Jirka Rysavy - Chairman, CEO Paul Tarell - CFO.

Mark Argento - Lake Street Capital Markets Peter Rabover - Artko Capital Zacary Sherman - Foxhill Capital Partners Douglas Coburn - Venture Capital.

Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Gaia’s Third Quarter Earnings. Joining us today are Gaia’s Chairman and CEO, Jirka Rysavy; and CFO, Paul Tarell. Before we get started, I would like to take a minute to read the Safe Harbor language.

The following constitutes the Safe Harbor statement on the Private Securities Litigation Reform Act of 1995.

Except for historic information contained herein, the matters discussed in this call today are forward-looking statements and involve risks and uncertainties, including, but not limited to, general business conditions, integration of acquisitions, timely development of new business, impact of competition and other risk details from time-to-time as described in the SEC reports.

The risks and uncertainties associated with the forward-looking statements are described in the company’s filings with the Securities and Exchange Commission, including the company’s reports on Form 10-K and Form 10-Q. Gaia assumes no obligation to publicly update or revise any forward-looking statements.

I would like to remind everyone this call is available for replay through November 17, 2016 starting at 7:30 PM Eastern Time tonight. With that, I would like to turn the call over to Gaia’s Chairman and CEO, Jirka Rysavy. Please go ahead, sir..

Thank you, Melissa. And good afternoon everyone. During the third quarter, we completed the sale of our branded consumer product business and recognized $114 million pre-tax gain. In addition to the second quarter $12.8 million sale of our 51% interest in Natural Habitat, which we acquired for a $0.6 million. Other gains were offset by our NOL.

We have used the majority of the proceeds from the disposition to conduct a share purchase tender offer and acquired 9,637,000 shares of our shock at 840,000 vested stock options at $7.75 per share. The remaining proceeds will be used to fund the continuing growth and development of our business, as well as general corporate purposes.

Our third quarter results, including the subscriber count and it's slightly ahead of our expectation and guidance this paid subscribers growing 46% to 180,000 from 123,000 at the end of 3Q of 2015. Gross margin improved higher 70 basis points to 84.3% from 82.6% in the 3Q of 2015.

Net loss from continuing operation for the third quarter was 200,000 or $0.01 per share compared to a loss of 700,000 or $0.03 per share in a year ago. Now, will let Paul Tarell our CFO to speak more about third quarter..

Thanks, Jirka. The reported results we issued in today's press release are from continuing operations, excluding the results of the Gaiam branded business which we sold on July 1st and our interest in Natural Habitat which we sold on May 5th.

The assets, liabilities, in the financial results from these businesses are reported as discontinued operations for all periods presented. Now, moving on to our Q3 results.

Streaming revenue in the third quarter increased 35% to $3.8 million compared to the year ago quarter due to continue strong subscriber growth which was slightly offset by the decline in revenues generated from non-streaming, including our legacy DVD subscription club.

Total subscribers at the end of the third quarter grew 46% to 180,000 compared to a 123,000 in for the same quarter of 2015. Growth profit in the third quarter increased 30% to $3.8 million compared to $2.9 million in the year-ago quarter. Gross margin increased a 170 basis points to 84.3% from 82.6% in the third quarter last year.

The increase was primarily due to leverage gained on streaming cost due to higher volumes and higher revenues. Total expenses in the third quarter increased to $8 million compared to $3.5 million in the year ago quarter.

This increase was primarily due to spending $2.9 million on customer acquisition and branding during the current quarter compared to $0.6 million in the year ago quarter. The remaining increase was due to higher payroll related expenses due to an increase in headcount to support our realized and projected growth.

The cost of business separation activities and the cost of transition services which ended on September 30th. Loss from operations in the third quarter was $4.2 million compared to $0.6 million in the year ago quarter driven by primarily by the increased expenses previously mentioned.

With the conclusion of the sale of the Gaiam branded business during the quarter combined with the gain from Natural Habitat in the second quarter, we realize a total gain of a 124.8 million.

We utilized historical net operating loss carry forward to offset a majority of this gain, resulting in 14.1 million of tax expense related to this divestitures. This tax expense was further offset by losses generated from continuing operation which resulted in a tax benefit of $4 million in the third quarter of 2016 for continuing operations.

We find to pay approximately $2 million in remaining cash taxes in December 1, we'll make our estimated tax payment for the year. Net loss from continuing operations in the third quarter was 200,000 or $0.01 per share compared to a loss of 2 million or $0.08 per share in the year ago quarter.

Income from discontinued operations including the gain on the sale of the Gaiam branded business, net of taxes and transaction expenses contributed to generating net income of 100.4 million or $6.64 per share compared to a loss of 8.8 million or 36% spent per share in the third quarter of last year.

