GAIA, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing was signed February 26, 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Business context
Gaia operates a global subscription streaming service and online community focused on yoga, transformation, and “Seeking Truth” content. Its library exceeded 8,000 titles; the company said over 90% of titles were exclusive to Gaia, and in-house produced and owned content accounted for about 80% of viewing. Approximately 30% of subscribers were outside the United States. In 2017, Gaia launched Spanish-language content and later added German.
Following the 2016 sales of its Gaiam Brand consumer-products business and Natural Habitat eco-travel subsidiary, results discussed here principally reflect continuing operations.
Financial and operating highlights
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net revenue | $28.3 million | $17.2 million |
| Streaming revenue | $26.2 million | $14.7 million |
| Gross profit / gross margin | $24.4 million / 86.1% | $14.4 million / 83.5% |
| Operating loss | $(25.1) million | $(16.6) million |
| Continuing-operations loss | $(23.7) million | $(10.8) million |
| Net income (loss) | $(23.3) million | $87.1 million |
| Basic and diluted EPS | $(1.54) | $4.39 |
| Cash used in continuing operating activities | $(20.8) million | $(6.1) million |
| Cash at year-end | $32.8 million | $54.0 million |
- Revenue rose 64.5%; streaming revenue increased 78.2%, driven primarily by 80% growth in paying subscribers. Management reported subscriber growth of 52% in 2016.
- Cost of revenue grew more slowly than sales, lifting gross margin to 86.1%. Selling and operating expense rose 76% to $44.0 million, primarily from marketing to acquire subscribers; advertising expense alone was $25.7 million, versus $13.2 million in 2016.
- Operating margin was approximately negative 88.9%. Gaia continued to report substantial operating losses despite revenue growth.
- Working capital from continuing operations was $16.8 million at year-end, down from $46.8 million. Total assets were $97.0 million and total liabilities were $20.8 million.
- At December 31, 2017, $12.5 million was outstanding on a real-estate-secured revolving credit facility of up to $13.5 million. The balance was repaid in January 2018, according to the filing. The facility matures in December 2020, bears interest at prime plus 0.5% (4.50% at year-end, subject to a 4.25% floor), and includes covenants.
Material changes versus the prior comparable period
- Revenue growth was accompanied by a larger continuing-operations loss: $23.7 million in 2017 versus $10.8 million in 2016. Higher marketing investment was the principal stated driver of increased operating expenses.
- 2016 net income of $87.1 million was not a comparable measure of recurring performance: discontinued operations included a $124.8 million pretax gain on disposal of the Gaiam Brand segment, alongside the sale of Natural Habitat. 2017 net loss therefore reflects the continuing subscription business more clearly.
- Operating cash use increased to $20.8 million from $6.1 million for continuing operations. Cash declined by $21.2 million during 2017, while the new credit facility provided $12.5 million of financing.
- Gaia recorded a $5.9 million valuation allowance against deferred tax assets in 2017, citing cumulative losses over a three-year period, excluding the 2016 Gaiam Brand sale. The federal tax-rate reduction also required remeasurement of deferred tax balances.
Outlook, risks, and unusual items
- Outlook: Management estimated 2018 capital expenditures, including produced content, of approximately $13 million to $17 million, expected to be funded from available cash. It stated that cash on hand, anticipated operating cash flows, and potential financing were expected to fund operations, while warning that needs could change. The filing provides no specific revenue, earnings, subscriber, or profitability guidance.
- Principal risks: Subscriber acquisition and retention; intense streaming competition and pricing pressure; continued operating losses and negative operating cash flow; cybersecurity, privacy, service reliability, and third-party platform dependence; content production, licensing, and intellectual-property risks; and legal, regulatory, currency, and execution risks from international expansion.
- Financing and control: The company disclosed that it may seek additional capital if operating cash flow remains negative, potentially diluting shareholders or issuing securities senior to common stock. Founder and CEO Jirka Rysavy held about 85% of voting power through super-voting Class B shares.
- Other notable items: No material litigation exposure was identified by management based on matters that could be reasonably estimated. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of year-end. No dividend was declared or paid.
Investor facts to verify
- Whether subscriber growth and retention remain strong, and whether growth translates into improved unit economics and a path to profitability.
- Whether marketing spending and content investment can be sustained while operating cash use remains high; compare actual 2018 capital expenditures with the $13 million to $17 million estimate.
- How quickly revenue growth, gross-margin improvement, and international-language launches develop relative to operating expenses.
- The January 2018 repayment of the $12.5 million credit-facility balance, and the facility’s continuing availability, covenants, and collateral terms.
- The assumptions supporting deferred-tax-asset realizability and the $5.9 million valuation allowance, as well as the impact of tax-law changes.
- The effects of founder voting control, stock-based compensation and potential share dilution, and the performance and terms of the $10 million cost-method investment.