Gaia, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Gaia operates a global digital video subscription service and online community. Revenue is primarily subscription fees, recognized over subscription terms.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $12.467 million | $9.138 million; up $3.329 million |
| Gross profit / margin | $10.867 million / 87.2% | $7.957 million / 87.1% |
| Operating expenses | $17.315 million | $15.928 million |
| Operating loss | $6.448 million | $7.971 million |
| Net loss | $6.726 million; $0.38 per share | $6.035 million; $0.39 per share |
| Operating cash flow | $(2.741) million | $(2.890) million |
| Investing cash flow | $(4.924) million | $(4.058) million |
| Cash at period end | $22.299 million | $29.964 million at Dec. 31, 2018 |
At March 31, cash was $22.3 million, current assets $26.7 million, and current liabilities $13.8 million. The balance sheet reported a $12.5 million line of credit, unchanged from year-end. On April 26, Gaia repaid and replaced that facility with a $17.0 million term loan bearing a fixed spread over LIBOR, maturing May 1, 2022, and secured by its corporate campus; Gaia guarantees the loan. The filing does not state the spread or resulting interest rate. The subsidiary borrower’s assets and credit are available only for its own obligations.
Changes and management commentary
- Management attributed revenue growth primarily to more paying subscribers. The filing’s MD&A says revenue increased 37.4%; the reported revenue figures imply growth of approximately 36.4%.
- Cost of revenue rose 33.3%, while its share of revenue edged down to 12.8%. Selling and operating expense increased 8.3%, including increased marketing for subscriber acquisition; both major expense categories declined as a percentage of revenue.
- Operating loss narrowed, but net loss increased. Q1 2018 included a $1.826 million income tax benefit; Q1 2019 had none. Gaia reported a full valuation allowance on deferred tax assets and federal and state net operating loss carryforwards of $82.8 million and $23.3 million, respectively.
- Cash used in investing increased, primarily due to greater media-library investment. Cash fell by $7.665 million during Q1 2019. Financing cash flow was zero, versus $24.841 million provided in Q1 2018, which included a stock offering.
- Gaia estimated capital expenditures, including media-library investment, of $8–$12 million for the remainder of 2019, expected to be funded by cash, operating cash generation, and borrowing under the new term loan. Management believed available and potential funding sources would support operations, while noting that needs could change.
Outlook, risks, and unusual items
Gaia’s strategy is to grow subscriptions domestically and internationally through exclusive content, platform and user-interface improvements, device expansion, and community development. It reported approximately 8,000 English-language titles; over 85% of content was exclusive, and owned and produced content represented over 80% of viewership. Management noted seasonal subscriber growth, generally strongest October–February and slowest May–August. No specific revenue or profitability guidance was provided.
In Q1 2019 Gaia reclassified its legacy DVD subscription club as a discontinued operation; it reported a $315,000 discontinued-operations loss, with no related balance-sheet assets or liabilities. The filing identifies risks including ongoing losses, competition, subscriber and pricing trends, marketing and growth execution, key-personnel retention, technology and security, third-party service performance, regulation, litigation, and founder control. Management reported effective disclosure controls and no material change in internal control over financial reporting; it reported no legal proceedings.
Important facts for investors to verify
- Reconcile the MD&A’s stated 37.4% revenue growth with the reported revenue amounts, which imply approximately 36.4%.
- Review the complete term-loan agreement for its LIBOR spread, covenants, fees, and repayment terms, and assess the campus security and guarantee.
- Track cash burn, subscriber growth, marketing efficiency, and the funding plan for the stated $8–$12 million remaining-2019 capital expenditures.
- Assess continuing losses and the assumptions underlying management’s liquidity outlook and the deferred-tax-asset valuation allowance.