GAIA, INC (GAIA) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements that involve risks and uncertainties. When used in this discussion, we intend the words “anticipate,” “believe,” “plan,” “estimate,” “expect,” “strive,” “future,” “intend”, “will” and similar expressions as they relate to us to identify such forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth under “Risk Factors” and elsewhere in this Form 10-K. Risks and uncertainties that could cause actual results to differ include, without limitation, general economic conditions, future losses, competition, loss of key personnel, price changes, membership growth, brand reputation, acquisitions, new initiatives we undertake, security and information systems, legal liability for website content, failure of third parties to provide adequate service, future internet-related taxes, our founder’s control of us, litigation, fluctuations in quarterly operating results, consumer trends, the effect of government regulation and programs, the impact of the coronavirus (COVID-19) pandemic and our response to it, and other risks and uncertainties included in our filings with the Securities and Exchange Commission. We caution you that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these forward-looking statements which reflect our views only as of the date of this report. We undertake no obligation to update any forward-looking information.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes included elsewhere in this document. This section is designed to provide information that will assist readers in understanding our consolidated financial statements, changes in certain items in those statements from year to year, the primary factors that caused those changes and how certain accounting principles, policies and estimates affect the consolidated financial statements.
Overview and Outlook
We operate a global digital video subscription service with a library of over 10,000 titles, with a growing selection of titles available in Spanish, German and French that caters to a unique, underserved member base. Our digital content is available to our members on most internet-connected devices anytime, anywhere, commercial-free. Through our online Gaia subscription service our members have unlimited access to a library of inspiring films, cutting edge documentaries, interviews, yoga classes, transformation related content, and more – 80% of which is exclusively available to our members for digital streaming on most internet-connected devices.
Gaia’s position in the streaming video landscape is firmly supported by its wide variety of exclusive and unique content, which provides a complementary offering to other entertainment-based streaming video services. Our original content is developed and produced in-house in our production studios near Boulder, Colorado. By offering exclusive and unique content through our streaming service, we believe we will be able to significantly expand our target member base.
Our available content is currently focused on yoga, transformation, alternative healing, seeking truth and conscious films. This content is specifically targeted to a unique member base that is interested in alternatives and supplements to the content provided by mainstream media. We have grown these content options both organically through our own productions and through strategic acquisitions. In addition, through our investments in our streaming video technology and our user interface, we have expanded the many ways our subscription member base can access our unique library of media titles.
Our core strategy is to grow our subscription business domestically and internationally by expanding our unique and exclusive content library, enhancing our user interface, extending our streaming service to new internet-connected devices as they are developed and creating a conscious community built around our content.
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The full impact that the COVID-19 pandemic will have on our business, operations and financial results will depend on a number of evolving factors that we may not be able to accurately predict. See Item 1A “Risk Factors” in this Form 10-K for additional details.
Commencing during the second half of March 2020 and continuing through July 2020, we saw an increase in demand for our content from both current and potential members. This created a positive trend in existing member retention, costs to acquire new members, and the corresponding revenue and cash flow impacts from these higher volumes. This trend dissipated beginning in August 2020, when we saw the online paid media advertising market start to return to historical norms with a corresponding effect on the cost of our online advertising efforts. With the rollout of privacy changes affecting a large number of mobile consumers during the summer of 2021, we have continued to see an increase in the cost of our online advertising efforts which has reduced the number of new members we can add with our allocated marketing spend.
We are a Colorado corporation. Our principal and executive office is located at 833 West South Boulder Road, Louisville, CO 80027-2452. Our telephone number at that address is (303) 222-3600.
