IZEA, Inc. — Q1 2017 Form 10-Q
Business and period. This unaudited filing covers the three months ended March 31, 2017, compared with Q1 2016. IZEA operates online marketplaces and technology platforms connecting marketers with content creators. Revenue is reported in three streams: Managed Services, Content Workflow, and Service Fee Revenue.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Revenue | $6.20 million | $5.47 million; up 13.5% |
| Gross profit and margin | $3.01 million; 48% | $2.36 million; 43% |
| Operating expenses | $5.71 million | $4.94 million; up 15.6% |
| Operating loss | $2.70 million | $2.58 million |
| Net loss / loss per share | $2.72 million / $0.49 | $2.59 million / $0.49 |
| Operating cash flow | $(1.52) million | $(1.41) million |
| Cash and cash equivalents | $4.36 million | $5.95 million at Dec. 31, 2016 |
| Current assets / current liabilities | $9.12 million / $7.60 million | $10.03 million / $7.28 million at Dec. 31, 2016 |
| Total liabilities / stockholders’ equity | $8.40 million / $7.41 million | $8.03 million / $8.99 million at Dec. 31, 2016 |
Cost of sales was $3.20 million, up 3%. Investing cash outflow was $68,000, including software development spending; financing cash outflow was $2,000. The company had no advances outstanding on its secured credit facility. It reported up to $3.56 million of facility availability, assuming all accounts receivable qualified, under a $5 million maximum facility secured by receivables and substantially all other assets. Acquisition costs payable totaled $1.12 million, including $364,000 current and $754,000 long-term. The filing reports no other bank borrowings outstanding.
Material changes and management commentary
- Managed Services revenue rose 27% to approximately $4.68 million, while Content Workflow revenue fell 14% to $1.47 million and Service Fee Revenue fell 42% to $48,000. Managed Services represented 76% of revenue and had a reported 61% gross margin; Content Workflow had a 7% margin.
- Management attributed Managed Services growth to larger campaigns and repeat customers, and improved production costs following the ZenContent acquisition. Content Workflow continued to weaken amid consolidation and cutbacks in the newspaper industry; management does not actively market this low-margin stream.
- Gross profit increased 27%, but operating expenses rose 16%, contributing to a 5% increase in net loss. Higher expenses reflected personnel and the February IZEAFest conference, including increased marketing and event costs.
- Net bookings were $7.8 million, 5% above Q1 2016. Management said bookings typically convert to revenue within 90–120 days, though larger contracts can take longer; bookings may change due to cancellations, order changes, or delivery timing.
- Cash declined by $1.59 million during the quarter, primarily due to operating losses. The accumulated deficit was $44.53 million.
Guidance, outlook, and risks
- Management estimated 2017 revenue of $29–$30 million, representing 8%–10% growth. It expected Managed Services to increase by more than 20%, partly offset by further Content Workflow declines, potentially up to 50% versus prior-year levels.
- Management forecast 2017 Adjusted EBITDA of approximately negative $4.0–$4.5 million, citing continued investment in sales and engineering. It also expected Cash Opex as a percentage of revenue to decline by nearly 1,500 basis points in future quarters.
- Management stated that cash and the available credit line should cover expenses for longer than 12 months, but said it may seek additional capital. Equity financing could dilute shareholders. The company expects continuing losses in 2017 and cannot assure profitability.
- Customer retention and concentration are risks: the notes state one customer generated 11% of Q1 2017 revenue, compared with two customers representing 24% in Q1 2016. The risk-factor discussion also refers to two customers accounting for 24% in Q1 2017, an apparent inconsistency to verify.
- ZenContent acquisition consideration includes guaranteed and contingent payments; the contingent liability was remeasured to $366,000 at quarter-end. Payments may be made partly in cash or, at the company’s option, shares, creating potential dilution. Ebyline earn-out targets were not met in the first two years and management did not expect them to be met in the third year.
- No legal proceeding or claim was identified as likely to have a material adverse effect. Management reported disclosure controls effective as of March 31, 2017 and no significant quarterly change in internal control over financial reporting.
- The company planned to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method, but had not finalized its impact assessment. The new lease standard’s impact was also under evaluation.
Important facts for investors to verify
- Whether revenue, bookings, and Managed Services growth support the $29–$30 million 2017 revenue outlook, particularly given projected Content Workflow declines.
- Cash burn, eligible receivables, and actual availability under the secured facility; management’s longer-than-12-month liquidity assessment; and any need for additional financing.
- The customer concentration disclosure inconsistency and the effect of any major customer loss, cancellation, or delayed delivery.
- The timing, amount, and cash-versus-stock settlement of ZenContent payments, as well as the potential dilution from acquisition obligations, options, and warrants.
- Whether expense growth moderates and the company achieves its Adjusted EBITDA outlook; evaluate the non-GAAP measure alongside GAAP losses and cash flows.
- The eventual effects of adopting the new revenue recognition and lease accounting standards.