IZEA, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The company operates social media sponsorship marketplaces and related advertising services. Financial statements are unaudited.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / prior year-end |
|---|---|---|
| Revenue | $1.385 million | $1.614 million |
| Gross profit / margin | $809,173 / 58% | $954,373 / 59% |
| Operating expenses | $1.669 million | $1.946 million |
| Operating loss | $(859,588) | $(991,434) |
| Net loss | $(883,830) | $(917,190) |
| Cash used in operations | $(697,272) | $(568,890) |
| Cash and cash equivalents | $130,252 at March 31 | $657,946 at December 31, 2012 |
| Total assets / liabilities | $1.016 million / $2.965 million | $1.402 million / $2.715 million at December 31, 2012 |
| Working capital | $(2.054) million | Not stated in the filing text for the comparable date |
Revenue fell 14.2% year over year, primarily from a $241,000 decline in sponsored revenue. Management said Q1 2012 had unusually strong sales; Q1 2013 net bookings were 10% higher, with growth in new customers, larger campaigns, and repeat clients. Management views bookings as an indicator of revenue generally recognized within 90 days. Operating expenses fell 14.2%, helping reduce the net loss by $33,360 despite lower gross profit. Gross margin declined one percentage point.
At quarter-end, current liabilities were $2.950 million. Notes payable totaled $268,890 current, including $193,890 drawn on the Bridge Bank facility and a $75,000 shareholder note in default; accrued interest on the defaulted note was $7,336. The company also reported $23.687 million of accumulated deficit and $1.949 million of stockholders’ deficit.
Liquidity, financing, and outlook
The company reported substantial doubt about its ability to continue as a going concern. It said operating revenue was insufficient to sustain operations and that continued operations depended on raising capital. It warned that financing might not be available on acceptable terms; if funding and operating revenue prove insufficient, it may curtail plans or cease operations. Potential equity financing could dilute existing shareholders.
On March 1, 2013, IZEA entered a secured, accounts-receivable-based Bridge Bank facility with advances up to 80% of eligible receivables, capped at $1.5 million; $193,890 was outstanding at March 31. On April 11, the company borrowed $500,000 unsecured from a director, due May 31 at 7% annual interest (12% default rate). The proceeds repaid the Bridge Bank balance and funded operating expenses. The company also disclosed the unpaid $75,000 note, which matured in December 2012 and bears 18% default interest.
No quantified earnings or revenue guidance was provided. Other unusual or potentially dilutive items included conversion of the remaining $112,150 balance of a senior secured note into 773,983 common shares in February, and a consultant option grant to purchase 1,000,000 shares at $0.25, vesting over four years. The filing reported 7,145,526 common shares outstanding at March 31 and 7,145,526 at May 10.
Risks, contingencies, and other disclosures
- Three customers represented 55% of accounts receivable at March 31; no customer exceeded 10% of Q1 2013 revenue. The company had no allowance for doubtful accounts.
- Blue Calypso, Inc. filed a patent infringement suit in October 2012 seeking unspecified damages. IZEA said it considered the suit without merit and intended to defend itself; it could not estimate likelihood or potential exposure.
- Fair-value changes in derivative liabilities produced $8,124 of expense in Q1 2013, versus $90,987 of income in Q1 2012, contributing to the change in other income or expense.
- Management concluded disclosure controls were effective as of March 31, 2013, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether IZEA secured sufficient financing to meet near-term operating needs and repay the short-term director loan and defaulted shareholder note.
- Whether reported net bookings convert into recognized revenue and whether revenue growth is sustained.
- The timing, terms, and potential dilution of any new debt or equity financing, including outstanding options and warrants.
- Developments in the Blue Calypso patent litigation and any resulting financial exposure.
- Customer receivable concentration, collections, cash burn, and progress toward operating cash-flow break-even.