Gaia, Inc.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia Incorporated's financial results for the third quarter ended September 30th, 2022. Joining us today are Gaia's CEO, Yirka Raisavi, 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, future losses, competition, loss of key personnel, price changes, membership growth, brand reputation, changing consumer preferences, customer acquisition costs, member 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. With that, I would now like to turn the call over to GAIA's CEO, Jirka Raisavi. Please go ahead, sir.

Thank you, and good afternoon, everyone. Revenues for the nine months of the year increased 6.3% to 62.5 million from 58.7 million. During the quarter, similar to the previous quarter, because of the challenging market environment and the weaker member acquisition part of the year, we pulled back on our marketing spend. Led together with the tale of increased departures of members that signed up during COVID lockdown, in July and part of August, caused a slightly negative quarterly revenue growth. The revenue for the quarter decreased 2.5% to 19.9 million, and member count to 776,000. The challenging marketing environment is now subsiding. The COVID lockdown member cleanup this year actually put our member base to a very good place. Now about half of our direct member base is with us over two years, where the member retention is about six times higher than for members that came during the last 90 days. This provides us much more favorable math for the near future, and it's a very good base for our growth next year. Despite a challenging microenvironment, we manage, excluding the non-recurring charges, to deliver positive earnings and adjusted EBITDA of 4.1 million, which is 21% of revenue. During the last two months, our effort in French markets started to bear fruit, and we expect the German market to follow later this month. We also executed new agreement to launch Gaia on Amazon Mexico. Gaia was also selected to become part of new Google subscription initiative YouTube Primetime that launched last week, which will be similar, like we have on Amazon, that the price of the offering is the same for Gaia. I recently achieved technology independence, where we are now able to operate our business on Gaia, our own hardware infrastructure. will also make it easier for us to introduce an additional monetization of our member base with our new Gaia Marketplace initiative we plan to launch next year. As a company, we have no net debt, and the replacement value of the 10,000 titles we fully own and the future cash lifetime value of member base is over $300 million. And Paul is going to talk more about a result. Go ahead.

Thanks. Revenues were down 2% to $19.9 million for the third quarter of 2022, but up 6% to $62.5 million for the nine months ended September 30th, 2022. Gross margins declined slightly to 86.7% for the quarter compared to 87.1% for the same period in the prior year. The slight decrease is primarily due to additional content amortization compared to the previous period. While our subscriber contraction improved from the prior quarter, we did experience our second sequential quarter of net subscriber loss, ending the quarter with 776,000 members. The decline in the member base was primarily driven by reduced marketing spend during the quarter because of a challenging marketing environment. We also experienced elevated cancellations in March through July for members that joined us during the peak COVID periods in 2020 and 2021. While these cancellations began to dissipate in the second half of August, the reduced demand during the summer combined with these elevated losses in the first half of the quarter impacted both our revenue and member growth objectives for Q3. Marketing expenses were $7 million or 35% of revenues during the quarter, which is down from $7.8 million or 39% of revenues in the year-ago quarter. As part of our focus on improving the returns on our advertising spend, we've begun evaluating the efficacy of our marketing initiatives on one-month and three-month retention levels, not just initial sign-up volume and CPA. While we are implementing this approach, it is allowing us to reduce our overall marketing spending as a percentage of revenues to balance our expenses against revenues to ensure we maintain our financial independence. Our focus remains on attracting high-potential lifetime value members to find GAIA and become a member. The results of this will take some time to be reflected in revenues and cash flows. While this is creating some pressure on near-term revenues and member numbers, we believe the long-term cash flow generation will more than offset the short-term impacts. We have continued to scale up our language marketing efforts and have seen good early traction in both our French and German audiences over the past few months, with both audiences growing 20% plus sequentially during the third quarter. During the third quarter of 2022, selling and operating expenses excluding marketing and member acquisition costs were 8.6 million or 43% of revenues, up from 7.7 million or 38% of revenues in the year-ago quarter. Personnel-related costs have remained flat year-over-year, with the increases driven primarily by increased technology-related operating expenses tied to our business continuity initiative that Yurka mentioned to reduce dependence on third-party service providers that we completed in the second quarter. With the initial phase of this project completed, we are now beginning to optimize these expenses and expect to reduce them as a percentage of revenues over the next few quarters. Corporate and G&A expenses were 2 million or 10% of revenues during the quarter, which is up from 1.5 million or 8% of revenues in the year-ago quarter. The increase is primarily related to elevated legal fees. As you may have seen, we disclosed today in our 10-Q that we anticipate a settlement with the SEC that would resolve an ongoing investigation and eliminate these related legal fees. Under the settlement framework that we've agreed to with the SEC staff, the company would consent without admitting or denying any findings to an administrative SEC order that would find that in our April 29, 2019 earnings release and earnings call, we misstated the number of paying members as of March 31, 2019. when GAIA extended a free month of service to some members while we were implementing a new billing and subscription management system. The administrative order also would find that we failed to comply with SEC whistleblower protection requirements when we terminated an employee and used incorrect language in our form severance agreements with other employees. Our agreement in principle with the SEC staff would require GAIA to pay a $2 million penalty over the course of a year The anticipated settlement is based on negligence rather than intentional conduct. There's no guarantee that the settlement will be finalized and approved, but we concluded that our agreement in principle with the SEC staff counseled in favor of disclosing and accruing the anticipated settlement as a loss contingency. Just to be clear at the outset, we won't be saying anything more about the SEC matter at this time. We direct you to the disclosure in the 10-Q file today and we will not be answering any questions about it on this call. EBITDA was $1.8 million, or 9% of revenues, in the quarter and marks yet another consecutive quarter of positive EBITDA. Adjusted EBITDA, which excludes the settlement accrual and share-based compensation expense, was $4.1 million, or 21% of revenues. Net loss was $2 million, or 11 cents per share, compared to net income of $0.6 million, or 3 cents per share, in the year-ago quarter. Excluding the impact of the settlement accrual and associated legal fees, we would have had slightly positive earnings for the quarter. On August 25, 2022, Gaia entered into a $10 million revolving credit line facility with KeyBank. As of September 30, 2022, our cash balance was $10.8 million. As a closing note, I would like to announce that we launched a new distribution partnership with YouTube last week in connection with their launch of YouTube Primetime Channels. This will allow us to seamlessly tap into the large audience that engages with YouTube and Gaia content on a monthly basis. As this new service is rolling out to US YouTube consumers during November, we don't expect this to have a meaningful impact on the fourth quarter, but we are excited to be a part of this select group of premium content channels that were invited to be a part of this program. With that, I would like to open the call up for questions. Operator?