GAIA, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2016. Following the May sale of its Natural Habitat interest and the July 1 sale of its Gaiam Brand business, Gaia is principally a digital video subscription and online community business; the disposed businesses are reported as discontinued operations. The company changed its name from Gaiam, Inc. to Gaia, Inc. in July 2016.
Financial performance and position
- Continuing-business revenue: Q3 revenue was $4.46 million, up 27.4% year over year. Streaming revenue rose 34.9% to $3.80 million; DVD subscription and other revenue was $0.66 million. Nine-month revenue was $12.49 million, up 26.3%, with streaming revenue up 34.1% to $10.64 million.
- Margins and expenses: Gross margin improved to 84.3% in Q3 from 82.6%; for the nine months it was 82.7%, versus 80.2%. Q3 selling and operating expense increased to $6.54 million from $2.25 million, primarily reflecting higher subscriber-acquisition marketing and payroll. Nine-month selling and operating expense rose to $17.38 million, including increased marketing, technology and payroll costs.
- Operating results: Operating loss widened to $4.21 million in Q3 from $0.64 million; nine-month operating loss increased to $11.27 million from $5.38 million. Continuing-operations net loss was $0.15 million for Q3 and $7.36 million for the nine months, compared with $0.66 million and $5.66 million, respectively, in 2015.
- Reported net income: Net income was $100.44 million for Q3 and $90.38 million for the nine months, versus losses in 2015. This largely reflects discontinued-operation gains from the divestiture, including a $114.5 million Q3 gain and $124.8 million for the nine-month period; it does not represent recurring performance of the continuing business. Nine-month diluted and basic earnings per share were $4.22.
- Cash flow and liquidity: Cash was $62.45 million at September 30, compared with $1.27 million at year-end 2015. Nine-month operating cash flow was negative $9.00 million overall, including negative $4.15 million from continuing operations. Investing activities provided $147.30 million, principally reflecting divestiture proceeds; financing used $77.12 million, primarily for the tender offer. Management estimated approximately $2.9 million of capital expenditures for the remainder of 2016.
- Debt and equity: No balance was outstanding on the $5 million revolving credit facility at September 30; the company drew and repaid $3 million during the nine months. The facility bears interest at prime plus 3.25% and is secured by the company’s headquarters property. Total equity was $101.28 million.
Material changes versus the prior period
- Streaming growth and improved gross margin were offset by substantially higher selling and operating costs, leaving the continuing business loss-making.
- The Gaiam Brand and Natural Habitat divestitures changed Gaia’s business profile and financial statements; prior-period comparisons include the former businesses as discontinued operations.
- Gaia used $76.17 million in the tender offer to repurchase 9.64 million Class A shares, reducing Class A shares outstanding from 19.13 million at December 31, 2015 to 9.75 million at September 30, 2016.
- In September, Gaia invested $10.0 million for 10% of a privately held Colorado company. The investment agreement includes a right to buy additional shares and potential consequences if that right is not exercised or is forfeited.
Outlook, commentary, and risks
- Management’s strategy is to grow the subscription business through exclusive content, platform and user-interface improvements, additional connected-device access, and domestic and international expansion. It cited subscriber growth as the primary driver of streaming revenue growth.
- Management believed available cash, sale proceeds, expected operating cash, and potential financing would be sufficient for short- and long-term needs, while noting cash needs could change with acquisitions, product development, operating difficulties or other factors. No specific revenue or profitability guidance was provided.
- Management cautioned that the company has a history of continuing-operation losses and cannot assure future profitability. Stand-alone costs, loss of scale and purchasing power, and potentially reduced access to capital after the divestiture may affect results and liquidity.
- The company reported no material market-risk exposure after the sale of the Gaiam Brand segment. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
- Legal matters arise in the ordinary course. Management said probable and estimable matters were reserved or were not expected to materially affect results, but acknowledged some proceedings could be resolved unfavorably and above accrued amounts.
Key facts for investors to verify
- Confirm the precise tender-offer option count: the filing gives conflicting figures of 842,114 and 824,114 options in different sections.
- Review sale proceeds, closing adjustments, transaction costs and tax effects underlying the reported divestiture gains and cash proceeds.
- Assess recurring subscriber growth, customer-acquisition spending and whether revenue growth can eventually cover continuing-business operating costs.
- Evaluate cash burn, planned capital expenditures, the terms and availability of the secured credit facility, and the terms of the $10 million private-company investment.
- Consider that reported 2016 net income and per-share earnings are dominated by discontinued-operation gains, while continuing operations remained loss-making.