Gaia, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. Gaia operates a global digital video subscription service and online community.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $14.5 million | $12.5 million | Up 16.0%, attributed to more paying members and higher average monthly revenue per member |
| Gross profit / margin | $12.6 million / 86.9% | $10.9 million / 87.2% | Margin down 0.3 percentage points; higher content amortization increased cost of revenue |
| Operating expenses | $15.9 million | $17.3 million | Down 8.3%; selling and operating expenses fell with lower marketing spend |
| Operating loss | $3.3 million | $6.4 million | Improved year over year |
| Net loss | $3.6 million; $0.19 per share | $6.7 million; $0.38 per share | Improved; Q1 2019 included a $0.3 million discontinued-operations loss |
| Cash from operating activities | $2.0 million provided | $2.7 million used | Improved by $4.7 million, with higher revenue and deferred revenue and lower operating spend |
| Investing cash flow | $3.6 million used | $4.9 million used | Primarily media library, property and equipment additions |
| Cash | $10.0 million | $11.5 million at Dec. 31, 2019 | Quarterly decrease of $1.5 million |
| Debt | $16.7 million long-term debt, net | $18.4 million at Dec. 31, 2019 | Mortgage debt; additional acquisition-related convertible notes due Jan. 2, 2021 are included in current liabilities |
Liquidity, outlook and management commentary
- Current assets were $14.0 million and current liabilities were $22.0 million at March 31, 2020. Deferred revenue was $10.7 million, up from $8.0 million at year-end.
- Management estimated approximately $10.0 million of capital expenditures, including media-library investment, for the remainder of 2020. Planned spending is discretionary and may be scaled to cash flows.
- Management expected cash on hand, operating cash flows and potential borrowing capacity to be sufficient for short- and long-term operations, while noting that needs could change. It also cited a possible sale-leaseback of its headquarters as an additional funding source.
- The $17.0 million campus-secured mortgage bears a stated current rate of 5.78%, matures May 1, 2022 and has a two-year extension option. The lender’s recourse is limited to the subsidiary and its collateral, with a Gaia guarantee.
- In the second half of March, Gaia saw increased demand and positive trends in retention, customer acquisition costs, revenue and cash flow. Management cautioned that the duration and persistence of these trends were uncertain.
Material changes, risks and unusual items
- Selling and operating expenses fell 7.6% year over year as marketing shifted toward acquiring members with higher expected lifetime value; management said this reduced new-member volume. Corporate and administrative costs declined 12.5%.
- Cost of revenue rose 18.8%, faster than revenue, primarily because of increased amortization of investments in original content. Gross margin edged lower.
- COVID-19 created uncertain risks: increased at-home video use had supported demand, but weaker consumer spending, changing behavior, partner responses and broader economic conditions could reduce demand. Live events scheduled for March through May were canceled or postponed, and tenant rent defaults could affect the company.
- Gaia reported ongoing operating losses and said it expected to continue investing and generating losses through 2020. It had federal and state net operating loss carryforwards of $105.3 million and $28.4 million, respectively, and a full valuation allowance on deferred tax assets.
- Potential additional acquisition consideration of up to 139,665 Class A shares depends on the acquired platform meeting profitability and subscriber-growth conditions as of June 30, 2020. Two acquisition-related convertible notes totaling $1.75 million are due January 2, 2021 and may be converted into shares.
- No legal proceedings were reported as of the filing, and management said disclosure controls and procedures were effective. No formal revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether the late-quarter COVID-19 demand, retention and acquisition-cost trends persisted after March 31, and the net effect of the pandemic on subscriptions, events and tenants.
- Whether operating cash flow remains positive and supports planned 2020 investment, given $10.0 million of cash and approximately $10.0 million of planned remaining-year capital expenditures.
- The timing and terms of the January 2021 convertible-note maturities and any potential share issuance, including the conditional earn-out shares.
- Debt service and refinancing or extension requirements for the campus-secured mortgage, as well as the availability and terms of any additional borrowing.
- Whether member growth and revenue gains can be sustained while marketing investment is reduced and content costs continue to rise.