Results of Operations
The table below summarizes certain of our results for the periods indicated:
| Years ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | 2021 | 2020 | ||||||
| Revenues, net | $ | 79,573 | $ | 66,827 | ||||
| Cost of revenues | 10,526 | 8,651 | ||||||
| Gross profit margin | 86.8 | % | 87.1 | % | ||||
| Selling and operating | 60,577 | 56,937 | ||||||
| Corporate, general and administration | 6,125 | 5,867 | ||||||
| Acquisition costs | 360 | — | ||||||
| Income (loss) from operations | 1,985 | (4,628 | ) | |||||
| Interest and other income (expense), net | (265 | ) | 5,327 | |||||
| Income before income taxes | 1,720 | 699 | ||||||
| Provision for (benefit from) income taxes | (2,011 | ) | 180 | |||||
| Net income | $ | 3,731 | $ | 519 |
The following table sets forth certain financial data as a percentage of net revenues for the periods indicated:
| Years ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Revenues, net | 100.0 | % | 100.0 | % | ||||
| Cost of revenues | 13.2 | % | 12.9 | % | ||||
| Gross profit | 86.8 | % | 87.1 | % | ||||
| Expenses: | ||||||||
| Selling and operating | 76.1 | % | 85.2 | % | ||||
| Corporate, general and administration | 7.7 | % | 8.8 | % | ||||
| Acquisition costs | 0.5 | % | 0.0 | % | ||||
| Total operating expenses | 84.3 | % | 94.0 | % | ||||
| Income (loss) from operations | 2.5 | % | (6.9 | )% | ||||
| Interest and other income (expense), net | (0.3 | )% | 8.0 | % | ||||
| Income before income taxes | 2.2 | % | 1.0 | % | ||||
| Provision for (benefit from) income taxes | (2.5 | )% | 0.3 | % | ||||
| Net income | 4.7 | % | 0.8 | % |
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenues, net. Revenues increased $12.8 million, or 19.2%, to $79.6 million during 2021, compared to $66.8 million during 2020. The increase was primarily driven by an increase in our average number of members as result
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of our member acquisition efforts. Revenue growth also benefitted from an increase in average monthly revenue per member as we continue to add new members to our Events+ premium offering.
Cost of revenues. Cost of revenues increased $1.8 million, or 20.7%, to $10.5 million during 2021 from $8.7 million during 2020, with gross profit of 86.8% in 2021 compared to 87.1% in 2020. The gross profit margin decline was primarily due to increased content amortization as we continue to increase our investment in our original content offering and add additional native language content in Spanish, French and German.
Selling and operating expenses. Selling and operating expenses increased $3.7 million, or 6.5%, to $60.6 million during 2021 from $56.9 million during 2020 and, as a percentage of revenues, decreased significantly to 76.1% during 2021 from 85.2% during 2020. The increase in absolute dollars was primarily driven by increased personnel related costs during 2021 and higher operating expenses to support our international growth efforts. The decrease as a percentage of revenues is primarily as a result of increased revenues.
Corporate, general and administration expenses. Corporate, general and administration expenses increased $0.2 million, or 3.4%, to $6.1 million during 2021 from $5.9 million during 2020 and, as a percentage of net revenue, decreased to 7.7% during 2021 from 8.8% during 2020. The increase in absolute dollars was primarily driven by increased personnel related costs during 2021. The decrease as a percentage of revenues was primarily due to increased revenues.
Interest and other income (expense), net. Interest and other income (expense), net for 2020 reflects the $6.1 million gain from the sale of a portion of our corporate campus during the third quarter of 2020 and the corresponding reduction in interest expense as we used the proceeds in September 2020 to repay $13.0 million of debt that had an interest rate of 5.75% and refinanced the remaining debt at an interest rate of 3.75% in December 2020. The expenses for 2021 reflect the decreased debt balance and associated interest rate.
Provision for (benefit from) income taxes. Provision for (benefit from) income taxes reflect the benefit of a partial valuation allowance release related to the recognition of deferred tax liabilities associated with the acquisition of Yoga International. The provision for income taxes in 2020 is primarily related to state tax liabilities for states with no offsetting net operating losses.
