GAIA, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited interim financial statements. Following the July 1 sale of its Gaiam Brand business, the company’s continuing business is primarily its digital video subscription service, now its sole reportable segment. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Continuing-operation revenue: Q2 revenue was $4.20 million, up 27.8% year over year. Streaming revenue rose 39.7% to $3.61 million, while DVD subscription and other revenue declined 16.0% to $0.59 million. First-half revenue was $8.03 million, up 25.6%.
- Margins and operating results: Q2 gross profit was $3.45 million, or 82.2% of revenue, versus $2.60 million and 79.0% a year earlier. Operating loss widened to $2.97 million from $1.90 million; operating margin was -70.7% versus -57.9%. First-half operating loss was $7.06 million versus $4.73 million, with gross margin of 81.8% versus 78.8%.
- Net loss: Q2 continuing-operations loss was $3.09 million; total net loss was $2.44 million, or $0.10 per share, compared with $1.12 million, or $0.05 per share, in Q2 2015. First-half continuing-operations loss was $7.21 million; total net loss was $10.06 million, or $0.41 per share, versus $5.01 million, or $0.20 per share. Discontinued operations materially affected total results.
- Cash flow: First-half cash used by continuing operations was $4.80 million, compared with $1.55 million in 2015. Consolidated operating cash flow was negative $1.55 million, including $3.25 million provided by discontinued operations. Investing activities provided $7.06 million, including $11.33 million of Natural Habitat sale proceeds; financing used $0.57 million. Cash increased $4.95 million to $6.21 million.
- Liquidity and debt: At June 30, cash was $6.21 million and current assets were $37.66 million, including $29.64 million of discontinued-operation assets. Current liabilities were $12.00 million, including $3.54 million of discontinued-operation liabilities. A $5.5 million revolving credit facility had no amount outstanding at quarter-end; the company drew and repaid $3.0 million during the first half. The filing reports no other debt balance.
- Other metrics: Total assets were $89.71 million and total equity was $77.71 million at June 30. Accumulated deficit was $98.10 million. The company reported federal and state gross net operating losses of $94.6 million and $26.2 million, respectively, and maintained a full valuation allowance against deferred tax assets.
Material changes and unusual items
- Gaia sold its 51.4% interest in Natural Habitat on May 4 for $12.85 million cash and recorded a $10.3 million gain. Its results are presented in discontinued operations.
- On July 1, after quarter-end, the company sold the Gaiam Brand business for a gross purchase price of $167.0 million, subject to post-closing adjustments. It reported a preliminary gain of approximately $120.8 million before taxes. Historical Brand results are classified as discontinued operations; the business had represented the majority of consolidated revenue and expenses.
- On July 1, the company used part of the sale proceeds to tender for 9,636,848 Class A shares and 842,114 options at $7.75 each, substantially reducing shares outstanding. It also appointed new executive officers in connection with the sale. The company changed its name from Gaiam, Inc. to Gaia, Inc. on July 14.
- Q2 selling and operating expense increased 57.2% to $4.99 million, primarily due to higher subscriber-acquisition marketing and one-time charges related to the sales and previously planned spin-off. Corporate and administrative expense also included one-time separation and sale costs. The company issued 50,000 shares as a charitable contribution and recorded $0.4 million of expense.
Outlook, risks and contingencies
- Management’s strategy is to grow subscriptions domestically and internationally by expanding exclusive content, improving the user interface, supporting additional devices and building a community around its content. It cited subscriber growth as the primary driver of streaming revenue gains.
- Management estimated approximately $4.0 million of capital expenditures for the remainder of 2016, to be funded by operating cash flow and proceeds from the Brand sale. It believed available cash, sale proceeds, operating cash flow and financing sources would be sufficient for short- and long-term needs, while noting that cash needs could change.
- Subscriber growth is typically strongest in the fourth and first quarters and slowest from May through August. The company cautioned that historical consolidated results may not represent future standalone performance; loss of shared costs, scale, purchasing power and access to capital may affect the business. It reported continuing-operation losses and did not assure future profitability.
- Management stated that existing legal matters, based on information available, were reserved or not expected to materially harm financial condition, results or cash flows, while acknowledging that adverse outcomes above accrued amounts were reasonably possible. No material market-risk exposure was identified at June 30. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Final Brand-sale proceeds, post-closing adjustments, taxes, and the realized gain compared with the preliminary $120.8 million estimate.
- Actual share and option tender costs and the post-tender share count, given the substantial reduction in outstanding shares.
- Subscriber additions, retention, acquisition costs and whether streaming growth can support a path toward profitability.
- Standalone cash burn and capital spending after the divestiture, including the assumptions behind management’s funding outlook.
- One-time separation and transaction costs, remaining legal contingencies, and the effect of the disposal on comparability with prior periods.