At September 30th, 2016, we had $62.5 million in cash, we continue to carry no debt, which resulted in a current ratio of over 5:1. We also own our fully leased 150,000 square foot office headquarters in Boulder, Colorado.

With that, I would now like to turn the call back over to Jirka for some additional remarks after which we'll open the call up for questions.

Jirka?.

Yes. Last week we also launched our new gaia.com site with a new personalization engine and dramatic improvements in our with the delivery. The new technology is designed to optimize for algorithms of search engines, which currently represent a significant part of our customer physician efforts.

The new features include our latest the geo-fencing technology and also flexible to support our multilingual international efforts. We also invested in retention technology and several new apps, is the new android app already launched, a new iOS, Roku and smart TV apps launching later this month.

We have expanded our subscriber reach to several new countries bringing detouring current count to a 130. We also meaningfully edit to our content, growing our current US library to approximately 75,00 titles.

Because of the exclusivity of our content and the niche offering, Gaia's position as complementary service to large entertainment SVOD players like Netflix. 71% of Gaia's subscribers have now also subscription to Netflix. 80% of the views on Gaia are generated by content produced by us.

We recently renew our shelf registration with SEC, it was set to expire in October. We have had this shelf registration in place continually since 2007, while we have no current plans to utilize the shelf, to renewals consistent with our history of keeping the filing current and available for use if strategic opportunities arise.

And I would like to reiterate that we do not have any current plan to use it. Our recent stock purchase representing about 40% for our shares outstanding was in addition to previous 10 years when company was also a net buyer of its stock. At end of the quarter, we have $62.5 million cash on our campus and carry no debt.

As announced previously, we expect our subscriber growth to start accelerating and reaching about 200,000 by the end of the year which would be 50% subscriber growth. We have elected to expand the subscriber acquisition costs upfront and do not capitalize the value of our subscribers on balance sheet despite of the significant lifetime value.

Therefore no value of these customers is reflected on our GAAP financial statement. And because of this, all these exciting potentials and opportunities, I have return after 8 years as a CEO and I do truly enjoy the job. And with that, I like to open the call for questions.

Operator, Melissa?.

Thank you, sir. [Operator Instructions] And our first question will come from Mark Argento with Lake Street Capital Markets..

Hi, good afternoon, guys..

Hi, Mark..

Hello..

Hey. Just some, maybe could just help us think through a little bit how ramp in terms of the customer acquisition spending. Think you ended the quarter at about a 180,000 and then you got a 200,000. Have you guys started to crank up the customer acquisition spend.

Are you seeing the trends there you like in terms of the customer acquisition costs, so you can drive a positive ROI on those new subs?.

Yes. I mean, even with the increase, I mean, this third quarter it was a meaningful increase of the spending. It's doing, it's going really well but the spending wasn’t really different per customer. And as a we go to fourth quarter, we expect similar thing.

We don’t spend more per customer, we're just spending more overall dollars to acquire more customers. And we don’t expand because for acquisition increasing.

Actually, what we saw generally over last few months that especially on the kind of transformation in secret side of the business that the cost per acquisition is slightly below what we actually budgeted it..

In terms of the overall seasonality, I know the I would say kind of fitness wellness is still a decent part of your mix. And that historically has favored seasonality, some in Q4 but obviously in Q1.

You anticipate seeing similar type of seasonality with the subscriber growth?.

Yes. I think right now in the fourth quarter, it's come more from the transformation side as generally come yoga and that wellness for kind of new me, I'm sure will be done many like every, I don’t think that will change, it will be always generally ahead with already on that.

And as we go to end of the first quarter, I think we'll kind of reverse back to the transformation side. But, generally this half of the year is better for us historically than the other parts. It should follow kind of Netflix's acquisition seasonality. It's pretty much same as they see..

All right. And then in terms of the balance sheet and I know the stock have been pretty soft for the last month or so. Do you have a share buyback authorized at this point, I know you obviously get this on a bunch of stock back or kind of a bunch of stock.

But just given kind of the choppiness with the tape right now, would you guys be amenable they take continue to use your balance sheet opportunistically on the buyback?.

Well, we talk about several times why this is definitely becomes where it is, what's the pricing and stuff, we put a buyback on time ago. We talked about it. We already want to put all the numbers because basically today is the first time we put in actual number of the balance sheet and the tax phase and all that stuff.

So, we would definitely we're going to have information up there before we consider the buyback. But as we said, we just bought 40% and we previously for last 10 years we're net buyers. So, I don’t think that finally we'll change the direction. Right now, we have the lot of cash..

Okay, all right. Congrats on the sale on the new business model. Thanks..

Thank you, Mark..

Thank you. We'll next go to Peter Rabover with Artko Capital..

Hi guys, can you hear me?.

Yes, do..

