GAIA, INC. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Financial amounts below are in millions unless noted. Gaia operates a global digital video subscription service and online community, with a library of more than 8,000 titles.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $9.615 | $5.784 |
| Gross profit / margin | $8.343 / 86.8% | $4.964 / 85.8% |
| Operating loss | $(7.878) | $(6.853) |
| Net loss | $(6.035) | $(6.180) |
| Net loss per share, basic and diluted | $(0.39) | $(0.41) |
| Cash used in operating activities | $(2.890) | $(6.191) |
| Cash used in investing activities | $(4.058) | $(2.456) |
Streaming revenue rose 75.0% to $9.138 million and represented 95% of revenue, compared with 90.1% a year earlier. DVD subscription and other revenue declined to $0.477 million from $0.575 million. Operating expenses increased to $16.221 million from $11.817 million, including selling and operating expenses of $14.810 million, which management attributed primarily to increased marketing for subscriber acquisition. Gross margin improved by 1.0 percentage point.
At March 31, cash was $50.671 million, versus $32.778 million at year-end 2017. Current assets were $55.361 million and current liabilities were $10.735 million. Gaia reported no debt and an undrawn $13.5 million real-estate-secured line of credit. The quarter’s $24.841 million of financing cash flow included approximately $37.1 million of net proceeds from a March stock offering and $12.5 million of line-of-credit repayments.
Changes versus prior year and year-end
- Revenue grew 65.5%, primarily on growth in paying subscribers, while operating loss widened by $1.025 million. Net loss narrowed by $0.145 million, aided by a larger income tax benefit.
- Operating cash use decreased by $3.301 million, which management attributed to lower operating losses and favorable working-capital dynamics from recurring subscription revenue. Investing cash use increased, primarily due to greater investment in the media library.
- Cash increased following the equity offering. Class A shares outstanding rose to 12.484 million at March 31 from 9.770 million at December 31, 2017.
Outlook, risks and other notable items
- Management estimated remaining-2018 capital expenditures, including media-library investment, at approximately $9 million to $13 million, to be funded from available cash. Management said available cash, expected operating cash generation, potential equity sales and borrowing capacity should be sufficient for near- and long-term needs, while noting needs could change with acquisitions, development or operational difficulties.
- No specific revenue or earnings guidance was provided. Management described continued investment in exclusive content, the user interface, device availability and marketing to grow subscriptions. It noted member growth is generally strongest in the fourth and first quarters and slowest from May through August.
- Gaia reported net losses of $6.0 million in Q1 2018 and $6.2 million in Q1 2017. The filing discusses plans to invest in growth and generate losses for the next few years.
- The $1.826 million income tax benefit in Q1 2018 resulted from historical alternative minimum tax payments becoming fully refundable. Gaia maintained a full valuation allowance on deferred tax assets; reported gross net operating loss carryforwards were $40.0 million federal and $12.9 million state.
- Management said ordinary-course legal matters were either reserved or not expected to materially affect financial condition, results or cash flows; Part II reports no legal proceedings. No material changes to previously disclosed risk factors were reported. Forward-looking risks include ongoing losses, competition, subscriber trends, key-personnel retention, security and information systems, regulation and litigation.
- Management concluded disclosure controls were effective as of March 31, 2018 and reported no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Verify subscriber growth, acquisition costs and retention underlying the 75% streaming-revenue increase and higher marketing spend.
- Track whether revenue growth and gross-margin gains can outpace operating expenses and reduce operating losses and cash consumption.
- Assess the return on planned $9 million–$13 million remaining-2018 capital expenditures and ongoing content investment.
- Review cash use and funding needs, including the effects of the offering, line-of-credit repayment and future potential equity issuance or borrowing.
- Confirm the sustainability and cash-tax implications of the tax benefit, given the full valuation allowance and substantial loss carryforwards.