IZEA, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. IZEA operates online marketplaces connecting marketers with content creators, primarily through its IZEAx platform and the Ebyline content workflow platform.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $8.15 million | $7.50 million | $21.34 million | $19.88 million |
| Gross profit / margin | $4.40 million / 54% | $3.57 million / 48% | $10.94 million / 51% | $9.43 million / 47% |
| Operating expenses | $5.03 million | $5.04 million | $15.69 million | $15.12 million |
| Operating loss | $(0.63) million | $(1.47) million | $(4.75) million | $(5.69) million |
| Net loss | $(0.56) million | $(1.51) million | $(4.72) million | $(5.73) million |
| Loss per share, basic and diluted | $(0.10) | $(0.28) | $(0.83) | $(1.07) |
- Cash flow: Nine-month operating cash outflow was $3.23 million, investing cash outflow was $0.09 million, and financing cash inflow was $0.82 million. Cash declined $2.50 million to $3.45 million.
- Liquidity and debt: At September 30, cash was $3.45 million; current assets were $9.14 million and current liabilities were $8.79 million. The company had $810,376 outstanding on its secured revolving credit facility and reported $3.39 million of remaining availability, assuming all receivables qualified. The facility has a $5 million limit and bears interest at prime plus 2%.
- Other balance-sheet items: Total assets were $15.14 million, total liabilities $9.30 million, and stockholders’ equity $5.84 million. Accumulated deficit was $46.53 million.
Changes versus prior comparable periods
- Q3 revenue grew 9%; nine-month revenue grew 7%. Managed Services revenue rose 20% in Q3 and 17% year to date, while lower-margin Content Workflow revenue declined 28% and 19%, respectively.
- Gross margin increased to 54% in Q3 and 51% year to date, from 48% and 47%. Management attributed the improvement mainly to a greater contribution from higher-margin Managed Services.
- Net losses narrowed in both periods, primarily reflecting higher gross profit. Nine-month operating expenses nevertheless increased 4%, including personnel, amortization, and acquisition-related costs.
- Q3 net bookings were $7.9 million versus $7.7 million; nine-month bookings were $22.3 million versus $21.9 million. Management says revenue is typically recognized within 90–120 days of booking, though larger contracts may take longer.
Outlook, commentary, and risks
- 2017 outlook: Management estimated revenue of $29–$30 million and gross margin of 49%–50%. It expected Adjusted EBITDA of approximately negative $3.0 million for 2017. These are management estimates, not guarantees.
- Management expected Managed Services growth to be partly offset by continued Content Workflow declines, forecasting declines of up to 35% versus prior-year levels because of consolidation and cutbacks in the newspaper industry. The company said it does not actively market this lower-margin stream to new customers.
- Management believed cash and available credit would cover expenses for longer than the next 12 months, but noted it could seek additional capital. Equity financing could dilute existing shareholders. The filing also reports a history of losses and negative operating cash flow and expects a 2017 net loss.
- ZenContent acquisition payments remain contingent on revenue targets. The estimated contingent-payment fair value was $508,444 at September 30, 2017; remeasurement and compensation allocations affected general and administrative expense. Some future consideration may be paid in cash or stock, which could create dilution.
- Other notable risks include customer retention and cancellations, competition, execution and integration of acquisitions, dependence on key personnel, international operations, and the possibility of further losses. One customer represented 11% of Q3 revenue and 14% of receivables at September 30; no customer represented more than 10% of nine-month 2017 revenue. Management reported no known legal claims expected to have a material adverse effect and no material subsequent events.
- The company was preparing to adopt the new revenue recognition standard effective January 1, 2018. It expected the most significant effect to be additional disclosures but had not completed its assessment. Disclosure controls were assessed as effective; no significant quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Managed Services growth and improved gross margins can continue as Content Workflow revenue contracts.
- Whether bookings convert to recognized revenue on the expected timetable, and whether cancellations or customer payment delays affect that conversion.
- Cash burn, receivables collection, eligibility for the stated remaining credit availability, and the need for additional financing.
- Progress toward management’s 2017 revenue, gross-margin, and Adjusted EBITDA estimates, noting that Adjusted EBITDA is a non-GAAP measure.
- ZenContent earn-out estimates, related cash obligations, and possible share issuance; also assess potential dilution from outstanding options, warrants, and equity plans.
- The final effects of adopting the new revenue recognition standard and the concentration represented by the Q3 customer with 11% of revenue and 14% of receivables.