, 2012 and also had share-price-based conversion terms. After quarter-end, holders converted $302,700 of the larger note; the reported remaining balance was $247,300 as of November 12, 2012.
- The company completed a 1-for-40 reverse stock split effective August 1, 2012. It reported 4,117,460 common shares outstanding at September 30 and 5,114,280 at November 12. The filing warns that convertible notes, options and warrants may cause further dilution; conversion prices could fall with the share price.
- In October 2012, Blue Calypso sued the company alleging patent infringement related to peer-to-peer mobile advertising and seeking unspecified damages. The company said it intended to defend the suit; it could not estimate the likelihood or amount of exposure.
- Celebrity endorsements involved $100,000 cash and restricted shares. The company also issued 71,221 shares to former legal counsel for $356,103 of services. Derivative fair values use Level 3 valuation inputs.
- Management concluded disclosure controls were effective as of September 30, 2012 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company secured sufficient financing to fund operations and meet note obligations, and the terms and dilution effects of any new funding or conversions.
- Actual cash burn, liquidity and progress toward profitability, given continued operating losses, negative operating cash flow and the going-concern warning.
- Whether management achieved its stated 2012 revenue-growth expectation and whether newer revenue streams offset declines in legacy platforms.
- How much additional dilution may result from variable-price convertible notes, warrants, options and other potentially issuable shares.
- Developments and potential financial exposure in the Blue Calypso patent litigation.