Business context and reporting period
IZEA, Inc. operates online marketplaces and services that connect marketers with content creators. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; 2017 comparisons are presented under the prior revenue-accounting standard.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Revenue | $4.12 million; down 28% year over year | $8.02 million; down 24% |
| Operating loss | $1.73 million, versus $1.41 million loss | $3.63 million, versus $4.11 million loss |
| Net loss | $1.65 million, versus $1.45 million loss | $3.69 million, versus $4.17 million loss |
| Loss per share, basic and diluted | $0.28, versus $0.25 | $0.63, versus $0.74 |
| Operating cash flow | Quarter-specific value not provided | $(1.98) million, versus $(2.31) million |
For the quarter, cost of revenue (excluding amortization) was 47% of revenue versus 48% a year earlier; reported operating loss was 42% of revenue versus 25%. For the first half, cost of revenue was 51% of revenue versus 48%, and operating loss was 45% versus 39%. The six-month decrease in net loss was driven mainly by lower expenses, including a $647,512 reduction in the estimated ZenContent contingent acquisition liability; the quarter’s net loss increased as revenue fell.
At June 30, cash was $1.88 million, down from $3.91 million at year-end. Current assets were $5.37 million and current liabilities $8.35 million, a working-capital deficit of about $2.98 million. Total liabilities were $8.70 million and stockholders’ equity $2.27 million. The secured line of credit had $845,365 outstanding, with up to $1.58 million stated as remaining availability, subject to eligible receivables. Gross billings, a company-defined non-GAAP measure, fell 30% in Q2 and 27% in the first half. Adjusted EBITDA was a loss of $1.51 million for Q2 and $3.36 million for the first half; these are non-GAAP measures and are not substitutes for GAAP results.
Material changes versus prior periods
- Managed Services, about 97% of first-half revenue, declined 24%; Q2 declined 28%. Management cited lower commitments from larger customers and fewer small campaigns.
- First-half Content Workflow revenue declined 36%, reflecting reduced use of the Ebyline platform amid consolidation and cutbacks in the newspaper industry. Service fees and other revenue rose 21% but remained about 1% of revenue.
- Managed Services net bookings were $2.7 million in Q2 versus $5.4 million, and $8.4 million in the first half versus $11.8 million.
- IZEA adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption reduced opening accumulated equity by $98,822. ASC 606 increased Q2 2018 revenue by $185,202 versus the prior-standard presentation, but reduced first-half revenue by $12,946; prior-year periods were not restated.
- Sales and marketing and general and administrative costs decreased year over year in the first half, but expenses remained high relative to revenue. Lower acquired-intangible amortization also reduced reported depreciation and amortization.
Outlook, risks and unusual items
Management expected Managed Services revenue to remain lower year over year in the second half of 2018, reflecting weak prior bookings. It anticipated improving quarter-over-quarter bookings beginning in Q3, with revenue recognition lagging bookings, and expected growth in Content Workflow and service-fee revenue from additional IZEAx platform partners. These are expectations, not assurances.
The filing states there is substantial doubt about IZEA’s ability to continue as a going concern for one year from issuance. Management said the July financing, credit availability and expected post-merger revenue and efficiencies could support operations into Q4 2018, but available cash was not enough to meet later acquisition obligations. The company expects to rely on additional financing, borrowing, or issuing shares to meet obligations; it gave no assurance these sources would be available on acceptable terms.
Subsequent to quarter-end, IZEA raised approximately $3.1 million net in a July 2 public offering of 3,556,000 shares and completed its TapInfluence merger on July 26. TapInfluence consideration included $1.5 million cash, 1,150,000 IZEA shares and a further $4.5 million payable in cash, stock or a combination in two installments. IZEA also paid a $333,333 ZenContent installment on July 30, partly in stock. These transactions provide financing but create significant future cash, dilution and integration considerations.
Other notable matters include a securities lawsuit for which the company could not estimate a reasonably possible loss range, and a shareholder derivative suit filed after quarter-end. Management intended to defend both. Disclosure controls were deemed ineffective at June 30 due to a previously reported material weakness involving revenue and cost presentation; remediation efforts were underway. The company also reported a delayed 2018 annual meeting and risks to continued Nasdaq listing and access to capital.
Important facts for investors to verify
- Whether bookings and revenue trends improved after Q2, and whether management’s second-half expectations were achieved.
- Cash runway, borrowing availability, and the funding and payment terms for TapInfluence and remaining ZenContent obligations.
- Actual integration results and whether the TapInfluence acquisition delivers the expected revenue and efficiencies.
- Any dilution from future equity issuance, acquisition payments in shares, options, warrants or additional financing.
- Progress remediating the material weakness, and developments or potential financial exposure in the pending lawsuits.
- Nasdaq listing compliance and the impact of ASC 606 timing differences when comparing reported revenue.