IZEA, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. IZEA operates online marketplaces and technology platforms connecting marketers with content creators. The filing describes the registrant as IZEA, Inc.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $3.90 million | $4.83 million; down 19% |
| Gross profit and margin, calculated as revenue less cost of revenue | $1.73 million; 44% | $2.50 million; 52% |
| Operating loss | $1.90 million | $2.70 million |
| Net loss | $2.05 million; $0.35 per share | $2.72 million; $0.49 per share |
| Adjusted EBITDA, non-GAAP | $(1.85) million | $(2.03) million |
| Cash used in operating activities | $1.12 million | $1.52 million |
Managed Services generated $3.80 million, or 97% of revenue, and declined 19% year over year. Content Workflow revenue was $64,000, down 38%; Service Fees and Other were $36,000, down 25%. Gross billings, a non-GAAP operating measure, declined 24% to $4.71 million.
Cash and cash equivalents were $2.76 million at March 31, down $1.15 million from year-end. Current assets were $6.76 million and current liabilities $8.30 million, leaving a $1.53 million working-capital deficit. The company had $731,000 outstanding on its secured revolving credit facility and reported up to $2.05 million of additional availability, assuming all receivables were eligible. Acquisition costs payable totaled $964,000. Stockholders’ equity was $3.70 million.
Investing activities used $259,000, primarily for equipment and software development; financing activities provided $230,000, primarily net credit-line advances. Accumulated deficit was $49.42 million.
Material changes and accounting comparability
- Reported revenue fell 19% year over year. Management attributed the decline principally to lower initial 2018 advertising commitments from larger customers.
- IZEA adopted ASC 606 on January 1, 2018 using the modified retrospective method. The 2017 comparison remains under prior GAAP; management quantified a $198,148 reduction to Q1 2018 revenue from the accounting change. Under prior GAAP, Q1 2018 revenue would have been $4.09 million.
- Sales and marketing expense decreased 27%, partly because the 2017 IZEAFest event did not recur and sales/support staffing was lower. General and administrative expense decreased 34%, including a $404,552 noncash benefit from remeasurement of ZenContent contingent consideration. These and other acquisition-liability changes contributed $496,886 to the year-over-year decrease in general and administrative expense.
- Operating loss improved by $798,000 and net loss by $674,000, as expenses fell; however, revenue also declined. Cost of revenue fell only 7%, so it rose to 56% of revenue from 48%, with fixed internal fulfillment costs weighing on margins.
Outlook, risks, and unusual items
- Management expects year-over-year revenue to decline again in Q2 2018 and said customer commitments translating into future Q2 revenue were below expectations. It expects continued Content Workflow declines, potentially up to 50% for 2018, as legacy Ebyline customers reduce usage.
- The company expects a net loss for 2018. Management said existing cash and available credit were expected to cover expenses into Q3, but that additional capital would be needed in the next several months to sustain operations at a consistent level. If financing is unavailable, IZEA may curtail plans, reduce expenses or workforce, or potentially cease operations. The filing states there is substantial doubt about the company’s ability to continue as a going concern for one year from issuance.
- The $5 million secured facility is borrowing-base limited and bears interest at prime plus 2%. Financing plans include potential securities issuance or borrowing, but there are no financing commitments; new equity could dilute shareholders.
- A securities lawsuit was filed on April 4, 2018 against the company and certain executives. IZEA disputes the allegations, intends to defend itself, and cannot estimate a possible loss range.
- Disclosure controls were deemed ineffective as of March 31, 2018 because of a previously identified material weakness in revenue presentation. The company reported restatements of prior periods and said remediation efforts, including outside technical-accounting support and additional contract-review controls, were ongoing.
- Other unusual items include a $125,595 expense from the change in fair value of restricted-stock derivatives and approximately $11,000 of cryptocurrency-mining proceeds included in other income.
Most important facts for investors to verify
- Whether IZEA obtains financing soon enough to address its stated liquidity needs and going-concern uncertainty, and the terms and dilution of any financing.
- Whether Q2 revenue and customer commitments confirm or worsen management’s expected decline, particularly in Managed Services.
- How ASC 606 affects revenue timing and comparability, and whether the revenue-reporting material weakness is fully remediated.
- The continuing eligibility and availability of credit-line borrowing, cash burn, and payment requirements for acquisition costs.
- Developments in the securities lawsuit, potential costs or losses, and compliance with Nasdaq’s stockholders’ equity and minimum-bid-price requirements.