Hey, got a couple of questions.

So, looks like you guys went $6.5 million on customer acquisitions but what was the growth at of the customers?.

We don’t provide those numbers.

Even on really kind of grow, we say numbers Netflix get, because then you kind of get to how you come with the retention and the -- for example, the issues like for us, if you lose the customers and get them back six months or as a new customer for Netflix with the existing customers, is a confused issue if you start to talk about net, net and gross customers.

So, I think we would say this net add on the cost. We got a full pretty much in Netflix disclosures..

And Peter, I just want to clarify my scripted comments, we said 2.9 million on customer acquisition, that is for to make sure you had the right number there..

Okay, yes, sorry, I apologize..

Okay..

And then on the last quarter you guys entered 170,000, is that right?.

Yes..

Okay. And then on the balance sheet, so it looks like you guys have a little bit more cash, it's 62.5, and on that investments and other 10 million.

Could you guys clarify what that is?.

Yes. We made some investment in there's a kind of couple, mostly it's been retention technologies investment, and invested a little bit on a private company which were interesting, technology for retention. We also invested our new apps. And as we said, we kind of launched some of the apps now and we're going to do a little more.

And so, that’s pretty much all of that's up there..

Is all the escrow cash been released from the transaction?.

Yes, we received all the escrow cash though it was a small amount of receivables left from the buyer that we received in October but not meaningful amount, but all the cash have now been received..

It was about 800,000 what we received in October. And we mentioned the tax is revised, we'll have to pay over next quarter when there wasn’t -- pay is about 2 million..

Okay, great. And just last question.

Can you guys comment what the cash burn was this quarter, was that EBIT, the kind of approximate number on that?.

The Q will be filed tomorrow that will have that in there..

Okay, great. Thanks..

Thank you. We'll next go to Zacary Sherman with Foxhill Capital Partners..

Hi, guys..

Hello..

I was just wondering if you could break out with the onetime expenses in the quarter were from the business separation in the transition services and what you see going forward in the next couple of quarters if there's anything remaining. Thanks..

Sure. I'll answer those in a reverse order. So, the ongoing stuff is de minimis at this point.

Being able to break it out specifically that that harder to do for this quarter because it's not as cut and dry as it was in the first half of the year because it was transitioning and separating the businesses but also doing all the setup of the new business going forward as that smaller or new public company.

So, I can't put a specific number on it but I would say it's somewhere in that $500,000 to $600,000 range would probably be a safe number. But those are not going to be continuing in into Q4..

And those are kind of what we -- the problem with the counting GAAP statement, there are statements what I allow to put in discontinue line and the head staff would even it's related to discontinue operation is not, because let's say we have our previous general counsel and CFO which stay on the payroll too, like end of this September and they are still staying bonus is some staff and so how you count for it.

It is all pretty significant all the severance system stuff. So, why they not kind of one time effective as they will be for us because they will not continue but they will allow them to -- they even they don’t allow to be classified a discontinue operation.

So, this is what Paul saying, so difficult to put actually a number on it, it have crossing the GAAP statements. But I think, next quarter, the number I think will be pretty clean. There is worth so nothing would continue so over this, except we still would have.

But we still have some severance is little bit but they are actually all accrued, I think, right?.

Yes..

So, next quarter should be pretty clean..

Thank you. [Operator Instructions] And we'll next go to Douglas Coburn with Venture Capital..

Hello?.

Wait just a moment please..

Can you hear me?.

Okay. Mr. Coburn, go ahead..

Thank you.

Hi, this is Douglas here, how are you?.

Good.

How are you doing, good?.

Doing good, thanks. Thank you for taking my question here. I just have two questions. The first is if you could walk me through how you think about deploying cash through prior customers in a profitable way.

Do you have a minimum return threshold?.

Yes, of course. For us, you can think it simple our balance sheet right now is basically cash. And our building and so we can call it 80 million plus our library which we carry a much lower number because we expand whatever with the deal. And then we have we basically turn cash into new customers.

We do not capitalize the customer, so that's not on the balance sheet, so you have to use your judgement how many hire 8000 customers are. They are obviously people like current subscribers, they typically kind of well you step about 500 but it's more to market value if you kind of to look last time value, true last time values maybe a half of that.

But we basically the goal for us when we acquire new customer is to spend maximum 50% of the lifetime value. We actually currently spend quite less than that, but in average we'll be always less than a half because some of them we get a 10%, I mean, 20%, but we never spend more than 50%.

So, basically the idea is take $1 of cash and turn it to $2 or $3 customer value. So that's pretty much the guidance..

Got it. And then I think you haven’t disclosed the average lifetime of the customer.

But I guess the overall return would vary depending on whether that value is realized in a few years or in the longer term?.