Quarterly and Seasonal Fluctuations
The following tables set forth our unaudited results of operations for each of the quarters in 2021 and 2020. In our opinion, this unaudited financial information includes all adjustments, consisting solely of normal recurring accruals and adjustments, necessary for a fair presentation of the results of operations for the quarters presented. You should read this financial information in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. The results of operations for any quarter are not necessarily indicative of future results of operations.
| Year 2021 Quarters Ended | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | March 31 | June 30 | September 30 | December 31 | ||||||||||||
| Revenues, net | $ | 18,896 | $ | 19,443 | $ | 20,405 | $ | 20,829 | ||||||||
| Gross profit | 16,458 | 16,934 | 17,779 | 17,876 | ||||||||||||
| Gross margin | 87.1 | % | 87.1 | % | 87.1 | % | 85.8 | % | ||||||||
| Income from operations | 424 | 695 | 726 | 140 | ||||||||||||
| Net income | 358 | 643 | 647 | 2,083 | ||||||||||||
| Basic net income per share | $ | 0.02 | $ | 0.03 | $ | 0.03 | $ | 0.11 | ||||||||
| Diluted net income per share | $ | 0.02 | $ | 0.03 | $ | 0.03 | $ | 0.10 | ||||||||
| Weighted average shares outstanding - basic | 19,201 | 19,268 | 19,318 | 19,441 | ||||||||||||
| Weighted average shares outstanding - diluted | 19,724 | 19,810 | 19,812 | 19,899 |
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| Year 2020 Quarters Ended | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | March 31 | June 30 | September 30 | December 31 | ||||||||||||
| Revenues, net | $ | 14,511 | $ | 16,153 | $ | 17,537 | $ | 18,626 | ||||||||
| Gross profit | 12,610 | 14,070 | 15,273 | 16,223 | ||||||||||||
| Gross margin | 86.9 | % | 87.1 | % | 87.1 | % | 87.1 | % | ||||||||
| Income (loss) from operations | (3,265 | ) | (2,220 | ) | 368 | 489 | ||||||||||
| Net income (loss) | (3,580 | ) | (2,525 | ) | 6,314 | 310 | ||||||||||
| Basic and diluted net income (loss) per share | $ | (0.19 | ) | $ | (0.13 | ) | $ | 0.33 | $ | 0.02 | ||||||
| Diluted net income (loss) per share | $ | (0.19 | ) | $ | (0.13 | ) | $ | 0.32 | $ | 0.02 | ||||||
| Weighted average shares outstanding - basic | 18,482 | 18,837 | 19,183 | 19,183 | ||||||||||||
| Weighted average shares outstanding - diluted | 18,482 | 18,837 | 19,737 | 19,603 |
Our member base growth reflects seasonal variations driven primarily by periods when consumers typically spend more time indoors and, as a result, tend to increase their viewing, similar to those of traditional TV and cable networks. The effects of the global pandemic have shifted our historical pattern over the past two years, but we have historically experienced the greatest member growth in the fourth and first quarters (October through February), and slowest during May through August. This has historically driven quarterly variations in our spending on member acquisition efforts and the number of net new subscribers we add each quarter but does not result in a corresponding seasonality in net revenue. As the world emerges from the effects of the pandemic, we expect these seasonal trends to return. As we continue to expand internationally, we also expect regional seasonality trends to demonstrate more predictable seasonal patterns as our service offering in each market becomes more established and we have a longer history to assess such patterns.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require us to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the consolidated financial statements in Item 8 of this Form 10-K summarizes the significant accounting policies and methods used in the preparation of our consolidated financial statements.
We believe the following to be critical accounting policies whose application has a material impact on our financial presentation, and involve a higher degree of complexity, as they require us to make judgments and estimates about matters that are inherently uncertain.
Media library
Media library represents the lower of unamortized cost or net realizable value of capitalized costs to produce our proprietary media content, rights obtained through license arrangements and digital media content acquired through asset purchases or business combinations.
The value of our produced media library consists of capitalized costs incurred to produce original media content, including salary and overhead costs of our in-house production team and other third-party costs.
