IZEA Worldwide, Inc. quarterly report, Q3 FY2018

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IZEA Worldwide, Inc. — Q3 2018 Form 10-Q

Reporting period: Three and nine months ended September 30, 2018. IZEA operates online marketplaces and software platforms connecting marketers with content creators. It completed its TapInfluence merger on July 26, 2018 and changed its name to IZEA Worldwide, Inc. effective August 20, 2018. Results include TapInfluence only from the acquisition date; it contributed $797,244 of revenue in the quarter.

Financial performance and liquidity

  • Q3 revenue: $5.78 million, down 18% from $7.09 million. Managed Services revenue fell 31% to $4.86 million; SaaS-related Marketplace Spend Fees and License Fees increased following the TapInfluence acquisition.
  • Nine-month revenue: $13.80 million, down 22% from $17.64 million. Managed Services declined 27% to $12.66 million. Gross billings, a non-GAAP measure, were $9.22 million in Q3 (up 13%) and $18.83 million for nine months (down 12%).
  • Profitability: Q3 operating loss was $1.26 million and net loss was $1.33 million, compared with losses of $0.63 million and $0.56 million, respectively, a year earlier. Nine-month operating loss was $4.89 million and net loss was $5.03 million, versus $4.75 million and $4.72 million. Diluted loss per share was $0.13 for Q3 and $0.68 for nine months.
  • Costs and margins: Cost of revenue was 41% of revenue in Q3 versus 47% a year earlier; for nine months it was approximately 47% in both periods. Cash operating expenses were 105% of revenue in Q3 and 127% for nine months. Adjusted EBITDA was a loss of $0.29 million in Q3 and $3.66 million for nine months; both are non-GAAP measures.
  • Cash flow: Nine-month operating cash use was $4.16 million; investing cash use was $0.64 million; financing provided $4.75 million. Cash declined $42,121 from year-end 2017 to $3.86 million.
  • Balance sheet and debt: Current assets were $11.33 million and current liabilities $16.91 million at September 30. The balance sheet reported $1.73 million outstanding on the secured line of credit, with up to $3.27 million of remaining availability assuming all receivables were eligible. Current acquisition costs payable were $4.54 million, with $43,055 long-term. Total liabilities were $16.95 million.
  • Equity financing: Two 2018 public offerings generated approximately $4.96 million net. Shares outstanding increased from 5.73 million at year-end 2017 to 12.07 million at September 30, 2018.

Material changes versus the prior period

  • Managed Services weakness reflected lower commitments and spending by larger customers and fewer smaller campaigns. Nine-month Managed Services net bookings were $12.8 million versus $18.5 million; Q3 bookings were approximately $4.7 million versus $6.7 million.
  • TapInfluence added self-service platform activity: Q3 SaaS gross billings were $3.68 million. Management said the acquisition should support further SaaS growth, while Legacy Workflow revenue is expected to continue declining.
  • Q3 general and administrative expense rose 17%, including a $500,000 estimated legal-expense accrual. Nine-month G&A fell 9%, partly reflecting a $646,637 reduction in the estimated ZenContent contingent consideration liability.
  • Interest expense increased to $90,452 in Q3 and $147,166 for nine months, primarily due to higher borrowing and rates. The credit facility rate was amended to 1.5% per annum effective August 30, 2018.
  • ASC 606 adoption reduced opening accumulated equity by $98,822. Its effect on 2018 revenue versus prior accounting was modest: an increase of $16,459 for Q3 and $29,405 for nine months. Prior-year comparisons remain under ASC 605.

Outlook, risks, and unusual items

  • Management expected lower year-over-year Managed Services revenue for the remainder of 2018, but anticipated growth in Marketplace Spend Fees, License Fees, and other SaaS revenue. It reported improved year-over-year opportunity-pipeline growth and higher Q3 bookings than Q2, with revenue recognition lagging bookings.
  • Management estimated cash and financing sources could cover expenses through at least Q3 2019, conditional in part on continued progress toward operating profitability. The filing also states substantial doubt exists about the company’s ability to continue as a going concern for one year from issuance.
  • IZEA said it did not have sufficient cash to meet acquisition obligations as they come due. TapInfluence deferred consideration totals $4.5 million, payable in installments six and twelve months after closing, in cash, stock, or a combination at IZEA’s option. Additional ZenContent payments were also due in 2019. Management intended to rely on stock issuance, additional financing, or borrowing; no additional financing commitments were disclosed.
  • The company reported a $500,000 estimated litigation liability, less approximately $62,000 of legal fees expected to count against its insurance retention. Securities and shareholder derivative lawsuits were pending; another derivative suit was filed after quarter-end. The company said it intended to defend the claims.
  • Disclosure controls were deemed ineffective as of September 30 because of a previously identified material weakness involving revenue presentation. Management described additional controls and third-party accounting support, but said remediation efforts were ongoing.
  • TapInfluence purchase accounting remained preliminary and subject to measurement-period changes. The company also disclosed potential dilution from acquisition payments in shares, future offerings, options, and warrants.

Important facts for investors to verify

  • Whether bookings and pipeline growth translate into recognized revenue, and whether SaaS growth offsets continued Managed Services and Legacy Workflow declines.
  • Cash burn, eligible receivables and actual credit availability, and the company’s ability to fund 2019 acquisition installments without further financing or material dilution.
  • Progress toward profitability and the assumptions underlying management’s estimated runway through Q3 2019, given the stated going-concern doubt.
  • Final TapInfluence purchase-price allocation, integration results, and the expected margins and cash contribution of its SaaS business.
  • Resolution and costs of the disclosed lawsuits, and whether the $500,000 litigation accrual and insurance coverage prove adequate.
  • Whether the identified internal-control material weakness is remediated and whether future filings require further accounting or reporting changes.