Business context and reporting period
IZEA, Inc. operates online marketplaces that connect advertisers with social-media publishers for sponsored posts, tweets, clicks, purchases and other actions. Its platforms include SocialSpark, SponsoredTweets and WeReward, alongside legacy PayPerPost and InPostLinks. The company reports a fiscal year ended December 31, 2011, with FY2010 comparatives; this 10-K does not provide standalone fourth-quarter results. The May 2011 share exchange was accounted for as a reverse merger, with IZEA treated as the accounting acquirer.
Key financial results
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $4.347 million | $3.822 million |
| Gross profit / margin | $2.396 million / 55% | $2.003 million / 52% |
| Operating expenses | $6.682 million | $4.086 million |
| Operating loss | $(4.287) million | $(2.083) million |
| Net loss | $(3.979) million | $(2.158) million |
| Basic and diluted loss per share | $(0.16) | $(3.34) |
| Cash used in operating activities | $(3.916) million | $(1.926) million |
| Cash and cash equivalents at year-end | $225,277 | $1.503 million |
Revenue grew 13.8%. Sponsored revenue was 80% of FY2011 revenue, down from 88% in FY2010, while service-fee revenue rose to 20% from 12%. Core platforms accounted for 70% of revenue versus 51% in 2010; legacy platforms accounted for 30% versus 48%. No customer represented more than 10% of annual revenue.
Liquidity, debt and material changes
Year-end current assets were $1.120 million and current liabilities were $2.473 million, implying negative working capital of approximately $1.353 million. Total liabilities were $3.253 million, including a $752,486 warrant liability and $52,920 of capital-lease obligations. The Silicon Valley Bank loan was repaid in full during December 2011. The company reported an accumulated deficit of $18.131 million.
Net cash fell by $1.278 million during 2011. Financing provided $2.686 million, principally from the May 2011 offering; the offering raised $3.330 million gross and $3.043 million net after stated costs. Operating cash outflow increased from 2010. The net loss widened by $1.821 million, as operating expenses rose 63.6%, substantially faster than revenue and gross profit. General and administrative costs increased 76.5%, including $1.216 million of investor-relations expense (net expense for those services was $1.180 million). A $332,484 noncash gain from remeasurement of warrant liabilities partly offset the loss.
Outlook, commentary and risks
Management expected revenue to increase as it focused sales efforts on its three core platforms, expanded its sales force and developed products, partnerships and WeReward marketing. The filing provides no quantified revenue, earnings or cash-flow guidance. Management was negotiating for additional capital and warned that failure to obtain financing could require curtailing plans or ceasing operations. The independent auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern.
After year-end, on February 3, 2012, the company issued a $550,000 senior secured note to existing shareholders for $500,000. It matures August 2, 2012, with a possible extension, and is secured by substantially all company and subsidiary assets; certain additional borrowing, receivable sales and dividends are restricted without holder consent. Also after year-end, IZEA signed a non-binding letter of intent to acquire Twelvefold Media in a stock transaction. Closing was uncertain and conditioned in part on the combined company having $7 million of net cash. Twelvefold’s unaudited reported 2011 revenue was approximately $10.248 million and its net loss approximately $5.377 million.
Other notable risks include a landlord notice of default after rent for the Orlando headquarters went unpaid for February and March 2012; dependence on additional financing and potential dilution; competitive and rapidly changing social-media advertising markets; reliance on third-party social-platform access and hosting; privacy, security, advertising-disclosure and regulatory exposure; and thin trading in the company’s OTC stock. A material weakness in controls over accounting for complex financing instruments led to a 2011 second-quarter restatement and was reported remediated by September 30, 2011. Management did not complete a formal assessment of internal control over financial reporting for 2011; disclosure controls were reported effective as of year-end.
Investor verification priorities
- Verify current liquidity, financing availability and the company’s ability to meet obligations, including the 2012 secured note and lease commitments.
- Review the terms, dilution and accounting treatment of the May 2011 offering, warrants and preferred shares; also verify registration-rights deadlines and any associated damages.
- Confirm the status and final terms, if any, of the Twelvefold Media proposal and its financing condition; do not treat it as a completed acquisition.
- Assess the sustainability of revenue growth and gross-margin improvement against rising operating expenses, cash burn and ongoing losses.
- Review the Q2 2011 restatement, remediation of the identified material weakness, and the absence of a formal 2011 internal-control assessment.
- Confirm resolution of the Orlando office lease default and evaluate potential dilution from outstanding options, warrants and convertible securities.