Gaia, Inc. — Q2 2017 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2017, compared with 2016. Gaia operates a global digital video subscription service and online community, with about 8,000 titles; over 90% of content was exclusive to Gaia. Following the 2016 sale of its Gaiam Brand business, results presented here primarily reflect the streaming and subscription business.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $6.56m | $4.20m | $12.34m | $8.03m |
| Streaming revenue | $6.06m | $3.61m | $11.27m | $6.84m |
| Gross profit / margin | $5.65m / 86.1% | $3.45m / 82.2% | $10.61m / 86.0% | $6.57m / 81.8% |
| Operating loss | $(6.35)m | $(2.97)m | $(13.21)m | $(7.06)m |
| Net loss | $(6.31)m | $(2.44)m | $(12.49)m | $(10.06)m |
| Basic and diluted loss per share | $(0.42) | $(0.10) | $(0.82) | $(0.41) |
Revenue increased 56% in Q2 and 54% for the first half, driven primarily by growth in paying subscribers. Streaming represented 92% of Q2 revenue, versus 86% a year earlier. Gross margin improved as streaming costs grew more slowly than revenue. Selling and operating expense rose 112% in Q2 to $10.56m and 94% in the first half to $21.03m, largely due to increased marketing for planned subscriber growth; consequently, operating losses widened. The 2016 comparison includes discontinued operations: the Gaiam Brand segment was sold in July 2016, and discontinued operations contributed $0.65m income in Q2 2016 and a $2.85m loss in the first half of 2016. The company repurchased approximately 40% of its outstanding shares in July 2016, affecting per-share comparisons.
Cash, liquidity, and balance sheet
- Cash was $36.86m at June 30, 2017, down $17.17m from year-end 2016; current assets were $39.01m and current liabilities $7.85m.
- Six-month cash used in operating activities was $11.61m, all from continuing operations; cash used in investing was $5.58m, principally media library, property, and equipment additions. Financing provided $0.03m.
- No debt was outstanding at June 30, 2017. Management estimated approximately $6.5m of capital expenditures, including media-library investment, for the remainder of 2017, funded from available cash. Management said available and potential funding sources should support short- and long-term needs, while noting needs could change.
- Deferred revenue was $3.18m. The filing reports no separate operating cash-flow guidance or formal revenue/profit forecast.
Outlook, risks, and other notable items
- Management’s strategy is to grow subscriptions domestically and internationally through exclusive content, platform and interface improvements, device expansion, and community development. Marketing investment was being accelerated to pursue subscriber growth; no quantified subscriber or earnings target was provided.
- Subscriber growth is generally strongest in the fourth and first quarters and slowest from May through August; the company says this affects acquisition spending but does not create corresponding revenue seasonality.
- Management reported continuing operating losses and expects to continue investing in growth. Risks cited include competition, general economic conditions, pricing and consumer trends, key-personnel loss, technology and security issues, legal exposure, and execution of new initiatives. No material changes to the prior annual report’s risk factors were reported.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. No legal proceedings were listed in Part II; the notes describe ordinary-course proceedings and state that probable, estimable losses were reserved or not expected to have a material adverse effect, while unfavorable outcomes in excess of accruals remain reasonably possible.
- The company adopted share-based-payment accounting guidance in 2017, recording a $0.2m cumulative adjustment to opening retained earnings and paid-in capital. It recognized $0.9m of share-based compensation in the first half, versus $0.1m in 2016. Management did not expect the cited new lease and revenue-recognition standards to materially affect reported results or financial position.
Important facts for investors to verify
- Whether subscriber growth and revenue gains can continue and ultimately offset elevated marketing and operating costs.
- Cash-burn trajectory, remaining-2017 capital expenditures, and the sufficiency of liquidity if growth investments or operating losses exceed expectations.
- Subscriber acquisition economics and retention, which the filing does not quantify clearly.
- Comparability of per-share results after the July 2016 share repurchase and of year-over-year results after the divestiture of the former business.
- Potential legal exposures and the realization of deferred tax assets; the company reported a full valuation allowance as of June 30, 2017.