Gaia, Inc.

And thank you for participating in today's conference call to discuss Gaia Incorporated's financial results for the second quarter ended June 30th, 2021. Joining us today are Gaia CEO, Yurka Rusev and CFO, Paul Terrell. Following some prepared remarks, we will open the call for your questions. Before we get started, however, I would like to take a minute to read the Safe Harbor language. The following constitutes the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The matters discussed today include forward-looking statements that involve numerous assumptions, risks, and uncertainties. These include but are not limited to general business conditions, historical losses, competition, changing consumer preferences, subscriber costs, and retention rates. Acquisitions and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission including our reports on Form 10-K and Form 10-Q. GAIA assumes no obligation to publicly update or revise any forward-looking statements. Please note that today's call is being recorded. And with that, I would now like to turn the call over to GAIA's CEO, Yurko Ricevi. Please go ahead.

Thank you, Jenny, and good afternoon, everyone. Revenues for our second quarter increased 20% to 19.4 million with 770,000 members. Gross margin was steady at 87.1 percent. Even with 20 percent of the revenue gross, our operating expenses in dollars actually slightly decreased, improving significantly as percentage of revenue to 84 percent from 101 percent a year ago. Net income improved by $3.1 million to $600,003 per share, from net loss of $2.5 million and $0.13 loss. As a percentage of revenue, this represented an 18% improvement. Our EBITDA improved to $3.9 million, which is now 20% of revenue, from 800,005% of revenue in a year-ago quarter. These improvements were driven by an increase in gross profit for employee of almost 100,000, or 23 percent, to 535,000 from 436,000. And Paul will now talk, speak to you more about the results.

Thanks, Jerka. Revenues for the second quarter increased 20 percent to 19.4 million, with gross margin steady at 87.1 percent. This marks our fifth consecutive quarter of revenue growth, over 20 percent, while generating positive income and EBITDA. We ended the quarter with 770,200 paying members. Total member acquisition costs during the quarter were 7.7 million, or 40% of revenues, which improved from 52% of revenues in the year-ago quarter. The digital advertising market continued to be crowded and competitive during the quarter, which caused an uptick in our per customer acquisition costs to $74. Even with this uptick, our lifetime value to customer acquisition cost ratio is still over 4.5 to 1. Despite the challenging paid media market, we were able to drive 20,000 net ads during the quarter while staying within our overall target spend level. Our net growth for the period benefited from an annual renewal rate north of 60% for the large cohort of annual members we added during the lockdowns that occurred in the year-ago quarter. This strong renewal rate of the COVID cohort as the world has started to reopen and a variety of new streaming services have been launching is a testament to the quality and size of our original content library and our focus on an underserved niche audience. We also saw the benefit of early traction in our ambassador program that our new internal sales team has been focusing on scaling globally. Selling and operating expenses, excluding marketing and member acquisition costs in the second quarter, were $7 million, or 36% of revenues, which improved from 37% of revenues in the year-ago quarter. Corporate and G&A expenses in the second quarter improved to $1.5 million, down from $1.8 million in the year-ago quarter. EBITDA improved to $3.9 million, or 20% of revenues in the quarter, from $0.8 million, or 5% of revenues in the year-ago quarter. Again, this marks our fifth consecutive quarter of generating positive EBITDA, and the first quarter we have reached the 20% threshold. We generated net income of $600,000 or $0.03 per share during the second quarter of 2021, an improvement of $3.1 million from a net loss of $2.5 million or $0.13 per share in the year-ago quarter. We've been able to flow through to net income almost 100% of the incremental revenues generated in 2021 compared to the same period in the prior year. Cash flow from operations increased to 4.3 million during the quarter, an improvement of 2.4 million from the second quarter of 2020, and our seventh consecutive quarter of generating positive cash flows from operations. We increased our content investment during the quarter as planned, while also increasing our overall cash balance to 13.7 million. With 80% of our monthly viewership on original programming and our end-to-end content production fully in-house, We have continued to control the cost on a per hour basis to ensure that our new content is providing a high return on investment at our current member levels. Live events have restarted in full swing with a successful event completed in July and upcoming events each month from August to November. As we look to the second half of the year, we are putting our energy into growing the premium membership tier. We will be utilizing the upcoming events combined with a growing ambassador network to promote the $299 premium annual offering to new potential members, as well as a concentrated focus on educating current members on the additional value of this premium offering. This will allow us to continue to drive revenue growth and profitability while reducing the business model's dependence on paid media spend to drive member growth. Monthly ARPU, or average revenue per user, for the premium offering is $25 compared to our current blended monthly ARPU of $8.50. with operating margins on the incremental revenues north of 50%. As the results of this focus start to compound, we expect to generate higher operating margins at similar revenue levels, resulting in increased profitability. With that, I'd like to open up the call for questions. Operator?

