Gaia, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The interim financial statements are unaudited. Gaia operates a global digital video subscription service with more than 10,000 titles; the company says 88% of its library is exclusive to members.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $19.8 million | $20.7 million | $39.5 million | $42.6 million |
| Gross margin | 85.7% | 86.7% | 85.8% | 86.7% |
| Operating income (loss) | ($1.6 million) | $0.3 million | ($2.6 million) | $0.6 million |
| Net income (loss) | ($1.7 million) | $0.1 million | ($2.9 million) | $0.2 million |
| Operating cash flow | $3.3 million | $2.4 million | $6.5 million | $6.4 million |
Revenue declined 4.3% in Q2 and 7.3% in the first half year over year. Management attributed the declines primarily to post-pandemic subscriber contraction in the second half of 2022, while stating that member growth returned in the first half of 2023. Q2 selling and operating expense rose 7.5% to $17.1 million, primarily due to higher marketing spend. Gross margin fell amid increased amortization from investment in original content. Q2 diluted loss per share was $0.08; first-half diluted loss per share was $0.14.
Cash, liquidity and debt
- Cash was $10.9 million at June 30, 2023, versus $11.6 million at December 31, 2022. First-half net cash decreased $0.7 million.
- First-half operating cash flow was $6.5 million; investing cash use was $7.1 million, primarily for media library, software and equipment additions.
- Long-term debt, net was $14.9 million; the balance sheet also reports $0.9 million of short-term debt and lease liability. The filing reports $9.0 million drawn on the $10.0 million KeyBank revolving facility.
- The KeyBank facility matures August 25, 2025, bears interest at SOFR plus applicable adjustments and a 2.00% margin, and includes financial covenants. The company also guarantees a campus mortgage bearing 3.75% interest and maturing December 2025.
- Operating lease liabilities totaled $6.9 million. Deferred revenue was $15.5 million, compared with $14.1 million at year-end.
Outlook, risks and unusual items
- Management expects positive operating cash flow for the remainder of 2023 and plans $6 million to $8 million of content and capital expenditures, primarily for content and digital-platform development, funded from operating cash flows. Management says these expenditures are discretionary and can be scaled.
- Management considers cash on hand, expected operating cash flow and available borrowing capacity sufficient for short- and long-term needs, while cautioning that needs may change due to acquisitions, development, operating difficulties or other factors. No revenue or earnings guidance is provided.
- On May 23, 2023, Gaia agreed to an SEC cease-and-desist order without admitting or denying the findings. The SEC found that Gaia misstated paying-subscriber growth in a 2019 earnings release and call and failed to comply with whistleblower-protection requirements. Gaia is required to pay a $2.0 million civil penalty over one year; the penalty had been accrued at December 31, 2022.
- VAT examinations are ongoing; some have resulted in assessments. The company accrues liabilities when probable and estimable and says future developments could require adjustments.
- Gaia issued a $701,558 convertible note for Food Matters Institute intellectual property and content assets, then converted it into 272,980 Class A shares in June. The seller was 50% owned by a current Gaia board member, in connection with that person’s new COO role.
- Management identifies member acquisition and retention, competition, marketing costs, content production, service disruptions, economic conditions, legal and regulatory matters, and other risks as factors that could affect results. It notes that the business is seasonal, historically seeing strongest member growth in the fourth and first quarters.
Important facts for investors to verify
- Whether the reported return to member growth translates into sustained subscriber gains and revenue growth; the filing does not provide a clear subscriber count.
- Whether marketing spending and content investment can support growth while restoring operating profitability and gross margin.
- Cash generation and borrowing needs relative to planned second-half 2023 expenditures, debt maturities, and KeyBank covenant requirements.
- Payment timing and completion of the SEC penalty, and any developments in VAT examinations or other contingencies.
- Terms and governance handling of the Food Matters asset acquisition and related-party share issuance.