Gaia, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The interim financial statements are unaudited. Gaia operates a global subscription streaming service with approximately 8,000 titles; about 85% of its content is exclusive to members.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $17.5m | $13.7m | $48.2m | $39.3m |
| Gross margin | 87.1% | 86.8% | 87.0% | 86.8% |
| Operating income (loss) | $0.4m | ($3.9m) | ($5.1m) | ($14.6m) |
| Net income (loss) | $6.3m | ($4.1m) | $0.2m | ($15.3m) |
| Diluted earnings (loss) per share | $0.32 | ($0.23) | $0.01 | ($0.84) |
- Q3 revenue rose 27.7%; nine-month revenue rose 22.6%. Management attributed growth to increases in members and average monthly revenue per member; member counts and average revenue per member are not quantified in the filing text.
- Q3 selling and operating expense fell 5.6% to $13.5m; nine-month expense fell 4.1% to $42.4m. Corporate, general and administration expense was $1.4m in Q3 and $4.7m for nine months.
- Q3 net income included a $6.1m gain on sale of real estate. Excluding that gain, management reported Q3 net income of approximately $0.2m, or $0.01 per share. Nine-month interest and other income also included the gain.
- Operating cash flow was $7.2m for the first nine months, versus cash used of $5.9m a year earlier. Investing cash flow was positive $2.8m, including $13.2m proceeds from the property sale and $10.4m of additions to the media library, property and equipment. Financing used $12.8m, mainly reflecting debt repayment. Cash decreased $2.8m to $8.7m.
- At September 30, current assets were $13.1m and current liabilities $20.9m; deferred revenue was $12.6m, up from $8.0m at year-end 2019. Total assets were $106.8m and equity $73.5m.
Material changes, liquidity and capital structure
- In September, Gaia sold a 50% undivided interest in part of its campus for $13.15m, retaining a 50% interest and full ownership of its studio and production facilities. It used sale proceeds and a new $4.0m unsecured loan to repay the campus mortgage. The loan bears 5.75% interest and is due by January 3, 2022, or earlier if the property owners obtain mortgage financing.
- Gaia entered a master lease on the campus through September 30, 2030, with two five-year extension options, and guaranteed the lessee’s obligations. The balance sheet recorded an $8.8m operating lease liability and an $8.8m right-of-use asset. Long-term debt and other liabilities totaled $12.1m, a combined line item that includes lease liabilities.
- Management expected approximately $4.0m of capital expenditures for the remainder of 2020, mainly for content and digital platforms. It said planned spending was discretionary and could be scaled to operating cash flow, and expected to continue generating cash for the rest of 2020. Management believed available cash, expected operating cash flow and potential borrowing capacity would fund operations, while noting needs could change.
Outlook, commentary and risks
- Management’s stated focus was to continue generating net income and cash while growing revenue. It described disciplined expense management and attributed improved operating cash flow partly to member growth and more members paying annual subscriptions in advance.
- Management reported increased demand, improved retention trends and lower member-acquisition costs from the second half of March through July 2020. From August, online paid-media advertising costs began returning toward historical norms.
- COVID-19’s longer-term effects remained uncertain. The filing cites potential weaker discretionary consumer spending, changes in demand and partner or economic conditions. Gaia canceled or postponed live events scheduled from March through December and limited in-person capacity at its event studio, which management said would negatively affect event revenue and exposure.
- Member growth is seasonal, generally strongest in the fourth and first quarters and slowest from May through August. Management cautioned that interim results are not necessarily indicative of full-year results. Other cited risks include competition, ongoing losses, acquisitions, cybersecurity and third-party service risks, regulation, litigation, and founder control.
- Management said disclosure controls were effective as of September 30, 2020, with no material changes in internal control over financial reporting during the quarter. The filing reports no legal proceedings and states that probable, estimable litigation losses were reserved or not expected to materially affect results.
Important facts for investors to verify
- How much of reported profitability and cash generation is recurring, particularly excluding the $6.1m property-sale gain and considering the timing benefit of advance annual subscriptions.
- Whether member growth, retention and revenue per member continue after the pandemic-driven demand increase and the normalization of advertising costs; the filing does not provide clear numerical values for these operating measures.
- The detailed terms and ongoing cost of the campus sale-and-lease arrangement, the $4.0m note’s repayment or refinancing, and the company’s total debt apart from the combined “debt and other liabilities” balance-sheet line.
- Whether planned content and platform investment, including the approximately $4.0m remaining-2020 capex estimate, can be funded while sustaining operating cash flow and growth.
- The duration and financial effects of COVID-19 on subscriptions, discretionary spending, third-party partners and live events.