Gaia, Inc. — Q3 2018 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2018. Gaia operates a global digital video subscription service with more than 8,000 titles; management says over 90% of its content is exclusive to Gaia. Its strategy centers on growing subscribers through exclusive content, platform improvements, device expansion, and community development.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $11.4 million | $7.5 million | $31.5 million | $19.9 million |
| Streaming revenue | $10.9 million | $7.0 million | $30.1 million | $18.3 million |
| Gross profit / margin | $9.9 million / 87.0% | $6.5 million / 86.2% | $27.3 million / 86.9% | $17.1 million / 86.1% |
| Operating loss | $10.4 million | $5.8 million | $24.8 million | $19.0 million |
| Net loss | $10.3 million | $5.2 million | $22.7 million | $17.7 million |
| Net loss per share | $0.58 | $0.34 | $1.33 | $1.17 |
- For the nine months, operating cash used was $13.1 million, versus $15.0 million in 2017; investing cash used was $13.8 million, versus $9.5 million. Financing provided $24.9 million, including $37.1 million net proceeds from a March stock offering, partly offset by repayment of $12.5 million on the credit line. Cash declined $2.0 million to $30.8 million.
- At September 30, cash was $30.8 million, there was no debt, and a $13.0 million real-estate-secured line of credit was undrawn. Current assets were $35.5 million and current liabilities $12.8 million. Total assets were $105.0 million; equity was $92.0 million.
- No formal revenue or earnings guidance is provided. Management estimated remaining-2018 capital expenditures, including media library, product, and campus investment, of $4 million to $6 million, to be funded from cash.
Changes and management commentary
- Q3 revenue grew 52.0% year over year; nine-month revenue grew 58.3%. Management attributed streaming growth primarily to more paying subscribers.
- Operating losses widened despite revenue growth. Q3 selling and operating expense rose 75% to $18.9 million, with increased customer-acquisition spending and costs for the alternative-healing channel and planned premium subscription offering. Nine-month selling and operating expense rose 50.9% to $48.0 million, mainly from planned customer-acquisition investment.
- Gross margin improved modestly: 87.0% versus 86.2% in Q3 and 86.9% versus 86.1% for the nine-month period. Q3 net loss included no discontinued-operations income, compared with $0.4 million after tax in Q3 2017.
- The March 2018 public offering issued 2,683,333 Class A shares at $15 per share and generated approximately $37.1 million net proceeds. Class A shares outstanding increased to 12.5 million at September 30 from 9.8 million at year-end 2017.
- Management noted subscriber growth is generally strongest in the fourth and first quarters and slowest from May through August; it says this affects customer-acquisition spending but not revenue seasonality. It expects ongoing losses while investing in growth.
Risks, contingencies, and unusual items
- Management cited risks including ongoing losses, competition, subscriber acquisition and pricing, reliance on key personnel and third parties, security and information systems, content-related legal liability, regulation, litigation, consumer trends, and quarterly fluctuations. Actual results may differ from forward-looking statements.
- The company reported gross net operating loss carryforwards of $65.0 million federal and $19.4 million state, and a full valuation allowance on deferred tax assets due to historical losses and expected continued investment and losses. The 2018 tax benefit reflected historical alternative-minimum-tax payments becoming refundable.
- Management said existing legal matters were in the ordinary course and expected outcomes considered probable and estimable were reserved or not expected to materially affect results. Part II reports no legal proceedings. Disclosure controls were deemed effective, with no material quarterly change in internal control.
- Revenue-recognition standard adoption in Q1 2018 had no material impact. The filing says the forthcoming lease standard was preliminarily not expected to have a material impact.
Investor facts to verify
- Whether subscriber growth and customer-acquisition spending are producing sustainable subscriber economics and improved operating leverage.
- Whether planned content, platform, channel, and premium-offering investments remain within the stated capital-spending range and support future growth.
- Cash burn, future capital requirements, and availability of the undrawn $13.0 million secured credit line, particularly if losses or investment needs rise.
- The effect of dilution from equity issuance and the potential realization of tax assets given the company’s continuing losses.