Well, I mean, it roughly when I said it's about half, so she would have taken 250 and take -- we do to lifetime value based on our cash contribution margin which is currently about 89% 90%. If we don’t do the calculate it in a revenue, so we actually taking true value of the customer and then you go pretty much from the revenue.

And the average revenue we charge $9.95 a month, but people buy annual, it would be less because the annual people pay about a $100. So, that's how you can pretty much figure out the average.

There is little more complications because there are some different way if you go through Apple of not, or if the use are different but in because we would pay up or like 30% first year and 15% second year. So, but they would have additional marketing expenses per se.

So, the calculation is little more difficult but roughly the retention is kind of depends customer segment very small then like 2.5x. So, we would have to talk specific customer segments to make sense. But average you can get from the overall guidance or lifetime value..

Got you, thank you. And along those same lines, in terms of how you expect that customer acquisition cost to change over time and potentially increase with more competition.

If you think I had in five years based on the numbers that you projected, when you're above 1 million subscribers, how do you expect competition to manifest? Where do you think it's coming from and how would it impact your acquisition costs?.

Well, I mean, our -- the competition for what we're doing, it's not coming from what you say competitors. It's definitely competitors for when you bid on certain names or works. Right? But they don’t necessarily come from our competing segment. They might be somebody who sell some widgets.

But so, it's not really per se our competitor where we see the pressure from. But we don’t expect to go over 50% lifetime value anywhere during the process. Actually our expectation, it is because we see we're getting more efficient in buying same as Netflix.

So, I think the trend that you tend to actually be better what you do obviously as we kind of grow faster that that additions few might be more people you're paying its toward 50% than we pay today, because today our average in some of the department, some of the channels are 60%, 50%, 60% of the 50%.

But we will see probably getting closer to 50% as we go as the numbers get bigger. But overall, saying we got same amount of customers today and then, I think we actually be more efficient than we are today..

Right. But do you expect another company or somebody to copy basically what you're doing and come up with their media library and start addressing some of those same topics that you're currently selling.

Do you think that is something that will likely happen?.

Look, we don't know about anybody today. There's nobody in our horizon, but I think your guess is as good as ours, it should happen or not..

Okay.

And do you have a certain, I guess, plan to deal with such competition?.

It is hard to plan on something before it exists where we know our competition will come from. They, it can manifest various way. But today, on our main channel, it's really question, it's a channel different like in Yoga, there is currently 12 people in the US doing it..

Right..

Nobody really success or significant. But there is lot of people doing it for 10+ years. On the what we call Truth Seekers side, then it's like much more difficult because when we originally envision it in now four five years to go, we outline like 3000 titles, make sure are published in the United State or anywhere like in English over a 50 years.

And we went aggressively after them with a team and we today are probably 80% of those titles. So, for somebody coming to that space would be quite difficult, it's possible because they can produce the content but produce maybe a half a 1000 titles, it takes some time.

So, if it's somebody will be pocket will be much cheaper for them to buy us and try to compete on from this get go. And if it's somebody who's doesn't have enough financial, they're just going to have a hard time..

Got it.

So, you basically in those specific nature, you control the market by earning the majority of the relevant content?.

That's kind of the plan. So, if we go to the new space, we need to kind of dominate a space that's kind of the idea. It's pretty much exclusive content. Also, the content is for us over 90% exclusive and its and its increasing because we're producing more, we're getting better, the license is about a little long. So, it's very stable business at a way.

So, I don’t think that this would particularly quite sure we will be proud. The dealer issue, I think we would more worry about somebody from waiting there for some other reason. Is one of reason, we have a guy and we have 40% of US market share and fitness by -- this we kind of finale them effectively was this statistic and it's called video scan.

And in the videos. We decided not to be in a fitness, so we pretty much took our viewing outside fitness from about 15% to less than a 1%.

And in long term, probably, we don’t have any fitness, because we would see that long term, somebody like Nike might decide to create a content and give it free to sell the product and we will not be caught in situation like that. So, for us the position niche is really part of strategy.

So, it's very important for us to that these kind of niches we can play significant role or just not be there. Because we have lot of niches we can go to..

Got it. That makes sense.

And the content that you're currently creating, is it mostly for Yoga or that you'd be costing pretty much across the board?.

Made across the board, Yoga is not. Probably from usage on this side, Yoga is maybe 20%..

Okay.

So, the content you create might be under areas such as transformation?.

Yes..

Got it. That's all, thank you very much. I appreciate the insight..

Thank you..

At this time, this concludes our question and answer session. I would now like to turn the call back to Mr. Rysavy for closing remarks..

Thank you, Melissa. And thank you everyone for joining. And we look forward to speaking with you when we are at our fourth quarter which will be at the end of February. Thank you, very much..

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..