Our licensed media library is obtained through license arrangements. Generally, we pay an advance against a percentage royalty or an upfront license fee in exchange for the distribution rights for a specific license window, but we may also obtain a license for a fixed fee for perpetuity. These payments are capitalized at the time of payment. Certain agreements also include an ongoing royalty obligation, which entitles the licensor to a share of the revenues generated from the licensed works. These expenses are calculated and accrued on a monthly basis and included in costs of revenues. We pay these accrued royalties on a quarterly basis and therefore have included the related liability in accrued liabilities.
The value of our acquired media library consists of the fair value of media assets obtained through asset acquisitions and business combinations recorded at the estimated fair value of the titles acquired, which is based on a number of
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factors, including the number of titles, the total hours of content, the production quality and age of the acquired media assets.
We amortize our media library in cost of revenues on a straight-line basis over the shorter of the license period or the estimated useful life of the titles, which typically ranges from 12 to 90 months. The amortization period begins with the first month of availability on our service.
Management reviews content viewership to determine whether viewing patterns correlate with initial estimates supporting the amortization period utilized. If current estimates indicate that viewing is significantly higher in earlier periods relative to the remaining amortization period, we will begin amortizing the respective titles on an accelerated basis over the amortization period. Due to our exclusive content and growing member base, our viewership trends have continued to support both the amortization period and the straight-line basis of amortization with no additional amortization recorded.
Our media library is reviewed for impairment at the film group level when an event or change in circumstances indicates that the carrying amount of the film group may not be recoverable. Recoverability of the film group is measured by a comparison of the carrying amount of the film group to estimated undiscounted future cash flows expected to be generated by the film group. If the carrying amount exceeds the estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value exceeds the fair value. No impairment charges were recorded during 2021 or 2020.
Goodwill
Goodwill represents the excess of the purchase consideration over the estimated fair value of assets acquired less liabilities assumed in a business acquisition. We have only one reporting unit; therefore, goodwill is assessed at the enterprise level. We review goodwill for impairment annually as of December 31 or more frequently if indicators of impairment are identified. We have the option of first assessing qualitative factors to determine whether events and circumstances indicate that it is more likely than not that the estimated fair value of goodwill is less than its carrying amount. If the estimated fair value of goodwill exceeds its carrying amount, we consider the goodwill to not be impaired. If the carrying amount of goodwill exceeds its estimated fair value, we use either a comparable market approach or a traditional present value method to test for potential impairment. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. Application of alternative assumptions and definitions could yield significantly different results. During 2021 and 2020, no impairment of goodwill was indicated.
Income Taxes and Deferred Tax Balances
Deferred income tax assets and liabilities are recorded with respect to temporary differences in the accounting treatment of items for financial reporting purposes and for income tax purposes. The tax expense or benefit related to ordinary income or loss must be computed at an annual effective tax rate and the tax expense or benefit related to all other items must be individually computed and recognized as a discrete item when it occurs. Where, based on the weight of available evidence, it is more likely than not that some amount of recorded deferred tax assets will not be realized, a valuation allowance is established for the amount that, in management’s judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized. As we have historically had cumulative losses, we have not released the current valuation allowance. The timing of the release of the valuation allowance will be dependent on cumulative income for a period of 36 months and an expectation that we will not have cumulative losses in the future.
A tax position must meet a minimum probability threshold before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
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Share-Based Compensation
We recognize compensation cost for share-based awards based on the estimated fair value of the award on the date of grant. We measure compensation cost at the grant date based on the estimated fair value of the award and recognize compensation cost upon the probable attainment of a specified performance condition over the estimated performance period or for time-based awards over the service period. Since 2019, we have only granted restricted stock units, for which we utilize the intrinsic valuation model to estimate fair value.
