IZEA, Inc. (identified in the request as IZEA Worldwide) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. The company operates social sponsorship and advertising platforms, earning revenue mainly by connecting advertisers with social media creators.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.566 million | $1.059 million | $4.666 million | $3.877 million |
| Gross profit | $1.067 million | $0.625 million | $2.820 million | $2.283 million |
| Gross margin | 68% | 59% | 60% | 59% |
| Operating loss | $0.652 million | $0.931 million | $2.047 million | $3.510 million |
| Net loss | $0.975 million | $0.952 million | $2.753 million | $3.708 million |
| Loss per share, basic and diluted | $0.08 | $0.42 | $0.30 | $1.64 |
For the nine months, operating cash outflow was $2.245 million; investing cash outflow was $14,000; financing provided $3.265 million. Cash increased by $1.006 million to $1.664 million. At September 30, current assets were $2.991 million and current liabilities $2.515 million, implying working capital of approximately $476,000. Total liabilities were $4.685 million, including a $2.140 million warrant liability. Notes payable were zero; capital lease obligations totaled approximately $70,000. Stockholders’ deficit was $1.289 million.
Changes versus comparable periods
- Q3 revenue rose 47.9%; nine-month revenue rose 20.4%. Management attributed growth mainly to sponsored campaigns, particularly larger managed campaigns and repeat customers.
- Nine-month gross margin improved one percentage point; Q3 margin increased nine points, which management linked to a greater mix of larger managed campaigns.
- Nine-month operating expenses declined 16.0%, mainly due to lower payroll, occupancy, and promotional costs. Q3 operating expenses increased 10.5%, with higher professional fees and non-cash stock compensation.
- Nine-month net loss narrowed, but Q3 net loss increased slightly. Fair-value changes and financing-related losses affected reported results: nine-month net expense from changes in fair value of derivatives and notes carried at fair value was $558,869.
- Common shares outstanding increased to 22.336 million from 6.187 million at year-end 2012, reflecting financing, debt conversions, and stock issued for services.
Outlook, risks, and unusual items
- Management said Q3 net bookings were 69% above the prior-year quarter and nine-month bookings were 31% higher, with $5.1 million of bookings in the first nine months. It expected revenue to exceed prior-year quarters; bookings are not recognized revenue and are typically recognized within 90 days.
- The company was developing the Native Ad Exchange (NAX), with full implementation expected in Q1 2014. It capitalized $244,878 of development payroll and benefits during the first nine months. Completion, customer adoption, and profitability were uncertain.
- The filing reiterates substantial doubt about the company’s ability to continue as a going concern. Management said operating revenue and cash were insufficient to sustain operations for more than one year and that continued operations depended on positive cash flow and/or additional financing. Future financing may be unavailable or dilutive.
- From August 15 to September 23, the company raised $2.183 million in cash in a private placement and issued 8.730 million shares, along with five-year warrants to buy 14.236 million shares at $0.25 and $0.50 per share. It also converted approximately $1.377 million of notes and accrued interest into shares. These securities create substantial potential dilution.
- A director, Brian Brady, provided $1.270 million in short-term loans that were converted into equity and warrants in the placement. The filing also describes additional warrants and restricted stock units granted in connection with the director’s loan arrangements.
- IZEA was defending a patent infringement suit brought by Blue Calypso. Damages were unspecified, and the company could not estimate the likelihood or amount of exposure; it said it intended to defend the case.
- The company recorded a $93,482 loss on exchange of debt in Q3. Q3 results also included a $422,554 expense from the fair-value increase of related-party notes before conversion, partly offset by warrant fair-value income.
- Management reported disclosure controls were effective as of September 30, 2013, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash burn declines enough to extend the stated less-than-one-year operating runway, and whether additional capital is required.
- Actual conversion of bookings into recognized revenue, gross margins, and sustainable profitability.
- NAX development costs, launch timing, adoption, and commercial contribution.
- Potential dilution from outstanding warrants, options, restricted awards, and future financing; also verify registration status and key deadlines for placement securities.
- Developments and potential costs or business restrictions arising from the Blue Calypso litigation.