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    May 22, 2007

    PlanetOut free-fall watch

    Posted by: Chris

    Lgbt_priceTWO UPDATES: At the end of the post.

    It's been just seven business days since I last posted about the free-fall in share price for Planet Out, Inc., and in that time it has dropped to a close yesterday of 98 cents, a loss of one-third the company's value in that short time.

    Eric Savitz, who blogs for Barrons, pointed out yesterday that most of the damage came in the last two trading days:

    PlanetOut (LGBT), which fell 20% on Friday, is down another 13% today, and still no updates from the company on its financial situation. The company, which provides web sites, print publications and travel services for the gay and lesbian market, has been more or less in free fall since reporting disappointing financial results earlier this month. The company is running low on cash, and has hired Allen & Co. to consider strategic options.

    PlanetOut shares are down 15 cents today to $1, a decline of 13%. The shares are now down 78% for the year to date, 60% since its earnings report earlier this month and 31% over the last two days.

    Savitz, who has been tracking PlanetOut's problems, reports that he was promised an interview with someone in the company's management, so perhaps the most recent serious decline will be explained soon.

    In what is perhaps a telling display of the company's lack of focus, Magee told investors and reporters in  a May 9 conference call that PlanetOut will sell off one of its few profitable divisions, the soft-porn magazine titles owned by LPI's Specialty Publications, in an effort to raise cash. Specialty publishes Unzipped, Men (formerly Advocate Men) and Freshmen magazines.

    "It is a profitable one for us," Magee is quoted as saying about Specialty on the call, according to the Bay Area Reporter. "With that said, the adult business does not fit going forward with our other media properties."

    As far as I can tell, one danger not immediately faced by the first gay company ever traded publicly in the U.S. is being delisted by Nasdaq.  The stock exchange does require stocks to trade above a price of $1 per share, because below that amount even changes of a few cents represents a dramatic change in value.  But the price must trade below $1 for 30 days and even then, the company is given 90 days to recover.

    Still, an earlier post on Barrons, Savitz lays out the quandry raised by PlanetOut's impending cash crunch:

    [Magee] said the company will require a capital raise or strategic transaction in the coming months.  [JMP Securities analyst William] Morrison has some advice for potential investors: Don’t do it. “We continue to recommend that investors refrain from putting new capital to work in LGBT until we see evidence that its turnaround plan is working and the company raises additional capital.”

    FIRST UPDATE: Barron's Eric Savitz is even more of a night owl than I am. In a blog post at 1:42 a.m. this morning, he relates the substance of his interview with PlanetOut's CFO:

    In an interview Monday, PlanetOut CFO Dan Miller said the deep slide of the company’s stock … likely reflects sales by 1 or more of the company’s largest shareholders, rather than any specific new developments in its financial situation. It also may reflect the anticipated massive dilution from a capital raise of the size it has promised to seek.

    Miller says the company is “moving as quickly as we can” to solve its financial issues. If it can’t find a way to raise additional funds, he says, PlanetOut “would be forced to approach the lender and work with them on what is best for all parties.” One possibility is that they would trigger a default on the debt. …

    Miller notes that the company’s Gay.com URL is “incredibly valuable.” That may be true; what’s not clear is whether the company can raise enough cash to avoid having the site and the rest of PlanetOut’s assets sold off in a Chapter 11 fire sale.

    As I post this update at 1:30 p.m. (Eastern time), LGBT is trading at 92 cents, a slight rally from a new record low price per share of 86 cents in early trading this morning.

    SECOND UPDATE:  The PlanetOut rally continued off and on until the closing of trading today, when the price per share was at $1.11, a 13 cent rise from yesterday's closing price of 98 cents.  That small increase also represents a 13% increase in the stock value of the company in one day, demonstrating how volatile the stock can be when the price per share is so low.

    Still, the news could be much worse.  At least some investor(s) decided in the early afternoon that the record low represented an opportunity to buy PlanetOut stock at bargain basement prices and had enough confidence in the company as an ongoing concern to pony up.  But if the analysts are right, it will take  decisive action from management, and response from the financial community, for PlanetOut to truly rally.




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    1. Amicus on May 23, 2007 3:34:51 PM:

      The company has three problems (at least), based on the figures.

      (1) They have an expense problem.

      Either the industry economics are changing or they have badly misjudged sales growth.

      In the past year, revenues are down yr-to-yr yet ALL categories of expense are up significantly. "Production" costs, almost $3M; Sales and Marketing, almost $1M; General and Admin, up $1.4M (this last is most startling because the company spent almost $1M in restructuring charges - cash restructuring).

      (2) They have a *possible* managment problem, since they don't seem to be acknowledging the expense issues and they appear to have compounded business risk with financial risk.

      (3) They appear to have a financing problem.

      Their net tangible assets are down in the quarter to $213,000.

      In 3Q06 they took on $10-million in new debt, in agreements with Orix Venture Finance.

      There is some $12M due in debt payments in the upcoming year (from March) and about $18M in cash and s/t investments to pay it. That's not a lot of wiggle-room for a company that doesn't have a lot of profitable quarters, even if they can revolve significant parts of that debt.

      Based on the rework of loan agreement in Feb07, it looks like they may have missed the covenant on EBITDA coverage, which was trailing six month greater than -$500K. They appear to have pledged some IP rights to get the agreement done, so now it's not clear what passes, now.

      Assuming that their lenders work with them rather than salvage them, they still upped their interest payment to over $2M per year, which is high for a company that generated $3.1M in their best year (2005) since going public, before interest and taxes.

      They probably do need to do a debt-for-equity trade, but no one is likely to do it until they can show that they have their expenses understood and under control (e.g. like paying guaranteed bonuses, $280K retentions to folks who subsequently leave, and not getting obvious results from restructuring charges - including the one that was left on the YE06 b/s).

      They are certainly motivated to turn this around. 15% or so of the company is in the hands of the folks running it.

    1. dan on May 23, 2007 8:14:53 PM:

      that 1 million is made up retention bonuses paid to the upper management in liue of employess bonuses at the end of last year, and an enormous golden parachute buyout of jeff soukoup (one of the recipients of the retention bonuses.) in other words, its part of the upper management team's bleeding the company's cash out before its too late for them to benefit...

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