Liquidity and Capital Resources
Our capital needs arise from working capital required to fund operations, capital expenditures related to acquisition and development of media content, development and marketing of our digital platforms, acquisitions of new businesses and other investments, replacements, expansions and improvements to our infrastructure, and future growth. These capital requirements depend on numerous factors, including the rate of market acceptance of our offerings, our ability to expand our customer base, the cost of ongoing upgrades to our offerings, our expenditures for marketing, and other factors. Additionally, we will continue to pursue opportunities to expand our media libraries, evaluate possible investments in businesses and technologies, and increase our marketing programs as needed.
In September 2020, we repaid a $17.0 million mortgage loan made by BDS III Mortgage Capital B LLC to our wholly owned subsidiary Boulder Road LLC (“Boulder Road”) with proceeds from the real estate transaction described in Item 2 “Properties” in this 10-K and a $4.0 million unsecured promissory note that bore interest at 5.75% per annum. This promissory note was subsequently paid off on December 29, 2020 with the proceeds of the mortgage discussed below that bears interest at 3.75% per annum.
On December 28, 2020, Boulder Road and Westside Boulder, LLC entered into a loan agreement with Great Western Bank, as lender, providing for a mortgage loan in the principal amount of $13.0 million. The loan bears interest at a fixed rate of 3.75% per annum and matures on December 28, 2025. Westside and Boulder Road each received 50% of the proceeds and are each responsible for 50% of the monthly installments. The loan is secured by a deed of trust, assignment of rents, security agreement and fixture filing on our corporate campus and is guaranteed by Gaia. This refinancing resulted in a net increase in our cash balance as of December 31, 2020 of $2.4 million and reduced our interest rate by 200 basis points.
We began to generate cash flows from operations in October 2019 and have continued to increase the cash flows generated from operations each subsequent quarter. We expect to continue generating cash flows from operations during 2022. We generated approximately $20.9 million in cash flows from operations during 2021, which funded our $17.3 million investment in our content library and ongoing investment in our technology platform used to deliver the content to our members.
We intend to invest approximately 20% of our consolidated revenues each year to support investment in our content library and technology platform enhancements. This spending is entirely discretionary in nature with no contractual commitments and due to our in-house production capabilities, we can scale our content investment based on the cash flows generated from operations if necessary to ensure we have sufficient liquidity to operate our business into the future. As of December 31, 2021, our cash balance was $10.3 million.
In the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, minority investment, strategic relationship and other business combination opportunities in our market. For any future investment, acquisition or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities or incurring indebtedness.
While there can be no assurances, we believe our cash on hand, cash expected to be generated from operations, and potential capital raising capabilities should be sufficient to fund our operations on both a short-term and long-term basis. However, our projected cash needs may change as a result of acquisitions, product development, unforeseen operational difficulties or other factors.
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Cash Flows
The following table summarizes our primary sources (uses) of cash during the periods presented:
| Years ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2021 | 2020 | ||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | 20,867 | $ | 11,650 | ||||
| Investing activities | (23,858 | ) | (176 | ) | ||||
| Financing activities | 655 | (10,363 | ) | |||||
| Net increase (decrease) in cash | $ | (2,336 | ) | $ | 1,111 |
2021 Compared to 2020
Operating activities. Cash flows from operations improved $9.2 million during 2021 compared to 2020. The improvement was primarily driven by continued operating efficiencies as we continue to grow revenues combined with payables management to optimize the utilization of cash flows from upfront annual payments we receive from those members electing to pay their annual memberships in advance.
Investing activities. Cash flow used in investing activities increased $23.7 million during 2021 compared to 2020 primarily due to 2021 including cash utilization of $6.6 million to fund the cash consideration portion of the acquisition of Yoga International and 2020 including cash proceeds of $13.2 million in proceeds from the sale of a portion of our corporate campus. We also increased our investment in our content library and technology platform enhancement by $4.0 million during 2021 as a result of our goal to invest approximately 20% of revenues in these areas.
Financing activities. Cash flows from financing activities improved $11.0 million during 2021 compared to 2020. In September 2020, we repaid our $17.0 million mortgage loan discussed above. The repayment was partially offset with a new term mortgage discussed above, of which Boulder Road’s portion is $6.5 million.