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're on speakerphone, make sure the tribute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. And we will go to our first question from Mark Argento of Lake Street.

Good afternoon, Paul. Good afternoon, Yurka. Nice quarter. I just wanted to drill down a little bit on the premium, maybe just talk a little bit about what incremental content you get. Is there a livestream? you know, life component to that. And then just wanted to also talk a little bit about the Ambassador Program, if there's any updates on that as well. Thanks.

Sure. So from the premium offering perspective, the events in our Gaiosphere Event Center here are the incremental content that those members get. And because of COVID and the restrictions, we weren't able to produce any new content in 2020 or the early part of 2021. So now we've had, as I mentioned, the July event and we have events each month from August through November. So not only do we have the catalog of the events that have already been completed, but we have these upcoming ones that are coming as well. And we expect to be able to roll out the 2022 preliminary calendar sometime in the fall as well. So from a value perspective, it's really about getting that access to the conference style or workshop style content as opposed to the kind of lean back, watch on your couch type of content. So that's really the key there. And it's fundamentally intertwined with the Ambassador Program because if you think about the price point of the premium subscription tier, it's a lot more lucrative for our ambassadors to be promoting and marketing those events and that premium tier because of the way that the RevShare economics work. As I mentioned on the last call, we had our SVP of sales start beginning of March. She's ramped up and starting to hire, and the ambassador network is starting to grow.

Right, and then just one other quick one. In terms of EBITDA margins look to be pretty strong. In terms of any philosophy around EBITDA, if you hit a certain threshold, you know, accelerating growth. I know you had been, you know, playing around. At one point you had, you know, got to plow everything back in. And, you know, when the market didn't look as good, you kind of throttled that back and were able to, you know, toggle it kind of on and off here. Any thoughts on now that you're generating cash, you know, look like you're, incremental margins are significant to, you know, think about re-accelerating, you know, the growth rate or, you know, what do you do with that extra, you know, free cash as it starts to pile up?

So as a kind of vision, you know, we definitely kind of said at the beginning of the year, we'd like to kind of refocus a little bit more on growth on the next year, like we're talking 2022, while we still want EBITDA margin to grow. So there's a lot of leverage. You see how much we're contributing for an incremental revenue. But we'd like to absolutely refocus on growth from starting next year. So it's really, it's why the embossed data network, it's kind of what's going to be a main undergrowth factor. But as Paul said, for us, since we really focus on profitability and cash flow as well, to getting more our members to subscribe for our premium because there's a big difference, obviously, if you pay monthly $8 or $25 because the costs are very similar. So we would like to also put some focus on getting more people on a premium because of profitability. So you're going to see probably from now on a revenue and the subscribers kind of a little divergent because the revenue will grow more as more people subscribe to the $300 membership.

Great. Thanks, guys. Appreciate it.

And we'll move to our next question from Eric Walt of B. Reilly Securities.

Thanks. Good afternoon. So a couple questions. I guess, Paul, you mentioned obviously the focus on the ambassador program and the premium subscription will lessen your dependence on paid media as that becomes more competitive during the economic restart. Maybe just give us a sense of how you – for what you are spending on paid media, how have you pivoted that spend? And have you kind of shifted where your focus is to kind of get more bang for the buck or kind of how have you adapted?

Yeah, that's a good question. I think that there's a couple things at play here. One is the reopening, as you mentioned. So there's a lot more advertisers coming into the digital space than there would have been historically at this time of year. The second piece that we have is the iOS 14 and the privacy restrictions that have rolled through there. A lot of the tools that digital advertisers historically used for performance-based marketing have started to become a bit challenging as the various app providers respond to Apple's changes in their terms of service there. But for us, we really focus on using first-party information to... go after our audience where they are. And for us, that means that we've been able to move pretty heavily away from paid social media over the last year plus. And now YouTube is starting to become more worthwhile for us, both in terms of the cost, but also in terms of the volume that we're able to drive from it. And then just the bread and butter paid search and SEM, those are really starting to build for us as we continue to grow our reach and size and scale globally.

