IZEA Worldwide, Inc. — Q3 2022 Form 10-Q
Business context and period: IZEA operates creator-marketing and content marketplaces and provides managed campaign services and SaaS tools. This unaudited filing covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $10.83m | $7.73m | $32.29m | $19.68m |
| Gross profit / margin | $4.23m / 39.1% | $3.71m / 48.0% | $13.30m / 41.2% | $9.99m / 50.8% |
| Operating loss | $(1.33)m | $(1.42)m | $(4.22)m | $(5.45)m |
| Net loss | $(0.91)m | $(1.40)m | $(3.55)m | $(3.45)m |
| Adjusted EBITDA (non-GAAP) | $(0.59)m | $(0.93)m | $(2.46)m | $(3.68)m |
Revenue rose 40% in Q3 and 64% year to date, driven by Managed Services; this business represented 96.8% of Q3 revenue and 96.1% of nine-month revenue. SaaS Services revenue declined 22.6% in Q3 and 7.4% year to date. Gross margins contracted as cost of revenue grew faster than sales. Q3 operating margin was approximately -12.3% versus -18.4% a year earlier; nine-month operating margin was approximately -13.1% versus -27.7%.
Cash, liquidity and debt: At September 30, cash and cash equivalents were $20.0m, short-term investments $21.9m, and long-term investments $25.1m. Cash plus investments totaled $67.0m. Current assets were $53.5m versus current liabilities of $13.1m, or approximately $40.4m in working capital. Total liabilities were $13.1m. Cash fell $55.4m from year-end, primarily because funds were moved into investments, as well as operating cash use; this decline should not be read as equivalent to cash burn. Operating cash outflow was $6.9m for the nine months, versus $3.7m in 2021. The filing reports $63,512 in remaining contractual debt obligations; the CEBA loan and equipment financing are current obligations.
Marketable securities had $864,595 of net unrealized losses recognized in other comprehensive income. The company reported $230,000 of interest income on investments during the first nine months. It also recorded $141,808 of digital-asset impairment in that period. Accumulated deficit was $77.2m.
Material changes versus prior periods
- Managed Services revenue increased 43.9% in Q3 and 69.5% year to date. One large customer contract accounted for $3.1m of Q3’s revenue increase, represented about 30% of Q3 revenue, and about 33% of nine-month revenue.
- Despite revenue growth, Q3 cost of revenue rose 64%, reducing gross margin to 39.1% from 48.0%. Management attributed the higher delivery costs primarily to the large customer contract.
- Managed Services bookings fell 27.2% in Q3 to $8.22m, although nine-month bookings increased 2.9% to $29.68m. Management said recent bookings had been softer than expected and larger, more complex orders can take longer to convert to revenue.
- Q3 net loss improved from $1.40m to $0.91m, partly reflecting higher investment income. Nine-month net loss widened slightly to $3.55m from $3.45m; the 2021 comparison included $1.93m of debt-forgiveness income.
- Q3 and nine-month SaaS Services revenue declined, including lower marketplace spending and reduced subscriptions. The company cited competitive pricing efforts and lower BrandGraph subscriptions.
Outlook, risks and unusual items
- Management said available cash and invested resources should fund operations and planned investments for at least the next 12 months, while anticipating operating expenses will increase. It may need future equity, equity-linked or debt financing if additional capital is required. No quantified revenue or earnings guidance was provided.
- Management reported that a weakening economic outlook and pressure on marketing budgets may be contributing to slower bookings and longer sales cycles. It cited continued demand in its pipeline but warned these conditions could adversely affect future results.
- IZEA announced The Creator Marketplace, intended to replace IZEAx and Shake as the primary marketplace, and expected to launch IZEA Flex later in 2022 as a workflow tool. The filing gives no quantified financial impact or updated launch timetable.
- On October 21, 2022, the company was notified that it did not qualify for forgiveness of its $40,000 CAD CEBA loan and said it would repay the full amount in Q4 2022.
- Nasdaq notified the company on July 6, 2022 that its share price did not meet the $1 minimum bid requirement. The initial cure period ran through January 2, 2023; a further period may be available if eligibility criteria are met, potentially involving a reverse split. Delisting could impair share liquidity and access to capital.
- Management concluded disclosure controls were ineffective as of September 30, 2022 because of a material weakness involving the timing of creator-content cost accruals and related revenue recognition. The weakness followed a restatement of 2020 interim financial statements. Remediation measures include additional controls, outside technical-accounting assistance and use of a new ERP system; remediation is not stated as complete.
- Customer concentration is significant: one customer represented 33% of accounts receivable at quarter-end, and two customers together represented almost 40% of Q3 gross billings. Management noted that most customer contracts are no longer than one year.
- The company reported no legal proceedings it believed would have a material adverse effect. It also cited risks including the prior restatement, customer cancellations, competition, financing needs, COVID-19 and broader economic conditions.
Key facts for investors to verify
- Whether the Q3 bookings decline persists and how bookings convert to recognized revenue, especially for large, complex contracts.
- Whether revenue growth can be sustained without further gross-margin pressure or reliance on a small number of customers.
- Cash generation and investment liquidity, including the effects of operating cash use and market-value changes in the securities portfolio.
- Progress in remediating the material weakness and whether the new ERP and added controls operate effectively.
- Nasdaq bid-price compliance status, any extension or reverse split, and the implications for financing and share liquidity.
- Completion of the CEBA repayment and the timing and commercial adoption of The Creator Marketplace and IZEA Flex.