And also, Don, kind of in perspective, you know, as we took the marketing as a percentage of revenue from 52% last year to 40% this year, that's also give us a little bit of, you know, restriction. We obviously try to, you know, control that spend. So that also put that to this kind of drive for what we want to have with these premium members.

Okay.

How should we think about over time as you maybe get less dependent on paid media and more towards ambassadors and kind of, you know, how they'll be compensated? How should we think about how that shifts your spend kind of philosophy and total? Is the total dollar amount kind of unchanged? It's going to move in the buckets or you could actually get more efficient on a lower spend?

So I think the way we think about it is as percentage of revenue. So today we're in that 40% target range. As we look at the economics of the ambassador model, we're trying to move that closer to 30% of revenues all in. So as you get more shift to that channel, then you can bring the marketing as a percentage of revenue down while still driving the growth rates that we're targeting. and then in the future that would allow us to potentially allocate more of the revenue to content. If you remember, we said 20% is our target for the near and midterm, but ideally I'd like to see that longer term more in balance with the marketing spend as a percent of revenue.

And then this final question, the 60% renewal rate, for the kind of the lockdown cohort of subscribers. Was that for those that joined on the annual plan? And if so, do you have any kind of sense of, you know, how successfully we're retaining ones that kind of came on a month to month and maybe left or come back and kind of, you know, aspect there?

Yeah, that was just for the annual plan. The monthly people behaved very similarly to how our monthly members behave independent of COVID, albeit in a bigger way. But what we do see is that with our content that we're continuing to push out and promote, we do get a decent number of returning monthly members that might cancel or go away for a few months and then come back and re-sign up. And we've actually implemented a product feature where a monthly member can put their account on hold for up to three months so that we don't lose them from a churn perspective, and then they have to re-sign up. And we're seeing some positive trends there for people that might just want to take a couple-month break and then come back without losing visibility into them. So that's a positive for us as well, as we've seen pretty consistent monthly member behavior that they want the flexibility to pay as they use it, but they also have high intent of coming back. Helpful. Thanks, Paul.

And we'll go to our next question from Darren of Roth Capital Partners.

Hey, guys. Good afternoon. Thanks for taking my questions. Just first, how aggressive were you in terms of marketing spend in terms of upselling subs on the premium product or just going after new growth ads in general?

Most of our marketing initiatives in the quarter were focused on going after subs in general because If you recall, we didn't really get out of the shroud of capacity restrictions until mid-Q2, so we really didn't want to put any major emphasis behind the events in case we had to pivot it at all. However, thankfully in Colorado, we've been moving more and more to clear and open, which has given us more confidence in our ability to have the events and therefore start to push on it. But I'd say the primary focus is around educating and converting existing members to that higher price point and then using the talent that are coming in around their events and whatever marketing they might have on their own to really drive the new audience acquisition for the premium offering. We have a relatively visible in the social media world talent coming in for the September event and we expect that to be a pretty good catalyst for us with their show launching in August. And then the event in September, we'll be able to feed into not only members, but also the upsell opportunity for the premium members.

But also over the last three, four quarters, our, a lot of focus would still really make sure we stay profitable with positive cashflow. We're on the level of when we are right now, we can spend more time thinking about the growth because, you know, it's the, growth would we have really put as much, you know, more solid way on the profitability equation. So as Paul said, now it's kind of more focused in what's the next step and try to accelerate growth as we go to the next year.

And then on international, like out of the 20,000 ads in the quarter, like what was mixed in any markets you would kind of call out? And then as you look at your point about accelerating growth, like how critical is international to that acceleration in growth?

Yeah, I wouldn't say it's critical, but it's definitely one of the levers that I like having at my disposal, particularly as we see the U.S., paid media market getting saturated and the prices going up, that's not the same case around the world. We've actually seen with our Spanish offering and our focus on building ambassadors, we've actually seen quite a bit of traction on the ambassador front in Mexico, Central and South America, which while that didn't contribute meaningfully to the quarters net ads, it is building the capability for us to continue growing more in the future down there. So that was a big area of opportunity for us that we saw, and we couldn't do it with our traditional marketing initiative. So this is a way for us to get more word-of-mouth marketing in those regional areas down in Central and South America.

And then this last one for me, given inflation is prevalent everywhere, and I know you guys run your own content house, Is there anything in the logistics of creating content that has actually increased the cost to produce that for you guys in-house, say, versus 2019 levels as a baseline?

No, not at all. It's actually we invest a lot of money early to try to avoid that because pretty much all our content is done with our full-time employees. we don't see that pressure at all. So, I mean, we might be having a little more like music in all the shows and more animation. So we consciously kind of increase our production quality with number of subscribers, but it's totally internal. We have virtually zero pressure from outside on any content cost.

That's good to hear. Thanks, guys.

And as a reminder, you may press star 1 on your telephone keypad if you have a question at this time. That is star 1 for questions. And we will go to Peter Rebhofer of Artco Capital.

Hey, guys. Hey, just so – I was kind of curious. You guys have been doing this for about five years, and congratulations on getting to almost 800,000 subscribers. I'm curious whether you have a little bit better idea on your total addressable market, like what's changed in the last few years, what you've learned, you know, whether you've discovered new potential clients or, you know, maybe some have taken off. So any color on that would be great.

Yeah, I will say anecdotally, I see our addressable market expanding every day with the world events that are going on around us and now mental health and some of the challenges of separation becoming more and more prevalent. I see a lot of opportunity from that perspective to be a resource in helping people move through to the other side of this, whatever that looks like for them. We stay away from things that drive separation and really try to not use fear in any of our content. And I think that'll start resonating with more and more people. as we move through the current situation that is going on around the globe. And then we also obviously have the benefit of investing in Spanish, French, and German, which wasn't really part of our original addressable market when we started with English only. So we have expansion there. And then the third piece that we have is obviously within our ability to mine our data and start to call out sub-segments of our existing audience that we can start to produce content for we're able to take, if you will, niches of niches and actually start to give them some love and get them to grow and then use that to go out and grow the audience as well. So I didn't answer your question with any specific numbers, but I would say that our early targets for our total addressable market just continue to grow as more and more households move digital first and get comfortable streaming. And then also as people become more aware of the content and the topics that Gaia covers and the fact that we're a pretty exclusive resource for the depth and breadth of content that we bring and the technology that we use to deliver it. So I'd say everything's going in the right direction from the addressable market perspective.

Great. Thanks so much for that color. And then maybe, you know, I think like the media industry is, kind of, I don't want to use the word turmoil, more of an influx in the last few years. And I'm sure that affects certain ways you guys look at from business development to content focus, to customer spend, to potential accommodations. So I'm just curious whether you guys have any thoughts or colors that you would be willing to share with us on I guess your thoughts on the current state of the media industry and where you guys think you fit into that.

Yeah, it's definitely like question, but I think it's like even five years ago, a lot of question was about validity of streaming, right. For different markets, different segments. I think that's totally disappear right now. You have a lot of players who kind of launched a business. Some of them struggled and they started to combine to create like better offering and you start to see a difference in, you know, quality of execution. You know, if you compare, like say Netflix compared like peacock, it's night and day, you know, obviously Netflix have a benefit doing it longer and kind of debugging it. So some of the players, the subscription quality is still kind of lagged behind the standard, I would say, let's say Netflix being a standard right now. But definitely there are new market entries, so make it more difficult on the advertising market. On the other side, it's really more overall than we would see competition in our size, that we didn't really see any entries in our space. And we want to kind of keep staying, being in a niche. But, you know, there's definitely defining the market will happen and still going to happen. It's kind of what is this offering looks? You know, how would you expect to have and not have? It's changing. But overall, it does not affect us much. We didn't see a short of, didn't you see kind of like a year ago, Virtually everybody knew how to deal per se with the new restriction, the COVID restriction, so the advertising market is much looser. Now it's more tightening, probably. I'm not sure how much is the impact, but there's probably some impact in the Olympics, but I wouldn't see that it really affects us that much. but there's definitely some. So you have these advances, you kind of, you know, typically media events, but I think the whole advertising market's developing. You have changes, you know, Apple-driven, with, you know, the way how they control the iPhone. So you have to always adjust to it, but I would say from our point, it's not directly impacting us. I think it's much more what we do than what other people do.

Okay, great. I really appreciate you giving us this call, and I'll let somebody else take the question.

Thanks, Peter.

And so at this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Rizavi for closing remarks.

Thank you, Jenny, and thanks to everyone for joining. And we look forward to speak with you when we'll report our third quarter, which will be in early November. Thank you very much.

And so, ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.